-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IIK4KxkXyXRCr5VsOV+NkXs7hxNTYT0pnKXJb3M/ldJwYSrjYkw0IJVWrGtR+cgo 7+bFoR859SEJ8RDksuBC7A== 0000950137-07-017754.txt : 20071126 0000950137-07-017754.hdr.sgml : 20071126 20071126161234 ACCESSION NUMBER: 0000950137-07-017754 CONFORMED SUBMISSION TYPE: N-14/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 20071126 DATE AS OF CHANGE: 20071126 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RIVERSOURCE DIVERSIFIED INCOME SERIES INC CENTRAL INDEX KEY: 0000049697 IRS NUMBER: 411237361 STATE OF INCORPORATION: MN FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-14/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-146689 FILM NUMBER: 071266432 BUSINESS ADDRESS: STREET 1: 50606 AMERIPRISE FINANCIAL CENTER STREET 2: H27/5228 CITY: MINNEAPOLIS STATE: MN ZIP: 55474 BUSINESS PHONE: 6126714321 MAIL ADDRESS: STREET 1: 50606 AMERIPRISE FINANCIAL CENTER STREET 2: H27/5228 CITY: MINNEAPOLIS STATE: MN ZIP: 55474 FORMER COMPANY: FORMER CONFORMED NAME: RIVERSOURCE DIVERSIFIED INCOME SERIES, INC. DATE OF NAME CHANGE: 20060504 FORMER COMPANY: FORMER CONFORMED NAME: AXP FIXED INCOME SERIES INC DATE OF NAME CHANGE: 20021118 FORMER COMPANY: FORMER CONFORMED NAME: AXP BOND FUND INC DATE OF NAME CHANGE: 20000829 CENTRAL INDEX KEY: 0000049697 CENTRAL INDEX KEY: 0000352663 S000003454 RiverSource Core Bond Fund C000009560 RiverSource Core Bond Fund Class B ABOBX C000009561 RiverSource Core Bond Fund Class C C000009563 RiverSource Core Bond Fund Class A ACBAX C000009564 RiverSource Core Bond Fund Class I ABDIX C000042950 RiverSource Core Bond Fund Class R2 C000042951 RiverSource Core Bond Fund Class R3 C000042952 RiverSource Core Bond Fund Class R4 RSCFX C000042953 RiverSource Core Bond Fund Class R5 C000042954 RiverSource Core Bond Fund Class W RCBWX N-14/A 1 c18637b1nv14za.txt AMENDMENT TO REGISTRATION STATEMENT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM N-14 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X] Pre-Effective Amendment No. 1 (File No. 333-146689) [ ] Post-Effective Amendment No. [__] (Check Appropriate Box or Boxes) RiverSource Diversified Income Series, Inc. (Exact Name of Registrant as Specified in Charter) (612) 671-1947 (Area Code and Telephone Number) 50606 Ameriprise Financial Center, Minneapolis, Minnesota 55474 (Address of Principal Executive Offices: Number, Street, City, State, Zip Code) Scott R. Plummer (Name and Address of Agent for Service) 5228 Ameriprise Financial Center Minneapolis MN 55474 (Number and Street) (City) (State) (Zip Code) Approximate Date of Proposed Public Offering: As soon as practicable after the effective date of the Registration Statement. Title of Securities Being Registered: Common Stock No filing fee is due because of reliance on Section 24(f) of the Investment Company Act of 1940. This Registration Statement shall hereafter become effective in accordance with Section 8(a) of the Securities Act of 1933. It is proposed that this filing will become effective on Nov. 27, 2007. RIVERSOURCE(R) FUNDS 734 Ameriprise Financial Center Minneapolis, Minnesota 55474 NOTICE OF A JOINT SPECIAL MEETING OF SHAREHOLDERS TO BE HELD JAN. 29, 2008 RIVERSOURCE CORE BOND FUND RIVERSOURCE FUNDAMENTAL GROWTH FUND RIVERSOURCE INTERNATIONAL EQUITY FUND RIVERSOURCE MASSACHUSETTS TAX-EXEMPT FUND RIVERSOURCE MICHIGAN TAX-EXEMPT FUND RIVERSOURCE MINNESOTA TAX-EXEMPT FUND RIVERSOURCE OHIO TAX-EXEMPT FUND RIVERSOURCE VALUE FUND A Joint Special Meeting of Shareholders (the "Meeting") of each of the Funds listed above will be held at 10:00 a.m. on Jan. 29, 2008, at the Marquette Hotel, 710 Marquette Avenue, Minneapolis, Minnesota 55402 in the Lake Michigan Room on the fourth floor. At the Meeting, shareholders will consider the following proposals: 1. To approve an Agreement and Plan of Reorganization between RiverSource Core Bond Fund ("Core Bond Fund" or the "Selling Fund") and RiverSource Diversified Bond Fund ("Diversified Bond Fund" or the "Buying Fund"). Under this Agreement, the Selling Fund will transfer all of its assets attributable to Class A, B, C, I, R2, R3, R4, R5 and W shares to the Buying Fund in exchange for corresponding Class A, B, C, I, R2, R3, R4, R5 and W shares of the Buying Fund and the assumption by the Buying Fund of all liabilities of the Selling Fund. These shares will be distributed proportionately to you and the other shareholders of the Selling Fund. 2. To approve an Agreement and Plan of Reorganization between RiverSource Fundamental Growth Fund ("Fundamental Growth Fund" or the "Selling Fund") and RiverSource Growth Fund ("Growth Fund" or the "Buying Fund"). Under this Agreement, the Selling Fund will transfer all of its assets attributable to Class A, B, C, I and R4 shares to the Buying Fund in exchange for corresponding Class A, B, C, I and R4 shares of the Buying Fund and the assumption by the Buying Fund of all liabilities of the Selling Fund. These shares will be distributed proportionately to you and the other shareholders of the Selling Fund. 3. To approve an Agreement and Plan of Reorganization between RiverSource International Equity Fund ("International Equity Fund" or the "Selling Fund") and RiverSource Disciplined International Equity Fund ("Disciplined International Equity Fund" or the "Buying Fund"). Under this Agreement, the Selling Fund will transfer all of its assets attributable to Class A, B, C, I and R4 shares to the Buying Fund in exchange for corresponding Class A, B, C, I and R4 shares of the Buying Fund and the assumption by the Buying Fund of all liabilities of the Selling Fund. These shares will be distributed proportionately to you and the other shareholders of the Selling Fund. 4. To approve an Agreement and Plan of Reorganization between RiverSource Massachusetts Tax-Exempt Fund ("Massachusetts Tax-Exempt Fund" or the "Selling Fund") and RiverSource Tax-Exempt High Income Fund ("Tax-Exempt High Income Fund" or the "Buying Fund"). Under this Agreement, the Selling Fund will transfer all of its assets attributable to Class A, B and C shares to the Buying Fund in exchange for corresponding Class A, B and C shares of the Buying Fund and the assumption by the Buying Fund of all liabilities of the Selling Fund. These shares will be distributed proportionately to you and the other shareholders of the Selling Fund. 5. To approve an Agreement and Plan of Reorganization between RiverSource Michigan Tax-Exempt Fund ("Michigan Tax-Exempt Fund" or the "Selling Fund") and RiverSource Tax-Exempt High Income Fund ("Tax-Exempt High Income Fund" or the "Buying Fund"). Under this Agreement, the Selling Fund will transfer all of its assets attributable to Class A, B and C shares to the Buying Fund in exchange for corresponding Class A, B and C shares of the Buying Fund and the assumption by the Buying Fund of all liabilities of the Selling Fund. These shares will be distributed proportionately to you and the other shareholders of the Selling Fund. 6. To approve an Agreement and Plan of Reorganization between RiverSource Ohio Tax-Exempt Fund ("Ohio Tax-Exempt Fund" or the "Selling Fund") and RiverSource Tax-Exempt High Income Fund ("Tax-Exempt High Income Fund" or the "Buying Fund"). Under this Agreement, the Selling Fund will transfer all of its assets attributable to Class A, B and C shares to the Buying Fund in exchange for corresponding Class A, B and C shares of the Buying Fund and the assumption by the Buying Fund of all liabilities of the Selling Fund. These shares will be distributed proportionately to you and the other shareholders of the Selling Fund. 7. To approve an Agreement and Plan of Reorganization between RiverSource Value Fund ("Value Fund" or the "Selling Fund") and RiverSource Diversified Equity Income Fund ("Diversified Equity Income Fund" or the "Buying Fund"). Under this Agreement, the Selling Fund will transfer all of its assets attributable to Class A, B, C, I and R4 shares to the Buying Fund in exchange for corresponding Class A, B, C, I and R4 shares of the Buying Fund and the assumption by the Buying Fund of all liabilities of the Selling Fund. These shares will be distributed proportionately to you and the other shareholders of the Selling Fund. 8. To approve a change in the classification of RiverSource Minnesota Tax-Exempt Fund ("Minnesota Tax-Exempt Fund") from a "diversified" fund to a "non-diversified" fund, as such terms are defined under the Investment Company Act of 1940, as amended. 9. To transact such other business as may properly come before the Meeting, or any adjournment of the Meeting. Please take some time to read the proxy statement. It discusses these proposals in more detail. If you were a shareholder on Nov. 30, 2007, you may vote at the Meeting or any adjournment of the Meeting. We hope you can attend the Meeting. If you cannot attend, please vote by telephone, internet or mail. Just follow the instructions on the enclosed proxy card. If you have questions, please call toll free at (866) 438-8932. It is important that you vote. The Board of Directors/Trustees of each RiverSource Fund recommends that you vote FOR each of the proposals. This proxy statement was first mailed to shareholders on or about Dec. 1, 2007. By order of the Boards of Directors/Trustees Scott R. Plummer, Secretary Dec. 1, 2007 RIVERSOURCE(R) CORE BOND FUND RIVERSOURCE FUNDAMENTAL GROWTH FUND RIVERSOURCE INTERNATIONAL EQUITY FUND RIVERSOURCE MASSACHUSETTS TAX-EXEMPT FUND RIVERSOURCE MICHIGAN TAX-EXEMPT FUND RIVERSOURCE MINNESOTA TAX-EXEMPT FUND RIVERSOURCE OHIO TAX-EXEMPT FUND RIVERSOURCE VALUE FUND COMBINED PROXY STATEMENT/PROSPECTUS DATED DEC. 1, 2007 This document is a proxy statement for each Selling Fund (as defined below) and RiverSource Minnesota Tax-Exempt Fund (the "Minnesota Tax-Exempt Fund") and a prospectus for each Buying Fund (as defined below). The address of each of the funds is 734 Ameriprise Financial Center, Minneapolis, Minnesota 55474. The phone number for each fund is (888) 791-3380. This combined proxy statement/prospectus contains information you should know before voting on the following proposals:
TO BE VOTED ON BY PROPOSALS SHAREHOLDERS OF: - -------------------------------------------------------------------------------------------------------- 1. To approve an Agreement and Plan of Reorganization RiverSource Core Bond Fund between RiverSource Core Bond Fund ("Core Bond Fund" or the "Selling Fund") and RiverSource Diversified Bond Fund ("Diversified Bond Fund" or the "Buying Fund"), a series of RiverSource Diversified Income Series, Inc. Under this Agreement, the Selling Fund will transfer all of its assets attributable to Class A, B, C, I, R2, R3, R4, R5 and W shares to the Buying Fund in exchange for corresponding Class A, B, C, I, R2, R3, R4, R5 and W shares of the Buying Fund and the assumption by the Buying Fund of all liabilities of the Selling Fund. These shares will be distributed proportionately to you and the other shareholders of the Selling Fund. - -------------------------------------------------------------------------------------------------------- 2. To approve an Agreement and Plan of Reorganization RiverSource Fundamental Growth Fund between RiverSource Fundamental Growth Fund ("Fundamental Growth Fund" or the "Selling Fund") and RiverSource Growth Fund ("Growth Fund" or the "Buying Fund"), a series of RiverSource Large Cap Series, Inc. Under this Agreement, the Selling Fund will transfer all of its assets attributable to Class A, B, C, I and R4 shares to the Buying Fund in exchange for corresponding A, B, C, I and R4 shares of the Buying Fund and the assumption by the Buying Fund of all liabilities of the Selling Fund. These shares will be distributed proportionately to you and the other shareholders of the Selling Fund. - -------------------------------------------------------------------------------------------------------- 3. To approve an Agreement and Plan of Reorganization RiverSource International Equity Fund between RiverSource International Equity Fund ("International Equity Fund" or the "Selling Fund") and RiverSource Disciplined International Equity Fund ("Disciplined International Equity Fund" or the "Buying Fund"), a series of RiverSource International Series, Inc. Under this Agreement, the Selling Fund will transfer all of its assets attributable to Class A, B, C, I and R4 shares to the Buying Fund in exchange for corresponding Class A, B, C, I and R4 shares of the Buying Fund and the assumption by the Buying Fund of all liabilities of the Selling Fund. These shares will be distributed proportionately to you and the other shareholders of the Selling Fund. - -------------------------------------------------------------------------------------------------------- 4. To approve an Agreement and Plan of Reorganization RiverSource Massachusetts Tax-Exempt Fund between RiverSource Massachusetts Tax-Exempt Fund ("Massachusetts Tax-Exempt Fund" or the "Selling Fund") and RiverSource Tax-Exempt High Income Fund ("Tax-Exempt High Income Fund" or the "Buying Fund"), a series of RiverSource Tax-Exempt Income Series, Inc. Under this Agreement, the Selling Fund will transfer all of its assets attributable to Class A, B and C shares to the Buying Fund in exchange for corresponding Class A, B and C shares of the Buying Fund and the assumption by the Buying Fund of all liabilities of the Selling Fund. These shares will be distributed proportionately to you and the other shareholders of the Selling Fund. - -------------------------------------------------------------------------------------------------------- 5. To approve an Agreement and Plan of Reorganization RiverSource Michigan Tax-Exempt Fund between RiverSource Michigan Tax-Exempt Fund ("Michigan Tax-Exempt Fund" or the "Selling Fund") and RiverSource Tax-Exempt High Income Fund ("Tax-Exempt High Income Fund" or the "Buying Fund"), a series of RiverSource Tax-Exempt Income Series, Inc. Under this Agreement, the Selling Fund will transfer all of its assets attributable to Class A, B and C shares to the Buying Fund in exchange for corresponding Class A, B and C shares of the Buying Fund and the assumption by the Buying Fund of all liabilities of the Selling Fund. These shares will be distributed proportionately to you and the other shareholders of the Selling Fund.
RIVERSOURCE FUNDS -- PROXY STATEMENT 1
TO BE VOTED ON BY PROPOSALS SHAREHOLDERS OF: - -------------------------------------------------------------------------------------------------------- 6. To approve an Agreement and Plan of Reorganization RiverSource Ohio Tax-Exempt Fund between RiverSource Ohio Tax-Exempt Fund ("Ohio Tax-Exempt Fund" or the "Selling Fund") and RiverSource Tax-Exempt High Income Fund ("Tax-Exempt High Income Fund" or the "Buying Fund"), a series of RiverSource Tax-Exempt Income Series, Inc. Under this Agreement, the Selling Fund will transfer all of its assets attributable to Class A, B and C shares to the Buying Fund in exchange for corresponding A, B and C shares of the Buying Fund and the assumption by the Buying Fund of all liabilities of the Selling Fund. These shares will be distributed proportionately to you and the other shareholders of the Selling Fund. - -------------------------------------------------------------------------------------------------------- 7. To approve an Agreement and Plan of Reorganization RiverSource Value Fund between RiverSource Value Fund ("Value Fund" or the "Selling Fund") and RiverSource Diversified Equity Income Fund ("Diversified Equity Income Fund" or the "Buying Fund"), a series of RiverSource Investment Series, Inc. Under this Agreement, the Selling Fund will transfer all of its assets attributable to Class A, B, C, I and R4 shares to the Buying Fund in exchange for corresponding Class A, B, C, I and R4 shares of the Buying Fund and the assumption by the Buying Fund of all liabilities of the Selling Fund. These shares will be distributed proportionately to you and the other shareholders of the Selling Fund. - -------------------------------------------------------------------------------------------------------- 8. To approve a change in the classification of Minnesota RiverSource Minnesota Tax-Exempt Fund Tax-Exempt Fund from a "diversified" fund to a "non-diversified" fund, as such terms are defined under the Investment Company Act of 1940, as amended (the "1940 Act"). - --------------------------------------------------------------------------------------------------------
These proposals will be considered by shareholders of the Selling Funds and Minnesota Tax-Exempt Fund at a special joint meeting of such shareholders (the "Meeting") that will be held at 10:00 a.m. on Jan. 29, 2008, at the Marquette Hotel, 710 Marquette Avenue, Minneapolis, Minnesota 55402 in the Lake Michigan Room on the fourth floor. Each of the Minnesota Tax-Exempt Fund, the Selling Funds and the Buying Funds (collectively, the "Funds") is a series of a registered open-end management investment company. Please read this proxy statement/prospectus and keep it for future reference. Although the Board of Directors/Trustees of each of the Funds (the "Board") proposes that each Selling Fund merge with the corresponding Buying Fund, the reorganization of each Selling Fund (each a "Reorganization") is not conditioned upon the Reorganization of any other Selling Fund. Accordingly, if shareholders of one Selling Fund approve its Reorganization, but shareholders of another Selling Fund do not approve that Fund's Reorganization, it is expected that the Reorganization of the approved Selling Fund will take place as described in this proxy statement/prospectus. HOW EACH REORGANIZATION WILL WORK - - Each Selling Fund will transfer all of its assets to the corresponding Buying Fund in exchange for shares of such Buying Fund ("Reorganization Shares") and the assumption of all of the Selling Fund's liabilities. - - Each Buying Fund will issue Reorganization Shares in an amount equal to the value of the assets of the shares that it receives from the Selling Fund, less the liabilities it assumes. The Reorganization Shares of each class will be distributed to the Selling Fund's shareholders of the corresponding class in proportion to their holdings in the Selling Fund. For example, holders of Class A shares of a Selling Fund will receive Class A shares of the corresponding Buying Fund with the same aggregate net asset value as their Selling Fund shares at the time of the Reorganization. You will not pay any sales charge in connection with this distribution of shares. If you already have a Buying Fund account, shares distributed in the Reorganization are typically added to that account. As a result, when average cost is calculated for income tax purposes, the cost of the shares in the two accounts you owned will be combined. WHERE TO GET MORE INFORMATION The following documents have been filed with the Securities and Exchange Commission (the "SEC") and are incorporated into this proxy statement/prospectus by reference: - - the prospectus of Core Bond Fund, dated Sept. 28, 2007; - - the prospectus of Fundamental Growth Fund, dated July 30, 2007; - - the prospectus of International Equity Fund, dated Dec. 29, 2006; - - the prospectus of Massachusetts Tax-Exempt Fund, Michigan Tax-Exempt Fund and Ohio Tax-Exempt Fund dated Oct. 30, 2007; - - the prospectus of Value Fund, dated July 30, 2007; - - the Statement of Additional Information of the Selling Funds, dated Nov. 29, 2007; 2 RIVERSOURCE FUNDS -- PROXY STATEMENT - - the Statement of Additional Information relating to the Reorganizations, dated Dec. 1, 2007 (the "Merger SAI"); - - the Report of the Independent Registered Public Accounting Firm and the audited financial statements included in the Annual Report to Shareholders of Core Bond Fund for the period ended July 31, 2007; - - the Report of the Independent Registered Public Accounting Firm and the audited financial statements included in the Annual Report to Shareholders of Diversified Bond Fund for the period ended Aug. 31, 2007; - - the Report of the Independent Registered Public Accounting Firm and the audited financial statements included in the Annual Report to Shareholders of Fundamental Growth Fund for the period ended May 31, 2007; - - the Report of the Independent Registered Public Accounting Firm and the audited financial statements included in the Annual Report to Shareholders of Growth Fund for the period ended July 31, 2007; - - the Report of the Independent Registered Public Accounting Firm and the audited financial statements included in the Annual Report to Shareholders of International Equity Fund for the period ended Oct. 31, 2006 and the unaudited financial statements included in the Semiannual Report to Shareholders of International Equity Fund for the period ended April 30, 2007; - - the Report of the Independent Registered Public Accounting Firm and the audited financial statements included in the Annual Report to Shareholders of Disciplined International Equity Fund for the period ended Oct. 31, 2006 and the unaudited financial statements included in the Semiannual Report to Shareholders of Disciplined International Equity Fund for the period ended April 30, 2007; - - the Report of the Independent Registered Public Accounting Firm and the audited financial statements included in the Annual Report to Shareholders of Massachusetts Tax-Exempt Fund, Michigan Tax-Exempt Fund and Ohio Tax-Exempt Fund for the period ended Aug. 31, 2007; - - the Report of the Independent Registered Public Accounting Firm and the audited financial statements included in the Annual Report to Shareholders of Tax-Exempt High Income Fund for the period ended Nov. 30, 2006 and the unaudited financial statements included in the Semiannual Report to Shareholders of Tax-Exempt High Income Fund for the period ended May 31, 2007; - - the Report of the Independent Registered Public Accounting Firm and the audited financial statements included in the Annual Report to Shareholders of Value Fund for the period ended May 31, 2007; and - - the Report of the Independent Registered Public Accounting Firm and the audited financial statements included in the Annual Report to Shareholders of Diversified Equity Income Fund for the period ended Sept. 30, 2007. For a copy at no charge of any of the documents listed above or to ask questions about this proxy statement/prospectus, call toll-free (866) 438-8932 or write to RiverSource Funds, 734 Ameriprise Financial Center, Minneapolis, Minnesota 55474. Each of the Funds is subject to the information requirements of the Securities Exchange Act of 1934 and the 1940 Act and files reports, proxy materials and other information with the Securities and Exchange Commission ("SEC"). These reports, proxy materials and other information can be inspected and copied at the Public Reference Room maintained by the SEC. Copies may be obtained, after paying a duplicating fee, by electronic request at http://www.publicinfo@sec.gov, or by writing to the Public Reference Section of the SEC, 100 F Street, N.E., Washington, D.C. 20549-0102. In addition, copies of these documents may be viewed on-line or downloaded from the SEC's Web site at http://www.sec.gov. Please note that each Fund is not a bank deposit, is not federally insured, is not endorsed by any bank or government agency and is not guaranteed to achieve its goal. As with all mutual funds, the SEC has not approved or disapproved these securities or passed on the adequacy of this prospectus. Any representation to the contrary is a criminal offense. RIVERSOURCE FUNDS -- PROXY STATEMENT 3 TABLE OF CONTENTS
PAGE ---- SECTION A -- REORGANIZATION PROPOSALS..................................................... 6 SUMMARY................................................................................ 6 How Each Reorganization Will Work................................................... 6 Tax Consequences.................................................................... 6 Fees and Expenses................................................................... 7 Proposal 1. Reorganization of Core Bond Fund into Diversified Bond Fund.......... 7 Proposal 2. Reorganization of Fundamental Growth Fund into Growth Fund........... 11 Proposal 3. Reorganization of International Equity Fund into Disciplined International Equity Fund......................................................... 13 Proposals 4, 5 and 6. Reorganizations of Each of Massachusetts Tax-Exempt Fund, Michigan Tax-Exempt Fund and Ohio Tax-Exempt Fund into Tax-Exempt High Income Fund.............................................................................. 16 Proposal 7. Reorganization of Value Fund into Diversified Equity Income Fund..... 22 PROPOSAL 1. REORGANIZATION OF CORE BOND FUND INTO DIVERSIFIED BOND FUND................ 24 Comparison of the Selling Fund and the Buying Fund.................................. 24 Comparison of Investment Objectives.............................................. 24 Comparison of Principal Investment Strategies.................................... 24 Comparison of Fundamental Policies............................................... 26 Comparison of Nonfundamental Policies............................................ 27 Comparison of Principal Risk Factors............................................. 27 Performance...................................................................... 28 PROPOSAL 2. REORGANIZATION OF FUNDAMENTAL GROWTH FUND INTO GROWTH FUND................. 31 Comparison of the Selling Fund and the Buying Fund.................................. 31 Comparison of Investment Objectives.............................................. 31 Comparison of Principal Investment Strategies.................................... 31 Comparison of Fundamental Policies............................................... 32 Comparison of Nonfundamental Policies............................................ 33 Comparison of Principal Risk Factors............................................. 33 Performance...................................................................... 34 PROPOSAL 3. REORGANIZATION OF INTERNATIONAL EQUITY FUND INTO DISCIPLINED INTERNATIONAL EQUITY FUND.......................................................................... 38 Comparison of the Selling Fund and the Buying Fund.................................. 38 Comparison of Investment Objectives.............................................. 38 Comparison of Principal Investment Strategies.................................... 38 Comparison of Fundamental Policies............................................... 40 Comparison of Nonfundamental Policies............................................ 41 Comparison of Principal Risk Factors............................................. 41 Performance...................................................................... 42
4 RIVERSOURCE FUNDS -- PROXY STATEMENT
PAGE ---- PROPOSALS 4, 5 AND 6. REORGANIZATIONS OF EACH OF MASSACHUSETTS TAX-EXEMPT FUND, MICHIGAN TAX-EXEMPT FUND AND OHIO TAX-EXEMPT FUND INTO TAX-EXEMPT HIGH INCOME FUND... 45 Comparison of the Selling Funds and the Buying Fund................................. 45 Comparison of Investment Objectives.............................................. 45 Comparison of Principal Investment Strategies.................................... 45 Comparison of Fundamental Policies............................................... 47 Comparison of Nonfundamental Policies............................................ 48 Comparison of Principal Risk Factors............................................. 48 Performance...................................................................... 49 PROPOSAL 7. REORGANIZATION OF VALUE FUND INTO DIVERSIFIED EQUITY INCOME FUND........... 55 Comparison of the Selling Fund and the Buying Fund.................................. 55 Comparison of Investment Objectives.............................................. 55 Comparison of Principal Investment Strategies.................................... 55 Comparison of Fundamental Policies............................................... 57 Comparison of Nonfundamental Policies............................................ 58 Comparison of Principal Risk Factors............................................. 58 Performance...................................................................... 59 ADDITIONAL INFORMATION ABOUT EACH REORGANIZATION....................................... 62 Terms of the Reorganizations........................................................ 62 Conditions to Closing Each Reorganization........................................... 62 Termination of the Agreement........................................................ 62 Tax Status of the Reorganizations................................................... 62 Reasons for the Proposed Reorganizations and Board Deliberations.................... 64 Boards' Determinations.............................................................. 67 Recommendation and Vote Required.................................................... 68 SECTION B -- PROPOSAL FOR MINNESOTA TAX-EXEMPT FUND....................................... 69 PROPOSAL 8. APPROVE OR REJECT CHANGE OF INVESTMENT COMPANY CLASSIFICATION TO "NON-DIVERSIFIED" FOR MINNESOTA TAX-EXEMPT FUND...................................... 69 SECTION C -- PROXY VOTING AND SHAREHOLDER MEETING INFORMATION............................. 70 SECTION D -- CAPITALIZATION, OWNERSHIP OF FUND SHARES AND FINANCIAL HIGHLIGHTS............ 71 Capitalization of Selling Funds and Buying Funds.................................... 71 Ownership of Selling Fund and Buying Fund Shares.................................... 74 Capitalization and Ownership of Minnesota Tax-Exempt Fund........................... 78 Financial Highlights................................................................ 79 EXHIBITS A. Form of Agreement and Plan of Reorganization........................................... A.1 B. Minnesota Business Corporation Act Sections 302A.471 and 302A.473...................... B.1 C. Additional Information Applicable to the Buying Funds.................................. C.1 D. Comparison of Organizational Documents................................................. D.1
RIVERSOURCE FUNDS -- PROXY STATEMENT 5 SECTION A -- REORGANIZATION PROPOSALS The following information describes the proposed reorganization of each Selling Fund into a corresponding Buying Fund. SUMMARY This proxy statement/prospectus is being used by each Selling Fund to solicit proxies to vote at a joint special meeting of shareholders. Shareholders of each Selling Fund will consider a proposal to approve the Agreement and Plan of Reorganization (the "Agreement") providing for the Reorganization of their Selling Fund into the corresponding Buying Fund. A form of the Agreement is included as Exhibit A. The following is a summary. More complete information appears later in this proxy statement/prospectus. You should read the entire proxy statement/prospectus and the exhibits because they contain details that are not in this summary. HOW EACH REORGANIZATION WILL WORK - - Each Selling Fund will transfer all of its assets to the corresponding Buying Fund in exchange for shares of such Buying Fund ("Reorganization Shares") and the assumption of all of the Selling Fund's liabilities. - - Each Buying Fund will issue Reorganization Shares in an amount equal to the value of the assets of the shares that it receives from the Selling Fund, less the liabilities it assumes. The Reorganization Shares of each class will be distributed to the Selling Fund's shareholders of the corresponding class in proportion to their holdings in the Selling Fund. For example, holders of Class A shares of a Selling Fund will receive Class A shares of the corresponding Buying Fund with the same aggregate net asset value as their Selling Fund shares at the time of the Reorganization. You will not pay any sales charge in connection with this distribution of shares. If you already have a Buying Fund account, shares distributed in the Reorganization are typically added to that account. As a result, when average cost is calculated for income tax purposes, the cost of the shares in the two accounts you owned will be combined. - - As part of the Reorganization, systematic transactions (such as bank authorizations and systematic payouts) currently set up for your Selling Fund account may be transferred to your new Buying Fund account. Please contact your financial institution for additional details. - - Neither the Selling Fund nor the shareholders of the Selling Fund will pay any sales charge in connection with the Reorganization. - - After the Reorganization is completed, current Selling Fund shareholders will be shareholders of the Buying Fund. The Selling Fund will be terminated. TAX CONSEQUENCES Each Reorganization is expected to be tax-free for federal income tax purposes and will not take place unless the Selling Fund and the corresponding Buying Fund receive a satisfactory opinion of tax counsel, substantially to that effect. Accordingly, no gain or loss is expected to be recognized by the Selling Fund or its shareholders as a direct result of a Reorganization. However, because the Reorganization will end the tax year of each Selling Fund, it will accelerate distributions to shareholders from the Selling Fund for its short tax year ending on the date of the Reorganization. Those tax year-end distributions, which are taxable, will include any net capital gains realized prior to the implementation of a Reorganization and not previously distributed. At any time prior to the consummation of a Reorganization, a shareholder may redeem shares. This would likely result in recognition of gain or loss to the shareholder for federal income tax purposes if the shareholder holds the shares in a taxable account. The tax basis and holding period of the shareholders' Selling Fund shares is expected to carry over to the shareholders' new shares in the Buying Fund. For more information about the federal income tax consequences of the Reorganization, see the section entitled "Tax Status of the Reorganizations" on page 62. 6 RIVERSOURCE FUNDS -- PROXY STATEMENT FEES AND EXPENSES The following tables describe the fees and expenses that you pay if you buy and hold shares of the Selling Fund or shares of the Buying Fund. The table also shows pro forma expenses of the Buying Fund assuming the proposed Reorganization had been effective at the beginning of the most recent fiscal year, adjusted to reflect current fees, as applicable. The fees and expenses below exclude the costs of this Reorganization, because these will be paid by RiverSource Investments, LLC ("RiverSource Investments" or "investment manager") and its affiliates. PROPOSAL 1. REORGANIZATION OF CORE BOND FUND INTO DIVERSIFIED BOND FUND ACTUAL AND PRO FORMA FUND EXPENSES FOR THE MOST RECENT FISCAL YEAR SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS I, R2, R3, R4, R5 CORE BOND FUND (ACTUAL) (SELLING FUND) CLASS A CLASS B CLASS C & W Maximum sales charge (load) imposed on purchases (as a percentage of offering price) 4.75%(a) None None None Maximum deferred sales charge (load) imposed on sales (as a percentage of offering price at time of purchase) None 5% 1% None DIVERSIFIED BOND FUND (ACTUAL) (BUYING FUND) Maximum sales charge (load) imposed on purchases (as a percentage of offering price) 4.75%(a) None None None Maximum deferred sales charge (load) imposed on sales (as a percentage of offering price at time of purchase) None 5% 1% None DIVERSIFIED BOND FUND (PRO FORMA COMBINED) Maximum sales charge (load) imposed on purchases (as a percentage of offering price) 4.75%(a) None None None Maximum deferred sales charge (load) imposed on sales (as a percentage of offering price at time of purchase) None 5% 1% None
(a) This charge may be reduced depending on the value of your total investments in RiverSource Funds. See page C.6 "Sales Charges." ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS:
CORE BOND FUND (ACTUAL) (SELLING FUND) CLASS A CLASS B CLASS C CLASS W Management fees 0.48% 0.48% 0.48% 0.48% Distribution (12b-1) fees 0.25% 1.00% 1.00% 0.25% Other expenses(a) 0.36% 0.37% 0.37% 0.35% Total annual fund operating expenses 1.09% 1.85% 1.85% 1.08% Fee waiver/expense reimbursement 0.20% 0.20% 0.20% 0.13% Total annual (net) fund operating expenses(b) 0.89% 1.65% 1.65% 0.95%
DIVERSIFIED BOND FUND (ACTUAL) (BUYING FUND) CLASS A CLASS B CLASS C CLASS W Management fees 0.46% 0.46% 0.46% 0.46% Distribution (12b-1) fees 0.25% 1.00% 1.00% 0.25% Other expenses(a) 0.26% 0.27% 0.27% 0.30% Total annual fund operating expenses 0.97% 1.73% 1.73% 1.01% Fee waiver/expense reimbursement 0.08% 0.08% 0.08% 0.03% Total annual (net) fund operating expenses(c) 0.89% 1.65% 1.65% 0.98%
DIVERSIFIED BOND FUND (PRO FORMA COMBINED) CLASS A CLASS B CLASS C CLASS W Management fees 0.45% 0.45% 0.45% 0.45% Distribution (12b-1) fees 0.25% 1.00% 1.00% 0.25% Other expenses(a) 0.26% 0.27% 0.27% 0.30% Total annual fund operating expenses 0.96% 1.72% 1.72% 1.00% Fee waiver/expense reimbursement 0.07% 0.07% 0.07% 0.02% Total annual (net) fund operating expenses(c) 0.89% 1.65% 1.65% 0.98%
RIVERSOURCE FUNDS -- PROXY STATEMENT 7 ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) (CONTINUED) AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS:
CORE BOND FUND (ACTUAL) (SELLING FUND) CLASS I CLASS R2 CLASS R3 CLASS R4 CLASS R5 Management fees 0.48% 0.48% 0.48% 0.48% 0.48% Distribution (12b-1) fees 0.00% 0.50% 0.25% 0.00% 0.00% Other expenses(a) 0.18% 0.47% 0.46% 0.47% 0.23% Total annual fund operating expenses 0.66% 1.45% 1.19% 0.95% 0.71% Fee waiver/expense reimbursement 0.16% 0.15% 0.14% 0.18% 0.16% Total annual (net) fund operating expenses(b) 0.50% 1.30% 1.05% 0.77% 0.55%
DIVERSIFIED BOND FUND (ACTUAL) (BUYING FUND) CLASS I CLASS R2 CLASS R3 CLASS R4 CLASS R5 Management fees 0.46% 0.46% 0.46% 0.46% 0.46% Distribution (12b-1) fees 0.00% 0.50% 0.25% 0.00% 0.00% Other expenses(a) 0.10% 0.40% 0.40% 0.40% 0.15% Total annual fund operating expenses 0.56% 1.36% 1.11% 0.86% 0.61% Fee waiver/expense reimbursement 0.03% 0.03% 0.03% 0.09% 0.03% Total annual (net) fund operating expenses(c) 0.53% 1.33% 1.08% 0.77% 0.58%
DIVERSIFIED BOND FUND (PRO FORMA COMBINED) CLASS I CLASS R2 CLASS R3 CLASS R4 CLASS R5 Management fees 0.45% 0.45% 0.45% 0.45% 0.45% Distribution (12b-1) fees 0.00% 0.50% 0.25% 0.00% 0.00% Other expenses(a) 0.10% 0.40% 0.40% 0.40% 0.15% Total annual fund operating expenses 0.55% 1.35% 1.10% 0.85% 0.60% Fee waiver/expense reimbursement 0.02% 0.02% 0.02% 0.08% 0.02% Total annual (net) fund operating expenses(c) 0.53% 1.33% 1.08% 0.77% 0.58%
(a) Other expenses include an administrative services fee, a transfer agency fee, a custody fee, other nonadvisory expenses and, for Class R2, Class R3 and Class R4, a plan administration services fee. Other expenses may also include fees and expenses of affiliated and unaffiliated funds (acquired funds) which the Fund indirectly bears when it invests in the acquired funds. The impact of these acquired funds fees and expenses for the most recent fiscal period was less than 0.01%. Because acquired funds will 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 by the Fund with respect to such investments will vary. (b) The investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until July 31, 2008, unless sooner terminated at the discretion of Core Bond Fund's Board. There is no assurance that the investment manager and its affiliates will continue to waive fees or absorb expenses at the current level after the contractual period had expired. Any amounts waived will not be reimbursed by Core Bond Fund. Under this agreement, net Core Bond Fund expenses (excluding fees and expenses of acquired funds) will not exceed 0.89% for Class A, 1.65% for Class B, 1.65% for Class C, 0.50% for Class I, 1.30% for Class R2, 1.05% for Class R3, 0.77% for Class R4, 0.55% for Class R5 and 0.95% for Class W. (c) The investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until Aug. 31, 2008, unless sooner terminated at the discretion of Diversified Bond Fund's Board. There is no assurance that the investment manager and its affiliates will continue to waive fees or absorb expenses at the current level after the contractual period had expired. Any amounts waived will not be reimbursed by Diversified Bond Fund. Under this agreement, net Diversified Bond Fund expenses (excluding fees and expenses of acquired funds) will not exceed 0.89% for Class A, 1.65% for Class B, 1.65% for Class C, 0.53% for Class I, 1.33% for Class R2, 1.08% for Class R3, 0.77% for Class R4, 0.58% for Class R5 and 0.98% for Class W. EXPENSE EXAMPLES: These examples are intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. These examples assume that you invest $10,000 in the Fund for the time periods and then redeem all of your shares at the end of those periods indicated under the current arrangements and if the proposed Reorganization had been in effect. These examples also assume that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
CORE BOND FUND (ACTUAL) (SELLING FUND) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $562 $786 $1,030 $1,728 Class B $668(b) $963(b) $1,183(b) $1,958(c) Class C $268(b) $563 $ 983 $2,158 Class I $ 51 $195 $ 353 $ 811 Class R2 $132 $444 $ 779 $1,728 Class R3 $107 $364 $ 642 $1,436 Class R4 $ 79 $285 $ 509 $1,154 Class R5 $ 56 $211 $ 380 $ 871 Class W $ 97 $331 $ 584 $1,310
8 RIVERSOURCE FUNDS -- PROXY STATEMENT
DIVERSIFIED BOND FUND (ACTUAL) (BUYING FUND) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $561 $761 $ 978 $1,602 Class B $667(b) $937(b) $1,131(b) $1,834(c) Class C $267(b) $537 $ 931 $2,036 Class I $ 54 $176 $ 309 $ 698 Class R2 $135 $427 $ 741 $1,634 Class R3 $110 $349 $ 608 $1,350 Class R4 $ 78 $265 $ 467 $1,053 Class R5 $ 59 $192 $ 336 $ 759 Class W $100 $318 $ 554 $1,235
DIVERSIFIED BOND FUND (PRO FORMA COMBINED) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $561 $760 $ 975 $1,595 Class B $667(b) $935(b) $1,128(b) $1,827(c) Class C $267(b) $535 $ 928 $2,029 Class I $ 54 $174 $ 306 $ 691 Class R2 $135 $426 $ 738 $1,627 Class R3 $110 $348 $ 605 $1,343 Class R4 $ 78 $263 $ 464 $1,046 Class R5 $ 59 $190 $ 333 $ 752 Class W $100 $317 $ 551 $1,227
(a) Includes a 4.75% sales charge. (b) Includes the applicable CDSC. (c) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. You would pay the following expenses if you did not redeem your shares at the end of the periods indicated.
CORE BOND FUND (ACTUAL) (SELLING FUND) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $562 $786 $1,030 $1,728 Class B $168 $563 $ 983 $1,958(b) Class C $168 $563 $ 983 $2,158 Class I $ 51 $195 $ 353 $ 811 Class R2 $132 $444 $ 779 $1,728 Class R3 $107 $364 $ 642 $1,436 Class R4 $ 79 $285 $ 509 $1,154 Class R5 $ 56 $211 $ 380 $ 871 Class W $ 97 $331 $ 584 $1,310
DIVERSIFIED BOND FUND (ACTUAL) (BUYING FUND) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $561 $761 $978 $1,602 Class B $167 $537 $931 $1,834(b) Class C $167 $537 $931 $2,036 Class I $ 54 $176 $309 $ 698 Class R2 $135 $427 $741 $1,634 Class R3 $110 $349 $608 $1,350 Class R4 $ 78 $265 $467 $1,053 Class R5 $ 59 $192 $336 $ 759 Class W $100 $318 $554 $1,235
RIVERSOURCE FUNDS -- PROXY STATEMENT 9
DIVERSIFIED BOND FUND (PRO FORMA COMBINED) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $561 $760 $975 $1,595 Class B $167 $535 $928 $1,827(b) Class C $167 $535 $928 $2,029 Class I $ 54 $174 $306 $ 691 Class R2 $135 $426 $738 $1,627 Class R3 $110 $348 $605 $1,343 Class R4 $ 78 $263 $464 $1,046 Class R5 $ 59 $190 $333 $ 752 Class W $100 $317 $551 $1,227
(a) Includes a 4.75% sales charge. (b) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. For more information regarding the comparison of the Selling Fund and the Buying Fund, see page 24. For additional information about the Reorganization, see page 62. 10 RIVERSOURCE FUNDS -- PROXY STATEMENT PROPOSAL 2. REORGANIZATION OF FUNDAMENTAL GROWTH FUND INTO GROWTH FUND ACTUAL AND PRO FORMA FUND EXPENSES FOR THE MOST RECENT FISCAL YEAR SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT) CLASS I & FUNDAMENTAL GROWTH FUND (ACTUAL) (SELLING FUND) CLASS A CLASS B CLASS C R4 Maximum sales charge (load) imposed on purchases (as a percentage of offering price) 5.75%(a) None None None Maximum deferred sales charge (load) imposed on sales (as a percentage of offering price at time of purchase) None 5% 1% None GROWTH FUND (ACTUAL) (BUYING FUND) Maximum sales charge (load) imposed on purchases (as a percentage of offering price) 5.75%(a) None None None Maximum deferred sales charge (load) imposed on sales (as a percentage of offering price at time of purchase) None 5% 1% None GROWTH FUND (PRO FORMA COMBINED) Maximum sales charge (load) imposed on purchases (as a percentage of offering price) 5.75%(a) None None None Maximum deferred sales charge (load) imposed on sales (as a percentage of offering price at time of purchase) None 5% 1% None
(a) This charge may be reduced depending on the value of your total investments in RiverSource Funds. See page C.6 "Sales Charges." ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS:
FUNDAMENTAL GROWTH FUND (ACTUAL) (SELLING FUND) CLASS A CLASS B CLASS C CLASS I CLASS R4 Management fees(a),(f) 0.78% 0.78% 0.78% 0.78% 0.78% Distribution (12b-1) fees 0.25% 1.00% 1.00% 0.00% 0.00% Other expenses(b) 0.38% 0.39% 0.38% 0.13% 0.44% Total annual fund operating expenses(c) 1.41% 2.17% 2.16% 0.91% 1.22%
GROWTH FUND (ACTUAL) (BUYING FUND) CLASS A CLASS B CLASS C CLASS I CLASS R4 Management fees(d),(f) 0.66% 0.66% 0.66% 0.66% 0.66% Distribution (12b-1) fees 0.25% 1.00% 1.00% 0.00% 0.00% Other expenses(b) 0.28% 0.30% 0.29% 0.08% 0.38% Total annual fund operating expenses 1.19% 1.96% 1.95% 0.74% 1.04%(e)
GROWTH FUND (PRO FORMA COMBINED) CLASS A CLASS B CLASS C CLASS I CLASS R4 Management fees(d),(f) 0.65% 0.65% 0.65% 0.65% 0.65% Distribution (12b-1) fees 0.25% 1.00% 1.00% 0.00% 0.00% Other expenses(b) 0.28% 0.30% 0.30% 0.10% 0.39% Total annual fund operating expenses 1.18% 1.95% 1.95% 0.75% 1.04%(e)
(a) Includes the impact of a performance incentive adjustment fee that increased the management fee by 0.001% for the most recent fiscal year. The index against which Fundamental Growth Fund's performance is measured for purposes of determining the performance incentive adjustment is the Lipper Large-Cap Growth Funds Index. (b) Other expenses include an administrative services fee, a transfer agency fee, a custody fee, other nonadvisory expenses and, for Class R4, a plan administration services fee. Other expenses may also include fees and expenses of affiliated and unaffiliated funds (acquired funds) which the Fund indirectly bears when it invests in the acquired funds. The impact of these acquired funds fees and expenses for the most recent fiscal period was less than 0.01%. Because acquired funds will 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 by the Fund with respect to such investments will vary. (c) The investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until May 31, 2008, unless sooner terminated at the discretion of Fundamental Growth Fund's Board. There is no assurance that the investment manager and its affiliates will continue to waive fees or absorb expenses at the current level after the contractual period had expired. Any amounts waived will not be reimbursed by Fundamental Growth Fund. Under this agreement, net Fundamental Growth Fund expenses (excluding fees and expenses of acquired funds), before giving effect to any performance incentive adjustment, will not exceed 1.42% for Class A, 2.18% for Class B, 2.18% for Class C, 0.99% for Class I and 1.29% for Class R4. (d) Includes the impact of a performance incentive adjustment fee that increased the management fee by 0.09% for the most recent fiscal year. The index against which Growth Fund's performance is measured for purposes of determining the performance incentive adjustment is the Lipper Large-Cap Growth Funds Index. (e) The investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until July 31, 2008, unless sooner terminated at the discretion of Growth Fund's Board. There is no assurance that the investment manager and its affiliates will continue to waive fees or absorb expenses at the current level after the contractual period had expired. Any amounts waived will not be reimbursed by Growth Fund. Under this agreement, net Growth Fund expenses (excluding fees and expenses of acquired funds), before giving effect to any performance incentive adjustment, will not exceed 0.97% for Class R4. (f) The performance incentive adjustment arrangements for the Selling Fund and the Buying Fund are structured identically and are computed by comparing the Fund's performance to the performance of an index of comparable funds published by Lipper Inc., as noted above. The maximum adjustment (increase or decrease) is 0.12% of the average net assets on an annual basis. The adjustment is determined monthly by measuring the percentage difference over a rolling 12-month period between the performance of the Fund and the change in the designated Lipper index. Additional information on the calculation methodology is set forth in the Merger SAI. RIVERSOURCE FUNDS -- PROXY STATEMENT 11 EXPENSE EXAMPLES: These examples are intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. These examples assume that you invest $10,000 in the Fund for the time periods and then redeem all of your shares at the end of those periods indicated under the current arrangements and if the proposed Reorganization had been in effect. These examples also assume that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
FUNDAMENTAL GROWTH FUND (ACTUAL) (SELLING FUND) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $710 $ 996 $1,303 $2,173 Class B $720(b) $1,079(b) $1,365(b) $2,315(c) Class C $319(b) $ 676 $1,160 $2,498 Class I $ 93 $ 290 $ 505 $1,124 Class R4 $124 $ 387 $ 671 $1,482
GROWTH FUND (ACTUAL) (BUYING FUND) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $689 $ 931 $1,193 $1,940 Class B $699(b) $1,016(b) $1,258(b) $2,090(c) Class C $298(b) $ 613 $1,053 $2,280 Class I $ 76 $ 237 $ 412 $ 922 Class R4 $106 $ 331 $ 575 $1,276
GROWTH FUND (PRO FORMA COMBINED) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $688 $ 928 $1,188 $1,929 Class B $698(b) $1,013(b) $1,253(b) $2,079(c) Class C $298(b) $ 613 $1,053 $2,280 Class I $ 77 $ 240 $ 418 $ 934 Class R4 $106 $ 331 $ 575 $1,276
(a) Includes a 5.75% sales charge. (b) Includes the applicable CDSC. (c) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. You would pay the following expenses if you did not redeem your shares at the end of the periods indicated.
FUNDAMENTAL GROWTH FUND (ACTUAL) (SELLING FUND) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $710 $996 $1,303 $2,173 Class B $220 $679 $1,165 $2,315(b) Class C $219 $676 $1,160 $2,498 Class I $ 93 $290 $ 505 $1,124 Class R4 $124 $387 $ 671 $1,482
GROWTH FUND (ACTUAL) (BUYING FUND) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $689 $931 $1,193 $1,940 Class B $199 $616 $1,058 $2,090(b) Class C $198 $613 $1,053 $2,280 Class I $ 76 $237 $ 412 $ 922 Class R4 $106 $331 $ 575 $1,276
GROWTH FUND (PRO FORMA COMBINED) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $688 $928 $1,188 $1,929 Class B $198 $613 $1,053 $2,079(b) Class C $198 $613 $1,053 $2,280 Class I $ 77 $240 $ 418 $ 934 Class R4 $106 $331 $ 575 $1,276
(a) Includes a 5.75% sales charge. (b) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. For more information regarding the comparison of the Selling Fund and the Buying Fund, see page 31. For additional information about the Reorganization, see page 62. 12 RIVERSOURCE FUNDS -- PROXY STATEMENT PROPOSAL 3. REORGANIZATION OF INTERNATIONAL EQUITY FUND INTO DISCIPLINED INTERNATIONAL EQUITY FUND ACTUAL AND PRO FORMA FUND EXPENSES FOR THE MOST RECENT FISCAL YEAR SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS I & INTERNATIONAL EQUITY FUND (ACTUAL) (SELLING FUND) CLASS A CLASS B CLASS C R4 Maximum sales charge (load) imposed on purchases (as a percentage of offering price) 5.75%(a) None None None Maximum deferred sales charge (load) imposed on sales (as a percentage of offering price at time of purchase) None 5% 1% None DISCIPLINED INTERNATIONAL EQUITY FUND (ACTUAL) (BUYING FUND) Maximum sales charge (load) imposed on purchases (as a percentage of offering price) 5.75%(a) None None None Maximum deferred sales charge (load) imposed on sales (as a percentage of offering price at time of purchase) None 5% 1% None DISCIPLINED INTERNATIONAL EQUITY FUND (PRO FORMA COMBINED) Maximum sales charge (load) imposed on purchases (as a percentage of offering price) 5.75%(a) None None None Maximum deferred sales charge (load) imposed on sales (as a percentage of offering price at time of purchase) None 5% 1% None
(a) This charge may be reduced depending on the value of your total investments in RiverSource Funds. See page C.6 "Sales Charges." ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS: CLASS INTERNATIONAL EQUITY FUND (ACTUAL) (SELLING FUND) CLASS A CLASS B CLASS C CLASS I R4(A) Management fees(b), (j) 0.97% 0.97% 0.97% 0.97% 0.97% Distribution (12b-1) fees 0.25% 1.00% 1.00% 0.00% 0.00% Other expenses(c) 0.47% 0.49% 0.49% 0.26% 0.56% Total annual fund operating expenses 1.69% 2.46% 2.46% 1.23% 1.53% Fee waiver/expense reimbursement 0.09% 0.09% 0.09% 0.00% 0.10% Total annual (net) fund operating expenses(d) 1.60% 2.37% 2.37% 1.23% 1.43%
CLASS DISCIPLINED INTERNATIONAL EQUITY FUND (ACTUAL) (BUYING FUND) CLASS A CLASS B CLASS C CLASS I R4(A) Management fees(e), (j) 0.80% 0.80% 0.80% 0.80% 0.80% Distribution (12b-1) fees 0.25% 1.00% 1.00% 0.00% 0.00% Other expenses(f) 0.87% 0.89% 0.89% 0.77% 0.95% Total annual fund operating expenses 1.92% 2.69% 2.69% 1.57% 1.75% Fee waiver/expense reimbursement 0.42% 0.42% 0.42% 0.42% 0.42% Total annual (net) fund operating expenses(g) 1.50% 2.27% 2.27% 1.15% 1.33% Acquired fund fees and expenses(h) 0.05% 0.05% 0.05% 0.05% 0.05% Total fund and acquired fund fees and expenses(h) 1.55% 2.32% 2.32% 1.20% 1.38%
CLASS DISCIPLINED INTERNATIONAL EQUITY FUND (PRO FORMA COMBINED) CLASS A CLASS B CLASS C CLASS I R4(A) Management fees(e), (j) 0.80% 0.80% 0.80% 0.80% 0.80% Distribution (12b-1) fees 0.25% 1.00% 1.00% 0.00% 0.00% Other expenses(f) 0.53% 0.52% 0.52% 0.42% 0.60% Total annual fund operating expenses 1.58% 2.32% 2.32% 1.22% 1.40% Fee waiver/expense reimbursement 0.08% 0.06% 0.06% 0.10% 0.03% Total annual (net) fund operating expenses(i) 1.50% 2.26% 2.26% 1.12% 1.37% Acquired fund fees and expenses(h) 0.05% 0.05% 0.05% 0.05% 0.05% Total fund and acquired fund fees and expenses(h) 1.55% 2.31% 2.31% 1.17% 1.42%
(a) In September 2006, the Board approved renaming Class Y as Class R4, terminating the shareholder servicing agreement, revising the fee structure under the transfer agent agreement from account-based to asset-based, and adopting a plan administration services agreement. (b) Includes the impact of a performance incentive adjustment fee that decreased the management fee by 0.002% for the most recent fiscal year. The index against which International Equity Fund's performance is measured for purposes of determining the performance incentive adjustment is the Lipper International Funds Index. (c) Other expenses include an administrative services fee, a transfer agency fee, a custody fee, other nonadvisory expenses and, for Class R4, a plan administration services fee. Other expenses may also include fees and expenses of affiliated and unaffiliated funds (acquired funds) which the Fund indirectly bears when it invests in the acquired funds. The impact of these acquired funds fees and expenses for the most recent fiscal period was less than 0.01%. Because acquired funds will have varied expense and RIVERSOURCE FUNDS -- PROXY STATEMENT 13 fee levels and the Fund may own different proportions of acquired funds at different times, the amount of fees and expenses incurred by the Fund with respect to such investments will vary. (d) The investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until Oct. 31, 2007, unless sooner terminated at the discretion of International Equity Fund's Board. There is no assurance that the investment manager and its affiliates will continue to waive fees or absorb expenses at the current level after the contractual period had expired. Any amounts waived will not be reimbursed by International Equity Fund. Under this agreement, net International Equity Fund expenses (excluding fees and expenses of acquired funds), before giving effect to any performance incentive adjustment, will not exceed 1.60% for Class A, 2.37% for Class B, 2.37% for Class C, 1.25% for Class I and 1.43% for Class R4. (e) Disciplined International Equity Fund's management fee may be increased or decreased due to the effect of a performance incentive adjustment. During the period May 18, 2006 (when shares became publicly available) to Oct. 31, 2006, the management fee was not adjusted. The index against which Disciplined International Equity Fund's performance is measured for purposes of determining the performance incentive adjustment is the Lipper International Large-Cap Core Funds Index. (f) Other expenses include an administrative services fee, a transfer agency fee, a custody fee, other nonadvisory expenses and, for Class R4, a plan administration services fee. (g) The investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until Oct. 31, 2007, unless sooner terminated at the discretion of Disciplined International Equity Fund's Board. There is no assurance that the investment manager and its affiliates will continue to waive fees or absorb expenses at the current level after the contractual period had expired. Any amounts waived will not be reimbursed by Disciplined International Equity Fund. Under this agreement, net Disciplined International Equity Fund expenses (excluding fees and expenses of acquired funds), before giving effect to any performance incentive adjustment, will not exceed 1.50% for Class A, 2.27% for Class B, 2.27% for Class C, 1.15% for Class I and 1.33% for Class R4. (h) In addition to the Fund's total annual operating expenses that the Fund bears directly, the Fund's shareholders indirectly bear the expenses of the acquired funds (affiliated and unaffiliated funds) in which the Fund invests. The Fund's "Acquired fund fees and expenses," based on its investment in the acquired funds, is as shown. (i) Effective Nov. 1, 2007, the investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until Oct. 31, 2008, unless sooner terminated at the discretion of Disciplined International Equity Fund's Board. There is no assurance that the investment manager and its affiliates will continue to waive fees or absorb expenses at the current level after the contractual period had expired. Any amounts waived will not be reimbursed by Disciplined International Equity Fund. Under this agreement, net Disciplined International Equity Fund expenses (excluding fees and expenses of acquired funds), before giving effect to any performance incentive adjustment, will not exceed 1.50% for Class A, 2.26% for Class B, 2.26% for Class C, 1.12% for Class I and 1.37% for Class R4. (j) The performance incentive adjustment arrangements for the Selling Fund and the Buying Fund are structured identically and are computed by comparing the Fund's performance to the performance of an index of comparable funds published by Lipper Inc., as noted above. The maximum adjustment (increase or decrease) is 0.12% of the average net assets on an annual basis. The adjustment is determined monthly by measuring the percentage difference over a rolling 12-month period between the performance of the Fund and the change in the designated Lipper index. Additional information on the calculation methodology is set forth in the Merger SAI. EXPENSE EXAMPLES: These examples are intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. These examples assume that you invest $10,000 in the Fund for the time periods and then redeem all of your shares at the end of those periods indicated under the current arrangements and if the proposed Reorganization had been in effect. These examples also assume that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
INTERNATIONAL EQUITY FUND (ACTUAL) (SELLING FUND) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $728 $1,069 $1,433 $2,456 Class B $740(b) $1,158(b) $1,503(b) $2,603(c) Class C $340(b) $ 758 $1,303 $2,794 Class I $125 $ 391 $ 677 $1,494 Class R4 $146 $ 474 $ 826 $1,820
DISCIPLINED INTERNATIONAL EQUITY FUND (ACTUAL) (BUYING FUND) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $724 $1,120 $1,541 $2,712 Class B $735(b) $1,211(b) $1,613(b) $2,858(c) Class C $335(b) $ 811 $1,413 $3,044 Class I $122 $ 470 $ 843 $1,892 Class R4 $140 $ 526 $ 937 $2,087
DISCIPLINED INTERNATIONAL EQUITY FUND (PRO FORMA COMBINED) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $724 $1,053 $1,404 $2,395 Class B $734(b) $1,134(b) $1,461(b) $2,521(c) Class C $334(b) $ 734 $1,261 $2,706 Class I $119 $ 393 $ 688 $1,530 Class R4 $145 $ 456 $ 790 $1,738
(a) Includes a 5.75% sales charge. (b) Includes the applicable CDSC. (c) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. 14 RIVERSOURCE FUNDS -- PROXY STATEMENT You would pay the following expenses if you did not redeem your shares at the end of the periods indicated.
INTERNATIONAL EQUITY FUND (ACTUAL) (SELLING FUND) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $728 $1,069 $1,433 $2,456 Class B $240 $ 758 $1,303 $2,603(b) Class C $240 $ 758 $1,303 $2,794 Class I $125 $ 391 $ 677 $1,494 Class R4 $146 $ 474 $ 826 $1,820
DISCIPLINED INTERNATIONAL EQUITY FUND (ACTUAL) (BUYING FUND) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $724 $1,120 $1,541 $2,712 Class B $235 $ 811 $1,413 $2,858(b) Class C $235 $ 811 $1,413 $3,044 Class I $122 $ 470 $ 843 $1,892 Class R4 $140 $ 526 $ 937 $2,087
DISCIPLINED INTERNATIONAL EQUITY FUND (PRO FORMA COMBINED) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $724 $1,053 $1,404 $2,395 Class B $234 $ 734 $1,261 $2,521(b) Class C $234 $ 734 $1,261 $2,706 Class I $119 $ 393 $ 688 $1,530 Class R4 $145 $ 456 $ 790 $1,738
(a) Includes a 5.75% sales charge. (b) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. For more information regarding the comparison of the Selling Fund and the Buying Fund, see page 38. For additional information about the Reorganization, see page 62. RIVERSOURCE FUNDS -- PROXY STATEMENT 15 PROPOSALS 4, 5 AND 6. REORGANIZATIONS OF EACH OF MASSACHUSETTS TAX-EXEMPT FUND, MICHIGAN TAX-EXEMPT FUND AND OHIO TAX-EXEMPT FUND INTO TAX-EXEMPT HIGH INCOME FUND ACTUAL AND PRO FORMA FUND EXPENSES FOR THE MOST RECENT FISCAL YEAR SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
MASSACHUSETTS TAX-EXEMPT FUND, MICHIGAN TAX-EXEMPT FUND AND OHIO TAX-EXEMPT FUND (ACTUAL) (SELLING FUNDS) CLASS A CLASS B CLASS C Maximum sales charge (load) imposed on purchases (as a percentage of offering price) 4.75%(a) None None Maximum deferred sales charge (load) imposed on sales (as a percentage of offering price at time of purchase) None 5% 1% TAX-EXEMPT HIGH INCOME FUND (ACTUAL) (BUYING FUND) Maximum sales charge (load) imposed on purchases (as a percentage of offering price) 4.75%(a) None None Maximum deferred sales charge (load) imposed on sales (as a percentage of offering price at time of purchase) None 5% 1% TAX-EXEMPT HIGH INCOME FUND (PRO FORMA COMBINED) Maximum sales charge (load) imposed on purchases (as a percentage of offering price) 4.75%(a) None None Maximum deferred sales charge (load) imposed on sales (as a percentage of offering price at time of purchase) None 5% 1%
(a) This charge may be reduced depending on the value of your total investments in RiverSource Funds. See page C.6 "Sales Charges." ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS:
MASSACHUSETTS TAX-EXEMPT FUND (ACTUAL) (SELLING FUND) CLASS A CLASS B CLASS C Management fees 0.41% 0.41% 0.41% Distribution (12b-1) fees 0.25% 1.00% 1.00% Other expenses(a) 0.40% 0.40% 0.41% Total annual fund operating expenses 1.06% 1.81% 1.82% Fee waiver/expense reimbursement 0.23% 0.23% 0.24% Total annual (net) fund operating expenses(b) 0.83% 1.58% 1.58% MICHIGAN TAX-EXEMPT FUND (ACTUAL) (SELLING FUND) Management fees 0.41% 0.41% 0.41% Distribution (12b-1) fees 0.25% 1.00% 1.00% Other expenses(a) 0.42% 0.40% 0.42% Total annual fund operating expenses 1.08% 1.81% 1.83% Fee waiver/expense reimbursement 0.27% 0.24% 0.27% Total annual (net) fund operating expenses(b) 0.81% 1.57% 1.56% OHIO TAX-EXEMPT FUND (ACTUAL) (SELLING FUND) Management fees 0.41% 0.41% 0.41% Distribution (12b-1) fees 0.25% 1.00% 1.00% Other expenses(a) 0.41% 0.40% 0.41% Total annual fund operating expenses 1.07% 1.81% 1.82% Fee waiver/expense reimbursement 0.26% 0.25% 0.26% Total annual (net) fund operating expenses(b) 0.81% 1.56% 1.56% TAX-EXEMPT HIGH INCOME FUND (ACTUAL) (BUYING FUND) Management fees 0.44% 0.44% 0.44% Distribution (12b-1) fees 0.25% 1.00% 1.00% Other expenses(c) 0.39% 0.40% 0.40% Total annual fund operating expenses 1.08% 1.84% 1.84% Fee waiver/expense reimbursement 0.03% 0.03% 0.03% Total annual (net) fund operating expenses(d) 1.05% 1.81% 1.81%
(a) Other expenses include an administrative services fee, a transfer agency fee, a custody fee and other nonadvisory expenses. Other expenses also include 0.04%, 0.02% and 0.02% for Massachusetts Tax-Exempt Fund, Michigan Tax-Exempt Fund, and Ohio Tax-Exempt Fund, respectively, of interest and fee expense related to the Fund's participation in certain inverse floater programs where the Fund transferred fixed rate municipal bonds it owns to a trust in exchange for inverse floating rate securities and cash. The trust funds the purchase of the fixed rate municipal bonds by issuing related short-term floating rate notes to third parties (inverse floater programs). (b) The investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until Aug. 31, 2008, unless sooner terminated at the discretion of the Fund's Board. There is no assurance that the investment manager and its affiliates will continue to waive fees or absorb expenses at the current level after the contractual period had expired. Any amounts waived will not be reimbursed by the Fund. Under this agreement, net Fund expenses (excluding interest and fee expenses related to the Fund's participation in certain inverse floater programs) for Massachusetts Tax-Exempt Fund and Ohio Tax-Exempt Fund will not exceed 0.79% for Class A; 1.54% for Class B and 1.54% for Class C and for Michigan Tax-Exempt Fund will not exceed 0.79% for Class A, 1.55% for Class B and 1.54% for Class C. 16 RIVERSOURCE FUNDS -- PROXY STATEMENT (c) Other expenses include an administrative services fee, a transfer agency fee, a custody fee and other nonadvisory expenses. Other expenses also include 0.26% of interest and fee expense related to Tax-Exempt High Income Fund's participation in certain inverse floater programs where the Fund transferred fixed rate municipal bonds it owns to a trust in exchange for inverse floating rate securities and cash. The trust funds the purchase of the fixed rate municipal bonds by issuing related short-term floating rate notes to third parties (inverse floater programs). (d) The investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until Nov. 30, 2007, unless sooner terminated at the discretion of Tax-Exempt High Income Fund's Board. There is no assurance that the investment manager and its affiliates will continue to waive fees or absorb expenses at the current level after the contractual period had expired. Any amounts waived will not be reimbursed by Tax-Exempt High Income Fund. Under this agreement, net Tax-Exempt High Income Fund expenses (excluding interest and fee expenses related to the Fund's participation in certain inverse floater programs) will not exceed 0.79% for Class A, 1.55% for Class B and 1.55% for Class C. The number of Reorganizations into the Tax-Exempt High Income Fund that occur will affect the total Annual Fund Operating Expenses of the Acquiring Fund on a pro forma combined basis after the Reorganizations. The tables below present the pro forma combined Annual Fund Operating Expenses assuming in each case that one, two or three of the Reorganizations into the Tax-Exempt High Income Fund are consummated. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) (CONTINUED)
TAX-EXEMPT HIGH INCOME FUND (PRO FORMA COMBINED, ASSUMING REORGANIZATION OF ONLY MASSACHUSETTS TAX-EXEMPT FUND IS CONSUMMATED) CLASS A CLASS B CLASS C Management fees 0.44% 0.44% 0.44% Distribution (12b-1) fees 0.25% 1.00% 1.00% Other expenses(a) 0.40% 0.41% 0.41% Total annual fund operating expenses 1.09% 1.85% 1.85% Fee waiver/expense reimbursement 0.04% 0.05% 0.05% Total annual (net) fund operating expenses(b) 1.05% 1.80% 1.80%
TAX-EXEMPT HIGH INCOME FUND (PRO FORMA COMBINED, ASSUMING REORGANIZATION OF ONLY MICHIGAN TAX-EXEMPT FUND IS CONSUMMATED) CLASS A CLASS B CLASS C Management fees 0.44% 0.44% 0.44% Distribution (12b-1) fees 0.25% 1.00% 1.00% Other expenses(a) 0.40% 0.41% 0.41% Total annual fund operating expenses 1.09% 1.85% 1.85% Fee waiver/expense reimbursement 0.04% 0.05% 0.05% Total annual (net) fund operating expenses(b) 1.05% 1.80% 1.80%
TAX-EXEMPT HIGH INCOME FUND (PRO FORMA COMBINED, ASSUMING REORGANIZATIONS OF ONLY OHIO TAX-EXEMPT FUND IS CONSUMMATED) CLASS A CLASS B CLASS C Management fees 0.44% 0.44% 0.44% Distribution (12b-1) fees 0.25% 1.00% 1.00% Other expenses(a) 0.40% 0.40% 0.41% Total annual fund operating expenses 1.09% 1.84% 1.85% Fee waiver/expense reimbursement 0.04% 0.04% 0.05% Total annual (net) fund operating expenses(b) 1.05% 1.80% 1.80%
TAX-EXEMPT HIGH INCOME FUND (PRO FORMA COMBINED, ASSUMING REORGANIZATIONS OF ONLY MASSACHUSETTS TAX-EXEMPT FUND AND MICHIGAN TAX-EXEMPT FUND ARE CONSUMMATED) CLASS A CLASS B CLASS C Management fees 0.44% 0.44% 0.44% Distribution (12b-1) fees 0.25% 1.00% 1.00% Other expenses(a) 0.40% 0.40% 0.41% Total annual fund operating expenses 1.09% 1.84% 1.85% Fee waiver/expense reimbursement 0.04% 0.04% 0.05% Total annual (net) fund operating expenses(b) 1.05% 1.80% 1.80%
TAX-EXEMPT HIGH INCOME FUND (PRO FORMA COMBINED, ASSUMING REORGANIZATIONS OF ONLY MASSACHUSETTS TAX-EXEMPT FUND AND OHIO TAX-EXEMPT FUND ARE CONSUMMATED) CLASS A CLASS B CLASS C Management fees 0.44% 0.44% 0.44% Distribution (12b-1) fees 0.25% 1.00% 1.00% Other expenses(a) 0.40% 0.40% 0.41% Total annual fund operating expenses 1.09% 1.84% 1.85% Fee waiver/expense reimbursement 0.04% 0.04% 0.05% Total annual (net) fund operating expenses(b) 1.05% 1.80% 1.80%
RIVERSOURCE FUNDS -- PROXY STATEMENT 17 ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) (CONTINUED)
TAX-EXEMPT HIGH INCOME FUND (PRO FORMA COMBINED, ASSUMING REORGANIZATIONS OF ONLY MICHIGAN TAX-EXEMPT FUND AND OHIO TAX-EXEMPT FUND ARE CONSUMMATED) CLASS A CLASS B CLASS C Management fees 0.44% 0.44% 0.44% Distribution (12b-1) fees 0.25% 1.00% 1.00% Other expenses(a) 0.40% 0.40% 0.41% Total annual fund operating expenses 1.09% 1.84% 1.85% Fee waiver/expense reimbursement 0.04% 0.04% 0.05% Total annual (net) fund operating expenses(b) 1.05% 1.80% 1.80%
TAX-EXEMPT HIGH INCOME FUND (PRO FORMA COMBINED, ASSUMING REORGANIZATIONS OF MASSACHUSETTS TAX-EXEMPT FUND, MICHIGAN TAX-EXEMPT FUND AND OHIO TAX-EXEMPT FUND ARE CONSUMMATED) CLASS A CLASS B CLASS C Management fees 0.44% 0.44% 0.44% Distribution (12b-1) fees 0.25% 1.00% 1.00% Other expenses(a) 0.40% 0.40% 0.41% Total annual fund operating expenses 1.09% 1.84% 1.85% Fee waiver/expense reimbursement 0.04% 0.04% 0.05% Total annual (net) fund operating expenses(b) 1.05% 1.80% 1.80%
(a) Other expenses include an administrative services fee, a transfer agency fee, a custody fee and other nonadvisory expenses. Other expenses also include 0.26% of interest and fee expense related to the Fund's participation in certain inverse floater programs where the Fund transferred fixed rate municipal bonds it owns to a trust in exchange for inverse floating rate securities and cash. The trust funds the purchase of the fixed rate municipal bonds by issuing related short-term floating rate notes to third parties (inverse floater programs). (b) Effective Dec. 1, 2007, the investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until Nov. 30, 2008, unless sooner terminated at the discretion of Tax-Exempt High Income Fund's Board. There is no assurance that the investment manager and its affiliates will continue to waive fees or absorb expenses at the current level after the contractual period had expired. Any amounts waived will not be reimbursed by Tax-Exempt High Income Fund. Under this agreement, net Tax-Exempt High Income Fund expenses (excluding interest and fee expenses related to the Fund's participation in certain inverse floater programs) will not exceed 0.79% for Class A, 1.54% for Class B and 1.54% for Class C. 18 RIVERSOURCE FUNDS -- PROXY STATEMENT EXPENSE EXAMPLES: These examples are intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. These examples assume that you invest $10,000 in the Fund for the time periods and then redeem all of your shares at the end of those periods indicated under the current arrangements and if the proposed Reorganization had been in effect. These examples also assume that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
MASSACHUSETTS TAX-EXEMPT FUND (ACTUAL) (SELLING FUND) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $556 $775 $1,012 $1,692 Class B $661(b) $947(b) $1,160(b) $1,915(c) Class C $261(b) $550 $ 964 $2,123 MICHIGAN TAX-EXEMPT FUND (ACTUAL) (SELLING FUND) Class A(a) $554 $777 $1,018 $1,711 Class B $660(b) $946(b) $1,159(b) $1,919(c) Class C $259(b) $550 $ 966 $2,131 OHIO TAX-EXEMPT FUND (ACTUAL) (SELLING FUND) Class A(a) $554 $775 $1,014 $1,701 Class B $659(b) $945(b) $1,158(b) $1,916(c) Class C $259(b) $548 $ 962 $2,121 TAX-EXEMPT HIGH INCOME FUND (ACTUAL) (BUYING FUND) Class A(a) $577 $800 $1,040 $1,732 Class B $684(b) $976(b) $1,194(b) $1,961(c) Class C $284(b) $576 $ 994 $2,161
TAX-EXEMPT HIGH INCOME FUND (PRO FORMA COMBINED, ASSUMING REORGANIZATION OF ONLY MASSACHUSETTS TAX-EXEMPT FUND IS CONSUMMATED) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $577 $802 $1,044 $1,742 Class B $683(b) $977(b) $1,197(b) $1,970(c) Class C $283(b) $577 $ 997 $2,170
TAX-EXEMPT HIGH INCOME FUND (PRO FORMA COMBINED, ASSUMING REORGANIZATION OF ONLY MICHIGAN TAX-EXEMPT FUND IS CONSUMMATED) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $577 $802 $1,044 $1,742 Class B $683(b) $977(b) $1,197(b) $1,970(c) Class C $283(b) $577 $ 997 $2,170
TAX-EXEMPT HIGH INCOME FUND (PRO FORMA COMBINED, ASSUMING REORGANIZATION OF ONLY OHIO TAX-EXEMPT FUND IS CONSUMMATED) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $577 $802 $1,044 $1,742 Class B $683(b) $975(b) $1,193(b) $1,963(c) Class C $283(b) $577 $ 997 $2,170
TAX-EXEMPT HIGH INCOME FUND (PRO FORMA COMBINED, ASSUMING REORGANIZATIONS OF ONLY MASSACHUSETTS TAX-EXEMPT FUND AND MICHIGAN TAX-EXEMPT FUND ARE CONSUMMATED) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $577 $802 $1,044 $1,742 Class B $683(b) $975(b) $1,193(b) $1,963(c) Class C $283(b) $577 $ 997 $2,170
TAX-EXEMPT HIGH INCOME FUND (PRO FORMA COMBINED, ASSUMING REORGANIZATIONS OF ONLY MASSACHUSETTS TAX-EXEMPT FUND AND OHIO TAX-EXEMPT FUND ARE CONSUMMATED) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $577 $802 $1,044 $1,742 Class B $683(b) $975(b) $1,193(b) $1,963(c) Class C $283(b) $577 $ 997 $2,170
TAX-EXEMPT HIGH INCOME FUND (PRO FORMA COMBINED, ASSUMING REORGANIZATIONS OF ONLY MICHIGAN TAX-EXEMPT FUND AND OHIO TAX-EXEMPT FUND ARE CONSUMMATED) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $577 $802 $1,044 $1,742 Class B $683(b) $975(b) $1,193(b) $1,963(c) Class C $283(b) $577 $ 997 $2,170
RIVERSOURCE FUNDS -- PROXY STATEMENT 19
TAX-EXEMPT HIGH INCOME FUND (PRO FORMA COMBINED, ASSUMING REORGANIZATIONS OF MASSACHUSETTS TAX-EXEMPT FUND, MICHIGAN TAX-EXEMPT FUND AND OHIO TAX-EXEMPT FUND ARE CONSUMMATED) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $577 $802 $1,044 $1,742 Class B $683(b) $975(b) $1,193(b) $1,963(c) Class C $283(b) $577 $ 997 $2,170
(a) Includes a 4.75% sales charge. (b) Includes the applicable CDSC. (c) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. You would pay the following expenses if you did not redeem your shares at the end of the periods indicated.
MASSACHUSETTS TAX-EXEMPT FUND (ACTUAL) (SELLING FUND) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $556 $775 $1,012 $1,692 Class B $161 $547 $ 960 $1,915(b) Class C $161 $550 $ 964 $2,123
MICHIGAN TAX-EXEMPT FUND (ACTUAL) (SELLING FUND) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $554 $777 $1,018 $1,711 Class B $160 $546 $ 959 $1,919(b) Class C $159 $550 $ 966 $2,131
OHIO TAX-EXEMPT FUND (ACTUAL) (SELLING FUND) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $554 $775 $1,014 $1,701 Class B $159 $545 $ 958 $1,916(b) Class C $159 $548 $ 962 $2,121
TAX-EXEMPT HIGH INCOME FUND (ACTUAL) (BUYING FUND) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $577 $800 $1,040 $1,732 Class B $184 $576 $ 994 $1,961(b) Class C $184 $576 $ 994 $2,161
TAX-EXEMPT HIGH INCOME FUND (PRO FORMA COMBINED, ASSUMING REORGANIZATION OF ONLY MASSACHUSETTS TAX-EXEMPT FUND IS CONSUMMATED) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $577 $802 $1,044 $1,742 Class B $183 $577 $ 997 $1,970(b) Class C $183 $577 $ 997 $2,170
TAX-EXEMPT HIGH INCOME FUND (PRO FORMA COMBINED, ASSUMING REORGANIZATION OF ONLY MICHIGAN TAX-EXEMPT FUND IS CONSUMMATED) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $577 $802 $1,044 $1,742 Class B $183 $577 $ 997 $1,970(b) Class C $183 $577 $ 997 $2,170
TAX-EXEMPT HIGH INCOME FUND (PRO FORMA COMBINED, ASSUMING REORGANIZATION OF ONLY OHIO TAX-EXEMPT FUND IS CONSUMMATED) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $577 $802 $1,044 $1,742 Class B $183 $575 $ 993 $1,963(b) Class C $183 $577 $ 997 $2,170
TAX-EXEMPT HIGH INCOME FUND (PRO FORMA COMBINED, ASSUMING REORGANIZATIONS OF ONLY MASSACHUSETTS TAX-EXEMPT FUND AND MICHIGAN TAX-EXEMPT FUND ARE CONSUMMATED) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $577 $802 $1,044 $1,742 Class B $183 $575 $ 993 $1,963(b) Class C $183 $577 $ 997 $2,170
TAX-EXEMPT HIGH INCOME FUND (PRO FORMA COMBINED, ASSUMING REORGANIZATIONS OF ONLY MASSACHUSETTS TAX-EXEMPT FUND AND OHIO TAX-EXEMPT FUND ARE CONSUMMATED) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $577 $802 $1,044 $1,742 Class B $183 $575 $ 993 $1,963(b) Class C $183 $577 $ 997 $2,170
20 RIVERSOURCE FUNDS -- PROXY STATEMENT
TAX-EXEMPT HIGH INCOME FUND (PRO FORMA COMBINED, ASSUMING REORGANIZATIONS OF ONLY MICHIGAN TAX-EXEMPT FUND AND OHIO TAX-EXEMPT FUND ARE CONSUMMATED) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $577 $802 $1,044 $1,742 Class B $183 $575 $ 993 $1,963(b) Class C $183 $577 $ 997 $2,170
TAX-EXEMPT HIGH INCOME FUND (PRO FORMA COMBINED, ASSUMING REORGANIZATIONS OF MASSACHUSETTS TAX-EXEMPT FUND, MICHIGAN TAX-EXEMPT FUND AND OHIO TAX-EXEMPT FUND ARE CONSUMMATED) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $577 $802 $1,044 $1,742 Class B $183 $575 $ 993 $1,963(b) Class C $183 $577 $ 997 $2,170
(a) Includes a 4.75% sales charge. (b) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. For more information regarding the comparison of the Selling Funds and the Buying Fund, see page 45. For additional information about the Reorganization, see page 62. RIVERSOURCE FUNDS -- PROXY STATEMENT 21 PROPOSAL 7. REORGANIZATION OF VALUE FUND INTO DIVERSIFIED EQUITY INCOME FUND ACTUAL AND PRO FORMA FUND EXPENSES FOR THE MOST RECENT FISCAL YEAR SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS I & VALUE FUND (ACTUAL) (SELLING FUND) CLASS A CLASS B CLASS C R4 Maximum sales charge (load) imposed on purchases (as a percentage of offering price) 5.75%(a) None None None Maximum deferred sales charge (load) imposed on sales (as a percentage of offering price at time of purchase) None 5% 1% None DIVERSIFIED EQUITY INCOME FUND (ACTUAL) (BUYING FUND) Maximum sales charge (load) imposed on purchases (as a percentage of offering price) 5.75%(a) None None None Maximum deferred sales charge (load) imposed on sales (as a percentage of offering price at time of purchase) None 5% 1% None DIVERSIFIED EQUITY INCOME FUND (PRO FORMA COMBINED) Maximum sales charge (load) imposed on purchases (as a percentage of offering price) 5.75%(a) None None None Maximum deferred sales charge (load) imposed on sales (as a percentage of offering price at time of purchase) None 5% 1% None
(a) This charge may be reduced depending on the value of your total investments in RiverSource Funds. See page C.6 "Sales Charges." ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS: CLASS VALUE FUND (ACTUAL) (SELLING FUND) CLASS A CLASS B CLASS C CLASS I R4(A) Management fees(b),(g) 0.72% 0.72% 0.72% 0.72% 0.72% Distribution (12b-1) fees 0.25% 1.00% 1.00% 0.00% 0.00% Other expenses(c) 0.32% 0.34% 0.33% 0.12% 0.42% Total annual fund operating expenses 1.29% 2.06% 2.05% 0.84% 1.14% Fee waiver/expense reimbursement 0.07% 0.08% 0.07% 0.01% 0.05% Total annual (net) fund operating expenses(d) 1.22% 1.98% 1.98% 0.83% 1.09%
CLASS DIVERSIFIED EQUITY INCOME FUND (ACTUAL) (BUYING FUND) CLASS A CLASS B CLASS C CLASS I R4(A) Management fees(e), (g) 0.56% 0.56% 0.56% 0.56% 0.56% Distribution (12b-1) fees 0.25% 1.00% 1.00% 0.00% 0.00% Other expenses(c) 0.19% 0.20% 0.20% 0.06% 0.37% Total annual fund operating expenses 1.00% 1.76% 1.76% 0.62% 0.93% Fee waiver/expense reimbursement 0.00% 0.00% 0.00% 0.00% 0.02% Total annual (net) fund operating expenses 1.00% 1.76% 1.76% 0.62% 0.91%(f)
CLASS DIVERSIFIED EQUITY INCOME FUND (PRO FORMA COMBINED) CLASS A CLASS B CLASS C CLASS I R4(A) Management fees(e),(g) 0.56% 0.56% 0.56% 0.56% 0.56% Distribution (12b-1) fees 0.25% 1.00% 1.00% 0.00% 0.00% Other expenses(c) 0.19% 0.20% 0.20% 0.06% 0.37% Total annual fund operating expenses 1.00% 1.76% 1.76% 0.62% 0.93% Fee waiver/expense reimbursement 0.00% 0.00% 0.00% 0.00% 0.02% Total annual (net) fund operating expenses 1.00% 1.76% 1.76% 0.62% 0.91%(f)
(a) Effective Dec. 11, 2006, the following changes were implemented: renaming Class Y as Class R4, terminating the shareholder servicing agreement, revising the fee structure under the transfer agent agreement from account-based to asset-based, and adopting a plan administration services agreement. (b) Includes the impact of a performance incentive adjustment fee that decreased the management fee by 0.01% for the most recent fiscal year. The index against which Value Fund's performance is measured for purposes of determining the performance incentive adjustment is the Lipper Large-Cap Value Funds Index. (c) Other expenses include an administrative services fee, a transfer agency fee, a custody fee, other nonadvisory expenses and, for Class R4, a plan administration services fee. Other expenses may also include fees and expenses of affiliated and unaffiliated funds (acquired funds) which the Fund indirectly bears when it invests in the acquired funds. The impact of these acquired funds fees and expenses for the most recent fiscal period was less than 0.01%. Because acquired funds will 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 by the Fund with respect to such investments will vary. (d) The investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until May 31, 2008, unless sooner terminated at the discretion of Value Fund's Board. There is no assurance that the investment manager and its affiliates will continue to waive fees or absorb expenses at the current level after the contractual period had expired. Any amounts waived will not be reimbursed by Value Fund. Under this agreement, net Value Fund expenses (excluding fees and expenses of acquired funds), before giving effect to any performance incentive adjustment, will not exceed 1.23% for Class A, 1.99% for Class B, 1.99% for Class C, 0.84% for Class I and 1.10% for Class R4. (e) Includes the impact of a performance incentive adjustment fee that increased the management fee by 0.02% for the most recent fiscal year. The index against which Diversified Equity Income Fund's performance is measured for purposes of determining the performance incentive adjustment is the Lipper Equity Income Funds Index. (f) The investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until Sept. 30, 2008, unless sooner terminated at the discretion of Diversified Equity Income Fund's Board. There is no assurance that the investment manager and its affiliates will continue to waive fees or absorb expenses at the current level after the contractual period had expired. Any amounts waived will not be reimbursed by Diversified Equity Income Fund. Under this agreement, net Diversified Equity Income Fund expenses, before giving effect to any performance incentive adjustment, will not exceed 0.89% for Class R4. (g) The performance incentive adjustment arrangements for the Selling Fund and the Buying Fund are structured identically and are computed by comparing the Fund's performance to the performance of an index of comparable funds published by Lipper Inc., as noted above. The maximum adjustment (increase or decrease) is 0.12% of the average net assets on an annual basis. The adjustment is determined monthly by measuring the percentage difference over a rolling 12-month period between the performance of the Fund and the change in the designated Lipper index. Additional information on the calculation methodology is set forth in the Merger SAI. 22 RIVERSOURCE FUNDS -- PROXY STATEMENT EXPENSE EXAMPLES: These examples are intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. These examples assume that you invest $10,000 in the Fund for the time periods and then redeem all of your shares at the end of those periods indicated under the current arrangements and if the proposed Reorganization had been in effect. These examples also assume that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
VALUE FUND (ACTUAL) (SELLING FUND) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $692 $ 954 $1,236 $2,041 Class B $701(b) $1,038(b) $1,302(b) $2,190(c) Class C $301(b) $ 636 $1,098 $2,379 Class I $ 85 $ 267 $ 466 $1,040 Class R4 $111 $ 358 $ 624 $1,386
DIVERSIFIED EQUITY INCOME FUND (ACTUAL) (BUYING FUND) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $671 $875 $1,097 $1,733 Class B $679(b) $954(b) $1,155(b) $1,877(c) Class C $279(b) $554 $ 955 $2,078 Class I $ 63 $199 $ 346 $ 778 Class R4 $ 93 $295 $ 514 $1,146
DIVERSIFIED EQUITY INCOME FUND (PRO FORMA COMBINED) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $671 $875 $1,097 $1,733 Class B $679(b) $954(b) $1,155(b) $1,877(c) Class C $279(b) $554 $ 955 $2,078 Class I $ 63 $199 $ 346 $ 778 Class R4 $ 93 $295 $ 514 $1,146
(a) Includes a 5.75% sales charge. (b) Includes the applicable CDSC. (c) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. You would pay the following expenses if you did not redeem your shares at the end of the periods indicated.
VALUE FUND (ACTUAL) (SELLING FUND) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $692 $954 $1,236 $2,041 Class B $201 $638 $1,102 $2,190(b) Class C $201 $636 $1,098 $2,379 Class I $ 85 $267 $ 466 $1,040 Class R4 $111 $358 $ 624 $1,386
DIVERSIFIED EQUITY INCOME FUND (ACTUAL) (BUYING FUND) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $671 $875 $1,097 $1,733 Class B $179 $554 $ 955 $1,877(b) Class C $179 $554 $ 955 $2,078 Class I $ 63 $199 $ 346 $ 778 Class R4 $ 93 $295 $ 514 $1,146
DIVERSIFIED EQUITY INCOME FUND (PRO FORMA COMBINED) 1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $671 $875 $1,097 $1,733 Class B $179 $554 $ 955 $1,877(b) Class C $179 $554 $ 955 $2,078 Class I $ 63 $199 $ 346 $ 778 Class R4 $ 93 $295 $ 514 $1,146
(a) Includes a 5.75% sales charge. (b) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. For more information regarding the comparison of the Selling Fund and the Buying Fund, see page 55. For additional information about the Reorganization, see page 62. RIVERSOURCE FUNDS -- PROXY STATEMENT 23 PROPOSAL 1. REORGANIZATION OF CORE BOND FUND INTO DIVERSIFIED BOND FUND COMPARISON OF THE SELLING FUND AND THE BUYING FUND Both the Selling Fund and the Buying Fund: - - Have RiverSource Investments as an investment adviser. - - Have the same policies for buying and selling shares and the same exchange rights. - - Have the same distribution policies. - - Offer the same classes of shares: Classes A, B, C, I, R2, R3, R4, R5 and W. - - Are structured as a series of capital stock of an open-end management investment company organized as a Minnesota corporation. COMPARISON OF INVESTMENT OBJECTIVES The investment objectives for the Funds are as follows: SELLING FUND: Core Bond Fund seeks to provide shareholders with a high total return through current income and capital appreciation. BUYING FUND: 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. COMPARISON OF PRINCIPAL INVESTMENT STRATEGIES Each Fund seeks to achieve its investment objective by investing 80% of its net assets in bonds and other debt securities. The Selling Fund invests primarily, and the Buying Fund invests at least 50%, in securities included in the Lehman Brothers Aggregate Bond Index, which are investment grade and denominated in U.S. dollars. Unlike the Selling Fund, which does not invest in securities rated below investment grade, the Buying Fund may invest up to 50% in securities rated below investment grade (junk bonds). As of Oct. 31, 2007, investments in below investment grade securities for the Selling Fund and the Buying Fund were 0% and 5.84%, respectively. Each of the Selling Fund and the Buying Fund may invest up to 25% in foreign investments all of which may include investments in emerging markets. As of Oct. 31, 2007, investments in emerging markets for the Selling Fund and the Buying Fund were 0% and 0.43%, respectively. Both Funds target an average portfolio duration within one year of the Lehman Brothers Aggregate Bond Index. Neither the Selling Fund nor the Buying Fund has a limitation on investments in mortgage-backed securities. As of Oct. 31, 2007, the Selling Fund's and the Buying Fund's exposure to mortgage-backed securities were materially identical at 46.05% and 46.08% of net assets, respectively. Further, the Selling Fund's and the Buying Fund's exposure to subprime mortgage-backed securities were materially identical at between 1% and 2% of net assets. Detailed strategies for the Selling Fund and the Buying Fund are set forth below: CORE BOND FUND (SELLING FUND): Under normal market conditions, Core Bond Fund invests at least 80% of its net assets in bonds and other debt securities. Although the Fund is not an index fund, it invests primarily in securities like those included in the Lehman Brothers Aggregate Bond Index (the Index), which are investment grade and denominated in U.S. dollars. The Index includes securities issued by the U.S. government, corporate bonds, and mortgage- and asset-backed securities. The Fund will not invest in securities rated below investment grade, although it may hold securities that have been downgraded. The Fund will provide shareholders with at least 60 days' notice of any change in the 80% policy. In pursuit of Core Bond Fund's objective, the investment manager chooses investments by: - - Evaluating the portfolio's total exposure to sectors, industries and securities relative to the Index. - - Analyzing factors such as credit quality, interest rate outlook and price to select the most attractive securities within each sector (for example, identifying securities that have the opportunity to appreciate in value or provide income based on duration, expectations of changes in interest rates or credit quality). - - Targeting an average portfolio duration within one year of the duration of the Index which, as of July 31, 2007, was 4.67 years. Duration measures the sensitivity of bond prices to changes in interest rates. The longer the duration of a bond, the longer it will take to repay the principal and interest obligations and the more sensitive it will be to changes in interest rates. For example, a five-year duration means a bond is expected to decrease in value by 5% if interest rates rise 1% and increase in value by 5% if interest rates fall 1%. The Fund's investment process employs risk controls that are designed to maintain risk levels comparable to the Index. These controls include review of effective duration and limitation on sector allocations, industry concentration and the size of individual positions. 24 RIVERSOURCE FUNDS -- PROXY STATEMENT In evaluating whether to sell a security, the investment manager considers, among other factors: - - The portfolio's total exposure to sectors, industries and securities relative to the Index. - - Whether a security's rating has changed or is vulnerable to a change. - - Whether a sector or industry is experiencing change. - - Changes in the interest rate or economic outlook. - - Identification of a more attractive opportunity. The investment manager may use derivatives such as futures, options, forward contracts and swaps, including credit default swaps, in an effort to produce incremental earnings, to hedge existing positions, to increase market exposure and investment flexibility, or to obtain or reduce credit exposure. DIVERSIFIED BOND FUND (BUYING FUND): Under normal market conditions, Diversified Bond Fund invests at least 80% of its net assets in bonds and other debt securities. At least 50% of the Fund's net assets will be invested in securities like those included in the Lehman Brothers Aggregate Bond Index (the Index), which are investment grade and denominated in U.S. dollars. The Index includes securities issued by the U.S. government, corporate bonds, and mortgage- and asset-backed securities. Although the Fund emphasizes high- and medium-quality debt securities, it will assume some credit risk in an effort to achieve higher yield and/or capital appreciation by buying lower-quality (junk) bonds. Up to 25% of the Fund's net assets may be invested in foreign investments, which may include investments in emerging markets. The Fund will provide shareholders with at least 60 days' notice of any change in the 80% policy. The selection of debt obligations is the primary decision in building the investment portfolio. In pursuit of Diversified Bond Fund's objective, the investment manager chooses investments by: - - Evaluating the portfolio's total exposure to sectors, industries and securities relative to the Index. - - Analyzing factors such as credit quality, interest rate outlook and price in seeking to select the most attractive securities within each sector. - - Investing in lower-quality (junk) bonds and foreign investments as attractive opportunities arise. - - Targeting an average portfolio duration within one year of the duration of the Index which, as of Aug. 31, 2007 was 4.64 years. Duration measures the sensitivity of bond prices to changes in interest rates. The longer the duration of a bond, the longer it will take to repay the principal and interest obligations and the more sensitive it will be to changes in interest rates. For example, a five-year duration means a bond is expected to decrease in value by 5% if interest rates rise 1% and increase in value by 5% if interest rates fall 1%. In evaluating whether to sell a security, the investment manager considers, among other factors: - - Identification of more attractive investments based on relative value. - - The portfolio's total exposure to sectors, industries and securities relative to the Index. - - Whether a security's rating has changed or is vulnerable to a change. - - Whether a sector or industry is experiencing change. - - Changes in the interest rate or economic outlook. The investment manager may use derivatives such as futures, options, forward contracts and swaps, including credit default swaps, in an effort to produce incremental earnings, to hedge existing positions, to increase market exposure and investment flexibility, or to obtain or reduce credit exposure. BOTH FUNDS: - - Other Investment Strategies. In addition to the principal investment strategies previously described, the Fund may utilize investment strategies that are not principal investment strategies, including investment in affiliated and non-affiliated pooled investment vehicles (including mutual funds and exchange traded funds (ETFs), also referred to as "acquired funds") ownership of which results in the Fund bearing its proportionate share of the acquired funds' fees and expenses. Although ETFs are designed to replicate the price and yield of a specified market index, there is no guarantee that an ETF will track its specified market index, which may result in a loss. For more information on strategies and holdings, and the risks of such strategies, including derivative instruments that the Fund may use, see the Merger SAI and the Fund's annual and semiannual reports. For more information on the impact of derivatives on capital gains distributions, see "Distributions and Taxes" on page C.14. - - Unusual Market Conditions. During unusual market conditions, the Fund may temporarily invest more of its assets in money market securities than during normal market conditions. Although investing in these securities would serve primarily to avoid losses, this type of investing also could prevent the Fund from achieving its investment objective. During these times, the RIVERSOURCE FUNDS -- PROXY STATEMENT 25 portfolio managers may make frequent securities trades that could result in increased fees, expenses and taxes, and decreased performance. Instead of investing in money market securities directly, the fund may invest in shares of an affiliated money market fund. - - Securities Transaction Commissions. Securities transactions involve the payment by the Fund of brokerage commissions to broker-dealers, on occasion as compensation for research or brokerage services (commonly referred to as "soft dollars"), as the portfolio managers buy and sell securities for the Fund in pursuit of its objective. A description of the policies governing the Buying Fund's securities transactions and the dollar value of brokerage commissions paid by the Buying Fund is set forth in the Merger SAI. Funds that invest primarily in fixed income securities do not typically generate brokerage commissions that are used to pay for research or brokerage services. The brokerage commissions set forth in the Merger SAI do not include implied commissions or mark-ups (implied commissions) paid by the Buying Fund for principal transactions (transactions made directly with a dealer or other counterparty), including most fixed income securities (and certain other instruments, including derivatives). Brokerage commissions do not reflect other elements of transaction costs, including the extent to which the Fund's purchase and sale transactions may cause the market to move and change the market price for an investment. Although brokerage commissions and implied commissions are not reflected in the expense table under "Fees and Expenses," they are reflected in the total return of the Fund. - - Portfolio Turnover. Trading of securities may produce capital gains, which are taxable to shareholders when distributed. Active trading may also increase the amount of brokerage commissions paid or mark-ups to broker-dealers that the Fund pays when it buys and sells securities. Capital gains and increased brokerage commissions or mark-ups paid to broker-dealers may adversely affect a fund's performance. The Buying Fund's historical portfolio turnover rate, which measures how frequently the Buying Fund buys and sells investments, is shown in Section D -- "Financial Highlights." Additionally, a higher turnover rate may result in the realization of increased net short-term capital gains, which are taxable to shareholders as ordinary income. As of its most recent fiscal year-end, the portfolio turnover rates for the Selling Fund and Buying Fund were 347% and 295%, respectively. - - Directed Brokerage. The Fund's Board of Directors (Board) has adopted a policy prohibiting the investment manager, or any subadviser, from considering sales of shares of the Fund as a factor in the selection of broker-dealers through which to execute securities transactions. COMPARISON OF FUNDAMENTAL POLICIES The Selling Fund and the Buying Fund have substantially similar fundamental investment policies. The investment manager does not believe that the differences between the fundamental investment policies will result in any material difference in the way the Funds are managed. If shareholders of the Selling Fund approve the Reorganization, they will be subject to the fundamental investment policies of the Buying Fund. The fundamental policies of the Funds are set forth below. Neither of the Funds will: - - Act as an underwriter (sell securities for others). However, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. - - Lend securities or participate in an interfund lending program if the total of all such loans would exceed 33 1/3% of the Fund's total assets except this fundamental investment policy shall not prohibit the Fund from purchasing money market securities, loans, loan participation or other debt securities, or from entering into repurchase agreements. - - Borrow money, except for temporary purposes (not for leveraging or investment) in an amount not exceeding 33 1/3% of its total assets (including the amount borrowed) less liabilities (other than borrowings) immediately after the borrowings. - - Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. - - Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from buying or selling options and futures contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. - - Purchase more than 10% of the outstanding voting securities of an issuer, except that up to 25% of the Fund's assets may be invested without regard to this 10% limitation. - - Invest more than 5% of its total assets in securities of any company, government, or political subdivision thereof, except the limitation will not apply to investments in securities issued or guaranteed by the U.S. government, its agencies, or 26 RIVERSOURCE FUNDS -- PROXY STATEMENT instrumentalities, or other investment companies, and except that up to 25% of the Fund's total assets may be invested without regard to this 5% limitation. - - Concentrate in any one industry. According to the present interpretation by the Securities and Exchange Commission (SEC), this means that up to 25% of the Fund's total assets, based on current market value at time of purchase, can be invested in any one industry. In addition, neither Fund may issue senior securities, except as permitted under the 1940 Act. COMPARISON OF NONFUNDAMENTAL POLICIES Both Funds are also subject to the following nonfundamental policies: - - Up to 25% of the Fund's net assets may be invested in foreign investments. - - No more than 15% of the Fund's net assets will be held in securities and other instruments that are illiquid. COMPARISON OF PRINCIPAL RISK FACTORS The Selling Fund and the Buying Fund are subject to similar principal risks. Although the Buying Fund identifies liquidity as a principal risk, each of the Selling Fund and the Buying Fund are exposed to liquidity risk. The Buying Fund identifies liquidity risk as an increased exposure as a result of its ability to invest in lower quality (junk) bonds. The principal risks of investing in each of the Selling Fund and the Buying Fund are shown below:
PRINCIPAL RISK CORE BOND FUND DIVERSIFIED BOND FUND Active Management Risk X X Credit Risk X X Derivatives Risk X X Foreign/Emerging Markets Risk X Interest Rate Risk X X Liquidity Risk X Market Risk X X Prepayment and Extension Risk X X
- - ACTIVE MANAGEMENT RISK. The Fund is actively managed and its performance therefore will reflect in part the ability of the portfolio managers to make investment decisions that are suited to achieving the Fund's investment objective. Due to its active management, the Fund could underperform other mutual funds with similar investment objectives. - - CREDIT RISK. Credit risk is the risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable or unwilling to honor a financial obligation, such as payments due on a bond or a note. If the Fund purchases unrated securities, or if the rating of a security is reduced after purchase, the Fund will depend on the investment manager's analysis of credit risk more heavily than usual. For the Buying Fund, non-investment grade securities, commonly called "high-yield" or "junk" bonds, may react more to perceived changes in the ability of the issuing entity to pay interest and principal when due than to changes in interest rates. Non-investment grade securities have greater price fluctuations and are more likely to experience a default than investment grade bonds. Because the Buying Fund may invest in lower-rated (junk) bonds, it may be subject to greater credit risk than the Selling Fund. - - DERIVATIVES RISK. Derivatives are financial instruments that have a value which depends upon, or is derived from, the value of something else, such as one or more underlying securities, pools of securities, options, futures, indexes or currencies. Gains or losses involving derivative instruments may be substantial, because a relatively small price movement in the underlying security(ies), instrument, currency or index may result in a substantial gain or loss for the Fund. Derivative instruments in which the Fund invests will typically increase the Fund's exposure to principal risks to which it is otherwise exposed, and may expose the Fund to additional risks, including counterparty credit risk, hedging risk, correlation risk, liquidity risk and leverage risk. Counterparty credit risk is the risk that a counterparty to the derivative instrument becomes bankrupt or otherwise fails to perform its obligations due to financial difficulties, and the Fund may obtain no recovery of its investment or may only obtain a limited recovery, and any recovery may be delayed. Hedging risk is the risk that derivative instruments used to hedge against an opposite position may offset losses, but they may also offset gains. Correlation risk is related to hedging risk and is the risk that there may be an incomplete correlation between the hedge and the opposite position, which may result in increased or unanticipated losses. Liquidity risk is the risk that the derivative instrument may be difficult or impossible to sell or terminate, which may cause the Fund to be in a position to do something the investment manager would not otherwise choose, including, accepting a lower price for the derivative instrument, selling other investments or foregoing another, more appealing investment opportunity. Leverage risk is the risk that losses from the derivative instrument may be greater than the amount invested in the derivative instrument. Certain derivatives have the potential for unlimited losses, regardless of the size of the initial investment. See the Merger SAI for more information on derivative instruments and related risks. RIVERSOURCE FUNDS -- PROXY STATEMENT 27 - - FOREIGN/EMERGING MARKETS RISK. The following are all components of foreign/emerging markets risk: Country risk includes the political, economic, and other conditions of the country. These conditions include lack of publicly available information, less government oversight (including lack of accounting, auditing, and financial reporting standards), the possibility of government-imposed restrictions, and even the nationalization of assets. The liquidity of foreign investments may be more limited than for most U.S. investments, which means that, at times it may be difficult to sell foreign securities at desirable prices. Currency risk results from the constantly changing exchange rate between local currency and the U.S. dollar. Whenever the Fund holds securities valued in a foreign currency or holds the currency, changes in the exchange rate add to or subtract from the value of the investment. Custody risk refers to the process of clearing and settling trades. It also covers holding securities with local agents and depositories. Low trading volumes and volatile prices in less developed markets make trades harder to complete and settle. Local agents are held only to the standard of care of the local market. Governments or trade groups may compel local agents to hold securities in designated depositories that are not subject to independent evaluation. The less developed a country's securities market is, the greater the likelihood of problems occurring. Emerging markets risk includes the dramatic pace of change (economic, social, and political) in these countries as well as the other considerations listed above. These markets are in early stages of development and are extremely volatile. They can be marked by extreme inflation, devaluation of currencies, dependence on trade partners, and hostile relations with neighboring countries. - - INTEREST RATE RISK. Interest rate risk is the risk of losses attributable to changes in interest rates. Interest rate risk is generally associated with bond prices: when interest rates rise, bond prices fall. In general, the longer the maturity or duration of a bond, the greater its sensitivity to changes in interest rates. - - LIQUIDITY RISK. The risk associated from a lack of marketability of securities which may make it difficult or impossible to sell at desirable prices in order to minimize loss. The Fund may have to lower the selling price, sell other investments, or forego another, more appealing investment opportunity. - - MARKET RISK. The market value of securities may fall or fail to rise. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of securities may fluctuate, sometimes rapidly and unpredictably. - - PREPAYMENT AND EXTENSION RISK. Prepayment and extension risk is the risk that a bond or other security might be called, or otherwise converted, prepaid, or redeemed, before maturity. This risk is primarily associated with asset-backed securities, including mortgage backed securities. If a security is converted, prepaid, or redeemed, before maturity, particularly during a time of declining interest rates, the investment manager may not be able to reinvest in securities providing as high a level of income, resulting in a reduced yield to the Fund. Conversely, as interest rates rise, the likelihood of prepayment decreases. The investment manager may be unable to capitalize on securities with higher interest rates because the Fund's investments are locked in at a lower rate for a longer period of time. PERFORMANCE The following bar chart and table provide some illustration of the risks of investing in the Fund by showing, respectively: - - how the Fund's performance has varied for each full calendar year shown on the bar chart; and - - how the Fund's average annual total returns compare to recognized indexes shown on the table. Both the bar chart and the table assume that all distributions have been reinvested. The performance of different classes varies because of differences in sales charges and other fees and expenses. How the Fund has performed in the past (before and after taxes) does not indicate how the Fund will perform in the future. Performance reflects any fee waivers/expense caps in effect for the periods reported. In the absence of such fee waivers/expense caps, performance would have been lower. Bar Chart. Class A share information is shown in the bar chart; the sales charge for Class A shares is not reflected in the bar chart. Table. The table shows total returns from hypothetical investments in Class A, Class B, Class C, Class I and Class R4 shares of the Fund. These returns are compared to the indexes shown for the same periods. For purposes of the performance calculation in the table we assumed: - - the maximum sales charge for Class A shares; - - sales at the end of the period and deduction of the applicable contingent deferred sales charge (CDSC) for Class B and Class C shares; - - no sales charge for Class I and Class R4 shares; and - - with the exception of Class A shares, no adjustments for taxes paid by an investor on the reinvested income and capital gains. 28 RIVERSOURCE FUNDS -- PROXY STATEMENT AFTER-TAX RETURNS After-tax returns are shown only for Class A shares. After-tax returns for the other classes will vary. After-tax returns are calculated using the highest historical individual federal marginal income tax rate and do not reflect the impact of state and local taxes. Actual after-tax returns will depend on your tax situation and most likely will differ from the returns shown in the table. If you hold your shares in a tax-deferred account, such as a 401(k) plan or an IRA, the after-tax returns do not apply to you since you will not incur taxes until you begin to withdraw from your account. The return after taxes on distributions for a period may be the same as the return before taxes for the same period if there were no distributions or if the distributions were small. The return after taxes on distributions and sale of Fund shares for a period may be greater than the return before taxes for the same period if there was a tax loss realized on sale of Fund shares. The benefit of the tax loss (since it can be used to offset other gains) may result in a higher return. - -------------------------------------------------- CORE BOND FUND (SELLING FUND) CLASS A SHARE PERFORMANCE (BASED ON CALENDAR YEARS) (BAR CHART) +3.76% +1.86% +3.77% 2004 2005 2006
During the periods shown in the bar chart, the highest return for a calendar quarter was +3.38% (quarter ended Sept. 30, 2006) and the lowest return for a calendar quarter was -2.45% (quarter ended June 30, 2004). The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart; if reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The Fund's Class A year-to-date return at Sept. 30, 2007 was +3.35%. - -------------------------------------------------------------------------------- DIVERSIFIED BOND FUND (BUYING FUND) CLASS A SHARE PERFORMANCE (BASED ON CALENDAR YEARS) (BAR CHART) +9.94% +5.86% -0.22% +7.03% +7.33% +5.63% +4.61% +4.41% +2.09% +5.37% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
During the periods shown in the bar chart, the highest return for a calendar quarter was +3.80% (quarter ended June 30, 1997) and the lowest return for a calendar quarter was -2.53% (quarter ended June 30, 2004). The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart; if reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The Fund's Class A year-to-date return at Sept. 30, 2007 was +3.34%. RIVERSOURCE FUNDS -- PROXY STATEMENT 29 AVERAGE ANNUAL TOTAL RETURNS (FOR PERIODS ENDED DEC. 31, 2006)
SINCE INCEPTION SINCE (CLASSES A, B, INCEPTION 1 YEAR 5 YEARS 10 YEARS C & R4) (CLASS I) CORE BOND FUND (SELLING FUND): Class A Return before taxes -1.16% N/A N/A +0.91%(a) N/A Return after taxes on distributions -2.61% N/A N/A -0.27%(a) N/A Return after taxes on distributions and sale of Fund shares -0.78% N/A N/A +0.09%(a) N/A Class B Return before taxes -2.00% N/A N/A +0.77%(a) N/A Class C Return before taxes +1.98% N/A N/A +1.56%(a) N/A Class I Return before taxes +4.12% N/A N/A N/A +3.05%(b) Class R4* Return before taxes +3.94% N/A N/A +2.46%(a) N/A Lehman Brothers Aggregate Bond Index (reflects no deduction for fees, expenses or taxes) +4.33% N/A N/A +3.21%(c) +3.23%(d) Lipper Intermediate Investment Grade Debt Funds Index +4.47% N/A N/A +3.30%(c) +3.25%(d)
AVERAGE ANNUAL TOTAL RETURNS (FOR PERIODS ENDED DEC. 31, 2006) (CONTINUED)
SINCE SINCE INCEPTION INCEPTION 1 YEAR 5 YEARS 10 YEARS (CLASS C) (CLASS I) DIVERSIFIED BOND (BUYING FUND): Class A Return before taxes +0.37% +3.40% +4.66% N/A N/A Return after taxes on distributions -1.16% +1.88% +2.45% N/A N/A Return after taxes on distributions and sale of Fund shares +0.21% +1.98% +2.59% N/A N/A Class B Return before taxes -0.64% +3.28% +4.38% N/A N/A Class C Return before taxes +3.35% +3.62% N/A +4.68%(e) N/A Class I Return before taxes +5.73% N/A N/A N/A +4.05%(b) Class R4* Return before taxes +5.55% +4.58% +5.32% N/A N/A Lehman Brothers Aggregate Bond Index (reflects no deduction for fees, expenses or taxes) +4.33% +5.06% +6.24% +6.33%(f) +3.23%(d) Lipper Intermediate Investment Grade Index +4.47% +4.93% +5.87% +6.15%(f) +3.25%(d)
* Effective Dec. 11, 2006, Class Y was renamed Class R4. (a) Inception date is June 19, 2003. (b) Inception date is March 4, 2004. (c) Measurement period started July 1, 2003. (d) Measurement period started March 1, 2004. (e) Inception date is June 26, 2000. (f) Measurement period started July 1, 2000. The Lehman Brothers Aggregate Bond Index, an unmanaged index, is made up of a representative list of government, corporate, asset-backed and mortgage-backed securities. The index is frequently used as a general measure of bond market performance. The index reflects reinvestment of all distributions and changes in market prices. The Lipper Intermediate Investment Grade Debt Funds Index includes the 30 largest investment grade funds tracked by Lipper Inc. The index's returns include net reinvested dividends. Classes R2, R3, R5 and W have not been in existence for a full calendar year and therefore performance information for these classes is not shown. 30 RIVERSOURCE FUNDS -- PROXY STATEMENT PROPOSAL 2. REORGANIZATION OF FUNDAMENTAL GROWTH FUND INTO GROWTH FUND COMPARISON OF THE SELLING FUND AND THE BUYING FUND Both the Selling Fund and the Buying Fund: - - Have RiverSource Investments as an investment adviser. - - Are structured as a series of capital stock of an open-end management investment company organized as a Minnesota corporation. - - Have the same policies for buying and selling shares and the same exchange rights. - - Have the same distribution policies. - - Offer classes A, B, C, I and R4 (the Buying Fund also offers classes R2, R3, R5 and W). COMPARISON OF INVESTMENT OBJECTIVES Both Funds seek to provide shareholders with long-term capital growth. COMPARISON OF PRINCIPAL INVESTMENT STRATEGIES The Selling Fund and the Buying Fund have similar principal investment strategies. Both Funds invest primarily in U.S. equity securities, although each may invest up to 25% of its net assets in foreign investments, all of which may include investments in emerging markets. As of Oct. 31, 2007, investments in emerging markets for the Selling Fund and the Buying Fund were 2.05% and 0.47%, respectively. Although RiverSource Investments serves as investment manager of both Funds, the Selling Fund was, until Nov. 16, 2007, subadvised by Goldman Sachs Asset Management, L.P. (GSAM) and Wellington Management Company, LLP (Wellington Management). The Selling Fund's Board of Directors terminated the contracts of GSAM and Wellington Management. Since Nov. 16, 2007, RiverSource Investments has solely managed the Selling Fund. Current detailed strategies for the Selling Fund and the Buying Fund are set forth below: FUNDAMENTAL GROWTH FUND (SELLING FUND): Fundamental Growth Fund invests primarily in common stocks and securities convertible into common stocks that appear to offer growth opportunities. These growth opportunities could result from new management, market developments, or technological superiority. The Fund may invest up to 25% of its net assets in foreign investments. In pursuit of Fundamental Growth Fund's objective, the investment manager chooses investments by identifying companies that the investment manager believes have above-average long-term growth potential based, among other factors, on: - - Management's track record. - - Financial strength. - - Competitive market or product position. - - Technological advantage (more advanced technology or proven technological advantage) over competitors. In evaluating whether to sell a security, the investment manager considers, among other factors, whether: - - The security is overvalued relative to other potential investments. - - The security has reached the investment manager's price objective. - - The company has met the investment manager's earnings and/or growth expectations. - - The investment manager identifies a more attractive opportunity. The investment manger may use derivatives such as futures, options, forward contracts and structured investments, to produce incremental earnings, to hedge existing positions, or to increase flexibility. GROWTH FUND (BUYING FUND): Growth Fund invests primarily in common stocks and securities convertible into common stocks that appear to offer growth opportunities. These growth opportunities could result from new management, market developments, or technological superiority. The Growth Fund may invest up to 25% of its net assets in foreign investments. In pursuit of Growth Fund's objective, the investment manager chooses investments by identifying companies that the investment manager believes have above-average long-term growth potential based, among other factors, on: - - Management's track record. - - Financial strength. - - Competitive market or product position. RIVERSOURCE FUNDS -- PROXY STATEMENT 31 - - Technological advantage (more advanced technology or proven technological advantage) over competitors. In evaluating whether to sell a security, the investment manager considers, among other factors, whether: - - The security is overvalued relative to other potential investments. - - The security has reached the investment manager's price objective. - - The company has met the investment manager's earnings and/or growth expectations. - - The investment manager identifies a more attractive opportunity. The investment manger may use derivatives such as futures, options, forward contracts and structured investments, to produce incremental earnings, to hedge existing positions, or to increase flexibility. BOTH FUNDS: - - Other Investment Strategies. In addition to the principal investment strategies previously described, the Fund may utilize investment strategies that are not principal investment strategies, including investment in affiliated and non-affiliated pooled investment vehicles (including mutual funds and exchange traded funds (ETFs), also referred to as "acquired funds") ownership of which results in the Fund bearing its proportionate share of the acquired funds' fees and expenses. Although ETFs are designed to replicate the price and yield of a specified market index, there is no guarantee that an ETF will track its specified market index, which may result in a loss. For more information on strategies and holdings, and the risks of such strategies, including derivative instruments that the Fund may use, see the Merger SAI and the Fund's annual and semiannual reports. For more information on the impact of derivatives on capital gains distributions, see "Distributions and Taxes" on page C.14. - - Unusual Market Conditions. During unusual market conditions, the Fund may temporarily invest more of its assets in money market securities than during normal market conditions. Although investing in these securities would serve primarily to attempt to avoid losses, this type of investing also could prevent the Fund from achieving its investment objective. During these times, the portfolio managers may make frequent securities trades that could result in increased fees, expenses and taxes, and decreased performance. Instead of investing in money market securities directly, the Fund may invest in shares of an affiliated money market fund. - - Securities Transaction Commissions. Securities transactions involve the payment by the Fund of brokerage commissions to broker-dealers, on occasion as compensation for research or brokerage services (commonly referred to as "soft dollars"), as the portfolio managers buy and sell securities for the Fund in pursuit of its objective. A description of the policies governing the Buying Fund's securities transactions and the dollar value of brokerage commissions paid by the Buying Fund is set forth in the Merger SAI. The brokerage commissions set forth in the Merger SAI do not include implied commissions or mark-ups (implied commissions) paid by the Buying Fund for principal transactions (transactions made directly with a dealer or other counterparty), including most fixed income securities (and certain other instruments, including derivatives). Brokerage commissions do not reflect other elements of transaction costs, including the extent to which the Fund's purchase and sale transactions may cause the market to move and change the market price for an investment. Although brokerage commissions and implied commissions are not reflected in the expense table under "Fees and Expenses," they are reflected in the total return of the Fund. - - Portfolio Turnover. Trading of securities may produce capital gains, which are taxable to shareholders when distributed. Active trading may also increase the amount of brokerage commissions paid or mark-ups to broker-dealers that the Fund pays when it buys and sells securities. For subadvised funds, a change in a subadviser may result in increased portfolio turnover, which increase may be substantial, as the new subadviser realigns the portfolio, or if the subadviser(s) trades portfolio securities more frequently. A realignment or more active strategy could produce higher than expected capital gains. Capital gains and increased brokerage commissions or mark-ups paid to broker-dealers may adversely affect a Fund's performance. The Buying Fund's historical portfolio turnover rate, which measures how frequently the Buying Fund buys and sells investments, is shown in Section D -- "Financial Highlights." Additionally, a higher turnover rate may result in the realization of increased net short-term capital gains, which are taxable to shareholders as ordinary income. As of its most recent fiscal year-end, the portfolio turnover rates for the Selling Fund and Buying Fund were 85% and 98%, respectively. - - Directed Brokerage. The Fund's Board of Directors (Board) has adopted a policy prohibiting the investment manager, or any subadviser, from considering sales of shares of the Fund as a factor in the selection of broker-dealers through which to execute securities transactions. COMPARISON OF FUNDAMENTAL POLICIES The Selling Fund and the Buying Fund have substantially similar fundamental investment policies. The investment manager does not believe that the differences between the fundamental investment policies will result in any material difference in the way the Funds are managed. 32 RIVERSOURCE FUNDS -- PROXY STATEMENT If shareholders of the Selling Fund approve the Reorganization, they will be subject to the fundamental investment policies of the Buying Fund. The fundamental policies of the Funds are set forth below. Neither of the Funds will: - - Act as an underwriter (sell securities for others). However, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. - - Lend securities or participate in an interfund lending program if the total of all such loans would exceed 33 1/3% of the Fund's total assets except this fundamental investment policy shall not prohibit the Fund from purchasing money market securities, loans, loan participation or other debt securities, or from entering into repurchase agreements. - - Borrow money, except for temporary purposes (not for leveraging or investment) in an amount not exceeding 33 1/3% of its total assets (including the amount borrowed) less liabilities (other than borrowings) immediately after the borrowings. - - The Fund will not buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. - - The Fund will not buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from buying or selling options and futures contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. - - The Fund will not purchase more than 10% of the outstanding voting securities of an issuer, except that up to 25% of the Fund's assets may be invested without regard to this 10% limitation. - - The Fund will not invest more than 5% of its total assets in securities of any company, government, or political subdivision thereof, except the limitation will not apply to investments in securities issued or guaranteed by the U.S. government, its agencies, or instrumentalities, or other investment companies, and except that up to 25% of the Fund's total assets may be invested without regard to this 5% limitation. - - The Fund will not concentrate in any one industry. According to the present interpretation by the Securities and Exchange Commission (SEC), this means that up to 25% of the Fund's total assets, based on current market value at time of purchase, can be invested in any one industry. In addition, neither Fund may issue senior securities, except as permitted under the 1940 Act. COMPARISON OF NONFUNDAMENTAL POLICIES Both Funds are also subject to the following nonfundamental policies: - - Up to 25% of the Fund's net assets may be invested in foreign investments. - - No more than 15% of the Fund's net assets will be held in securities and other instruments that are illiquid. COMPARISON OF PRINCIPAL RISK FACTORS The Selling Fund and the Buying Fund are subject to similar principal risks. The principal risks of investing in each of the Selling Fund and the Buying Fund are shown below:
PRINCIPAL RISK FUNDAMENTAL GROWTH FUND GROWTH FUND Active Management Risk X X Derivatives Risk X X Foreign Risk X X Issuer Risk X X Market Risk X X Small and Mid-Sized Company Risk X X
- - ACTIVE MANAGEMENT RISK. The Fund is actively managed and its performance therefore will reflect in part the ability of the portfolio managers to select securities and to make investment decisions that are suited to achieving the Fund's investment objective. Due to its active management, the Fund could underperform other mutual funds with similar investment objectives. - - DERIVATIVES RISK. Derivatives are financial instruments that have a value which depends upon, or is derived from, the value of something else, such as one or more underlying securities, pools of securities, options, futures, indexes or currencies. Gains or losses involving derivative instruments may be substantial, because a relatively small price movement in the underlying security(ies), instrument, currency or index may result in a substantial gain or loss for the Fund. Derivative instruments in which the Fund invests will typically increase the Fund's exposure to Principal Risks to which it is otherwise exposed, and may expose the Fund to additional risks, including counterparty credit risk, hedging risk, correlation risk, liquidity risk and RIVERSOURCE FUNDS -- PROXY STATEMENT 33 leverage risk. Counterparty credit risk is the risk that a counterparty to the derivative instrument becomes bankrupt or otherwise fails to perform its obligations due to financial difficulties, and the Fund may obtain no recovery of its investment or may only obtain a limited recovery, and any recovery may be delayed. Hedging risk is the risk that derivative instruments used to hedge against an opposite position may offset losses, but they may also offset gains. Correlation risk is related to hedging risk and is the risk that there may be an incomplete correlation between the hedge and the opposite position, which may result in increased or unanticipated losses. Liquidity risk is the risk that the derivative instrument may be difficult or impossible to sell or terminate, which may cause the Fund to be in a position to do something the investment manager would not otherwise choose, including accepting a lower price for the derivative instrument, selling other investments or foregoing another, more appealing investment opportunity. Leverage risk is the risk that losses from the derivative instrument may be greater than the amount invested in the derivative instrument. Certain derivatives have the potential for unlimited losses, regardless of the size of the initial investment. See the Merger SAI for more information on derivative instruments and related risks. - - FOREIGN RISK. The following are all components of foreign risk: Country risk includes the political, economic, and other conditions of the country. These conditions include lack of publicly available information, less government oversight (including lack of accounting, auditing, and financial reporting standards), the possibility of government-imposed restrictions, and even the nationalization of assets. The liquidity of foreign investments may be more limited than for most U.S. investments, which means that, at times it may be difficult to sell foreign securities at desirable prices. Currency risk results from the constantly changing exchange rate between local currency and the U.S. dollar. Whenever the Fund holds securities valued in a foreign currency or holds the currency, changes in the exchange rate add to or subtract from the value of the investment. Custody risk refers to the process of clearing and settling trades. It also covers holding securities with local agents and depositories. Low trading volumes and volatile prices in less developed markets make trades harder to complete and settle. Local agents are held only to the standard of care of the local market. Governments or trade groups may compel local agents to hold securities in designated depositories that are not subject to independent evaluation. The less developed a country's securities market is, the greater the likelihood of problems occurring. - - ISSUER RISK. An issuer may perform poorly, and therefore, the value of its stocks and bonds may decline. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures or other factors. - - MARKET RISK. The market value of securities may fall or fail to rise. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of securities may fluctuate, sometimes rapidly and unpredictably. This risk is generally greater for small and mid-sized companies, which tend to be more vulnerable to adverse developments. In addition, focus on a particular style, for example, investment in growth or value securities, may cause the Fund to underperform other mutual funds if that style falls out of favor with the market. - - SMALL AND MID-SIZED COMPANY RISK. Investments in small and medium companies often involve greater risks than investments in larger, more established companies because small and medium companies may lack the management experience, financial resources, product diversification, experience and competitive strengths of larger companies. Additionally, in many instances the securities of small and medium companies are traded only over-the-counter or on regional securities exchanges and the frequency and volume of their trading is substantially less and may be more volatile than is typical of larger companies. PERFORMANCE The following bar chart and table provide some illustration of the risks of investing in the Fund by showing, respectively: - - how the Fund's performance has varied for each full calendar year shown on the bar chart; and - - how the Fund's average annual total returns compare to recognized indexes shown on the table. Both the bar chart and the table assume that all distributions have been reinvested. The performance of different classes varies because of differences in sales charges and other fees and expenses. How the Fund has performed in the past (before and after taxes) does not indicate how the Fund will perform in the future. Performance reflects any fee waivers/expense caps in effect for the periods reported. In the absence of such fee waivers/expense caps, performance would have been lower. Bar Chart. Class A share information is shown in the bar chart; the sales charge for Class A shares is not reflected in the bar chart. 34 RIVERSOURCE FUNDS -- PROXY STATEMENT Table. The table shows total returns from hypothetical investments in Class A, Class B, Class C, Class I and Class R4 shares of the Fund. These returns are compared to the indexes shown for the same periods. For purposes of the performance calculation in the table we assumed: - - the maximum sales charge for Class A shares; - - sales at the end of the period and deduction of the applicable contingent deferred sales charge (CDSC) for Class B and Class C shares; - - no sales charge for Class I and Class R4 shares; and - - with the exception of Class A shares, no adjustments for taxes paid by an investor on the reinvested income and capital gains. AFTER-TAX RETURNS After-tax returns are shown only for Class A shares. After-tax returns for the other classes will vary. After-tax returns are calculated using the highest historical individual federal marginal income tax rate and do not reflect the impact of state and local taxes. Actual after-tax returns will depend on your tax situation and most likely will differ from the returns shown in the table. If you hold your shares in a tax-deferred account, such as a 401(k) plan or an IRA, the after-tax returns do not apply to you since you will not incur taxes until you begin to withdraw from your account. The return after taxes on distributions for a period may be the same as the return before taxes for the same period if there were no distributions or if the distributions were small. The return after taxes on distributions and sale of Fund shares for a period may be greater than the return before taxes for the same period if there was tax loss realized on sale of Fund shares. The benefit of the tax loss (since it can be used to offset other gains) may result in a higher return. - -------------------------------------------------------------------------------- FUNDAMENTAL GROWTH FUND (SELLING FUND) CLASS A SHARE PERFORMANCE* (BASED ON CALENDAR YEARS) (BAR CHART) +1.54% +2.98% +5.99% 2004 2005 2006
* For the periods prior to Nov. 16, 2007, Fundamental Growth Fund was subadvised. During the periods shown in the bar chart, the highest return for a calendar quarter was +10.28% (quarter ended Dec. 31, 2004) and the lowest return for a calendar quarter was -6.51% (quarter ended Sept. 30, 2004). The 5.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart; if reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The Fund's Class A year-to-date return at Sept. 30, 2007 was +13.28%. RIVERSOURCE FUNDS -- PROXY STATEMENT 35 - -------------------------------------------------------------------------------- GROWTH FUND (BUYING FUND) CLASS A SHARE PERFORMANCE (BASED ON CALENDAR YEARS) (BAR CHART) +20.65% +22.56% +39.51% -19.02% -31.30% -24.09% +20.75% +8.49% +8.42% +10.91% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
During the periods shown in the bar chart, the highest return for a calendar quarter was +27.10% (quarter ended Dec. 31, 1998) and the lowest return for a calendar quarter was -28.16% (quarter ended Sept. 30, 2001). The 5.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart; if reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The Fund's Class A year-to-date return at Sept. 30, 2007 was +8.70%. The Fund formerly was a "feeder" fund in a master/feeder arrangement where the Fund invested all of its assets in a corresponding "master" fund with an identical investment objective and investment strategies. As of Dec. 6, 2005, the Fund became a stand-alone Fund that invests directly in a portfolio of securities. The information shown in the table and in the financial highlights for the Fund includes the activity of the Fund when it was a feeder in a master/feeder arrangement. 36 RIVERSOURCE FUNDS -- PROXY STATEMENT AVERAGE ANNUAL TOTAL RETURNS (FOR PERIODS ENDED DEC. 31, 2006)
SINCE INCEPTION SINCE (CLASSES A, INCEPTION 1 YEAR 5 YEARS 10 YEARS B, C & R4) (CLASS I) FUNDAMENTAL GROWTH FUND (SELLING FUND): Class A Return before taxes -0.11% N/A N/A +5.96%(a) N/A Return after taxes on distributions -0.61% N/A N/A +5.57%(a) N/A Return after taxes on distributions and sale of Fund shares +0.12% N/A N/A +4.92%(a) N/A Class B Return before taxes +0.12% N/A N/A +6.13%(a) N/A Class C Return before taxes +4.28% N/A N/A +6.86%(a) N/A Class I Return before taxes +6.42% N/A N/A N/A +3.15%(b) Class R4* Return before taxes +6.11% N/A N/A +7.90%(a) N/A Russell 1000(R) Growth Index (reflects no deduction for fees, expenses or taxes) +9.07% N/A N/A +11.50%(c) +6.28%(d) Lipper Large-Cap Growth Funds Index +4.72% N/A N/A +10.76%(c) +6.10%(d)
SINCE SINCE INCEPTION INCEPTION 1 YEAR 5 YEARS 10 YEARS (CLASS C) (CLASS I) GROWTH FUND (BUYING FUND): Class A Return before taxes +4.53% +2.42% +2.61% N/A N/A Return after taxes on distributions +4.27% +2.37% +2.26% N/A N/A Return after taxes on distributions and sale of Fund shares +2.94% +2.04% +2.16% N/A N/A Class B Return before taxes +5.09% +2.48% +2.43% N/A N/A Class C Return before taxes +9.09% +2.84% N/A -7.87%(e) N/A Class I Return before taxes +11.45% N/A N/A N/A +9.02%(b) Class R4* Return before taxes +11.11% +3.82% +3.37% N/A N/A Russell 1000(R) Growth Index (reflects no deduction for fees, expenses or taxes) +9.07% +2.69% +5.44% -5.84%(f) +6.28%(d) Lipper Large-Cap Growth Funds Index +4.72% +2.01% +4.72% -5.89%(f) +6.10%(d)
* Effective Dec. 11, 2006, Class Y was renamed Class R4. (a) Inception date is April 24, 2003. (b) Inception date is March 4, 2004. (c) Measurement period started May 1, 2003. (d) Measurement period started March 1, 2004. (e) Inception date is June 26, 2000. (f) Measurement period started July 1, 2000. The Russell 1000 Growth Index, an unmanaged index, measures the performance of those stocks in the Russell 1000 Index with higher price-to-book ratios and higher forecasted growth values. The index reflects reinvestment of all distributions and changes in market prices. The Lipper Large-Cap Growth Funds Index includes the 30 largest large-cap growth funds tracked by Lipper Inc. The index's returns include net reinvested dividends. Fundamental Growth Fund's and Growth Fund's performance is currently measured against this index for purposes of determining the performance incentive adjustment. RIVERSOURCE FUNDS -- PROXY STATEMENT 37 PROPOSAL 3. REORGANIZATION OF INTERNATIONAL EQUITY FUND INTO DISCIPLINED INTERNATIONAL EQUITY FUND COMPARISON OF THE SELLING FUND AND THE BUYING FUND Both the Selling Fund and the Buying Fund: - - Have RiverSource Investments as an investment adviser. - - Are structured as a series of capital stock of an open-end management investment company organized as a Minnesota corporation. - - Have the same policies for buying and selling shares and the same exchange rights. - - Have the same distribution policies. - - Offer classes A, B, C, I and R4 (the Buying Fund also offers Class W). COMPARISON OF INVESTMENT OBJECTIVES Both Funds seek to provide shareholders with long-term growth of capital. COMPARISON OF PRINCIPAL INVESTMENT STRATEGIES Both Funds invest primarily in equity securities of foreign issuers. Both Funds may invest in securities of or instruments that provide exposure to both developed and emerging markets issuers (neither Fund limits the percentage of the Fund's assets that may be invested in emerging markets issuers). As of Oct. 31, 2007, investments in securities of emerging markets issuers for the Selling Fund and the Buying Fund were 12.50% and 0%, respectively. Both Funds may invest in companies of any size, and will typically invest in a blend of both value and growth stocks. Although RiverSource Investments serves as investment manager of both Funds, the Selling Fund was, until Nov. 16, 2007, subadvised by The Boston Company Asset Management, LLC (Boston Company) and Marsico Capital Management, LLC (Marsico). The Selling Fund's Board of Directors terminated the contracts of the Boston Company and Marsico. Since Nov. 16, 2007, RiverSource Investments has solely managed the Selling Fund. Detailed strategies for the Selling Fund and the Buying Fund are set forth below: INTERNATIONAL EQUITY FUND (SELLING FUND): Under normal market conditions, at least 80% of International Equity Fund's assets will be invested in equity securities. The Fund's assets are primarily invested in equity securities of foreign issuers or in instruments that provide exposure to foreign equity markets. The Fund may invest in securities of or instruments that provide exposure to both developed and emerging markets issuers. The Fund will provide shareholders with at least 60 days' notice of any change in the 80% policy. In pursuit of International Equity Fund's objective, the investment manager will choose equity investments by employing proprietary, disciplined quantitative methods. The investment manager's disciplined quantitative approach is designed to identify companies with: - - Attractive valuations, based on factors such as price-to-earnings ratios; - - Sound balance sheets; or - - Improving outlooks, based on an analysis of return patterns over time. In evaluating whether to sell a security, the investment manager considers, among other factors, whether: - - The security is overvalued relative to other potential investments. - - The company does not meet the investment manager's performance expectations. The universe of stocks from which the investment manager selects the Fund's investments primarily will be those included in the Fund's benchmark, the Morgan Stanley Capital International (MSCI) EAFE Index (MSCI EAFE Index). In selecting stocks for the Fund to purchase or to sell, the investment manager also employs a rigorous process for evaluating the relationship between the risk associated with each security and its potential for positive returns. This process takes into account factors such as: - - Limits on positions relative to weightings in the benchmark index. - - Limits on country and region allocations relative to the benchmark index. - - Limits on size of holdings relative to market liquidity. The Fund will normally have exposure to foreign currencies. The investment manager closely monitors the Fund's exposure to foreign currency. From time to time, the investment manager may use forward currency transactions or other derivative instruments on a limited basis to hedge against currency fluctuations. The investment manager may also use derivative 38 RIVERSOURCE FUNDS -- PROXY STATEMENT instruments, such as options, futures, forward contracts, swaps or structured notes, to produce incremental earnings, to increase flexibility, to gain exposure to a segment of the market or to hedge against existing positions. DISCIPLINED INTERNATIONAL EQUITY FUND (BUYING FUND): Under normal market conditions, at least 80% of Disciplined International Equity Fund's assets will be invested in equity securities of foreign issuers or in instruments that provide exposure to foreign equity markets. The Fund may invest in securities of or instruments that provide exposure to both developed and emerging markets issuers. The Fund will provide shareholders with at least 60 days' notice of any change in the 80% policy. In pursuit of Disciplined International Equity Fund's objective, the investment manager will choose equity investments by employing proprietary, disciplined quantitative methods. The investment manager's disciplined quantitative approach is designed to identify companies with: - - Attractive valuations, based on factors such as price-to-earnings ratios; - - Sound balance sheets; or - - Improving outlooks, based on an analysis of return patterns over time. In evaluating whether to sell a security, the investment manager considers, among other factors, whether: - - The security is overvalued relative to other potential investments. - - The company does not meet the investment manager's performance expectations. The universe of stocks from which the investment manager selects the Fund's investments primarily will be those included in the Fund's benchmark, the Morgan Stanley Capital International (MSCI) EAFE Index (MSCI EAFE Index). In selecting stocks for the Fund to purchase or to sell, the investment manager also employs a rigorous process for evaluating the relationship between the risk associated with each security and its potential for positive returns. This process takes into account factors such as: - - Limits on positions relative to weightings in the benchmark index. - - Limits on country and region allocations relative to the benchmark index. - - Limits on size of holdings relative to market liquidity. The Fund will normally have exposure to foreign currencies. The investment manager closely monitors the Fund's exposure to foreign currency. From time to time, the investment manager may use forward currency transactions or other derivative instruments on a limited basis to hedge against currency fluctuations. The investment manager may also use derivative instruments, such as options, futures, forward contracts, swaps or structured notes, to produce incremental earnings, to increase flexibility, to gain exposure to a segment of the market or to hedge against existing positions. BOTH FUNDS: - - Other Investment Strategies. In addition to the principal investment strategies previously described, the Fund may invest in other securities and may use other investment strategies that are not principal investment strategies. Additionally, the Fund may use derivatives (financial instruments where the value depends upon, or is derived from, the value of something else) such as futures, options and forward contracts, to produce incremental earnings, to hedge existing positions or to increase flexibility. Just as with securities in which the Fund invests directly, derivatives are subject to a number of risks, including market, liquidity, interest rate and credit risk. In addition, a relatively small price movement in the underlying security, currency or index may result in a substantial gain or loss for the Fund using derivatives. Even though the Fund's policies permit the use of derivatives in this manner, the portfolio managers are not required to use derivatives. For more information on strategies and holdings, and the risks of such strategies, including other derivative instruments that the Buying Fund may use, see the Merger SAI. For more information on the impact of derivatives on capital gains distributions, see "Distributions and Taxes" on page C.14. - - Unusual Market Conditions. During unusual market conditions, the Fund may temporarily invest more of its assets in money market securities than during normal market conditions. Although investing in these securities would serve primarily to avoid losses, this type of investing also could prevent the Fund from achieving its investment objective. During these times, the portfolio managers may make frequent securities trades that could result in increased fees, expenses and taxes, and decreased performance. Instead of investing in money market securities directly, the Fund may invest in shares of an affiliated money market fund. - - Portfolio Turnover. Trading of securities may produce capital gains, which are taxable to shareholders when distributed. Active trading may also increase the amount of brokerage commissions paid or mark-ups to broker-dealers that the Fund pays when it buys and sells securities. For subadvised funds, a change in the subadviser(s) may result in increased portfolio RIVERSOURCE FUNDS -- PROXY STATEMENT 39 turnover, which increase may be substantial, as the new subadviser(s) realign the portfolio, or if the subadviser(s) trades portfolio securities more frequently. A realignment or more active strategy could produce higher than expected capital gains. Capital gains and increased brokerage commissions or mark-ups paid to broker-dealers may adversely affect a fund's performance. The Buying Fund's historical portfolio turnover rate, which measures how frequently the Buying Fund buys and sells investments, is shown in Section D -- "Financial Highlights." Additionally, a higher turnover rate may result in the realization of increased net short-term capital gains, which are taxable to shareholders as ordinary income. As of its most recent fiscal year-end, the portfolio turnover rates for the Selling Fund and Buying Fund were 89% and 10%, respectively. - - Securities Transaction Commissions. Securities transactions involve the payment by the Fund of brokerage commissions to broker-dealers, on occasion as compensation for research or brokerage services (commonly referred to as "soft dollars"), as the portfolio managers buy and sell securities for the Fund in pursuit of its objective. A description of the policies governing the Buying Fund's securities transactions and the dollar value of brokerage commissions paid by the Buying Fund is set forth in the Merger SAI. The brokerage commissions set forth in the Merger SAI do not include implied commissions or mark-ups (implied commissions) paid by the Buying Fund for principal transactions (transactions made directly with a dealer or other counterparty), including most fixed income securities (and certain other instruments, including derivatives). Brokerage commissions do not reflect other elements of transaction costs, including the extent to which the Fund's purchase and sale transactions may cause the market to move and change the market price for an investment. Although brokerage commissions and implied commissions are not reflected in the expense table under "Fees and Expenses," they are reflected in the total return of the Fund. - - Directed Brokerage. The Fund's Board of Directors (Board) has adopted a policy prohibiting the investment manager, or any subadviser, from considering sales of shares of the Fund as a factor in the selection of broker-dealers through which to execute securities transactions. COMPARISON OF FUNDAMENTAL POLICIES The Selling Fund and the Buying Fund have similar fundamental policies. The Selling Fund, however, will not buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Selling Fund from buying or selling options and futures contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. The Buying Fund has a similar policy, except that the policy also does not extend to entering into forward currency contracts. If shareholders of the Selling Fund approve the Reorganization, they will be subject to the fundamental policies of the Buying Fund. The remaining fundamental policies of the Funds are identical. Each of the Funds will not: - - Act as an underwriter (sell securities for others). However, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. - - Lend securities or participate in an interfund lending program if the total of all such loans would exceed 33 1/3% of the Fund's total assets except this fundamental investment policy shall not prohibit the Fund from purchasing money market securities, loans, loan participation or other debt securities, or from entering into repurchase agreements. - - Borrow money, except for temporary purposes (not for leveraging or investment) in an amount not exceeding 33 1/3% of its total assets (including the amount borrowed) less liabilities (other than borrowings) immediately after the borrowings. - - Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. - - Issue senior securities, except as permitted under the 1940 Act. - - Purchase more than 10% of the outstanding voting securities of an issuer, except that up to 25% of the Fund's assets may be invested without regard to this 10% limitation. - - Invest more than 5% of its total assets in securities of any company, government, or political subdivision thereof, except the limitation will not apply to investments in securities issued or guaranteed by the U.S. government, its agencies, or instrumentalities, or other investment companies, and except that up to 25% of the Fund's total assets may be invested without regard to this 5% limitation. - - Concentrate in any one industry. According to the present interpretation by the Securities and Exchange Commission (SEC), this means that up to 25% of the Fund's total assets, based on current market value at time of purchase, can be invested in any one industry. 40 RIVERSOURCE FUNDS -- PROXY STATEMENT COMPARISON OF NONFUNDAMENTAL POLICIES Both Funds are also subject to the following nonfundamental policy: - - No more than 15% of the Fund's net assets will be held in securities and other instruments that are illiquid. COMPARISON OF PRINCIPAL RISK FACTORS The Selling Fund and the Buying Fund are subject to identical principal risks. The principal risks of investing in each of the Selling Fund and the Buying Fund are shown below:
INTERNATIONAL DISCIPLINED INTERNATIONAL PRINCIPAL RISK EQUITY FUND EQUITY FUND Active Management Risk X X Derivatives Risk X X Foreign/Emerging Markets Risk X X Issuer Risk X X Market Risk X X Quantitative Model Risk X X
- - ACTIVE MANAGEMENT RISK. The Fund is actively managed and its performance therefore will reflect in part the ability of the portfolio managers to select securities and to make investment decisions that are suited to achieving the Fund's investment objective. Due to its active management, the Fund could underperform other mutual funds with similar investment objectives. - - DERIVATIVES RISK. Derivatives are financial instruments that have a value which depends upon, or is derived from, the value of something else, such as one or more underlying securities, pools of securities, options, futures, indexes or currencies. Gains or losses involving derivative instruments may be substantial, because a relatively small price movement in the underlying security(ies), instrument, currency or index may result in a substantial gain or loss for the Fund. Derivative instruments in which the Fund invests will typically increase the Fund's exposure to principal risks to which it is otherwise exposed, and may expose the Fund to additional risks, including counterparty credit risk, hedging risk, correlation risk, liquidity risk and leverage risk. Counterparty credit risk is the risk that a counterparty to the derivative instrument becomes bankrupt or otherwise fails to perform its obligations due to financial difficulties, and the Fund may obtain no recovery of its investment or may only obtain a limited recovery, and any recovery may be delayed. Hedging risk is the risk that derivative instruments used to hedge against an opposite position may offset losses, but they may also offset gains. Correlation risk is related to hedging risk and is the risk that there may be an incomplete correlation between the hedge and the opposite position, which may result in increased or unanticipated losses. Liquidity risk is the risk that the derivative instrument may be difficult or impossible to sell or terminate, which may cause the Fund to be in a position to do something the investment manager would not otherwise choose, including, accepting a lower price for the derivative instrument, selling other investments or foregoing another, more appealing investment opportunity. Leverage risk is the risk that losses from the derivative instrument may be greater than the amount invested in the derivative instrument. Certain derivatives have the potential for unlimited losses, regardless of the size of the initial investment. See the Merger SAI for more information on derivative instruments and related risks. - - FOREIGN/EMERGING MARKETS RISK. The following are all components of foreign/emerging markets risk: Country risk includes the political, economic, and other conditions of the country. These conditions include lack of publicly available information, less government oversight (including lack of accounting, auditing, and financial reporting standards), the possibility of government-imposed restrictions, and even the nationalization of assets. The liquidity of foreign investments may be more limited than for most U.S. investments, which means that, at times it may be difficult to sell foreign securities at desirable prices. Currency risk results from the constantly changing exchange rate between local currency and the U.S. dollar. Whenever the Fund holds securities valued in a foreign currency or holds the currency, changes in the exchange rate add to or subtract from the value of the investment. Custody risk refers to the process of clearing and settling trades. It also covers holding securities with local agents and depositories. Low trading volumes and volatile prices in less developed markets make trades harder to complete and settle. Local agents are held only to the standard of care of the local market. Governments or trade groups may compel local agents to hold securities in designated depositories that are not subject to independent evaluation. The less developed a country's securities market is, the greater the likelihood of problems occurring. Emerging markets risk includes the dramatic pace of change (economic, social, and political) in these countries as well as the other considerations listed above. These markets are in early stages of development and are extremely volatile. They can be marked by extreme inflation, devaluation of currencies, dependence on trade partners, and hostile relations with neighboring countries. RIVERSOURCE FUNDS -- PROXY STATEMENT 41 - - ISSUER RISK. An issuer may perform poorly, and therefore, the value of its stocks and bonds may decline. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures, or other factors. - - MARKET RISK. The market value of securities may fall or fail to rise. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of securities may fluctuate, sometimes rapidly and unpredictably. This risk is generally greater for small and mid-sized companies, which tend to be more vulnerable to adverse developments. In addition, focus on a particular style, for example, investment in growth or value securities, may cause the Fund to underperform other mutual funds if that style falls out of favor with the market. - - QUANTITATIVE MODEL RISK. Securities selected using quantitative methods may perform differently from the market as a whole for many reasons, including the factors used in building the quantitative analytical framework, the weights placed on each factor, and changing sources of market returns, among others. There can be no assurance that the methodology will enable the Fund to achieve its objective. PERFORMANCE Because Disciplined International Equity Fund commenced operations on May 18, 2006, no calendar year performance is available. The following bar chart and table provide some illustration of the risks of investing in International Equity Fund by showing, respectively: - - how International Equity Fund's performance has varied for each full calendar year shown on the bar chart; and - - how International Equity Fund's average annual total returns compare to recognized indexes shown on the table. Both the bar chart and the table assume that all distributions have been reinvested. The performance of different classes varies because of differences in sales charges and other fees and expenses. How International Equity Fund has performed in the past (before and after taxes) does not indicate how International Equity Fund will perform in the future. Performance reflects any fee waivers/expense caps in effect for the periods reported. In the absence of such fee waivers/expense caps, performance would have been lower. Bar Chart. Class A share information is shown in the bar chart; the sales charge for Class A shares is not reflected in the bar chart. Table. The table shows total returns from hypothetical investments in Class A, Class B, Class C, Class I and Class R4 shares of International Equity Fund. These returns are compared to the indexes shown for the same periods. For purposes of the performance calculation in the table we assumed: - - the maximum sales charge for Class A shares; - - sales at the end of the period and deduction of the applicable contingent deferred sales charge (CDSC) for Class B and Class C shares; - - no sales charge for Class I and R4 shares; and - - with the exception of Class A shares, no adjustments for taxes paid by an investor on the reinvested income and capital gains. 42 RIVERSOURCE FUNDS -- PROXY STATEMENT AFTER-TAX RETURNS After-tax returns are shown only for Class A shares. After-tax returns for the other classes will vary. After-tax returns are calculated using the highest historical individual federal marginal income tax rate and do not reflect the impact of state and local taxes. Actual after-tax returns will depend on your tax situation and most likely will differ from the returns shown in the table. If you hold your shares in a tax-deferred account, such as a 401(k) plan or an IRA, the after-tax returns do not apply to you since you will not incur taxes until you begin to withdraw from your account. The return after taxes on distributions for a period may be the same as the return before taxes for the same period if there were no distributions or if the distributions were small. The return after taxes on distributions and sale of Fund shares for a period may be greater than the return before taxes for the same period if there was a tax loss realized on sale of Fund shares. The benefit of the tax loss (since it can be used to offset other gains) may result in a higher return. - -------------------------------------------------------------------------------- INTERNATIONAL EQUITY FUND (SELLING FUND) CLASS A SHARE PERFORMANCE (BASED ON CALENDAR YEARS)* (BAR CHART) +32.07% +16.26% +15.28% +23.02% 2003 2004 2005 2006
* For the periods prior to Nov. 16, 2007, International Equity Fund was subadvised. During the periods shown in the bar chart, the highest return for a calendar quarter was +18.35% (quarter ended June 30, 2003) and the lowest return for a calendar quarter was -9.54% (quarter ended March 31, 2003). The 5.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart; if reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The Fund's Class A year-to-date return at Sept. 30, 2007 was +12.55%. RIVERSOURCE FUNDS -- PROXY STATEMENT 43 AVERAGE ANNUAL TOTAL RETURNS (FOR PERIODS ENDED DEC. 31, 2006)
SINCE SINCE INCEPTION INCEPTION 1 YEAR (A, B, C & R4) (CLASS I) INTERNATIONAL EQUITY FUND (SELLING FUND): Class A Return before taxes +15.95% +19.68%(a) N/A Return after taxes on distributions +11.50% +17.03%(a) N/A Return after taxes on distributions and sale of Fund shares +12.42% +16.06%(a) N/A Class B Return before taxes +17.17% +20.18%(a) N/A Class C Return before taxes +21.12% +20.43%(a) N/A Class I Return before taxes +23.78% N/A +18.37%(b) Class R4* Return before taxes +23.44% +21.59%(a) N/A MSCI EAFE Index (reflects no deduction for fees, expenses or taxes) +26.86% +25.06%(c) +20.15%(d) Lipper International Funds Index +25.89% +24.12%(c) +19.41%(d)
* Effective Dec. 11, 2006, Class Y was renamed Class R4. (a) Inception date is Oct. 3, 2002. (b) Inception date is March 4, 2004. (c) Measurement period started Oct. 1, 2002. (d) Measurement period started March 1, 2004. The Morgan Stanley Capital International (MSCI) EAFE Index, an unmanaged index, is compiled from a composite of securities markets of Europe, Australia and the Far East. The index is widely recognized by investors in foreign markets as the measurement index for portfolios of non-North American securities. The index reflects reinvestment of all distributions and changes in market prices, but excludes brokerage commissions or other fees. The Lipper International Funds Index includes the 30 largest international funds (growth and value) tracked by Lipper Inc. The index's returns include net reinvested dividends. International Equity Fund's performance is currently measured against this index for purposes of determining the performance incentive adjustment. DISCIPLINED INTERNATIONAL EQUITY FUND (BUYING FUND): When available, Disciplined International Equity Fund intends to compare its performance to the Morgan Stanley Capital International EAFE Index and the Lipper International Large-Cap Core Funds Index. 44 RIVERSOURCE FUNDS -- PROXY STATEMENT PROPOSALS 4, 5 AND 6. REORGANIZATIONS OF EACH OF MASSACHUSETTS TAX-EXEMPT FUND, MICHIGAN TAX-EXEMPT FUND AND OHIO TAX-EXEMPT FUND INTO TAX-EXEMPT HIGH INCOME FUND COMPARISON OF THE SELLING FUNDS AND THE BUYING FUND The Selling Funds and the Buying Fund each: - - Have RiverSource Investments as an investment adviser. - - Have the same policies for buying and selling shares and the same exchange rights. - - Have the same distribution policies. - - Offer the same classes of shares: Classes A, B and C - - Are structured as series of an open-end management investment company registered under the 1940 Act. The Buying Fund is a series of a Minnesota corporation, whereas the Selling Funds are each a series of a Massachusetts business trust. Please see Exhibit D to this proxy statement/prospectus for more information regarding the differences between the rights of shareholders of the Buying Fund and shareholders of the Selling Fund. COMPARISON OF INVESTMENT OBJECTIVES The investment objectives for the Funds are as follows: SELLING FUNDS: Each Selling Fund seeks to provide shareholders with a high level of income generally exempt from federal income tax as well as from the respective state and local income tax. BUYING FUND: Tax-Exempt High Income Fund seeks to provide shareholders with a high yield generally exempt from federal income taxes. COMPARISON OF PRINCIPAL INVESTMENT STRATEGIES The Selling Funds and the Buying Fund have similar principal investment strategies, except for the items noted below. First, whereas the Selling Funds seek to provide income exempt from federal income taxes, as well as state and local taxes, the Buying Fund seeks only to provide income exempt from federal income taxes. In pursuit of their respective investment objectives, each of the Funds normally invests at least 80% of its assets in municipal obligations. However, as noted, because the Buying Fund does not seek to provide income exempt from state and local taxes, it may invest in a broader geographic range of the municipal securities market. Second, the Buying Fund is a "diversified" fund, while each Selling Fund is a "non-diversified" fund, which means that a Selling Fund can invest more of its assets in the securities of fewer issuers. Third, whereas each Selling Fund may invest only up to 25% of its net assets in below investment grade bonds (junk bonds), the Buying Fund is not subject to such a limitation. As of Oct. 31, 2007, investments in below investment grade securities for Massachusetts Tax-Exempt Fund, Michigan Tax-Exempt Fund and Ohio Tax-Exempt Fund, the Selling Funds, were 4.56%, 1.99% and 1.22%, respectively, and the Buying Fund was 2.94%. Despite these differences, each of the Selling Funds and the Buying Fund target an average portfolio duration within one year of the duration of the primary index against which it measures performance, which for the Selling Funds are: the Lehman Brothers Massachusetts 3 Plus Year Enhanced Municipal Bond Index, the Lehman Brothers Michigan Municipal Bond Index and the Lehman Brothers Ohio 4 Plus Year Enhanced Municipal Bond Index for Massachusetts Tax-Exempt Fund, Michigan Tax-Exempt Fund and Ohio Tax-Exempt Fund, respectively, and for the Buying Fund is the Lehman Brothers 3 Plus Year Municipal Bond Index. Furthermore, the Selling Funds and the Buying Fund may each invest up to 20% of its net assets in debt obligations whose interest is subject to federal alternative minimum tax. Detailed strategies for the Selling Funds and the Buying Fund are set forth below: MASSACHUSETTS TAX-EXEMPT FUND, MICHIGAN TAX-EXEMPT FUND AND OHIO TAX-EXEMPT FUND (EACH A SELLING FUND): Each Selling Fund is a non-diversified mutual fund. Under normal market conditions, each Selling Fund invests at least 80% of its net assets in municipal obligations that are generally exempt from federal income tax as well as from the respective state and local income tax. Each Selling Fund may invest more than 25% of its total assets in a particular segment of the municipal securities market or in industrial revenue bonds. Each Selling Fund also may invest up to 20% of its net assets in debt obligations whose interest is subject to the alternative minimum tax. Additionally, each Selling Fund may invest up to 25% of its net assets in lower-quality bonds (junk bonds). In pursuit of each Selling Fund's objective, the investment manager chooses investments by: - - Considering opportunities and risks given current and expected interest rates. - - Targeting an average portfolio duration within one year of the duration of the index against which the Fund measures its performance. Duration measures the sensitivity of bond prices to changes in interest rates. The longer the duration of a bond, the longer it will take to repay the principal and interest obligations and the more sensitive it will be to changes in interest RIVERSOURCE FUNDS -- PROXY STATEMENT 45 rates. For example, a three-year duration means a bond is expected to decrease in value by 3% if interest rates rise 1% and increase in value by 3% if interest rates fall 1%. - - Identifying obligations in sectors which, due to supply and demand, are offering higher yields than comparable instruments. - - Identifying obligations that: - are investment-grade, - have coupons and/or maturities that are consistent with the investment manager's interest rate outlook, and - are expected to outperform other securities on a risk-adjusted basis (i.e., after considering coupon, sinking fund provision, call protection, and quality). - - The terms of a municipal security determine the issuer. In evaluating whether to sell a security, the investment manager considers, among other factors, whether: - - The security is overvalued relative to alternative investments. - - The issuer's credit rating declines or the investment manager expects a decline (the Massachusetts Tax-Exempt Fund may continue to own securities that are downgraded until the investment manager believes it is advantageous to sell). - - Political, economic, or other events could affect the issuer's performance. - - The investment manager expects the issuer to call the security. - - The investment manager identifies a more attractive opportunity. The investment manager may use derivatives such as futures, options, forward contracts and swaps, including credit default swaps, structured notes, including inverse floaters, in an effort to produce incremental earnings, to hedge existing positions, to increase market exposure and investment flexibility, or to obtain or reduce credit exposure. TAX-EXEMPT HIGH INCOME FUND (BUYING FUND): Under normal market conditions, Tax-Exempt High Income Fund will invest at least 80% of its net assets in municipal bonds and in other debt obligations issued by or on behalf of state or local governmental units whose interest is exempt from federal income tax and is not subject to the alternative minimum tax (AMT). However, Tax-Exempt High Income Fund may invest up to 20% of its net assets in debt obligations the interest from which is subject to AMT. Tax-Exempt High Income Fund invests its assets in medium and higher quality municipal bonds and other debt obligations. Tax-Exempt High Income Fund may also invest in lower-quality bonds which help to obtain a higher portfolio yield. Lower-quality bonds, often called "junk bonds" include securities that are rated below investment grade, commonly defined as bonds receiving a Standard & Poor's rating below BBB or a Moody's rating below Baa or non-rated securities of comparable quality. In pursuit of Tax-Exempt High Income Fund's objective, the Fund's investment manager chooses investments by: - - Considering opportunities and risks in municipal obligations given current and expected interest rates. - - Targeting an average portfolio duration within one year of the duration of the Lehman Brothers 3 Plus Year Municipal Bond Index. Duration measures the sensitivity of bond prices to changes in interest rates. The longer the duration of a bond, the longer it will take to pay the principal and interest on the bond and the more sensitive it will be to changes in interest rates. For example, a five-year duration means a bond is expected to decrease in value by 5% if interest rates rise 1% and increase in value by 5% if interest rates fall 1%. - - Identifying municipal obligations that it believes: - range from high to lower credit quality, including non-rated securities; - have maturities that represent the full spectrum of the municipal yield curve; - represent strong relative value; and - have characteristics (coupon, call, maturity, etc.) that fit Tax-Exempt High Income Fund's investment strategy at the time of purchase. - - Seeking to identify investments that contribute to portfolio diversification. The investment manager attempts to modify relative exposure to certain credits, sectors, maturities, states, or bond structures based on the investment manager's opinion of relative value and expected market trends. In evaluating whether to sell a security, the investment manager considers, among other factors, whether: - - The security is overvalued relative to alternative investments. - - The issuer's credit rating declines or the investment manager expects a decline in the issuer's creditworthiness (the Fund may continue to own securities that are downgraded until the investment manager believes it is advantageous to sell). 46 RIVERSOURCE FUNDS -- PROXY STATEMENT - - Political, economic, or other events could negatively affect the issuer's performance. - - The investment manager expects the issuer to call the security. - - The investment manager identifies a more attractive investment opportunity. - - The issuer or the security continues to meet the security selection criteria described above. The investment manager may use derivatives such as futures, options, forward contracts and swaps, including credit default swaps, structured notes, including inverse floaters, in an effort to produce incremental earnings, to hedge existing positions, to increase market exposure and investment flexibility, or to obtain or reduce credit exposure. EACH OF THE SELLING FUNDS AND THE BUYING FUND: - - Other Investment Strategies. In addition to the principal investment strategies previously described, the Fund may utilize investment strategies that are not principal investment strategies, including investment in affiliated and non-affiliated pooled investment vehicles (including mutual funds and exchange traded funds (ETFs), also referred to as "acquired funds") ownership of which results in the Fund bearing its proportionate share of the acquired funds' fees and expenses. Although ETFs are designed to replicate the price and yield of a specified market index, there is no guarantee that an ETF will track its specified market index, which may result in a loss. For more information on strategies and holdings, and the risks of such strategies, including derivative instruments that the Buying Fund may use, see the Fund's Merger SAI and the Fund's annual and semiannual reports. For more information on the impact of derivatives on capital gains distributions, see "Distributions and Taxes" on page C.14. - - Unusual Market Conditions. During unusual market conditions, the Fund may temporarily invest more of its assets in money market securities than during normal market conditions. Although investing in these securities would serve primarily to attempt to avoid losses, this type of investing also could prevent the Fund from achieving its investment objective. During these times, the portfolio managers may make frequent securities trades that could result in increased fees, expenses and taxes, and decreased performance. - - Portfolio Turnover. Trading of securities may produce capital gains, which are taxable to shareholders when distributed. Active trading may also increase the amount of brokerage commissions paid or mark-ups to broker-dealers that the Fund pays when it buys and sells securities. Capital gains and increased brokerage commissions or mark-ups paid to broker-dealers may adversely affect a Fund's performance. The Buying Fund's historical portfolio turnover rate, which measures how frequently the Buying Fund buys and sells investments, is shown in Section D -- "Financial Highlights." Additionally, a higher turnover rate may result in the realization of increased net short-term capital gains, which are taxable to shareholders as ordinary income. As of its most recent fiscal year-end, the portfolio turnover rates for Massachusetts Tax-Exempt Fund, Michigan Tax-Exempt Fund and Ohio Tax-Exempt Fund, the Selling Funds, were 24%, 20% and 27%, respectively, and the Buying Fund was 30%. - - Securities Transaction Commissions. Securities transactions involve the payment by the Fund of brokerage commissions to broker-dealers, on occasion as compensation for research or brokerage services (commonly referred to as "soft dollars"), as the portfolio managers buy and sell securities for the Fund in pursuit of its objective. A description of the policies governing the Buying Fund's securities transactions and the dollar value of brokerage commissions paid by the Buying Fund is set forth in the Merger SAI. Funds that invest primarily in fixed income securities do not typically generate brokerage commissions that are used to pay for research or brokerage services. The brokerage commissions set forth in the SAI do not include implied commissions or mark-ups (implied commissions) paid by the Buying Fund for principal transactions (transactions made directly with a dealer or other counterparty), including most fixed income securities (and certain other instruments, including derivatives). Brokerage commissions do not reflect other elements of transaction costs, including the extent to which the Fund's purchase and sale transactions may cause the market to move and change the market price for an investment. Although brokerage commissions and implied commissions are not reflected in the expense table under "Fees and Expenses," they are reflected in the total return of the Fund. - - Directed Brokerage. The Fund's Board of Directors (Board) has adopted a policy prohibiting the investment manager, or any subadviser, from considering sales of shares of the Fund as a factor in the selection of broker-dealers through which to execute securities transactions. COMPARISON OF FUNDAMENTAL POLICIES The Selling Funds and the Buying Fund have similar fundamental policies, except for the items noted below. First, whereas the Buying Fund has a policy that it will not, under normal market conditions, invest less than 80% of its net assets in bonds and notes issued by or on behalf of state and local governmental units whose interest, in the opinion of counsel for the issuer, is exempt from federal income tax and is not subject to the alternative minimum tax, the Selling Funds will not under normal market conditions, invest less than 80% of its net assets in municipal obligations that are generally exempt from federal income tax as well as the RIVERSOURCE FUNDS -- PROXY STATEMENT 47 respective state and local income tax. Second, the Selling Fund, as a "non-diversified fund" may invest more of its assets in the securities of fewer issuers. If shareholders of a Selling Fund approve the Reorganization, they will be subject to the fundamental policies of the Buying Fund. The other fundamental policies of the Funds are set forth below. Each of the Funds will not: - - Act as an underwriter (sell securities for others). However, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. - - Lend securities or participate in an interfund lending program if the total of all such loans would exceed 33 1/3% of the Fund's total assets, except this fundamental investment policy shall not prohibit the Fund from purchasing money market securities, loans, loan participation or other debt securities, or from entering into repurchase agreements. - - Borrow money, except for temporary purposes (not for leveraging or investment) in an amount not exceeding 33 1/3% of its total assets (including the amount borrowed) less liabilities (other than borrowings) immediately after the borrowings. - - Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. - - Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from buying or selling options and futures contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. In addition, neither Fund may issue senior securities, except as permitted under the 1940 Act. As a "diversified fund," the Buying Fund is subject to the following additional fundamental investment policies: - - The Fund will not purchase more than 10% of the outstanding voting securities of an issuer, except that up to 25% of the Fund's assets may be invested without regard to this 10% limitation. For tax-exempt funds, for purposes of this policy, the terms of a municipal security determine the issuer. - - The Fund will not invest more than 5% of its total assets in securities of any company, government, or political subdivision thereof, except the limitation will not apply to investments in securities issued or guaranteed by the U.S. government, its agencies, or instrumentalities, or other investment companies, and except that up to 25% of the Fund's total assets may be invested without regard to this 5% limitation. For tax-exempt funds, for purposes of this policy, the terms of a municipal security determine the issuer. COMPARISON OF NONFUNDAMENTAL POLICIES Both Funds are also subject to the following nonfundamental policy: - - No more than 15% of the Fund's net assets will be held in securities and other instruments that are illiquid. COMPARISON OF PRINCIPAL RISK FACTORS Each of the Selling Funds and the Buying Fund are subject to similar principal risks. The Selling Funds are subject to the additional principal risks related to diversification and geographic concentration because each Selling Fund focuses its investments within a specific geographic region (state) and each is a "non-diversified" fund. The principal risks of investing in each of the Selling Funds and the Buying Fund are shown below:
PRINCIPAL RISK SELLING FUNDS BUYING FUND Active Management Risk X X Credit Risk X X Derivatives Risk X X Diversification Risk X Geographic Concentration Risk X Interest Rate Risk X X Market Risk X X Prepayment and Extension Risk X X
- - ACTIVE MANAGEMENT RISK. The Fund is actively managed and its performance therefore will reflect in part the ability of the portfolio managers to select securities and to make investment decisions that are suited to achieving the Fund's investment objective. Due to its active management, the Fund could underperform other mutual funds with similar investment objectives. - - CREDIT RISK. Credit risk is the risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable or unwilling to honor a financial obligation, such as payments due on a bond or a note. If the Fund purchases unrated securities, or if the rating of a security is reduced after purchase, the Fund will depend on the investment manager's 48 RIVERSOURCE FUNDS -- PROXY STATEMENT analysis of credit risk more heavily than usual. Non-investment grade securities, commonly called "high-yield" or "junk" bonds, may react more to perceived changes in the ability of the issuing entity to pay interest and principal when due than to changes in interest rates. Non-investment grade securities have greater price fluctuations and are more likely to experience a default than investment grade bonds. - - DERIVATIVES RISK. Derivatives are financial instruments that have a value which depends upon, or is derived from, the value of something else, such as one or more underlying securities, pools of securities, options, futures, indexes or currencies. Gains or losses involving derivative instruments may be substantial, because a relatively small price movement in the underlying security(ies), instrument, currency or index may result in a substantial gain or loss for the Fund. Derivative instruments in which the Fund invests will typically increase the Fund's exposure to principal risks to which it is otherwise exposed, and may expose the Fund to additional risks, including counterparty credit risk, hedging risk, correlation risk, liquidity risk and leverage risk. Counterparty credit risk is the risk that a counterparty to the derivative instrument becomes bankrupt or otherwise fails to perform its obligations due to financial difficulties, and the Fund may obtain no recovery of its investment or may only obtain a limited recovery, and any recovery may be delayed. Hedging risk is the risk that derivative instruments used to hedge against an opposite position may offset losses, but they may also offset gains. Correlation risk is related to hedging risk and is the risk that there may be an incomplete correlation between the hedge and the opposite position, which may result in increased or unanticipated losses. Liquidity risk is the risk that the derivative instrument may be difficult or impossible to sell or terminate, which may cause the Fund to be in a position to do something the investment manager would not otherwise choose, including, accepting a lower price for the derivative instrument, selling other investments or foregoing another, more appealing investment opportunity. Leverage risk is the risk that losses from the derivative instrument may be greater than the amount invested in the derivative instrument. Certain derivatives have the potential for unlimited losses, regardless of the size of the initial investment. See the Merger SAI for more information on derivative instruments and related risks. - - DIVERSIFICATION RISK. A non-diversified Fund may invest more of its assets in fewer companies than if it were a diversified fund. Because each investment has a greater effect on the Fund's performance, the Fund may be more exposed to the risks of loss and volatility then a Fund that invests more broadly. - - GEOGRAPHIC CONCENTRATION RISK. Because state-specific tax-exempt funds invest primarily in the municipal securities issued by the state and political sub-divisions of the state, each Fund will be particularly affected by political and economic conditions and developments in the state in which it invests. This vulnerability to factors affecting the state's tax-exempt investments will be significantly greater than that of a more geographically diversified fund, which may result in greater losses and volatility. See the Merger SAI for details. The value of municipal securities owned by a Fund also may be adversely affected by future changes in federal or state income tax laws. In addition, because of the relatively small number of issuers of tax-exempt securities, the Fund may invest a higher percentage of assets in a single issuer and, therefore, be more exposed to the risk of loss by investing in a few issuers than a Fund that invests more broadly. At times, the Fund and other accounts managed by the investment manager may own all or most of the debt of a particular issuer. This concentration of ownership may make it more difficult to sell, or to determine the fair value of, these investments. - - INTEREST RATE RISK. Interest rate risk is the risk of losses attributable to changes in interest rates. Interest rate risk is generally associated with bond prices: when interest rates rise, bond prices fall. In general, the longer the maturity or duration of a bond, the greater its sensitivity to changes in interest rates. - - MARKET RISK. The market value of securities may fall or fail to rise. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of securities may fluctuate, sometimes rapidly and unpredictably. - - PREPAYMENT AND EXTENSION RISK. Prepayment and extension risk is the risk that a bond or other security might be called or otherwise converted, prepaid, or redeemed before maturity. This risk is primarily associated with asset-backed securities, including mortgage-backed securities. If a security is converted, prepaid, or redeemed before maturity, particularly during a time of declining interest rates, the investment manager may not be able to reinvest in securities providing as high a level of income, resulting in a reduced yield to the Fund. Conversely, as interest rates rise, the likelihood of prepayment decreases. The investment manager may be unable to capitalize on securities with higher interest rates because the Fund's investments are locked in at a lower rate for a longer period of time. PERFORMANCE The following bar chart and table provide some illustration of the risks of investing in the Funds by showing, respectively: - - how a Fund's performance has varied for each full calendar year shown on the bar chart; and - - how a Fund's average annual total returns compare to recognized indexes shown on the table. RIVERSOURCE FUNDS -- PROXY STATEMENT 49 Both the bar chart and the table assume that all distributions have been reinvested. The performance of different classes varies because of differences in sales charges and other fees and expenses. How a Fund has performed in the past (before and after taxes) does not indicate how the Fund will perform in the future. Performance reflects any fee waivers/expense caps in effect for the periods reported. In the absence of such fee waivers/expense caps, performance would have been lower. Bar Chart. Class A share information is shown in the bar chart; the sales charge for Class A shares is not reflected in the bar chart. Table. The table shows total returns from hypothetical investments in Class A, Class B and Class C shares of the Fund. These returns are compared to the indexes shown for the same periods. For purposes of the performance calculation in the table we assumed: - - the maximum sales charge for Class A shares; - - sales at the end of the period and deduction of the applicable contingent deferred sales charge (CDSC) for Class B and Class C shares; and - - no adjustments for taxes paid by an investor on the reinvested income and capital gains. AFTER-TAX RETURNS After-tax returns are shown only for Class A shares. After-tax returns for the other classes will vary. After-tax returns are calculated using the highest historical individual federal marginal income tax rate and do not reflect the impact of state and local taxes. Actual after-tax returns will depend on your tax situation and most likely will differ from the returns shown in the table. If you hold your shares in a tax-deferred account, such as a 401(k) plan or an IRA, the after-tax returns do not apply to you since you will not incur taxes until you begin to withdraw from your account. The return after taxes on distributions for a period may be the same as the return before taxes for the same period if there were no distributions or if the distributions were small. The return after taxes on distributions and sale of Fund shares for a period may be greater than the return before taxes for the same period if there was a tax loss realized on sale of Fund shares. The benefit of the tax loss (since it can be used to offset other gains) may result in a higher return. - -------------------------------------------------------------------------------- MASSACHUSETTS TAX-EXEMPT FUND (SELLING FUND) CLASS A SHARE PERFORMANCE (BASED ON CALENDAR YEARS) (BAR CHART) +8.31% +5.79% -4.56% +10.11% +5.13% +6.91% +3.71% +3.92% +2.19% +3.93% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
During the periods shown in the bar chart, the highest return for a calendar quarter was +5.38% (quarter ended Sept. 30, 2002) and the lowest return for a calendar quarter was -2.67% (quarter ended June 30, 2004). The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart; if reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The Fund's Class A year-to-date return at Sept. 30, 2007 was +1.43%. 50 RIVERSOURCE FUNDS -- PROXY STATEMENT - -------------------------------------------------------------------------------- MICHIGAN TAX-EXEMPT FUND (SELLING FUND) CLASS A SHARE PERFORMANCE (BASED ON CALENDAR YEARS) (BAR CHART) +7.53% +5.73% -4.16% +9.13% +5.14% +8.02% +4.32% +3.88% +2.71% +4.10% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
During the periods shown in the bar chart, the highest return for a calendar quarter was +5.39% (quarter ended Sept. 30, 2002) and the lowest return for a calendar quarter was -2.29% (quarter ended June 30, 2004). The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart; if reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The Fund's Class A year-to-date return at Sept. 30, 2007 was +1.59%. - -------------------------------------------------------------------------------- OHIO TAX-EXEMPT FUND (SELLING FUND) CLASS A SHARE PERFORMANCE (BASED ON CALENDAR YEARS) (BAR CHART) +7.95% +5.77% -3.74% +9.94% +4.73% +7.01% +4.10% +3.17% +2.07% +4.05% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
During the periods shown in the bar chart, the highest return for a calendar quarter was +5.39% (quarter ended Sept. 30, 2002) and the lowest return for a calendar quarter was -2.43% (quarter ended June 30, 2004). The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart; if reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The Fund's Class A year-to-date return at Sept. 30, 2007 was +1.28%. RIVERSOURCE FUNDS -- PROXY STATEMENT 51 - -------------------------------------------------------------------------------- TAX-EXEMPT HIGH INCOME FUND (BUYING FUND) CLASS A SHARE PERFORMANCE (BASED ON CALENDAR YEARS) (BAR CHART) +9.37% +5.58% -2.69% +9.51% +3.94% +8.27% +4.66% +3.58% +2.91% +4.47% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
During the periods shown in the bar chart, the highest return for a calendar quarter was +4.58% (quarter ended Sept. 30, 2002) and the lowest return for a calendar quarter was -2.32% (quarter ended June 30, 2004). The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart; if reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The Fund's Class A year-to-date return at Sept. 30, 2007 was +0.95%. The Fund formerly was a "feeder" fund in a master/feeder arrangement where the Fund invested all of its assets in a corresponding "master" fund with an identical investment objective and investment strategies. As of Oct. 18, 2005, the Fund became a stand-alone Fund that invests directly in a portfolio of securities. The information shown in the table and in the financial highlights for the Fund includes the activity of the Fund when it was a feeder in a master/feeder arrangement. 52 RIVERSOURCE FUNDS -- PROXY STATEMENT AVERAGE ANNUAL TOTAL RETURNS (FOR PERIODS ENDED DEC. 31, 2006)
SINCE INCEPTION 1 YEAR 5 YEARS 10 YEARS (CLASS C) MASSACHUSETTS TAX-EXEMPT FUND (SELLING FUND): Class A Return before taxes -1.00% +3.11% +3.97% N/A Return after taxes on distributions -1.00% +2.76% +3.79% N/A Return after taxes on distributions and sale of Fund shares +0.53% +2.87% +3.85% N/A Class B Return before taxes -1.85% +2.98% +3.69% N/A Class C Return before taxes +2.15% +3.34% N/A +4.17%(a) Lehman Brothers Massachusetts 3 Plus Year Enhanced Municipal Bond Index (reflects no deduction for fees, expenses or taxes) +4.87% +5.75% +5.91% +6.40%(b) Lehman Brothers Municipal Bond Index (reflects no deduction for fees, expenses or taxes) +4.84% +5.53% +5.76% +6.12%(b) Lipper Massachusetts Municipal Debt Funds Index +4.56% +5.16% +5.16% +5.76%(b) MICHIGAN TAX-EXEMPT FUND (SELLING FUND): Class A Return before taxes -0.84% +3.58% +4.07% N/A Return after taxes on distributions -0.84% +3.13% +3.84% N/A Return after taxes on distributions and sale of Fund shares +0.62% +3.26% +3.93% N/A Class B Return before taxes -1.70% +3.45% +3.79% N/A Class C Return before taxes +2.31% +3.80% N/A +4.45%(a) Lehman Brothers Michigan Municipal Bond Index (reflects no deduction for fees, expenses or taxes) +4.67% +5.53% +5.77% +6.17%(b) Lehman Brothers Municipal Bond Index (reflects no deduction for fees, expenses or taxes) +4.84% +5.53% +5.76% +6.12%(b) Lipper Michigan Municipal Debt Funds Index +4.28% +4.71% +4.80% +5.35%(b) OHIO TAX-EXEMPT FUND (SELLING FUND): Class A Return before taxes -0.90% +3.06% +3.94% N/A Return after taxes on distributions -0.89% +2.67% +3.74% N/A Return after taxes on distributions and sale of Fund shares +0.57% +2.80% +3.82% N/A Class B Return before taxes -1.73% +2.93% +3.66% N/A Class C Return before taxes +2.07% +3.28% N/A +3.95%(a) Lehman Brothers Ohio 4 Plus Year Enhanced Municipal Bond Index (reflects no deduction for fees, expenses or taxes) +4.82% +5.81% +5.81% +6.34%(b) Lehman Brothers Municipal Bond Index (reflects no deduction for fees, expenses or taxes) +4.84% +5.53% +5.76% +6.12%(b) Lipper Ohio Municipal Debt Funds Index +4.32% +4.94% +5.01% +5.54%(b)
RIVERSOURCE FUNDS -- PROXY STATEMENT 53 AVERAGE ANNUAL TOTAL RETURNS (FOR PERIODS ENDED DEC. 31, 2006) (CONTINUED)
SINCE INCEPTION 1 YEAR 5 YEARS 10 YEARS (CLASS C) TAX-EXEMPT HIGH INCOME FUND (BUYING FUND): Class A Return before taxes -0.50% +3.75% +4.40% N/A Return after taxes on distributions -0.50% +3.41% +4.22% N/A Return after taxes on distributions and sale of Fund shares +1.01% +3.51% +4.31% N/A Class B Return before taxes -1.32% +3.63% +4.12% N/A Class C Return before taxes +2.69% +3.93% N/A +4.46%(a) Lehman Brothers 3-Plus Year Municipal Bond Index(reflects no deduction for fees, expenses or taxes) +5.05% +5.87% +5.97% +6.43%(b) Lipper General Municipal Debt Funds Index +5.10% +5.37% +5.24% +5.82%(b)
(a) Inception date is June 26, 2000. (b) Measurement period started July 1, 2000. The Lehman Brothers Massachusetts 3 Plus Year Enhanced Municipal Bond Index, an unmanaged index, is a market value-weighted index of Massachusetts investment-grade fixed-rate municipal bonds with maturities of three years or more. The Lehman Brothers Michigan Municipal Bond Index, an unmanaged index, is a subset of the Lehman Brothers Municipal Bond Index. The index is made up of investment-grade, tax-exempt, and fixed-rate bonds issued in the state of Michigan. All securities have effective maturities greater than one year and are selected from issues larger than $50 million. The Lehman Brothers Ohio 4 Plus Year Enhanced Municipal Bond Index, an unmanaged index, is a market value-weighted index of Ohio investment-grade fixed-rate municipal bonds with maturities of four years or more. The Lehman Brothers Municipal Bond Index, an unmanaged index, is made up of a representative list of general obligation, revenue, insured and pre-refunded bonds. The index is frequently used as a general measure of tax-exempt bond market performance. The Lehman Brothers 3 Plus Year Municipal Bond Index, an unmanaged index, is a market value-weighted index of investment-grade fixed-rate municipal bonds with maturities of three years or more. The Lehman Brothers indices reflect reinvestment of all distributions and changes in market prices. The Lipper Massachusetts Municipal Debt Funds Index includes the 10 largest municipal debt funds in Massachusetts tracked by Lipper Inc. The Lipper Michigan Municipal Debt Funds Index includes the 10 largest municipal debt funds in Michigan tracked by Lipper Inc. The Lipper Ohio Municipal Debt Funds Index includes the 10 largest municipal debt funds in Ohio tracked by Lipper Inc. The Lipper General Municipal Debt Funds Index includes the 30 largest municipal debt funds tracked by Lipper Inc. The Lipper indices' returns include net reinvested dividends. 54 RIVERSOURCE FUNDS -- PROXY STATEMENT PROPOSAL 7. REORGANIZATION OF VALUE FUND INTO DIVERSIFIED EQUITY INCOME FUND COMPARISON OF THE SELLING FUND AND THE BUYING FUND Both the Selling Fund and the Buying Fund: - - Have RiverSource Investments as an investment adviser. - - Have the same policies for buying and selling shares and the same exchange rights. - - Have the same distribution policies. - - Offer Classes A, B, C, I and R4 (the Buying Fund also offers Classes R2, R3, R5 and W). - - Are structured as a series of capital stock of an open-end management investment company organized as a Minnesota corporation. COMPARISON OF INVESTMENT OBJECTIVES The investment objectives for the Funds are similar. Whereas the Selling Fund seeks to provide shareholders with long-term capital growth as a primary objective, this is a secondary objective of the Buying Fund, and whereas the Buying Fund seeks to provide a high level of current income, income is a secondary objective of the Selling Fund. This difference has not materially affected the way that the Funds have been managed. SELLING FUND: Value Fund seeks to provide shareholders with long-term capital growth. Income is a secondary objective. BUYING FUND: Diversified Equity Income Fund seeks to provide shareholders with a high level of current income and, as a secondary objective, steady growth of capital. COMPARISON OF PRINCIPAL INVESTMENT STRATEGIES The Buying Fund will invest at least 80% of its net assets in dividend-paying common and preferred stocks. The Selling Fund invests primarily in securities of large, well established U.S. and multinational companies. Each Fund may invest up to 25% of its net assets in foreign investments, all of which may include investments in emerging markets. As of Oct. 31, 2007, investments in emerging markets for the Selling Fund and the Buying Fund were 1.59% and 2.83%, respectively. Although RiverSource Investments serves as investment manager of both Funds, the Selling Fund was, until Nov. 16, 2007, subadvised by Lord, Abbett & Co. LLC (Lord Abbett). The Selling Fund's Board of Directors terminated the contract of Lord Abbett. Since Nov. 16, 2007, RiverSource Investments has solely managed the Selling Fund. Detailed strategies for the Selling Fund and the Buying Fund are set forth below: VALUE FUND (SELLING FUND): Value Fund's assets primarily are invested in equity securities. This Fund may invest up to 25% of its net assets in foreign investments. The Fund can invest in any economic sector and, at times, it may emphasize one or more particular sectors. In pursuit of Value Fund's objectives, the investment manager chooses equity investments by seeking to: - - Identify stocks that are selling at low prices in relation to: - current and projected earnings; - current and projected dividends; and - historic price levels. - - Identify companies with moderate growth potential based on: - effective management, as demonstrated by overall performance; and - financial strength. - - Identify companies with dividend-paying stocks. In evaluating whether to sell a security, the investment manager considers, among other factors, whether: - - The security is overvalued relative to alternative investments. - - The security has reached the investment manager's price objective. - - The company has met the investment manager's earnings and/or growth expectations. - - The company or the security continues to meet the other standards described above. RIVERSOURCE FUNDS -- PROXY STATEMENT 55 DIVERSIFIED EQUITY INCOME FUND (BUYING FUND): Diversified Equity Income Fund's assets primarily are invested in equity securities. Under normal market conditions, the Fund will invest at least 80% of its net assets in dividend-paying common and preferred stocks. This Fund may invest up to 25% of its net assets in foreign investments. The Fund can invest in any economic sector and, at times, it may emphasize one or more particular sectors. The Fund will provide shareholders with at least 60 days' notice of any change in the 80% policy. In pursuit of Diversified Equity Income Fund's objectives, the investment manager chooses equity investments by seeking to: - - Identify stocks that are selling at low prices in relation to: - current and projected earnings; - current and projected dividends; and - historic price levels. - - Identify companies with moderate growth potential based on: - effective management, as demonstrated by overall performance; and - financial strength. - - Identify companies with dividend-paying stocks. In evaluating whether to sell a security, the investment manager considers, among other factors, whether: - - The security is overvalued relative to alternative investments. - - The security has reached the investment manager's price objective. - - The company has met the investment manager's earnings and/or growth expectations. - - The company or the security continues to meet the other standards described above. BOTH FUNDS: - - Other Investment Strategies. In addition to the principal investment strategies previously described, the Fund may utilize investment strategies that are not principal investment strategies, including investment in affiliated and non-affiliated pooled investment vehicles (including mutual funds and exchange traded funds (ETFs), also referred to as "acquired funds") ownership of which results in the Fund bearing its proportionate share of the acquired funds' fees and expenses. Although ETFs are designed to replicate the price and yield of a specified market index, there is no guarantee that an ETF will track its specified market index, which may result in a loss. Additionally, the Fund may use derivatives such as futures, options, forward contracts, and swaps (which are financial instruments that have a value which depends upon, or is derived from, the value of something else, such as one or more underlying securities, pools of securities, indexes or currencies). These derivative instruments are used to produce incremental earnings, to hedge existing positions, to increase or reduce market or credit exposure, or to increase flexibility. Derivative instruments will typically increase the Fund's exposure to the principal risks to which it is otherwise exposed, and may expose the Fund to additional risks, including counterparty credit risk, leverage risk, hedging risk, correlation risk and liquidity risk. Counterparty credit risk is the risk that a counterparty to the derivative instrument becomes bankrupt or otherwise fails to perform its obligations due to financial difficulties, and the Fund may obtain no recovery of its investment or may only obtain a limited recovery, and any recovery may be delayed. Hedging risk is the risk that derivative instruments used to hedge against an opposite position may offset losses, but they may also offset gains. Correlation risk is related to hedging risk and is the risk that there may be an incomplete correlation between the hedge and the opposite position, which may result in increased or unanticipated losses. Liquidity risk is the risk that the derivative instrument may be difficult or impossible to sell or terminate, which may cause the Fund to be in a position to do something the investment manager or subadviser would not otherwise choose, including, accepting a lower price for the derivative instrument, selling other investments, or foregoing another, more appealing investment opportunity. Leverage risk is the risk that losses from the derivative instrument may be greater than the amount invested in the derivative instrument. In addition, a relatively small price movement in the underlying security, currency or index may result in a substantial gain or loss for the Fund using derivatives and certain derivatives have the potential for unlimited losses, regardless of the size of the initial investment. Even though the Fund's policies permit the use of derivatives in this manner, the portfolio managers are not required to use derivatives. For more information on strategies and holdings, and the risks of such strategies, including derivative instruments that the Buying Fund may use, see the Merger SAI. For more information on the impact of derivatives on capital gains distributions, see "Distributions and Taxes" on page C.14. - - Unusual Market Conditions. During unusual market conditions, the Fund may temporarily invest more of its assets in money market securities than during normal market conditions. Although investing in these securities would serve primarily to attempt to avoid losses, this type of investing also could prevent the Fund from achieving its investment objective. During these times, the portfolio managers may make frequent securities trades that could result in increased fees, expenses and taxes, and decreased performance. Instead of investing in money market securities directly, the Fund may invest in shares of an affiliated money market fund. 56 RIVERSOURCE FUNDS -- PROXY STATEMENT - - Securities Transaction Commissions. Securities transactions involve the payment by the Fund of brokerage commissions to broker-dealers, on occasion as compensation for research or brokerage services (commonly referred to as "soft dollars"), as the portfolio managers buy and sell securities for the Fund in pursuit of its objective. A description of the policies governing the Buying Fund's securities transactions and the dollar value of brokerage commissions paid by the Buying Fund is set forth in the Merger SAI. The brokerage commissions set forth in the Merger SAI do not include implied commissions or mark-ups (implied commissions) paid by the Buying Fund for principal transactions (transactions made directly with a dealer or other counterparty), including most fixed income securities (and certain other instruments, including derivatives). Brokerage commissions do not reflect other elements of transaction costs, including the extent to which the Fund's purchase and sale transactions may cause the market to move and change the market price for an investment. Although brokerage commissions and implied commissions are not reflected in the expense table under "Fees and Expenses," they are reflected in the total return of the Fund. - - Portfolio Turnover. Trading of securities may produce capital gains, which are taxable to shareholders when distributed. Active trading may also increase the amount of brokerage commissions paid or mark-ups to broker-dealers that the Fund pays when it buys and sells securities. For subadvised funds, a change in a subadviser may result in increased portfolio turnover, which increase may be substantial, as the new subadviser realigns the portfolio, or if the subadviser(s) trades portfolio securities more frequently. A realignment or more active strategy could produce higher than expected capital gains. Capital gains and increased brokerage commissions or mark-ups paid to broker-dealers may adversely affect a Fund's performance. The Buying Fund's historical portfolio turnover rate, which measures how frequently the Buying Fund buys and sells investments, is shown in Section D -- "Financial Highlights." Additionally, a higher turnover rate may result in the realization of increased net short-term capital gains, which are taxable to shareholders as ordinary income. As of its most recent fiscal year-end, the portfolio turnover rates for the Selling Fund and Buying Fund were 77% and 31%, respectively. - - Directed Brokerage. The Fund's Board of Directors (Board) has adopted a policy prohibiting the investment manager, or any subadviser, from considering sales of shares of the Fund as a factor in the selection of broker-dealers through which to execute securities transactions. COMPARISON OF FUNDAMENTAL POLICIES The Selling Fund and the Buying Fund have substantially similar fundamental investment policies. The investment manager does not believe that the differences between the fundamental investment policies will result in any material difference in the way the Funds are managed. If shareholders of the Selling Fund approve the Reorganization, they will be subject to the fundamental investment policies of the Buying Fund. The fundamental policies of the Funds are set forth below. Neither of the Funds will: - - Act as an underwriter (sell securities for others). However, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. - - Lend securities or participate in an interfund lending program if the total of all such loans would exceed 33 1/3% of the Fund's total assets except this fundamental investment policy shall not prohibit the Fund from purchasing money market securities, loans, loan participation or other debt securities, or from entering into repurchase agreements. - - Borrow money, except for temporary purposes (not for leveraging or investment) in an amount not exceeding 33 1/3% of its total assets (including the amount borrowed) less liabilities (other than borrowings) immediately after the borrowings. - - Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. - - Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from buying or selling options and futures contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. - - Purchase more than 10% of the outstanding voting securities of an issuer, except that up to 25% of the Fund's assets may be invested without regard to this 10% limitation. - - Invest more than 5% of its total assets in securities of any company, government, or political subdivision thereof, except the limitation will not apply to investments in securities issued or guaranteed by the U.S. government, its agencies, or instrumentalities, or other investment companies, and except that up to 25% of the Fund's total assets may be invested without regard to this 5% limitation. RIVERSOURCE FUNDS -- PROXY STATEMENT 57 - - Concentrate in any one industry. According to the present interpretation by the Securities and Exchange Commission (SEC), this means that up to 25% of the Fund's total assets, based on current market value at time of purchase, can be invested in any one industry. In addition, neither Fund may issue senior securities, except as permitted under the 1940 Act. COMPARISON OF NONFUNDAMENTAL POLICIES Both Funds are also subject to the following nonfundamental policies: - - No more than 15% of the Fund's net assets will be held in securities and other instruments that are illiquid. - - Up to 25% of the Buying fund's net assets may be invested in foreign investments. COMPARISON OF PRINCIPAL RISK FACTORS The Selling Fund and the Buying Fund are subject to identical principal risks. Principal risks of investing in each of the Selling Fund and the Buying Fund, are shown below:
DIVERSIFIED EQUITY PRINCIPAL RISK VALUE FUND INCOME FUND Active Management Risk X X Foreign Risk X X Issuer Risk X X Market Risk X X Sector Risk X X Small and Mid-Sized Company Risk X X
- - ACTIVE MANAGEMENT RISK. The Fund is actively managed and its performance therefore will reflect in part the ability of the portfolio managers to select securities and to make investment decisions that are suited to achieving the Fund's investment objectives. Due to its active management, the Fund could underperform other mutual funds with similar investment objectives. - - FOREIGN RISK. The following are all components of foreign risk: Country risk includes the political, economic, and other conditions of a country. These conditions include lack of publicly available information, less government oversight (including lack of accounting, auditing, and financial reporting standards), the possibility of government-imposed restrictions, and even the nationalization of assets. The liquidity of foreign investments may be more limited than for most U.S. investments, which means that, at times, it may be difficult to sell foreign securities at desirable prices. Currency risk results from the constantly changing exchange rate between local currency and the U.S. dollar. Whenever the Fund holds securities valued in a foreign currency or holds the currency, changes in the exchange rate add or subtract from the value of the investment. Custody risk refers to the process of clearing and settling trades. It also covers holding securities with local agents and depositories. Low trading volumes and volatile prices in less developed markets make trades harder to complete and settle. Local agents are held only to the standard of care of the local market. Governments or trade groups may compel local agents to hold securities in designated depositories that are not subject to independent evaluation. The less developed a country's securities market is, the greater the likelihood of problems occurring. - - ISSUER RISK. An issuer may perform poorly, and therefore, the value of its stocks and bonds may decline. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures or other factors. - - MARKET RISK. The market value of securities may fall or fail to rise. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of securities may fluctuate, sometimes rapidly and unpredictably. This risk is generally greater for small and mid-sized companies, which tend to be more vulnerable to adverse developments. In addition, focus on a particular style, for example, investment in growth or value securities, may cause the Fund to underperform other mutual funds if that style falls out of favor with the market. - - SECTOR RISK. If a Fund emphasizes one or more economic sectors, it may be more susceptible to the financial, market or economic events affecting the particular issuers and industries in which it invests than funds that do not emphasize particular sectors. The more a Fund diversifies, the more it spreads risk and potentially reduces the risks of loss and volatility. - - SMALL AND MID-SIZED COMPANY RISK. Investments in small and medium companies often involve greater risks than investments in larger, more established companies because small and medium companies may lack the management experience, financial resources, product diversification, experience, and competitive strengths of larger companies. Additionally, in many instances the securities of small and medium companies are traded only over-the-counter or on regional securities exchanges and the frequency and volume of their trading is substantially less and may be more volatile than is typical of larger companies. 58 RIVERSOURCE FUNDS -- PROXY STATEMENT PERFORMANCE The following bar chart and table provide some illustration of the risks of investing in the Fund by showing, respectively: - - how the Fund's performance has varied for each full calendar year shown on the bar chart; and - - how the Fund's average annual total returns compare to recognized indexes shown on the table. Both the bar chart and the table assume that all distributions have been reinvested. The performance of different classes varies because of differences in sales charges and other fees and expenses. How the Fund has performed in the past (before and after taxes) does not indicate how the Fund will perform in the future. Performance reflects any fee waivers/expense caps in effect for the periods reported. In the absence of such fee waivers/expense caps, performance would have been lower. Bar Chart. Class A share information is shown in the bar chart; the sales charge for Class A shares is not reflected in the bar chart. Table. The table shows total returns from hypothetical investments in Class A, Class B, Class C, Class I, and Class R4 shares of the Fund. These returns are compared to the indexes shown for the same periods. For purposes of the performance calculation in the table we assumed: - - the maximum sales charge for Class A shares; - - sales at the end of the period and deduction of the applicable contingent deferred sales charge (CDSC) for Class B and Class C shares; - - no sales charge for Class I and R4 shares; and - - with the exception of Class A shares, no adjustments for taxes paid by an investor on the reinvested income and capital gains. AFTER-TAX RETURNS After-tax returns are shown only for Class A shares. After-tax returns for the other classes will vary. After-tax returns are calculated using the highest historical individual federal marginal income tax rate and do not reflect the impact of state and local taxes. Actual after-tax returns will depend on your tax situation and most likely will differ from the returns shown in the table. If you hold your shares in a tax-deferred account, such as a 401(k) plan or an IRA, the after-tax returns do not apply to you since you will not incur taxes until you begin to withdraw from your account. The return after taxes on distributions for a period may be the same as the return before taxes for the same period if there were no distributions or if the distributions were small. The return after taxes on distributions and sale of Fund shares for a period may be greater than the return before taxes for the same period if there was a tax loss realized on sale of Fund shares. The benefit of the tax loss (since it can be used to offset other gains) may result in a higher return. - -------------------------------------------------------------------------------- VALUE FUND (SELLING FUND) CLASS A SHARE PERFORMANCE (BASED ON CALENDAR YEARS)* (BAR CHART) -18.96% +31.04% +11.94% +2.72% +17.65% 2002 2003 2004 2005 2006
* For periods prior to Nov. 16, 2007, Value Fund was subadvised. During the periods shown in the bar chart, the highest return for a calendar quarter was +18.06% (quarter ended June 30, 2003) and the lowest return for a calendar quarter was -19.58% (quarter ended Sept. 30, 2002). The 5.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart; if reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The Fund's Class A year-to-date return at Sept. 30, 2007 was +7.87%. RIVERSOURCE FUNDS -- PROXY STATEMENT 59 - -------------------------------------------------------------------------------- DIVERSIFIED EQUITY INCOME FUND (BUYING FUND) CLASS A SHARE PERFORMANCE (BASED ON CALENDAR YEARS) (BAR CHART) +20.30% +11.58% +9.22% -1.78% +2.70% -18.40% +41.89% +18.23% +13.33% +19.66% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
During the periods shown in the bar chart, the highest return for a calendar quarter was +22.66% (quarter ended June 30, 2003) and the lowest return for a calendar quarter was -21.13% (quarter ended Sept. 30, 2002). The 5.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart; if reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The Fund's Class A year-to-date return at Sept. 30, 2007 was +12.42%. The Fund formerly was a "feeder" fund in a master/feeder arrangement where the Fund invested all of its assets in a corresponding "master" Fund with an identical investment objective and investment strategies. As of Dec. 6, 2005, the fund became a stand-alone fund that invests directly in a portfolio of securities. The information shown in the table and in the financial highlights for the Fund includes the activity of the Fund when it was a feeder in a master/feeder arrangement. AVERAGE ANNUAL TOTAL RETURNS (FOR PERIODS ENDED DEC. 31, 2006)
SINCE INCEPTION SINCE (CLASSES A, INCEPTION 1 YEAR 5 YEARS 10 YEARS B, C & R4) (CLASS I) VALUE FUND (SELLING FUND): Class A Return before taxes +10.89% +6.25% N/A +5.17%(a) N/A Return after taxes on distributions +8.68% +5.42% N/A +4.42%(a) N/A Return after taxes on distributions and sale of Fund shares +9.14% +5.23% N/A +4.31%(a) N/A Class B Return before taxes +11.63% +6.40% N/A +5.37%(a) N/A Class C Return before taxes +15.66% +6.71% N/A +5.56%(a) N/A Class I Return before taxes +18.04% N/A N/A N/A +10.05%(b) Class R4* Return before taxes +17.83% +7.70% N/A +6.46%(a) N/A Russell 1000(R) Value Index (reflects no deduction for fees, expenses or taxes) +22.25% +10.86% N/A +8.94%(c) +14.48%(d) Lipper Large-Cap Value Funds Index +18.28% +7.67% N/A +5.94%(c) +11.41%(d)
60 RIVERSOURCE FUNDS -- PROXY STATEMENT AVERAGE ANNUAL TOTAL RETURNS (FOR PERIODS ENDED DEC. 31, 2006) (CONTINUED)
SINCE SINCE INCEPTION INCEPTION 1 YEAR 5 YEARS 10 YEARS (CLASSES C) (CLASS I) DIVERSIFIED EQUITY INCOME FUND (BUYING FUND): Class A Return before taxes +12.78% +11.84% +9.97% N/A N/A Return after taxes on distributions +10.85% +10.88% +8.19% N/A N/A Return after taxes on distributions and sale of Fund shares +10.11% +9.98% +7.79% N/A N/A Class B Return before taxes +13.83% +12.06% +9.78% N/A N/A Class C Return before taxes +17.72% +12.30% N/A +10.16%(e) N/A Class I Return before taxes +20.13% N/A N/A N/A +16.72%(b) Class R4* Return before taxes +19.83% +13.36% +10.79% N/A N/A Russell 1000(R) Value Index (reflects no deduction for fees, expenses or taxes) +22.25% +10.86% +11.00% +9.15%(f) +14.48%(d) Lipper Equity Income Funds Index +18.40% +8.28% +8.43% +6.99%(f) +11.70%(d)
* Effective Dec. 11, 2006, Class Y was renamed Class R4. (a) Inception date is June 18, 2001. (b) Inception date is March 4, 2004. (c) Measurement period started July 1, 2001. (d) Measurement period started March 1, 2004. (e) Inception date is June 26, 2000. (f) Measurement period started July 1, 2000. The Russell 1000 Value Index, an unmanaged index, measures the performance of those stocks in the Russell 1000 Index with lower price-to-book ratios and lower forecasted growth values. The index reflects reinvestment of all distributions and changes in market prices. The Lipper Large-Cap Value Funds Index includes the 30 largest large-cap value funds tracked by Lipper Inc. The index's returns include net reinvested dividends. Value Fund's performance is currently measured against this index for purposes of determining the performance incentive adjustment. The Lipper Equity Income Funds Index includes the 30 largest equity income funds tracked by Lipper Inc. The index's returns include net reinvested dividends. Diversified Equity Income Fund's performance is currently measured against this index for purposes of determining the performance incentive adjustment. RIVERSOURCE FUNDS -- PROXY STATEMENT 61 ADDITIONAL INFORMATION ABOUT EACH REORGANIZATION TERMS OF THE REORGANIZATIONS The Board has approved the Agreement, a copy of which is attached as Exhibit A. The Agreement provides for each Reorganization on the following terms: - - The Reorganization is expected to occur in the first quarter of 2008, pending shareholder approval and receipt of any necessary regulatory approvals. However, following shareholder approval, the Reorganization may happen at any time as agreed to between the Selling Fund and the Buying Fund. - - The Selling Fund will transfer all of its assets to the Buying Fund and, in exchange, the Buying Fund will assume all the Selling Fund's liabilities and will issue to the Selling Fund, as applicable, Class A, B, C, I, R2, R3, R4, R5 and W shares with an aggregate net asset value at the time of the Reorganization equal to the value of the assets of Classes A, B, C, I, R2, R3, R4, R5 and W shares that it receives from the Selling Fund, less the liabilities assumed by the Buying Fund in the transaction. These shares will immediately be distributed by the Selling Fund to its shareholders in proportion to their holdings in the Selling Fund. As a result, shareholders of the Selling Fund will become Class A, B, C, I, R2, R3, R4, R5 or W shareholders of the Buying Fund. - - Neither the Selling Fund nor the shareholders of the Selling Fund will pay any sales charge in connection with the Reorganization. - - The net asset value of the Selling Fund and the Buying Fund will be computed as of 3:00 p.m. Central time, on the business day immediately preceding the closing date. - - After the Reorganization, the Selling Fund will be terminated. CONDITIONS TO CLOSING EACH REORGANIZATION The completion of each Reorganization is subject to certain conditions described in the Agreement, including: - - The Selling Fund will have declared and paid a dividend that will distribute all of the Fund's taxable income, if any, to the shareholders of the Fund for the taxable years ending at or prior to the closing. - - The Funds will have received any approvals, consents or exemptions from the SEC or any regulatory body necessary to carry out the Reorganization. - - A registration statement on Form N-14 will have been filed with the SEC and declared effective. - - The shareholders of the Selling Fund will have approved the Agreement. - - The Selling Fund will have received an opinion of tax counsel that, although not entirely free from doubt, the proposed Reorganization will not result in gain or loss to any shareholder for federal income tax purposes. TERMINATION OF THE AGREEMENT The Agreement and the transactions contemplated by it may be terminated and abandoned with respect to any Reorganization by resolutions of the Board of the Selling Fund or the Buying Fund at any time prior to closing. In the event of a termination, there will be no liability for damages on the part of either the Selling Fund or the Buying Fund or any of their affiliates. TAX STATUS OF THE REORGANIZATIONS Each Reorganization is expected to be tax-free for federal income tax purposes and will not take place in any case unless the Selling Fund and the Buying Fund receive a satisfactory opinion of tax counsel (which opinion will be based on certain factual representations and certain customary assumptions), to the effect that, although not entirely free from doubt, on the basis of existing provisions of the Internal Revenue Code of 1986, as amended (the "Code", U.S. Treasury regulations issued thereunder ("Regulations"), current administrative rules, pronouncements and court decisions, for federal income tax purposes): - - The transfer of the Selling Fund's assets to the Buying Fund in exchange for Class A, B, C, I, R2, R3, R4, R5 and W shares, as applicable, of the Buying Fund and the assumption of the Selling Fund's liabilities, followed by the distribution of those Class A, B, C, I, R2, R3, R4, R5 and W shares, as applicable, to the Selling Fund's shareholders and the termination of the Selling Fund will be a "reorganization" within the meaning of Section 368(a)(1) of the Code, and the Selling Fund and the Buying Fund will each be a "party to the reorganization" within the meaning of Section 368(b) of the Code. - - Under Section 361 of the Code, no gain or loss will be recognized by the Selling Fund upon the transfer of all of its assets to the Buying Fund or on the distribution by the Selling Fund of Class A, B, C, I, R2, R3, R4, R5 and W shares, as applicable, of the Buying Fund to Selling Fund shareholders in liquidation. 62 RIVERSOURCE FUNDS -- PROXY STATEMENT - - Under Section 354 of the Code, the shareholders of the Selling Fund will not recognize gain or loss upon the exchange of their Class A, B, C, I, R2, R3, R4, R5 and W shares, as applicable, of the Selling Fund solely for Buying Fund Class A, B, C, I, R2, R3, R4, R5 and W shares, as applicable, as part of the Reorganization. - - Under Section 358 of the Code, the aggregate basis of the Class A, B, C, I, R2, R3, R4, R5 and W shares, as applicable, of the Buying Fund that a Selling Fund shareholder receives in the Reorganization will be the same as the aggregate basis of the Class A, B, C, I, R2, R3, R4, R5 and W shares, as applicable, of the Selling Fund exchanged therefor. - - Under Section 1223(1) of the Code, the tax holding period for the Class A, B, C, I, R2, R3, R4, R5 and W shares, as applicable, of the Buying Fund that a Selling Fund shareholder receives in the Reorganization will include the period for which he or she held the Class A, B, C, I, R2, R3, R4, R5 and W shares, as applicable, of the Selling Fund exchanged therefor, provided that on the date of the exchange he or she held such Selling Fund shares as capital assets. - - Under Section 1032 of the Code, no gain or loss will be recognized by the Buying Fund upon the receipt of the Selling Fund's assets solely in exchange for the issuance of Buying Fund's Class A, B, C, I, R2, R3, R4, R5 and W shares, as applicable, to the Selling Fund and the assumption of all of the Selling Fund's liabilities by the Buying Fund. - - Under Section 362(b) of the Code, the Buying Fund's tax basis in the assets that the Buying Fund received from the Selling Fund will be the same as the Selling Fund's tax basis in those assets immediately prior to the transfer. - - Under Section 1223(2) of the Code, the Buying Fund's holding periods in the assets received from the Selling Fund will include the Selling Fund's holding periods in such assets. - - Under Section 381 of the Code, the Buying Fund will succeed to and take into account the items of the Selling Fund described in Section 381(c) of the Code, subject to the conditions and limitations specified in Sections 381, 382, 383 and 384 of the Code and Regulations thereunder. The opinion will note and distinguish certain published precedent; it is possible that the Internal Revenue Service (the "IRS") could disagree with tax counsel's opinion. Tax counsel will express no view with respect to the effect of the Reorganization on any transferred assets as to which any unrealized gain or loss is required to be recognized at the end of a taxable year (or on the termination or transfer thereof) under federal income tax principles. A portion of the portfolio assets of the Selling Fund may be sold in connection with the Reorganization. The actual tax impact of such sales will depend on the difference between the price at which such portfolio assets are sold and the Selling Fund's basis in such assets. Any net capital gains recognized in these sales will be distributed to Selling Fund shareholders as capital gain dividends (to the extent of net realized long-term capital gains) and/or ordinary dividends (to the extent of net realized short-term capital gains) during or with respect to year of sale, and such distributions will be taxable to shareholders. Prior to the closing of each Reorganization, the Selling Fund will, and the Buying Fund may, declare a distribution to shareholders, which together with all previous distributions, will have the effect of distributing to shareholders all of its investment company taxable income (computed without regard to the deduction for dividends paid) and net realized capital gains (after reduction by any available capital loss carryforwards), if any, through the closing of the Reorganization. These distributions will be taxable to shareholders. A Fund's ability to carry forward capital losses and use them to offset future gains may be limited. First, one Fund's "pre-acquisition losses" (including capital loss carryforwards, net current-year capital losses, and unrealized losses that exceed certain thresholds) cannot be used to offset unrealized gains in another Fund that are "built in" at the time of the Reorganization and that exceed certain thresholds ("non-de minimis built-in gains") for five calendar years. Second, a portion of a Fund's pre-acquisition losses may become unavailable to offset any gains at all. Third, any remaining pre-acquisition losses will offset capital gains realized after the Reorganization and thus will reduce subsequent capital gain distributions to a broader group of shareholders than would have been the case absent such Reorganization. Therefore, in certain circumstances, former shareholders of a Fund may pay taxes sooner, or pay more taxes, than they would have had a Reorganization not occurred. In addition, in each case the combined Fund resulting from each Reorganization will have tax attributes that reflect a blending of the tax attributes of the two Funds at the time of the Reorganization (including as affected by the rules set forth above). Therefore, the shareholders of the Selling Fund will in each case receive a proportionate share of any "built-in" (unrealized) gains in the Buying Fund's assets, as well as any taxable gains realized by the Buying Fund but not distributed to its shareholders prior to the Reorganization, when such gains are eventually distributed by the Buying Fund. The impact of the rules described above will depend on the relative sizes of, and the losses and gains (both realized and unrealized) in, each Fund at the time of the Reorganization and thus cannot be calculated precisely at this time. As stated above, for five years beginning after the closing date, the combined Fund will not be allowed to offset gains "built in" to either Fund at the time of the Reorganization against capital losses (including capital loss carryforwards) built in to the other Fund. RIVERSOURCE FUNDS -- PROXY STATEMENT 63 The realized and unrealized gains and losses of each Fund at the time of each Reorganization will determine the extent to which the combining Funds' respective losses, both realized and unrealized, will be available to reduce gains realized by the combined Fund following the Reorganization, and consequently the extent to which the combined Fund may be required to distribute gains to its shareholders earlier than would have been the case absent the Reorganization. The following paragraphs provide a brief summary of the tax impact of each Reorganization had it occurred on June 30, 2007. As noted above, the tax impact of the Reorganization depends on each Fund's relative tax situations at the time of the Reorganization and cannot be calculated precisely at this time. Proposal 1. Reorganization of Core Bond Fund into Diversified Bond Fund: As of June 30, 2007, Core Bond Fund and Diversified Bond Fund had net realized capital losses (including capital loss carryforwards) of approximately $2.51 million (1.03% of the Fund's net assets) and $143.18 million (4.68% of the Fund's net assets), respectively. If the Reorganization had occurred on June 30, 2007, the combined fund would have had gross losses equal to approximately 4.76% of its net assets, and the loss-limitation rules would not have affected the funds' ability to use their losses, and the losses of Diversified Bond Fund would potentially have protected gains recognized by the combined fund. Proposal 2. Reorganization of Fundamental Growth Fund into Growth Fund: As of June 30, 2007, Fundamental Growth Fund and Growth Fund had net unrealized built-in gains equal to 10.5% and 9.1% of net assets, respectively, and Growth Fund had losses (including capital loss carryforwards) of approximately $344.8 million (10% of the Fund's net assets). If the Reorganization had occurred on that date, it is possible that it would have permitted the shareholders of Fundamental Growth Fund to spread some of the tax cost associated with those unrealized gains to the other shareholders of the combined fund, and shareholders of Fundamental Growth Fund might also have benefited from the use of Growth Fund's losses to reduce or eliminate the tax cost associated with Growth Fund's unrealized gains. Proposal 3. Reorganization of International Equity Fund into Disciplined International Equity Fund: As of June 30, 2007, International Equity Fund and Disciplined International Equity Fund had net unrealized built-in gains of 13.6% and 7.4% of net assets, respectively. Neither Fund had any capital loss carryforwards to help offset its gains. If the Reorganization had occurred on June 30, 2007, it is possible that it would have permitted the shareholders of International Equity Fund to spread some of the tax cost of their Fund's unrealized gains to the other shareholders of the combined Fund. Proposals 4, 5 and 6. Reorganizations of each of Massachusetts Tax-Exempt Fund, Michigan Tax-Exempt Fund and Ohio Tax-Exempt Fund into Tax-Exempt High Income Fund: As of June 30, 2007 of the Selling Funds and Tax-Exempt High Income Fund, only Massachusetts Tax-Exempt Fund had net realized capital losses (that is, capital loss carryforwards, net of gains recognized year to date), and those were extremely modest. Its losses (including capital loss carryforwards) were $0.13 million (0.26% of the Fund's net assets). At that time, the Buying Fund, which is considerably larger than any of the Selling Funds, had modest unrealized ("built-in") capital gains. If any or all the Reorganizations of these Funds into Tax-Exempt High Income Fund had occurred on June 30, 2007, the combined fund would have been technically subject to the loss-limitation rules described above, but those rules would not likely have prevented the use of such losses; Tax-Exempt High Income Fund's built-in gains would potentially have caused the shareholders of the Selling Fund in each case to receive distributions somewhat earlier, and in higher amounts than they would have absent the Reorganization. Proposal 7. Reorganization of Value Fund into Diversified Equity Income Fund: As of June 30, 2007, Value Fund and Diversified Equity Income Fund had net unrealized built-in gains equal to 12.9% and 24.8% of net assets, respectively. Neither Fund had any capital loss carryforwards to help offset its gains. If the Reorganization had occurred on June 30, 2007, the combined fund's built-in gains would have been substantially larger, both in absolute terms and as a percentage of net assets, than those of Value Fund, and so it is possible that the Reorganization would potentially have caused Value Fund shareholders to receive distributions somewhat earlier, and in higher amounts, than they would have absent the Reorganization. The tax principles described above will remain true; their application and, at a minimum, the specific percentages noted above will change prior to each Reorganization, because of market developments, any pre-Reorganization realignments (including, in the case of Fundamental Growth Fund, International Equity Fund and Value Fund, realignments anticipated in connection with the termination of the funds' subadvisers on or about Nov. 16, 2007) or other sales of portfolio securities and shareholder activity in the Funds, among other changes. This description of the federal income tax consequences of the Reorganizations does not take into account your particular facts and circumstances. Consult your own tax adviser about the effect of state, local, foreign, and other tax laws. REASONS FOR THE PROPOSED REORGANIZATIONS AND BOARD DELIBERATIONS The Board believes that each proposed Reorganization will be advantageous to Selling Fund shareholders based on its consideration of the following matters: - - TERMS AND CONDITIONS OF THE REORGANIZATION. The Board considered the terms and conditions of each Reorganization as described in the previous paragraphs. 64 RIVERSOURCE FUNDS -- PROXY STATEMENT - - TAX CONSEQUENCES. The Board considered the tax-free nature of each Reorganization. The Board also considered the relative tax situations of each Fund and the resulting tax impact of the Reorganization to Selling Fund shareholders, and noted that the benefits of each Reorganization will outweigh any resulting tax cost to shareholders. With respect to the proposed Reorganizations of Massachusetts Tax-Exempt Fund, Michigan Tax-Exempt Fund and Ohio Tax-Exempt Fund ("Single State Funds") into Tax-Exempt High Income Fund, the Board considered the impact on shareholders of the Single State Funds of the expected taxability of distributions from the Buying Fund for state and local tax purposes. In this regard, the Board also considered the historic performance of the Funds and noted that, even when taking into account the state and local taxes to which shareholders of Tax-Exempt High Income Fund would be subject on distributions from the Fund, the after-tax performance of Tax-Exempt High Income Fund was higher than that of the Single State Funds (see "Performance and Other Factors" below). - - CONTINUITY OF INVESTMENT. The Board took into account the fact that, currently, each Selling Fund and the corresponding Buying Fund have similar or identical investment objectives and, except as noted below and as discussed in more detail under each proposal, similar investment strategies. In particular, for each Reorganization: Proposal 1. Reorganization of Core Bond Fund into Diversified Bond Fund: The Board noted that Diversified Bond Fund's primary objective of providing shareholders with a high level of current income, while conserving the value of the investment for the longest period of time, is similar to that of Core Bond Fund, which is to provide shareholders with a high total return through current income and capital appreciation. The Board also noted that the Funds shared a common benchmark, the Lehman Brothers Aggregate Bond Index. Proposal 2. Reorganization of Fundamental Growth Fund into Growth Fund: The Board considered that the Funds shared a common investment objective of providing shareholders with long-term capital growth. The Board also noted the similarity in investment strategies (considering that, although both Funds had RiverSource Investments as an investment adviser, Fundamental Growth Fund had been subadvised by GSAM and Wellington Management). In this regard, the Board noted that both Funds shared a common benchmark, the Russell 1000 Growth Index. Proposal 3. Reorganization of International Equity Fund into Disciplined International Equity Fund: The Board considered that the Funds shared a common investment objective of providing shareholders with long-term capital growth. The Board also noted the similarity in investment strategies (considering that, although both Funds had RiverSource Investments as an investment adviser, International Equity Fund had been subadvised by The Boston Company and Marsico). In this regard, the Board noted that both Funds shared a common benchmark, the MSCI EAFE Index. Proposals 4, 5 and 6. Reorganizations of each of Massachusetts Tax-Exempt Fund, Michigan Tax-Exempt Fund and Ohio Tax-Exempt Fund into Tax-Exempt High Income Fund: The Board considered the principal difference between the Funds, that unlike Tax-Exempt High Income Fund, each Single State Fund, as its investment objective, seeks to generate income that is exempt not only from federal income taxes but also state and local taxes. The Board further considered that, whereas each of the Single State Funds invest in securities exempt from a particular state or local tax, the combined portfolio would continue to consist of municipal securities which are generally exempt from federal tax, and that the holdings of each of the Single State Funds are eligible holdings of Tax-Exempt High Income Fund. In this regard, however, the Board noted that the Single State Funds continue to be faced with a limited supply of investment opportunities in these states, whereas, Tax-Exempt High Income Fund, as a national tax-exempt fund, has a much broader investment universe from which to seek to generate high current income. Proposal 7. Reorganization of Value Fund into Diversified Equity Income Fund: The Board considered that Diversified Equity Income Fund had a primary objective of seeking a high level of current income, whereas this was a secondary objective for Value Fund. In this regard, the Board considered that, although both Funds had RiverSource Investments as an investment adviser, Value Fund had been subadvised by Lord Abbett, but observed that both Funds were managed against the same benchmark, the Russell 1000(R) Value Index, and that a substantial portion of Value Fund's holdings pay a dividend and thus are eligible holdings for Diversified Equity Income Fund. - - EXPENSE RATIOS. The Board considered the relative expenses of the Funds. Specifically, the Board considered that, as of the end of each Fund's most recent fiscal year, the net expense ratios for each Selling Fund's Class A shares (before giving effect to any applicable performance incentive adjustment and excluding interest and fee expenses related to participation in certain inverse floater programs) were higher than or equal to the pro forma expense ratios for the corresponding Buying Fund's Class A shares (adjusted to reflect current fees, before giving effect to any applicable performance incentive adjustment and excluding interest and fee expenses related to participation in certain inverse floater programs). The Board also evaluated the anticipated expense ratio impacts to each Funds' other share classes. In particular, for each Reorganization (unless otherwise specified, discussion of expense ratio impacts are with respect to a Fund's Class A shares): Proposal 1. Reorganization of Core Bond Fund into Diversified Bond Fund: The Board considered that, based on current commitments of the investment manager and its affiliates to waive fees and cap expenses, net expense ratios for Class A RIVERSOURCE FUNDS -- PROXY STATEMENT 65 shares, Class B shares, Class C shares and Class R4 shares of Core Bond Fund would remain the same or fall slightly after the Reorganization. Although modest increases in expense ratios for Class R2 shares, Class R3 shares, Class R5 shares and Class W shares of Core Bond Fund are expected as a result of the Reorganization, the Board observed that there are no current public shareholders that own such share classes. With respect to Class I shares, the Board considered that the only shareholders are affiliated funds-of-funds, and although the expense ratio of Class I shares is expected to increase modestly as a result of the Reorganization, and such increase will contribute to a modest increase in the overall underlying expenses realized by the funds-of-funds investing in the Fund, such increases would not be material to the overall expense ratios for the funds-of-funds. Proposal 2. Reorganization of Fundamental Growth Fund into Growth Fund: The Board considered that Growth Fund is not currently subject to any commitment by the investment manager and its affiliates to waive fees or cap expenses, and although the investment manager and its affiliates have agreed to waive fees and cap expenses on Fundamental Growth Fund to 1.42%, Fundamental Growth Fund's total expense ratio (before giving effect to any performance incentive adjustment) was 1.41%. The Board observed that the total expense ratio (before giving effect to any applicable performance incentive adjustment) of Fundamental Growth Fund would decline significantly (approximately 0.31%) as a result of the Reorganization, while the total expense ratio of Growth Fund would remain the same or fall slightly. Proposal 3. Reorganization of International Equity Fund into Disciplined International Equity Fund: The Board considered that the expenses of International Equity Fund (before giving effect to any applicable performance incentive adjustment) would decline (approximately 0.11%) on a gross expense basis and (approximately 0.05%) on a net basis (based on current commitments of the investment manager and its affiliates to waive fees and cap expenses, and on new commitments scheduled to go effective on Nov. 1, 2007), as a result of the Reorganization. Proposals 4, 5 and 6. Reorganizations of each of Massachusetts Tax-Exempt Fund, Michigan Tax-Exempt Fund and Ohio Tax-Exempt Fund into Tax-Exempt High Income Fund: The Board considered that, based both on current commitments of the investment manager and its affiliates to waive fees and cap expenses, and on new commitments to waive fees and cap expenses scheduled to go effective on Dec. 1, 2007, total expense ratios on a net basis (excluding interest and fee expenses associated with the Funds' participation in inverse floater programs) would be the same for each Single State Fund (equal to 0.79%) both prior to and following these Reorganizations. The Board also considered that investment in inverse floater programs by each Fund will vary, and that, for the most recent fiscal year, each of the Single State Funds included in its expense ratio between 0.02% and 0.04% of expenses related to participation in inverse floater programs, whereas Tax-Exempt High Income Fund included 0.26% of such expenses. The Board recognized that, when a fund participates in an inverse floater program, the fee and interest expenses associated with participation in inverse floater programs are typically offset by incremental interest income earned through such programs. In this regard, the Board considered that, excluding these inverse floater program expenses, total expense ratios of the Single State Funds, which range from 1.02% to 1.06%, would decline significantly to approximately 0.82%. Proposal 7. Reorganization of Value Fund into Diversified Equity Income Fund: The Board considered that the total expense ratio (before giving effect to any applicable performance incentive adjustment) of Value Fund would decline significantly (approximately 0.32% on a gross expense basis and approximately 0.25% on a net basis (based on current commitments of the investment manager and its affiliates to waive fees and cap expenses)) as a result of the Reorganization, while the total expense ratio of Diversified Equity Income Fund would remain the same or fall slightly. - - ECONOMIES OF SCALE. The Board observed that by combining the Funds, in addition to potential immediate economies of scale of a larger fund, the combined Fund would be able take advantage of other economies of scale associated with a larger fund. For example, a larger fund may realize breakpoints more quickly and it should have an enhanced ability to effect portfolio transactions on more favorable terms and should have greater investment flexibility. Furthermore, the Board also considered that higher aggregate net assets resulting from each Reorganization and the opportunity for net cash inflows (or reduced outflows) may reduce the risk that, if net assets of the Selling Fund fail to grow, or diminish, its total expense ratio could rise from current levels as fixed expenses, such as audit expenses and accounting expenses that are charged on a per Fund basis, become a larger percentage of net assets. - - COSTS. The Board considered the fact that the investment manager and its affiliates have agreed to bear all solicitation expenses in order to achieve shareholder approval of the Reorganization and to bear any other costs of effecting each Reorganization (other than any brokerage or other transaction costs associated with the sale or purchase of portfolio securities in connection with the Reorganization). - - DILUTION. The Board considered the fact that the Reorganization will not dilute the interests of the current shareholders because it would be effected on the basis of the relative net asset value per share of the Selling Fund and Buying Fund, respectively. Thus, for example, a Class A shareholder of a Selling Fund will receive Class A shares of the corresponding Buying Fund equal in value to his or her Class A shares in the Selling Fund at the time of the Reorganization. 66 RIVERSOURCE FUNDS -- PROXY STATEMENT - - PERFORMANCE AND OTHER FACTORS. The Board considered the relative performance records of each of the Funds, noting, however, that past performance is no guarantee of future results. The Board also considered the fact that the Reorganizations should allow for a more concentrated selling effort by the Funds' underwriter, thereby potentially benefiting each of the Funds, and that reduced outflows or increased inflows could help the Selling Fund shareholders achieve further economies of scale (see "Economies of Scale" above). The Board further took into account the investment manager's belief that each Selling Fund, as a stand-alone fund, was unlikely to experience any growth in assets from investor inflows in the near term. In particular, for each Reorganization, the Board observed: Proposal 1. Reorganization of Core Bond Fund into Diversified Bond Fund: The Board noted that, on an absolute basis, the performance of Diversified Bond Fund was substantially stronger than the performance of Core Bond Fund. The Board noted the weak asset level of Core Bond Fund and its relatively weak prospects for asset growth, particularly compared to Diversified Bond Fund. The Board accorded particular weight to the fact that Diversified Bond Fund had substantially greater assets than Core Bond Fund, noting that Diversified Bond Fund was more than 10 times the size of Core Bond Fund. Proposal 2. Reorganization of Fundamental Growth Fund into Growth Fund: The Board noted that Growth Fund's performance was substantially stronger than that of Fundamental Growth Fund for both the one and three year periods (both on an absolute basis and when compared to their respective peer groups). The Board also noted Fundamental Growth Fund's small asset size and its relatively weak prospects for asset growth, particularly compared to Growth Fund. The Board accorded particular weight to the fact that Growth Fund was more than 10 times the size of Fundamental Growth Fund. Proposal 3. Reorganization of International Equity Fund into Disciplined International Equity Fund: The Board noted that although Disciplined International Equity Fund has a shorter period of operations than International Equity Fund, its performance during this brief period has been strong and significantly better than that of International Equity Fund for the same period. The Board also noted that, notwithstanding its short period of operations, Disciplined International Equity Fund has garnered more assets relative to International Equity Fund. Proposals 4, 5 and 6. Reorganizations of each of Massachusetts Tax-Exempt Fund, Michigan Tax-Exempt Fund and Ohio Tax-Exempt Fund into Tax-Exempt High Income Fund: The Board noted that Tax-Exempt High Income Fund's performance was stronger than the performance for each of the Single State Funds for both the one and three year periods (both on an absolute basis and when compared to their respective peer groups). The Board also observed that Tax-Exempt High Income Fund's performance was stronger than that of the Single State Funds even when taking into account state and local taxes (i.e., of each relevant state covered by the Single State Funds) to which shareholders of Tax-Exempt High Income Fund would be subject. In this regard, it was noted that Tax-Exempt High Income Fund's relatively strong performance, when compared to the performance of the Single State Funds, may reflect the benefits of having access to a broader investment universe. The Board further observed that due to the relatively small asset size of each Single State Fund (each has less than $60 million of assets), the continued strength and viability of the single-state products were questionable and that, in this regard, Tax-Exempt High Income Fund had grown to more than 15 times the size of the largest of the Single State Funds. Proposal 7. Reorganization of Value Fund into Diversified Equity Income Fund: The Board noted that Diversified Equity Income Fund's performance was substantially stronger than that of Value Fund (both on an absolute basis and compared to their respective peer groups). The Board also discussed Value Fund's small asset level and its relatively weak prospects for asset growth, particularly compared to Diversified Equity Income Fund. The Board accorded particular weight to the fact that Diversified Equity Income Fund was almost 20 times the size of Value Fund. - - POTENTIAL BENEFITS TO THE INVESTMENT MANAGER AND ITS AFFILIATES. The Board considered the potential benefits from the Reorganization that could be realized by the investment manager and its affiliates. For Funds that are currently sub-advised, the Board recognized that potential benefits to the investment manager consist principally of the savings associated with the elimination of the expense of paying the subadviser(s) and, for all Funds, the elimination of expenses incurred in duplicative efforts to administer separate Funds. The Board also noted, however, that shareholders of the Selling Fund are expected to benefit over time from any decrease in overall operating expense ratios resulting from the proposed Reorganization. BOARDS' DETERMINATIONS After considering the factors described above and other relevant information, at meetings held on July 10-12, 2007, Sept. 10-11, 2007, and Nov. 7-8, 2007 each Selling Fund Board, including a majority of the independent Board members, found that participation in the Reorganization is in the best interests of the Selling Fund and that the interests of existing shareholders of the Fund will not be diluted as a result of the Reorganization. The Board of Directors of each Buying Fund approved the Agreement at a meeting held on Sept. 10-11, 2007. Among other factors, the Board members considered the terms of the Agreement, the provisions intended to avoid the dilution of shareholder interests and the anticipated tax consequences of the Reorganization. The Board found that participation in each Reorganization is in the best interests of the Buying Fund and that the interests of existing shareholders of the Buying Fund will not be diluted as a result of the Reorganization. RIVERSOURCE FUNDS -- PROXY STATEMENT 67 RECOMMENDATION AND VOTE REQUIRED The Board recommends that shareholders approve the proposed Agreement. The Agreement must be approved by a majority of the voting power of all shares entitled to vote. If the Agreement is not approved, the Board will consider what further action should be taken. If shareholders approve the Reorganization, it will take place shortly after the shareholder meeting, currently anticipated for the first quarter of 2008. 68 RIVERSOURCE FUNDS -- PROXY STATEMENT SECTION B -- PROPOSAL FOR MINNESOTA TAX-EXEMPT FUND PROPOSAL 8. APPROVE OR REJECT CHANGE OF INVESTMENT COMPANY CLASSIFICATION TO "NON-DIVERSIFIED" FOR MINNESOTA TAX-EXEMPT FUND Reference to the "Fund" in this proposal is a reference to Minnesota Tax-Exempt Fund. The Board has approved, and recommends that shareholders approve, a proposal to change the classification of the Fund from a "diversified" fund to a "non-diversified" fund, as such terms are defined under the Investment Company Act of 1940, as amended. There will be no adverse tax consequences as a result of the change in classification. FUND CLASSIFICATION. The Fund is currently classified as a diversified fund under the 1940 Act. This means that the Fund may not, with respect to 75% of its total assets, invest more than 5% of its total assets in any one issuer or purchase more than 10% of the outstanding voting securities of any one issuer. With respect to the remaining 25% of the Fund's total assets, there is no limitation on the amount of assets the Fund may invest in any one issuer. Section 13(a)(1) of the 1940 Act and Rule 13a-1 thereunder generally provide that if a non-diversified fund actually operates as if it were a diversified fund for a period of three years, its classification under the 1940 Act will convert automatically from non-diversified to diversified. The Fund's current classification as a diversified fund resulted from its operating as a diversified fund for more than three years. The Fund is seeking shareholder approval to restore its non-diversified classification because its investment manager believes that the Fund will benefit from the additional investment flexibility of investing in a smaller number of issuers, and because a diversified fund may convert to non-diversified status only with shareholder approval. The Fund is also subject to certain additional diversification requirements under the Internal Revenue Code of 1986, as amended (the "Code"). With respect to 50% of the Fund's total assets, the Fund may not invest more than 5% of its total assets in any one issuer and may not purchase more than 10% of the outstanding voting securities of any one issuer. With respect to the remaining 50% of the Fund's total assets, the Fund may not invest more than 25% of its assets in any one issuer. If this proposal is approved, the Fund will continue to be subject to the Code's diversification requirements with respect to regulated investment companies. REASONING AND POTENTIAL RISK. The Fund's investment manager is seeking to regain the flexibility to invest more of the Fund's assets in a small number of issuers. The Fund's investment manager believes this flexibility will allow the Fund to better pursue its investment objective of providing shareholders with a high level of income generally exempt from federal income tax, as well as from Minnesota state and local tax. Even if this proposal is approved, the Fund's investment manager may or may not operate the Fund as non-diversified, depending on its assessment of the investment opportunities available to the Fund from time to time. Of course, pursuant to Rule 13a-1, should the Fund operate as a "diversified" fund for a period of three years, it would revert to its diversified status. A non-diversified Fund is subject to greater risk. The Fund may invest more of its assets in fewer issuers than if it were a diversified fund. Because each investment may have a greater effect on the Fund's performance, the Fund may be more exposed to the risks of loss and volatility than a fund that invests more broadly. BOARD RECOMMENDATION AND VOTE REQUIRED. The Board recommends that you vote to approve to change the classification of the Fund to non-diversified. Approval of the proposed change requires the favorable vote of the lesser of (a) a majority of the Fund's outstanding voting securities or (b) 67% or more of the voting securities present at the meeting, so long as more than 50% of the outstanding voting securities are present. If shareholders approve the proposed change, it will take effect shortly after the shareholder meeting. If the proposed change is not approved, the Fund will continue to operate as a diversified fund. RIVERSOURCE FUNDS -- PROXY STATEMENT 69 SECTION C -- PROXY VOTING AND SHAREHOLDER MEETING INFORMATION Reference to the "Fund" in this section is a reference to each Selling Fund and Minnesota Tax-Exempt Fund. VOTING. You are entitled to vote based on your total dollar interest in the Fund. Each dollar is entitled to one vote. For those of you who cannot come to the meeting, the Board is asking permission to vote for you. The shares will be voted as you instruct either by telephone, internet or mail. Signed proxy cards returned without instructions will be voted in favor of all proposals of Fund(s) for which you own shares. All votes count toward a quorum, regardless of how they are voted (For, Against or Abstain). Broker non-votes will be counted toward a quorum but not toward the approval of any proposals. (Broker non-votes are shares for which the underlying owner has not voted and the broker holding the shares does not have authority to vote.) If your shares are held in an IRA account with Ameriprise Trust Company as custodian, you have the right to instruct the IRA Custodian how to vote those shares. The IRA Custodian will vote any shares for which it has not received voting instructions in proportionately the same manner -- either For, Against, or Abstain -- as other Fund shareholders have voted. REVOKING YOUR PROXY. If you change your mind after you vote and you can attend the meeting, simply inform the Secretary at the meeting that you will be voting your shares in person. Also, if you change your mind after you vote, but cannot attend the meeting, you may change your vote or revoke it by telephone, internet or mail. SIMULTANEOUS MEETINGS. The meeting will be held simultaneously with meetings of other RiverSource mutual funds. Each proposal will be voted on separately by shareholders of a Fund. If any shareholder objects to the holding of simultaneous meetings, the shareholder may move for an adjournment of his or her Fund's meeting to a time immediately after the simultaneous meetings so that a meeting of that Fund may be held separately. If a shareholder makes this motion, the persons named as proxies will take into consideration the reasons for the objection in deciding whether to vote in favor of the adjournment. SOLICITATION OF PROXIES. The Board is asking for your vote and for you to vote as promptly as possible. The investment manager will pay the expenses of the solicitation. Supplementary solicitations may be made by mail, telephone, electronic means or personal contact. SHAREHOLDER PROPOSALS. No proposals were received from shareholders. RiverSource Funds are not required to hold regular meetings of shareholders each year. However, meetings of shareholders are held from time to time and proposals of shareholders that are intended to be presented at future shareholder meetings must be submitted in writing to RiverSource Funds in reasonable time prior to the solicitation of proxies for the meeting. DISSENTERS' RIGHT OF APPRAISAL. Under Sections 302A.471 and 302A.473 of the Minnesota Business Corporation Act, Selling Fund shareholders (except Michigan Tax-Exempt Fund, Ohio Tax-Exempt Fund and Michigan Tax-Exempt Fund, which are organized as Massachusetts business trusts) are entitled to assert dissenters' rights in connection with the Reorganization and obtain payment of the "fair value" of their shares, provided that they comply with the requirements of Minnesota law. A copy of the relevant provisions is attached as Exhibit B. Notwithstanding the provisions of Minnesota law, the SEC has taken the position that use of state appraisal procedures by a mutual fund would be a violation of Rule 22c-1, the forward pricing rule, under the 1940 Act. This rule states that no mutual fund may redeem its shares other than at net asset value next computed after receipt of a request for redemption. It is the SEC's position that Rule 22c-1 supersedes appraisal provisions in state statutes. In the interest of ensuring equal valuation for all shareholders, dissenters' rights will be determined in accordance with the SEC's interpretation. As a result, if any shareholder elects to exercise dissenters' rights under Minnesota law, the Selling Fund intends to submit this question to a court of competent jurisdiction. In that event, a dissenting shareholder would not receive any payment until the end of the court proceeding. OTHER BUSINESS. The Board does not know at this time of any other business to come before the meetings. If something does come up, the proxies will use their best judgment to vote for you on the matter. ADJOURNMENT. In the event that not enough votes are received by the time scheduled for the meeting, the persons named as proxies may move for one or more adjournments of the meeting for a period of not more than 120 days in the aggregate to allow further solicitation of shareholders on the proposals. Any adjournment requires the affirmative vote of a majority of the voting power of the shares present at the meeting. The persons named as proxies will vote in favor of adjournment those shares they are entitled to vote that have voted in favor of the proposal. They will vote against any adjournment those shares that have voted against the proposal. The investment manager and its affiliates will pay the costs of any additional solicitation and of any adjourned meeting. A shareholder vote may be taken on one or more of the items in this proxy statement prior to adjournment if sufficient votes have been received. 70 RIVERSOURCE FUNDS -- PROXY STATEMENT SECTION D -- CAPITALIZATION, OWNERSHIP OF FUND SHARES AND FINANCIAL HIGHLIGHTS This section contains the following information about the Funds:
TABLE CONTENT PAGE (all information is shown for the last fiscal year unless noted otherwise) Actual and pro forma capitalization of each Selling Fund and D-1 each Buying Fund 71 Actual and pro forma ownership of Selling Fund and Buying D-2 Fund shares 74 D-3 Capitalization and ownership of Minnesota Tax-Exempt Fund 78 D-4 Financial Highlights of each Buying Fund 79
THE FUND'S INVESTMENT MANAGER AND DISTRIBUTOR. RiverSource Investments is the investment manager for each fund. RiverSource Distributors, Inc., a wholly owned subsidiary of Ameriprise Financial, is the distributor for the funds. The address for RiverSource Investments and RiverSource Distributors is 200 Ameriprise Financial Center, Minneapolis, MN 55474. CAPITALIZATION OF SELLING FUNDS AND BUYING FUNDS The following table shows the capitalization of the Funds as of Sept. 30, 2007 and on a pro forma basis, assuming the proposed Reorganization had taken place. The pro forma combined shares outstanding is determined by dividing the net assets of each Selling Fund by the net asset value per share of the corresponding Buying Fund and adding the actual shares outstanding of the Buying Fund. For example, for the Reorganization of Core Bond Fund into Diversified Bond Fund, the pro forma combined shares outstanding for Class A is [$42,708,979 / $4.84] + 402,607,422 = 411,431,591. TABLE D-1. ACTUAL AND PRO FORMA CAPITALIZATION OF EACH SELLING FUND AND EACH BUYING FUND
NET ASSET VALUE SHARES FUND NET ASSETS PER SHARE OUTSTANDING - ---------------------------------------------------------------------------------------------------------------- CORE BOND FUND (ACTUAL) (SELLING FUND) Class A $ 42,708,979 $ 9.58 4,460,032 Class B 10,869,457 9.58 1,134,347 Class C 836,113 9.59 87,231 Class I 274,336,374 9.57 28,680,524 Class R2 4,964 9.58 518 Class R3 4,964 9.58 518 Class R4 9,576 9.57 1,000 Class R5 4,964 9.58 518 Class W 4,941 9.57 516 DIVERSIFIED BOND FUND (ACTUAL) (BUYING FUND) Class A $1,948,219,755 $ 4.84 402,607,422 Class B 304,200,631 4.84 62,868,798 Class C 17,227,253 4.84 3,559,322 Class I 392,127,542 4.85 80,928,718 Class R2 5,022 4.83 1,040 Class R3 5,022 4.83 1,040 Class R4 77,569,937 4.83 16,051,007 Class R5 5,023 4.83 1,040 Class W 260,597,795 4.84 53,834,982 DIVERSIFIED BOND FUND (PRO FORMA COMBINED) Class A $1,990,928,734 $ 4.84 411,431,591 Class B 315,070,088 4.84 65,114,554 Class C 18,063,366 4.84 3,732,073 Class I 666,463,916 4.85 137,492,919 Class R2 9,986 4.83 2,068 Class R3 9,986 4.83 2,068 Class R4 77,579,513 4.83 16,052,990 Class R5 9,987 4.83 2,068 Class W 260,602,736 4.84 53,836,003
RIVERSOURCE FUNDS -- PROXY STATEMENT 71
NET ASSET VALUE SHARES FUND NET ASSETS PER SHARE OUTSTANDING - ---------------------------------------------------------------------------------------------------------------- FUNDAMENTAL GROWTH FUND (ACTUAL) (SELLING FUND) Class A $ 19,560,822 $ 7.25 2,696,272 Class B 5,104,382 7.00 729,158 Class C 829,186 7.01 118,287 Class I 192,605,990 7.37 26,127,981 Class R4 50,123 7.33 6,840 GROWTH FUND (ACTUAL) (BUYING FUND) Class A $2,464,860,973 $34.49 71,463,417 Class B 379,772,808 31.36 12,111,368 Class C 21,185,694 31.33 676,134 Class I 316,923,720 35.37 8,959,939 Class R4 150,624,163 35.14 4,286,189 GROWTH FUND (PRO FORMA COMBINED) Class A $2,484,421,795 $34.49 72,030,562 Class B 384,877,190 31.36 12,274,135 Class C 22,014,880 31.33 702,600 Class I 509,529,710 35.37 14,405,401 Class R4 150,674,286 35.14 4,287,615 INTERNATIONAL EQUITY FUND (ACTUAL) (SELLING FUND) Class A $ 106,806,505 $ 8.52 12,529,871 Class B 22,818,683 8.38 2,723,649 Class C 1,807,796 8.38 215,757 Class I 77,955,698 8.57 9,093,112 Class R4 137,212 8.53 16,093 DISCIPLINED INTERNATIONAL EQUITY FUND (ACTUAL) (BUYING FUND) Class A $ 19,839,939 $12.33 1,609,317 Class B 2,532,930 12.21 207,465 Class C 377,032 12.21 30,879 Class I 186,292,184 12.37 15,062,828 Class R4 64,000 12.34 5,187 DISCIPLINED INTERNATIONAL EQUITY FUND (PRO FORMA COMBINED) Class A $ 126,646,444 $12.33 10,271,645 Class B 25,351,613 12.21 2,076,317 Class C 2,184,828 12.21 178,938 Class I 264,247,882 12.37 21,364,825 Class R4 201,212 12.34 16,306 MASSACHUSETTS TAX-EXEMPT FUND (ACTUAL) (SELLING FUND) Class A $ 40,623,765 $ 5.27 7,712,751 Class B 5,738,114 5.27 1,089,492 Class C 567,447 5.26 107,789 MICHIGAN TAX-EXEMPT FUND (ACTUAL) (SELLING FUND) Class A $ 37,385,393 $ 5.21 7,177,184 Class B 1,232,293 5.21 236,449 Class C 1,016,118 5.21 195,052 OHIO TAX-EXEMPT FUND (ACTUAL) (SELLING FUND) Class A $ 38,038,296 $ 5.21 7,301,879 Class B 3,184,066 5.21 611,028 Class C 963,105 5.21 184,802
72 RIVERSOURCE FUNDS -- PROXY STATEMENT
NET ASSET VALUE SHARES FUND NET ASSETS PER SHARE OUTSTANDING - ---------------------------------------------------------------------------------------------------------------- TAX-EXEMPT HIGH INCOME FUND (ACTUAL) (BUYING FUND) Class A $2,658,677,627 $ 4.32 615,646,120 Class B 83,083,815 4.32 19,243,741 Class C 14,391,682 4.32 3,331,223 TAX-EXEMPT HIGH INCOME FUND (PRO FORMA COMBINED, ASSUMING REORGANIZATION OF ONLY MASSACHUSETTS TAX-EXEMPT FUND IS CONSUMMATED) Class A $2,699,301,392 $ 4.32 625,049,769 Class B 88,821,929 4.32 20,572,008 Class C 14,959,129 4.32 3,462,576 TAX-EXEMPT HIGH INCOME FUND (PRO FORMA COMBINED, ASSUMING REORGANIZATION OF ONLY MICHIGAN TAX-EXEMPT FUND IS CONSUMMATED) Class A $2,696,063,020 $ 4.32 624,300,146 Class B 84,316,108 4.32 19,528,994 Class C 15,407,800 4.32 3,566,436 TAX-EXEMPT HIGH INCOME FUND (PRO FORMA COMBINED, ASSUMING REORGANIZATION OF ONLY OHIO TAX-EXEMPT FUND IS CONSUMMATED) Class A $2,696,715,923 $ 4.32 624,451,281 Class B 86,267,881 4.32 19,980,793 Class C 15,354,787 4.32 3,554,164 TAX-EXEMPT HIGH INCOME FUND (PRO FORMA COMBINED, ASSUMING REORGANIZATIONS OF ONLY MASSACHUSETTS TAX-EXEMPT FUND AND MICHIGAN TAX-EXEMPT FUND ARE CONSUMMATED) Class A $2,736,686,785 $ 4.32 633,703,795 Class B 90,054,222 4.32 20,857,261 Class C 15,975,247 4.32 3,697,789 TAX-EXEMPT HIGH INCOME FUND (PRO FORMA COMBINED, ASSUMING REORGANIZATIONS OF ONLY MASSACHUSETTS TAX-EXEMPT FUND AND OHIO TAX-EXEMPT FUND ARE CONSUMMATED) Class A $2,737,339,688 $ 4.32 633,854,930 Class B 92,005,995 4.32 21,309,060 Class C 15,922,234 4.32 3,685,517 TAX-EXEMPT HIGH INCOME FUND (PRO FORMA COMBINED, ASSUMING REORGANIZATIONS OF ONLY MICHIGAN TAX-EXEMPT FUND AND OHIO TAX-EXEMPT FUND ARE CONSUMMATED) Class A $2,734,101,316 $ 4.32 633,105,307 Class B 87,500,174 4.32 20,266,046 Class C 16,370,905 4.32 3,789,376 TAX-EXEMPT HIGH INCOME FUND (PRO FORMA COMBINED, ASSUMING REORGANIZATIONS OF MASSACHUSETTS TAX-EXEMPT FUND, MICHIGAN TAX-EXEMPT FUND AND OHIO TAX-EXEMPT FUND ARE CONSUMMATED) Class A $2,774,725,081 $ 4.32 642,508,957 Class B 93,238,288 4.32 21,594,313 Class C 16,938,352 4.32 3,920,730 VALUE FUND (ACTUAL) (SELLING FUND) Class A $ 203,699,510 $ 5.76 35,386,466 Class B 74,233,086 5.58 13,296,778 Class C 6,338,062 5.60 1,132,318 Class I 48,528,679 5.81 8,351,589 Class R4 131,849 5.79 22,784 DIVERSIFIED EQUITY INCOME FUND (ACTUAL) (BUYING FUND) Class A $6,501,945,416 $14.34 453,437,507 Class B 1,113,738,286 14.35 77,596,413 Class C 112,932,408 14.32 7,884,852 Class I 131,789,264 14.33 9,195,636 Class R4 209,845,096 14.35 14,620,839
RIVERSOURCE FUNDS -- PROXY STATEMENT 73
NET ASSET VALUE SHARES FUND NET ASSETS PER SHARE OUTSTANDING - ---------------------------------------------------------------------------------------------------------------- DIVERSIFIED EQUITY INCOME FUND (PRO FORMA COMBINED) Class A $6,705,644,926 $14.34 467,642,494 Class B 1,187,971,372 14.35 82,769,450 Class C 119,270,470 14.32 8,327,454 Class I 180,317,943 14.33 12,582,145 Class R4 209,976,945 14.35 14,630,027
OWNERSHIP OF SELLING FUND AND BUYING FUND SHARES The following table provides information on shareholders who owned more than 5% of each Fund's outstanding shares as of Sept. 30, 2007. As of Sept. 30, 2007, officers and directors of a Fund as a group owned less than 1% of the outstanding shares of a Fund. TABLE D-2. ACTUAL AND PRO FORMA OWNERSHIP OF SELLING FUND AND BUYING FUND SHARES
PERCENT OF PERCENT SHARES HELD OF SHARES FOLLOWING THE FUND 5% OWNERS HELD REORGANIZATION - --------------------------------------------------------------------------------------------------------- CORE BOND FUND (SELLING FUND) Class A Charles Schwab & Co., Inc. (Charles Schwab), a brokerage firm in San Francisco, CA 12.45% N/A Class B None N/A N/A Class C Jane F. and Theron O. Cox, Falmouth, ME 11.99% N/A Frank S. Gregory, Derry, NH 5.00% N/A Class I RiverSource Portfolio Builder Aggressive Fund* 9.19% N/A RiverSource Portfolio Builder Conservative Fund* 10.63% N/A RiverSource Portfolio Builder Moderate Fund* 39.63% N/A RiverSource Portfolio Builder Moderate Aggressive Fund* 26.01% N/A RiverSource Portfolio Builder Moderate Conservative Fund* 14.54% N/A Class R2 Ameriprise Financial Inc. (Ameriprise Financial)*, Minneapolis, MN 100.00% N/A Class R3 Ameriprise Financial* 100.00% N/A Class R4 RiverSource Life Insurance Company*, Minneapolis, MN 99.96% N/A Class R5 Ameriprise Financial* 100.00% N/A Class W Ameriprise Financial* 100.00% N/A DIVERSIFIED BOND FUND (BUYING FUND) Class A Charles Schwab 6.99% 7.11% Class B None N/A N/A Class C Jane F. and Theron O. Cox, Falmouth, ME N/A ** Frank S. Gregory, Derry, NH N/A ** Class I RiverSource Income Builder Moderate Income Fund* 7.35% 4.33% RiverSource Portfolio Builder Aggressive Fund* 8.27% 8.66% RiverSource Portfolio Builder Conservative Fund* N/A 4.38% RiverSource Portfolio Builder Moderate Fund* 38.13% 38.78% RiverSource Portfolio Builder Moderate Aggressive Fund* 28.74% 27.64% RiverSource Portfolio Builder Moderate Conservative Fund* 10.16% 11.97% Class R2 Ameriprise Financial* 100.00% 100.00% Class R3 Ameriprise Financial* 100.00% 100.00% Class R4 RiverSource Life Insurance Company* N/A ** Wachovia Bank NA (Wachovia Bank), Charlotte, NC 93.57% 93.50% GWFS Equities Inc., Greenwood Village, CO 5.01% 5.01% Class R5 Ameriprise Financial* 100.00% 100.00% Class W American Enterprise Investment Services Inc., Minneapolis, MN 99.98% 99.98% Ameriprise Financial* N/A **
74 RIVERSOURCE FUNDS -- PROXY STATEMENT * The combination of Ameriprise Financial and affiliated company (Ameriprise Financial) initial capital investment in Core Bond Fund (seed accounts), and affiliated funds-of-funds, including RiverSource Income Builder Funds and RiverSource Portfolio Builder Funds (funds-of-funds), investment in Class I shares of Core Bond Fund, represents aggregate ownership of 83.47% of the Fund. Ameriprise Financial and RiverSource Investments (in its capacity as investment manager of the funds-of-funds) do not invest in the Fund for the purposes of exercising control. However, since these ownership interests may be significant, in excess of 25% of the Fund, such that these entities may be deemed to control the Fund, procedures have been put in place to assure that public shareholders determine the outcome of all actions taken at shareholder meetings. Specifically, RiverSource Investments (which votes proxies for the seed accounts) and the funds-of-funds' Boards of Directors (which votes proxies for the funds-of-funds) vote on each proposal in the same proportion that other shareholders vote on the proposal. If the Reorganization is approved, Ameriprise Financial and the funds-of-funds will own less than 25% of Diversified Bond Fund. ** Less than 1%
PERCENT OF PERCENT SHARES HELD OF SHARES FOLLOWING THE FUND 5% OWNERS HELD REORGANIZATION - --------------------------------------------------------------------------------------------------------- FUNDAMENTAL GROWTH FUND (SELLING FUND) Class A Charles Schwab 5.84% N/A Class B None N/A N/A Class C Taylor Ambe-Crain Partnership, Westlake Village, CA 25.00% N/A Class I RiverSource Portfolio Builder Aggressive Fund* 19.64% N/A RiverSource Portfolio Builder Moderate Fund* 20.02% N/A RiverSource Portfolio Builder Moderate Aggressive Fund* 31.71% N/A RiverSource Portfolio Builder Moderate Conservative Fund* 5.11% N/A RiverSource Portfolio Builder Total Equity Fund* 22.24% N/A Class R4 Ameriprise Financial* 29.24% N/A Charles Schwab 70.70% N/A GROWTH FUND (BUYING FUND) Class A Charles Schwab 9.00% 8.98% Class B None N/A N/A Class C Taylor Ambe-Crain Partnership, Westlake Village, CA N/A ** Class I RiverSource Portfolio Builder Aggressive Fund* 19.63% 19.63% RiverSource Portfolio Builder Moderate Fund* 20.02% 20.02% RiverSource Portfolio Builder Moderate Aggressive Fund* 31.75% 31.73% RiverSource Portfolio Builder Moderate Conservative Fund* 5.12% 5.11% RiverSource Portfolio Builder Total Equity Fund* 22.22% 22.23% Class R4 Ameriprise Financial* N/A ** Ameriprise Trust Company*, Minneapolis, MN 42.34% 42.32% Charles Schwab N/A ** New York Life Trust Company, Parsippany, NY 5.89% 5.88% Wachovia Bank 48.27% 48.25%
* The combination of Ameriprise Financial and affiliated company (Ameriprise Financial) initial capital investment in Fundamental Growth Fund (seed accounts), and affiliated funds-of-funds, including RiverSource Portfolio Builder Funds (funds-of-funds), investment in Class I shares of Fundamental Growth Fund, represents aggregate ownership of 88.04% of the Fund. Ameriprise Financial and RiverSource Investments (in its capacity as investment manager of the funds-of-funds) do not invest in the Fund for the purposes of exercising control. However, since these ownership interests may be significant, in excess of 25% of the Fund, such that these entities may be deemed to control the Fund, procedures have been put in place to assure that public shareholders determine the outcome of all actions taken at shareholder meetings. Specifically, RiverSource Investments (which votes proxies for the seed accounts) and the funds-of-funds' Boards of Directors (which votes proxies for the funds-of-funds) vote on each proposal in the same proportion that other shareholders vote on the proposal. If the Reorganization is approved, Ameriprise Financial and the funds-of-funds will own less than 25% of Growth Fund. ** Less than 1% RIVERSOURCE FUNDS -- PROXY STATEMENT 75
PERCENT OF PERCENT SHARES HELD OF SHARES FOLLOWING THE FUND 5% OWNERS HELD REORGANIZATION - --------------------------------------------------------------------------------------------------------- INTERNATIONAL EQUITY FUND (SELLING FUND) Class A Charles Schwab 11.24% N/A Class B None N/A N/A Class C Daniel and Linda L. Miklovic, St. Louis, MO 6.43% N/A Class I RiverSource Portfolio Builder Aggressive Fund* 19.58% N/A RiverSource Portfolio Builder Moderate Fund* 20.06% N/A RiverSource Portfolio Builder Moderate Aggressive Fund* 31.68% N/A RiverSource Portfolio Builder Moderate Conservative Fund* 5.12% N/A RiverSource Portfolio Builder Total Equity Fund* 22.19% N/A Class R4 Ameriprise Financial* 12.43% N/A Charles Schwab 87.57% N/A DISCIPLINED INTERNATIONAL EQUITY FUND (BUYING FUND) Class A Charles Schwab 22.05% 12.93% Class B None N/A N/A Class C Chester L. and Jewel Carter, Sacramento, CA 6.29% 1.09% Daniel and Linda L. Miklovic, St. Louis, MO N/A 5.32% Linda A. O'Donnel, West Chester, OH 6.33% 1.09% Class I RiverSource Income Builder Basic Income Fund* 6.70% 4.73% RiverSource Income Builder Enhanced Income Fund* 14.18% 10.00% RiverSource Income Builder Moderate Income Fund* 15.47% 10.91% RiverSource Portfolio Builder Aggressive Fund* 8.06% 11.46% RiverSource Portfolio Builder Moderate Fund* 8.25% 11.73% RiverSource Portfolio Builder Moderate Aggressive Fund* 13.03% 18.53% RiverSource Portfolio Builder Moderate Conservative Fund* N/A 1.51% RiverSource Portfolio Builder Total Equity Fund* 9.14% 12.99% Class R4 Ameriprise Financial* 19.28% 14.61% Charles Schwab 80.72% 85.42%
* The combination of Ameriprise Financial and affiliated company (Ameriprise Financial) initial capital investment in International Equity Fund and Disciplined International Equity Fund (seed accounts), and affiliated funds-of-funds, including RiverSource Income Builder Funds and RiverSource Portfolio Builder Funds (funds-of-funds), investment in Class I shares of International Equity Fund and Disciplined International Equity Fund, represents aggregate ownership of 37.00% and 31.72% of the Funds, respectively. Ameriprise Financial and RiverSource Investments (in its capacity as investment manager of the funds-of-funds) do not invest in the Fund for the purposes of exercising control. However, since these ownership interests may be significant, in excess of 25% of the Fund, such that these entities may be deemed to control the Fund, procedures have been put in place to assure that public shareholders determine the outcome of all actions taken at shareholder meetings. Specifically, RiverSource Investments (which votes proxies for the seed accounts) and the funds-of-funds' Boards of Directors (which votes proxies for the funds-of-funds) vote on each proposal in the same proportion that other shareholders vote on the proposal. If the Reorganization is approved, Ameriprise Financial and the funds-of-funds will own 33.14% of Disciplined International Equity Fund. 76 RIVERSOURCE FUNDS -- PROXY STATEMENT
PERCENT OF PERCENT SHARES HELD OF SHARES FOLLOWING THE FUND 5% OWNERS HELD REORGANIZATION - ------------------------------------------------------------------------------------------------------- MASSACHUSETTS TAX-EXEMPT FUND (SELLING FUND) Class A Charles Schwab 5.76% N/A Class B None N/A N/A Class C Kevin H. and Nancy A. Aiken, Athol, MA 9.74% N/A Charles M. and Carol A. Breau, Clinton, MA 9.13% N/A Alphonse A. and Linda Di Nardo, Leominster, MA 6.64% N/A June P. and Norman E. Venette as the Trustees of the Norman E. Venette Revocable Trust, Orange, MA 21.79% N/A MICHIGAN TAX-EXEMPT FUND (SELLING FUND) Class A None N/A N/A Class B Nancy J. Anderson, Iron River, MI 6.85% N/A Ann Marie and Harley R. Arnold, Barton City, MI 8.09% N/A Orva Lee and Jean E. Ice, Sterling Heights, MI 5.31% N/A Chester V. and Rose M. Mysliwiec as the Trustees of the Rose M. Mysliwiec Living Trust, Grand Rapids, MI 5.27% N/A Elizabeth L. and Dennis P. Sexton, Benton Harbor, MI 5.41% N/A Class C Carl L. and Marian A. Beaver, Riga, MI 7.68% N/A Barry J. Fishman and Teresa A. McMahon as Trustees for the Barry J. Fishman Living Trust, Cambridge, MA 6.22% N/A Francis D. and Isabel S. Kinser, Waterford, MI 8.00% N/A Lorne R. and Vivian T. Trainor, Erie, MI 7.35% N/A OHIO TAX-EXEMPT FUND (SELLING FUND) Class A None N/A N/A Class B Clarence J. and Nancy J. Varhol, Euclid, OH 6.00% N/A Class C George and Ophelia M. Hill, Cincinnati, OH 8.39% N/A Randall J. Hohman, Tiffin, OH 6.48% N/A Richard L. Sears, Parma, OH 12.76% N/A TAX-EXEMPT HIGH INCOME FUND (BUYING FUND) Class A None N/A * Class B None N/A * Class C None N/A *
* All of the 5% owners listed above will own less than 1% of Tax-Exempt High Income Fund, assuming the Reorganization of Tax-Exempt High Income Fund with Massachusetts Tax-Exempt Fund, Michigan Tax-Exempt Fund or Ohio Tax-Exempt Fund, or any combination of the three. RIVERSOURCE FUNDS -- PROXY STATEMENT 77
PERCENT OF PERCENT SHARES HELD OF SHARES FOLLOWING THE FUND 5% OWNERS HELD REORGANIZATION - -------------------------------------------------------------------------------------------------------- VALUE FUND (SELLING FUND) Class A Charles Schwab 10.99% N/A Class B None N/A N/A Class C National Financial Services Corp., New York, NY 9.72% N/A Class I RiverSource Portfolio Builder Aggressive Fund 19.70% N/A RiverSource Portfolio Builder Moderate Fund 20.02% N/A RiverSource Portfolio Builder Moderate Aggressive Fund 31.65% N/A RiverSource Portfolio Builder Moderate Conservative Fund 5.11% N/A RiverSource Portfolio Builder Total Equity Fund 22.24% N/A Class R4 Ameriprise Financial 8.78% N/A Charles Schwab 91.22% N/A DIVERSIFIED EQUITY INCOME FUND (BUYING FUND) Class A Charles Schwab 26.54% 26.07% Class B None N/A N/A Class C National Financial Services Corp., New York, NY N/A * Class I RiverSource Portfolio Builder Aggressive Fund 19.66% 19.67% RiverSource Portfolio Builder Moderate Fund 20.00% 20.00% RiverSource Portfolio Builder Moderate Aggressive Fund 31.70% 31.69% RiverSource Portfolio Builder Moderate Conservative Fund 5.12% 5.11% RiverSource Portfolio Builder Total Equity Fund 22.25% 22.25% Class R4 American Century Services LLC, Kansas City, MO 5.39% 5.38% Ameriprise Financial N/A * Charles Schwab N/A * Wachovia Bank 49.48% 49.44% Wells Fargo Bank, Minneapolis, MN 32.15% 32.13%
* Less than 1% CAPITALIZATION AND OWNERSHIP OF MINNESOTA TAX-EXEMPT FUND The following table shows capitalization of Minnesota Tax-Exempt Fund as of Sept. 30, 2007 and provides information on shareholders who owned more than 5% of the Fund's outstanding shares as of Sept. 30, 2007. As of Sept. 30, 2007, officers and trustees of the Fund as a group owned less than 1% of the outstanding shares of the Fund. TABLE D-3. CAPITALIZATION AND OWNERSHIP OF MINNESOTA TAX-EXEMPT FUND
NET ASSET VALUE SHARES FUND NET ASSETS PER SHARE OUTSTANDING 5% OWNERS - --------------------------------------------------------------------------------------------------------------------------- MINNESOTA TAX-EXEMPT FUND Class A $290,234,054 $5.20 55,809,298 None Class B 19,836,222 5.20 3,813,225 None Class C 7,073,634 5.20 1,360,039 None
78 RIVERSOURCE FUNDS -- PROXY STATEMENT FINANCIAL HIGHLIGHTS THE FINANCIAL HIGHLIGHTS TABLES ARE INTENDED TO HELP YOU UNDERSTAND THE BUYING FUND'S FINANCIAL PERFORMANCE. CERTAIN INFORMATION REFLECTS FINANCIAL RESULTS FOR A SINGLE BUYING FUND SHARE. THE TOTAL RETURNS IN THE TABLES REPRESENT THE RATE THAT AN INVESTOR WOULD HAVE EARNED OR LOST ON AN INVESTMENT IN THE BUYING FUND (ASSUMING REINVESTMENT OF ALL DIVIDENDS AND DISTRIBUTIONS). THE INFORMATION FOR THE FISCAL PERIODS ENDED JULY 31, 2007 OR LATER HAS BEEN AUDITED BY ERNST & YOUNG LLP, WHOSE REPORT, ALONG WITH THE BUYING FUND'S FINANCIAL STATEMENTS AND FINANCIAL HIGHLIGHTS, IS INCLUDED IN THE ANNUAL REPORT WHICH, IF NOT INCLUDED WITH THIS PROSPECTUS, IS AVAILABLE UPON REQUEST. THE INFORMATION FOR THE PERIODS ENDED ON OR BEFORE JUNE 30, 2007 HAS BEEN AUDITED BY KPMG LLP. TABLE D-4. FINANCIAL HIGHLIGHTS OF EACH BUYING FUND Diversified Bond Fund - Class A
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007 2006 2005 2004 2003 Net asset value, beginning of period $4.77 $4.89 $4.87 $4.78 $4.75 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .21(b) .19 .18 .18 .20 Net gains (losses) (both realized and unrealized) .05 (.11) .03 .08 .03 - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations .26 .08 .21 .26 .23 - --------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.21) (.20) (.19) (.17) (.20) Tax return of capital (.01) -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Total distributions (.22) (.20) (.19) (.17) (.20) - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.81 $4.77 $4.89 $4.87 $4.78 - --------------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $1,937 $2,013 $1,774 $1,933 $2,280 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) .89%(e) .89%(e) .94%(e) .98%(e) .97% - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.43% 4.09% 3.67% 3.55% 4.16% - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% 281% 300% 279% 256% - --------------------------------------------------------------------------------------------------------------------------------- Total return(f) 5.54% 1.64% 4.38% 5.54% 4.91% - ---------------------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amount has been calculated using the average shares outstanding method. (c) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. (d) 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. (e) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class A would have been 0.97%, 0.99%, 1.02% and 1.00% for the years ended Aug. 31, 2007, 2006, 2005 and 2004, respectively. (f) Total return does not reflect payment of a sales charge. RIVERSOURCE FUNDS -- PROXY STATEMENT 79 Diversified Bond Fund - Class B
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007 2006 2005 2004 2003 Net asset value, beginning of period $4.77 $4.89 $4.88 $4.78 $4.75 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .18(b) .16 .15 .14 .16 Net gains (losses) (both realized and unrealized) .04 (.12) .01 .09 .03 - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations .22 .04 .16 .23 .19 - --------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.18) (.16) (.15) (.13) (.16) Tax return of capital (.00) -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Total distributions (.18) (.16) (.15) (.13) (.16) - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.81 $4.77 $4.89 $4.88 $4.78 - --------------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $304 $402 $484 $628 $902 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) 1.65%(e) 1.65%(e) 1.70%(e) 1.73%(e) 1.73% - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.66% 3.31% 2.92% 2.78% 3.40% - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% 281% 300% 279% 256% - --------------------------------------------------------------------------------------------------------------------------------- Total return(f) 4.74% .88% 3.39% 4.95% 4.12% - ---------------------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amount has been calculated using the average shares outstanding method. (c) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. (d) 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. (e) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class B would have been 1.73%, 1.76%, 1.78% and 1.75% for the years ended Aug. 31, 2007, 2006, 2005 and 2004, respectively. (f) Total return does not reflect payment of a sales charge. 80 RIVERSOURCE FUNDS -- PROXY STATEMENT Diversified Bond Fund - Class C
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007 2006 2005 2004 2003 Net asset value, beginning of period $4.77 $4.90 $4.88 $4.78 $4.75 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .18(b) .16 .15 .14 .16 Net gains (losses) (both realized and unrealized) .04 (.13) .02 .09 .03 - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations .22 .03 .17 .23 .19 - --------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.18) (.16) (.15) (.13) (.16) Tax return of capital (.00) -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Total distributions (.18) (.16) (.15) (.13) (.16) - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.81 $4.77 $4.90 $4.88 $4.78 - --------------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $17 $17 $18 $21 $27 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) 1.65%(e) 1.66%(e) 1.70%(e) 1.73%(e) 1.74% - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.67% 3.31% 2.93% 2.79% 3.34% - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% 281% 300% 279% 256% - --------------------------------------------------------------------------------------------------------------------------------- Total return(f) 4.73% .66% 3.60% 4.95% 4.11% - ---------------------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amount has been calculated using the average shares outstanding method. (c) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. (d) 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. (e) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class C would have been 1.73%, 1.76%, 1.79% and 1.75% for the years ended Aug. 31, 2007, 2006, 2005 and 2004, respectively. (f) Total return does not reflect payment of a sales charge. RIVERSOURCE FUNDS -- PROXY STATEMENT 81 Diversified Bond Fund - Class I
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007 2006 2005 2004(B) Net asset value, beginning of period $4.78 $4.89 $4.88 $4.91 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .23(c) .21 .20 .11 Net gains (losses) (both realized and unrealized) .04 (.11) .02 (.04) - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations .27 .10 .22 .07 - --------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.22) (.21) (.21) (.10) Tax return of capital (.01) -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Total distributions (.23) (.21) (.21) (.10) - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.82 $4.78 $4.89 $4.88 - --------------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $386 $276 $-- $-- - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e) .54%(f) .54%(f) .60% .59%(g) - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.80% 4.59% 4.01% 3.13%(g) - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% 281% 300% 279% - --------------------------------------------------------------------------------------------------------------------------------- Total return(h) 5.90% 2.19% 4.53% 1.43%(i) - ---------------------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from March 4, 2004 (inception date) to Aug. 31, 2004. (c) Per share amount has been calculated using the average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. (e) 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. (f) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class I would have been 0.56% and 0.55% for the years ended Aug. 31, 2007 and 2006, respectively. (g) Adjusted to an annual basis. (h) Total return does not reflect payment of a sales charge. (i) Not annualized. 82 RIVERSOURCE FUNDS -- PROXY STATEMENT Diversified Bond Fund - Class R2
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007(B) Net asset value, beginning of period $4.81 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .14(c) Net gains (losses) (both realized and unrealized) (.02) - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations .12 - --------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.13) Tax return of capital (.00) - --------------------------------------------------------------------------------------------------------------------------------- Total distributions (.13) - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.80 - --------------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e) 1.32%(f) - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.06%(f) - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% - --------------------------------------------------------------------------------------------------------------------------------- Total return(g) 2.70%(h) - ---------------------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Dec. 11, 2006 (inception date) to Aug. 31, 2007. (c) Per share amount has been calculated using the average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. (e) 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. (f) Adjusted to an annual basis. (g) Total return does not reflect payment of a sales charge. (h) Not annualized. RIVERSOURCE FUNDS -- PROXY STATEMENT 83 Diversified Bond Fund - Class R3
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007(B) Net asset value, beginning of period $4.81 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .15(c) Net gains (losses) (both realized and unrealized) (.02) - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations .13 - --------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.14) Tax return of capital (.00) - --------------------------------------------------------------------------------------------------------------------------------- Total distributions (.14) - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.80 - --------------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e) 1.06%(f) - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.33%(f) - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% - --------------------------------------------------------------------------------------------------------------------------------- Total return(g) 2.90%(h) - ---------------------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Dec. 11, 2006 (inception date) to Aug. 31, 2007. (c) Per share amount has been calculated using the average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. (e) 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. (f) Adjusted to an annual basis. (g) Total return does not reflect payment of a sales charge. (h) Not annualized. 84 RIVERSOURCE FUNDS -- PROXY STATEMENT Diversified Bond Fund - Class R4*
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007 2006 2005 2004 2003 Net asset value, beginning of period $4.77 $4.89 $4.88 $4.78 $4.75 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .22(b) .20 .19 .18 .21 Net gains (losses) (both realized and unrealized) .04 (.12) .02 .10 .03 - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations .26 .08 .21 .28 .24 - --------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.22) (.20) (.20) (.18) (.21) Tax return of capital (.01) -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Total distributions (.23) (.20) (.20) (.18) (.21) - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.80 $4.77 $4.89 $4.88 $4.78 - --------------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $78 $173 $202 $203 $268 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) .73%(e) .73%(e) .78%(e) .81%(e) .81% - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.53% 4.24% 3.85% 3.70% 4.34% - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% 281% 300% 279% 256% - --------------------------------------------------------------------------------------------------------------------------------- Total return(f) 5.49% 1.81% 4.34% 5.92% 5.08% - ---------------------------------------------------------------------------------------------------------------------------------
* Effective Dec. 11, 2006, Class Y was renamed Class R4. (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amount has been calculated using the average shares outstanding method. (c) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. (d) 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. (e) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class R4 would have been 0.83%, 0.82%, 0.86% and 0.83% for the years ended Aug. 31, 2007, 2006, 2005 and 2004, respectively. (f) Total return does not reflect payment of a sales charge. RIVERSOURCE FUNDS -- PROXY STATEMENT 85 Diversified Bond Fund - Class R5
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007(B) Net asset value, beginning of period $4.81 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .17(c) Net gains (losses) (both realized and unrealized) (.02) - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations .15 - --------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.16) Tax return of capital (.00) - --------------------------------------------------------------------------------------------------------------------------------- Total distributions (.16) - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.80 - --------------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e),(f) .57%(g) - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.81%(g) - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% - --------------------------------------------------------------------------------------------------------------------------------- Total return(h) 3.25%(i) - ---------------------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Dec. 11, 2006 (inception date) to Aug. 31, 2007. (c) Per share amount has been calculated using the average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. (e) 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. (f) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratio of expenses for Class R5 would have been 0.59% for the period ended Aug. 31, 2007. (g) Adjusted to an annual basis. (h) Total return does not reflect payment of a sales charge. (i) Not annualized. 86 RIVERSOURCE FUNDS -- PROXY STATEMENT Diversified Bond Fund - Class W
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007(B) Net asset value, beginning of period $4.82 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .15(c) - --------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.16) Tax return of capital (.00) - --------------------------------------------------------------------------------------------------------------------------------- Total distributions (.16) - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.81 - --------------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $223 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e),(f) .97%(g) - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.32%(g) - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% - --------------------------------------------------------------------------------------------------------------------------------- Total return(h) 2.71%(i) - ---------------------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Dec. 1, 2006 (inception date) to Aug. 31, 2007. (c) Per share amount has been calculated using the average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. (e) 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. (f) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratio of expenses for Class W would have been 0.98% for the period ended Aug. 31, 2007. (g) Adjusted to an annual basis. (h) Total return does not reflect payment of a sales charge. (i) Not annualized. RIVERSOURCE FUNDS -- PROXY STATEMENT 87 Growth Fund - Class A
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED JULY 31, 2007 2006 2005 2004 2003 Net asset value, beginning of period $28.61 $28.34 $23.73 $22.80 $20.88 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .23(b) .18 .04 .02 -- Net gains (losses) (both realized and unrealized) 4.11 .10 4.57 .91 1.92 - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 4.34 .28 4.61 .93 1.92 - --------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.22) (.01) -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $32.73 $28.61 $28.34 $23.73 $22.80 - --------------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $2,393 $2,351 $2,101 $2,117 $2,263 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) 1.19% 1.14% 1.19% 1.03% 1.21% - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets .71% .72% .16% .07% --% - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 98% 134% 136% 171% 205% - --------------------------------------------------------------------------------------------------------------------------------- Total return(e) 15.20% .98% 19.43% 4.08% 9.20% - ---------------------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amounts have been calculated using the average shares outstanding method. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. Includes the impact of a performance incentive adjustment fee, if any. (d) 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. (e) Total return does not reflect payment of a sales charge. Growth Fund - Class B
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED JULY 31, 2007 2006 2005 2004 2003 Net asset value, beginning of period $26.06 $26.01 $21.95 $21.25 $19.61 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (.02)(b) (.05) (.16) (.16) (.17) Net gains (losses) (both realized and unrealized) 3.75 .10 4.22 .86 1.81 - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 3.73 .05 4.06 .70 1.64 - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $29.79 $26.06 $26.01 $21.95 $21.25 - --------------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $369 $462 $578 $598 $775 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) 1.96% 1.91% 1.97% 1.81% 1.99% - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets (.06%) (.06%) (.62%) (.71%) (.77%) - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 98% 134% 136% 171% 205% - --------------------------------------------------------------------------------------------------------------------------------- Total return(e) 14.31% .19% 18.50% 3.29% 8.36% - ---------------------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amounts have been calculated using the average shares outstanding method. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. Includes the impact of a performance incentive adjustment fee, if any. (d) 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. (e) Total return does not reflect payment of a sales charge. 88 RIVERSOURCE FUNDS -- PROXY STATEMENT Growth Fund - Class C
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED JULY 31, 2007 2006 2005 2004 2003 Net asset value, beginning of period $26.07 $26.01 $21.95 $21.25 $19.62 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (.01)(b) (.04) (.16) (.16) (.17) Net gains (losses) (both realized and unrealized) 3.74 .10 4.22 .86 1.80 - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 3.73 .06 4.06 .70 1.63 - --------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.03) -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $29.77 $26.07 $26.01 $21.95 $21.25 - --------------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $20 $19 $15 $13 $12 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) 1.95% 1.91% 1.97% 1.81% 2.01% - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets (.03%) (.03%) (.62%) (.71%) (.81%) - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 98% 134% 136% 171% 205% - --------------------------------------------------------------------------------------------------------------------------------- Total return(e) 14.31% .23% 18.50% 3.29% 8.31% - ---------------------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amounts have been calculated using the average shares outstanding method. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. Includes the impact of a performance incentive adjustment fee, if any. (d) 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. (e) Total return does not reflect payment of a sales charge. Growth Fund - Class I
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED JULY 31, 2007 2006 2005 2004(B) Net asset value, beginning of period $29.31 $28.93 $24.10 $25.61 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .40(c) .32 .12 .09 Net gains (losses) (both realized and unrealized) 4.19 .10 4.71 (1.60) - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 4.59 .42 4.83 (1.51) - --------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.36) (.04) -- -- - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $33.54 $29.31 $28.93 $24.10 - --------------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $298 $256 $147 $18 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e) .74% .68% .75% .57%(f) - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 1.21% 1.22% .55% .43%(f) - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 98% 134% 136% 171% - --------------------------------------------------------------------------------------------------------------------------------- Total return(g) 15.70% 1.44% 20.04% (5.90%)(h) - ---------------------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from March 4, 2004 (inception date) to July 31, 2004. (c) Per share amounts have been calculated using the average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. Includes the impact of a performance incentive adjustment fee, if any. (e) 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. (f) Adjusted to an annual basis. (g) Total return does not reflect payment of a sales charge. (h) Not annualized. RIVERSOURCE FUNDS -- PROXY STATEMENT 89 Growth Fund - Class R4*
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED JULY 31, 2007 2006 2005 2004 2003 Net asset value, beginning of period $29.13 $28.81 $24.07 $23.09 $21.11 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .25(b) .24 .09 .07 .04 Net gains (losses) (both realized and unrealized) 4.22 .10 4.65 .91 1.94 - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 4.47 .34 4.74 .98 1.98 - --------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.26) (.02) -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $33.34 $29.13 $28.81 $24.07 $23.09 - --------------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $146 $265 $304 $350 $398 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) 1.03% .95% 1.02% .86% 1.03% - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets .79% .89% .34% .25% .18% - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 98% 134% 136% 171% 205% - --------------------------------------------------------------------------------------------------------------------------------- Total return(e) 15.39% 1.17% 19.69% 4.24% 9.38% - ---------------------------------------------------------------------------------------------------------------------------------
* Effective Dec. 11, 2006, Class Y was renamed Class R4. (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amounts have been calculated using the average shares outstanding method. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. Includes the impact of a performance incentive adjustment fee, if any. (d) 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. (e) Total return does not reflect payment of a sales charge. 90 RIVERSOURCE FUNDS -- PROXY STATEMENT Disciplined International Equity Fund - Class A
PER SHARE INCOME AND CAPITAL CHANGES(A) Fiscal period ended Oct. 31, 2007(I) 2006(B) Net asset value, beginning of period $9.82 $9.21 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .08 .01 Net gains (losses) (both realized and unrealized) 1.58 .60 - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.66 .61 - --------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.07) -- Distributions from realized gains (.01) -- - --------------------------------------------------------------------------------------------------------------------------------- Total distributions (.08) -- - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $11.40 $9.82 - --------------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $10 $11 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d),(e) 1.42%(f) 1.42%(f) - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 1.51%(f) 1.48%(f) - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 31% 10% - --------------------------------------------------------------------------------------------------------------------------------- Total return(g) 17.02%(h) 6.62%(h) - ---------------------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from May 18, 2006 (when shares became publicly available) to Oct. 31, 2006. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. Includes the impact of a performance incentive adjustment fee, if any. (d) 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 ratio. (e) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class A would have been 1.43% for the six months ended April 30, 2007 and 1.92% for the period ended Oct. 31, 2006. (f) Adjusted to an annual basis. (g) Total return does not reflect payment of a sales charge. (h) Not annualized. (i) Six months ended April 30, 2007 (Unaudited). RIVERSOURCE FUNDS -- PROXY STATEMENT 91 Disciplined International Equity Fund - Class B
PER SHARE INCOME AND CAPITAL CHANGES(a) Fiscal period ended Oct. 31, 2007(I) 2006(B) Net asset value, beginning of period $9.79 $9.21 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .07 -- Net gains (losses) (both realized and unrealized) 1.54 .58 - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.61 .58 - --------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.07) -- Distributions from realized gains (.01) -- - --------------------------------------------------------------------------------------------------------------------------------- Total distributions (.08) -- - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $11.32 $9.79 - --------------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $1 $-- - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d),(e) 2.25%(f) 2.21%(f) - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 1.75%(f) (.03%)(f) - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 31% 10% - --------------------------------------------------------------------------------------------------------------------------------- Total return(g) 16.48%(h) 6.30%(h) - ---------------------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from May 18, 2006 (when shares became publicly available) to Oct. 31, 2006. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. Includes the impact of a performance incentive adjustment fee, if any. (d) 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 ratio. (e) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class B would have been 2.26% for the six months ended April 30, 2007 and 2.71% for the period ended Oct. 31, 2006. (f) Adjusted to an annual basis. (g) Total return does not reflect payment of a sales charge. (h) Not annualized. (i) Six months ended April 30, 2007 (Unaudited). 92 RIVERSOURCE FUNDS -- PROXY STATEMENT Disciplined International Equity Fund - Class C
PER SHARE INCOME AND CAPITAL CHANGES(a) Fiscal period ended Oct. 31, 2007(I) 2006(B) Net asset value, beginning of period $9.79 $9.21 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .07 -- Net gains (losses) (both realized and unrealized) 1.54 .58 - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.61 .58 - --------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.06) -- Distributions from realized gains (.01) -- - --------------------------------------------------------------------------------------------------------------------------------- Total distributions (.07) -- - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $11.33 $9.79 - --------------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- $-- - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d),(e) 2.24%(f) 2.21%(f) - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 1.59%(f) .74%(f) - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 31% 10% - --------------------------------------------------------------------------------------------------------------------------------- Total return(g) 16.50%(h) 6.30%(h) - ---------------------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from May 18, 2006 (when shares became publicly available) to Oct. 31, 2006. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. Includes the impact of a performance incentive adjustment fee, if any. (d) 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 ratio. (e) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class C would have been 2.25% for the six months ended April 30, 2007 and 2.71% for the period ended Oct. 31, 2006. (f) Adjusted to an annual basis. (g) Total return does not reflect payment of a sales charge. (h) Not annualized. (i) Six months ended April 30, 2007 (Unaudited). RIVERSOURCE FUNDS -- PROXY STATEMENT 93 Disciplined International Equity Fund - Class I
PER SHARE INCOME AND CAPITAL CHANGES(a) Fiscal period ended Oct. 31, 2007(I) 2006(B) Net asset value, beginning of period $9.83 $9.21 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .10 .02 Net gains (losses) (both realized and unrealized) 1.58 .60 - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.68 .62 - --------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.09) -- Distributions from realized gains (.01) -- - --------------------------------------------------------------------------------------------------------------------------------- Total distributions (.10) -- - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $11.41 $9.83 - --------------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $157 $63 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d),(e) 1.16%(f) 1.15%(f) - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 2.51%(f) 1.17%(f) - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 31% 10% - --------------------------------------------------------------------------------------------------------------------------------- Total return(g) 17.16%(h) 6.73%(h) - ---------------------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from May 18, 2006 (when shares became publicly available) to Oct. 31, 2006. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. Includes the impact of a performance incentive adjustment fee, if any. (d) 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 ratio. (e) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class I would have been 1.17% for the six months ended April 30, 2007 and 1.65% for the period ended Oct. 31, 2006. (f) Adjusted to an annual basis. (g) Total return does not reflect payment of a sales charge. (h) Not annualized. (i) Six months ended April 30, 2007 (Unaudited). 94 RIVERSOURCE FUNDS -- PROXY STATEMENT Disciplined International Equity Fund - Class R4*
PER SHARE INCOME AND CAPITAL CHANGES(a) Fiscal period ended Oct. 31, 2007(i) 2006(b) Net asset value, beginning of period $9.83 $9.21 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .09 .02 Net gains (losses) (both realized and unrealized) 1.57 .60 - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.66 .62 - --------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.08) -- Distributions from realized gains (.01) -- - --------------------------------------------------------------------------------------------------------------------------------- Total distributions (.09) -- - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $11.40 $9.83 - --------------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- $-- - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d),(e) 1.35%(f) 1.27%(f) - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 2.44%(f) 1.72%(f) - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 31% 10% - --------------------------------------------------------------------------------------------------------------------------------- Total return(g) 16.99%(h) 6.73%(h) - ---------------------------------------------------------------------------------------------------------------------------------
* Effective Dec. 11, 2006, Class Y was renamed Class R4. (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from May 18, 2006 (when shares became publicly available) to Oct. 31, 2006. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. Includes the impact of a performance incentive adjustment fee, if any. (d) 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 ratio. (e) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class R4 would have been 1.45% for the six months ended April 30, 2007 and 1.77% for the period ended Oct. 31, 2006. (f) Adjusted to an annual basis. (g) Total return does not reflect payment of a sales charge. (h) Not annualized. (i) Six months ended April 30, 2007 (Unaudited). RIVERSOURCE FUNDS -- PROXY STATEMENT 95 Tax-Exempt High Income Fund - Class A
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED NOV. 30, 2007(H) 2006 2005 2004 2003 Net asset value, beginning of period $4.44 $4.39 $4.42 $4.46 $4.38 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .09 .17 .18 .18 .20 Net gains (losses) (both realized and unrealized) (.08) .08 (.04) (.04) .07 - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations .01 .25 .14 .14 .27 - --------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.09) (.17) (.17) (.18) (.19) Distributions from realized gains -- (.03) -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Total distributions (.09) (.20) (.17) (.18) (.19) - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.36 $4.44 $4.39 $4.42 $4.46 - --------------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $2,807 $3,042 $3,460 $3,914 $4,321 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets, excluding interest and fee expense(b) .79%(c),(d) .79%(c) .80%(c) .80% .79% - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets, including interest and fee expense(e) 1.06%(c),(d) 1.05%(c) .97%(c) .89% .91% - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.99%(d) 3.93% 3.89% 3.98% 4.46% - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 24% 30% 30% 22% 44% - --------------------------------------------------------------------------------------------------------------------------------- Total return(f) .16%(g) 5.81% 3.25% 3.15% 6.39% - ---------------------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. (c) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class A would have been 0.82% excluding interest and fee expense and 1.09% including interest and fee expense for the six months ended May 31, 2007 and 0.83% and 0.81% excluding interest and fee expense and 1.09% and 0.98% including interest and fee expense for the years ended Nov. 30, 2006 and 2005, respectively. (d) Adjusted to an annual basis. (e) Ratios include interest and fee expense related to the Fund's participation in certain inverse floater programs. Due to an equal increase in interest income from fixed rate municipal bonds held in trust, there is no impact on the Fund's net assets, net asset value per share, total return or net investment income. (f) Total return does not reflect payment of a sales charge. (g) Not annualized. (h) Six months ended May 31, 2007 (Unaudited). 96 RIVERSOURCE FUNDS -- PROXY STATEMENT Tax-Exempt High Income Fund - Class B
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED NOV. 30, 2007(H) 2006 2005 2004 2003 Net asset value, beginning of period $4.44 $4.39 $4.41 $4.46 $4.38 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .07 .14 .14 .15 .17 Net gains (losses) (both realized and unrealized) (.08) .07 (.02) (.05) .07 - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations (.01) .21 .12 .10 .24 - --------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.07) (.13) (.14) (.15) (.16) Distributions from realized gains -- (.03) -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Total distributions (.07) (.16) (.14) (.15) (.16) - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.36 $4.44 $4.39 $4.41 $4.46 - --------------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $112 $127 $190 $250 $319 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets, excluding interest and fee expense(b) 1.54%(c),(d) 1.55%(c) 1.56%(c) 1.55% 1.55% - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets, including interest and fee expense(e) 1.81%(c),(d) 1.81%(c) 1.73%(c) 1.64% 1.67% - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.23%(d) 3.15% 3.13% 3.23% 3.70% - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 24% 30% 30% 22% 44% - --------------------------------------------------------------------------------------------------------------------------------- Total return(f) (.22%)(g) 5.01% 2.69% 2.14% 5.60% - ---------------------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. (c) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class B would have been 1.58% excluding interest and fee expense and 1.85% including interest and fee expense for the six months ended May 31, 2007 and 1.59% and 1.57% excluding interest and fee expense and 1.85% and 1.74% including interest and fee expense for the years ended Nov. 30, 2006 and 2005, respectively. (d) Adjusted to an annual basis. (e) Ratios include interest and fee expense related to the Fund's participation in certain inverse floater programs. Due to an equal increase in interest income from fixed rate municipal bonds held in trust, there is no impact on the Fund's net assets, net asset value per share, total return or net investment income. (f) Total return does not reflect payment of a sales charge. (g) Not annualized. (h) Six months ended May 31, 2007 (Unaudited). RIVERSOURCE FUNDS -- PROXY STATEMENT 97 Tax-Exempt High Income Fund - Class C
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED NOV. 30, 2007(H) 2006 2005 2004 2003 Net asset value, beginning of period $4.45 $4.39 $4.42 $4.46 $4.38 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .07 .14 .14 .15 .17 Net gains (losses) (both realized and unrealized) (.09) .08 (.03) (.04) .07 - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations (.02) .22 .11 .11 .24 - --------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.07) (.13) (.14) (.15) (.16) Distributions from realized gains -- (.03) -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Total distributions (.07) (.16) (.14) (.15) (.16) - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.36 $4.45 $4.39 $4.42 $4.46 - --------------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $15 $18 $23 $28 $30 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets, excluding interest and fee expense(b) 1.54%(c),(d) 1.55%(c) 1.56%(c) 1.55% 1.56% - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets, including interest and fee expense(e) 1.81%(c),(d) 1.81%(c) 1.73%(c) 1.64% 1.68% - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.23%(d) 3.16% 3.13% 3.23% 3.70% - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 24% 30% 30% 22% 44% - --------------------------------------------------------------------------------------------------------------------------------- Total return(f) (.44%)(g) 5.25% 2.46% 2.37% 5.59% - ---------------------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. (c) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class C would have been 1.58% excluding interest and fee expense and 1.85% including interest and fee expense for the six months ended May 31, 2007 and 1.59% and 1.57% excluding interest and fee expense and 1.85% and 1.74% including interest and fee expense for the years ended Nov. 30, 2006 and 2005, respectively. (d) Adjusted to an annual basis. (e) Ratios include interest and fee expense related to the Fund's participation in certain inverse floater programs. Due to an equal increase in interest income from fixed rate municipal bonds held in trust, there is no impact on the Fund's net assets, net asset value per share, total return or net investment income. (f) Total return does not reflect payment of a sales charge. (g) Not annualized. (h) Six months ended May 31, 2007 (Unaudited). 98 RIVERSOURCE FUNDS -- PROXY STATEMENT Diversified Equity Income Fund - Class A
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED SEPT. 30, 2007 2006 2005 2004 2003 Net asset value, beginning of period $13.10 $12.11 $9.88 $8.14 $6.26 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .18(b) .18 .15 .15 .14 Net gains (losses) (both realized and unrealized) 2.41 1.54 2.23 1.73 1.86 - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 2.59 1.72 2.38 1.88 2.00 - --------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.18) (.19) (.15) (.14) (.12) Distributions from realized gains (1.17) (.54) -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Total distributions (1.35) (.73) (.15) (.14) (.12) - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $14.34 $13.10 $12.11 $9.88 $8.14 - --------------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $6,502 $5,433 $3,751 $2,455 $1,539 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) 1.00% 1.10% 1.04% 1.06% 1.04% - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 1.34% 1.40% 1.46% 1.67% 1.94% - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 31% 28% 24% 18% 38% - --------------------------------------------------------------------------------------------------------------------------------- Total return(e) 20.98% 14.72% 24.24% 23.09% 32.17% - ---------------------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amounts have been calculated using the average shares outstanding method. (c) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. Includes the impact of a performance incentive adjustment fee, if any. (d) 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. (e) Total return does not reflect payment of a sales charge. RIVERSOURCE FUNDS -- PROXY STATEMENT 99 Diversified Equity Income Fund - Class B
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED SEPT. 30, 2007 2006 2005 2004 2003 Net asset value, beginning of period $13.11 $12.07 $9.85 $8.12 $6.25 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .08(b) .04 .07 .06 .08 Net gains (losses) (both realized and unrealized) 2.40 1.58 2.22 1.73 1.86 - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 2.48 1.62 2.29 1.79 1.94 - --------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.07) (.04) (.07) (.06) (.07) Distributions from realized gains (1.17) (.54) -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Total distributions (1.24) (.58) (.07) (.06) (.07) - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $14.35 $13.11 $12.07 $9.85 $8.12 - --------------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $1,113 $1,208 $1,141 $877 $629 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),)(d) 1.76% 1.86% 1.80% 1.83% 1.81% - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets .57% .64% .70% .89% 1.18% - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 31% 28% 24% 18% 38% - --------------------------------------------------------------------------------------------------------------------------------- Total return(e) 20.04% 13.87% 23.28% 22.11% 31.10% - ---------------------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amounts have been calculated using the average shares outstanding method. (c) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. Includes the impact of a performance incentive adjustment fee, if any. (d) 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. (e) Total return does not reflect payment of a sales charge. 100 RIVERSOURCE FUNDS -- PROXY STATEMENT Diversified Equity Income Fund - Class C
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED SEPT. 30, 2007 2006 2005 2004 2003 Net asset value, beginning of period $13.09 $12.06 $9.84 $8.11 $6.25 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .08(b) .04 .07 .07 .08 Net gains (losses) (both realized and unrealized) 2.40 1.58 2.22 1.73 1.85 - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 2.48 1.62 2.29 1.80 1.93 - --------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.08) (.05) (.07) (.07) (.07) Distributions from realized gains (1.17) (.54) -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Total distributions (1.25) (.59) (.07) (.07) (.07) - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $14.32 $13.09 $12.06 $9.84 $8.11 - --------------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $114 $86 $58 $38 $20 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) 1.76% 1.86% 1.81% 1.83% 1.83% - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets .58% .63% .69% .92% 1.15% - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 31% 28% 24% 18% 38% - --------------------------------------------------------------------------------------------------------------------------------- Total return(e) 20.04% 13.84% 23.33% 22.18% 30.96% - ---------------------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amounts have been calculated using the average shares outstanding method. (c) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. Includes the impact of a performance incentive adjustment fee, if any. (d) 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. (e) Total return does not reflect payment of a sales charge. RIVERSOURCE FUNDS -- PROXY STATEMENT 101 Diversified Equity Income Fund - Class I
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED SEPT. 30, 2007 2006 2005 2004(B) Net asset value, beginning of period $13.09 $12.13 $9.89 $10.03 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .23(c) .26 .20 .19 Net gains (losses) (both realized and unrealized) 2.41 1.50 2.24 (.19) - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 2.64 1.76 2.44 -- - --------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.23) (.26) (.20) (.14) Distributions from realized gains (1.17) (.54) -- -- - --------------------------------------------------------------------------------------------------------------------------------- Total distributions (1.40) (.80) (.20) (.14) - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $14.33 $13.09 $12.13 $9.89 - --------------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $132 $133 $96 $18 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e) .62% .70% .62% .63%(f) - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 1.72% 1.79% 1.85% 2.35%(f) - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 31% 28% 24% 18% - --------------------------------------------------------------------------------------------------------------------------------- Total return(g) 21.44% 15.14% 24.81% .02%(h) - ---------------------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from March 4, 2004 (inception date) to Sept. 30, 2004. (c) Per share amounts have been calculated using the average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. Includes the impact of a performance incentive adjustment fee, if any. (e) 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. (f) Adjusted to an annual basis. (g) Total return does not reflect payment of a sales charge. (h) Not annualized. 102 RIVERSOURCE FUNDS -- PROXY STATEMENT Diversified Equity Income Fund - Class R4*
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED SEPT. 30, 2007 2006 2005 2004 2003 Net asset value, beginning of period $13.11 $12.12 $9.89 $8.14 $6.26 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .20(b) .21 .17 .16 .15 Net gains (losses) (both realized and unrealized) 2.41 1.53 2.23 1.74 1.86 - --------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 2.61 1.74 2.40 1.90 2.01 - --------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.20) (.21) (.17) (.15) (.13) Distributions from realized gains (1.17) (.54) -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Total distributions (1.37) (.75) (.17) (.15) (.13) - --------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $14.35 $13.11 $12.12 $9.89 $8.14 - --------------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $210 $96 $58 $67 $50 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) .89%(e) .93% .87% .90% .87% - --------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 1.46% 1.56% 1.63% 1.83% 2.11% - --------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 31% 28% 24% 18% 38% - --------------------------------------------------------------------------------------------------------------------------------- Total return(f) 21.10% 14.91% 24.38% 23.41% 32.39% - ---------------------------------------------------------------------------------------------------------------------------------
* Effective Dec. 11, 2006, Class Y was renamed Class R4. (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amounts have been calculated using the average shares outstanding method. (c) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. Includes the impact of a performance incentive adjustment fee, if any. (d) 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. (e) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratio of expenses for Class R4 would have been 0.91% for the year ended Sept. 30, 2007. (f) Total return does not reflect payment of a sales charge. RIVERSOURCE FUNDS -- PROXY STATEMENT 103 THIS PAGE LEFT BLANK INTENTIONALLY EXHIBIT A FORM OF AGREEMENT AND PLAN OF REORGANIZATION This Agreement and Plan of Reorganization dated as of (the "Agreement") is between each selling entity identified in Schedule A hereto (each a "Selling Corporation")(1), on behalf of each series thereof identified in Schedule A hereto as a Selling Fund (each a "Selling Fund"), each corresponding buying entity identified in Schedule A hereto (each a "Buying Corporation"), on behalf of each series thereof identified in Schedule A hereto as the corresponding Buying Fund (each a "Buying Fund"), and RiverSource Investments, LLC (solely for the purposes of Sections 3c and 11 of the Agreement). This Agreement shall be treated as if each reorganization between a Selling Fund and its corresponding Buying Fund contemplated hereby had been the subject of a separate agreement. In consideration of their mutual promises, the parties agree as follows: 1. SHAREHOLDER APPROVAL. Each Selling Fund will call a meeting of its shareholders for the purpose of approving the Agreement and the transactions it contemplates (each a "Reorganization"). Each Buying Fund agrees to furnish data and information, as reasonably requested, for the proxy statement to be furnished to shareholders of the corresponding Selling Fund. 2. REORGANIZATION. a. Plan of Reorganization. The Reorganization will be a reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"). At the Closing, each Selling Corporation will convey all of the assets of each Selling Fund to the corresponding Buying Fund. Each Buying Fund will assume all liabilities of the corresponding Selling Fund. At the Closing, each Buying Corporation will deliver shares of each Buying Fund, including fractional shares, to the corresponding Selling Corporation. The number of shares will be determined by dividing the value of the net assets of shares of each Selling Fund, computed as described in paragraph 3(a), by the net asset value of one share of the corresponding Buying Fund, computed as described in paragraph 3(b). Each Selling Fund will not pay a sales charge on the receipt of the corresponding Buying Fund's shares in exchange for the assets of such Selling Fund. In addition, the shareholders of each Selling Fund will not pay a sales charge on distribution to them of shares of the corresponding Buying Fund. b. Closing and Effective Time of the Reorganization. The Reorganization and all related acts necessary to complete the Reorganization (the "Closing") will occur on the first day on which the New York Stock Exchange (the "NYSE") is open for business following approval of shareholders of each Selling Fund and receipt of all necessary regulatory approvals, or such later date as the parties may agree. 3. VALUATION OF NET ASSETS. a. The net asset value of shares of each Selling Fund will be computed as of the close of regular trading on the NYSE on the business day immediately preceding the day of Closing (the "Valuation Date") using the valuation procedures in the corresponding Buying Fund's prospectus. b. The net asset value per share of shares of each Buying Fund will be determined as of the close of regular trading on the NYSE on the Valuation Date, using the valuation procedures in each Buying Fund's prospectus. c. At the Closing, each Selling Fund will provide the corresponding Buying Fund with a copy of the computation showing the valuation of the net asset value per share of shares of such Selling Fund on the Valuation Date. Each Buying Fund will provide the corresponding Selling Fund with a copy of the computation showing the determination of the net asset value per share of shares of such Buying Fund on the Valuation Date. Both computations will be certified by an officer of RiverSource Investments, LLC, the investment manager. 4. LIQUIDATION AND DISSOLUTION OF THE SELLING FUND. a. As soon as practicable after the Valuation Date, each Selling Corporation will liquidate each Selling Fund and distribute shares of each class of the corresponding Buying Fund to such Selling Fund's shareholders of record of such class. Each Buying Fund will establish shareholder accounts in the names of each corresponding Selling Fund shareholder, representing the respective pro rata number of full and fractional shares of such class of the Buying Fund due to each shareholder. All issued and outstanding shares of each Selling Fund will simultaneously be cancelled on the books of each Selling Corporation. Each Buying Fund or its transfer agent will establish shareholder accounts in accordance with instructions from the corresponding Selling Corporation. - --------------- (1) As noted in Schedule A, the Selling Corporation for the Reorganization of RiverSource Massachusetts Tax-Exempt Fund, RiverSource Michigan Tax-Exempt Fund and RiverSource Ohio Tax-Exempt Fund is a Massachusetts business trust. RIVERSOURCE FUNDS -- PROXY STATEMENT A.1 b. Immediately after the Valuation Date, the share transfer books of each Selling Corporation relating to each Selling Fund will be closed and no further transfer of shares will be made. c. Promptly after the distribution, each Buying Fund or its transfer agent will notify each shareholder of the corresponding Selling Fund of the number of shares distributed to the shareholder and confirm the registration in the shareholder's name. d. As promptly as practicable after the liquidation of each Selling Fund, and in no event later than twelve months from the date of the Closing, each Selling Fund will be dissolved. 5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BUYING CORPORATION. With respect to each Reorganization, the Buying Corporation represents and warrants to the corresponding Selling Fund as follows: a. Organization, Existence, etc. The Buying Corporation is a corporation duly organized, validly existing and in good standing under the laws of the state of Minnesota and has the power to carry on its business as it is now being conducted. b. Registration as Investment Company. The Buying Fund is a series of the Buying Corporation, registered under the Investment Company Act of 1940 (the "1940 Act") as an open-end, management investment company. c. Capitalization. The Buying Corporation has authorized capital of 10,000,000,000 shares of common stock, par value $0.01 per share. All of the outstanding shares of the Buying Corporation have been duly authorized and are validly issued, fully paid and non-assessable. Since the Buying Fund is engaged in the continuous offering and redemption of its shares, the number of outstanding shares may vary daily. d. Financial Statements. The audited financial statements as of the end of the last fiscal year, and the subsequent unaudited semi-annual financial statements, if any (the "Buying Fund Financial Statements"), fairly present the financial position of the Buying Fund and the results of its operations and changes in its net assets for the periods shown. e. Shares to be Issued Upon Reorganization. The shares to be issued in connection with the Reorganization will be duly authorized and, at the time of the Closing, will be validly issued, fully paid and non-assessable. f. Authority Relative to the Agreement. The Buying Corporation has the power to enter into and carry out the obligations described in this Agreement. The Agreement and the transactions contemplated by it have been duly authorized by the Board of Directors of the Buying Corporation and no other proceedings by the Buying Corporation or the Buying Fund are necessary. g. No Violation. The Buying Corporation is not in violation of its Articles of Incorporation or By-Laws (the "Articles") or in default in the performance of any material agreement to which it is a party. The execution of this Agreement and the completion of the transactions contemplated by it will not conflict with, or constitute a breach of, any material contract or other instrument to which the Buying Fund is subject. The transactions will not result in any violation of the provisions of the Articles or any law, administrative regulation or administrative or court decree applicable to the Buying Fund. h. Liabilities. The Buying Fund has no liabilities other than liabilities disclosed in the Buying Fund Financial Statements, liabilities incurred in the ordinary course of business subsequent to the date of the latest annual or semi-annual financial statements, or liabilities previously disclosed to the Selling Fund, none of which has been materially adverse to the business, assets or results of operation of the Buying Fund. i. Litigation. There is no litigation, administrative proceeding or investigation before any court or governmental body currently pending or, to the knowledge of the Buying Fund, threatened, that would materially and adversely affect the Buying Fund, its financial condition or the conduct of its business, or that would prevent or hinder completion of the transactions contemplated by this Agreement. The Buying Fund knows of no facts that might form the basis for the institution of any such litigation, proceeding or investigation and the Buying Fund is not a party to or subject to the provisions of any order, decree or judgment. j. Contracts. Except for contracts and agreements previously disclosed to the Selling Corporation, the Buying Fund is not a party to or subject to any material contract, debt instrument, plan, lease, franchise, license or permit. k. Regulated Investment Company Qualification. The Buying Fund has qualified as a regulated investment company under the Internal Revenue Code with respect to each taxable year since commencement of its operations and will qualify as a regulated investment company at all times through the Closing. l. Taxes. As of the Closing, the Buying Fund will (i) have filed all federal and other tax returns and reports that have been required to be filed, (ii) have paid or provided for payment of all federal and other taxes shown to be due on such returns A.2 RIVERSOURCE FUNDS -- PROXY STATEMENT or on any assessments received, (iii) have adequately provided for all tax liabilities on its books, (iv) except as disclosed to the Selling Fund, not have had any tax deficiency or liability asserted against it or question with respect thereto raised, and (v) except as disclosed to the Selling Fund, not be under audit by the Internal Revenue Service or by any state or local tax authority for taxes in excess of those already paid. m. Registration Statement. The Buying Fund will file a registration statement on Form N-14 (the "Registration Statement") with the Securities and Exchange Commission under the Securities Act of 1933 (the "1933 Act") relating to the shares to be issued in the Reorganization. At the time the Registration Statement becomes effective, at the time of the shareholders' meeting and at the Closing, the Registration Statement will not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading. However, none of the representations and warranties in this subsection apply to statements in, or omissions from, the Registration Statement made in reliance on information furnished by the Selling Fund for use in the Registration Statement. n. Business Activities. The Buying Fund will operate its business in the ordinary course between the date hereof and the Closing Date, it being understood that such ordinary course of business will include regular and customary periodic dividends and distributions and any other distribution that may be advisable. 6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SELLING CORPORATION. With respect to each Reorganization, the Selling Corporation represents and warrants to the corresponding Buying Fund as follows: a. Organization, Existence, etc. The Selling Corporation is a corporation duly organized, validly existing and in good standing under the laws of the state of Minnesota and has the power to carry on its business as it is now being conducted (for the Reorganization of RiverSource Massachusetts Tax-Exempt Fund, RiverSource Michigan Tax-Exempt Fund and RiverSource Ohio Tax-Exempt Fund, the Selling Corporation is a Massachusetts business trust that is duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts). b. Registration as Investment Company. The Selling Fund is a series of the Selling Corporation, registered under the 1940 Act as an open-end, management investment company. c. Capitalization. The Selling Corporation has authorized capital of 10,000,000,000 shares of common stock, par value $0.01 per share (for the Reorganization of RiverSource Massachusetts Tax-Exempt Fund, RiverSource Michigan Tax-Exempt Fund and RiverSource Ohio Tax-Exempt Fund, the beneficial interest of the Selling Corporation shall at all times be divided into an unlimited number of shares, without par value). All of the outstanding shares have been duly authorized and are validly issued, fully paid and non-assessable. Since the Selling Fund is engaged in the continuous offering and redemption of its shares, the number of outstanding shares may vary daily. d. Financial Statements. The audited financial statements as of the end of the last fiscal year, and the subsequent unaudited semi-annual financial statements, if any (the "Selling Fund Financial Statements"), fairly present the financial position of the Selling Fund, and the results of its operations and changes in its net assets for the periods shown. e. Authority Relative to the Agreement. The Selling Corporation has the power to enter into and to carry out its obligations under this Agreement. The Agreement and the transactions contemplated by it have been duly authorized by the Board of Directors (for the Reorganization of RiverSource Massachusetts Tax-Exempt Fund, RiverSource Michigan Tax- Exempt Fund and RiverSource Ohio Tax-Exempt Fund, the Board of Trustees) of the Selling Corporation and no other proceedings by the Selling Corporation or the Selling Fund are necessary. f. No Violation. The Selling Corporation is not in violation of its Articles or in default in the performance of any material agreement to which it is a party (for the Reorganization of RiverSource Massachusetts Tax-Exempt Fund, RiverSource Michigan Tax-Exempt Fund and RiverSource Ohio Tax-Exempt Fund, the Selling Corporation is not in violation of its Agreement and Declaration of Trust or By-Laws (the "Charter Documents") or in default in the performance of any material agreement to which it is a party). The execution of this Agreement and the completion of the transactions contemplated by it will not conflict with or constitute a breach of, any material contract to which the Selling Fund is subject. The transactions will not result in any violation of the provisions of the Articles or Charter Documents, as the case may be, or any law, administrative regulation or administrative or court decree applicable to the Selling Fund. g. Liabilities. The Selling Fund has no liabilities other than liabilities disclosed in the Selling Fund Financial Statements, liabilities incurred in the ordinary course of business subsequent to the date of the latest annual or semi-annual financial statements, or liabilities previously disclosed to the Buying Fund, none of which has been materially adverse to the business, assets or results of operation of the Selling Fund. h. Litigation. There is no litigation, administrative proceeding or investigation before any court or governmental body currently pending or, to the knowledge of the Selling Fund, threatened, that would materially and adversely affect the RIVERSOURCE FUNDS -- PROXY STATEMENT A.3 Selling Fund, its financial condition or the conduct of its business, or that would prevent or hinder completion of the transactions contemplated by this Agreement. The Selling Fund knows of no facts that might form the basis for the institution of any such litigation, proceeding or investigation and is not a party to or subject to the provisions of any order, decree or judgment. i. Contracts. Except for contracts and agreements previously disclosed to the Buying Corporation, the Selling Fund is not a party to or subject to any material contract, debt instrument, plan, lease, franchise, license or permit. j. Regulated Investment Company Qualification. The Selling Fund has qualified as a regulated investment company under the Internal Revenue Code with respect to each taxable year since commencement of its operations and will qualify as regulated investment company at all times through the Closing. k. Taxes. As of the Closing, the Selling Fund will (i) have filed all federal and other tax returns and reports that have been required to be filed, (ii) have paid or provided for payment of all federal and other taxes shown to be due on such returns or on any assessments received, (iii) have adequately provided for all tax liabilities on its books, (iv) except as disclosed to the Buying Fund, not have had any tax deficiency or liability asserted against it or question with respect thereto raised, and (v) except as disclosed to the Buying Fund, not be under audit by the Internal Revenue Service or by any state or local tax authority for taxes in excess of those already paid. l. Fund Securities. All securities listed in the schedule of investments of the Selling Fund as of the Closing will be owned by the Selling Fund free and clear of any encumbrances, except as indicated in the schedule. m. Registration Statement. The Selling Fund will cooperate with the Buying Fund and will furnish information relating to the Selling Corporation and the Selling Fund required in the Registration Statement. At the time the Registration Statement becomes effective, at the time of the shareholders' meeting and at the Closing, the Registration Statement, as it relates to the Selling Corporation or the Selling Fund, will not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading. However, the representations and warranties in this subsection apply only to statements in or omissions from the Registration Statement made in reliance upon information furnished by the Selling Corporation or the Selling Fund for use in the Registration Statement. n. Provision of Books and Records. The Selling Fund will provide its books and records to the Buying Fund for purposes of preparing any tax returns required by law to be filed after the Closing date, including (1) the tax return for the period ending on the Closing date, and (2) the tax return for the period beginning the day after the Closing and ending the earlier of the current fiscal year-end of the Buying Fund and the taxable year end chosen by the Buying Fund following each Reorganization. o. Business Activities. The Selling Fund will operate its business in the ordinary course between the date hereof and the Closing Date, it being understood that such ordinary course of business will include regular and customary periodic dividends and distributions and any other distribution that may be advisable. 7. CONDITIONS TO OBLIGATIONS OF THE BUYING CORPORATION. The obligations of the Buying Corporation with respect to each Reorganization are subject to the satisfaction of the following conditions: a. Shareholder Approval. This Agreement will have been approved by the affirmative vote of the holders of the majority of the voting power of all Selling Fund shares entitled to vote. b. Representations, Warranties and Agreements. The Selling Corporation and the Selling Fund will have complied with this Agreement and each of the representations and warranties in this Agreement will be true in all material respects as of the Closing. An officer of the Selling Corporation will provide a certificate to the Buying Fund confirming that, as of the Closing, the representations and warranties set forth in Section 6 are true and correct and that there have been no material adverse changes in the financial condition, results of operations, business, properties or assets of the Selling Fund since the date of its last financial statement, except as otherwise indicated in any financial statements, certified by an officer of the Selling Corporation, and delivered to the Buying Fund on or prior to the last business day before the Closing. c. Regulatory Approvals. - The Registration Statement referred to in Sections 5(m) and 6(m) will be effective and no stop orders under the 1933 Act will have been issued. - All necessary approvals, consents and exemptions from federal and state regulatory authorities will have been obtained. d. Opinion of Counsel. The Buying Corporation will have received an opinion of counsel for the Selling Corporation, dated as of the Closing, to the effect that: (i) the Selling Corporation is a corporation duly organized and validly existing under the laws of the state of Minnesota (for the Reorganization of RiverSource Massachusetts Tax-Exempt Fund, RiverSource A.4 RIVERSOURCE FUNDS -- PROXY STATEMENT Michigan Tax-Exempt Fund and RiverSource Ohio Tax-Exempt Fund, the Selling Corporation is a Massachusetts business trust duly organized and validly existing under the laws of the Commonwealth of Massachusetts); (ii) the Selling Fund is a series of the Selling Corporation, an open-end investment company registered under the 1940 Act; (iii) this Agreement and the Reorganization have been duly authorized and approved by all requisite action of the Selling Corporation and the Selling Fund and this Agreement has been duly executed by, and is a valid and binding obligation of, the Selling Corporation. e. Declaration of Dividend. The Selling Fund, prior to the Closing, has declared a dividend or dividends, which, together with all previous such dividends, shall have the effect of distributing to the Selling Fund shareholders (i) all of the excess of (x) the Selling Fund's investment income excludable from gross income under Section 103 of the Code over (y) the Selling Fund's deductions disallowed under Sections 265 and 171 of the Code, (ii) all of the Selling Fund's investment company taxable income as defined in Section 852 of the Code (in each case computed without regard to any deduction for dividends paid) and (iii) all of the Selling Fund's net capital gain realized (after reduction for any capital loss carryover), in each case for the current taxable year (which will end on the Closing date) and any preceding taxable years for which such a dividend is eligible to be made under Section 855 of the Code. 8. CONDITIONS TO OBLIGATIONS OF THE SELLING CORPORATION. The obligations of the Selling Corporation with respect to each Reorganization are subject to the satisfaction of the following conditions: a. Shareholder Approval. This Agreement will have been approved by the affirmative vote of the holders of the majority of the voting power of all Selling Fund shares entitled to vote. b. Representations, Warranties and Agreements. The Buying Fund will have complied with this Agreement and each of the representations and warranties in this Agreement will be true in all material respects as of the Closing. An officer of the Buying Corporation will provide a certificate to the Selling Fund confirming that, as of the Closing, the representations and warranties set forth in Section 5 are true and correct and that there have been no material adverse changes in the financial condition, results of operations, business, properties or assets of the corresponding Buying Fund since the date of its last financial statement, except as otherwise indicated in any financial statements, certified by an officer of the Buying Corporation, and delivered to the Selling Fund on or prior to the last business day before the Closing. c. Regulatory Approvals. - The Registration Statement referred to in Sections 5(m) and 6(m) will be effective and no stop orders under the 1933 Act will have been issued. - All necessary approvals, consents and exemptions from federal and state regulatory authorities will have been obtained. d. Opinion of Counsel. The Selling Corporation will have received the opinion of counsel for the Buying Corporation, dated as of the Closing, to the effect that: (i) the Buying Corporation is a corporation duly organized and validly existing under the laws of the state of Minnesota; (ii) the Buying Fund is a series of the Buying Corporation, an open-end investment company registered under the 1940 Act; (iii) this Agreement and the Reorganization have been authorized and approved by all requisite action of the Buying Corporation and the Buying Fund and this Agreement has been duly executed by, and is a valid and binding obligation of, the Buying Corporation; and (iv) the shares to be issued in the Reorganization are duly authorized and upon issuance in accordance with this Agreement will be validly issued, fully paid and non-assessable shares of the Buying Fund. 9. CONDITIONS TO OBLIGATIONS OF THE SELLING CORPORATION AND THE BUYING CORPORATION. The obligations of each of the Selling Corporation and the Buying Corporation with respect to each Reorganization are subject to the satisfaction of the following conditions: Tax Opinion. With respect to each Reorganization, each Selling Fund shall have received a favorable opinion of Ropes & Gray LLP satisfactory to each Selling Fund, and each Buying Fund shall have received a favorable opinion of Ropes & Gray LLP satisfactory to each Buying Fund, each substantially to the effect that, on the basis of existing provisions of the Code, Treasury regulations promulgated thereunder, current administrative rules and court decisions, generally for federal income tax purposes: - The transactions contemplated by this Agreement will constitute a reorganization within the meaning of Section 368(a) of the Code, and each Selling Fund and the corresponding Buying Fund will each be "a party to a reorganization" within the meaning of Section 368(b) of the Code; - No gain or loss will be recognized by each Selling Fund upon the transfer of its assets to the corresponding Buying Fund in exchange for the acquisition shares or upon the distribution of the acquisition shares by such Selling Fund to its shareholders in liquidation, as contemplated in paragraph 1 hereof; RIVERSOURCE FUNDS -- PROXY STATEMENT A.5 - No gain or loss will be recognized by each Buying Fund upon receipt of the assets of the corresponding Selling Fund in exchange for acquisition shares and the assumption by each Buying Fund of the liabilities of such Selling Fund as contemplated in paragraph 1 hereof; - The basis in the hands of each Buying Fund of the assets of each Selling Fund transferred to the Buying Fund in the Reorganization will be the same as the basis of such assets in the hands of such Selling Fund immediately prior to the transfer; - The holding periods of the assets of each Selling Fund in the hands of each Buying Fund will include the periods during which such assets were held by each Selling Fund; - No gain or loss will be recognized by each Selling Fund's shareholders upon the exchange of their shares of each Selling Fund for the acquisition shares; - The aggregate basis of the acquisition shares each Selling Fund shareholder receives in connection with the Reorganization will be the same as the aggregate basis of his or her Selling Fund's shares exchanged therefor; - Each Selling Fund shareholder's holding period for the acquisition shares will be determined by including the period for which he or she held the Selling Fund's shares exchanged therefor, provided that the shareholder held such Selling Fund's shares as capital assets; and - Each Buying Fund will succeed to and take into account the items of the Selling Fund described in Section 381(c) of the Code, subject to the conditions and limitations specified in Sections 381, 382, 383 and 384 of the Code and the regulations thereunder. The opinion will be based on certain factual certifications made by officers of the Selling Fund and the corresponding Buying Fund will also be based on customary assumptions. The opinion is not a guarantee that the tax consequences of the Reorganization will be as described above. Ropes & Gray LLP will express no view with respect to the effect of the Reorganization on any transferred asset as to which any unrealized gain or loss is required to be recognized at the end of a taxable year (or on the termination or transfer thereof) under federal income tax principles. 10. AMENDMENT; TERMINATION; NON-SURVIVAL OF COVENANTS, WARRANTIES AND REPRESENTATIONS. a. This Agreement may be amended in writing if authorized by the respective Boards of Directors/Trustees. The Agreement may be amended at any time before or after approval by the shareholders of each Selling Fund. b. At any time prior to the Closing, any of the parties may waive in writing (i) any inaccuracies in the representations and warranties made to it and (ii) compliance with any of the covenants or conditions made for its benefit. c. Each party hereto may terminate this Agreement at any time prior to the Closing by notice to the other party if a material condition to its performance or a material covenant of the other party is not fulfilled on or before the date specified for its fulfillment or a material breach of this Agreement is made by the other party and is not cured. d. This Agreement may be terminated by any party at any time prior to the Closing, whether before or after approval by the shareholders of each Selling Fund, without any liability on the part of any party or its respective directors/trustees, officers, or shareholders, on written notice to the other party, and shall be terminated without liability as of the close of business on December 31, 2008, or a later date agreed upon by the parties, if the Closing is not on or prior to that date. e. The representations, warranties and covenants contained in this Agreement, or in any document delivered in connection with this Agreement, will survive the Reorganization. 11. EXPENSES. RiverSource Investments, LLC and its affiliates will pay all solicitation expenses in order to achieve shareholder approval of each Reorganization whether or not the Reorganization is completed and will bear the other costs of effecting each Reorganization (other than any brokerage or other transaction costs associated with the sale or purchase of portfolio securities in connection with a Reorganization). 12. GENERAL. a. Headings. The headings contained in this Agreement are for reference purposes only and will not affect the meaning or interpretation of this Agreement. Nothing in this Agreement is intended to confer upon any other person any rights or remedies by reason of this Agreement. b. Governing Law. This Agreement will be governed by the laws of the state of Minnesota. 13. INDEMNIFICATION. Each party will indemnify and hold the other and its officers and directors/trustees (each an "Indemnitee") harmless from and against any liability or other cost and expense, in connection with the defense or disposition of any action, suit, or other proceeding, before any court or administrative or investigative body in which the A.6 RIVERSOURCE FUNDS -- PROXY STATEMENT Indemnitee may be involved as a party, with respect to actions taken under this Agreement. However, no Indemnitee will be indemnified against any liability or expense arising by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the Indemnitee's position. 14. NON-RECOURSE. A copy of the Declaration of Trust of RiverSource Special Tax-Exempt Series Trust is on file with the Secretary of The Commonwealth of Massachusetts, and notice is hereby given that no trustee, officer, agent or employee of such fund shall have any personal liability under this Agreement, and that this Agreement is binding only upon the assets and properties of each relevant Selling Fund. IN WITNESS WHEREOF, each of the parties has caused this Agreement to be signed. RIVERSOURCE BOND SERIES, INC., on behalf of RiverSource Core Bond Fund By: - --------------------------------------------- Name: - --------------------------------------------- Title: - --------------------------------------------- RIVERSOURCE DIVERSIFIED BOND SERIES, INC., on behalf of RiverSource Diversified Bond Fund By: - --------------------------------------------- Name: - --------------------------------------------- Title: - --------------------------------------------- RIVERSOURCE MANAGERS SERIES, INC., on behalf of RiverSource Fundamental Growth Fund By: - --------------------------------------------- Name: - --------------------------------------------- Title: - --------------------------------------------- RIVERSOURCE LARGE CAP SERIES, INC., on behalf of RiverSource Growth Fund By: - --------------------------------------------- Name: - --------------------------------------------- Title: - --------------------------------------------- RIVERSOURCE INTERNATIONAL MANAGERS SERIES, INC., on behalf of RiverSource International Equity Fund By: - --------------------------------------------- Name: - --------------------------------------------- Title: - --------------------------------------------- RIVERSOURCE INTERNATIONAL SERIES, INC., on behalf of RiverSource Disciplined International Equity Fund By: - --------------------------------------------- Name: - --------------------------------------------- Title: - --------------------------------------------- RIVERSOURCE FUNDS -- PROXY STATEMENT A.7 RIVERSOURCE SPECIAL TAX-EXEMPT SERIES TRUST, on behalf of RiverSource Massachusetts Tax-Exempt Fund RiverSource Michigan Tax-Exempt Fund RiverSource Ohio Tax-Exempt Fund By: - --------------------------------------------- Name: - --------------------------------------------- Title: - --------------------------------------------- RIVERSOURCE TAX-EXEMPT INCOME SERIES, INC., on behalf of RiverSource Tax-Exempt High Income Fund By: - --------------------------------------------- Name: - --------------------------------------------- Title: - --------------------------------------------- RIVERSOURCE MANAGERS SERIES, INC., on behalf of RiverSource Value Fund By: - --------------------------------------------- Name: - --------------------------------------------- Title: - --------------------------------------------- RIVERSOURCE INVESTMENT SERIES, INC., on behalf of RiverSource Diversified Equity Income Fund By: - --------------------------------------------- Name: - --------------------------------------------- Title: - --------------------------------------------- The undersigned is a party to this Agreement for the purposes of Section 3c and 11 only. RIVERSOURCE INVESTMENTS, LLC By: - --------------------------------------------- Name: - --------------------------------------------- Title: - --------------------------------------------- A.8 RIVERSOURCE FUNDS -- PROXY STATEMENT SCHEDULE A
- ---------------------------------------------------------------------------------------------------------------------------------- SELLING ENTITY SELLING FUND BUYING ENTITY BUYING FUND - ---------------------------------------------------------------------------------------------------------------------------------- RiverSource Bond Series, RiverSource Core Bond Fund RiverSource Diversified Income RiverSource Diversified Bond Inc. Series, Inc. Fund - ---------------------------------------------------------------------------------------------------------------------------------- RiverSource Managers Series, RiverSource Fundamental Growth RiverSource Large Cap Series, RiverSource Growth Fund Inc. Fund Inc. - ---------------------------------------------------------------------------------------------------------------------------------- RiverSource International RiverSource International RiverSource International RiverSource Disciplined Managers Series, Inc. Equity Fund Series, Inc. International Equity Fund - ---------------------------------------------------------------------------------------------------------------------------------- RiverSource Special RiverSource Massachusetts RiverSource Tax-Exempt Income RiverSource Tax-Exempt High Tax-Exempt Series Trust Tax-Exempt Fund Series, Inc. Income Fund - ---------------------------------------------------------------------------------------------------------------------------------- RiverSource Special RiverSource Michigan Tax-Exempt RiverSource Tax-Exempt Income RiverSource Tax-Exempt High Tax-Exempt Series Trust Fund Series, Inc. Income Fund - ---------------------------------------------------------------------------------------------------------------------------------- RiverSource Special RiverSource Ohio Tax-Exempt RiverSource Tax-Exempt Income RiverSource Tax-Exempt High Tax-Exempt Series Trust Fund Series, Inc. Income Fund - ---------------------------------------------------------------------------------------------------------------------------------- RiverSource Managers Series, RiverSource Value Fund RiverSource Investment Series, RiverSource Diversified Equity Inc. Inc. Income Fund - ----------------------------------------------------------------------------------------------------------------------------------
RIVERSOURCE FUNDS -- PROXY STATEMENT A.9 THIS PAGE LEFT BLANK INTENTIONALLY EXHIBIT B MINNESOTA BUSINESS CORPORATION ACT SECTIONS 302A.471 AND 302A.473 Minnesota law requires that we provide you with a copy of the state law on dissenters' rights. Notwithstanding the provisions of the law set out below, the SEC has taken the position that use of state appraisal procedures by a registered mutual fund such as the Fund would be a violation of Rule 22c-1, the forward pricing rule, under the 1940 Act. As a result, if any shareholder elects to exercise dissenters' rights under Minnesota law, the Fund intends to submit this question to a court of competent jurisdiction. In that event, a dissenting shareholder would not receive any payment until the end of the court proceeding. 302A.471. RIGHTS OF DISSENTING SHAREHOLDERS SUBDIVISION 1. ACTIONS CREATING RIGHTS. A shareholder of a corporation may dissent from, and obtain payment for the fair value of the shareholder's shares in the event of, any of the following corporate actions: (a) unless otherwise provided in the articles, an amendment of the articles that materially and adversely affects the rights or preferences of the shares of the dissenting shareholder in that it: (1) alters or abolishes a preferential right of the shares; (2) creates, alters, or abolishes a right in respect of the redemption of the shares, including a provision respecting a sinking fund for the redemption or repurchase of the shares; (3) alters or abolishes a preemptive right of the holder of the shares to acquire shares, securities other than shares, or rights to purchase shares or securities other than shares; (4) excludes or limits the right of a shareholder to vote on a matter, or to cumulate votes, except as the right may be excluded or limited through the authorization or issuance of securities of an existing or new class or series with similar or different voting rights; except that an amendment to the articles of an issuing public corporation that provides that section 302A.671 does not apply to a control share acquisition does not give rise to the right to obtain payment under this section; (5) eliminates the right to obtain payment under this subdivision; (b) a sale, lease, transfer, or other disposition of property and assets of the corporation that requires shareholder approval under section 302A.661, subdivision 2, but not including a disposition in dissolution described in section 302A.725, subdivision 2, or a disposition pursuant to an order of a court, or a disposition for cash on terms requiring that all or substantially all of the net proceeds of disposition be distributed to the shareholders in accordance with their respective interests within one year after the date of disposition; (c) a plan of merger, whether under this chapter or under chapter 322B, to which the corporation is a party, except as provided in subdivision 3, and except for a plan of merger adopted under section 302A.626; (d) a plan of exchange, whether under this chapter or under chapter 322B, to which the corporation is a party as the corporation whose shares will be acquired by the acquiring corporation, except as provided in subdivision 3; (e) a plan of conversion adopted by the corporation; or (f) Any other corporate action taken pursuant to a shareholder vote with respect to which the articles, the bylaws, or a resolution approved by the board directs that dissenting shareholders may obtain payment for their shares. SUBDIVISION 2. BENEFICIAL OWNERS. (a) A shareholder shall not assert dissenters' rights as to less than all of the shares registered in the name of the shareholder, unless the shareholder dissents with respect to all the shares that are beneficially owned by another person but registered in the name of the shareholder and discloses the name and address of each beneficial owner on whose behalf the shareholder dissents. In that event, the rights of the dissenter shall be determined as if the shares as to which the shareholder has dissented and the other shares were registered in the names of different shareholders. (b) A beneficial owner of shares who is not the shareholder may assert dissenters' rights with respect to shares held on behalf of the beneficial owner, and shall be treated as a dissenting shareholder under the terms of this section and section 302A.473, if the beneficial owner submits to the corporation at the time of or before the assertion of the rights a written consent of the shareholder. SUBDIVISION 3. RIGHTS NOT TO APPLY. (a) Unless the articles, the bylaws, or a resolution approved by the board otherwise provide, the right to obtain payment under this section does not apply to a shareholder of (1) the surviving corporation in a merger with respect to shares of the shareholder that are not entitled to be voted on the merger and are not canceled or exchanged in the merger or (2) the RIVERSOURCE FUNDS -- PROXY STATEMENT B.1 corporation whose shares will be acquired by the acquiring organization in a plan of exchange with respect to shares of the shareholder that are not entitled to be voted on the plan of exchange and are not exchanged in the plan of exchange. (b) If a date is fixed according to section 302A.445, subdivision 1, for the determination of shareholders entitled to receive notice of and to vote on an action described in subdivision 1, only shareholders as of the date fixed, and beneficial owners as of the date fixed who hold through shareholders, as provided in subdivision 2, may exercise dissenters' rights. (c) Notwithstanding subdivision 1, the right to obtain payment under this section, other than in connection with a plan of merger adopted under section 302A.621, is limited in accordance with the following provisions: (1) The right to obtain payment under this section is not available for the holders of shares of any class or series of shares that is listed on the New York Stock Exchange or the American Stock Exchange or designated as a national market security on the Nasdaq Stock Market. (2) The applicability of clause (1) is determined as of: (i) the record date fixed to determine the shareholders entitled to receive notice of, and to vote at, the meeting of shareholders to act upon the corporate action described in subdivision 1; or (ii) the day before the effective date of corporate action described in subdivision 1 if there is no meeting of shareholders. (3) Clause (1) is not applicable, and the right to obtain payment under this section is available pursuant to subdivision 1, for the holders of any class or series of shares who are required by the terms of the corporate action described in subdivision 1 to accept for such shares anything other than shares, or cash in lieu of fractional shares, of any class or any series of shares of a domestic or foreign corporation, or any other ownership interest of any other organization, that satisfies the standards set forth in clause (1) at the time the corporate action becomes effective. SUBDIVISION 4. OTHER RIGHTS. The shareholders of a corporation who have a right under this section to obtain payment for their shares, or who would have the right to obtain payment for their shares absent the exception set forth in paragraph (c) of subdivision 3, do not have a right at law or in equity to have a corporate action described in subdivision 1 set aside or rescinded, except when the corporate action is fraudulent with regard to the complaining shareholder or the corporation. 302A.473. PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS SUBDIVISION 1. DEFINITIONS. (a) For purposes of this section, the terms defined in this subdivision have the meanings given them. (b) "Corporation" means the issuer of the shares held by a dissenter before the corporate action referred to in section 302A.471, subdivision 1 or the successor by merger of that issuer. (c) "Fair value of the shares" means the value of the shares of a corporation immediately before the effective date of the corporate action referred to in section 302A.471, subdivision 1. (d) "Interest" means interest commencing five days after the effective date of the corporate action referred to in section 302A.471, subdivision 1, up to and including the date of payment, calculated at the rate provided in section 549.09 for interest on verdicts and judgments. SUBDIVISION 2. NOTICE OF ACTION. If a corporation calls a shareholder meeting at which any action described in section 302A.471, subdivision 1 is to be voted upon, the notice of the meeting shall inform each shareholder of the right to dissent and shall include a copy of section 302A.471 and this section and a brief description of the procedure to be followed under these sections. SUBDIVISION 3. NOTICE OF DISSENT. If the proposed action must be approved by the shareholders and the corporation holds a shareholder meeting, a shareholder who is entitled to dissent under section 302A.471 and who wishes to exercise dissenters' rights must file with the corporation before the vote on the proposed action a written notice of intent to demand the fair value of the shares owned by the shareholder and must not vote the shares in favor of the proposed action. SUBDIVISION 4. NOTICE OF PROCEDURE; DEPOSIT OF SHARES. (a) After the proposed action has been approved by the board and, if necessary, the shareholders, the corporation shall send to (i) all shareholders who have complied with subdivision 3, (ii) all shareholders who did not sign or consent to a written action that gave effect to the action creating the right to obtain payment under section 302A.471, and (iii) all shareholders entitled to dissent if no shareholder vote was required, a notice that contains: (1) The address to which a demand for payment and certificates of certificated shares must be sent in order to obtain payment and the date by which they must be received; (2) Any restrictions on transfer of uncertificated shares that will apply after the demand for payment is received; B.2 RIVERSOURCE FUNDS -- PROXY STATEMENT (3) A form to be used to certify the date on which the shareholder, or the beneficial owner on whose behalf the shareholder dissents, acquired the shares or an interest in them and to demand payment; and (4) A copy of section 302A.471 and this section and a brief description of the procedures to be followed under these sections. (b) In order to receive the fair value of the shares, a dissenting shareholder must demand payment and deposit certificated shares or comply with any restrictions on transfer of uncertificated shares within 30 days after the notice required by paragraph (a) was given, but the dissenter retains all other rights of a shareholder until the proposed action takes effect. SUBDIVISION 5. PAYMENT; RETURN OF SHARES. (a) After the corporate action takes effect, or after the corporation receives a valid demand for payment, whichever is later, the corporation shall remit to each dissenting shareholder who has complied with subdivisions 3 and 4 the amount the corporation estimates to be the fair value of the shares, plus interest, accompanied by: (1) The corporation's closing balance sheet and statement of income for a fiscal year ending not more than 16 months before the effective date of the corporate action, together with the latest available interim financial statements; (2) An estimate by the corporation of the fair value of the shares and a brief description of the method used to reach the estimate; and (3) A copy of section 302A.471 and this section, and a brief description of the procedure to be followed in demanding supplemental payment. (b) The corporation may withhold the remittance described in paragraph (a) from a person who was not a shareholder on the date the action dissented from was first announced to the public or who is dissenting on behalf of a person who was not a beneficial owner on that date. If the dissenter has complied with subdivisions 3 and 4, the corporation shall forward to the dissenter the materials described in paragraph (a), a statement of the reason for withholding the remittance, and an offer to pay to the dissenter the amount listed in the materials if the dissenter agrees to accept that amount in full satisfaction. The dissenter may decline the offer and demand payment under subdivision 6. Failure to do so entitles the dissenter only to the amount offered. If the dissenter makes demand, subdivision 7 and 8 apply. (c) If the corporation fails to remit payment within 60 days of the deposit of certificates or the imposition of transfer restrictions on uncertificated shares, it shall return all deposited certificates and cancel all transfer restrictions. However, the corporation may again give notice under subdivision 4 and require deposit or restrict transfer at a later time. SUBDIVISION 6. SUPPLEMENTAL PAYMENT; DEMAND. If a dissenter believes that the amount remitted under subdivision 5 is less than the fair value of the shares plus interest, the dissenter may give written notice to the corporation of the dissenter's own estimate of the fair value of the shares, plus interest, within 30 days after the corporation mails the remittance under subdivision 5, and demand payment of the difference. Otherwise, a dissenter is entitled only to the amount remitted by the corporation. SUBDIVISION 7. PETITION; DETERMINATION. If the corporation receives a demand under subdivision 6, it shall, within 60 days after receiving the demand, either pay to the dissenter the amount demanded or agreed to by the dissenter after discussion with the corporation or file in a court a petition requesting that the court determine the fair value of the shares, plus interest. The petition shall be filed in the county in which the registered office of the corporation is located, except that a surviving foreign corporation that receives a demand relating to the shares of a constituent domestic corporation shall file the petition in the county in this state in which the last registered office of the constituent corporation was located. The petition shall name as parties all dissenters who have demanded payment under subdivision 6 and who have not reached agreement with the corporation. The corporation shall, after filing the petition, serve all parties with a summons and copy of the petition under the rules of civil procedure. Nonresidents of this state may be served by registered or certified mail or by publication as provided by law. Except as otherwise provided, the rules of civil procedures apply to this proceeding. The jurisdiction of the court is plenary and exclusive. The court may appoint appraisers, with powers and authorities the court deems proper, to receive evidence on and recommend the amount of the fair value of the shares. The court shall determine whether the shareholder or shareholders in question have fully complied with the requirements of this section, and shall determine the fair value of the shares, taking into account any and all factors the court finds relevant, computed by any method or combination of methods that the court, in its discretion, sees fit to use, whether or not used by the corporation or by a dissenter. The fair value of the shares as determined by the court is binding on all shareholders, wherever located. A dissenter is entitled to judgment in cash for the amount by which the fair value of the shares as determined by the court, plus interest, exceeds the amount, if any, remitted under subdivision 5, but shall not be liable to the corporation for the amount, if any, by which the amount, if any, remitted to the dissenter under subdivision 5 exceeds the fair value of the shares as determined by the court, plus interest. RIVERSOURCE FUNDS -- PROXY STATEMENT B.3 SUBDIVISION 8. COSTS; FEES; EXPENSES. (a) The court shall determine the costs and expenses of a proceeding under subdivision 7, including the reasonable expenses and compensation of any appraisers appointed by the court, and shall assess those costs and expenses against the corporation, except that the court may assess part or all of those costs and expenses against a dissenter whose action in demanding payment under subdivision 6 is found to be arbitrary, vexatious, or not in good faith. (b) If the court finds that the corporation has failed to comply substantially with this section, the court may assess all fees and expenses of any experts or attorneys as the court deems equitable. These fees and expenses may also be assessed against a person who has acted arbitrarily, vexatiously, or not in good faith in bringing the proceeding, and may be awarded to a party injured by those actions. (c) The court may award, in its discretion, fees and expenses to an attorney for the dissenters out of the amount awarded to the dissenters, if any. B.4 RIVERSOURCE FUNDS -- PROXY STATEMENT EXHIBIT C ADDITIONAL INFORMATION APPLICABLE TO THE BUYING FUNDS FUND MANAGEMENT AND COMPENSATION INVESTMENT MANAGER RiverSource Investments, LLC (the investment manager or RiverSource Investments), 200 Ameriprise Financial Center, Minneapolis, Minnesota 55474, is the investment manager to the RiverSource funds, and is a wholly-owned subsidiary of Ameriprise Financial, Inc. (Ameriprise Financial). Ameriprise Financial is a financial planning and financial services company that has been offering solutions for clients' asset accumulation, income management and protection needs for more than 110 years. In addition to managing investments for all of the RiverSource funds, RiverSource Investments manages investments for itself and its affiliates. For institutional clients, RiverSource Investments and its affiliates provide investment management and related services, such as separate account asset management, and institutional trust and custody, as well as other investment products. For all of its clients, RiverSource Investments seeks to allocate investment opportunities in an equitable manner over time. See the Merger SAI for more information. Each Fund pays RiverSource Investments a fee for managing its assets. Under the Investment Management Services Agreement (Agreement), the fee for the most recent fiscal year was the following percentage of the Fund's average daily net assets:
PERCENTAGE OF FUND'S FUND AVERAGE DAILY NET ASSETS Diversified Bond Fund 0.46% Growth Fund 0.66% Disciplined International Equity Fund 0.80% Tax-Exempt High Income Fund 0.44% Diversified Equity Income Fund 0.56%
For Growth Fund and Diversified Equity Income Fund, the fee includes an adjustment under the terms of a performance incentive arrangement. For Disciplined International Equity Fund, beginning Dec. 1, 2006, the fee may be adjusted under the terms of a performance incentive arrangement. The adjustment is computed by comparing the Fund's performance to the performance of an index of comparable funds published by Lipper Inc. The index against which the Fund's performance is currently measured for purposes of the performance incentive adjustment is the Lipper Large-Cap Growth Funds Index for Growth Fund, the Lipper International Large-Cap Core Funds Index for Disciplined International Equity Fund and the Lipper Equity Income Funds Index for Diversified Equity Income Fund. In certain circumstances, the Fund's Board may approve a change in the index. The maximum adjustment (increase or decrease) is 0.12% of the Fund's average net assets on an annual basis. Under the Agreement, each Fund also pays taxes, brokerage commissions, and nonadvisory expenses. A discussion regarding the basis for the Board approving the Agreement is available in each Fund's most recent annual or semiannual shareholder report. Diversified Bond Fund Portfolio Managers. The portfolio managers responsible for the day-to-day management of Diversified Bond Fund are: Jamie Jackson, CFA, Portfolio Manager - - Co-managed the Fund since 2003. - - Leader of the liquid assets sector team. - - Joined RiverSource Investments in 2003. - - Co-head of U.S. Investment Grade Fixed Income, UBS Global Asset Management, 1997 to 2003. - - Began investment career in 1988. - - MBA, Marquette University. Scott Kirby, Portfolio Manager - - Co-managed the Fund since 2003. - - Leader of the structured assets sector team. - - Employed by RiverSource Investments from 1979 to 1985 and from 1987 to the present. - - Began investment career in 1979. - - MBA, University of Minnesota. RIVERSOURCE FUNDS -- PROXY STATEMENT C.1 Tom Murphy, CFA, Portfolio Manager - - Co-managed the Fund since 2003. - - Leader of the investment grade corporate bond sector team. - - Joined RiverSource Investments in 2002. - - Managing Director and Portfolio Manager, BlackRock Financial Management, 2002; various positions, Zurich Scudder, 1992 to 2002. - - Began investment career in 1986. - - MBA, University of Michigan. Nicholas Pifer, CFA, Portfolio Manager - - Co-managed the Fund since 2003. - - Leader of the global sector team. - - Joined RiverSource Investments in 2000. - - Fixed Income Portfolio Manager, Investment Advisers, Inc., 1997 to 2000. - - Began investment career in 1990. - - MA, Johns Hopkins University School of Advanced International Studies. Jennifer Ponce de Leon, Portfolio Manager - - Co-managed the Fund since 2003. - - Leader of the high yield sector team. - - Joined RiverSource Investments in 1997. - - Began investment career in 1989. - - MBA, De Paul University. The fixed income department of RiverSource Investments is divided into six sector teams, each of which includes a portfolio manager or portfolio managers and several analysts, and each of which specializes in a specific sector of the fixed income market. The Fund's portfolio managers lead the teams that specialize in the sectors in which the Fund primarily invests, and collectively determine allocation of Fund assets among the sectors. Growth Fund Portfolio Manager. The portfolio manager responsible for the day-to-day management of Growth Fund is: Nick Thakore, Portfolio Manager - - Managed the Fund since 2002. - - Joined RiverSource Investments in 2002. - - Analyst and Portfolio Manager, Fidelity Investments, 1993 to 2002. - - Began investment career in 1993. - - MBA, Wharton School, University of Pennsylvania. Disciplined International Equity Fund Portfolio Managers. The portfolio managers responsible for the day-to-day management of Disciplined International Equity Fund are: Dimitris J. Bertsimas, Ph.D., Senior Portfolio Manager - - Managed the Fund since 2006. - - Joined RiverSource Investments as a portfolio manager and leader of the Disciplined Equity and Asset Allocation Team in 2002. - - Co-founded Dynamic Ideas, LLC, a consulting firm that specialized in the development of quantitative tools for the asset management industry, where he served as Managing Partner, 1999 to 2002. Currently, Boeing Professor of Operations Research, Sloan School of Management and the Operations Research Center, MIT. - - Began investment career as a consultant to asset managers in 1993; became portfolio manager in 2002. - - MS and Ph.D., MIT. C.2 RIVERSOURCE FUNDS -- PROXY STATEMENT Alexander M. Sauer-Budge, Ph.D., Portfolio Manager - - Managed the Fund since 2006. - - Joined RiverSource Investments in 2003 as a Quantitative Analyst after receiving his Ph.D. from MIT (1998-2003). - - Began investment career in 2003. - - SM and Ph.D., MIT. Tax-Exempt High Income Fund Portfolio Manager. The portfolio manager responsible for the day-to-day management of Tax-Exempt High Income Fund is: Catherine Stienstra, Portfolio Manager - - Managed the Fund since August 2007. - - Leader of the municipal sector team. - - Joined RiverSource Investments in 2007. - - Director and Senior Portfolio Manager, FAF Advisors, Inc. (formerly USBancorp Asset Management), 1998-2007. - - Began investment career in 1988 and has worked in the municipal fixed income market since 1990. - - BA, international studies, University of Nebraska. The fixed income department of RiverSource Investments is divided into six sector teams, each of which includes a portfolio manager or portfolio managers and several analysts, and each of which specializes in a specific sector of the fixed income market. The Fund's portfolio manager leads the team that specializes in the sector in which the Fund primarily invests. Diversified Equity Income Fund Portfolio Managers. The portfolio managers responsible for the day-to-day management of Diversified Equity Income Fund are: Warren Spitz, Senior Portfolio Manager - - Managed the Fund since 2000. - - Joined RiverSource Investments in 2000 as a Senior Portfolio Manager. - - Portfolio Manager, Prudential Global Asset Management, 1987 to 2000. - - Began investment career in 1984. - - MBA, Wharton School, University of Pennsylvania. Steve Schroll, Portfolio Manager - - Managed the Fund since 2003. - - Joined RiverSource Investments in 1998 as a Senior Security Analyst. - - Senior Equity Analyst, Piper Jaffray, 1988 to 1998; Equity Analyst, First Asset Management, 1985 to 1988; Equity Analyst, Dain Rauscher, 1981 to 1985. - - Began investment career in 1981. - - MBA, University of Minnesota. Laton Spahr, CFA, Portfolio Manager - - Managed the Fund since 2003. - - Joined RiverSource Investments in 2001 as a Security Analyst. - - Sector Analyst, Holland Capital Management, 2000 to 2001; Statistical Research Intern, Friess Associates, 1998 to 1999. - - Began investment career in 1998. - - MS, University of Wisconsin, Applied Security Analysis Program. Paul Stocking, Portfolio Manager - - Managed the Fund since 2006. - - Joined RiverSource Investments in 1995 as a Senior Equity Analyst. - - Vice President, JP Morgan Securities, 1987 to 1995; Investment Banking. RIVERSOURCE FUNDS -- PROXY STATEMENT C.3 - - Began investment career in 1987. - - MBA, University of Chicago. The Merger SAI provides additional information about portfolio manager compensation, management of other accounts and ownership of shares in the Fund. BUYING AND SELLING SHARES The RiverSource funds are available through broker-dealers, certain 401(k) or other qualified and nonqualified plans, banks, or other financial intermediaries or institutions (financial institutions). THESE FINANCIAL INSTITUTIONS MAY CHARGE YOU ADDITIONAL FEES FOR THE SERVICES THEY PROVIDE AND THEY MAY HAVE DIFFERENT POLICIES NOT DESCRIBED IN THIS PROSPECTUS. Some policy differences may include different minimum investment amounts, exchange privileges, fund choices and cutoff times for investments. Additionally, recordkeeping, transaction processing and payments of distributions relating to your account may be performed by the financial institutions through which shares are held. Since the fund may not have a record of your transactions, you should always contact the financial institution through which you purchased the fund to make changes to or give instructions concerning your account or to obtain information about your account. The fund, the distributor and the transfer agent are not responsible for the failure of one of these financial institutions to carry out its obligations to its customers. DESCRIPTION OF SHARE CLASSES INVESTMENT OPTIONS -- CLASSES OF SHARES The RiverSource funds offer different classes of shares. There are differences among the fees and expenses for each class. See the "Fees and Expenses" table for more information. Not everyone is eligible to buy every class. After determining which classes you are eligible to buy, decide which class best suits your needs. Your financial institution can help you with this decision. The following table shows the key features of each class. (The Comparison of the Selling Fund and the Buying Fund section indicates which classes are currently offered for the Funds.) INVESTMENT OPTIONS SUMMARY See the "Fees and Expenses" table to determine which classes are offered by this fund.
CONTINGENT PLAN INITIAL DEFERRED SALES DISTRIBUTION AND ADMINISTRATION AVAILABILITY SALES CHARGE CHARGE (CDSC) SERVICE FEE(A) FEE - ------------------------------------------------------------------------------------------------------------- Class A Available to Yes. Payable at No. Yes. No. all investors. time of purchase. 0.25% Lower sales charge for larger investments. - ------------------------------------------------------------------------------------------------------------- Class Available to No. Entire Maximum 5% CDSC during Yes. No. B(b) all investors. purchase price is the first year decreasing 1.00% invested in to 0% after six years. shares of the fund. - ------------------------------------------------------------------------------------------------------------- Class C Available to No. Entire 1% CDSC may apply if you Yes. No. all investors. purchase price is sell shares within one 1.00% invested in year after purchase. shares of the fund. - ------------------------------------------------------------------------------------------------------------- Class I Limited to No. No. No. No. qualifying institutional investors. - ------------------------------------------------------------------------------------------------------------- Class R2 Limited to No. No. Yes. Yes. qualifying 0.50% 0.25% institutional investors. - ------------------------------------------------------------------------------------------------------------- Class R3 Limited to No. No. Yes. Yes. qualifying 0.25% 0.25% institutional investors. - ------------------------------------------------------------------------------------------------------------- Class R4 Limited to No. No. No. Yes. qualifying 0.25% institutional investors. - ------------------------------------------------------------------------------------------------------------- Class R5 Limited to No. No. No. No. qualifying institutional investors. - -------------------------------------------------------------------------------------------------------------
C.4 RIVERSOURCE FUNDS -- PROXY STATEMENT
INVESTMENT OPTIONS SUMMARY (CONTINUED) CONTINGENT PLAN INITIAL DEFERRED SALES DISTRIBUTION AND ADMINISTRATION AVAILABILITY SALES CHARGE CHARGE (CDSC) SERVICE FEE(A) FEE - ------------------------------------------------------------------------------------------------------------- Class W Limited to No. No. Yes. No. qualifying 0.25% discretionary managed accounts. - -------------------------------------------------------------------------------------------------------------
(a) For Class A, Class B, Class C, Class R2, Class R3 and Class W shares, each fund has adopted a plan under Rule 12b-1 of the Investment Company Act of 1940, as amended, that allows it to pay distribution and shareholder servicing-related expenses for the sale of shares. Because these fees are paid out of a fund's assets on an on-going basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of distribution (sales) or servicing charges. (b) See "Buying and Selling Shares, Sales Charges, Class B and Class C -- contingent deferred sales charge alternative" for more information on the timing of conversion of Class B shares to Class A shares. Timing will vary depending on the date of your original purchase of the Class B shares. DISTRIBUTION AND SERVICE FEES The distribution and shareholder servicing fees for Class A, Class B, Class C, Class R2, Class R3 and Class W are subject to the requirements of Rule 12b-1 under the Investment Company Act of 1940, as amended, and are used to reimburse the distributor for certain expenses it incurs in connection with distributing a fund's shares and providing services to fund shareholders. These expenses include payment of distribution and shareholder servicing fees to financial institutions that sell shares of the fund, up to 0.50% of the average daily net assets of Class R2 shares sold and held through them and up to 0.25% of the average daily net assets of Class A, Class B, Class C, Class R3 and Class W shares sold and held through them. For Class A, Class B, Class R2, Class R3 and Class W shares, the distributor begins to pay these fees immediately after purchase. For Class C shares, the distributor begins to pay these fees one year after purchase. Financial institutions also receive distribution fees up to 0.75% of the average daily net assets of Class C shares sold and held through them, which the distributor begins to pay one year after purchase. For Class B shares, and, for the first year after sale only, for Class C shares, the fund's distributor retains the distribution fee of up to 0.75% in order to finance the payment of sales commissions to financial institutions that sell Class B shares, and to pay for other distribution related expenses. Financial institutions may compensate their financial advisors with the shareholder servicing and distribution fees paid to them by the distributor. PLAN ADMINISTRATION FEE Class R2, Class R3 and Class R4 pay an annual plan administration services fee for the provision of various administrative, recordkeeping, communication and educational services. The fee for Class R2, Class R3 and Class R4 is equal on an annual basis to 0.25% of assets attributable to the respective class. DETERMINING WHICH CLASS OF SHARES TO PURCHASE CLASS A, CLASS B AND CLASS C SHARES If your investments in RiverSource funds total $100,000 or more, Class A shares may be the better option because the sales charge is reduced for larger purchases. If you invest less than $100,000, consider how long you plan to hold your shares. Class B shares have a higher annual distribution fee than Class A shares and a CDSC for six years. Class B shares convert to Class A shares in the ninth year of ownership. Class B shares purchased through reinvested dividends and distributions also will convert to Class A shares in the same proportion as the other Class B shares. Class C shares also have a higher annual distribution fee than Class A shares. Class C shares have no sales charge if you hold the shares for longer than one year. Unlike Class B shares, Class C shares do not convert to Class A. As a result, you will pay a distribution fee for as long as you hold Class C shares. If you choose a deferred sales charge option (Class B or Class C), you should consider the length of time you intend to hold your shares. To help you determine which investment is best for you, consult your financial institution. CLASS I SHARES. The following eligible investors may purchase Class I shares: - - Any fund distributed by RiverSource Distributors, Inc., if the fund seeks to achieve its investment objective by investing primarily in shares of the fund and other RiverSource funds. Class I shares may be purchased, sold or exchanged only through the distributor or an authorized financial institution. CLASS R SHARES. The following eligible institutional investors may purchase Class R2, Class R3, Class R4 and Class R5 shares: - - Qualified employee benefit plans. RIVERSOURCE FUNDS -- PROXY STATEMENT C.5 - - Trust companies or similar institutions, and charitable organizations that meet the definition in Section 501(c)(3) of the Internal Revenue Code. - - Non-qualified deferred compensation plans whose participants are included in a qualified employee benefit plan described above. - - State sponsored college savings plans established under Section 529 of the Internal Revenue Code. - - Health Savings Accounts (HSAs) created pursuant to public law 108-173. Additionally, if approved by the distributor, the following eligible institutional investors may purchase Class R5 shares: - - Institutional or corporate accounts above a threshold established by the distributor (currently $1 million per fund or $10 million in all RiverSource funds). - - Bank Trusts departments. Class R shares generally are not available to retail non-retirement accounts, traditional and Roth IRAs, Coverdell Educational Savings Accounts, SEPs, SAR-SEPs, SIMPLE IRAs and individual 403(b) plans. Class R shares may be purchased, sold or exchanged only through the distributor or an authorized financial institution. CLASS W SHARES. The following eligible investors may purchase Class W shares: - - Investors purchasing through authorized investment programs managed by investment professionals, including discretionary managed account programs. Class W shares may be purchased, sold or exchanged only through the distributor or an authorized financial institution. Shares originally purchased in a discretionary managed account may continue to be held in Class W outside of a discretionary managed account, but no additional Class W purchases may be made and no exchanges to Class W shares of another fund may be made outside of a discretionary managed account. IN ADDITION, FOR CLASS I, CLASS R AND CLASS W SHARES, THE DISTRIBUTOR, IN ITS SOLE DISCRETION, MAY ACCEPT INVESTMENTS FROM OTHER PURCHASERS NOT LISTED ABOVE. For more information, see the Merger SAI. SALES CHARGES CLASS A -- INITIAL SALES CHARGE ALTERNATIVE Your purchase price for Class A shares is generally the net asset value (NAV) plus a front-end sales charge. The distributor receives the sales charge and re-allows a portion of the sales charge to the financial institution through which you purchased the shares. The distributor retains the balance of the sales charge. Sales charges vary depending on the amount of your purchase. SALES CHARGE* FOR CLASS A SHARES:
MAXIMUM AS A % OF AS A % OF RE-ALLOWANCE AS A % OF PURCHASE PRICE** NET AMOUNT INVESTED PURCHASE PRICE ------------------------------------------------------------------------------ FIXED FIXED FIXED EQUITY INCOME EQUITY INCOME EQUITY INCOME TOTAL MARKET VALUE FUNDS FUNDS FUNDS FUNDS FUNDS FUNDS - ------------------------------------------------------------------------------------------------------------------------------ Up to $49,999 5.75% 4.75% 6.10% 4.99% 5.00% 4.00% $50,000 -- $99,999 4.75 4.25 4.99 4.44 4.00 3.50 $100,000 -- $249,999 3.50 3.50 3.63 3.63 3.00 3.00 $250,000 -- $499,999 2.50 2.50 2.56 2.56 2.15 2.15 $500,000 -- $999,999 2.00 2.00 2.04 2.04 1.75 1.75 $1,000,000 or more 0.00 0.00 0.00 0.00 0.00*** 0.00***
* Because of rounding in the calculation of the offering price, the portion of the sales charge retained by the distributor may vary and the actual sales charge you pay may be more or less than the sales charge calculated using these percentages. ** Purchase price includes the sales charge. ***Although there is no sales charge for purchases with a total market value over $1,000,000, and therefore no re-allowance, the distributor may pay a financial institution the following: a sales commission of up to 1.00% for a sale with a total market value of $1,000,000 to $2,999,999; a sales commission up to 0.50% for a sale of $3,000,000 to $9,999,999; and a sales commission up to 0.25% for a sale of $10,000,000 or more. C.6 RIVERSOURCE FUNDS -- PROXY STATEMENT INITIAL SALES CHARGE -- RIGHTS OF ACCUMULATION. You may be able to reduce the sales charge on Class A shares, based on the combined market value of your accounts. The current market values of the following investments are eligible to be added together for purposes of determining the sales charge on your purchase: - - Your current investment in a fund; and - - Previous investments you and members of your primary household group have made in Class A, Class B or Class C shares in the fund and other RiverSource funds, provided your investment was subject to a sales charge. Your primary household group consists of you, your spouse or domestic partner and your unmarried children under age 21 sharing a mailing address. The following accounts are eligible to be included in determining the sales charge on your purchase: - - Individual or joint accounts; - - Roth and traditional IRAs, SEPs, SIMPLEs and TSCAs, provided they are invested in Class A, Class B or Class C shares that were subject to a sales charge; - - UGMA/UTMA accounts for which you, your spouse, or your domestic partner is parent or guardian of the minor child; - - Revocable trust accounts for which you or a member of your primary household group, individually, is the beneficial owner/grantor; - - Accounts held in the name of your, your spouse's, or your domestic partner's sole proprietorship or single owner limited liability company or S corporation; and - - Qualified retirement plan assets, provided that you are the sole owner of the business sponsoring the plan, are the sole participant (other than a spouse) in the plan, and have no intention of adding participants to the plan. The following accounts are NOT eligible to be included in determining the sales charge on your purchase: - - Accounts of pension and retirement plans with multiple participants, such as 401(k) plans (which are combined to reduce the sales charge for the entire pension or retirement plan and therefore are not used to reduce the sales charge for your individual accounts); - - Investments in Class A shares where the sales charge is waived, for example, purchases through wrap accounts; - - Investments in Class D, Class E, Class I, Class R2, Class R3, Class R4, Class R5, Class W or Class Y shares; - - Investments in 529 plans, donor advised funds, variable annuities, variable life insurance products, wrap accounts or managed separate accounts; and - - Charitable and irrevocable trust accounts. If you purchase RiverSource fund shares through different financial institutions, and you want to include those assets toward a reduced sales charge, you must inform your financial institution in writing about the other accounts when placing your purchase order. Contact your financial institution to determine what information is required. Unless you provide your financial institution in writing with information about all of the accounts that may count toward a sales charge reduction, there can be no assurance that you will receive all of the reductions for which you may be eligible. You should request that your financial institution provide this information to the fund when placing your purchase order. For more information on rights of accumulation, please see the Merger SAI. INITIAL SALES CHARGE -- LETTER OF INTENT (LOI). Generally, if you intend to invest $50,000 or more over a period of 13 months or less, you may be able to reduce the front-end sales charges for investments in Class A shares by completing and filing a LOI form. The LOI becomes effective only after the form is processed in good order by the fund. An LOI can be backdated up to a maximum of 90 days. If the LOI is backdated, you may include prior investments in Class A shares that were charged a front-end sales load toward the LOI commitment amount. If the LOI is backdated, the 13-month period begins on the date of the earliest purchase included in the LOI. Holdings More than 90 Days Old. Purchases made more than 90 days before your LOI is processed by the fund will not be counted toward the commitment amount of the LOI and cannot be used as the starting point for the LOI. While these purchases cannot be included in an LOI, they may help you obtain a reduced sales charge on future purchases as described in "Initial Sales Charge -- Rights of Accumulation." Notification Obligation. You must request the reduced sales charge when you buy shares. If you do not complete and file the LOI form, or do not request the reduced sales charge at the time of purchase, you will not be eligible for the reduced sales charge. You should request that your financial institution provide this information to the fund when placing your purchase order. For more details on LOIs, please contact your financial institution or see the Merger SAI. RIVERSOURCE FUNDS -- PROXY STATEMENT C.7 INITIAL SALES CHARGE -- WAIVERS OF THE SALES CHARGE FOR CLASS A SHARES. Sales charges do not apply to: - - current or retired Board members, officers or employees of RiverSource funds or RiverSource Investments or its affiliates, their spouses or domestic partners, children, parents and their spouse's or domestic partner's parents. - - current or retired Ameriprise Financial Services, Inc. (Ameriprise Financial Services) financial advisors, employees of financial advisors, their spouses or domestic partners, children, parents and their spouse's or domestic partner's parents. - - registered representatives and other employees of financial institutions having a selling agreement with the distributor, including their spouses, domestic partners, children, parents and their spouse's or domestic partner's parents. - - portfolio managers employed by subadvisers of the RiverSource funds, including their spouses or domestic partners, children, parents and their spouse's or domestic partner's parents. - - qualified employee benefit plans offering participants daily access to RiverSource funds. Eligibility must be determined in advance. For assistance, please contact your financial institution. - - direct rollovers from qualified employee benefit plans, provided that the rollover involves a transfer of Class R or Class Y shares in a fund to Class A shares in the same fund. - - purchases made: - with dividend or capital gain distributions from a fund or from the same class of another RiverSource fund; - through or under a wrap fee product or other investment product sponsored by a financial institution having a selling agreement with the distributor; - through state sponsored college savings plans established under Section 529 of the Internal Revenue Code; - through bank trust departments. - - shareholders whose original purchase was in a Strategist fund merged into a RiverSource fund in 2000. The distributor may, in its sole discretion, authorize the waiver of sales charges for additional purchases or categories of purchases. Policies related to reducing or waiving the sales charge may be modified or withdrawn at any time. Unless you provide your financial institution with information in writing about all of the factors that may count toward a waiver of the sales charge, there can be no assurance that you will receive all of the waivers for which you may be eligible. You should request that your financial institution provide this information to the fund when placing your purchase order. Because the current prospectus is available on RiverSource Investment's website free of charge, RiverSource Investments does not disclose this information separately on the website. CLASS B AND CLASS C -- CONTINGENT DEFERRED SALES CHARGE ALTERNATIVE FOR CLASS B, the CDSC is based on the sale amount and the number of years between purchase and sale. The following table shows how CDSC percentages on sales decline:
IF THE SALE IS MADE DURING THE: THE CDSC PERCENTAGE RATE IS:* First year 5% Second year 4% Third year 4% Fourth year 3% Fifth year 2% Sixth year 1% Seventh or eighth year 0%
* Because of rounding in the calculation, the portion of the CDSC retained by the distributor may vary and the actual CDSC you pay may be more or less than the CDSC calculated using these percentages. Although there is no front-end sales charge when you buy Class B shares, the distributor pays a sales commission of 4% to financial institutions that sell Class B shares. A portion of this commission may, in turn, be paid to your financial advisor. The distributor receives any CDSC imposed when you sell your Class B shares. Purchases made prior to May 21, 2005 age on a calendar year basis. Purchases made beginning May 21, 2005 age on a daily basis. For example, a purchase made on Nov. 12, 2004 completed its first year on Dec. 31, 2004 under calendar year aging. However, a purchase made on Nov. 12, 2005 completed its first year on Nov. 11, 2006 under daily aging. C.8 RIVERSOURCE FUNDS -- PROXY STATEMENT Class B shares purchased prior to May 21, 2005 will convert to Class A shares in the ninth calendar year of ownership. Class B shares purchased beginning May 21, 2005 will convert to Class A shares one month after the completion of the eighth year of ownership. FOR CLASS C, a 1% CDSC may be charged if you sell your shares within one year after purchase. Although there is no front-end sales charge when you buy Class C shares, the distributor pays a sales commission of 1% to financial institutions that sell Class C shares. A portion of this commission may, in turn, be paid to your financial advisor. The distributor receives any CDSC imposed when you sell your Class C shares. For both Class B and Class C, if the amount you sell causes the value of your investment to fall below the cost of the shares you have purchased, the CDSC will be based on the lower of the cost of those shares purchased or market value. Because the CDSC is imposed only on sales that reduce your total purchase payments, you do not have to pay a CDSC on any amount that represents appreciation in the value of your shares, income earned by your shares, or capital gains. In addition, the CDSC on your sale, if any, will be based on your oldest purchase payment. The CDSC on the next amount sold will be based on the next oldest purchase payment. EXAMPLE Assume you had invested $10,000 in Class B shares and that your investment had appreciated in value to $12,000 after 3 1/2 years, including reinvested dividends and capital gain distributions. You could sell up to $2,000 worth of shares without paying a CDSC ($12,000 current value less $10,000 purchase amount). If you sold $2,500 worth of shares, the CDSC would apply to the $500 representing part of your original purchase price. The CDSC rate would be 3% because the sale was made during the fourth year after the purchase. CDSC -- WAIVERS OF THE CDSC FOR CLASS B SHARES. The CDSC will be waived on sales of shares: - - in the event of the shareholder's death; - - held in trust for an employee benefit plan; or - - held in IRAs or certain qualified plans, such as Keogh plans, tax-sheltered custodial accounts or corporate pension plans, provided that the shareholder is: - at least 59 1/2 years old AND - taking a retirement distribution (if the sale is part of a transfer to an IRA or qualified plan, or a custodian-to-custodian transfer, the CDSC will not be waived) OR - selling under an approved substantially equal periodic payment arrangement. CDSC -- WAIVERS OF THE CDSC FOR CLASS C SHARES. The CDSC will be waived on sales of shares in the event of the shareholder's death. CLASS I, CLASS R2, CLASS R3, CLASS R4, CLASS R5 AND CLASS W -- NO SALES CHARGE. For Class I, Class R2, Class R3, Class R4, Class R5 and Class W, there is no initial sales charge or CDSC. OPENING AN ACCOUNT Financial institutions are required by law to obtain certain personal information from each person who opens an account in order to verify the identity of the person. As a result, when you open an account you will be asked to provide your name, permanent street address, date of birth, and Social Security or Employer Identification number. You may also be asked for other identifying documents or information. If you do not provide this information, the financial institution through which you are investing in the fund may not be able to open an account for you. If the financial institution through which you are investing in the fund is unable to verify your identity, your account may be closed, or other steps may be taken, as deemed appropriate. When you buy shares, your order will be priced at the next NAV calculated after your order is accepted by the fund or an authorized financial institution. Your financial institution may establish and maintain your account directly or it may establish and maintain your account with the distributor. The distributor may appoint servicing agents to accept purchase orders and to accept exchange (and sale) orders on its behalf. Accounts maintained by the distributor will be supported by the fund's transfer agent. METHODS OF PURCHASING SHARES These methods of purchasing shares apply to Class A, Class B, and Class C shares. THROUGH AN ACCOUNT ESTABLISHED WITH YOUR FINANCIAL INSTITUTION ALL REQUESTSThe financial institution through which you buy shares may have different policies not described in this prospectus, including different minimum investment amounts and minimum account balances. - -------------------------------------------------------------------------------- RIVERSOURCE FUNDS -- PROXY STATEMENT C.9 METHODS OF PURCHASING SHARES (CONTINUED) THROUGH AN ACCOUNT ESTABLISHED WITH THE FUND BY MAIL The financial institution through which you buy shares may establish an account directly with the fund. To establish an account in this fashion, complete a RiverSource funds account application with your financial advisor or investment professional, and mail the account application to the address below. Account applications may be requested by calling (888) 791-3380. Make your check payable to the fund. The fund does not accept cash, credit card convenience checks, money orders, traveler's checks, starter checks, third or fourth party checks, or other cash equivalents. Mail your check and completed application to: REGULAR MAIL RIVERSOURCE INVESTMENTS (FUNDS) P.O. BOX 8041 BOSTON, MA 02266-8041 EXPRESS MAIL RIVERSOURCE INVESTMENTS (FUNDS) C/O BFDS 30 DAN ROAD CANTON, MA 02021-2809 If you already have an account, include your name, account number and the name of the fund and class of shares along with your check. You can make scheduled investments in the fund by moving money from your checking account or savings account. See the Minimum Investment and Account Balance chart below for more information regarding scheduled investment plans. - -------------------------------------------------------------------------------- BY WIRE OR ACH Fund shares purchased through the distributor may be paid for by federal funds wire. Before sending a wire, call (888) 791-3380 to notify the distributor of the wire and to receive further instructions. If you are establishing an account with a wire purchase, you are required to send a signed account application to the address above. Please include the wire control number or your new account number on the application. Your bank or financial institution may charge additional fees for wire transactions. - -------------------------------------------------------------------------------- BY EXCHANGE Call (888) 791-3380 or send signed written instructions to the address above. - -------------------------------------------------------------------------------- MINIMUM INVESTMENT AND ACCOUNT BALANCE
FOR ALL FUNDS, CLASSES AND ACCOUNTS EXCEPT THOSE LISTED TO THE TAX QUALIFIED RIGHT (NONQUALIFIED) ACCOUNTS CLASS W - --------------------------------------------------------------------------------------------------------------------------------- INITIAL INVESTMENT $2,000 $1,000 $500 - --------------------------------------------------------------------------------------------------------------------------------- ADDITIONAL INVESTMENTS $100 $100 None - --------------------------------------------------------------------------------------------------------------------------------- ACCOUNT BALANCE* $300 None $500
* If your fund account balance falls below the minimum account balance for any reason, including a market decline, you may be asked to increase it to the minimum account balance or establish a scheduled investment plan. If you do not do so within 30 days, your shares may be automatically redeemed and the proceeds mailed to you. - -------------------------------------------------------------------------------- C.10 RIVERSOURCE FUNDS -- PROXY STATEMENT MINIMUM INVESTMENT AND ACCOUNT BALANCE -- SCHEDULED INVESTMENT PLANS
FOR ALL FUNDS, CLASSES AND ACCOUNTS EXCEPT THOSE LISTED TO THE TAX QUALIFIED RIGHT (NONQUALIFIED) ACCOUNTS CLASS W - --------------------------------------------------------------------------------------------------------------------------------- INITIAL INVESTMENT $100 $100 $500 - --------------------------------------------------------------------------------------------------------------------------------- ADDITIONAL INVESTMENTS $100 $50 None - --------------------------------------------------------------------------------------------------------------------------------- ACCOUNT BALANCE** None None $500
** If your fund account balance is below the minimum initial investment described above, you must make payments at least monthly. - -------------------------------------------------------------------------------- These minimums may be waived for accounts that are managed by an investment professional, for accounts held in approved discretionary or non-discretionary wrap programs, for accounts that are a part of an employer-sponsored retirement plan, or for other account types if approved by the distributor. The fund reserves the right to modify its minimum account requirements at any time, with or without prior notice. Please contact your financial institution for information regarding wire or electronic funds transfer. EXCHANGING OR SELLING SHARES You may exchange or sell shares by having your financial institution process your transaction. If your account is maintained directly with your financial institution, you must contact that financial institution to exchange or sell shares of the fund. If your account was established with the distributor, there are a variety of methods you may use to exchange or sell shares of the fund. WAYS TO REQUEST AN EXCHANGE OR SALE OF SHARES ACCOUNT ESTABLISHED WITH YOUR FINANCIAL INSTITUTION ALL REQUESTSYou can exchange or sell shares by having your financial institution process your transaction. The financial institution through which you purchased shares may have different policies not described in this prospectus, including different transaction limits, exchange policies and sale procedures. - -------------------------------------------------------------------------------- ACCOUNT ESTABLISHED WITH THE FUND BY MAIL Mail your exchange or sale request to: REGULAR MAIL RIVERSOURCE INVESTMENTS (FUNDS) P.O. BOX 8041 BOSTON, MA 02266-8041 EXPRESS MAIL RIVERSOURCE INVESTMENTS (FUNDS) C/O BFDS 30 DAN ROAD CANTON, MA 02021-2809 Include in your letter: - your name - the name of the fund(s) - your account number - the class of shares to be exchanged or sold - your Social Security number or Employer Identification number - the dollar amount or number of shares you want to exchange or sell - specific instructions regarding delivery or exchange destination - signature(s) of registered account owner(s) - any special documents the transfer agent may require in order to process your order Corporate, trust or partnership accounts may need to send additional documents. Payment will be mailed to the address of record and made payable to the names listed on the account, unless your request specifies differently and is signed by all owners. - -------------------------------------------------------------------------------- RIVERSOURCE FUNDS -- PROXY STATEMENT C.11 WAYS TO REQUEST AN EXCHANGE OR SALE OF SHARES (CONTINUED) ACCOUNT ESTABLISHED WITH THE FUND (CONT.) BY MAIL (CONT.) A Medallion Signature Guarantee is required if: - Amount is over $50,000. - You want your check made payable to someone other than yourself. - Your address has changed within the last 30 days. - You want the check mailed to an address other than the address of record. - You want the proceeds sent to a bank account not on file. - You are the beneficiary of the account and the account owner is deceased (additional documents may be required). A Medallion Signature Guarantee assures that a signature is genuine and not a forgery. The financial institution providing the Guarantee is financially liable for the transaction if the signature is a forgery. Eligible guarantors include commercial banks, trust companies, savings associations, and credit unions as defined by the Federal Deposit Insurance Act. Note: A guarantee from a notary public is not acceptable. NOTE: Any express mail delivery charges you pay will vary depending on domestic or international delivery instructions. - -------------------------------------------------------------------------------- BY TELEPHONECall (888) 791-3380. Unless you elect not to have telephone exchange and sale privileges, they will automatically be available to you. Reasonable procedures will be used to confirm authenticity of telephone exchange or sale requests. Telephone privileges may be modified or discontinued at any time. Telephone exchange and sale privileges automatically apply to all accounts except custodial, corporate or qualified retirement accounts. You may request that these privileges NOT apply by writing to the address above. Payment will be mailed to the address of record and made payable to the names listed on the account. Telephone sale requests are limited to $100,000 per day. - -------------------------------------------------------------------------------- BY WIRE OR ACH You can wire money from your fund account to your bank account. Make sure we have your bank account information on file. If we do not have this information, you will need to send written instructions with your bank's name and a voided check or savings account deposit slip. Call (888) 791-3380 or send a letter of instruction, with a Medallion Signature Guarantee if required, to the address above. A service fee may be charged against your account for each wire sent. Minimum amount: $100 Your bank or financial institution may charge additional fees for wire transactions. - -------------------------------------------------------------------------------- BY SCHEDULED PAYOUT PLAN You may elect to receive regular periodic payments through an automatic sale of shares. See the Merger SAI for more information. - -------------------------------------------------------------------------------- IMPORTANT: Payments sent by a bank authorization or check that are not guaranteed may take up to ten days to clear. This may cause your sale request to fail to process if the requested amount includes unguaranteed funds. EXCHANGES Generally, you may exchange your fund shares for shares of the same class of any other publicly offered RiverSource fund without a sales charge. For complete information on the fund you are exchanging into, including fees and expenses, read that fund's prospectus carefully. Your exchange will be priced at the next NAV calculated after your transaction request is received in good order. MARKET TIMING IS FREQUENT OR SHORT-TERM TRADING BY CERTAIN SHAREHOLDERS INTENDED TO PROFIT AT THE EXPENSE OF OTHER SHAREHOLDERS BY SELLING SHARES OF A FUND SHORTLY AFTER PURCHASE. MARKET TIMING MAY ADVERSELY IMPACT A FUND'S PERFORMANCE BY PREVENTING THE INVESTMENT MANAGER FROM FULLY INVESTING THE ASSETS OF THE FUND, DILUTING THE VALUE OF SHARES HELD BY LONG-TERM SHAREHOLDERS, OR INCREASING THE FUND'S TRANSACTION COSTS. FUNDS THAT INVEST IN SECURITIES THAT TRADE INFREQUENTLY MAY BE VULNERABLE TO MARKET TIMERS WHO SEEK TO TAKE ADVANTAGE OF INEFFICIENCIES IN THE SECURITIES MARKETS. FUNDS THAT INVEST IN SECURITIES THAT TRADE ON OVERSEAS SECURITIES MARKETS MAY BE VULNERABLE TO MARKET TIMERS WHO SEEK TO TAKE ADVANTAGE OF CHANGES IN THE VALUES OF SECURITIES BETWEEN THE CLOSE OF OVERSEAS MARKETS AND THE CLOSE OF U.S. MARKETS, WHICH IS GENERALLY THE TIME AT WHICH A FUND'S NAV IS CALCULATED. TO THE C.12 RIVERSOURCE FUNDS -- PROXY STATEMENT EXTENT THAT A FUND HAS SIGNIFICANT HOLDINGS OF SMALL CAP STOCKS, HIGH YIELD BONDS, TAX-EXEMPT SECURITIES OR FOREIGN SECURITIES, THE RISKS OF MARKET TIMING MAY BE GREATER FOR THE FUND THAN FOR OTHER FUNDS. SEE "COMPARISON OF PRINCIPAL INVESTMENT STRATEGIES SECTION" FOR A DISCUSSION OF THE TYPES OF SECURITIES IN WHICH YOUR FUND INVESTS. SEE "VALUING FUND SHARES" FOR A DISCUSSION OF THE RIVERSOURCE FUNDS' POLICY ON FAIR VALUE PRICING, WHICH IS INTENDED, IN PART, TO REDUCE THE FREQUENCY AND EFFECT OF MARKET TIMING. THE RIVERSOURCE FUNDS' BOARDS HAVE ADOPTED A POLICY THAT IS DESIGNED TO DETECT AND DETER MARKET TIMING THAT MAY BE HARMFUL TO THE FUNDS. EACH FUND SEEKS TO ENFORCE THIS POLICY THROUGH ITS SERVICE PROVIDERS AS FOLLOWS: - - The fund tries to distinguish market timing from trading that it believes is not harmful, such as periodic rebalancing for purposes of asset allocation or dollar cost averaging. Under the fund's procedures, there is no set number of transactions in the fund that constitutes market timing. Even one purchase and subsequent sale by related accounts may be market timing. Generally, the fund seeks to restrict the exchange privilege of an investor who makes more than three exchanges into or out of the fund in any 90-day period. Accounts held by a retirement plan or a financial institution for the benefit of its participants or clients, which typically engage in daily transactions, are not subject to this limit, although the fund seeks the assistance of financial institutions in applying similar restrictions on the sub-accounts of their participants or clients. - - If an investor's trading activity is determined to be market timing or otherwise harmful to existing shareholders, the fund reserves the right to modify or discontinue the investor's exchange privilege or reject the investor's purchases or exchanges, including purchases or exchanges accepted by a financial institution. The fund may treat accounts it believes to be under common control as a single account for these purposes, although it may not be able to identify all such accounts. - - Although the fund does not knowingly permit market timing, it cannot guarantee that it will be able to identify and restrict all short-term trading activity. The fund receives purchase and sale orders through financial institutions where market timing activity may not always be successfully detected. Other exchange policies: - - Exchanges must be made into the same class of shares of the new fund. - - Exchanges into RiverSource Tax-Exempt Money Market Fund may be made only from Class A shares. - - If your exchange creates a new account, it must satisfy the minimum investment amount for new purchases. - - Once the fund receives your exchange request, you cannot cancel it. - - Shares of the new fund may not be used on the same day for another exchange or sale. - - Shares of Class W originally purchased, but no longer held in a discretionary managed account, may not be exchanged for Class W shares of another fund. You may continue to hold these shares in the fund. Changing your investment to a different fund will be treated as a sale and purchase, and you will be subject to applicable taxes on the sale and sales charges on the purchase of the new fund. SELLING SHARES You may sell your shares at any time. The payment will be sent within seven days after your request is received in good order. When you sell shares, the amount you receive may be more or less than the amount you invested. Your sale price will be the next NAV calculated after your request is received in good order, minus any applicable CDSC. REPURCHASES. You can change your mind after requesting a sale and use all or part of the sale proceeds to purchase new shares in the same account, fund and class from which you sold. If you reinvest in Class A, you will purchase the new shares at NAV, up to the amount of the sale proceeds, instead of paying a sales charge on the date of a new purchase. If you reinvest in Class B or Class C, any CDSC you paid on the amount you are reinvesting also will be reinvested. In order for you to take advantage of this repurchase waiver, you must notify your financial institution within 90 days of the date your sale request was processed. Contact your financial institution for information on required documentation. The repurchase privilege may be modified or discontinued at any time and use of this option may have tax consequences. Each fund reserves the right to redeem in kind. For more details and a description of other sales policies, please see the Merger SAI. VALUING FUND SHARES For classes of shares sold with an initial sales charge, the public offering or purchase price is the net asset value plus the sales charge. For funds or classes of shares sold without an initial sales charge, the public offering price is the NAV. Orders in good form are priced at the NAV next determined after you place your order. Good form or good order means that your instructions have been received in the form required by the fund. This may include, for example, providing the fund name and account number, the amount of the transaction and all required signatures. For more information, contact your financial institution. RIVERSOURCE FUNDS -- PROXY STATEMENT C.13 The NAV is the value of a single share of a fund. The NAV is determined by dividing the value of a fund's assets, minus any liabilities, by the number of shares outstanding. The NAV is calculated as of the close of business on the New York Stock Exchange (NYSE), normally 4:00 p.m. Eastern time, on each day that the NYSE is open. Securities are valued primarily on the basis of market quotations and floating rate loans are valued primarily on the basis of indicative bids. Both market quotations and indicative bids are obtained from outside pricing services approved and monitored under procedures adopted by the Board. Certain short-term securities with maturities of 60 days or less are valued at amortized cost. When reliable market quotations or indicative bids are not readily available, investments are priced at fair value based on procedures adopted by the Board. These procedures are also used when the value of an investment held by a fund is materially affected by events that occur after the close of a securities market but prior to the time as of which the fund's NAV is determined. Valuing investments at fair value involves reliance on judgment. The fair value of an investment is likely to differ from any available quoted or published price. To the extent that a fund has significant holdings of high yield bonds, floating rate loans, tax-exempt securities, foreign securities or small cap stocks that may trade infrequently, fair valuation may be used more frequently than for other funds. The funds use an unaffiliated service provider to assist in determining fair values for foreign securities. Foreign investments are valued in U.S. dollars. Some of a fund's securities may be listed on foreign exchanges that trade on weekends or other days when the fund does not price its shares. In that event, the NAV of the fund's shares may change on days when shareholders will not be able to purchase or sell the fund's shares. DISTRIBUTIONS AND TAXES As a shareholder you are entitled to your share of your fund's net income and net gains. Each fund distributes dividends and capital gains to qualify as a regulated investment company and to avoid paying corporate income and excise taxes. DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS Your fund's net investment income is distributed to you as dividends. Dividends may be composed of qualifying dividend income, which is eligible for preferential tax rates under current tax law, as well as other ordinary dividend income, which may include non-qualifying dividends, interest income and short-term capital gains. Because of the types of income earned by fixed income funds, it is unlikely the funds will distribute qualifying dividend income. Capital gains are realized when a security is sold for a higher price than was paid for it. Each realized capital gain or loss is long-term or short-term depending on the length of time the fund held the security. Realized capital gains and losses offset each other. The fund offsets any net realized capital gains by any available capital loss carryovers. Net short-term capital gains are included in net investment income and are taxable as ordinary income. Net realized long-term capital gains, if any, are distributed by the end of the calendar year as capital gain distributions. REINVESTMENTS Dividends and capital gain distributions are automatically reinvested in additional shares in the same class of the fund, unless you request distributions in cash. The financial institution through which you purchased shares may have different policies. Distributions are reinvested at the next calculated NAV after the distribution is paid. If you choose cash distributions, you will receive cash only for distributions declared after your request has been processed. TAXES If you buy shares shortly before the record date of a distribution, you may pay taxes on money earned by the fund before you were a shareholder. You will pay the full pre-distribution price for the shares, then receive a portion of your investment back as a distribution, which may be taxable. For tax purposes, an exchange is considered a sale and purchase, and may result in a gain or loss. A sale is a taxable transaction. Generally, if you sell shares for less than their cost, the difference is a capital loss or if you sell shares for more than their cost, the difference is a capital gain. Your gain may be short term (for shares held for one year or less) or long term (for shares held for more than one year). You may not create a tax loss, based on paying a sales charge, by exchanging shares before the 91(st) day after the day of purchase. If you buy Class A shares and exchange into another fund before the 91(st) day after the day of purchase, you may not include the sales charge in your calculation of tax gain or loss on the sale of the first fund you purchased. The sales charge may be included in the calculation of your tax gain or loss on a subsequent sale of the second fund you purchased. For more information, see the Merger SAI. FOR TAXABLE FUNDS. Distributions are subject to federal income tax and may be subject to state and local taxes in the year they are declared. You must report distributions on your tax returns, even if they are reinvested in additional shares. C.14 RIVERSOURCE FUNDS -- PROXY STATEMENT Distributions of shares not held in IRAs or other retirement accounts are subject to federal income tax and may be subject to state and local taxes in the year they are declared. You must report distributions on your tax returns, even if they are reinvested in additional shares. Income received by a fund may be subject to foreign tax and withholding. Tax conventions between certain countries and the U.S. may reduce or eliminate these taxes. Shares held in an IRA or qualified retirement account are generally subject to different tax rules. Taking a distribution from your IRA or qualified retirement plan may subject you to federal taxes, penalties and reporting requirements. Please consult your tax advisor. FOR TAX-EXEMPT FUNDS. Dividends distributed from interest earned on tax-exempt securities (exempt-interest dividends) are exempt from federal income taxes but may be subject to state and local taxes. Dividends distributed from capital gain distributions and other income earned are not exempt from federal income taxes. Distributions are taxable in the year the fund declares them regardless of whether you take them in cash or reinvest them. Interest on certain private activity bonds is a preference item for purposes of the individual and corporate alternative minimum taxes. To the extent the fund earns such income, it will flow through to its shareholders and may be taxable to those shareholders who are subject to the alternative minimum tax. See the Merger SAI for more information. Because interest on municipal bonds and notes is tax-exempt for federal income tax purposes, any interest on money you borrow that is used directly or indirectly to purchase fund shares is not deductible on your federal income tax return. You should consult a tax advisor regarding its deductibility for state and local income tax purposes. FOR STATE TAX-EXEMPT FUNDS. The Kentucky Court of Appeals recently held that Kentucky's tax exemption of interest on its own bonds and its taxation of interest on the bonds of other states is illegal. The United States Supreme Court (Supreme Court) has granted certiorari and if the Supreme Court affirms this decision or other state courts reach the same conclusion with respect to the states in which the State Tax-Exempt Funds invest, this decision could have implications for the tax treatment of the bonds held by the State Tax-Exempt Funds. For additional information regarding the Minnesota Tax-Exempt Fund, please see "Taxes" in the Merger SAI. REITs often do not provide complete tax information until after the calendar year-end; generally mid to late January and continuing through early February. Consequently, if your fund has significant investments in REITs, you may not receive your Form 1099-DIV until February. Other RiverSource funds tax statements are mailed in January. Certain derivative instruments subject the Fund to special tax rules, the effect of which may be to accelerate income to the Fund, defer Fund losses, cause adjustments in the holding periods of Fund securities, convert capital gains into ordinary income and convert short-term capital losses into long-term capital losses. These rules could therefore affect the amount, timing and character of distributions to shareholders. IMPORTANT: This information is a brief and selective summary of some of the tax rules that apply to an investment in a fund. Because tax matters are highly individual and complex, you should consult a qualified tax advisor. GENERAL INFORMATION AVAILABILITY AND TRANSFERABILITY OF FUND SHARES Please consult your financial institution to determine availability of RiverSource funds. Currently, RiverSource funds may be purchased or sold through affiliated broker-dealers of RiverSource Investments and through certain unaffiliated financial institutions. If you set up an account at a financial institution that does not have, and is unable to obtain, a selling agreement with the distributor of the RiverSource funds, you will not be able to transfer RiverSource fund holdings to that account. In that event, you must either maintain your RiverSource fund holdings with your current financial institution, find another financial institution with a selling agreement, or sell your shares, paying any applicable CDSC. Please be aware that transactions in taxable accounts are taxable events and may result in income tax liability. ADDITIONAL SERVICES AND COMPENSATION In addition to acting as the fund's investment manager, RiverSource Investments and its affiliates also receive compensation for providing other services to the funds. Administration Services. Ameriprise Financial, 200 Ameriprise Financial Center, Minneapolis, Minnesota 55474, provides or compensates others to provide administrative services to the RiverSource funds. These services include administrative, accounting, treasury, and other services. Fees paid by a fund for these services are included under "Other expenses" in the expense table under "Fees and Expenses." Custody Services. Ameriprise Trust Company, 200 Ameriprise Financial Center, Minneapolis, Minnesota 55474 (the custodian or Ameriprise Trust Company), provides custody services to all but a limited number of the RiverSource funds, for which U.S. Bank National Association provides custody services. In addition, Ameriprise Trust Company is paid for certain transaction fees RIVERSOURCE FUNDS -- PROXY STATEMENT C.15 and out-of-pocket expenses incurred while providing services to the funds. Fees paid by a fund for these services are included under "Other expenses" in the expense table under "Fees and Expenses." Distribution and Shareholder Services. RiverSource Distributors, Inc., 50611 Ameriprise Financial Center, Minneapolis, Minnesota 55474 (the distributor or RiverSource Distributors), provides underwriting and distribution services to the RiverSource funds. Under the Distribution Agreement and related distribution and shareholder servicing plans, the distributor receives distribution and shareholder servicing fees. The distributor may retain a portion of these fees to support its distribution and shareholder servicing activity. The distributor re-allows the remainder of these fees (or the full fee) to the financial institutions that sell fund shares and provide services to shareholders. Fees paid by a fund for these services are set forth under "Distribution (12b-1) fees" in the expense table under "Fees and Expenses." More information on how these fees are used is set forth under "Investment Options -- Classes of Shares" in Exhibit C and in the Merger SAI. The distributor also administers any sales charges paid by an investor at the time of purchase or at the time of sale. See "Shareholder Fees (fees paid directly from your investment)" under "Fees and Expenses" for the scheduled sales charge of each share class. See "Buying and Selling Shares: Sales Charges" for variations in the scheduled sales charges, and for how these sales charges are used by the distributor. See "Comparison of Other Investment Strategies and Risks" for the RiverSource funds' policy regarding directed brokerage. Plan Administration Services. Under a Plan Administration Services Agreement the fund pays for plan administration services, including services such as implementation and conversion services, account set-up and maintenance, reconciliation and account recordkeeping, education services and administration to various plan types, including 529 plans, retirement plans and Health Savings Accounts (HSAs). Fees paid by a fund for these services are included under "Other expenses" in the expense table under "Fees and Expenses." Transfer Agency Services. RiverSource Service Corporation, 734 Ameriprise Financial Center, Minneapolis, Minnesota 55474 (the transfer agent or RiverSource Service Corporation), provides or compensates others to provide transfer agency services to the RiverSource funds. The RiverSource funds pay the transfer agent a fee that varies by class, as set forth in the Merger SAI, and reimburses the transfer agent for its out-of-pocket expenses incurred while providing these transfer agency services to the funds. Fees paid by a fund for these services are included under "Other expenses" in the expense table under "Fees and Expenses." RiverSource Service Corporation pays a portion of these fees to financial institutions that provide sub-recordkeeping and other services to fund shareholders. The Merger SAI provides additional information about the services provided and the fee schedules for the transfer agent agreements. PAYMENTS TO FINANCIAL INSTITUTIONS RiverSource Investments and its affiliates may make or support additional cash payments out of their own resources to financial institutions, including inter-company allocation of resources to affiliated broker-dealers such as Ameriprise Financial Services (and its licensed representatives), in connection with selling fund shares or providing services to the fund or its shareholders. These inter-company allocations may include payment as compensation to employees of RiverSource Investments who are licensed by Ameriprise Financial Services, in respect of certain sales and solicitation activity on behalf of the funds. These payments and inter-company allocations are in addition to any 12b-1 distribution and/or shareholder service fees or other amounts paid by the fund to the distributor under distribution and shareholder servicing plans, or paid by the fund to the transfer agent under its transfer agency agreement or plan administration agreement, which fees may be used by these entities to support shareholder account maintenance, sub-accounting, recordkeeping or other services provided directly by the financial institution to shareholders or 529 and retirement plans and the plan participants. In exchange for these payments and inter-company allocations, RiverSource Investments and its affiliates may receive preferred access to registered representatives of a financial institution (for example, the ability to make presentations in branch offices or at conferences) or preferred access to customers of the financial institution (for example, the ability to advertise or directly interact with the financial institution's customers in order to sell the fund). These arrangements are sometimes referred to as "revenue sharing payments." In some cases, these arrangements may create an incentive for a financial institution or its representatives to recommend or sell shares of a fund and may create a conflict of interest between a financial institution's financial interest and its duties to its customers. Please contact the financial institution through which you are purchasing shares of the fund for details about any payments it may receive in connection with the solicitation and sale of fund shares or providing services to the fund or its shareholders. These payments and inter-company allocations are usually calculated based on a percentage of fund sales and/or as a percentage of fund assets attributable to a particular financial institution. These payments may also be negotiated based on other criteria or factors including, but not limited to, the financial institution's affiliation with the investment manager, its reputation in the industry, its ability to attract and retain assets, its access to target markets, its customer relationships and the scope and quality of services it provides. The amount of payment or inter-company allocation may vary by financial institution and by type of sale (e.g., purchases of different share classes or purchases of the fund through a qualified plan or through a wrap program), and may be significant. From time to time, RiverSource Investments and its affiliates may make other reimbursements or payments to financial institutions or their representatives including non-cash compensation, in the form of gifts of nominal value, occasional meals, C.16 RIVERSOURCE FUNDS -- PROXY STATEMENT tickets, or other entertainment, support for due diligence trips, training and educational meetings or conference sponsorships, support for recognition programs, and other forms of non-cash compensation permissible under regulations to which these financial institutions and their representatives are subject. ADDITIONAL MANAGEMENT INFORMATION MANAGER OF MANAGERS EXEMPTION. The RiverSource funds have received an order from the Securities and Exchange Commission that permits RiverSource Investments, subject to the approval of the Board, to appoint a subadviser or change the terms of a subadvisory agreement for a fund without first obtaining shareholder approval. The order permits the fund to add or change unaffiliated subadvisers or change the fees paid to subadvisers from time to time without the expense and delays associated with obtaining shareholder approval of the change. Before certain fixed income funds may rely on the order, holders of a majority of the fund's outstanding voting securities will need to approve operating the fund in this manner. There is no assurance shareholder approval will be received, and no changes will be made without shareholder approval until that time. For more information, see the Merger SAI. RiverSource Investments or its affiliates may have other relationships, including significant financial relationships, with current or potential subadvisers or their affiliates, which may create a conflict of interest. In making recommendations to the Board to appoint or to change a subadviser, or to change the terms of a subadvisory agreement, RiverSource Investments does not consider any other relationship it or its affiliates may have with a subadviser, and RiverSource Investments discloses the nature of any material relationships it has with a subadviser to the Board. AFFILIATED PRODUCTS. RiverSource Investments also serves as investment manager to RiverSource funds that provide asset-allocation services to shareholders by investing in shares of other RiverSource funds (Funds of Funds) and to discretionary managed accounts (collectively referred to as "affiliated products"). A fund may experience relatively large purchases or redemptions from the affiliated products. Although RiverSource Investments seeks to minimize the impact of these transactions by structuring them over a reasonable period of time or through other measures, a fund may experience increased expenses as it buys and sells securities to manage transactions for the affiliated products. In addition, because the affiliated products may own a substantial portion of a fund, a redemption by one or more affiliated product could cause a fund's expense ratio to increase as the fund's fixed costs would be spread over a smaller asset base. RiverSource Investments monitors expense levels and is committed to offering funds that are competitively priced. RiverSource Investments will report to the Board on the steps it has taken to manage any potential conflicts. CASH RESERVES. A fund may invest its daily cash balance in RiverSource Short-Term Cash Fund (Short-Term Cash Fund), a money market fund established for the exclusive use of the RiverSource funds and other institutional clients of RiverSource Investments. While Short-Term Cash Fund does not pay an advisory fee to RiverSource Investments, it does incur other expenses, and is expected to operate at a very low expense ratio. A fund will invest in Short-Term Cash Fund only to the extent it is consistent with the fund's investment objectives and policies. Short-Term Cash Fund is not insured or guaranteed by the FDIC or any other government agency. FUND HOLDINGS DISCLOSURE. The Board has adopted policies and procedures that govern the timing and circumstances of disclosure to shareholders and third parties of information regarding the securities owned by a fund. A description of these policies and procedures is included in the Merger SAI. LEGAL PROCEEDINGS. 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 fund is 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 fund or the ability of Ameriprise Financial or its affiliates to perform under their contracts with the fund. Information regarding certain pending and settled legal proceedings may be found in the Fund's shareholder reports and in the Merger SAI. Additionally, 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. RIVERSOURCE FUNDS -- PROXY STATEMENT C.17 THIS PAGE LEFT BLANK INTENTIONALLY EXHIBIT D COMPARISON OF ORGANIZATIONAL DOCUMENTS This document highlights the material differences between the terms of the Declaration of Trust and By-laws of RiverSource Special Tax-Exempt Series Trust ("Selling Trust") (of which each of Massachusetts Tax-Exempt Fund, Michigan Tax-Exempt Fund and Ohio Tax-Exempt Fund is a series) and the Articles of Incorporation and By-laws for RiverSource Tax-Exempt Income Series, Inc. ("Buying Corporation") (of which Tax-Exempt High Income Fund is a series).
- --------------------------------------------------------------------------------------------------------------------------------- RIVERSOURCE TAX-EXEMPT INCOME SERIES, INC. RIVERSOURCE SPECIAL TAX-EXEMPT SERIES TRUST - --------------------------------------------------------------------------------------------------------------------------------- SHAREHOLDER Under Minnesota law, a shareholder's liability to the No shareholder shall be subject to any personal LIABILITY: corporation or its creditors is limited to paying the liability whatsoever in tort, contract or amount agreed to be paid for the shares which the otherwise to any other person(s) in connection shareholder holds or has agreed to purchase. with the assets or the affairs of the Trust or of any fund. If any shareholder (or former shareholder) of the Trust shall be charged or held to be personally liable for any obligation or liability of the Trust solely by reason of being or having been a shareholder and not because of such shareholder's acts or omissions or for some other reason, the Trust (upon request by the shareholder) shall assume the defense against such charge and satisfy any judgment thereon, and the shareholder or former shareholder to be held harmless from and indemnified against all loss and expense arising from such liability. The Trustees shall use their best efforts to ensure that every note, bond, contract, instrument, certificate or undertaking made or issued by the Trustees or by any officer(s) shall give notice that the Declaration of Trust is on file with the Secretary of The Commonwealth of Massachusetts and shall recite that the obligations of such instrument are not binding upon any of them or the shareholders individually but are binding only upon the assets and property of the Trust, or the particular fund in question, as the case may be, but the omission thereof shall not operate to bind any Trustee(s), officer(s) or shareholder(s) individually, or to subject the fund assets of any fund to the obligations of any other fund. - --------------------------------------------------------------------------------------------------------------------------------- SHAREHOLDER VOTING Shareholders have the power to vote (i) for the Shareholders have power to vote (i) for the RIGHTS: election of directors; (ii) on most amendments to the election or removal of Trustees; (ii) for the corporation's articles of incorporation and on certain approval or termination of any contract as to amendments to the corporation's bylaws; (iii) on which shareholder approval is required by the certain proposed mergers and exchanges to which the 1940 Act; (iii) with respect to any termination corporation is a party; (iv) on the proposed sale of or reorganization of the Trust or any fund; (iv) all or substantially all of the corporation's property with respect to any amendment of the Declaration and assets not in the usual and regular course of its of Trust; (v) to the same extent as the business; and (v) on the proposed dissolution of the stockholders of a Massachusetts business corporation. corporation as to whether or not a court action, proceeding or claim should or should not be Each shareholder of record entitled to vote at a brought or maintained derivatively or as a class shareholder meeting shall be entitled to one vote for action on behalf of the Trust or any fund, or the each dollar of net asset value (number of shares owned shareholders of any of them; and (vi) with times net asset value per share) of stock standing in respect to such additional matters relating to her or his name and entitled to vote at such meeting, the Trust as may be required by the 1940 Act, the and each fractional dollar amount shall be entitled to Declaration of Trust, the Bylaws or any a proportionate fractional vote. registration of the Trust with the Securities and Exchange Commission (or any successor agency) or At all elections of directors, each shareholder shall any state, or as the Trustees may consider be entitled to as many votes as shall equal the number necessary or desirable. of dollars of net asset value of shares owned multiplied by the number of directors to be elected and On each matter submitted to a vote of the may cast all of such votes for a single director or may shareholders, other than the election of any distribute them among the number to be voted for, or Trustee, each shareholder of any series shall be any two or more of them. entitled to one vote for each dollar of net asset value (number of shares owned times net asset The standard form of certifying resolution creating value per Share) and each fractional dollar rights and preferences for series of capital stock amount shall be entitled to a proportionate provides that each share may be voted by series (i) as fractional vote. required by the provisions of the 1940 Act, as amended and all rules and regulations promulgated thereunder; At all elections of Trustees, shareholders of any (ii) when the Board determines that a matter affects Series shall be entitled to as many votes as series in a materially different way; or (iii) when the shall equal the dollars of net asset value Board determines a matter affects only one or some of multiplied by the number of Trustees to be the series. In addition, under Minnesota law, elected and may cast all of such votes for a shareholders are entitled to vote as separate series or single Trustee or may distribute them among the classes with respect to certain amendments to the number to be voted for, or any two or more of corporation's articles of incorporation and on certain them. mergers and exchanges to which the corporation is a party. - ---------------------------------------------------------------------------------------------------------------------------------
RIVERSOURCE FUNDS -- PROXY STATEMENT D.1
- --------------------------------------------------------------------------------------------------------------------------------- RIVERSOURCE TAX-EXEMPT INCOME SERIES, INC. RIVERSOURCE SPECIAL TAX-EXEMPT SERIES TRUST - --------------------------------------------------------------------------------------------------------------------------------- Trustees shall cause each matter to be voted upon to be submitted to a separate vote of the outstanding shares of each fund entitled to vote thereon; provided, that (i) when expressly required by the 1940 Act or by other law, actions of shareholders shall be taken by single class voting of all outstanding shares of each series or class whose holders are entitled to vote thereon; and (ii) when the Trustees determine that any matter to be submitted to a vote of shareholders affects only the rights or interests of shareholders of one or more but not all funds or of one or more but not all classes of a single fund, then only the shareholders of the funds or classes so affected shall be entitled to vote thereon. - --------------------------------------------------------------------------------------------------------------------------------- SHAREHOLDER If a regular meeting of shareholders has not been held If a meeting of shareholders has not been held MEETINGS: during the immediately preceding 15 months, a during the immediately preceding 15 months for shareholder or shareholders holding three percent or the purpose of electing Trustees, a shareholder more of the voting power of all shares entitled to vote or shareholders holding 3% or more of the voting may demand a regular meeting of shareholders by written power of all shares entitled to vote may demand a notice of demand given to the chief executive officer meeting of shareholders for the purpose of or chief financial officer. Within 30 days after electing Trustees by written notice of demand receipt of the demand by one of those officers, the given to the Trustees. Within 30 days after Board of Directors must cause a regular meeting of receipt of such demand, the Trustees shall call shareholders to be called and held on notice no later and give notice of a meeting of shareholders for than 90 days after receipt of the demand, all at the the purpose of electing Trustees. If the Trustees expense of the Fund. fail to call such meeting or give notice thereof, then the shareholder or shareholders making the In addition, a special meeting of shareholders may be demand may call and give notice of such meeting called at any time by a shareholder or shareholders at the expense of the Trust. holding ten percent or more of the voting power of all shares entitled to vote, except that a special meeting The Trustees shall promptly call and give notice for the purpose of considering any action to directly of a meeting of shareholders for the purpose of or indirectly facilitate or effect a business voting upon removal of any Trustee of the Trust combination must be called by 25% or more of the voting when requested to do so in writing by power of all shares entitled to vote. shareholders holding not less than 10% of the shares then outstanding. If the Trustees fail to call or give notice of any meeting of shareholders for a period of 30 days after written application by shareholders holding at least 10% of the shares then outstanding requesting that a meeting be called for any other purpose requiring action by the shareholders as provided in the Declaration of Trust or Bylaws, then shareholders holding at least 10% of the outstanding shares may call and give notice of such meetings. - --------------------------------------------------------------------------------------------------------------------------------- SHAREHOLDER QUORUM: 10% of the shares entitled to vote. 10% of the shares entitled to vote. - --------------------------------------------------------------------------------------------------------------------------------- SHAREHOLDER An action required or permitted to be taken at a Subject to the provisions of the 1940 Act and CONSENT: shareholder meeting may be taken by written action other applicable law, any action taken by signed, or consented to by authorized electronic shareholders may be taken without a meeting if communication, by all of the shareholders entitled to shareholders who hold at least 10% of the shares vote on that action. Such a written action is not entitled to vote on the matter (or such larger effective if it is signed or consented to by fewer than proportion thereof or of the shares of any all the shareholders entitled to vote on the action. particular Series as shall be required by the 1940 Act or by any express provision of the Declaration of Trust or the Bylaws or as shall be permitted by the Trustees) consent to the action in writing and if the writings in which such consent is given are filed with the records of the meetings of shareholders, to the same extent and for the same period as proxies given in connection with a shareholders' meeting. - --------------------------------------------------------------------------------------------------------------------------------- NOTICE TO In general, shareholders who are entitled to vote at a Written notice of any meeting of shareholders SHAREHOLDERS RECORD shareholder meeting must be given notice of the meeting shall be given by the Trustees by mailing such DATE: at least ten and not more than 60 days before the notice at least 10 days before such meeting, meeting. In certain cases, the notice of meeting must postage prepaid, stating the time, place and include specified information required by Minnesota purpose of the meeting, to each shareholder at law. the shareholder's address as it appears on the records of the Trust. The Board of Directors can establish a record date for determining the shareholders who are entitled to vote For the purpose of determining the shareholders at a shareholder meeting. The record date cannot be who are entitled to vote or act at any meeting or more than 60 days before the date of the meeting. any adjournment thereof, the Trustees may fix a date and time not more than 90 days prior to the date of any meeting of shareholders or other action as the date and time of record for the determination of shareholders entitled to vote at such meeting or any adjournment thereof, and any shareholder who was a shareholder at the date and time so fixed shall be entitled to vote at such meeting or any - ---------------------------------------------------------------------------------------------------------------------------------
D.2 RIVERSOURCE FUNDS -- PROXY STATEMENT
- --------------------------------------------------------------------------------------------------------------------------------- RIVERSOURCE TAX-EXEMPT INCOME SERIES, INC. RIVERSOURCE SPECIAL TAX-EXEMPT SERIES TRUST - --------------------------------------------------------------------------------------------------------------------------------- adjournment thereof, even though he has since that date and time disposed of his shares, and no shareholder becoming such after that date and time shall be so entitled to vote at such meeting or any adjournment thereof. - --------------------------------------------------------------------------------------------------------------------------------- SHAREHOLDER At each shareholder meeting, the polls may be opened Shares may be voted in person or by proxy. PROXIES: and closed, the proxies and ballots may be received and taken in charge, and all questions touching the A proxy with respect to shares held in the name qualification of voters, the validity of proxies, and of two or more persons shall be valid if executed acceptances or rejections of votes may be decided by by any one of them unless at or prior to exercise two (2) inspectors of election. of the proxy the Trust receives a specific written notice to the contrary from any one of Minnesota law provides that shareholders can submit them. A proxy purporting to be executed by or on proxies in writing or by telephonic transmission or behalf of a shareholder shall be deemed valid authenticated electronic communication. It also unless challenged at or prior to its exercise and provides that the Board of Directors can establish the burden of proving invalidity shall rest on procedures whereby a record holder can certify in the challenger. writing that another person is the beneficial owner of shares, and the beneficial owner then can vote the shares or appoint a proxy. - --------------------------------------------------------------------------------------------------------------------------------- DIRECTOR POWER TO The Board of Directors, acting without shareholder The provisions of the Declaration of Trust may be AMEND ARTICLES OF approval, can amend the corporation's articles of amended at any time, so long as such amendment INCORPORATION/TRUSTEE incorporation to (i) change the name of the does not adversely affect the rights of any POWER TO AMEND corporation; (ii) increase or decrease, but not below shareholder with respect to which such amendment DECLARATION OF the number of then- outstanding shares, the aggregate is or purports to be applicable and so long as TRUST: number of shares the corporation has authority to such amendment is not in contravention of issue, including shares of any class or series; and applicable law, including the 1940 Act, by an (iii) amend or cancel a certificate fixing the rights instrument in writing signed by a majority of the and preferences of a class or series of shares, but Trustees. Any amendment to the Declaration of only when no shares of that class or series are Trust that adversely affects the rights of all outstanding. shareholders may be adopted at any time by an instrument in writing signed by a majority of the In all other cases, the corporation's articles of Trustees when authorized to do so by the vote of incorporation only can be amended with the approval of shareholders holding a majority of all the shares the requisite shareholders. outstanding and entitled to vote, without regard to series, or if said amendment adversely affects the rights of the shareholders of less than all of the funds or of less than all of the classes of shares of any fund, by the vote of the holders of a majority of all the shares entitled to vote of each fund or of each class, as the case may be, so affected. Subject to the foregoing, any such amendment shall be effective when the terms thereof have been duly adopted, as aforesaid. - --------------------------------------------------------------------------------------------------------------------------------- TERMINATION OF In order to dissolve a Minnesota corporation, the The Trust may be terminated at any time by a CORPORATION/TRUST: affirmative vote of a majority of the voting power of majority of the Trustees, subject to the all shares entitled to vote is required. In order to favorable vote of the holders of not less than a discontinue an individual class or series of shares majority of the shares outstanding and entitled without dissolving the corporation, an amendment to the to vote of each fund of the Trust, or by such corporation's articles of incorporation would be greater or different vote of shareholders of any required. In order to adopt such an amendment, Series as may be established by the Certificate shareholders would have to approve the amendment by the of Designation by which such Series was affirmative vote of the greater of (i) a majority of authorized. the voting power of the shares of that class or series present and entitled to vote or (ii) a majority of the voting power of the minimum number of shares of such class or series entitled to vote that would constitute a quorum for the transaction of business at the meeting (a "Minnesota Statutory Vote"). The Board of Directors, acting without a shareholder vote, does not have the power to dissolve the corporation or to discontinue an individual class or series of shares. - --------------------------------------------------------------------------------------------------------------------------------- MERGER OR In most cases, any merger or exchange in which a The Trustees may sell, convey and transfer all or CONSOLIDATION OF Minnesota corporation is not the continuing entity, and substantially all of the assets of the Trust, or TRUST/ CORPORATION: any sale of all or substantially all of the the assets belonging to any one or more funds corporation's property and assets not in the usual and when and as authorized by vote or written consent regular course of its business, requires the of a majority of the Trustees and approved by the affirmative vote of a majority of the voting power of affirmative vote of the holders of not less than all shares entitled to vote. a majority of the shares outstanding and entitled to vote of each fund whose assets are affected by Any sale of the assets belonging to an individual such transaction, or by an instrument or series of shares of a Minnesota corporation in exchange instruments in writing without a meeting, for shares of another corporation or trust or shares of consented to by the holders of not less than a another series of the corporation, while leaving other majority of such shares, and/or by such other series of the corporation outstanding, would require an vote of any Series as may be established by the amendment to the corporation's articles of Certificate of Designation with respect to such incorporation. In order to adopt such an amendment, Series. shareholders of that series would have to approve the amendment by a Minnesota Statutory Majority. - --------------------------------------------------------------------------------------------------------------------------------- REMOVAL OF Under Minnesota law, the Board of Directors can remove Any Trustee may be removed with or without cause DIRECTORS/ a director by a majority vote of the remaining at any time: (i) by written instrument, signed by TRUSTEES: directors, but only if the director was at least two-thirds of the - ---------------------------------------------------------------------------------------------------------------------------------
RIVERSOURCE FUNDS -- PROXY STATEMENT D.3
- --------------------------------------------------------------------------------------------------------------------------------- RIVERSOURCE TAX-EXEMPT INCOME SERIES, INC. RIVERSOURCE SPECIAL TAX-EXEMPT SERIES TRUST - --------------------------------------------------------------------------------------------------------------------------------- appointed by the Board of Directors to fill a vacancy number of Trustees prior to such removal; or (ii) and has not subsequently been elected by shareholders. by vote of shareholders holding not less than two-thirds of the shares of each Series then In all other cases, a director can only be removed by outstanding, cast in person or by proxy at any shareholder vote. In general, such removal requires the meeting called for the purpose; or (iii) by a affirmative vote of the holders of a majority of the written declaration signed by shareholders voting power of all shares entitled to vote at an holding not less than two-thirds of the shares of election of directors. However, where a corporation has each Series then outstanding and filed with the cumulative voting (as do the Funds), unless the entire Trust's custodian. Board is removed simultaneously, a director is not removed from the Board if there are cast against removal of the director the votes of a proportion of the voting power sufficient to elect the director at an election of the entire board under cumulative voting. - --------------------------------------------------------------------------------------------------------------------------------- DIRECTOR/TRUSTEE The Corporation's bylaws provide that the Board may, by The Trustees, by vote of a majority of the COMMITTEES: resolution passed by a majority of the whole Board, Trustees, may elect an Executive Committee and designate an Executive Committee of two or more any other committees and may delegate thereto directors, which may meet at stated times or on notice some or all of their powers except those which by to all by any of their number during intervals between law, by the Declaration of Trust or by the Bylaws meetings of the Board. The Executive Committee shall may not be delegated; provided, that the advise with and aid the officers of the Fund in all Executive Committee shall not be empowered to matters concerning its interests and the management of elect the President or the Treasurer, to amend its business, and generally perform such duties and the Bylaws, to exercise the powers of the exercise such powers as may be delegated to it from Trustees, or to perform any act for which the time to time by the Board of Directors. action of a majority of the Trustees is required by law, by the Declaration of Trust or Bylaws. The Board of Directors also may, by resolution passed by a majority of the whole Board, appoint any other The quorum for any committee is two members committee or committees for any purpose or purposes, regardless of the number of members serving on which committee or committees shall have such powers as the committee. shall be specified in the resolution of appointment. The quorum for such committee established by the Board The Trustees may at any time alter or abolish any of Directors is two members regardless of the number of committee, change the membership of any members serving on the committee. Under Minnesota law, committee, or revoke, rescind or modify any the members of such other committees do not need to be action of any committee or the authority of any directors. committee with respect to any matter or class of matters; provided, that no such action shall impair the rights of any third parties. - --------------------------------------------------------------------------------------------------------------------------------- DIRECTOR/TRUSTEE The Corporation's articles of incorporation provide No Trustee shall be subject to any personal LIABILITY: that, to the full extent permitted by the laws of the liability in tort, contract, or otherwise, to any State of Minnesota, as now existing or hereafter other person(s) in connection with the assets or amended, no director of the Fund shall be liable to the affairs of the Trust or of any fund, save only Fund or to its shareholders for monetary damages for that arising from his own willful misfeasance, breach of fiduciary duty as a director but such limit bad faith, gross negligence or reckless disregard on liability shall be permitted only to the extent of the duties involved in the conduct of his allowable under the provisions of the Investment office or the discharge of his functions. Company Act of 1940. Under Minnesota law, the foregoing provision is not effective to eliminate a director's personal liability to the Funds or its shareholders for, among other things, (i) any breach of the director's duty of loyalty to the corporation or its shareholders; (ii) acts or omissions not in good faith or that involve intentional misconduct or knowing violation of law; or (iii) any transaction from which the director derived an improper personal benefit. - --------------------------------------------------------------------------------------------------------------------------------- DIRECTOR/TRUSTEE Under Minnesota law, a corporation is required to The Trust shall indemnify each Trustee against INDEMNIFICATION: indemnify and advance expenses to present and former judgments, penalties, fines, including without directors against judgments, penalties, fines, limitation, settlements, and reasonable expenses, settlements and reasonable expenses, including including attorneys' fees and disbursements, attorneys' fees and disbursements, if they are made incurred in connection with a proceeding, if, parties to a legal proceeding by virtue of their with respect to the acts or omissions of the position as directors. However, indemnification and Trustee, the Trustee has: (1) not been advances are not required or permitted if a director indemnified by another organization or employee engaged in specified disabling conduct. benefit plan for the same judgments, penalties, fines, including, without limitation, excise The Corporation's articles of incorporation and bylaws taxes assessed against the person with respect to provide that each person made or threatened to be made an employee benefit plan, settlements, and a party to or is involved (including, without reasonable expenses, including attorneys' fees limitation, as a witness) in any actual or threatened and disbursements, incurred by the person in action, suit or proceeding whether civil, criminal, connection with the proceeding with respect to administrative, arbitration, or investigative, the same acts of omissions; (2) acted in good including a proceeding by or in the right of the Fund faith; (3) received no improper personal benefit; by reason of the former or present capacity as a (4) in the case of a criminal proceeding, had no director or officer of the Fund or who, while a reasonable cause to believe the conduct was director or officer of the Fund, is or was serving at unlawful; and (5) in the case of acts or the request of the Fund or whose duties as a director omissions occurring in the official capacity as or officer involve or involved service as a director, Trustee, reasonably believed that the conduct was officer, partner, trustee or agent of another in the best interests of the Trust, or in the organization or employee benefit plan, whether the case of acts or omissions occurring when serving basis of any proceeding is alleged action in an at the request of the Trust or whose duties in official capacity or in any capacity while serving as a that position involve or involved service as a director, officer, partner, trustee or agent, shall be director, officer, partner, trustee, governor, indemnified and held harmless by the Fund to the full manager, employee, or agent of another extent authorized by the Minnesota Business Corporation organization, the position of that person as a Act, as the same or may hereafter be amended (but, in director, officer, partner, trustee, governor, the case of any such amendment, only to the extent manager, - ---------------------------------------------------------------------------------------------------------------------------------
D.4 RIVERSOURCE FUNDS -- PROXY STATEMENT
- --------------------------------------------------------------------------------------------------------------------------------- RIVERSOURCE TAX-EXEMPT INCOME SERIES, INC. RIVERSOURCE SPECIAL TAX-EXEMPT SERIES TRUST - --------------------------------------------------------------------------------------------------------------------------------- that such amendment permits the Fund to provide broader employee, or agent, as the case may be, of indemnification rights than the law permitted the Fund another organization, reasonably believed that to provide prior to such amendment), or by any other the conduct was not opposed to the best interests applicable law as then in effect, against judgments, of the Trust. If the Trustee's acts or omissions penalties, fines including, without limitation, excise relate to conduct as trustee, employee, or agent taxes assessed against the person with respect to an of an employee benefit plan, the conduct is not employee benefit plan, settlements and reasonable considered to be opposed to the best interests of expenses, including attorneys' fees and disbursements, the Trust if the person reasonably believed that incurred in connection therewith and such the conduct was in the best interests of the indemnification shall continue as to any person who has participants. ceased to be a director or officer and shall inure to the benefit of the person's heirs, executors and The termination of a proceeding by judgment, administrators provided, however, in an action brought order, settlement, conviction, or upon a plea of against the Fund to enforce rights to indemnification, nolo contendere or its equivalent does not, of the director or officer shall be indemnified only if itself, establish that the person did not meet the action was authorized by the Board of Directors of the criteria set forth above. the Fund. The right to indemnification conferred by this Section shall be a contract right and shall If a Trustee is made or threatened to be made a include the right to be paid by the Fund in advance of party to a proceeding or required to serve as a the final disposition of a proceeding for expenses witness, the Trustee is entitled, upon written incurred in connection therewith provided, however, request to the Trust, to payment or reimbursement such payment of expenses shall be made only upon by the Trust of reasonable expenses, including receipt of a written undertaking by the director or attorneys' fees and disbursements, incurred by officer to repay all amounts so paid if it is the Trustees in advance of the final disposition ultimately determined that the director or officer is of the proceeding, (i) upon receipt by the Trust not entitled to indemnification. of a written affirmation by the Trustee of a good faith belief that the criteria for Each person who upon written request to the Fund has indemnification have been satisfied and a written not received payment within thirty days may at any time undertaking by the person to repay all amounts so thereafter bring suit against the Fund to recover any paid or reimbursed by the Trust, if it is unpaid amount and, to the extent successful, in whole ultimately determined that the criteria for or in part, shall be entitled to be paid the expenses indemnification have not been satisfied, and (ii) of prosecuting such suit. Each person shall be presumed after a determination that the facts then known to be entitled to indemnification upon filing a written to those making the determination would not request for payment and the Fund shall have the burden preclude indemnification under this section. The of proof to overcome the presumption that the director written undertaking is an unlimited general or officer is not so entitled. Neither the obligation of the person making it, but need not determination by the Fund, whether by the Board of be secured and shall be accepted without Directors, special legal counsel or by shareholder, nor reference to financial ability to make the the failure of the Fund to have made any determination repayment. shall be a defense or create the presumption that the director or officer is not entitled to indemnification. All determinations whether indemnification of a person is required because the criteria have been The right to indemnification and to the payment of satisfied and whether a person is entitled to expenses prior to any final determination shall not be payment or reimbursement of expenses in advance exclusive of any other right which any person may have of the final disposition of a proceeding shall be or hereinafter acquire under any statute, provision of made: (1) by the board by a majority of a quorum, the Articles of Incorporation, by-law, agreement, vote if the Trustees who are at the time parties to of shareholders or otherwise and notwithstanding any the proceeding are not counted for determining provisions in these bylaws, the Fund is not obligated either a majority or the presence of a quorum; to make any payment with respect to any claim for which (2) if a quorum under clause (1) cannot be payment is required to be made to or on behalf of the obtained, by a majority of a committee of the director or officer under any insurance policy, except board, consisting solely of two or more Trustees with respect to any excess beyond the amount of not at the time parties to the proceeding, duly required payment under such insurance and no designated to act in the matter by a majority of indemnification will be made in violation of the the full board including Trustees who are provisions of the Investment Company Act of 1940. parties; (3) if a determination is not made under clause (1) or (2), by special legal counsel, selected either by a majority of the board or a committee by vote pursuant to clause (1) or (2) or, if the requisite quorum of the full board cannot be obtained and the committee cannot be established, by a majority of the full board including directors who are parties; (4) if a determination is not made under clauses (1) to (3), by the affirmative vote of the shareholders, but the shares held by parties to the proceeding must not be counted in determining the presence of a quorum and are not considered to be present and entitled to vote on the determination; or (5) if an adverse determination is made under clauses (1) to (4) or under paragraph (b), or if no determination is made under clauses (1) to (4) or under paragraph (b) within 60 days after (i) the later to occur of the termination of a proceeding or a written request for indemnification to the Trust or (ii) a written request for an advance of expenses, as the case may be, by a court, which may be the same court in which the proceeding involving the person's liability took place, upon application of the person and any notice the court requires. The Trustee seeking indemnification or payment or reimbursement of expenses pursuant to this clause has the burden of establishing that the person is entitled to indemnification or payment or reimbursement of expenses. - ---------------------------------------------------------------------------------------------------------------------------------
RIVERSOURCE FUNDS -- PROXY STATEMENT D.5
- --------------------------------------------------------------------------------------------------------------------------------- RIVERSOURCE TAX-EXEMPT INCOME SERIES, INC. RIVERSOURCE SPECIAL TAX-EXEMPT SERIES TRUST - --------------------------------------------------------------------------------------------------------------------------------- The Trust may purchase and maintain insurance on behalf of a person in that person's official capacity against any liability asserted against and incurred by the person in or arising from that capacity, whether or not the Trust would have been required to indemnify the person against the liability under the provisions of this section. The Trust agrees that it has a contractual obligation to indemnify from the assets of the fund(s) to which the conduct in question relates. The right of indemnification is not be exclusive of or affect any other rights to which any Trustee may be entitled. - --------------------------------------------------------------------------------------------------------------------------------- DIVIDENDS: The Corporation's articles of incorporation provide The charter documents do not limit the ability of that the directors may declare and pay dividends in the Trustees to declare dividends. their discretion at any time and from time to time to the extent and from such sources as permitted by the laws of the State of Minnesota. Under Minnesota law, the Board of Directors can authorize a dividend if it determines that the corporation will be able to pay its debts in the ordinary course of business after paying the dividend. - --------------------------------------------------------------------------------------------------------------------------------- CAPITALIZATION: The Corporation's articles of incorporation authorize The beneficial interest in the Trust shall be the issuance of up to 10,000,000,000 shares of stock divided into shares having a nominal or par value with a par value of $0.01 per share. The Board of of one cent ($.01) per Share, of which an Directors can authorize the issuance of shares in such unlimited number may be issued. classes or series with such designations, preferences and relative, participating, optional or other special rights, or qualifications, limitations or restrictions thereof, as are stated in the Board resolution establishing the class or series. The Board of Directors can, without shareholder approval, increase or decrease the total number of authorized shares, or the authorized shares of a class or series, in the manner and to the extent set forth under "Director Power to Amend Articles of Incorporation/Trustee Power to Amend Declaration of Trust" below. - --------------------------------------------------------------------------------------------------------------------------------- NUMBER OF The Corporation's articles of incorporation require The Trustees serving as such, whether named above DIRECTORS; there to be at least two and not more than 15 or hereafter becoming Trustees, may increase (to VACANCIES: directors, as determined from time to time by the Board not more than 15) or decrease the number of of Directors. If there is a vacancy on the Board by Trustees by a written instrument signed by a reason of death, resignation or otherwise, the vacancy majority of the Trustees. No decrease in the can be filled for the unexpired term by a majority vote number of Trustees shall have the effect of of the remaining directors, even if the remaining removing any Trustee from office prior to the number of directors is less than a quorum. expiration of his term, but the number of Trustees may be decreased in conjunction with the removal of a Trustee pursuant to the Declaration of Trust. - --------------------------------------------------------------------------------------------------------------------------------- INDEPENDENT CHAIR The Corporation's bylaws require the Board of Directors The Board of Trustees shall elect one independent OF THE BOARD: to elect one independent member to serve as Chair of member to serve as chair of the board whose the Board, whose duties shall include serving as the duties shall include serving as the lead lead independent director. independent Trustee and who shall preside at each meeting of the Trustees as chairman of the meeting. - --------------------------------------------------------------------------------------------------------------------------------- INSPECTION OF BOOKS Minnesota law requires the Corporation (each Fund) to The charter documents do not give shareholders AND RECORDS: keep (i) a share register containing the names and any right to inspect the books and records of the addresses of its shareholders and the number and Trust. classes of shares held by each; (ii) records of all proceedings of shareholders for the last three years; (iii) records of all proceedings of the Board of Directors for the last three years; (iv) its articles of incorporation and bylaws, as amended; (v) certain financial statements which Minnesota law requires the Corporation (each Fund) to prepare; (vi) all reports to shareholders generally within the last three years; and (vii) a statement of the names and usual business addresses of its directors and principal officers. The Funds' shareholders and beneficial owners have the right, upon written demand stating the purpose, at any reasonable time to examine and copy those records which are reasonably related to the stated purpose, provided that the stated purpose is reasonably related to the person's interest as a shareholder or beneficial owner.
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D.6 RIVERSOURCE FUNDS -- PROXY STATEMENT PROXY RIVERSOURCE(R)FUNDS PROXY NOTICE OF A JOINT SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON JANUARY 29, 2008 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS/TRUSTEES. The undersigned hereby constitutes and appoints Stephen R. Lewis, Jr.,Scott R. Plummer and Christopher O. Petersen, and each of them, as proxies for the undersigned, with full power of substitution and resubstitution, and hereby authorizes said proxies, and each of them, to represent and vote, as designated on the reverse side, all shares of the RiverSource Fund(s) listed below held of record by the undersigned on November 30, 2007 at the Joint Special Meeting of Shareholders to be held on January 29, 2008, and at any adjournment thereof. The undersigned hereby revokes any and all proxies with respect to such stock heretofore given by the undersigned. THIS PROXY CARD, WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER, AND, IN THE DISCRETION OF SUCH PROXIES, UPON ANY AND ALL OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT THEREOF. IF THIS PROXY CARD IS SIGNED, DATED AND RETURNED WITH NO CHOICE INDICATED AS TO THE PROPOSAL(S) ON WHICH SHARES REPRESENTED BY THE UNDERSIGNED ARE ENTITLED TO VOTE, SUCH SHARES SHALL BE VOTED FOR THE PROPOSAL(s). VOTE VIA TELEPHONE: 1-866-241-6192 VOTE VIA THE INTERNET: WWW.PROXY-DIRECT.COM -------------------------------------------------------- 999 9999 9999 999 -------------------------------------------------------- NOTE: Please sign exactly as your name appears on this Proxy Card and date. If signing for estates, trusts or corporations, title or capacity should be stated. If shares are held jointly, each holder should sign. -------------------------------------------------------- Signature -------------------------------------------------------- Signature (if held jointly) -------------------------------------------------------- Date RSF_18189_111907 FUND FUND - ---- ----- Core Bond Fundamental Growth International Equity Massachusetts Tax-Exempt Michigan Tax-Exempt Minnesota Tax-Exempt Ohio Tax-Exempt Value VOTING OPTIONS READ YOUR PROXY STATEMENT AND HAVE IT AT HAND WHEN VOTING. [PC GRAPHIC] [PHONE GRAPHIC] [LETTER GRAPHIC] [PERSON GRAPHIC] VOTE ON THE INTERNET VOTE BY PHONE VOTE BY MAIL VOTE IN PERSON LOG ON TO: CALL 1-866-241-6192 VOTE, SIGN AND DATE THIS PROXY ATTEND SHAREHOLDER MEETING WWW.PROXY-DIRECT.COM FOLLOW THE RECORDED CARD AND RETURN IN THE MARQUETTE HOTEL FOLLOW THE ON-SCREEN INSTRUCTIONS INSTRUCTIONS POSTAGE-PAID ENVELOPE 710 MARQUETTE AVE AVAILABLE 24 HOURS AVAILABLE 24 HOURS MINNEAPOLIS, MN 55402 ON JANUARY 29, 2008
PLEASE VOTE BY FILLING IN THE APPROPRIATE BOX BELOW. THIS PROXY CARD CONTAINS PROPOSALS RELATING TO MULTIPLE FUNDS. IF YOU DO NOT OWN A FUND "NOT APPLICABLE" IS NOTED UNDER THAT PROPOSAL. YOU ARE ONLY PERMITTED TO VOTE ON PROPOSALS OF FUND(s) FOR WHICH YOU OWN SHARES. IF YOU DO NOT MARK ONE OR MORE PROPOSALS, YOUR PROXY WILL BE VOTED FOR EACH SUCH PROPOSAL THAT YOU ARE ENTITLED TO VOTE. PLEASE MARK BOXES BELOW IN BLUE OR BLACK INK AS FOLLOWS. EXAMPLE: [X] [ ] To vote FOR ALL Proposals of fund(s) for which you own shares mark this box. (No other vote is necessary.) 1. TO APPROVE AN AGREEMENT AND PLAN OF REORGANIZATION BETWEEN RIVERSOURCE CORE BOND FUND AND RIVERSOURCE DIVERSIFIED BOND FUND. FOR AGAINST ABSTAIN Core Bond [ ] [ ] [ ] 2. TO APPROVE AN AGREEMENT AND PLAN OF REORGANIZATION BETWEEN RIVERSOURCE FUNDAMENTAL GROWTH FUND AND RIVERSOURCE GROWTH FUND. FOR AGAINST ABSTAIN Fundamental Growth [ ] [ ] [ ] 3. TO APPROVE AN AGREEMENT AND PLAN OF REORGANIZATION BETWEEN RIVERSOURCE INTERNATIONAL EQUITY FUND AND RIVERSOURCE DISCIPLINED INTERNATIONAL EQUITY FUND. FOR AGAINST ABSTAIN International Equity [ ] [ ] [ ] 4. TO APPROVE AN AGREEMENT AND PLAN OF REORGANIZATION BETWEEN RIVERSOURCE MASSACHUSETTS TAX-EXEMPT FUND AND RIVERSOURCE TAX-EXEMPT HIGH INCOME FUND. FOR AGAINST ABSTAIN Massachusetts Tax-Exempt [ ] [ ] [ ] 5. TO APPROVE AN AGREEMENT AND PLAN OF REORGANIZATION BETWEEN RIVERSOURCE MICHIGAN TAX-EXEMPT FUND AND RIVERSOURCE TAX-EXEMPT HIGH INCOME FUND. FOR AGAINST ABSTAIN Michigan Tax-Exempt [ ] [ ] [ ] 6. TO APPROVE AN AGREEMENT AND PLAN OF REORGANIZATION BETWEEN RIVERSOURCE OHIO TAX-EXEMPT FUND AND RIVERSOURCE TAX-EXEMPT HIGH INCOME FUND. FOR AGAINST ABSTAIN Ohio Tax-Exempt [ ] [ ] [ ] 7. TO APPROVE AN AGREEMENT AND PLAN OF REORGANIZATION BETWEEN RIVERSOURCE VALUE FUND AND RIVERSOURCE DIVERSIFIED EQUITY INCOME FUND. FOR AGAINST ABSTAIN Value [ ] [ ] [ ] 8. TO APPROVE A CHANGE IN THE CLASSIFICATION OF RIVERSOURCE MINNESOTA TAX-EXEMPT FUND FROM A "DIVERSIFIED" FUND TO A "NON-DIVERSIFIED" FUND. FOR AGAINST ABSTAIN Minnesota Tax-Exempt [ ] [ ] [ ] 9. TO TRANSACT SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING, OR ANY ADJOURNMENT OF THE MEETING. EVERY VOTE IS IMPORTANT! PLEASE VOTE TODAY USING ONE OF THE FOUR AVAILABLE OPTIONS! RSF_18189_111907 RIVERSOURCE(R) CORE BOND FUND RIVERSOURCE FUNDAMENTAL GROWTH FUND RIVERSOURCE INTERNATIONAL EQUITY FUND RIVERSOURCE MASSACHUSETTS TAX-EXEMPT FUND RIVERSOURCE MICHIGAN TAX-EXEMPT FUND RIVERSOURCE MINNESOTA TAX-EXEMPT FUND RIVERSOURCE OHIO TAX-EXEMPT FUND RIVERSOURCE VALUE FUND LOGO Dec. 1, 2007 HERE IS A BRIEF OVERVIEW OF THE CHANGES BEING RECOMMENDED FOR YOUR RIVERSOURCE FUND. WE ENCOURAGE YOU TO READ THE FULL TEXT OF THE ENCLOSED PROXY STATEMENT. Q: WHY AM I BEING ASKED TO VOTE? Mutual funds are required to get shareholders' approval for certain kinds of changes, like the ones included in this proxy statement. Q: IS MY VOTE IMPORTANT? Absolutely! While the Board of each RiverSource Fund has reviewed these changes and recommends you approve them, you have the right to voice your opinion. Until a Fund is sure that a quorum has been reached, it will continue to contact shareholders asking them to vote. Q: WHAT AM I BEING ASKED TO VOTE ON? Shareholders are being asked to vote on: - - The merger (a "Reorganization") of one or more RiverSource Funds (each a "Selling Fund" and together, the "Selling Funds") into a corresponding RiverSource Fund (each a "Buying Fund" and together, the "Buying Funds") as noted in the table below:
SELLING FUND BUYING FUND RiverSource Core Bond Fund RiverSource Diversified Bond Fund RiverSource Fundamental Growth Fund RiverSource Growth Fund RiverSource International Equity Fund RiverSource Disciplined International Equity Fund RiverSource Massachusetts Tax-Exempt Fund RiverSource Tax-Exempt High Income Fund RiverSource Michigan Tax-Exempt Fund RiverSource Tax-Exempt High Income Fund RiverSource Ohio Tax-Exempt Fund RiverSource Tax-Exempt High Income Fund RiverSource Value Fund RiverSource Diversified Equity Income Fund
If the Reorganization of your Selling Fund is approved by shareholders and the other closing conditions are met, shares of the Selling Fund will, in effect, be converted into shares of the Buying Fund with the same aggregate net asset value as Selling Fund shares at the time of the Reorganization. (Selling Funds and Buying Funds may be individually or collectively referred to as a "Fund" or the "Funds".) - - With respect to RiverSource Minnesota Tax-Exempt Fund only ("Minnesota Tax-Exempt Fund"), the restoration of the fund's former status as "non-diversified." We encourage you to read the full text of the proxy statement to obtain a more detailed understanding of the issues. Q: WHY IS THE REORGANIZATION BEING PROPOSED? The Reorganization of each Selling Fund into the respective Buying Fund would result in a larger combined fund with the same or similar investment objectives, principal investment strategies and investment policies which will allow for more focused distribution, potentially increasing sales and economies of scale. Additionally, following the Reorganization, for nearly all classes of shares of the combined fund, expenses will be the same or lower than they would have been for the Selling Fund. Q: IF APPROVED, WHEN WILL THE REORGANIZATION HAPPEN? If shareholders approve the Reorganization, it is expected to take place in the first quarter of 2008. Q: WHAT CHANGE IS PROPOSED FOR MINNESOTA TAX-EXEMPT FUND? The Board of RiverSource Special Tax-Exempt Series Trust, which Minnesota Tax-Exempt Fund is a series of, has approved, and recommends that shareholders approve, a proposal to change the classification of Minnesota Tax-Exempt Fund from a "diversified" fund back to a "non-diversified" fund (its original classification). This would permit Minnesota Tax-Exempt Fund to invest more of its assets in the securities of fewer issuers. Q. IF APPROVED, WHEN WILL THE CHANGE FOR MINNESOTA TAX-EXEMPT FUND TAKE EFFECT? If shareholders of Minnesota Tax-Exempt Fund approve the proposed change of its status, the fund will have the ability to act as a "non-diversified" fund immediately after the shareholder meeting. Q: HOW DOES THE BOARD RECOMMEND THAT I VOTE? After careful consideration, the Board of each RiverSource Fund recommends that you vote FOR each proposal. Q: HOW DO I VOTE? You can vote in one of four ways: - - By telephone - - By internet - - By mail with the enclosed proxy card - - In person at the meeting Please refer to the enclosed proxy card for the telephone number and internet address. Q: WHAT NUMBER SHOULD I CALL IF I HAVE QUESTIONS? If you have questions about any of the proposals described in the proxy statement or about voting procedures, please call toll free at (866) 438-8932. STATEMENT OF ADDITIONAL INFORMATION FOR RIVERSOURCE(R) DIVERSIFIED INCOME SERIES, INC. RiverSource Diversified Bond Fund RIVERSOURCE INTERNATIONAL SERIES, INC. RiverSource Disciplined International Equity Fund RIVERSOURCE INVESTMENT SERIES, INC. RiverSource Diversified Equity Income Fund RIVERSOURCE LARGE CAP SERIES, INC. RiverSource Growth Fund RIVERSOURCE TAX-EXEMPT INCOME SERIES, INC. RiverSource Tax-Exempt High Income Fund DEC. 1, 2007 This Statement of Additional Information ("SAI") incorporates by reference the following described Buying and Selling Fund documents, each of which has been previously filed and accompanies this SAI. 1. RiverSource Diversified Bond Fund's most recent annual report, for the period ended Aug. 31, 2007. 2. RiverSource Core Bond Fund's most recent annual report, for the period ended July 31, 2007. 3. RiverSource Disciplined International Equity Fund's most recent annual report, for the period ended Oct. 31, 2006, and the most recent semiannual report for the period ended April 30, 2007. 4. RiverSource International Equity Fund's most recent annual report, for the period ended Oct. 31, 2006, and the most recent semiannual report for the period ended April 30, 2007. 5. RiverSource Diversified Equity Income Fund's most recent annual report, for the period ended Sept. 30, 2007. 6. RiverSource Value Fund's most recent annual report, for the period ended May 31, 2007. 7. RiverSource Growth Fund's most recent annual report, for the period ended July 31, 2007. 8. RiverSource Fundamental Growth Fund's most recent annual report for the period ended May 31, 2007. 9. RiverSource Tax-Exempt High Income Fund's most recent annual report, for the period ended Nov. 30, 2006 and the semiannual report for the period ended May 31, 2007. 10. RiverSource Massachusetts Tax-Exempt Fund's, RiverSource Michigan Tax-Exempt Fund's and RiverSource Ohio Tax-Exempt Fund's most recent annual report, for the period ended Aug. 31, 2007. 11. The most recent SAI, dated Nov. 29, 2007, for the Buying and Selling funds. This SAI is not a prospectus. It should be read in conjunction with the proxy statement/prospectus, dated the same date as this SAI, which may be obtained by calling (866) 438-8932 or writing to RiverSource Funds, 734 Ameriprise Financial Center, Minneapolis, MN 55474. In accordance with Securities and Exchange Commission requirements, pro forma financial statements are not included for RiverSource Diversified Equity Income Fund, RiverSource Growth Fund and RiverSource Tax-Exempt High Income Fund since the net asset value of the Selling Fund is less than 10% of the net asset value of the Buying Fund. TABLE OF CONTENTS RIVERSOURCE DIVERSIFIED BOND FUND PRO FORMA FINANCIALS Introduction to Proposed Fund Merger.......................................... 3 Pro Forma Combining Statement of Assets and Liabilities....................... 4 Pro Forma Combining Statement of Operations................................... 5 Notes to Pro Forma Financial Statements....................................... 6 Combined Investments in Securities............................................ 8 RIVERSOURCE DISCIPLINED INTERNATIONAL EQUITY FUND PRO FORMA FINANCIALS Introduction to Proposed Fund Merger.......................................... 29 Pro Forma Combining Statement of Assets and Liabilities....................... 30 Pro Forma Combining Statement of Operations................................... 31 Notes to Pro Forma Financial Statements....................................... 32 Combined Investments in Securities............................................ 34
2 RIVERSOURCE DIVERSIFIED BOND FUND (BUYING FUND) RIVERSOURCE CORE BOND FUND (SELLING FUND) INTRODUCTION TO PROPOSED FUND MERGER Aug. 31, 2007 The accompanying unaudited pro forma combining statement of assets and liabilities and the statement of operations reflect the accounts of the two funds at and for the 12-month period ending Aug. 31, 2007. These statements have been derived from financial statements prepared for RiverSource Diversified Bond Fund and RiverSource Core Bond Fund as of Aug. 31, 2007. RiverSource Diversified Bond Fund invests primarily in bonds and other debt securities including securities issued by the U.S. government, corporate bonds and mortgage- and asset-backed securities. RiverSource Core Bond Fund invests primarily in securities like those included in the Lehman Brothers Aggregate Bond Index (Index), which are investment grade and denominated in U.S. dollars. The Index includes securities issued by the U.S. government, corporate bonds and mortgage- and asset-backed securities. Under the proposed Agreement and Plan of Reorganization, Class A shares of the RiverSource Core Bond Fund would be exchanged for Class A shares of the RiverSource Diversified Bond Fund. Class B shares of the RiverSource Core Bond Fund would be exchanged for Class B shares of the RiverSource Diversified Bond Fund. Class C shares of the RiverSource Core Bond Fund would be exchanged for Class C shares of the RiverSource Diversified Bond Fund. Class I shares of the RiverSource Core Bond Fund would be exchanged for Class I shares of the RiverSource Diversified Bond Fund. Class R2 shares of the RiverSource Core Bond Fund would be exchanged for Class R2 shares of the RiverSource Diversified Bond Fund. Class R3 shares of the RiverSource Core Bond Fund would be exchanged for Class R3 shares of the RiverSource Diversified Bond Fund. Class R4 shares of the RiverSource Core Bond Fund would be exchanged for Class R4 shares of the RiverSource Diversified Bond Fund. Class R5 shares of the RiverSource Core Bond Fund would be exchanged for Class R5 shares of the RiverSource Diversified Bond Fund. Class W shares of the RiverSource Core Bond Fund would be exchanged for Class W shares of the RiverSource Diversified Bond Fund. The pro forma combining statements have been prepared to give effect to the proposed transaction on the historical operations of the accounting survivor, RiverSource Diversified Bond Fund, as if the transaction had occurred at the beginning of the fiscal year ending Aug. 31, 2007. 3 RIVERSOURCE DIVERSIFIED BOND FUND (BUYING FUND) RIVERSOURCE CORE BOND FUND (SELLING FUND) PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES
RIVERSOURCE RIVERSOURCE DIVERSIFIED DIVERSIFIED RIVERSOURCE RIVERSOURCE BOND FUND BOND FUND DIVERSIFIED BOND CORE PRO FORMA PRO FORMA AUG. 31, 2007 (UNAUDITED) FUND BOND FUND ADJUSTMENTS COMBINED ASSETS Investments in securities, at cost Unaffiliated issuers $3,199,830,408 $320,011,783 $ -- $3,519,842,191 Affiliated money market fund $ 45,885,729 $ 33,717,195 $ -- $ 79,602,924 -------------------------------------------------------------------------------- Investments in securities, at value Unaffiliated issuers* $3,180,596,306 $319,734,958 $ -- $3,500,331,264 Affiliated money market fund $ 45,885,729 $ 33,717,195 $ -- $ 79,602,924 Cash in bank on demand deposit 27,052 -- -- 27,052 Foreign currency holdings (identified cost $1,022 for RiverSource Diversified Bond Fund) 1,035 -- -- 1,035 Capital shares receivable 11,081,420 213,877 -- 11,295,297 Dividends and accrued interest receivable 25,647,494 2,444,626 -- 28,092,120 Receivable for investment securities sold 163,119,499 13,234,881 -- 176,354,380 Variation margin receivable 712,678 39,374 -- 752,052 Unrealized appreciation on swap transactions, at value 526,101 -- -- 526,101 Receivable from RiverSource Investments, LLC (Note 2) -- -- 24,269(a),(d) 24,269 - ---------------------------------------------------------------------------------------------------------------------------------- Total assets 3,427,597,314 369,384,911 24,269 3,797,006,494 - ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES Disbursements in excess of cash on demand deposit -- 30,954 -- 30,954 Dividends payable to shareholders 2,614,030 296,718 -- 2,910,748 Capital shares payable 2,846,093 84,163 -- 2,930,256 Variation margin payable -- 29,982 -- 29,982 Payable for investment securities purchased 132,764,420 45,036,567 -- 177,800,987 Payable for securities purchased on a forward- commitment basis 277,561,571 -- -- 277,561,571 Payable upon return of securities loaned 54,427,500 -- -- 54,427,500 Payable to RiverSource Investments, LLC (Note 2) -- -- 303,743(g) 303,743 Unrealized depreciation on swap transactions, at value 2,248,872 157,685 -- 2,406,557 Accrued investment management services fee (Note 2) 36,751 4,261 (41,012)(a) -- Accrued distribution fee 542,794 11,598 -- 554,392 Accrued transfer agency fee (Note 2) 8,066 35 10,668(b) 18,769 Accrued administrative services fee (Note 2) 5,047 621 (5,668)(d) -- Accrued plan administration services fee 16,925 4 -- 16,929 Other accrued expenses (Note 2) 283,602 72,861 (111,963)(c),(e),(f) 244,500 Forward sale commitments, at value (proceeds receivable $9,884,375) 9,940,620 -- -- 9,940,620 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities 483,296,291 45,725,449 155,768 529,177,508 - ---------------------------------------------------------------------------------------------------------------------------------- Net assets applicable to outstanding capital stock $2,944,301,023 $323,659,462 $(131,499) $3,267,828,986 - ---------------------------------------------------------------------------------------------------------------------------------- REPRESENTED BY Capital stock -- $.01 par value (Note 3) $ 6,119,286 $ 340,039 $ 331,050 $ 6,790,375 Additional paid-in capital (Note 3) 3,125,529,521 326,980,277 (331,050) 3,452,178,748 Undistributed (excess of distributions over) net investment income (Note 2) (1,432,632) 1,247 (131,499) (1,562,884) Accumulated net realized gain (loss) (164,897,645) (3,168,991) -- (168,066,636) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (21,017,507) (493,110) -- (21,510,617) - ---------------------------------------------------------------------------------------------------------------------------------- Total -- representing net assets applicable to outstanding capital stock $2,944,301,023 $323,659,462 $(131,499) $3,267,828,986 - ---------------------------------------------------------------------------------------------------------------------------------- Net assets applicable to outstanding shares: Class A $1,936,988,090 $ 41,746,934 $ (16,961) $1,978,718,063 Class B $ 303,507,236 $ 10,603,704 $ (4,308) $ 314,106,632 Class C $ 16,840,412 $ 661,277 $ (269) $ 17,501,420 Class I $ 386,010,354 $270,618,287 $(109,949) $ 656,518,692 Class R2 $ 4,993 $ 4,939 $ (2) $ 9,930 Class R3 $ 4,993 $ 4,939 $ (2) $ 9,930 Class R4 $ 77,835,688 $ 9,528 $ (4) $ 77,845,212 Class R5 $ 4,993 $ 4,939 $ (2) $ 9,930 Class W $ 223,104,264 $ 4,915 $ (2) $ 223,109,177 Shares outstanding (Note 3): Class A shares 402,638,195 4,381,976 -- 411,313,865 Class B shares 63,093,643 1,112,300 -- 65,297,260 Class C shares 3,499,861 69,346 -- 3,637,285 Class I shares 80,134,097 28,437,203 -- 136,256,159 Class R2 shares 1,040 518 -- 2,069 Class R3 shares 1,040 518 -- 2,069 Class R4 shares 16,200,659 1,001 -- 16,202,643 Class R5 shares 1,040 518 -- 2,069 Class W shares 46,359,028 516 -- 46,360,049 Net asset value per share of outstanding capital stock: Class A $ 4.81 $ 9.53 $ -- $ 4.81 Class B $ 4.81 $ 9.53 $ -- $ 4.81 Class C $ 4.81 $ 9.54 $ -- $ 4.81 Class I $ 4.82 $ 9.52 $ -- $ 4.82 Class R2 $ 4.80 $ 9.53 $ -- $ 4.80 Class R3 $ 4.80 $ 9.53 $ -- $ 4.80 Class R4 $ 4.80 $ 9.52 $ -- $ 4.80 Class R5 $ 4.80 $ 9.53 $ -- $ 4.80 Class W $ 4.81 $ 9.53 $ -- $ 4.81 - ---------------------------------------------------------------------------------------------------------------------------------- * Including securities on loan, at value $ 53,596,150 $ -- $ 53,596,150 - ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to pro forma financial statements. 4 RIVERSOURCE DIVERSIFIED BOND FUND (BUYING FUND) RIVERSOURCE CORE BOND FUND (SELLING FUND) PRO FORMA COMBINING STATEMENT OF OPERATIONS
RIVERSOURCE RIVERSOURCE DIVERSIFIED DIVERSIFIED RIVERSOURCE BOND FUND BOND FUND DIVERSIFIED BOND RIVERSOURCE CORE PRO FORMA PRO FORMA YEAR ENDED AUG. 31, 2007 (UNAUDITED) FUND BOND FUND ADJUSTMENTS COMBINED INVESTMENT INCOME Income: Interest $142,326,750 $11,258,787 $ -- $153,585,537 Income distributions from affiliated money market fund 5,748,763 1,302,960 -- 7,051,723 Fee income from securities lending 395,879 -- -- 395,879 - ----------------------------------------------------------------------------------------------------------------------- Total income 148,471,392 12,561,747 -- 161,033,139 - ----------------------------------------------------------------------------------------------------------------------- Expenses: Investment management services fee (Note 2) 12,770,016 1,135,181 (53,136)(a) 13,852,061 Distribution fee Class A 4,860,209 94,439 -- 4,954,648 Class B 3,704,597 114,337 -- 3,818,934 Class C 168,420 5,619 -- 174,039 Class R2 18 18 -- 36 Class R3 8 8 -- 16 Class W 128,130 9 -- 128,139 Transfer agency fee (Note 2) Class A 3,090,229 68,696 7,790(b) 3,166,715 Class B 631,378 22,048 2,685(b) 656,111 Class C 28,318 1,067 193(b) 29,578 Class R2 2 2 -- 4 Class R3 2 2 -- 4 Class R4 79,526 77 -- 79,603 Class R5 2 2 -- 4 Class W 102,504 8 -- 102,512 Service fee -- Class R4 (Note 2) 36,188 35 (36,223)(c) -- Administrative services fees and expenses (Note 2) 1,752,212 165,547 (17,813)(d) 1,899,946 Plan administration services fee Class R2 8 8 -- 16 Class R3 8 8 -- 16 Class R4 148,364 113 -- 148,477 Compensation of board members 52,475 4,410 -- 56,885 Custodian fees 249,190 92,348 -- 341,538 Printing and postage 483,505 30,095 -- 513,600 Registration fees (Note 2) 166,240 81,939 (40,970)(e) 207,209 Professional fees (Note 2) 65,771 36,981 (34,770)(f) 67,982 Other 87,435 9,761 -- 97,196 - ----------------------------------------------------------------------------------------------------------------------- Total expenses 28,604,755 1,862,758 (172,244) 30,295,269 Expenses waived/reimbursed by RiverSource Investments, LLC (Note 2) (2,004,697) (329,155) 303,743(g) (2,030,109) - ----------------------------------------------------------------------------------------------------------------------- 26,600,058 1,533,603 131,499 28,265,160 Earnings and bank fee credits on cash balances (229,404) (3,137) -- (232,541) - ----------------------------------------------------------------------------------------------------------------------- Total net expenses 26,370,654 1,530,466 131,499 28,032,619 - ----------------------------------------------------------------------------------------------------------------------- Investment income (loss) -- net 122,100,738 11,031,281 (131,499) 133,000,520 - ----------------------------------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) -- NET Net realized gain (loss) on: Security transactions 26,879,708 100,666 -- 26,980,374 Foreign currency transactions 145,184 9,539 -- 154,723 Futures contracts (2,400,100) 212,681 -- (2,187,419) Swap transactions (3,756,544) (302,300) -- (4,058,844) - ----------------------------------------------------------------------------------------------------------------------- Net realized gain (loss) on investments 20,868,248 20,586 -- 20,888,834 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 6,273,301 (101,564) -- 6,171,737 - ----------------------------------------------------------------------------------------------------------------------- Net gain (loss) on investments and foreign currencies 27,141,549 (80,978) -- 27,060,571 - ----------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $149,242,287 $10,950,303 $(131,499) $160,061,091 - -----------------------------------------------------------------------------------------------------------------------
See accompanying notes to pro forma financial statements. 5 RIVERSOURCE DIVERSIFIED BOND FUND (BUYING FUND) RIVERSOURCE CORE BOND FUND (SELLING FUND) NOTES TO PRO FORMA FINANCIAL STATEMENTS (Unaudited as to Aug. 31, 2007) 1. BASIS OF COMBINATION The unaudited pro forma combining statement of assets and liabilities and the statement of operations reflect the accounts of the two funds at and for the 12- month period ending Aug. 31, 2007. These statements have been derived from financial statements prepared for the RiverSource Diversified Bond Fund and RiverSource Core Bond Fund as of Aug. 31, 2007. Each Fund is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. The primary investments of each Fund are as follows: RiverSource Diversified Bond Fund invests primarily in bonds and other debt securities including securities issued by the U.S. government, corporate bonds and mortgage- and asset-backed securities. RiverSource Core Bond Fund invests primarily in securities like those included in the Lehman Brothers Aggregate Bond Index (Index), which are investment grade and denominated in U.S. dollars. The Index includes securities issued by the U.S. government, corporate bonds and mortgage- and asset-backed securities. The pro forma statements give effect to the proposed transfer of the assets and liabilities of RiverSource Core Bond Fund in exchange for Class A, B, C, I, R2, R3, R4, R5 and W shares of RiverSource Diversified Bond Fund under U.S. generally accepted accounting principles. The pro forma statements reflect estimates for the combined RiverSource Diversified Bond Fund based on the increased asset level of the merger and associated economies of scale, adjusted to reflect current fees. The pro forma combining statements should be read in conjunction with the historical financial statements of the funds incorporated by reference in the Statement of Additional Information. The pro forma statement of operations give effect to the proposed transaction on the historical operations of the accounting survivor, RiverSource Diversified Bond Fund, as if the transaction had occurred at the beginning of the year presented. 2. PRO FORMA ADJUSTMENTS (a) To reflect the reduction in investment management services fee due to the Reorganization. (b) To adjust for closed account fees for each RiverSource Core Bond Fund shareholder account that will be closed on the system as a result of this merger. (c) To reflect the elimination of the service fee for Class R4. (d) To reflect the change in administrative services fees due to the Reorganization. (e) To reflect the reduction in the registration fees due to the Reorganization. (f) To reflect the reduction in audit fees due to the Reorganization. (g) To adjust the expense reimbursement to reflect the net reduction in fees resulting from the reorganization per the agreement by RiverSource Investments, LLC and its affiliates to waive certain fees and absorb certain expenses following the merger. 6 3. CAPITAL SHARES The pro forma net asset value per share assumes the issuance of additional Class A, Class B, Class C, Class I, Class R2, Class R3, Class R4, Class R5 and Class W shares of RiverSource Diversified Bond Fund if the reorganization were to have taken place on Aug. 31, 2007. The pro forma number of Class A shares outstanding of 411,313,865 consists of 8,675,670 shares assumed to be issued to Class A shareholders of the RiverSource Core Bond Fund, plus 402,638,195 Class A shares of the RiverSource Diversified Bond Fund outstanding as of Aug. 31, 2007. The pro forma number of Class B shares outstanding of 65,297,260 consists of 2,203,617 shares assumed to be issued to Class B shareholders of the RiverSource Core Bond Fund, plus 63,093,643 Class B shares of the RiverSource Diversified Bond Fund outstanding as of Aug. 31, 2007. The pro forma number of Class C shares outstanding of 3,637,285 consists of 137,424 shares assumed to be issued to Class C shareholders of the RiverSource Core Bond Fund, plus 3,499,861 Class C shares of the RiverSource Diversified Bond Fund outstanding as of Aug. 31, 2007. The pro forma number of Class I shares outstanding of 136,256,159 consists of 56,122,062 shares assumed to be issued to Class I shareholders of the RiverSource Core Bond Fund, plus 80,134,097 Class I shares of the RiverSource Diversified Bond Fund outstanding as of Aug. 31, 2007. The pro forma number of Class R2 shares outstanding of 2,069 consists of 1,029 shares assumed to be issued to Class R2 shareholders of the RiverSource Core Bond Fund, plus 1,040 Class R2 shares of the RiverSource Diversified Bond Fund outstanding as of Aug. 31, 2007. The pro forma number of Class R3 shares outstanding of 2,069 consists of 1,029 shares assumed to be issued to Class R3 shareholders of the RiverSource Core Bond Fund, plus 1,040 Class R3 shares of the RiverSource Diversified Bond Fund outstanding as of Aug. 31, 2007. The pro forma number of Class R4 shares outstanding of 16,202,643 consists of 1,984 shares assumed to be issued to Class R4 shareholders of the RiverSource Core Bond Fund, plus 16,200,659 Class R4 shares of the RiverSource Diversified Bond Fund outstanding as of Aug. 31, 2007. The pro forma number of Class R5 shares outstanding of 2,069 consists of 1,029 shares assumed to be issued to Class R5 shareholders of the RiverSource Core Bond Fund, plus 1,040 Class R5 shares of the RiverSource Diversified Bond Fund outstanding as of Aug. 31, 2007. The pro forma number of Class W shares outstanding of 46,360,049 consists of 1,021 shares assumed to be issued to Class W shareholders of the RiverSource Core Bond Fund, plus 46,359,028 Class W shares of the RiverSource Diversified Bond Fund outstanding as of Aug. 31, 2007. 7 COMBINED INVESTMENTS IN SECURITIES RiverSource Diversified Bond Fund AUG. 31, 2007 (UNAUDITED) (Percentages represent value of investments compared to net assets)
BONDS (104.5%) ISSUER COUPON PRINCIPAL PRINCIPAL PRINCIPAL VALUE(A) VALUE(A) VALUE(A) RATE AMOUNT AMOUNT AMOUNT RIVERSOURCE RIVERSOURCE DIVERSIFIED DIVERSIFIED RIVERSOURCE RIVERSOURCE BOND FUND RIVERSOURCE RIVERSOURCE BOND FUND DIVERSIFIED CORE PRO FORMA DIVERSIFIED CORE PRO FORMA BOND FUND BOND FUND COMBINED BOND FUND BOND FUND COMBINED U.S. GOVERNMENT OBLIGATIONS & AGENCIES (18.3%) Federal Farm Credit Bank 10/10/08 4.25% $ 13,285,000 $ 660,000 $ 13,945,000 $ 13,190,743 $ 655,317 $ 13,846,060 Federal Home Loan Bank 02/08/08 4.63 -- 2,100,000 2,100,000 -- 2,094,328 2,094,328 06/18/08 5.13 14,675,000 -- 14,675,000 14,678,405 -- 14,678,405 09/12/08 4.25 -- 2,215,000 2,215,000 -- 2,200,168 2,200,168 12/29/08 5.13 11,285,000 -- 11,285,000 11,321,010 -- 11,321,010 Federal Home Loan Mtge Corp 06/15/08 3.88 -- 3,890,000 3,890,000 -- 3,847,677 3,847,677 03/15/09 5.75 4,385,000 170,000 4,555,000 4,441,273 172,182 4,613,455 07/15/09 4.25 10,000,000 -- 10,000,000 9,908,120 -- 9,908,120 07/12/10 4.13 -- 2,371,000 2,371,000 -- 2,333,266 2,333,266 03/15/31 6.75 16,550,000 2,095,000 18,645,000 19,605,196 2,481,745 22,086,941 04/16/37 6.00 43,260,000 3,615,000 46,875,000 43,250,180 3,614,179 46,864,359 Federal Natl Mtge Assn 01/15/08 3.25 -- 1,750,000 1,750,000 -- 1,735,580 1,735,580 06/15/08 5.25 -- 525,000 525,000 -- 524,727 524,727 08/15/08 3.25 86,170,000 -- 86,170,000 85,001,536 -- 85,001,536 02/16/12 5.00 30,185,000 3,215,000 33,400,000 30,454,039 3,243,655 33,697,694 05/18/12 4.88 20,165,000 4,865,000 25,030,000 20,281,755 4,893,168 25,174,923 11/15/30 6.63 72,815,000 8,000,000 80,815,000 84,954,134 9,333,697 94,287,831 07/15/37 5.63 14,730,000 1,595,000 16,325,000 15,280,018 1,654,557 16,934,575 Overseas Private Investment U.S. Govt Guaranty Series 1996A 09/15/08 6.99 1,666,667 -- 1,666,667 1,695,183 -- 1,695,183 U.S. Treasury 06/30/09 4.88 57,550,000 -- 57,550,000(q) 58,228,917 -- 58,228,917 07/31/09 4.63 6,565,000 9,395,000 15,960,000(q) 6,618,853 9,472,068 16,090,921 05/15/10 4.50 1,185,000 525,000 1,710,000 1,195,184 529,512 1,724,696 07/31/12 4.63 14,715,000 1,085,000 15,800,000 14,950,675 1,102,377 16,053,052 08/15/17 4.75 24,035,000 3,160,000 27,195,000 24,429,318 3,211,843 27,641,161 02/15/26 6.00 19,083,000 1,920,000 21,003,000 21,672,620 2,180,550 23,853,170 U.S. Treasury Inflation-Indexed Bond 01/15/14 2.00 57,785,913 5,000,596 62,786,509(s) 56,416,999 4,882,134 61,299,133 -------------------------------------------- Total 537,574,158 60,162,730 597,736,888 - ----------------------------------------------------------------------------------------------------------------------------------- ASSET-BACKED (2.5%) Capital Auto Receivables Asset Trust Series 2004-1 Cl CTFS 09/15/10 2.84 4,200,000 200,000 4,400,000 4,194,593 199,743 4,394,336 Capital Auto Receivables Asset Trust Series 2006-SN1A Cl D 04/20/11 6.15 2,500,000 200,000 2,700,000(d) 2,498,572 199,886 2,698,458 College Loan Trust Collateralized Mtge Obligation Interest Only Series 2006-1 Cl AIO 07/25/08 5.62 14,700,000 1,025,000 15,725,000(g) 1,259,262 87,806 1,347,068 Countrywide Asset- backed Ctfs Series 2005-10 Cl AF6 02/25/36 4.92 1,865,000 95,000 1,960,000 1,744,449 88,859 1,833,308 Countrywide Asset- backed Ctfs Series 2006-15 Cl A3 10/25/46 5.69 5,175,000 575,000 5,750,000 5,057,717 561,969 5,619,686 Countrywide Asset- backed Ctfs Series 2006-4 Cl 1A1M 07/25/36 5.77 2,268,423 147,333 2,415,756(i) 2,200,055 142,893 2,342,948 Countrywide Asset- backed Ctfs Series 2007-7 Cl 2A2 10/25/37 5.67 8,500,000 750,000 9,250,000(i) 8,371,174 738,633 9,109,807 Dunkin Securitization Series 2006-1 Cl A2 (AMBAC) 06/20/31 5.78 8,900,000 700,000 9,600,000(d,e) 8,957,591 704,530 9,662,121 Franklin Auto Trust Series 2004-1 ClA Cl A3 (MBIA) 03/15/12 4.15 -- 79,030 79,030(e) -- 78,486 78,486
8
BONDS (CONTINUED) ISSUER COUPON PRINCIPAL PRINCIPAL PRINCIPAL VALUE(A) VALUE(A) VALUE(A) RATE AMOUNT AMOUNT AMOUNT RIVERSOURCE RIVERSOURCE DIVERSIFIED DIVERSIFIED RIVERSOURCE RIVERSOURCE BOND FUND RIVERSOURCE RIVERSOURCE BOND FUND DIVERSIFIED CORE PRO FORMA DIVERSIFIED CORE PRO FORMA BOND FUND BOND FUND COMBINED BOND FUND BOND FUND COMBINED ASSET-BACKED (CONT.) Hertz Vehicle Financing LLC Series 2004-1A Cl A3 (MBIA) 05/25/09 2.85% $ 2,600,000 $ 200,000 $ 2,800,000(d,e) $ 2,572,811 $ 197,909 $ 2,770,720 Keycorp Student Loan Trust Series 2003-A Cl 2A2 (MBIA) 10/25/25 5.67 967,830 1,209,787 2,177,617(e,i) 970,249 1,212,810 2,183,059 Master Asset Backed Securities Trust Series 2006-HE1 Cl A2 01/25/36 5.65 8,400,000 900,000 9,300,000(i) 8,352,750 894,938 9,247,688 Natl Collegiate Student Loan Trust Collateralized Mtge Obligation Interest Only Series 2006-2 Cl AIO 08/25/11 5.89 8,875,000 650,000 9,525,000(g) 1,803,941 132,120 1,936,061 Natl Collegiate Student Loan Trust Collateralized Mtge Obligation Interest Only Series 2006-3 Cl AIO 01/25/12 5.88 13,900,000 1,100,000 15,000,000(g) 3,616,224 286,176 3,902,400 Natl Collegiate Student Loan Trust Collateralized Mtge Obligation Interest Only Series 2006-4 Cl AIO 02/27/12 5.88 11,700,000 -- 11,700,000(g) 2,881,359 -- 2,881,359 Natl Collegiate Student Loan Trust Collateralized Mtge Obligation Interest Only Series 2007-2 Cl AIO 07/25/12 5.90 6,250,000 550,000 6,800,000(g) 1,759,000 154,792 1,913,792 Popular ABS Mtge Pass-Through Trust Series 2005-A Cl AF2 06/25/35 4.49 117,301 5,516 122,817 116,823 5,494 122,317 Renaissance Home Equity Loan Trust Series 2005-4 Cl A3 02/25/36 5.57 4,670,000 275,000 4,945,000 4,613,540 271,675 4,885,215 Renaissance Home Equity Loan Trust Series 2007-2 Cl M4 06/25/37 6.31 1,380,000 120,000 1,500,000 1,026,902 89,296 1,116,198 Renaissance Home Equity Loan Trust Series 2007-2 Cl M5 06/25/37 6.66 900,000 80,000 980,000 674,645 59,968 734,613 Renaissance Home Equity Loan Trust Series 2007-2 Cl M6 06/25/37 7.01 1,320,000 115,000 1,435,000 967,365 84,278 1,051,643 Residential Asset Securities Series 2006-KS1 Cl A2 02/25/36 5.65 7,225,000 605,000 7,830,000(i) 7,148,234 598,572 7,746,806 Residential Asset Securities Series 2007-KS3 Cl AI2 04/25/37 5.69 -- 1,050,000 1,050,000(i) -- 1,022,185 1,022,185 SBA CMBS Trust Series 2006-1A Cl B 11/15/36 5.45 4,075,000 300,000 4,375,000(d) 4,094,103 301,406 4,395,509 WFS Financial Owner Trust Series 2004-1 Cl D 08/22/11 3.17 19,940 3,988 23,928 19,912 3,982 23,894 -------------------------------------------- Total 74,901,271 8,118,406 83,019,677 - ----------------------------------------------------------------------------------------------------------------------------------- COMMERCIAL MORTGAGE-BACKED (12.8%)(F) Banc of America Commercial Mtge Series 2005-1 Cl A4 11/10/42 5.02 4,850,000 225,000 5,075,000 4,789,819 222,208 5,012,027 Banc of America Commercial Mtge Series 2007-1 Cl A3 01/15/49 5.45 5,825,000 450,000 6,275,000 5,694,820 439,943 6,134,763 Bear Stearns Commercial Mtge Securities Series 2003-T10 Cl A1 03/13/40 4.00 1,983,533 291,696 2,275,229 1,921,310 282,546 2,203,856 Bear Stearns Commercial Mtge Securities Series 2004-PWR5 Cl A3 07/11/42 4.57 -- 325,000 325,000 -- 315,789 315,789 Bear Stearns Commercial Mtge Securities Series 2007-T26 Cl A4 01/12/45 5.47 5,950,000 475,000 6,425,000 5,794,765 462,607 6,257,372 CDC Commercial Mtge Trust Series 2002-FX1 Cl A2 11/15/30 5.68 11,775,000 750,000 12,525,000 11,863,109 755,612 12,618,721 Citigroup Commercial Mtge Trust Series 2005-EMG Cl A1 09/20/51 4.15 3,487,857 159,445 3,647,302(d) 3,443,896 157,435 3,601,331 Citigroup Commercial Mtge Trust Series 2006-C5 Cl A4 10/15/49 5.43 2,850,000 300,000 3,150,000 2,783,126 292,961 3,076,087 Citigroup Commercial Mtge Trust Series 2007-C6 Cl A4 12/10/49 5.89 11,550,000 1,250,000 12,800,000 11,549,555 1,249,952 12,799,507 Citigroup/Deutsche Bank Commercial Mtge Trust Series 2005-CD1 Cl ASB 07/15/44 5.40 3,050,000 175,000 3,225,000 3,011,088 172,767 3,183,855
9
BONDS (CONTINUED) ISSUER COUPON PRINCIPAL PRINCIPAL PRINCIPAL VALUE(A) VALUE(A) VALUE(A) RATE AMOUNT AMOUNT AMOUNT RIVERSOURCE RIVERSOURCE DIVERSIFIED DIVERSIFIED RIVERSOURCE RIVERSOURCE BOND FUND RIVERSOURCE RIVERSOURCE BOND FUND DIVERSIFIED CORE PRO FORMA DIVERSIFIED CORE PRO FORMA BOND FUND BOND FUND COMBINED BOND FUND BOND FUND COMBINED COMMERCIAL MORTGAGE-BACKED (CONT.) Commercial Mtge Acceptance Series 1999-C1 Cl A2 06/15/31 7.03% $ 8,567,660 $ -- $ 8,567,660 $ 8,723,709 $ -- $ 8,723,709 Commercial Mtge Pass-Through Ctfs Series 2006-CN2A Cl BFL 02/05/19 5.64 2,550,000 150,000 2,700,000(d,i) 2,557,051 150,415 2,707,466 Commercial Mtge Pass-Through Ctfs Series 2007-C9 Cl A4 12/10/49 6.01 12,600,000 1,350,000 13,950,000 12,738,881 1,364,880 14,103,761 Commercial Mtge Pass-Through Ctfs Series 2007-FL14 Cl MKL1 06/15/22 6.30 9,850,000 875,000 10,725,000(d,i) 9,800,750 870,625 10,671,375 Credit Suisse Mtge Capital Ctfs Series 2006-C2 Cl A3 03/15/39 5.85 5,025,000 375,000 5,400,000 5,045,327 376,517 5,421,844 Credit Suisse Mtge Capital Ctfs Series 2007-C3 Cl A4 06/15/39 5.91 5,750,000 650,000 6,400,000 5,767,253 651,950 6,419,203 CS First Boston Mtge Securities Series 2001-CP4 Cl A4 12/15/35 6.18 7,400,000 -- 7,400,000 7,541,743 -- 7,541,743 CS First Boston Mtge Securities Series 2003-CPN1 Cl A2 03/15/35 4.60 3,525,000 275,000 3,800,000 3,371,172 262,999 3,634,171 Federal Natl Mtge Assn #385683 02/01/13 4.83 6,116,277 -- 6,116,277 6,022,463 -- 6,022,463 Federal Natl Mtge Assn #385815 01/01/13 4.77 7,011,956 -- 7,011,956 6,856,249 -- 6,856,249 Federal Natl Mtge Assn #555806 10/01/13 5.26 471,690 -- 471,690 465,686 -- 465,686 GE Capital Commercial Mtge Series 2005-C1 Cl A5 06/10/48 4.77 -- 400,000 400,000 -- 381,226 381,226 General Electric Capital Assurance Series 2003-1 Cl A3 05/12/35 4.77 10,350,000 1,025,000 11,375,000(d) 10,225,021 1,012,623 11,237,644 GMAC Commercial Mtge Securities Series 1999-C1 Cl B 05/15/33 6.30 8,000,000 -- 8,000,000 8,067,490 -- 8,067,490 Greenwich Capital Commercial Funding Series 2004-GG1 Cl A5 06/10/36 4.88 3,400,000 150,000 3,550,000 3,348,659 147,735 3,496,394 Greenwich Capital Commercial Funding Series 2007-GG9 Cl A4 03/10/39 5.44 16,350,000 4,350,000 20,700,000 16,027,140 4,264,102 20,291,242 GS Mtge Securities II Series 2004-GG2 Cl A4 08/10/38 4.96 5,900,000 250,000 6,150,000 5,828,205 246,958 6,075,163 GS Mtge Securities II Series 2006-GG6 Cl A4 04/10/38 5.55 -- 375,000 375,000 -- 372,984 372,984 GS Mtge Securities II Series 2007-EOP Cl J 03/06/20 6.18 8,400,000 650,000 9,050,000(d,i) 8,232,281 637,022 8,869,303 GS Mtge Securities II Series 2007-GG10 Cl A4 08/10/45 5.99 11,900,000 1,250,000 13,150,000 11,989,255 1,259,376 13,248,631 GS Mtge Securities II Series 2007-GG10 Cl F 08/10/45 5.99 4,425,000 375,000 4,800,000 4,377,653 370,988 4,748,641 JPMorgan Chase Commercial Mtge Securities Series 2003-LN1 Cl A1 10/15/37 4.13 3,751,021 177,774 3,928,795 3,635,332 172,291 3,807,623 JPMorgan Chase Commercial Mtge Securities Series 2003-ML1A Cl A1 03/12/39 3.97 3,562,855 158,349 3,721,204 3,475,363 154,461 3,629,824 JPMorgan Chase Commercial Mtge Securities Series 2003-ML1A Cl A2 03/12/39 4.77 6,894,000 525,000 7,419,000 6,639,747 505,638 7,145,385 JPMorgan Chase Commercial Mtge Securities Series 2004-C2 Cl A2 05/15/41 5.26 -- 325,000 325,000 -- 322,012 322,012 JPMorgan Chase Commercial Mtge Securities Series 2004-CBX Cl A3 01/12/37 4.18 4,000,000 150,000 4,150,000 3,903,640 146,387 4,050,027 JPMorgan Chase Commercial Mtge Securities Series 2004-LN2 Cl A1 07/15/41 4.48 8,570,883 674,359 9,245,242 8,348,315 656,847 9,005,162 JPMorgan Chase Commercial Mtge Securities Series 2005-LDP5 Cl A4 12/15/44 5.34 5,200,000 550,000 5,750,000 5,056,740 534,848 5,591,588 JPMorgan Chase Commercial Mtge Securities Series 2006-LDP6 Cl A4 04/15/43 5.48 4,275,000 750,000 5,025,000 4,222,294 740,753 4,963,047 JPMorgan Chase Commercial Mtge Securities Series 2006-LDP6 Cl ASB 04/15/43 5.49 6,475,000 750,000 7,225,000 6,431,032 744,907 7,175,939 JPMorgan Chase Commercial Mtge Securities Series 2007-LDPX Cl A3 01/15/49 5.42 16,000,000 1,700,000 17,700,000 15,580,181 1,655,394 17,235,575
10
BONDS (CONTINUED) ISSUER COUPON PRINCIPAL PRINCIPAL PRINCIPAL VALUE(A) VALUE(A) VALUE(A) RATE AMOUNT AMOUNT AMOUNT RIVERSOURCE RIVERSOURCE DIVERSIFIED DIVERSIFIED RIVERSOURCE RIVERSOURCE BOND FUND RIVERSOURCE RIVERSOURCE BOND FUND DIVERSIFIED CORE PRO FORMA DIVERSIFIED CORE PRO FORMA BOND FUND BOND FUND COMBINED BOND FUND BOND FUND COMBINED COMMERCIAL MORTGAGE-BACKED (CONT.) LB-UBS Commercial Mtge Trust Series 2002-C4 Cl A4 09/15/26 4.56% $ 7,000,000 $ 200,000 $ 7,200,000 $ 6,836,054 $ 195,316 $ 7,031,370 LB-UBS Commercial Mtge Trust Series 2002-C4 Cl A5 09/15/31 4.85 6,000,000 500,000 6,500,000 5,809,769 484,147 6,293,916 LB-UBS Commercial Mtge Trust Series 2004-C2 Cl A3 03/15/29 3.97 4,475,000 225,000 4,700,000 4,259,663 214,173 4,473,836 LB-UBS Commercial Mtge Trust Series 2005-C5 Cl AAB 09/15/30 4.93 7,325,000 1,200,000 8,525,000 7,193,077 1,178,388 8,371,465 LB-UBS Commercial Mtge Trust Series 2006-C4 Cl AAB 06/15/32 6.06 4,125,000 975,000 5,100,000 4,194,353 991,393 5,185,746 LB-UBS Commercial Mtge Trust Series 2006-C6 Cl A4 09/15/39 5.37 4,900,000 550,000 5,450,000 4,773,782 535,833 5,309,615 LB-UBS Commercial Mtge Trust Series 2007-C1 Cl A4 02/15/40 5.42 4,875,000 375,000 5,250,000 4,756,949 365,919 5,122,868 LB-UBS Commercial Mtge Trust Series 2007-C6 Cl A4 07/15/40 5.86 6,350,000 700,000 7,050,000 6,381,746 703,500 7,085,246 Merrill Lynch Mtge Trust Series 2005-CKI1 Cl A1 11/12/37 5.08 -- 1,232,376 1,232,376 -- 1,227,028 1,227,028 Morgan Stanley Capital I Series 2003-T11 Cl A2 06/13/41 4.34 4,575,000 1,325,000 5,900,000 4,509,425 1,306,008 5,815,433 Morgan Stanley Capital I Series 2004-HQ4 Cl A5 04/14/40 4.59 4,950,000 250,000 5,200,000 4,821,053 243,488 5,064,541 Morgan Stanley Capital I Series 2006-T23 Cl AAB 08/12/41 5.97 3,425,000 250,000 3,675,000 3,472,257 253,449 3,725,706 Morgan Stanley Capital I Series 2007-IQ15 Cl A4 06/11/49 6.08 5,600,000 600,000 6,200,000 5,663,840 606,840 6,270,680 TIAA Retail Commercial Trust Series 2007-C4 Cl A3 08/15/39 6.10 8,500,000 975,000 9,475,000(c) 8,535,241 979,042 9,514,283 Wachovia Bank Commercial Mtge Trust Series 2003-C7 Cl A2 10/15/35 5.08 14,550,000 1,100,000 15,650,000(d) 14,160,801 1,070,576 15,231,377 Wachovia Bank Commercial Mtge Trust Series 2005-C18 Cl A4 04/15/42 4.94 4,815,000 300,000 5,115,000 4,624,074 288,104 4,912,178 Wachovia Bank Commercial Mtge Trust Series 2005-C20 Cl A5 07/15/42 5.09 4,667,000 300,000 4,967,000 4,574,808 294,074 4,868,882 Wachovia Bank Commercial Mtge Trust Series 2006-C27 Cl A3 07/15/45 5.77 11,950,372 1,225,000 13,175,372 11,953,069 1,225,276 13,178,345 Wachovia Bank Commercial Mtge Trust Series 2006-C27 Cl APB 07/15/45 5.73 5,075,000 400,000 5,475,000 5,034,875 396,837 5,431,712 Wachovia Bank Commercial Mtge Trust Series 2006-C29 Cl A4 11/15/48 5.31 8,900,000 900,000 9,800,000 8,648,747 874,592 9,523,339 Wachovia Bank Commercial Mtge Trust Series 2007-C31 Cl A4 04/15/47 5.51 17,350,000 1,775,000 19,125,000 16,998,308 1,739,020 18,737,328 -------------------------------------------- Total 382,332,011 37,528,761 419,860,772 - ----------------------------------------------------------------------------------------------------------------------------------- MORTGAGE-BACKED (49.3%)(F,N) Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2005-12 Cl 2A1 03/25/36 5.69 7,580,646 452,057 8,032,703(k) 7,581,474 452,106 8,033,580 Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2006-1 Cl 2A1 03/25/36 5.94 8,634,712 546,501 9,181,213(k) 8,623,832 545,812 9,169,644 Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2007-1 Cl 3A21 03/25/37 6.19 6,766,652 548,647 7,315,299(k) 6,840,918 554,669 7,395,587 American Home Mtge Assets Collateralized Mtge Obligation Series 2007-2 Cl A2A 03/25/47 5.67 -- 887,830 887,830(k) -- 835,772 835,772 Banc of America Alternative Loan Trust Collateralized Mtge Obligation Series 2003-11 Cl 1A1 01/25/34 6.00 6,816,612 102,506 6,919,118 6,691,868 100,630 6,792,498
11
BONDS (CONTINUED) ISSUER COUPON PRINCIPAL PRINCIPAL PRINCIPAL VALUE(A) VALUE(A) VALUE(A) RATE AMOUNT AMOUNT AMOUNT RIVERSOURCE RIVERSOURCE DIVERSIFIED DIVERSIFIED RIVERSOURCE RIVERSOURCE BOND FUND RIVERSOURCE RIVERSOURCE BOND FUND DIVERSIFIED CORE PRO FORMA DIVERSIFIED CORE PRO FORMA BOND FUND BOND FUND COMBINED BOND FUND BOND FUND COMBINED MORTGAGE-BACKED (CONT.) Banc of America Alternative Loan Trust Collateralized Mtge Obligation Series 2003-11 Cl 4A1 01/25/19 4.75% $ 3,729,443 $ 179,329 $ 3,908,772 $ 3,583,764 $ 172,324 $ 3,756,088 Banc of America Alternative Loan Trust Collateralized Mtge Obligation Series 2004-3 Cl 1A1 04/25/34 6.00 8,654,252 -- 8,654,252 8,589,345 -- 8,589,345 Banc of America Alternative Loan Trust Collateralized Mtge Obligation Series 2006-9 Cl 1CB1 01/25/37 6.00 16,660,970 1,388,414 18,049,384 16,401,807 1,366,817 17,768,624 Banc of America Funding Collateralized Mtge Obligation Series 2006-2 Cl N1 11/25/46 7.25 632,069 63,207 695,276(d) 595,725 59,573 655,298 Banc of America Funding Collateralized Mtge Obligation Series 2006-A Cl 3A2 02/20/36 5.89 6,140,551 441,237 6,581,788(k) 6,139,507 441,162 6,580,669 Banc of America Mtge Securities Collateralized Mtge Obligation Series 2005-9 Cl 3A3 10/25/20 5.00 27,132,255 2,556,110 29,688,365 26,300,240 2,477,727 28,777,967 Bear Stearns Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2005-8 Cl A4 08/25/35 5.10 6,025,000 450,000 6,475,000(d,k) 5,756,163 429,921 6,186,084 Bear Stearns Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2007-5 Cl 3A1 08/25/47 6.00 13,600,000 1,500,000 15,100,000(k) 13,319,500 1,469,063 14,788,563 ChaseFlex Trust Collateralized Mtge Obligation Series 2005-2 Cl 2A2 06/25/35 6.50 2,001,690 -- 2,001,690 2,023,585 -- 2,023,585 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Interest Only Series 2007-8CB Cl A13 05/25/37 7.73 6,218,487 473,321 6,691,808(g) 1,050,738 79,977 1,130,715 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2003-11T1 Cl A1 07/25/18 4.75 3,818,061 142,808 3,960,869 3,668,920 137,230 3,806,150 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2003-20CB Cl 1A1 10/25/33 5.50 14,928,280 2,195,335 17,123,615 14,371,375 2,113,437 16,484,812 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-54CB Cl 2A3 11/25/35 5.50 5,813,231 304,287 6,117,518 5,842,996 305,845 6,148,841 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-54CB Cl 3A7 11/25/35 5.50 5,890,080 307,358 6,197,438 5,920,217 308,931 6,229,148 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-64CB Cl 1A1 12/25/35 5.50 10,013,264 635,170 10,648,434 10,004,880 634,638 10,639,518 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-6CB Cl 1A1 04/25/35 7.50 5,308,276 259,163 5,567,439 5,502,702 268,656 5,771,358 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-85CB Cl 2A2 02/25/36 5.50 2,708,330 232,143 2,940,473 2,699,051 231,347 2,930,398 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-22R Cl 1A2 05/25/36 6.00 7,988,368 760,797 8,749,165 8,029,342 764,699 8,794,041 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-2CB Cl A11 03/25/36 6.00 8,310,985 620,802 8,931,787 8,132,753 607,489 8,740,242 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-31CB Cl A16 11/25/36 6.00 10,000,000 1,200,000 11,200,000 10,095,600 1,211,472 11,307,072 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-43CB Cl 1A4 02/25/37 6.00 12,356,857 952,272 13,309,129 12,389,479 954,786 13,344,265
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BONDS (CONTINUED) ISSUER COUPON PRINCIPAL PRINCIPAL PRINCIPAL VALUE(A) VALUE(A) VALUE(A) RATE AMOUNT AMOUNT AMOUNT RIVERSOURCE RIVERSOURCE DIVERSIFIED DIVERSIFIED RIVERSOURCE RIVERSOURCE BOND FUND RIVERSOURCE RIVERSOURCE BOND FUND DIVERSIFIED CORE PRO FORMA DIVERSIFIED CORE PRO FORMA BOND FUND BOND FUND COMBINED BOND FUND BOND FUND COMBINED MORTGAGE-BACKED (CONT.) Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2007-25 Cl 1A1 10/25/37 6.50% $ 20,000,000 $ 2,000,000 $ 22,000,000(j) $ 19,646,875 $ 1,964,688 $ 21,611,563 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2007-OA9 Cl A2 06/25/47 5.86 -- 1,100,000 1,100,000(i) -- 1,051,909 1,051,909 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2007-OH3 Cl A3 09/25/47 6.01 15,967,790 1,746,477 17,714,267(i) 14,637,770 1,601,006 16,238,776 Countrywide Home Loans Collateralized Mtge Obligation Series 2005-27 Cl 2A1 12/25/35 5.50 13,361,552 1,781,540 15,143,092 12,862,689 1,715,025 14,577,714 Countrywide Home Loans Collateralized Mtge Obligation Series 2005-R2 Cl 2A1 06/25/35 7.00 6,574,642 319,484 6,894,126(d) 6,909,833 335,772 7,245,605 Countrywide Home Loans Collateralized Mtge Obligation Series 2006-HYB1 Cl 1A1 03/20/36 5.36 3,756,789 632,152 4,388,941(k) 3,753,784 631,646 4,385,430 Countrywide Home Loans Collateralized Mtge Obligation Series 2007-17 Cl 2A1 10/25/37 6.50 18,000,000 2,500,000 20,500,000 17,907,188 2,487,109 20,394,297 Countrywide Home Loans Collateralized Mtge Obligation Series 2007-HY3 Cl 4A1 06/25/47 6.00 10,335,386 1,129,282 11,464,668(k) 10,121,814 1,105,946 11,227,760 CS First Boston Mtge Securities Collateralized Mtge Obligation Series 2003-29 Cl 8A1 11/25/18 6.00 2,027,217 -- 2,027,217 2,029,162 -- 2,029,162 Deutsche Bank Alternate Mtge Loan Trust Collateralized Mtge Obligation Series 2007-AR3 Cl 2A1 05/25/37 5.62 -- 444,209 444,209(k) -- 443,429 443,429 Downey Savings & Loan Assn Mtge Loan Trust Collateralized Mtge Obligation Interest Only Series 2005-AR5 Cl X1 08/19/45 9.55 42,924,289 2,360,026 45,284,315(g) 382,294 21,019 403,313 Federal Home Loan Mtge Corp 09/01/37 6.00 -- 3,785,000 3,785,000(j) -- 3,781,450 3,781,450 09/01/37 6.50 61,000,000 1,500,000 62,500,000(j) 61,914,999 1,522,500 63,437,499 Federal Home Loan Mtge Corp #170216 03/01/17 8.50 7,682 -- 7,682 8,171 -- 8,171 Federal Home Loan Mtge Corp #1J0283 02/01/37 5.83 -- 810,174 810,174(k) -- 811,447 811,447 Federal Home Loan Mtge Corp #1J1445 01/01/37 5.90 13,124,315 1,197,474 14,321,789(k) 13,200,534 1,204,428 14,404,962 Federal Home Loan Mtge Corp #284190 01/01/17 8.00 341 -- 341 358 -- 358 Federal Home Loan Mtge Corp #290970 04/01/17 8.00 9,885 -- 9,885 10,344 -- 10,344 Federal Home Loan Mtge Corp #295114 06/01/17 8.50 3,693 -- 3,693 3,929 -- 3,929 Federal Home Loan Mtge Corp #540861 09/01/19 8.50 33,499 -- 33,499 35,747 -- 35,747 Federal Home Loan Mtge Corp #A00304 04/01/21 9.00 46,970 -- 46,970 50,357 -- 50,357 Federal Home Loan Mtge Corp #A12692 10/01/32 6.00 -- 108,845 108,845 -- 109,540 109,540 Federal Home Loan Mtge Corp #A13854 09/01/33 6.00 -- 137,760 137,760 -- 138,453 138,453 Federal Home Loan Mtge Corp #A62544 06/01/37 6.00 8,106,420 -- 8,106,420 8,100,509 -- 8,100,509 Federal Home Loan Mtge Corp #A62695 06/01/37 6.00 -- 1,987,908 1,987,908 -- 1,986,805 1,986,805 Federal Home Loan Mtge Corp #B10254 10/01/18 5.50 -- 430,409 430,409 -- 428,846 428,846 Federal Home Loan Mtge Corp #B11835 01/01/19 5.50 502,437 -- 502,437 500,613 -- 500,613 Federal Home Loan Mtge Corp #B12280 02/01/19 5.50 -- 229,046 229,046 -- 228,215 228,215 Federal Home Loan Mtge Corp #C00103 03/01/22 8.50 122,079 -- 122,079 130,795 -- 130,795 Federal Home Loan Mtge Corp #C00144 08/01/22 8.50 111,358 -- 111,358 119,412 -- 119,412 Federal Home Loan Mtge Corp #C00356 08/01/24 8.00 390,728 -- 390,728 413,838 -- 413,838 Federal Home Loan Mtge Corp #C00666 10/01/28 7.00 46,602 -- 46,602 48,203 -- 48,203 Federal Home Loan Mtge Corp #C02951 07/01/37 6.50 24,963,125 2,995,575 27,958,700 25,340,171 3,040,821 28,380,992 Federal Home Loan Mtge Corp #C53878 12/01/30 5.50 1,617,997 -- 1,617,997 1,588,691 -- 1,588,691 Federal Home Loan Mtge Corp #C59161 10/01/31 6.00 -- 133,448 133,448 -- 134,144 134,144 Federal Home Loan Mtge Corp #C62993 01/01/32 6.50 1,135,757 -- 1,135,757 1,161,398 -- 1,161,398
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BONDS (CONTINUED) ISSUER COUPON PRINCIPAL PRINCIPAL PRINCIPAL VALUE(A) VALUE(A) VALUE(A) RATE AMOUNT AMOUNT AMOUNT RIVERSOURCE RIVERSOURCE DIVERSIFIED DIVERSIFIED RIVERSOURCE RIVERSOURCE BOND FUND RIVERSOURCE RIVERSOURCE BOND FUND DIVERSIFIED CORE PRO FORMA DIVERSIFIED CORE PRO FORMA BOND FUND BOND FUND COMBINED BOND FUND BOND FUND COMBINED MORTGAGE-BACKED (CONT.) Federal Home Loan Mtge Corp #C63552 01/01/32 6.50% $ 1,735,467 $ -- $ 1,735,467 $ 1,780,106 $ -- $ 1,780,106 Federal Home Loan Mtge Corp #C64703 03/01/32 6.50 991,391 -- 991,391 1,014,556 -- 1,014,556 Federal Home Loan Mtge Corp #C67723 06/01/32 7.00 797,346 -- 797,346 826,555 -- 826,555 Federal Home Loan Mtge Corp #C77372 03/01/33 6.00 -- 259,972 259,972 -- 261,569 261,569 Federal Home Loan Mtge Corp #C78031 04/01/33 5.50 8,896,394 -- 8,896,394 8,721,585 -- 8,721,585 Federal Home Loan Mtge Corp #C79930 06/01/33 5.50 7,723,071 -- 7,723,071 7,565,174 -- 7,565,174 Federal Home Loan Mtge Corp #C90613 01/01/23 5.00 -- 146,245 146,245 -- 141,703 141,703 Federal Home Loan Mtge Corp #C90683 06/01/23 5.00 -- 150,357 150,357 -- 145,687 145,687 Federal Home Loan Mtge Corp #C90767 12/01/23 6.00 7,307,024 127,372 7,434,396 7,375,724 128,570 7,504,294 Federal Home Loan Mtge Corp #D96300 10/01/23 5.50 5,004,713 -- 5,004,713 4,945,549 -- 4,945,549 Federal Home Loan Mtge Corp #E01127 02/01/17 6.50 1,138,468 -- 1,138,468 1,163,268 -- 1,163,268 Federal Home Loan Mtge Corp #E01419 05/01/18 5.50 4,247,554 -- 4,247,554 4,235,794 -- 4,235,794 Federal Home Loan Mtge Corp #E74288 12/01/13 6.00 -- 177,703 177,703 -- 180,093 180,093 Federal Home Loan Mtge Corp #E79810 11/01/14 7.50 952,062 -- 952,062 990,711 -- 990,711 Federal Home Loan Mtge Corp #E90216 05/01/17 6.00 1,320,121 -- 1,320,121 1,336,218 -- 1,336,218 Federal Home Loan Mtge Corp #E98725 08/01/18 5.00 9,615,590 186,083 9,801,673 9,429,100 182,474 9,611,574 Federal Home Loan Mtge Corp #E99684 10/01/18 5.00 9,634,698 -- 9,634,698 9,446,483 -- 9,446,483 Federal Home Loan Mtge Corp #G00286 02/01/25 8.00 153,612 -- 153,612 162,698 -- 162,698 Federal Home Loan Mtge Corp #G01108 04/01/30 7.00 2,957,443 -- 2,957,443 3,059,353 -- 3,059,353 Federal Home Loan Mtge Corp #G01410 04/01/32 7.00 -- 294,413 294,413 -- 303,601 303,601 Federal Home Loan Mtge Corp #G01441 07/01/32 7.00 2,685,445 -- 2,685,445 2,769,253 -- 2,769,253 Federal Home Loan Mtge Corp #G01535 04/01/33 6.00 10,192,550 -- 10,192,550 10,259,085 -- 10,259,085 Federal Home Loan Mtge Corp #G02757 06/01/36 5.00 26,392,109 2,140,160 28,532,269 25,135,440 2,038,256 27,173,696 Federal Home Loan Mtge Corp #G11302 07/01/17 7.00 3,189,876 -- 3,189,876 3,296,532 -- 3,296,532 Federal Home Loan Mtge Corp #G30225 02/01/23 6.00 10,088,513 -- 10,088,513 10,195,293 -- 10,195,293 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 237 Cl IO 05/15/36 8.64 4,230,664 315,049 4,545,713(g) 1,131,703 84,276 1,215,979 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2590 Cl BI 02/15/14 10.67 1,504,506 -- 1,504,506(g) 39,767 -- 39,767 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2718 Cl IA 10/15/22 20.00 3,332,378 84,600 3,416,978(g) 73,048 1,855 74,903 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2795 Cl IY 07/15/17 12.98 -- 410,473 410,473(g) -- 39,846 39,846 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2817 Cl SA 06/15/32 9.13 6,831,038 595,656 7,426,694(g) 381,443 33,261 414,704 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Series 1241 Cl K 03/15/22 7.00 570,583 -- 570,583 568,998 -- 568,998 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Series 2576 Cl KJ 02/15/33 5.50 10,213,966 167,993 10,381,959 10,268,501 168,890 10,437,391 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Series 2641 Cl KC 01/15/18 6.50 3,584,188 168,385 3,752,573 3,690,279 173,369 3,863,648
14
BONDS (CONTINUED) ISSUER COUPON PRINCIPAL PRINCIPAL PRINCIPAL VALUE(A) VALUE(A) VALUE(A) RATE AMOUNT AMOUNT AMOUNT RIVERSOURCE RIVERSOURCE DIVERSIFIED DIVERSIFIED RIVERSOURCE RIVERSOURCE BOND FUND RIVERSOURCE RIVERSOURCE BOND FUND DIVERSIFIED CORE PRO FORMA DIVERSIFIED CORE PRO FORMA BOND FUND BOND FUND COMBINED BOND FUND BOND FUND COMBINED MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn 09/01/22 5.50% $ -- $ 3,000,000 $ 3,000,000(j) $ -- $ 2,982,186 $ 2,982,186 09/01/22 6.00 -- 2,275,000 2,275,000(j) -- 2,299,172 2,299,172 09/01/37 5.50 34,500,000 1,000,000 35,500,000(j) 33,691,388 976,562 34,667,950 09/01/37 6.00 41,500,000 5,300,000 46,800,000(j) 41,448,124 5,293,375 46,741,499 09/01/37 7.00 56,000,000 7,500,000 63,500,000(j) 57,557,471 7,708,589 65,266,060 10/01/37 6.00 48,000,000 3,000,000 51,000,000(j) 47,925,023 2,995,314 50,920,337 Federal Natl Mtge Assn #125479 04/01/27 7.50 236,065 -- 236,065 247,416 -- 247,416 Federal Natl Mtge Assn #190899 04/01/23 8.50 371,661 -- 371,661 392,144 -- 392,144 Federal Natl Mtge Assn #190944 05/01/24 6.00 5,759,455 -- 5,759,455 5,786,298 -- 5,786,298 Federal Natl Mtge Assn #190988 06/01/24 9.00 332,477 -- 332,477 354,447 -- 354,447 Federal Natl Mtge Assn #231309 09/01/23 6.50 151,085 -- 151,085 154,501 -- 154,501 Federal Natl Mtge Assn #231310 09/01/23 6.50 379,461 -- 379,461 388,039 -- 388,039 Federal Natl Mtge Assn #250330 09/01/25 8.00 246,521 -- 246,521 260,661 -- 260,661 Federal Natl Mtge Assn #250495 03/01/26 7.00 596,810 -- 596,810 619,041 -- 619,041 Federal Natl Mtge Assn #250765 12/01/26 8.00 230,929 -- 230,929 244,296 -- 244,296 Federal Natl Mtge Assn #251116 08/01/27 8.00 251,494 -- 251,494 266,167 -- 266,167 Federal Natl Mtge Assn #252440 05/01/29 7.00 -- 213,992 213,992 -- 222,095 222,095 Federal Natl Mtge Assn #252498 06/01/29 7.00 5,772 -- 5,772 5,990 -- 5,990 Federal Natl Mtge Assn #253883 08/01/16 6.00 2,772,025 -- 2,772,025 2,807,905 -- 2,807,905 Federal Natl Mtge Assn #254236 03/01/17 6.50 1,649,152 -- 1,649,152 1,683,180 -- 1,683,180 Federal Natl Mtge Assn #254383 06/01/32 7.50 354,545 -- 354,545 369,739 -- 369,739 Federal Natl Mtge Assn #254587 12/01/22 5.50 -- 581,428 581,428 -- 574,764 574,764 Federal Natl Mtge Assn #254802 07/01/18 4.50 2,884,873 -- 2,884,873 2,737,441 -- 2,737,441 Federal Natl Mtge Assn #254916 09/01/23 5.50 9,754,235 441,817 10,196,052 9,638,128 436,558 10,074,686 Federal Natl Mtge Assn #255788 06/01/15 5.50 2,870,981 624,126 3,495,107 2,900,432 630,529 3,530,961 Federal Natl Mtge Assn #256135 02/01/36 5.50 -- 3,834,499 3,834,499 -- 3,722,787 3,722,787 Federal Natl Mtge Assn #268071 01/01/24 6.50 103,967 -- 103,967 106,317 -- 106,317 Federal Natl Mtge Assn #303226 02/01/25 8.00 114,443 -- 114,443 120,939 -- 120,939 Federal Natl Mtge Assn #313049 08/01/11 8.50 696,950 -- 696,950 727,849 -- 727,849 Federal Natl Mtge Assn #323715 05/01/29 6.00 -- 447,880 447,880 -- 450,883 450,883 Federal Natl Mtge Assn #323933 09/01/29 7.00 3,824,956 -- 3,824,956 3,969,786 -- 3,969,786 Federal Natl Mtge Assn #386558 10/01/10 4.85 -- 474,464 474,464 -- 469,517 469,517 Federal Natl Mtge Assn #408207 01/01/28 6.50 145,213 -- 145,213 149,108 -- 149,108 Federal Natl Mtge Assn #455791 01/01/29 6.50 532,019 -- 532,019 544,838 -- 544,838 Federal Natl Mtge Assn #489888 05/01/29 6.50 2,018,616 -- 2,018,616 2,065,600 -- 2,065,600 Federal Natl Mtge Assn #493945 04/01/29 6.50 -- 92,834 92,834 -- 94,956 94,956 Federal Natl Mtge Assn #496029 01/01/29 6.50 2,369,919 -- 2,369,919 2,431,209 -- 2,431,209 Federal Natl Mtge Assn #50700 03/01/08 7.00 198,293 -- 198,293 199,693 -- 199,693 Federal Natl Mtge Assn #518159 09/01/14 7.00 -- 376,863 376,863 -- 389,013 389,013 Federal Natl Mtge Assn #545008 06/01/31 7.00 2,408,108 -- 2,408,108 2,504,103 -- 2,504,103 Federal Natl Mtge Assn #545216 03/01/09 5.89 -- 103,100 103,100 -- 103,213 103,213 Federal Natl Mtge Assn #545342 04/01/13 7.00 1,073,319 -- 1,073,319 1,080,895 -- 1,080,895 Federal Natl Mtge Assn #545684 05/01/32 7.50 303,366 -- 303,366 317,198 -- 317,198 Federal Natl Mtge Assn #545868 08/01/32 7.00 -- 99,707 99,707 -- 103,669 103,669 Federal Natl Mtge Assn #545869 07/01/32 6.50 2,136,329 -- 2,136,329 2,186,657 -- 2,186,657 Federal Natl Mtge Assn #545885 08/01/32 6.50 3,774,242 -- 3,774,242 3,916,909 -- 3,916,909 Federal Natl Mtge Assn #545910 08/01/17 6.00 4,768,777 -- 4,768,777 4,836,062 -- 4,836,062 Federal Natl Mtge Assn #555340 04/01/33 5.50 -- 280,883 280,883 -- 275,378 275,378 Federal Natl Mtge Assn #555343 08/01/17 6.00 4,632,714 -- 4,632,714 4,690,762 -- 4,690,762 Federal Natl Mtge Assn #555375 04/01/33 6.00 22,600,396 -- 22,600,396 22,734,627 -- 22,734,627 Federal Natl Mtge Assn #555458 05/01/33 5.50 20,422,396 -- 20,422,396 20,014,152 -- 20,014,152 Federal Natl Mtge Assn #555528 04/01/33 6.00 14,854,511 1,559,724 16,414,235 14,913,146 1,565,880 16,479,026
15
BONDS (CONTINUED) ISSUER COUPON PRINCIPAL PRINCIPAL PRINCIPAL VALUE(A) VALUE(A) VALUE(A) RATE AMOUNT AMOUNT AMOUNT RIVERSOURCE RIVERSOURCE DIVERSIFIED DIVERSIFIED RIVERSOURCE RIVERSOURCE BOND FUND RIVERSOURCE RIVERSOURCE BOND FUND DIVERSIFIED CORE PRO FORMA DIVERSIFIED CORE PRO FORMA BOND FUND BOND FUND COMBINED BOND FUND BOND FUND COMBINED MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #555734 07/01/23 5.00% $ 7,982,726 $ 94,369 $ 8,077,095 $ 7,720,003 $ 91,263 $ 7,811,266 Federal Natl Mtge Assn #555740 08/01/18 4.50 9,704,041 164,790 9,868,831 9,357,955 158,913 9,516,868 Federal Natl Mtge Assn #555794 09/01/28 7.50 776,184 85,985 862,169 813,807 90,152 903,959 Federal Natl Mtge Assn #567840 10/01/30 7.00 1,235,140 -- 1,235,140 1,281,908 -- 1,281,908 Federal Natl Mtge Assn #582154 05/01/31 6.50 -- 123,681 123,681 -- 126,480 126,480 Federal Natl Mtge Assn #587859 12/01/16 5.50 4,352,732 -- 4,352,732 4,344,096 -- 4,344,096 Federal Natl Mtge Assn #597374 09/01/31 7.00 671,534 109,638 781,172 698,920 114,109 813,029 Federal Natl Mtge Assn #606882 10/01/31 7.00 931,403 -- 931,403 966,140 -- 966,140 Federal Natl Mtge Assn #611831 02/01/31 7.50 -- 43,797 43,797 -- 45,888 45,888 Federal Natl Mtge Assn #615135 11/01/16 6.00 -- 278,837 278,837 -- 282,446 282,446 Federal Natl Mtge Assn #634650 04/01/32 7.50 161,171 -- 161,171 168,077 -- 168,077 Federal Natl Mtge Assn #638969 03/01/32 5.50 1,461,588 -- 1,461,588 1,436,014 -- 1,436,014 Federal Natl Mtge Assn #643362 04/01/17 6.50 695,230 -- 695,230 709,575 -- 709,575 Federal Natl Mtge Assn #646147 06/01/32 7.00 2,326,228 689,007 3,015,235 2,419,678 716,686 3,136,364 Federal Natl Mtge Assn #646446 06/01/17 6.50 1,061,298 -- 1,061,298 1,083,197 -- 1,083,197 Federal Natl Mtge Assn #649068 06/01/17 6.50 1,808,865 -- 1,808,865 1,851,210 -- 1,851,210 Federal Natl Mtge Assn #649263 08/01/17 6.50 1,840,466 -- 1,840,466 1,880,523 -- 1,880,523 Federal Natl Mtge Assn #650009 09/01/31 7.50 -- 98,137 98,137 -- 102,824 102,824 Federal Natl Mtge Assn #654208 10/01/32 6.50 1,911,644 238,956 2,150,600 1,952,926 244,116 2,197,042 Federal Natl Mtge Assn #654682 10/01/32 6.00 1,274,448 -- 1,274,448 1,279,679 -- 1,279,679 Federal Natl Mtge Assn #654689 11/01/32 6.00 1,355,865 -- 1,355,865 1,360,673 -- 1,360,673 Federal Natl Mtge Assn #656908 09/01/32 6.50 1,783,790 -- 1,783,790 1,829,712 -- 1,829,712 Federal Natl Mtge Assn #661815 10/01/32 6.00 -- 148,633 148,633 -- 149,533 149,533 Federal Natl Mtge Assn #662061 09/01/32 6.50 1,609,997 993,401 2,603,398 1,644,765 1,014,854 2,659,619 Federal Natl Mtge Assn #667604 10/01/32 5.50 -- 277,761 277,761 -- 272,171 272,171 Federal Natl Mtge Assn #667787 02/01/18 5.50 1,694,185 -- 1,694,185 1,688,069 -- 1,688,069 Federal Natl Mtge Assn #670382 09/01/32 6.00 10,674,149 -- 10,674,149 10,716,283 -- 10,716,283 Federal Natl Mtge Assn #670387 08/01/32 7.00 1,368,542 -- 1,368,542 1,420,550 -- 1,420,550 Federal Natl Mtge Assn #677089 01/01/33 5.50 -- 637,024 637,024 -- 624,205 624,205 Federal Natl Mtge Assn #678028 09/01/17 6.00 5,336,031 144,217 5,480,248 5,402,891 146,024 5,548,915 Federal Natl Mtge Assn #678065 02/01/33 6.50 377,284 -- 377,284 386,835 -- 386,835 Federal Natl Mtge Assn #678937 01/01/18 5.50 2,673,148 -- 2,673,148 2,667,448 -- 2,667,448 Federal Natl Mtge Assn #678941 02/01/18 5.50 3,304,914 -- 3,304,914 3,297,821 -- 3,297,821 Federal Natl Mtge Assn #679095 04/01/18 5.00 5,180,011 -- 5,180,011 5,074,530 -- 5,074,530 Federal Natl Mtge Assn #680961 01/01/33 6.00 552,356 -- 552,356 555,642 -- 555,642 Federal Natl Mtge Assn #681080 02/01/18 5.00 -- 1,057,178 1,057,178 -- 1,035,650 1,035,650 Federal Natl Mtge Assn #681166 04/01/32 6.50 -- 418,542 418,542 -- 428,012 428,012 Federal Natl Mtge Assn #681400 03/01/18 5.50 4,852,612 -- 4,852,612 4,840,650 -- 4,840,650 Federal Natl Mtge Assn #682825 01/01/33 6.00 1,796,545 -- 1,796,545 1,776,530 -- 1,776,530 Federal Natl Mtge Assn #683100 02/01/18 5.50 -- 187,856 187,856 -- 187,372 187,372 Federal Natl Mtge Assn #683116 02/01/33 6.00 -- 266,400 266,400 -- 267,452 267,452 Federal Natl Mtge Assn #683274 02/01/18 5.50 2,210,392 -- 2,210,392 2,204,700 -- 2,204,700 Federal Natl Mtge Assn #684586 03/01/33 6.00 3,160,173 -- 3,160,173 3,175,854 -- 3,175,854 Federal Natl Mtge Assn #686172 02/01/33 6.00 2,763,574 -- 2,763,574 2,774,482 -- 2,774,482 Federal Natl Mtge Assn #686528 02/01/33 6.00 3,509,276 -- 3,509,276 3,531,370 -- 3,531,370 Federal Natl Mtge Assn #687051 01/01/33 6.00 10,563,262 -- 10,563,262 10,543,456 -- 10,543,456 Federal Natl Mtge Assn #689026 05/01/33 5.50 -- 1,149,267 1,149,267 -- 1,126,539 1,126,539 Federal Natl Mtge Assn #689093 07/01/28 5.50 3,299,941 123,529 3,423,470 3,242,200 121,367 3,363,567 Federal Natl Mtge Assn #694628 04/01/33 5.50 6,514,264 -- 6,514,264 6,388,136 -- 6,388,136 Federal Natl Mtge Assn #694795 04/01/33 5.50 7,911,592 -- 7,911,592 7,757,919 -- 7,757,919 Federal Natl Mtge Assn #694988 03/01/33 5.50 11,017,160 -- 11,017,160 10,799,582 -- 10,799,582 Federal Natl Mtge Assn #695202 03/01/33 6.50 4,144,718 -- 4,144,718 4,228,328 -- 4,228,328
16
BONDS (CONTINUED) ISSUER COUPON PRINCIPAL PRINCIPAL PRINCIPAL VALUE(A) VALUE(A) VALUE(A) RATE AMOUNT AMOUNT AMOUNT RIVERSOURCE RIVERSOURCE DIVERSIFIED DIVERSIFIED RIVERSOURCE RIVERSOURCE BOND FUND RIVERSOURCE RIVERSOURCE BOND FUND DIVERSIFIED CORE PRO FORMA DIVERSIFIED CORE PRO FORMA BOND FUND BOND FUND COMBINED BOND FUND BOND FUND COMBINED MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #695909 05/01/18 5.50% $ 2,185,816 $ -- $ 2,185,816 $ 2,179,956 $ -- $ 2,179,956 Federal Natl Mtge Assn #699424 04/01/33 5.50 4,447,211 -- 4,447,211 4,360,288 -- 4,360,288 Federal Natl Mtge Assn #702427 04/01/33 5.50 4,235,697 -- 4,235,697 4,153,614 -- 4,153,614 Federal Natl Mtge Assn #704005 05/01/33 5.50 -- 1,101,715 1,101,715 -- 1,079,102 1,079,102 Federal Natl Mtge Assn #704049 05/01/18 5.50 2,633,722 -- 2,633,722 2,626,737 -- 2,626,737 Federal Natl Mtge Assn #705655 05/01/33 5.00 -- 489,558 489,558 -- 466,996 466,996 Federal Natl Mtge Assn #709093 06/01/33 6.00 -- 170,117 170,117 -- 170,573 170,573 Federal Natl Mtge Assn #709901 06/01/18 5.00 -- 523,187 523,187 -- 513,468 513,468 Federal Natl Mtge Assn #710823 05/01/33 5.50 642,725 -- 642,725 630,299 -- 630,299 Federal Natl Mtge Assn #711503 06/01/33 5.50 -- 133,405 133,405 -- 131,182 131,182 Federal Natl Mtge Assn #712057 07/01/18 4.50 -- 80,342 80,342 -- 77,308 77,308 Federal Natl Mtge Assn #720070 07/01/23 5.50 2,571,009 -- 2,571,009 2,540,406 -- 2,540,406 Federal Natl Mtge Assn #720378 06/01/18 4.50 5,987,721 167,880 6,155,601 5,761,605 161,540 5,923,145 Federal Natl Mtge Assn #723687 08/01/28 5.50 4,027,298 -- 4,027,298 3,956,829 -- 3,956,829 Federal Natl Mtge Assn #725217 02/01/14 4.72 -- 1,171,178 1,171,178 -- 1,135,482 1,135,482 Federal Natl Mtge Assn #725232 03/01/34 5.00 17,912,257 1,131,301 19,043,558 17,086,761 1,079,164 18,165,925 Federal Natl Mtge Assn #725424 04/01/34 5.50 18,710,807 1,831,096 20,541,903 18,326,764 1,793,512 20,120,276 Federal Natl Mtge Assn #725425 04/01/34 5.50 24,235,824 3,107,284 27,343,108 23,742,274 3,044,006 26,786,280 Federal Natl Mtge Assn #725431 08/01/15 5.50 -- 149,302 149,302 -- 149,286 149,286 Federal Natl Mtge Assn #725684 05/01/18 6.00 9,712,655 328,687 10,041,342 9,842,789 333,091 10,175,880 Federal Natl Mtge Assn #725719 07/01/33 4.85 6,851,569 252,426 7,103,995(k) 6,670,893 245,770 6,916,663 Federal Natl Mtge Assn #725773 09/01/34 5.50 -- 1,755,846 1,755,846 -- 1,718,091 1,718,091 Federal Natl Mtge Assn #725813 12/01/33 6.50 10,195,718 -- 10,195,718 10,401,393 -- 10,401,393 Federal Natl Mtge Assn #726940 08/01/23 5.50 -- 77,883 77,883 -- 76,954 76,954 Federal Natl Mtge Assn #730153 08/01/33 5.50 1,157,023 -- 1,157,023 1,133,274 -- 1,133,274 Federal Natl Mtge Assn #735029 09/01/13 5.28 -- 478,518 478,518 -- 474,505 474,505 Federal Natl Mtge Assn #735212 12/01/34 5.00 19,847,099 1,823,788 21,670,887 18,913,399 1,737,988 20,651,387 Federal Natl Mtge Assn #735224 02/01/35 5.50 34,296,906 4,209,166 38,506,072 33,592,952 4,122,772 37,715,724 Federal Natl Mtge Assn #735841 11/01/19 4.50 -- 1,842,158 1,842,158 -- 1,770,381 1,770,381 Federal Natl Mtge Assn #738921 11/01/32 6.50 788,277 -- 788,277 807,330 -- 807,330 Federal Natl Mtge Assn #743262 10/01/18 5.00 3,429,389 -- 3,429,389 3,362,716 -- 3,362,716 Federal Natl Mtge Assn #743347 10/01/33 6.00 -- 99,512 99,512 -- 99,946 99,946 Federal Natl Mtge Assn #743579 11/01/33 5.50 -- 301,651 301,651 -- 295,459 295,459 Federal Natl Mtge Assn #745355 03/01/36 5.00 14,145,539 4,862,529 19,008,068 13,467,154 4,629,334 18,096,488 Federal Natl Mtge Assn #745392 12/01/20 4.50 -- 1,006,893 1,006,893 -- 967,661 967,661 Federal Natl Mtge Assn #745563 08/01/34 5.50 -- 1,503,713 1,503,713 -- 1,472,849 1,472,849 Federal Natl Mtge Assn #747642 11/01/28 5.50 2,607,614 -- 2,607,614 2,561,987 -- 2,561,987 Federal Natl Mtge Assn #753074 12/01/28 5.50 7,004,277 199,182 7,203,459 6,881,718 195,696 7,077,414 Federal Natl Mtge Assn #753091 12/01/33 5.50 4,402,938 -- 4,402,938 4,312,566 -- 4,312,566 Federal Natl Mtge Assn #753919 12/01/33 4.95 5,758,451 -- 5,758,451(k) 5,645,203 -- 5,645,203 Federal Natl Mtge Assn #757581 01/01/19 5.50 -- 961,786 961,786 -- 958,313 958,313 Federal Natl Mtge Assn #759342 01/01/34 6.50 1,629,744 -- 1,629,744 1,663,809 -- 1,663,809 Federal Natl Mtge Assn #765183 01/01/19 5.50 595,602 -- 595,602 593,721 -- 593,721 Federal Natl Mtge Assn #765759 12/01/18 5.00 3,517,988 -- 3,517,988 3,446,351 -- 3,446,351 Federal Natl Mtge Assn #765760 02/01/19 5.00 -- 243,988 243,988 -- 239,020 239,020 Federal Natl Mtge Assn #766641 03/01/34 5.00 6,667,469 -- 6,667,469 6,353,800 -- 6,353,800 Federal Natl Mtge Assn #776962 04/01/29 5.00 16,977,928 -- 16,977,928 16,227,156 -- 16,227,156 Federal Natl Mtge Assn #779676 06/01/34 5.00 -- 2,348,388 2,348,388 -- 2,237,908 2,237,908 Federal Natl Mtge Assn #804442 12/01/34 6.50 1,255,828 -- 1,255,828 1,279,151 -- 1,279,151 Federal Natl Mtge Assn #815264 05/01/35 5.23 -- 702,609 702,609(k) -- 697,439 697,439 Federal Natl Mtge Assn #829227 08/01/35 6.00 -- 1,402,274 1,402,274 -- 1,402,227 1,402,227 Federal Natl Mtge Assn #831870 11/01/36 6.50 -- 1,973,235 1,973,235 -- 2,003,188 2,003,188
17
BONDS (CONTINUED) ISSUER COUPON PRINCIPAL PRINCIPAL PRINCIPAL VALUE(A) VALUE(A) VALUE(A) RATE AMOUNT AMOUNT AMOUNT RIVERSOURCE RIVERSOURCE DIVERSIFIED DIVERSIFIED RIVERSOURCE RIVERSOURCE BOND FUND RIVERSOURCE RIVERSOURCE BOND FUND DIVERSIFIED CORE PRO FORMA DIVERSIFIED CORE PRO FORMA BOND FUND BOND FUND COMBINED BOND FUND BOND FUND COMBINED MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #837258 09/01/35 4.93% $ 2,710,141 $ -- $ 2,710,141(k) $ 2,698,108 $ -- $ 2,698,108 Federal Natl Mtge Assn #848482 12/01/35 6.00 -- 2,993,559 2,993,559 -- 2,993,458 2,993,458 Federal Natl Mtge Assn #878661 02/01/36 5.50 -- 1,835,806 1,835,806 -- 1,784,404 1,784,404 Federal Natl Mtge Assn #881629 02/01/36 5.50 -- 1,191,642 1,191,642 -- 1,158,276 1,158,276 Federal Natl Mtge Assn #882063 06/01/36 6.50 3,842,858 -- 3,842,858 3,913,141 -- 3,913,141 Federal Natl Mtge Assn #883201 07/01/36 6.50 -- 840,842 840,842 -- 854,911 854,911 Federal Natl Mtge Assn #886291 07/01/36 7.00 6,945,957 858,820 7,804,777 7,160,276 885,319 8,045,595 Federal Natl Mtge Assn #886464 08/01/36 6.50 -- 2,004,835 2,004,835 -- 2,035,267 2,035,267 Federal Natl Mtge Assn #915770 03/01/37 6.50 -- 3,187,335 3,187,335 -- 3,235,477 3,235,477 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-24 Cl PI 12/25/12 20.00 482,725 -- 482,725(g) 2,965 -- 2,965 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-63 Cl IP 07/25/33 12.86 14,982,101 1,304,431 16,286,532(g) 3,477,449 302,767 3,780,216 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-71 Cl IM 12/25/31 10.85 2,878,962 231,301 3,110,263(g) 522,216 41,956 564,172 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2004-84 Cl GI 12/25/22 9.48 773,245 133,831 907,076(g) 111,624 19,320 130,944 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2005-92 Cl SC 10/25/35 15.94 25,263,829 2,187,911 27,451,740(g) 964,573 83,534 1,048,107 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 367 Cl 2 01/01/36 8.59 14,407,307 1,415,003 15,822,310(g) 3,853,955 378,513 4,232,468 Federal Natl Mtge Assn Collateralized Mtge Obligation Principal Only Series 43 Cl I 09/01/18 5.77 19,379 -- 19,379(h) 15,804 -- 15,804 Federal Natl Mtge Assn Collateralized Mtge Obligation Series 2003-133 Cl GB 12/25/26 8.00 3,411,789 142,117 3,553,906 3,619,474 150,768 3,770,242 Govt Natl Mtge Assn #345538 02/15/24 8.00 135,245 -- 135,245 143,452 -- 143,452 Govt Natl Mtge Assn #398831 08/15/26 8.00 129,921 -- 129,921 137,949 -- 137,949 Govt Natl Mtge Assn #423782 05/15/26 7.50 437,532 -- 437,532 459,056 -- 459,056 Govt Natl Mtge Assn #425004 10/15/33 5.50 3,678,115 -- 3,678,115 3,620,417 -- 3,620,417 Govt Natl Mtge Assn #426170 06/15/26 8.00 107,855 -- 107,855 114,520 -- 114,520 Govt Natl Mtge Assn #567717 06/15/32 7.50 -- 15,565 15,565 -- 16,293 16,293 Govt Natl Mtge Assn #595256 12/15/32 6.00 6,182,445 -- 6,182,445 6,227,680 -- 6,227,680 Govt Natl Mtge Assn #604580 08/15/33 5.00 3,742,717 -- 3,742,717 3,612,110 -- 3,612,110 Govt Natl Mtge Assn #604708 10/15/33 5.50 9,923,822 104,461 10,028,283 9,768,150 102,823 9,870,973 Govt Natl Mtge Assn #606844 09/15/33 5.00 9,063,479 -- 9,063,479 8,747,197 -- 8,747,197 Govt Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2002-70 Cl IC 08/20/32 11.73 7,891,946 -- 7,891,946(g) 1,556,411 -- 1,556,411 Govt Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2002-80 Cl CI 01/20/32 12.47 1,364,184 -- 1,364,184(g) 142,851 -- 142,851 Harborview Mtge Loan Trust Collateralized Mtge Obligation Series 2005-16 Cl 3A1B 01/19/36 5.88 -- 331,765 331,765(k) -- 331,838 331,838
18
BONDS (CONTINUED) ISSUER COUPON PRINCIPAL PRINCIPAL PRINCIPAL VALUE(A) VALUE(A) VALUE(A) RATE AMOUNT AMOUNT AMOUNT RIVERSOURCE RIVERSOURCE DIVERSIFIED DIVERSIFIED RIVERSOURCE RIVERSOURCE BOND FUND RIVERSOURCE RIVERSOURCE BOND FUND DIVERSIFIED CORE PRO FORMA DIVERSIFIED CORE PRO FORMA BOND FUND BOND FUND COMBINED BOND FUND BOND FUND COMBINED MORTGAGE-BACKED (CONT.) Harborview Mtge Loan Trust Collateralized Mtge Obligation Series 2006-8 Cl 2A1B 08/21/36 5.76% $ -- $ 1,080,043 $ 1,080,043(k) $ -- $ 986,257 $ 986,257 Harborview Nim Collateralized Mtge Obligation Series 2006-10 Cl N1 11/19/36 6.41 530,358 70,714 601,072(d) 527,707 70,361 598,068 IndyMac Index Mtge Loan Trust Collateralized Mtge Obligation Interest Only Series 2005-AR8 Cl AX1 04/25/35 4.50 102,422,089 4,990,656 107,412,745(g) 640,138 31,192 671,330 IndyMac Index Mtge Loan Trust Collateralized Mtge Obligation Series 2005-AR25 Cl 1A21 12/25/35 5.85 6,148,290 367,941 6,516,231(k) 5,999,746 359,051 6,358,797 IndyMac Index Mtge Loan Trust Collateralized Mtge Obligation Series 2007-AR5 Cl 1A1 05/25/37 6.36 11,899,514 1,046,379 12,945,893(k) 12,049,091 1,059,532 13,108,623 IndyMac Index Nim Collateralized Mtge Obligation Series 2006-AR6 Cl NI 06/25/46 6.65 594,989 45,189 640,178(d) 591,270 44,907 636,177 Lehman XS Net Interest Margin Nts Collateralized Mtge Obligation Series 2006-2N Cl A1 02/27/46 7.00 571,927 -- 571,927(d) 571,838 -- 571,838 Lehman XS Net Interest Margin Nts Collateralized Mtge Obligation Series 2006-GPM6 Cl A1 10/28/46 6.25 1,185,241 124,762 1,310,003(d) 1,166,722 122,813 1,289,535 Lehman XS Net Interest Margin Nts Series 2006-AR8 Cl A1 10/28/46 6.25 360,757 -- 360,757(d) 359,711 -- 359,711 Lehman XS Trust Collateralized Mtge Obligation Series 2007-5H Cl 1A1 05/25/37 6.50 19,549,641 2,327,338 21,876,979 19,761,004 2,352,500 22,113,504 Master Alternative Loans Trust Collateralized Mtge Obligation Series 2004-2 Cl 4A1 02/25/19 5.00 5,827,888 397,792 6,225,680 5,653,069 385,859 6,038,928 Master Alternative Loans Trust Collateralized Mtge Obligation Series 2004-4 Cl 2A1 05/25/34 6.00 3,341,527 139,230 3,480,757 3,303,567 137,649 3,441,216 Master Alternative Loans Trust Collateralized Mtge Obligation Series 2004-7 Cl 8A1 08/25/19 5.00 4,678,416 162,619 4,841,035 4,601,784 159,955 4,761,739 Master Alternative Loans Trust Collateralized Mtge Obligation Series 2004-8 Cl 7A1 09/25/19 5.00 6,513,119 238,285 6,751,404 6,268,551 229,337 6,497,888 Master Alternative Loans Trust Collateralized Mtge Obligation Series 2005-3 Cl 1A2 04/25/35 5.50 -- 950,000 950,000 -- 873,250 873,250 Mastr Asset Securitization Trust Collateralized Mtge Obligation Series 2004-10 Cl 1A1 10/25/19 4.50 -- 1,177,455 1,177,455 -- 1,122,630 1,122,630 Merrill Lynch Alternative Nt Asset Collateralized Mtge Obligation Series 2007-OAR2 Cl A1 04/25/37 5.69 -- 1,045,622 1,045,622(i) -- 1,033,716 1,033,716 Morgan Stanley Mtge Loan Trust Collateralized Mtge Obligation Series 2007-12 Cl 3A22 08/25/37 6.00 16,988,485 1,998,645 18,987,130 16,611,510 1,954,295 18,565,805 Rali NIM Collateralized Mtge Obligation Series 2006-QO4 Cl N1 04/25/46 6.05 553,910 -- 553,910(d) 548,371 -- 548,371 Residential Accredit Loans Collateralized Mtge Obligation Series 2006-QS3 Cl 1A10 03/25/36 6.00 6,008,788 456,668 6,465,456 6,100,265 463,620 6,563,885 Residential Funding Mtge Securities I Collateralized Mtge Obligation Series 2005-S6 Cl A8 08/25/35 5.25 19,499,904 2,166,656 21,666,560 18,524,852 2,058,317 20,583,169
19
BONDS (CONTINUED) ISSUER COUPON PRINCIPAL PRINCIPAL PRINCIPAL VALUE(A) VALUE(A) VALUE(A) RATE AMOUNT AMOUNT AMOUNT RIVERSOURCE RIVERSOURCE DIVERSIFIED DIVERSIFIED RIVERSOURCE RIVERSOURCE BOND FUND RIVERSOURCE RIVERSOURCE BOND FUND DIVERSIFIED CORE PRO FORMA DIVERSIFIED CORE PRO FORMA BOND FUND BOND FUND COMBINED BOND FUND BOND FUND COMBINED MORTGAGE-BACKED (CONT.) Structured Adjustable Rate Mtge Loan Trust Collateralized Mtge Obligation Series 2006-5 Cl 4A1 06/25/36 5.94% $ -- $ 706,574 $ 706,574(k) $ -- $ 691,973 $ 691,973 Structured Asset Securities Collateralized Mtge Obligation Series 2003-33H Cl 1A1 10/25/33 5.50 13,088,921 1,056,523 14,145,444 12,600,309 1,017,083 13,617,392 Washington Mutual Alternative Mtge Loan Trust Pass-Through Ctfs Collateralized Mtge Obligation Interest Only Series 2005-AR1 Cl X2 12/25/35 7.10 38,521,818 -- 38,521,818(g) 264,838 -- 264,838 Washington Mutual Mtge Pass-Through Ctfs Collateralized Mtge Obligation Series 2004-CB2 Cl 6A 07/25/19 4.50 4,495,809 117,885 4,613,694 4,260,049 111,703 4,371,752 Washington Mutual Mtge Pass-Through Ctfs Collateralized Mtge Obligation Series 2005-AR14 Cl 2A1 12/25/35 5.29 5,256,421 401,092 5,657,513(k) 5,191,576 396,144 5,587,720 Washington Mutual Mtge Pass-Through Ctfs Collateralized Mtge Obligation Series 2005-AR8 Cl 2AB1 07/25/45 5.76 -- 87,834 87,834(k) -- 87,670 87,670 Washington Mutual Mtge Pass-Through Ctfs Collateralized Mtge Obligation Series 2006-AR10 Cl 1A1 09/25/36 5.95 5,026,762 383,722 5,410,484(k) 5,012,621 382,643 5,395,264 Washington Mutual Mtge Pass-Through Ctfs Collateralized Mtge Obligation Series 2006-AR3 Cl A1A 02/25/46 6.02 7,800,707 -- 7,800,707(k) 7,561,849 -- 7,561,849 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2005-10 Cl A1 10/25/35 5.00 17,397,295 1,688,845 19,086,140 16,470,715 1,598,897 18,069,612 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2005-14 Cl 2A1 12/25/35 5.50 -- 2,003,113 2,003,113 -- 1,928,200 1,928,200 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2005-5 Cl 2A1 05/25/35 5.50 11,715,569 663,882 12,379,451 11,369,596 644,277 12,013,873 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2006-16 Cl 1A1 12/25/18 4.75 15,965,609 1,505,175 17,470,784 15,339,242 1,446,124 16,785,366 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2006-AR12 Cl 1A1 09/25/36 6.03 4,800,062 366,417 5,166,479(k) 4,782,671 365,089 5,147,760 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2006-AR6 Cl 5A1 03/25/36 5.11 11,035,958 877,611 11,913,569(k) 10,798,084 858,694 11,656,778 -------------------------------------------- Total 1,453,480,309 156,621,100 1,610,101,409 - ----------------------------------------------------------------------------------------------------------------------------------- AEROSPACE & DEFENSE (0.2%) Communications & Power Inds 02/01/12 8.00 185,000 -- 185,000 185,925 -- 185,925 DRS Technologies 11/01/13 6.88 1,535,000 -- 1,535,000 1,504,300 -- 1,504,300 02/01/18 7.63 1,925,000 -- 1,925,000 1,886,499 -- 1,886,499 L-3 Communications 01/15/15 5.88 1,565,000 -- 1,565,000 1,482,838 -- 1,482,838 L-3 Communications Series B 10/15/15 6.38 1,675,000 -- 1,675,000 1,620,563 -- 1,620,563 TransDigm 07/15/14 7.75 195,000 -- 195,000 195,975 -- 195,975 -------------------------------------------- Total 6,876,100 -- 6,876,100 - ----------------------------------------------------------------------------------------------------------------------------------- BANKING (3.2%) Bank of America Sub Nts 03/15/17 5.30 20,295,000 2,160,000 22,455,000 19,552,162 2,080,940 21,633,102 Citigroup Sub Nts 02/15/17 5.50 13,810,000 1,520,000 15,330,000 13,476,047 1,483,243 14,959,290 JPMorgan Chase & Co Sub Nts 10/01/15 5.15 2,760,000 300,000 3,060,000 2,631,889 286,075 2,917,964 06/27/17 6.13 7,535,000 880,000 8,415,000 7,648,884 893,300 8,542,184
20
BONDS (CONTINUED) ISSUER COUPON PRINCIPAL PRINCIPAL PRINCIPAL VALUE(A) VALUE(A) VALUE(A) RATE AMOUNT AMOUNT AMOUNT RIVERSOURCE RIVERSOURCE DIVERSIFIED DIVERSIFIED RIVERSOURCE RIVERSOURCE BOND FUND RIVERSOURCE RIVERSOURCE BOND FUND DIVERSIFIED CORE PRO FORMA DIVERSIFIED CORE PRO FORMA BOND FUND BOND FUND COMBINED BOND FUND BOND FUND COMBINED BANKING (CONT.) Manufacturers & Traders Trust Sub Nts 12/01/16 5.63% $ -- $ 1,720,000 $ 1,720,000 $ -- $ 1,655,167 $ 1,655,167 12/01/21 5.63 17,095,000 -- 17,095,000 16,450,624 -- 16,450,624 Popular North America Sr Nts 10/01/08 3.88 28,122,000 2,180,000 30,302,000 27,537,260 2,134,671 29,671,931 Regions Bank Sub Nts 06/26/37 6.45 7,245,000 875,000 8,120,000 7,325,057 884,669 8,209,726 -------------------------------------------- Total 94,621,923 9,418,065 104,039,988 - ----------------------------------------------------------------------------------------------------------------------------------- BROKERAGE (1.3%) Discover Financial Services 06/12/17 6.45 3,985,000 440,000 4,425,000(d,o) 3,959,217 437,153 4,396,370 Lehman Brothers Holdings Sr Nts 07/19/12 6.00 22,700,000 2,500,000 25,200,000 22,673,032 2,497,030 25,170,062 Morgan Stanley Sr Unsecured 08/31/12 5.75 10,675,000 1,135,000 11,810,000 10,666,759 1,134,124 11,800,883 -------------------------------------------- Total 37,299,008 4,068,307 41,367,315 - ----------------------------------------------------------------------------------------------------------------------------------- CHEMICALS (0.2%) NALCO Sr Unsecured 11/15/11 7.75 4,605,000 -- 4,605,000 4,685,588 -- 4,685,588 NewMarket 12/15/16 7.13 1,815,000 -- 1,815,000 1,724,250 -- 1,724,250 -------------------------------------------- Total 6,409,838 -- 6,409,838 - ----------------------------------------------------------------------------------------------------------------------------------- CONSUMER PRODUCTS (--%) Jarden 05/01/17 7.50 635,000 -- 635,000 593,725 -- 593,725 Visant 10/01/12 7.63 285,000 -- 285,000 285,713 -- 285,713 -------------------------------------------- Total 879,438 -- 879,438 - ----------------------------------------------------------------------------------------------------------------------------------- DIVERSIFIED MANUFACTURING (0.1%) Balder Electric 02/15/17 8.63 2,985,000 -- 2,985,000 3,082,013 -- 3,082,013 - ----------------------------------------------------------------------------------------------------------------------------------- ELECTRIC (2.4%) Consumers Energy 1st Mtge Series F 05/15/10 4.00 1,040,000 105,000 1,145,000 1,004,968 101,463 1,106,431 Consumers Energy 1st Mtge Series H 02/17/09 4.80 13,520,000 1,165,000 14,685,000 13,413,463 1,155,820 14,569,283 Edison Mission Energy Sr Nts 05/15/17 7.00 2,855,000 -- 2,855,000(d) 2,712,250 -- 2,712,250 Entergy Gulf States 1st Mtge 06/01/08 3.60 5,500,000 425,000 5,925,000 5,391,304 416,601 5,807,905 Exelon 06/15/10 4.45 13,085,000 1,585,000 14,670,000 12,732,228 1,542,268 14,274,496 Indiana Michigan Power Sr Nts 03/15/37 6.05 3,825,000 330,000 4,155,000 3,629,405 313,125 3,942,530 IPALCO Enterprises Secured 11/14/08 8.38 400,000 -- 400,000 405,000 -- 405,000 11/14/11 8.63 3,680,000 -- 3,680,000 3,781,200 -- 3,781,200 Metropolitan Edison Sr Nts 03/15/10 4.45 1,810,000 140,000 1,950,000(o) 1,777,485 137,485 1,914,970 Midwest Generation LLC Pass-Through Ctfs Series B 01/02/16 8.56 163,621 -- 163,621 174,052 -- 174,052 Northern States Power Sr Nts 08/01/09 6.88 5,730,000 515,000 6,245,000 5,909,641 531,146 6,440,787 NRG Energy 02/01/14 7.25 695,000 -- 695,000 688,050 -- 688,050 01/15/17 7.38 800,000 -- 800,000 786,000 -- 786,000 Oncor Electric Delivery Sr Unsecured 01/15/15 6.38 830,000 75,000 905,000 846,095 76,454 922,549 Portland General Electric 03/15/10 7.88 2,935,000 230,000 3,165,000(o) 3,121,889 244,645 3,366,534 Potomac Electric Power Secured 06/01/35 5.40 3,040,000 240,000 3,280,000(o) 2,687,102 212,140 2,899,242 Public Service Company of Colorado Sr Nts Series A 07/15/09 6.88 2,005,000 160,000 2,165,000 2,066,415 164,901 2,231,316
21
BONDS (CONTINUED) ISSUER COUPON PRINCIPAL PRINCIPAL PRINCIPAL VALUE(A) VALUE(A) VALUE(A) RATE AMOUNT AMOUNT AMOUNT RIVERSOURCE RIVERSOURCE DIVERSIFIED DIVERSIFIED RIVERSOURCE RIVERSOURCE BOND FUND RIVERSOURCE RIVERSOURCE BOND FUND DIVERSIFIED CORE PRO FORMA DIVERSIFIED CORE PRO FORMA BOND FUND BOND FUND COMBINED BOND FUND BOND FUND COMBINED ELECTRIC (CONT.) Sierra Pacific Power Series M 05/15/16 6.00% $ 8,280,000 $ -- $ 8,280,000 $ 8,145,690 $ -- $ 8,145,690 Sierra Pacific Power Series P 07/01/37 6.75 915,000 -- 915,000 893,552 -- 893,552 Xcel Energy Sr Nts 07/01/08 3.40 3,315,000 145,000 3,460,000 3,257,385 142,480 3,399,865 -------------------------------------------- Total 73,423,174 5,038,528 78,461,702 - ----------------------------------------------------------------------------------------------------------------------------------- ENTERTAINMENT (0.2%) United Artists Theatre Circuit Pass-Through Ctfs 07/01/15 9.30 5,706,707 -- 5,706,707(p) 5,934,975 -- 5,934,975 - ----------------------------------------------------------------------------------------------------------------------------------- ENVIRONMENTAL (--%) Allied Waste North America 06/01/17 6.88 1,320,000 -- 1,320,000 1,280,400 -- 1,280,400 - ----------------------------------------------------------------------------------------------------------------------------------- FOOD AND BEVERAGE (1.7%) Cadbury Schweppes US Finance LLC 10/01/08 3.88 31,950,000 3,500,000 35,450,000(d) 31,465,703 3,446,947 34,912,650 Cott Beverages USA 12/15/11 8.00 1,740,000 -- 1,740,000 1,722,600 -- 1,722,600 Del Monte 02/15/15 6.75 220,000 -- 220,000 209,000 -- 209,000 HJ Heinz 12/01/08 6.43 5,920,000 640,000 6,560,000(d) 5,982,515 646,758 6,629,273 Molson Coors Capital Finance 09/22/10 4.85 12,180,000 1,055,000 13,235,000(c) 11,937,849 1,034,026 12,971,875 -------------------------------------------- Total 51,317,667 5,127,731 56,445,398 - ----------------------------------------------------------------------------------------------------------------------------------- GAMING (--%) Mohegan Tribal Gaming Authority Sr Sub Nts 04/01/12 8.00 750,000 -- 750,000 760,313 -- 760,313 Wynn Las Vegas LLC/Capital 1st Mtge 12/01/14 6.63 690,000 -- 690,000 667,575 -- 667,575 -------------------------------------------- Total 1,427,888 -- 1,427,888 - ----------------------------------------------------------------------------------------------------------------------------------- GAS DISTRIBUTORS (0.1%) Atmos Energy Sr Unsub 10/15/09 4.00 4,005,000 310,000 4,315,000 3,920,074 303,426 4,223,500 - ----------------------------------------------------------------------------------------------------------------------------------- GAS PIPELINES (1.0%) CenterPoint Energy Resources 02/15/11 7.75 3,685,000 285,000 3,970,000 3,910,920 302,473 4,213,393 Colorado Interstate Gas Sr Nts 11/15/15 6.80 10,510,000 970,000 11,480,000 10,845,720 1,000,984 11,846,704 Northern Natural Gas Sr Unsecured 02/15/37 5.80 1,535,000 165,000 1,700,000(d) 1,448,553 155,708 1,604,261 Northwest Pipeline Sr Unsecured 04/15/17 5.95 1,615,000 -- 1,615,000 1,566,550 -- 1,566,550 Southern Natural Gas 04/01/17 5.90 5,925,000 805,000 6,730,000(d) 5,759,171 782,470 6,541,641 Southern Star Central Sr Nts 03/01/16 6.75 1,460,000 -- 1,460,000 1,401,600 -- 1,401,600 Transcontinental Gas Pipe Line Series B 08/15/11 7.00 1,915,000 -- 1,915,000 1,996,388 -- 1,996,388 Transcontinental Gas Pipe Line Sr Unsecured 04/15/16 6.40 2,221,000 -- 2,221,000 2,237,658 -- 2,237,658 Williams Companies Sr Nts 07/15/19 7.63 2,079,000 -- 2,079,000 2,208,938 -- 2,208,938 -------------------------------------------- Total 31,375,498 2,241,635 33,617,133 - ----------------------------------------------------------------------------------------------------------------------------------- HEALTH CARE (0.2%) Coventry Health Care Sr Unsecured 08/15/14 6.30 3,040,000 330,000 3,370,000 3,035,540 329,516 3,365,056 Omnicare 12/15/13 6.75 2,370,000 -- 2,370,000 2,204,100 -- 2,204,100 12/15/15 6.88 355,000 -- 355,000 331,038 -- 331,038 -------------------------------------------- Total 5,570,678 329,516 5,900,194 - -----------------------------------------------------------------------------------------------------------------------------------
22
BONDS (CONTINUED) ISSUER COUPON PRINCIPAL PRINCIPAL PRINCIPAL VALUE(A) VALUE(A) VALUE(A) RATE AMOUNT AMOUNT AMOUNT RIVERSOURCE RIVERSOURCE DIVERSIFIED DIVERSIFIED RIVERSOURCE RIVERSOURCE BOND FUND RIVERSOURCE RIVERSOURCE BOND FUND DIVERSIFIED CORE PRO FORMA DIVERSIFIED CORE PRO FORMA BOND FUND BOND FUND COMBINED BOND FUND BOND FUND COMBINED HEALTH CARE INSURANCE (0.5%) UnitedHealth Group 06/15/37 6.50% $ 5,700,000 $ 630,000 $ 6,330,000(d) $ 5,924,522 $ 654,816 $ 6,579,338 WellPoint Sr Unsub 01/15/36 5.85 5,920,000 745,000 6,665,000 5,381,440 677,225 6,058,665 06/15/37 6.38 2,910,000 255,000 3,165,000 2,848,483 249,609 3,098,092 -------------------------------------------- Total 14,154,445 1,581,650 15,736,095 - ----------------------------------------------------------------------------------------------------------------------------------- HOME CONSTRUCTION (0.2%) DR Horton Sr Unsub 04/15/16 6.50 6,875,000 695,000 7,570,000 6,035,205 610,104 6,645,309 - ----------------------------------------------------------------------------------------------------------------------------------- INDEPENDENT ENERGY (0.8%) Anadarko Petroleum Sr Unsecured 09/15/16 5.95 4,015,000 425,000 4,440,000 3,992,809 422,651 4,415,460 Canadian Natural Resources 03/15/38 6.25 6,845,000 730,000 7,575,000(c) 6,567,332 700,388 7,267,720 Chesapeake Energy 01/15/16 6.63 4,892,000 -- 4,892,000 4,733,010 -- 4,733,010 01/15/18 6.25 925,000 -- 925,000 866,031 -- 866,031 Denbury Resources 04/01/13 7.50 250,000 -- 250,000 249,375 -- 249,375 Denbury Resources Sr Sub Nts 12/15/15 7.50 180,000 -- 180,000 179,100 -- 179,100 EnCana Sr Unsecured 08/15/37 6.63 3,035,000 330,000 3,365,000(c) 3,085,008 335,437 3,420,445 Forest Oil Sr Nts 06/15/19 7.25 265,000 -- 265,000(d) 255,063 -- 255,063 Range Resources 03/15/15 6.38 425,000 -- 425,000 408,000 -- 408,000 05/15/16 7.50 180,000 -- 180,000 181,800 -- 181,800 XTO Energy Sr Unsecured 08/01/37 6.75 3,245,000 350,000 3,595,000 3,325,995 358,736 3,684,731 -------------------------------------------- Total 23,843,523 1,817,212 25,660,735 - ----------------------------------------------------------------------------------------------------------------------------------- MEDIA CABLE (1.1%) Comcast 03/15/37 6.45 17,105,000 1,860,000 18,965,000 16,517,066 1,796,068 18,313,134 Comcast MO of Delaware LLC 09/01/08 9.00 9,500,000 1,000,000 10,500,000 9,799,060 1,031,480 10,830,540 CSC Holdings Sr Nts Series B 07/15/09 8.13 3,200,000 -- 3,200,000 3,224,000 -- 3,224,000 EchoStar DBS 10/01/13 7.00 225,000 -- 225,000 222,188 -- 222,188 10/01/14 6.63 363,000 -- 363,000 351,203 -- 351,203 02/01/16 7.13 940,000 -- 940,000 918,850 -- 918,850 Videotron Ltee 01/15/14 6.88 1,310,000 -- 1,310,000(c) 1,247,775 -- 1,247,775 -------------------------------------------- Total 32,280,142 2,827,548 35,107,690 - ----------------------------------------------------------------------------------------------------------------------------------- MEDIA NON CABLE (1.4%) British Sky Broadcasting Group 02/23/09 6.88 6,270,000 850,000 7,120,000(c) 6,430,155 871,712 7,301,867 Dex Media West LLC/Finance Sr Unsecured Series B 08/15/10 8.50 560,000 -- 560,000 567,000 -- 567,000 Idearc 11/15/16 8.00 1,530,000 -- 1,530,000 1,510,875 -- 1,510,875 News America 12/15/35 6.40 13,160,000 1,390,000 14,550,000(o) 12,580,328 1,328,773 13,909,101 Rainbow Natl Services LLC Sr Nts 09/01/12 8.75 1,565,000 -- 1,565,000(d) 1,602,169 -- 1,602,169 RH Donnelley Sr Disc Nts Series A-1 01/15/13 6.88 680,000 -- 680,000 640,900 -- 640,900 RH Donnelley Sr Disc Nts Series A-2 01/15/13 6.88 1,800,000 -- 1,800,000 1,696,500 -- 1,696,500 RR Donnelley & Sons Sr Unsecured 01/15/17 6.13 15,800,000 1,730,000 17,530,000 15,704,252 1,719,516 17,423,768 Sinclair Broadcast Group 03/15/12 8.00 338,000 -- 338,000 341,380 -- 341,380 -------------------------------------------- Total 41,073,559 3,920,001 44,993,560 - ----------------------------------------------------------------------------------------------------------------------------------- METALS (0.2%) Freeport-McMoRan Copper & Gold Sr Unsecured 04/01/15 8.25 3,600,000 -- 3,600,000 3,816,000 -- 3,816,000 04/01/17 8.38 535,000 -- 535,000 569,775 -- 569,775
23
BONDS (CONTINUED) ISSUER COUPON PRINCIPAL PRINCIPAL PRINCIPAL VALUE(A) VALUE(A) VALUE(A) RATE AMOUNT AMOUNT AMOUNT RIVERSOURCE RIVERSOURCE DIVERSIFIED DIVERSIFIED RIVERSOURCE RIVERSOURCE BOND FUND RIVERSOURCE RIVERSOURCE BOND FUND DIVERSIFIED CORE PRO FORMA DIVERSIFIED CORE PRO FORMA BOND FUND BOND FUND COMBINED BOND FUND BOND FUND COMBINED METALS (CONT.) Peabody Energy 11/01/16 7.38% $ 1,885,000 $ -- $ 1,885,000 $ 1,899,138 $ -- $ 1,899,138 Peabody Energy Series B 03/15/13 6.88 560,000 -- 560,000 558,600 -- 558,600 -------------------------------------------- Total 6,843,513 -- 6,843,513 - ----------------------------------------------------------------------------------------------------------------------------------- NON CAPTIVE CONSUMER (0.1%) SLM 01/15/13 5.38 2,125,000 195,000 2,320,000(o) 1,881,853 172,688 2,054,541 10/01/13 5.00 2,460,000 200,000 2,660,000 2,148,564 174,680 2,323,244 -------------------------------------------- Total 4,030,417 347,368 4,377,785 - ----------------------------------------------------------------------------------------------------------------------------------- OIL FIELD SERVICES (0.1%) OPTI Canada Secured 12/15/14 7.88 2,585,000 -- 2,585,000(c,d) 2,597,925 -- 2,597,925 - ----------------------------------------------------------------------------------------------------------------------------------- PACKAGING (0.2%) Ball 03/15/18 6.63 240,000 -- 240,000 229,800 -- 229,800 Crown Americas LLC/Capital 11/15/13 7.63 680,000 -- 680,000 683,400 -- 683,400 11/15/15 7.75 1,685,000 -- 1,685,000(o) 1,701,850 -- 1,701,850 Owens-Brockway Glass Container 05/15/13 8.25 3,345,000 -- 3,345,000 3,428,625 -- 3,428,625 -------------------------------------------- Total 6,043,675 -- 6,043,675 - ----------------------------------------------------------------------------------------------------------------------------------- PAPER (0.1%) Cascades Sr Nts 02/15/13 7.25 905,000 -- 905,000(c) 864,275 -- 864,275 NewPage 05/01/12 10.00 2,090,000 -- 2,090,000 2,163,150 -- 2,163,150 Smurfit-Stone Container Enterprises Sr Unsecured 03/15/17 8.00 1,900,000 -- 1,900,000 1,812,125 -- 1,812,125 -------------------------------------------- Total 4,839,550 -- 4,839,550 - ----------------------------------------------------------------------------------------------------------------------------------- PROPERTY & CASUALTY (0.2%) Travelers Companies Sr Unsecured 06/15/37 6.25 5,810,000 605,000 6,415,000 5,629,309 586,185 6,215,494 - ----------------------------------------------------------------------------------------------------------------------------------- RAILROADS (0.2%) Burlington Northern Santa Fe 05/01/37 6.15 6,205,000 660,000 6,865,000 6,015,232 639,815 6,655,047 - ----------------------------------------------------------------------------------------------------------------------------------- REITS (0.4%) Brandywine Operating Partnership LP 05/01/17 5.70 4,635,000 490,000 5,125,000 4,407,143 465,912 4,873,055 ERP Operating LP 06/15/17 5.75 6,955,000 605,000 7,560,000 6,801,921 591,684 7,393,605 -------------------------------------------- Total 11,209,064 1,057,596 12,266,660 - ----------------------------------------------------------------------------------------------------------------------------------- RETAILERS (1.0%) Home Depot Sr Unsecured 12/16/36 5.88 15,650,000 1,705,000 17,355,000 13,485,621 1,469,200 14,954,821 Macys Retail Holdings 07/15/09 4.80 16,219,000 1,735,000 17,954,000 15,992,501 1,710,771 17,703,272 Neiman Marcus Group 10/15/15 10.38 600,000 -- 600,000 645,000 -- 645,000 -------------------------------------------- Total 30,123,122 3,179,971 33,303,093 - ----------------------------------------------------------------------------------------------------------------------------------- TRANSPORTATION SERVICES (0.1%) Hertz 01/01/14 8.88 1,925,000 -- 1,925,000 1,992,375 -- 1,992,375 - ----------------------------------------------------------------------------------------------------------------------------------- WIRELESS (--%) American Tower Sr Nts 10/15/12 7.13 220,000 -- 220,000 220,000 -- 220,000 - ----------------------------------------------------------------------------------------------------------------------------------- WIRELINES (1.7%) AT&T 03/15/11 6.25 11,786,000 1,290,000 13,076,000(o) 12,088,653 1,323,126 13,411,779 AT&T Sr Unsub 09/15/09 4.13 1,090,000 135,000 1,225,000 1,066,289 132,063 1,198,352 Citizens Communications Sr Unsecured 03/15/19 7.13 425,000 -- 425,000 404,813 -- 404,813 Telecom Italia Capital 11/15/13 5.25 11,405,000 1,180,000 12,585,000(c) 10,988,056 1,136,862 12,124,918 11/15/33 6.38 7,175,000 785,000 7,960,000(c) 6,846,385 749,047 7,595,432 Telefonica Europe 09/15/10 7.75 17,311,000 1,860,000 19,171,000(c) 18,452,885 1,982,691 20,435,576 TELUS 06/01/11 8.00 35,878,500 3,727,500 39,606,000(c) 38,917,624 4,043,242 42,960,866
24
BONDS (CONTINUED) ISSUER COUPON PRINCIPAL PRINCIPAL PRINCIPAL VALUE(A) VALUE(A) VALUE(A) RATE AMOUNT AMOUNT AMOUNT RIVERSOURCE RIVERSOURCE DIVERSIFIED DIVERSIFIED RIVERSOURCE RIVERSOURCE BOND FUND RIVERSOURCE RIVERSOURCE BOND FUND DIVERSIFIED CORE PRO FORMA DIVERSIFIED CORE PRO FORMA BOND FUND BOND FUND COMBINED BOND FUND BOND FUND COMBINED WIRELINES (CONT.) Verizon New York Series A 04/01/12 6.88% $ 22,863,000 $ 1,900,000 $ 24,763,000 $ 24,089,463 $ 2,001,924 $ 26,091,387 Verizon Pennsylvania Series A 11/15/11 5.65 8,000,000 1,485,000 9,485,000 8,083,040 1,500,415 9,583,455 Windstream 08/01/16 8.63 4,915,000 -- 4,915,000 5,136,175 -- 5,136,175 03/15/19 7.00 420,000 -- 420,000 395,850 -- 395,850 -------------------------------------------- Total 126,469,233 12,869,370 139,338,603 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL BONDS (Cost: $3,428,413,827) $3,095,106,712 $318,395,025 $3,413,501,737 - ----------------------------------------------------------------------------------------------------------------------------------- MUNICIPAL BONDS (0.4%) NAME OF ISSUER AND TITLE OF ISSUE COUPON PRINCIPAL PRINCIPAL PRINCIPAL VALUE(A) VALUE(A) VALUE(A) RATE AMOUNT AMOUNT AMOUNT RIVERSOURCE RIVERSOURCE DIVERSIFIED DIVERSIFIED RIVERSOURCE RIVERSOURCE BOND FUND RIVERSOURCE RIVERSOURCE BOND FUND DIVERSIFIED CORE PRO FORMA DIVERSIFIED CORE PRO FORMA BOND FUND BOND FUND COMBINED BOND FUND BOND FUND COMBINED TOBACCO Tobacco Settlement Financing Corporation Revenue Bonds Series 2007A-1 06/01/46 6.71% $ 13,850,000 $ 1,480,000 $ 15,330,000 $ 12,539,236 $ 1,339,933 $ 13,879,169 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL MUNICIPAL BONDS (Cost: $15,316,040) $ 12,539,236 $ 1,339,933 $ 13,879,169 - ----------------------------------------------------------------------------------------------------------------------------------- SENIOR LOANS (2.2%)(L) BORROWER COUPON PRINCIPAL PRINCIPAL PRINCIPAL VALUE(A) VALUE(A) VALUE(A) RATE AMOUNT AMOUNT AMOUNT RIVERSOURCE RIVERSOURCE DIVERSIFIED DIVERSIFIED RIVERSOURCE RIVERSOURCE BOND FUND RIVERSOURCE RIVERSOURCE BOND FUND DIVERSIFIED CORE PRO FORMA DIVERSIFIED CORE PRO FORMA BOND FUND BOND FUND COMBINED BOND FUND BOND FUND COMBINED CHEMICALS (0.1%) Celanese Tranche B Term Loan 04/06/14 5.32-7.11% $ 2,939,125 $ -- $ 2,939,125(c) $ 2,838,695 $ -- $ 2,838,695 - ----------------------------------------------------------------------------------------------------------------------------------- CONSUMER PRODUCTS (0.2%) Jarden Tranche B3 Term Loan 01/24/12 2.50 5,940,000 -- 5,940,000(j) 5,836,050 -- 5,836,050 - ----------------------------------------------------------------------------------------------------------------------------------- FOOD AND BEVERAGE (0.2%) Aramark Letter of Credit 01/26/14 7.36 226,462 -- 226,462 217,888 -- 217,888 Aramark Tranche B Term Loan 01/20/14 7.36 3,218,915 -- 3,218,915 3,097,047 -- 3,097,047 Pinnacle Foods Finance Term Loan 04/02/14 8.11 2,560,000 -- 2,560,000 2,438,400 -- 2,438,400 -------------------------------------------- Total 5,753,335 -- 5,753,335 - ----------------------------------------------------------------------------------------------------------------------------------- GAMING (0.1%) Fontainebleau Las Vegas Delayed Draw Term Loan 06/05/14 0.00 959,355 -- 959,355(j,m) 889,802 -- 889,802 Fontainebleau Las Vegas Term Loan 06/05/14 8.61 1,918,711 -- 1,918,711 1,779,604 -- 1,779,604 -------------------------------------------- Total 2,669,406 -- 2,669,406 - ----------------------------------------------------------------------------------------------------------------------------------- HEALTH CARE (0.7%) Community Health Delayed Draw Term Loan 06/28/14 0.00 447,641 -- 447,641(j,m) 429,176 -- 429,176
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SENIOR LOANS (CONTINUED) BORROWER COUPON PRINCIPAL PRINCIPAL PRINCIPAL VALUE(A) VALUE(A) VALUE(A) RATE AMOUNT AMOUNT AMOUNT RIVERSOURCE RIVERSOURCE DIVERSIFIED DIVERSIFIED RIVERSOURCE RIVERSOURCE BOND FUND RIVERSOURCE RIVERSOURCE BOND FUND DIVERSIFIED CORE PRO FORMA DIVERSIFIED CORE PRO FORMA BOND FUND BOND FUND COMBINED BOND FUND BOND FUND COMBINED HEALTH CARE (CONT.) Community Health Term Loan 06/28/14 7.76% $ 6,787,359 $ -- $ 6,787,359 $ 6,507,380 $ -- $ 6,507,380 HCA Tranche B Term Loan 01/21/13 7.61 12,984,750 -- 12,984,750 12,479,513 -- 12,479,513 Vanguard Health Holding II Term Loan 09/23/11 7.61 2,970,000 -- 2,970,000(j) 2,840,063 -- 2,840,063 -------------------------------------------- Total 22,256,132 -- 22,256,132 - ----------------------------------------------------------------------------------------------------------------------------------- LIFE INSURANCE (0.1%) Asurion Term Loan 07/03/14 8.36 4,090,000 -- 4,090,000(j) 3,844,600 -- 3,844,600 - ----------------------------------------------------------------------------------------------------------------------------------- MEDIA CABLE (0.3%) Charter Communications Term Loan 03/06/14 7.36 6,130,000 -- 6,130,000 5,792,850 -- 5,792,850 Univision Communications Delayed Draw Term Loan 09/23/14 0.00 351,242 -- 351,242(j,m) 324,681 -- 324,681 Univision Communications Tranche B Term Loan 09/23/14 7.61 5,463,758 -- 5,463,758 5,050,589 -- 5,050,589 -------------------------------------------- Total 11,168,120 -- 11,168,120 - ----------------------------------------------------------------------------------------------------------------------------------- MEDIA NON CABLE (0.2%) Idearc Tranche B Term Loan 11/17/14 2.00 1,485,000 -- 1,485,000(j) 1,434,881 -- 1,434,881 VNU Tranche B Term Loan 08/09/13 7.36 5,442,569 -- 5,442,569(c) 5,184,047 -- 5,184,047 -------------------------------------------- Total 6,618,928 -- 6,618,928 - ----------------------------------------------------------------------------------------------------------------------------------- OIL FIELD SERVICES (0.1%) Dresser 1st Lien Term Loan 05/04/14 8.01-8.04 2,059,000 -- 2,059,000 1,973,201 -- 1,973,201 - ----------------------------------------------------------------------------------------------------------------------------------- PAPER (--%) Domtar Tranche B Term Loan 03/07/14 6.93 1,539,000 -- 1,539,000(c) 1,473,593 -- 1,473,593 - ----------------------------------------------------------------------------------------------------------------------------------- RETAILERS (0.1%) Michaels Stores Term Loan 10/31/13 7.63-7.69 1,201,206 -- 1,201,206 1,130,131 -- 1,130,131 Neiman Marcus Group Tranche B Term Loan 04/27/13 7.09-7.11 1,677,574 -- 1,677,574 1,624,444 -- 1,624,444 -------------------------------------------- Total 2,754,575 -- 2,754,575 - ----------------------------------------------------------------------------------------------------------------------------------- TECHNOLOGY (0.1%) West Corp Tranche B Term Loan 10/24/13 7.74-7.88 2,687,952 -- 2,687,952 2,585,138 -- 2,585,138 - ----------------------------------------------------------------------------------------------------------------------------------- WIRELINES (0.1%) Level 3 Communications Tranche B Term Loan 03/13/14 7.61 3,340,000 -- 3,340,000 3,178,578 -- 3,178,578 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL SENIOR LOANS (Cost: $76,112,324) $ 72,950,351 $ -- $ 72,950,351 - -----------------------------------------------------------------------------------------------------------------------------------
26
COMMON STOCKS (--%) ISSUER SHARES SHARES SHARES VALUE(A) VALUE(A) VALUE(A) RIVERSOURCE RIVERSOURCE DIVERSIFIED DIVERSIFIED RIVERSOURCE RIVERSOURCE BOND FUND RIVERSOURCE RIVERSOURCE BOND FUND DIVERSIFIED CORE PRO FORMA DIVERSIFIED CORE PRO FORMA BOND FUND BOND FUND COMBINED BOND FUND BOND FUND COMBINED PAPER & FOREST PRODUCTS Crown Paper Escrow 6,950,000 -- 6,950,000(b) $ 7 $ -- $ 7 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost: $--) $ 7 $ -- $ 7 - ----------------------------------------------------------------------------------------------------------------------------------- MONEY MARKET FUND (2.4%)(R) ISSUER SHARES SHARES SHARES VALUE(A) VALUE(A) VALUE(A) RIVERSOURCE RIVERSOURCE DIVERSIFIED DIVERSIFIED RIVERSOURCE RIVERSOURCE BOND FUND RIVERSOURCE RIVERSOURCE BOND FUND DIVERSIFIED CORE PRO FORMA DIVERSIFIED CORE PRO FORMA BOND FUND BOND FUND COMBINED BOND FUND BOND FUND COMBINED RiverSource Short- Term Cash Fund 45,885,729 33,717,195 79,602,924(t) $ 45,885,729 $ 33,717,195 $ 79,602,924 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL MONEY MARKET FUND (Cost: $79,602,924) $ 45,885,729 $ 33,717,195 $ 79,602,924 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $3,599,445,115)(u) $3,226,482,035 $353,452,153 $3,579,934,188 - ----------------------------------------------------------------------------------------------------------------------------------- NOTES TO COMBINED INVESTMENTS IN SECURITIES
(A) Securities are valued by procedures described in Note 1 to the financial statements in the annual report. (B) Non-income producing. For long-term debt securities, item identified is in default as to payment of interest and/or principal. (C) Foreign security values are stated in U.S. dollars. For debt securities, principal amounts are denominated in U.S. dollar currency unless otherwise noted. At Aug. 31, 2007, the value of foreign securities represented 4.2% of net assets. (D) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the Fund's Board of Directors. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At Aug. 31, 2007, the value of these securities amounted to $157,766,931 or 4.8% or net assets. (E) The following abbreviations are used in the portfolio security descriptions to identify the insurer of the issue: AMBAC -- Ambac Assurance Corporation MBIA -- MBIA Insurance Corporation (F) Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property, and include single- and multi-class pass-through securities and collateralized mortgage obligations. These securities may be issued or guaranteed by U.S. government agencies or instrumentalities, or by private issuers, generally originators and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers and special purpose entities. The maturity dates shown represent the original maturity of the underlying obligation. Actual maturity may vary based upon prepayment activity on these obligations. Unless otherwise noted, the coupon rates presented are fixed rates. (G) Interest only represents securities that entitle holders to receive only interest payments on the underlying mortgages. The yield to maturity of an interest only is extremely sensitive to the rate of principal payments on the underlying mortgage assets. A rapid (slow) rate of principal repayments may have an adverse (positive) effect on yield to maturity. The principal amount shown is the notional amount of the underlying mortgages. Interest rate disclosed represents yield based upon the estimated timing and amount of future cash flows at Aug. 31, 2007. (H) Principal only represents securities that entitle holders to receive only principal payments on the underlying mortgages. The yield to maturity of a principal only is sensitive to the rate of principal payments on the underlying mortgage assets. A slow (rapid) rate of principal repayments may have an adverse (positive) effect on yield to maturity. Interest rate disclosed represents yield based upon the estimated timing of future cash flows at Aug. 31, 2007. (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, 2007. (J) At Aug. 31, 2007, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $306,996,929. (K) Adjustable rate mortgage; interest rate varies to reflect current market conditions; rate shown is the effective rate on Aug. 31, 2007. (L) 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. (M) At Aug. 31, 2007, the Fund had unfunded senior loan commitments pursuant to the term of the loan agreement. The Fund receives a stated coupon rate until the borrower draws on the loan commitment, at which time the rate will become the stated rate in the loan agreement.
BORROWER UNFUNDED COMMITMENT Community Health $ 447,641 Fontainebleau Las Vegas 956,957 Univision Communications 351,242 - ------------------------------------------------------------------------------------------------- Total $1,755,840 - -------------------------------------------------------------------------------------------------
27 NOTES TO COMBINED INVESTMENTS IN SECURITIES (CONTINUED) (N) Comparable securities are held to satisfy future delivery requirements of the following open forward sale commitments at Aug. 31, 2007:
SECURITY PRINCIPAL PRINCIPAL PROCEEDS PROCEEDS AMOUNT AMOUNT RECEIVABLE RECEIVABLE RIVERSOURCE RIVERSOURCE DIVERSIFIED DIVERSIFIED RIVERSOURCE RIVERSOURCE BOND FUND RIVERSOURCE RIVERSOURCE BOND FUND DIVERSIFIED CORE PRO FORMA SETTLEMENT DIVERSIFIED CORE PRO FORMA BOND FUND BOND FUND COMBINED DATE BOND FUND BOND FUND COMBINED Federal Natl Mtge Assn 09-01-22 5.50% $10,000,000 $-- $10,000,000 9-18-07 $9,884,375 $-- $9,884,375 SECURITY VALUE VALUE RIVERSOURCE DIVERSIFIED RIVERSOURCE RIVERSOURCE BOND FUND DIVERSIFIED CORE BOND PRO FORMA BOND FUND FUND COMBINED Federal Natl Mtge Assn 09-01-22 5.50% $9,940,620 $-- $9,940,620
(O) Partially pledged as initial margin deposit on the following open interest rate futures contracts:
TYPE OF SECURITY NOTIONAL AMOUNT PURCHASE CONTRACTS U.S. Treasury Note, Dec. 2007, 2-year $ 9,400,000 U.S. Treasury Note, Dec. 2007, 10-year 6,100,000 SALE CONTRACTS U.S. Long Bond, Dec. 2007, 20-year 32,200,000 U.S. Treasury Note, Dec. 2007, 2-year 22,400,000 U.S. Treasury Note, Dec. 2007, 5-year 86,100,000 U.S. Treasury Note, Dec. 2007, 10-year 47,100,000
(P) Identifies issues considered to be illiquid as to their marketability. These securities are valued at fair value according to methods selected in good faith by the Fund's Board of Directors. Information concerning such security holdings at Aug. 31, 2007, is as follows:
ACQUISITION SECURITY DATES COST United Artists Theatre Circuit 9.30% Pass-Through Ctfs 2015 02-23-96 thru 08-01-96 $5,520,575
(Q) At Aug. 31, 2007, security was partially or fully on loan. (R) Cash collateral received from security lending activity is invested in an affiliated money market fund. (S) Inflation-indexed bonds are securities in which the principal amount is adjusted for inflation and the semiannual interest payments equal a fixed percentage of the inflation-adjusted principal amount. (T) Affiliated Money Market Fund -- See Note 7 and/or 8 to the financial statements in the annual report. (U) At Aug. 31, 2007, the approximate cost of securities for federal income tax purposes and the approximate aggregate gross unrealized appreciation and depreciation based on that cost was:
RIVERSOURCE DIVERSIFIED RIVERSOURCE BOND FUND DIVERSIFIED BOND RIVERSOURCE CORE PRO FORMA FUND BOND FUND COMBINED Cost of securities for federal income tax purposes: $3,254,169,000 $353,729,000 $3,607,898,000 Unrealized appreciation $ 18,711,000 $ 2,106,000 $ 20,817,000 Unrealized depreciation (46,398,000) (2,383,000) (48,781,000) - ------------------------------------------------------------------------------------------------------------------------ Net unrealized depreciation $ (27,687,000) $ (277,000) $ (27,964,000) - ------------------------------------------------------------------------------------------------------------------------
28 RIVERSOURCE DISCIPLINED INTERNATIONAL EQUITY FUND (BUYING FUND) RIVERSOURCE INTERNATIONAL EQUITY FUND (SELLING FUND) INTRODUCTION TO PROPOSED FUND MERGER April 30, 2007 The accompanying unaudited pro forma combining statement of assets and liabilities and the statement of operations reflect the accounts of the two funds at and for the 12-month period ending April 30, 2007. These statements have been derived from financial statements prepared for RiverSource Disciplined International Equity Fund and RiverSource International Equity Fund as of April 30, 2007. RiverSource Disciplined International Equity Fund and RiverSource International Equity Fund invest primarily in equity securities of foreign issuers or in instruments that provide exposure to foreign equity markets. Under the proposed Agreement and Plan of Reorganization, Class A shares of the RiverSource International Equity Fund would be exchanged for Class A shares of the RiverSource Disciplined International Equity Fund. Class B shares of the RiverSource International Equity Fund would be exchanged for Class B shares of the RiverSource Disciplined International Equity Fund. Class C shares of the RiverSource International Equity Fund would be exchanged for Class C shares of the RiverSource Disciplined International Equity Fund. Class I shares of the RiverSource International Equity Fund would be exchanged for Class I shares of the RiverSource Disciplined International Equity Fund. Class R4 shares of the RiverSource International Equity Fund would be exchanged for Class R4 shares of the RiverSource Disciplined International Equity Fund. RiverSource Disciplined International Equity Fund also offers Class W shares. The pro forma combining statements have been prepared to give effect to the proposed transaction on the historical operations of the accounting survivor, RiverSource Disciplined International Equity Fund, as if the transaction had occurred at the beginning of the fiscal year ending April 30, 2007. 29 RIVERSOURCE DISCIPLINED INTERNATIONAL EQUITY FUND (BUYING FUND) RIVERSOURCE INTERNATIONAL EQUITY FUND (SELLING FUND) PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES
RIVERSOURCE RIVERSOURCE DISCIPLINED DISCIPLINED RIVERSOURCE INTERNATIONAL INTERNATIONAL DISCIPLINED RIVERSOURCE EQUITY FUND EQUITY FUND INTERNATIONAL INTERNATIONAL PRO FORMA PRO FORMA APRIL 30, 2007 (UNAUDITED) EQUITY FUND EQUITY FUND ADJUSTMENTS COMBINED ASSETS Investments in securities, at cost Unaffiliated issuers $205,477,370 $178,140,235 $ -- $383,617,605 Affiliated money market fund $ 10,506,574 $ 3,243,442 $ -- $ 13,750,016 -------------------------------------------------------------------- Investments in securities, at value Unaffiliated issuers $221,390,138 $209,276,904 $ -- $430,667,042 Affiliated money market fund $ 10,506,574 $ 3,243,442 $ -- $ 13,750,016 Foreign currency holdings (identified cost $2,196,094 for RiverSource Disciplined International Equity Fund and $1,283,850 for RiverSource International Equity Fund) 2,197,096 1,287,115 -- 3,484,211 Capital shares receivable 8,795,353 29,110 -- 8,824,463 Dividends and accrued interest receivable 807,875 844,006 -- 1,651,881 Receivable for investment securities sold 181,850 1,966,692 -- 2,148,542 Margin deposits on future contracts 920,236 -- -- 920,236 Unrealized appreciation on foreign currency contracts held, at value -- 838 -- 838 Receivable from RiverSource Investments, LLC (Note 2) -- -- 143,599(a) 143,599 - ----------------------------------------------------------------------------------------------------------------------------- Total assets 244,799,122 216,648,107 143,599 461,590,828 - ----------------------------------------------------------------------------------------------------------------------------- LIABILITIES Disbursements in excess of cash on demand deposit -- 12,460 -- 12,460 Capital shares payable 2,252,581 49,082 -- 2,301,663 Payable for investment securities purchased 25,630 1,035,740 -- 1,061,370 Payable to RiverSource Investments, LLC (Note 2) -- -- 102,562(g) 102,562 Unrealized depreciation on foreign currency contracts held, at value -- 288 -- 288 Accrued investment management services fee (Note 2) 15,897 17,318 (33,215)(a) -- Accrued distribution fee 1,800 4,514 -- 6,314 Accrued transfer agency fee (Note 2) 1,279 1,482 30,800(b) 33,561 Accrued administrative services fee (Note 2) 1,590 1,428 9,229(d) 12,247 Accrued plan administration services fee 1 2 -- 3 Other accrued expenses (Note 2) 26,775 74,717 (55,255)(c),(e),(f) 46,237 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities 2,325,553 1,197,031 54,121 3,576,705 - ----------------------------------------------------------------------------------------------------------------------------- Net assets applicable to outstanding capital stock $242,473,569 $215,451,076 $ 89,478 $458,014,123 - ----------------------------------------------------------------------------------------------------------------------------- REPRESENTED BY Capital stock -- $.01 par value (Note 3) $ 212,580 $ 272,085 $(82,905) $ 401,760 Additional paid-in capital (Note 3) 222,081,472 169,021,796 82,905 391,186,173 Undistributed (excess of distributions over) net investment income (Note 2) 998,153 (5,396) 89,478 1,082,235 Accumulated net realized gain (loss) 3,312,247 15,011,800 -- 18,324,047 Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 15,869,117 31,150,791 -- 47,019,908 - ----------------------------------------------------------------------------------------------------------------------------- Total -- representing net assets applicable to outstanding capital stock $242,473,569 $215,451,076 $ 89,478 $458,014,123 - ----------------------------------------------------------------------------------------------------------------------------- Net assets applicable to outstanding shares: Class A $ 9,744,469 $105,284,636 $ 43,725 $115,072,830 Class B $ 1,146,998 $ 26,309,730 $ 10,927 $ 27,467,655 Class C $ 162,126 $ 1,814,967 $ 754 $ 1,977,847 Class I $157,282,453 $ 81,963,771 $ 34,040 $239,280,264 Class R4 $ 50,546 $ 77,972 $ 32 $ 128,550 Class W $ 74,086,977 N/A $ -- $ 74,086,977 Shares outstanding (Note 3): Class A shares 854,949 13,292,238 -- 10,094,279 Class B shares 101,302 3,368,851 -- 2,426,448 Class C shares 14,310 232,389 -- 174,568 Class I shares 13,779,349 10,305,183 -- 20,965,836 Class R4 shares 4,433 9,850 -- 11,275 Class W shares 6,503,622 N/A -- 6,503,622 Net asset value per share of outstanding capital stock: Class A $ 11.40 $ 7.92 $ -- $ 11.40 Class B $ 11.32 $ 7.81 $ -- $ 11.32 Class C $ 11.33 $ 7.81 $ -- $ 11.33 Class I $ 11.41 $ 7.95 $ -- $ 11.41 Class R4 $ 11.40 $ 7.92 $ -- $ 11.40 Class W $ 11.39 N/A $ -- $ 11.39 - -----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to pro forma financial statements. 30 RIVERSOURCE DISCIPLINED INTERNATIONAL EQUITY FUND (BUYING FUND) RIVERSOURCE INTERNATIONAL EQUITY FUND (SELLING FUND) PRO FORMA COMBINING STATEMENT OF OPERATIONS
RIVERSOURCE RIVERSOURCE DISCIPLINED DISCIPLINED RIVERSOURCE INTERNATIONAL INTERNATIONAL DISCIPLINED RIVERSOURCE EQUITY FUND EQUITY FUND INTERNATIONAL INTERNATIONAL PRO FORMA PRO FORMA YEAR ENDED APRIL 30, 2007 (UNAUDITED) EQUITY FUND EQUITY FUND ADJUSTMENTS COMBINED INVESTMENT INCOME Income: Dividends $ 2,511,944 $ 4,494,641 $ -- $ 7,006,585 Interest 133,315 331,915 -- 465,230 Income distributions from affiliated money market fund 184,358 118,412 -- 302,770 Less foreign taxes withheld (304,379) (478,961) -- (783,340) - ------------------------------------------------------------------------------------------------------------------------ Total income 2,525,238 4,466,007 -- 6,991,245 - ------------------------------------------------------------------------------------------------------------------------ Expenses: Investment management services fee (Note 2) 577,859 1,838,156 (176,814)(a) 2,239,201 Distribution fee Class A 27,614 251,105 -- 278,719 Class B 2,849 261,278 -- 264,127 Class C 528 17,697 -- 18,225 Class W 13,343 N/A -- 13,343 Transfer agency fee (Note 2) Class A 4,149 213,371 23,268(b) 240,788 Class B 222 60,002 6,910(b) 67,134 Class C 37 4,018 622(b) 4,677 Class R4 8 284 -- 292 Class W 10,674 N/A -- 10,674 Service fee -- Class R4 (Note 2) 8 134 (142)(c) -- Administrative services fees and expenses (Note 2) 56,772 155,174 9,229(d) 221,175 Plan administration services fee -- Class R4 32 175 -- 207 Compensation of board members 1,392 7,214 -- 8,606 Custodian fees 84,470 177,522 -- 261,992 Printing and postage 27,694 48,952 -- 76,646 Registration fees (Note 2) 120,951 64,999 (32,500)(e) 153,450 Professional fees (Note 2) 32,691 23,907 (22,613)(f) 33,985 Other 3,993 14,800 -- 18,793 - ------------------------------------------------------------------------------------------------------------------------ Total expenses 965,286 3,138,788 (192,040) 3,912,034 Expenses waived/reimbursed by RiverSource Investments, LLC (Note 2) (93,779) (76,628) 102,562(g) (67,845) - ------------------------------------------------------------------------------------------------------------------------ 871,507 3,062,160 (89,478) 3,844,189 Earnings and bank fee credits on cash balances (1,494) (6,461) -- (7,955) - ------------------------------------------------------------------------------------------------------------------------ Total net expenses 870,013 3,055,699 (89,478) 3,836,234 - ------------------------------------------------------------------------------------------------------------------------ Investment income (loss) -- net 1,655,225 1,410,308 89,478 3,155,011 - ------------------------------------------------------------------------------------------------------------------------ REALIZED AND UNREALIZED GAIN (LOSS) -- NET Net realized gain (loss) on: Security transactions 2,912,266 30,639,554 -- 33,551,820 Foreign currency transactions (60,158) 111,944 -- 51,786 Futures contracts 556,634 -- -- 556,634 - ------------------------------------------------------------------------------------------------------------------------ Net realized gain (loss) on investments 3,408,742 30,751,498 -- 34,160,240 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 16,714,801 (8,035,041) -- 8,679,760 - ------------------------------------------------------------------------------------------------------------------------ Net gain (loss) on investments and foreign currencies 20,123,543 22,716,457 -- 42,840,000 - ------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in net assets resulting from operations $21,778,768 $24,126,765 $ 89,478 $45,995,011 - ------------------------------------------------------------------------------------------------------------------------
See accompanying notes to pro forma financial statements. 31 RIVERSOURCE DISCIPLINED INTERNATIONAL EQUITY FUND (BUYING FUND) RIVERSOURCE INTERNATIONAL EQUITY FUND (SELLING FUND) NOTES TO PRO FORMA FINANCIAL STATEMENTS (Unaudited as to April 30, 2007) 1. BASIS OF COMBINATION The unaudited pro forma combining statement of assets and liabilities and the statement of operations reflect the accounts of the two funds at and for the 12- month period ending April 30, 2007. These statements have been derived from financial statements prepared for the RiverSource Disciplined International Equity Fund and RiverSource International Equity Fund as of April 30, 2007. Each Fund is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. The primary investments of each Fund are as follows: RiverSource Disciplined International Equity Fund and RiverSource International Equity Fund invest primarily in equity securities of foreign issuers or in instruments that provide exposure to foreign equity markets. The pro forma statements give effect to the proposed transfer of the assets and liabilities of RiverSource International Equity Fund in exchange for Class A, B, C, I and R4 shares of RiverSource Disciplined International Equity Fund under U.S. generally accepted accounting principles. The pro forma statements reflect estimates for the combined RiverSource Disciplined International Equity Fund based on the increased asset level of the merger and associated economies of scale, adjusted to reflect current fees. The pro forma combining statements should be read in conjunction with the historical financial statements of the funds incorporated by reference in the Statement of Additional Information. The pro forma statement of operations give effect to the proposed transaction on the historical operations of the accounting survivor, RiverSource Disciplined International Equity Fund, as if the transaction had occurred at the beginning of the year presented. 2. PRO FORMA ADJUSTMENTS (a) To reflect the reduction in investment management services fee due to the Reorganization. In addition, the Performance Incentive Adjustment (PIA) for RiverSource International Equity Fund was removed and a new PIA adjustment was calculated based on the RiverSource International Equity Fund average net assets as of April 30, 2007 and the RiverSource Disciplined International Equity Fund PIA rate. (b) To adjust for closed account fees for each RiverSource International Equity Fund shareholder account that will be closed on the system as a result of this merger. (c) To reflect the elimination of the service fee for Class R4. (d) To reflect the change in administrative services fees due to the Reorganization. (e) To reflect the reduction in the registration fees due to the Reorganization. (f) To reflect the reduction in audit fees due to the Reorganization. (g) To adjust the expense reimbursement to reflect the net reduction in fees resulting from the reorganization per the agreement by RiverSource Investments, LLC and its affiliates to waive certain fees and absorb certain expenses following the merger. 32 3. CAPITAL SHARES The pro forma net asset value per share assumes the issuance of additional Class A, Class B, Class C, Class I and Class R4 shares of RiverSource Disciplined International Equity Fund if the reorganization were to have taken place on April 30, 2007. The pro forma number of Class A shares outstanding of 10,094,279 consists of 9,239,330 shares assumed to be issued to Class A shareholders of the RiverSource International Equity Fund, plus 854,949 Class A shares of the RiverSource Disciplined International Equity Fund outstanding as of April 30, 2007. The pro forma number of Class B shares outstanding of 2,426,448 consists of 2,325,146 shares assumed to be issued to Class B shareholders of the RiverSource International Equity Fund, plus 101,302 Class B shares of the RiverSource Disciplined International Equity Fund outstanding as of April 30, 2007. The pro forma number of Class C shares outstanding of 174,568 consists of 160,258 shares assumed to be issued to Class C shareholders of the RiverSource International Equity Fund, plus 14,310 Class C shares of the RiverSource Disciplined International Equity Fund outstanding as of April 30, 2007. The pro forma number of Class I shares outstanding of 20,965,836 consists of 7,186,487 shares assumed to be issued to Class I shareholders of the RiverSource International Equity Fund, plus 13,779,349 Class I shares of the RiverSource Disciplined International Equity Fund outstanding as of April 30, 2007. The pro forma number of Class R4 shares outstanding of 11,275 consists of 6,842 shares assumed to be issued to Class R4 shareholders of the RiverSource International Equity Fund, plus 4,433 Class R4 shares of the RiverSource Disciplined International Equity Fund outstanding as of April 30, 2007. RiverSource Disciplined International Equity Fund had Class W outstanding shares of 6,503,622 as of April 30, 2007. 33 COMBINED INVESTMENTS IN SECURITIES RiverSource Disciplined International Equity Fund APRIL 30, 2007 (UNAUDITED) (Percentages represent value of investments compared to net assets)
COMMON STOCKS (93.6%)(C) ISSUER SHARES SHARES SHARES VALUE(A) VALUE(A) VALUE(A) RIVERSOURCE RIVERSOURCE DISCIPLINED DISCIPLINED RIVERSOURCE INTERNATIONAL RIVERSOURCE INTERNATIONAL DISCIPLINED RIVERSOURCE EQUITY FUND DISCIPLINED RIVERSOURCE EQUITY FUND INTERNATIONAL INTERNATIONAL PRO FORMA INTERNATIONAL INTERNATIONAL PRO FORMA EQUITY FUND EQUITY FUND COMBINED EQUITY FUND EQUITY FUND COMBINED AUSTRALIA (5.4%) AIRLINES (0.1%) Qantas Airways 128,752 -- 128,752 $ 565,567 $ -- $ 565,567 --------------------------------------------- BIOTECHNOLOGY (0.6%) CSL 21,395 16,526 37,921 1,541,027 1,190,326 2,731,353 --------------------------------------------- CAPITAL MARKETS (0.8%) Macquarie Bank -- 48,799 48,799 -- 3,496,607 3,496,607 --------------------------------------------- COMMERCIAL BANKS (0.2%) Natl Australia Bank -- 28,265 28,265 -- 1,003,978 1,003,978 --------------------------------------------- COMMERCIAL SERVICES & SUPPLIES (0.1%) Brambles 28,404 -- 28,404(b) 309,830 -- 309,830 --------------------------------------------- CONTAINERS & PACKAGING (0.2%) Amcor -- 148,711 148,711 -- 915,957 915,957 --------------------------------------------- DIVERSIFIED TELECOMMUNICATION SERVICES (0.3%) Telstra 248,582 99,600 348,182 960,260 384,750 1,345,010 --------------------------------------------- FOOD & STAPLES RETAILING (0.2%) Woolworths 46,036 -- 46,036 1,078,159 -- 1,078,159 --------------------------------------------- HOTELS, RESTAURANTS & LEISURE (0.2%) Tabcorp Holdings -- 65,567 65,567 -- 982,477 982,477 --------------------------------------------- INSURANCE (0.5%) Insurance Australia Group -- 63,000 63,000 -- 311,405 311,405 QBE Insurance Group 42,825 -- 42,825 1,085,943 -- 1,085,943 Suncorp-Metway -- 38,367 38,367 -- 679,128 679,128 --------------------------------------------- Total 1,085,943 990,533 2,076,476 --------------------------------------------- METALS & MINING (0.8%) BlueScope Steel 67,678 -- 67,678 671,931 -- 671,931 Rio Tinto 10,745 -- 10,745 733,769 -- 733,769 Zinifex 175,963 -- 175,963 2,403,144 -- 2,403,144 --------------------------------------------- Total 3,808,844 -- 3,808,844 --------------------------------------------- REAL ESTATE INVESTMENT TRUSTS (REITS) (0.8%) Centro Properties Group 63,491 -- 63,491 491,247 -- 491,247 DB RREEF Trust 558,575 -- 558,575 831,417 -- 831,417 Macquarie Goodman Group 57,025 -- 57,025 334,444 -- 334,444 Mirvac Group 56,697 -- 56,697 246,163 -- 246,163 Stockland 106,208 -- 106,208 756,199 -- 756,199 Westfield Group 63,562 -- 63,562 1,100,470 -- 1,100,470 --------------------------------------------- Total 3,759,940 -- 3,759,940 --------------------------------------------- REAL ESTATE MANAGEMENT & DEVELOPMENT (0.1%) Lend Lease 14,436 -- 14,436 237,839 -- 237,839 --------------------------------------------- ROAD & RAIL (0.2%) Toll Holdings 54,885 -- 54,885 999,625 -- 999,625 ---------------------------------------------
34
COMMON STOCKS (CONTINUED) ISSUER SHARES SHARES SHARES VALUE(A) VALUE(A) VALUE(A) RIVERSOURCE RIVERSOURCE DISCIPLINED DISCIPLINED RIVERSOURCE INTERNATIONAL RIVERSOURCE INTERNATIONAL DISCIPLINED RIVERSOURCE EQUITY FUND DISCIPLINED RIVERSOURCE EQUITY FUND INTERNATIONAL INTERNATIONAL PRO FORMA INTERNATIONAL INTERNATIONAL PRO FORMA EQUITY FUND EQUITY FUND COMBINED EQUITY FUND EQUITY FUND COMBINED TRANSPORTATION INFRASTRUCTURE (0.3%) Macquarie Airports 96,945 -- 96,945 $ 319,348 $ -- $ 319,348 Macquarie Infrastructure Group 97,532 275,569 373,101 305,638 863,555 1,169,193 --------------------------------------------- Total 624,986 863,555 1,488,541 --------------------------------------------- AUSTRIA (1.0%) COMMERCIAL BANKS (0.8%) Erste Bank der Oesterreichischen Sparkassen -- 41,411 41,411 -- 3,315,410 3,315,410 Raiffeisen Intl Bank Holding 1,085 -- 1,085 149,891 -- 149,891 --------------------------------------------- Total 149,891 3,315,410 3,465,301 --------------------------------------------- METALS & MINING (0.1%) voestalpine 7,678 -- 7,678 515,696 -- 515,696 --------------------------------------------- OIL, GAS & CONSUMABLE FUELS (0.1%) OMV 4,668 -- 4,668 295,428 -- 295,428 --------------------------------------------- REAL ESTATE MANAGEMENT & DEVELOPMENT ( -- %) IMMOFINANZ 11,252 -- 11,252(b) 182,875 -- 182,875 --------------------------------------------- BELGIUM (1.0%) CHEMICALS ( -- %) Solvay 1,114 -- 1,114 176,347 -- 176,347 --------------------------------------------- COMMERCIAL BANKS (0.4%) Dexia 20,021 -- 20,021 652,945 -- 652,945 KBC Groep 10,238 -- 10,238 1,354,383 -- 1,354,383 --------------------------------------------- Total 2,007,328 -- 2,007,328 --------------------------------------------- DIVERSIFIED FINANCIAL SERVICES (0.2%) Fortis 3,326 21,540 24,866 149,450 968,063 1,117,513 --------------------------------------------- DIVERSIFIED TELECOMMUNICATION SERVICES (0.3%) Belgacom 29,657 -- 29,657 1,303,333 -- 1,303,333 --------------------------------------------- FOOD & STAPLES RETAILING (0.1%) Delhaize Group 2,472 -- 2,472 237,317 -- 237,317 --------------------------------------------- BERMUDA ( -- %) OIL, GAS & CONSUMABLE FUELS Frontline 4,000 -- 4,000 149,724 -- 149,724 --------------------------------------------- BRAZIL (0.8%) COMMERCIAL BANKS (0.4%) UNIBANCO -- Uniao de Bancos Brasileiros GDR -- 17,595 17,595 -- 1,707,771 1,707,771 --------------------------------------------- DIVERSIFIED TELECOMMUNICATION SERVICES (0.1%) Tele Norte Leste Participacoes ADR -- 33,630 33,630 -- 550,523 550,523 --------------------------------------------- HOUSEHOLD DURABLES (0.1%) Gafisa -- 44,099 44,099 -- 625,676 625,676 --------------------------------------------- OIL, GAS & CONSUMABLE FUELS (0.1%) Petroleo Brasileiro ADR -- 4,010 4,010 -- 405,932 405,932 --------------------------------------------- REAL ESTATE (0.1%) JHSF Participacoes -- 73,600 73,600(b) -- 302,836 302,836 --------------------------------------------- CANADA (0.5%) FOOD & STAPLES RETAILING (0.2%) Shoppers Drug Mart -- 24,351 24,351 -- 1,109,835 1,109,835 --------------------------------------------- ROAD & RAIL (0.3%) Canadian Natl Railway -- 23,934 23,934 -- 1,202,444 1,202,444 ---------------------------------------------
35
COMMON STOCKS (CONTINUED) ISSUER SHARES SHARES SHARES VALUE(A) VALUE(A) VALUE(A) RIVERSOURCE RIVERSOURCE DISCIPLINED DISCIPLINED RIVERSOURCE INTERNATIONAL RIVERSOURCE INTERNATIONAL DISCIPLINED RIVERSOURCE EQUITY FUND DISCIPLINED RIVERSOURCE EQUITY FUND INTERNATIONAL INTERNATIONAL PRO FORMA INTERNATIONAL INTERNATIONAL PRO FORMA EQUITY FUND EQUITY FUND COMBINED EQUITY FUND EQUITY FUND COMBINED CHINA (0.7%) COMMERCIAL BANKS (0.2%) Industrial & Commercial Bank of China Series H -- 1,846,000 1,846,000(b) $ -- $ 1,003,124 $ 1,003,124 --------------------------------------------- OIL, GAS & CONSUMABLE FUELS (0.3%) CNOOC -- 1,355,300 1,355,300 -- 1,164,131 1,164,131 --------------------------------------------- TRANSPORTATION INFRASTRUCTURE (0.2%) China Merchants Holdings Intl -- 258,000 258,000 -- 1,140,282 1,140,282 --------------------------------------------- DENMARK (0.4%) BEVERAGES (0.1%) Carlsberg Series B 2,425 -- 2,425 271,693 -- 271,693 --------------------------------------------- COMMERCIAL BANKS (0.1%) Danske Bank 13,700 -- 13,700 639,976 -- 639,976 --------------------------------------------- ELECTRICAL EQUIPMENT (0.1%) Vestas Wind Systems 6,300 -- 6,300(b) 407,462 -- 407,462 --------------------------------------------- MARINE (0.1%) AP Moller-Maersk 47 -- 47 530,990 -- 530,990 --------------------------------------------- FINLAND (1.2%) COMMUNICATIONS EQUIPMENT (0.2%) Nokia -- 29,180 29,180(b) -- 736,015 736,015 Nokia ADR -- 13,540 13,540(b) -- 341,885 341,885 --------------------------------------------- Total -- 1,077,900 1,077,900 --------------------------------------------- DIVERSIFIED TELECOMMUNICATION SERVICES ( -- %) Elisa Series A 5,285 -- 5,285 153,773 -- 153,773 --------------------------------------------- FOOD & STAPLES RETAILING ( -- %) Kesko Series B 3,257 -- 3,257 225,940 -- 225,940 --------------------------------------------- INSURANCE (0.2%) Sampo Series A 35,841 -- 35,841 1,116,491 -- 1,116,491 --------------------------------------------- METALS & MINING (0.1%) Outokumpu 7,464 -- 7,464 247,986 -- 247,986 --------------------------------------------- OIL, GAS & CONSUMABLE FUELS (0.1%) Neste Oil 14,845 -- 14,845 524,080 -- 524,080 --------------------------------------------- PAPER & FOREST PRODUCTS (0.6%) M-real Series B -- 8,680 8,680 -- 59,227 59,227 Stora Enso Series R 68,299 -- 68,299 1,246,195 -- 1,246,195 UPM-Kymmene 18,073 35,934 54,007 445,367 885,509 1,330,876 --------------------------------------------- Total 1,691,562 944,736 2,636,298 --------------------------------------------- FRANCE (10.0%) AIRLINES (0.2%) Air France-KLM 16,977 -- 16,977 865,734 -- 865,734 --------------------------------------------- AUTO COMPONENTS (0.5%) Michelin Series B 16,954 -- 16,954 2,159,860 -- 2,159,860 Valeo 5,158 -- 5,158 296,321 -- 296,321 --------------------------------------------- Total 2,456,181 -- 2,456,181 --------------------------------------------- AUTOMOBILES (0.9%) Peugeot 15,445 6,860 22,305 1,253,020 556,537 1,809,557 Renault 16,502 -- 16,502 2,141,973 -- 2,141,973 --------------------------------------------- Total 3,394,993 556,537 3,951,530 --------------------------------------------- BUILDING PRODUCTS (0.4%) Compagnie de Saint-Gobain 5,239 13,330 18,569 559,358 1,423,219 1,982,577 ---------------------------------------------
36
COMMON STOCKS (CONTINUED) ISSUER SHARES SHARES SHARES VALUE(A) VALUE(A) VALUE(A) RIVERSOURCE RIVERSOURCE DISCIPLINED DISCIPLINED RIVERSOURCE INTERNATIONAL RIVERSOURCE INTERNATIONAL DISCIPLINED RIVERSOURCE EQUITY FUND DISCIPLINED RIVERSOURCE EQUITY FUND INTERNATIONAL INTERNATIONAL PRO FORMA INTERNATIONAL INTERNATIONAL PRO FORMA EQUITY FUND EQUITY FUND COMBINED EQUITY FUND EQUITY FUND COMBINED COMMERCIAL BANKS (2.0%) BNP Paribas 34,396 10,020 44,416 $ 3,989,867 $ 1,162,300 $ 5,152,167 Credit Agricole 48,735 28,820 77,555 2,051,973 1,213,458 3,265,431 Societe Generale 2,663 -- 2,663 564,292 -- 564,292 --------------------------------------------- Total 6,606,132 2,375,758 8,981,890 --------------------------------------------- CONSTRUCTION & ENGINEERING (0.1%) VINCI 4,080 -- 4,080 656,210 -- 656,210 --------------------------------------------- CONSTRUCTION MATERIALS (0.1%) Lafarge 2,311 -- 2,311 375,144 -- 375,144 --------------------------------------------- DIVERSIFIED TELECOMMUNICATION SERVICES (0.5%) France Telecom 32,979 53,070 86,049 964,274 1,551,715 2,515,989 --------------------------------------------- ELECTRIC EQUIPMENT (0.1%) ALSTOM 1,813 -- 1,813(b) 269,541 -- 269,541 --------------------------------------------- ELECTRICAL UTILITIES (0.1%) Electricite de France -- 7,325 7,325 -- 636,540 636,540 --------------------------------------------- FOOD & STAPLES RETAILING (0.2%) Carrefour 7,371 -- 7,371 566,481 -- 566,481 Casino Guichard Perrachon 2,920 -- 2,920 313,653 -- 313,653 --------------------------------------------- Total 880,134 -- 880,134 --------------------------------------------- FOOD PRODUCTS (0.2%) Groupe Danone 4,499 -- 4,499 739,644 -- 739,644 --------------------------------------------- HOTELS, RESTAURANTS & LEISURE (0.9%) Accor 6,085 34,780 40,865 573,098 3,275,651 3,848,749 Sodexho Alliance 5,735 -- 5,735 454,527 -- 454,527 --------------------------------------------- Total 1,027,625 3,275,651 4,303,276 --------------------------------------------- HOUSEHOLD DURABLES (0.2%) Thomson -- 40,260 40,260 -- 775,742 775,742 --------------------------------------------- INSURANCE (0.7%) AXA -- 59,849 59,849 -- 2,747,587 2,747,587 CNP Assurances 2,454 -- 2,454 312,798 -- 312,798 --------------------------------------------- Total 312,798 2,747,587 3,060,385 --------------------------------------------- MEDIA (0.5%) JC Decaux -- 46,176 46,176 -- 1,433,970 1,433,970 Lagardere -- 11,260 11,260 -- 884,889 884,889 --------------------------------------------- Total -- 2,318,859 2,318,859 --------------------------------------------- MULTILINE RETAIL ( -- %) PPR 1,160 -- 1,160 201,573 -- 201,573 --------------------------------------------- MULTI-UTILITIES (0.8%) SUEZ 15,685 -- 15,685 893,811 -- 893,811 Veolia Environnement 1,909 29,867 31,776 157,537 2,464,725 2,622,262 --------------------------------------------- Total 1,051,348 2,464,725 3,516,073 --------------------------------------------- OIL, GAS & CONSUMABLE FUELS (0.5%) Total -- 30,522 30,522 -- 2,249,781 2,249,781 --------------------------------------------- PHARMACEUTICALS (0.6%) Sanofi-Aventis -- 27,580 27,580 -- 2,524,314 2,524,314 --------------------------------------------- REAL ESTATE INVESTMENT TRUSTS (REITS) (0.3%) Klepierre 1,168 -- 1,168 225,211 -- 225,211 Unibail 3,514 -- 3,514 973,934 -- 973,934 --------------------------------------------- Total 1,199,145 -- 1,199,145 ---------------------------------------------
37
COMMON STOCKS (CONTINUED) ISSUER SHARES SHARES SHARES VALUE(A) VALUE(A) VALUE(A) RIVERSOURCE RIVERSOURCE DISCIPLINED DISCIPLINED RIVERSOURCE INTERNATIONAL RIVERSOURCE INTERNATIONAL DISCIPLINED RIVERSOURCE EQUITY FUND DISCIPLINED RIVERSOURCE EQUITY FUND INTERNATIONAL INTERNATIONAL PRO FORMA INTERNATIONAL INTERNATIONAL PRO FORMA EQUITY FUND EQUITY FUND COMBINED EQUITY FUND EQUITY FUND COMBINED WIRELESS TELECOMMUNICATION SERVICES (0.2%) Bouygues 12,972 -- 12,972 $ 1,033,512 $ -- $ 1,033,512 --------------------------------------------- GERMANY (6.8%) AIR FREIGHT & LOGISTICS (0.4%) Deutsche Post -- 49,810 49,810 -- 1,712,564 1,712,564 --------------------------------------------- AIRLINES (0.1%) Deutsche Lufthansa 13,040 -- 13,040 389,024 -- 389,024 --------------------------------------------- AUTO COMPONENTS (0.9%) Continental -- 30,701 30,701 -- 4,272,998 4,272,998 --------------------------------------------- AUTOMOBILES (1.7%) BMW -- 12,850 12,850 -- 792,773 792,773 DaimlerChrysler 61,695 -- 61,695 4,987,867 -- 4,987,867 Volkswagen 12,282 -- 12,282 1,854,217 -- 1,854,217 --------------------------------------------- Total 6,842,084 792,773 7,634,857 --------------------------------------------- CAPITAL MARKETS ( -- %) Deutsche Bank -- 840 840 -- 128,948 128,948 --------------------------------------------- CHEMICALS (0.3%) BASF 6,980 -- 6,980 832,703 -- 832,703 Linde -- 6,209 6,209 -- 695,464 695,464 --------------------------------------------- Total 832,703 695,464 1,528,167 --------------------------------------------- DIVERSIFIED FINANCIAL SERVICES (0.3%) Deutsche Boerse 5,709 -- 5,709 1,338,243 -- 1,338,243 --------------------------------------------- DIVERSIFIED TELECOMMUNICATION SERVICES (1.0%) Deutsche Telekom 183,133 74,550 257,683 3,351,847 1,364,474 4,716,321 --------------------------------------------- ELECTRIC UTILITIES (0.2%) E.ON -- 7,350 7,350 -- 1,104,380 1,104,380 --------------------------------------------- HOTELS, RESTAURANTS & LEISURE (0.1%) TUI 16,338 -- 16,338 448,530 -- 448,530 --------------------------------------------- INDUSTRIAL CONGLOMERATES (0.3%) Siemens -- 12,830 12,830 -- 1,548,533 1,548,533 --------------------------------------------- INSURANCE (0.5%) Allianz -- 3,590 3,590 -- 816,589 816,589 Hannover Rueckversicherung -- 6,830 6,830(b) -- 346,514 346,514 Munich Re Group -- 5,540 5,540 -- 989,517 989,517 --------------------------------------------- Total -- 2,152,620 2,152,620 --------------------------------------------- MACHINERY (0.3%) Heidelberger Druckmaschinen -- 5,890 5,890 -- 277,808 277,808 MAN 7,265 -- 7,265 967,601 -- 967,601 --------------------------------------------- Total 967,601 277,808 1,245,409 --------------------------------------------- METALS & MINING (0.3%) Salzgitter 3,109 -- 3,109 510,987 -- 510,987 ThyssenKrupp 16,870 -- 16,870 900,911 -- 900,911 --------------------------------------------- Total 1,411,898 -- 1,411,898 --------------------------------------------- MULTI-UTILITIES (0.1%) RWE 3,400 -- 3,400 359,301 -- 359,301 --------------------------------------------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (0.1%) Infineon Technologies 16,035 -- 16,035(b) 248,937 -- 248,937 --------------------------------------------- TEXTILES, APPAREL & LUXURY GOODS (0.2%) Adidas -- 15,600 15,600 -- 927,908 927,908 ---------------------------------------------
38
COMMON STOCKS (CONTINUED) ISSUER SHARES SHARES SHARES VALUE(A) VALUE(A) VALUE(A) RIVERSOURCE RIVERSOURCE DISCIPLINED DISCIPLINED RIVERSOURCE INTERNATIONAL RIVERSOURCE INTERNATIONAL DISCIPLINED RIVERSOURCE EQUITY FUND DISCIPLINED RIVERSOURCE EQUITY FUND INTERNATIONAL INTERNATIONAL PRO FORMA INTERNATIONAL INTERNATIONAL PRO FORMA EQUITY FUND EQUITY FUND COMBINED EQUITY FUND EQUITY FUND COMBINED GREECE (0.3%) COMMERCIAL BANKS (0.1%) Piraeus Bank 8,592 -- 8,592 $ 311,323 $ -- $ 311,323 --------------------------------------------- ELECTRIC UTILITIES (0.2%) Public Power -- 36,700 36,700 -- 961,769 961,769 --------------------------------------------- HONG KONG (3.1%) AIRLINES ( -- %) Cathay Pacific Airways 55,000 -- 55,000 142,226 -- 142,226 --------------------------------------------- COMMERCIAL BANKS (0.3%) Bank of East Asia 101,585 -- 101,585 623,512 -- 623,512 BOC Hong Kong Holdings -- 252,500 252,500 -- 619,807 619,807 --------------------------------------------- Total 623,512 619,807 1,243,319 --------------------------------------------- DISTRIBUTORS (0.1%) Li & Fung 114,000 -- 114,000 354,179 -- 354,179 --------------------------------------------- DIVERSIFIED FINANCIAL SERVICES (0.1%) Hong Kong Exchanges and Clearing 44,500 -- 44,500 423,946 -- 423,946 --------------------------------------------- ELECTRIC UTILITIES (0.4%) CLP Holdings 82,000 -- 82,000 598,965 -- 598,965 HongKong Electric Holdings 263,000 12,500 275,500 1,315,870 62,541 1,378,411 --------------------------------------------- Total 1,914,835 62,541 1,977,376 --------------------------------------------- ELECTRICAL EQUIPMENT (0.1%) Johnson Electric Holdings -- 495,000 495,000 -- 299,322 299,322 --------------------------------------------- HOTELS, RESTAURANTS & LEISURE (0.6%) Melco PBL Entertainment Macau ADR -- 93,693 93,693(b) -- 1,632,132 1,632,132 Shangri-La Asia -- 444,000 444,000 -- 1,085,753 1,085,753 --------------------------------------------- Total -- 2,717,885 2,717,885 --------------------------------------------- INDUSTRIAL CONGLOMERATES (0.1%) Hutchison Whampoa -- 74,500 74,500 -- 717,389 717,389 --------------------------------------------- MARINE (0.1%) Orient Overseas Intl 46,500 -- 46,500 393,215 -- 393,215 --------------------------------------------- REAL ESTATE MANAGEMENT & DEVELOPMENT (0.2%) Hang Lung Properties 104,000 -- 104,000 308,091 -- 308,091 Henderson Land Development 39,000 -- 39,000 233,060 -- 233,060 Swire Pacific Series A 23,500 -- 23,500 268,353 -- 268,353 --------------------------------------------- Total 809,504 -- 809,504 --------------------------------------------- SPECIALTY RETAIL (0.5%) Esprit Holdings 40,000 139,000 179,000 484,803 1,684,692 2,169,495 --------------------------------------------- WIRELESS TELECOMMUNICATION SERVICES (0.7%) China Mobile -- 343,000 343,000 -- 3,089,494 3,089,494 --------------------------------------------- INDIA (0.2%) COMMERCIAL BANKS ICICI Bank ADR -- 23,255 23,255 -- 951,595 951,595 --------------------------------------------- IRELAND (0.1%) BEVERAGES ( -- %) C&C Group 10,629 -- 10,629 178,163 -- 178,163 --------------------------------------------- COMMERCIAL BANKS (0.1%) Bank of Ireland 6,283 16,378 22,661 134,834 351,336 486,170 ---------------------------------------------
39
COMMON STOCKS (CONTINUED) ISSUER SHARES SHARES SHARES VALUE(A) VALUE(A) VALUE(A) RIVERSOURCE RIVERSOURCE DISCIPLINED DISCIPLINED RIVERSOURCE INTERNATIONAL RIVERSOURCE INTERNATIONAL DISCIPLINED RIVERSOURCE EQUITY FUND DISCIPLINED RIVERSOURCE EQUITY FUND INTERNATIONAL INTERNATIONAL PRO FORMA INTERNATIONAL INTERNATIONAL PRO FORMA EQUITY FUND EQUITY FUND COMBINED EQUITY FUND EQUITY FUND COMBINED ISRAEL (0.2%) PHARMACEUTICALS Teva Pharmaceutical Inds ADR -- 19,420 19,420 $ -- $ 743,980 $ 743,980 --------------------------------------------- ITALY (3.6%) AUTOMOBILES (0.2%) Fiat 37,291 -- 37,291(b) 1,095,411 -- 1,095,411 --------------------------------------------- COMMERCIAL BANKS (1.2%) Banco Popolare di Milano Societa Cooperativa 9,624 -- 9,624 161,781 -- 161,781 Intesa Sanpaolo -- 460,011 460,011(b) -- 3,854,037 3,854,037 UniCredito Italiano -- 106,800 106,800 -- 1,097,179 1,097,179 Unione di Banche Italiane 16,436 -- 16,436 497,283 -- 497,283 --------------------------------------------- Total 659,064 4,951,216 5,610,280 --------------------------------------------- DIVERSIFIED TELECOMMUNICATION SERVICES (0.4%) Telecom Italia 681,272 -- 681,272 1,733,289 -- 1,733,289 --------------------------------------------- GAS UTILITIES (0.1%) Snam Rete Gas 38,530 -- 38,530 246,077 -- 246,077 --------------------------------------------- INSURANCE (0.2%) Unipol -- 196,500 196,500 -- 781,175 781,175 --------------------------------------------- MEDIA (0.2%) Mediaset -- 98,540 98,540 -- 1,114,176 1,114,176 --------------------------------------------- OIL, GAS & CONSUMABLE FUELS (1.3%) Eni 132,808 26,510 159,318 4,403,934 879,076 5,283,010 Saras -- 106,580 106,580(b) -- 663,962 663,962 --------------------------------------------- Total 4,403,934 1,543,038 5,946,972 --------------------------------------------- JAPAN (13.5%) AUTO COMPONENTS (0.3%) Aisin Seiki 13,500 -- 13,500 443,870 -- 443,870 Bridgestone 15,900 -- 15,900 322,441 -- 322,441 NOK -- 42,500 42,500 -- 790,634 790,634 --------------------------------------------- Total 766,311 790,634 1,556,945 --------------------------------------------- AUTOMOBILES (2.1%) Honda Motor 122,400 -- 122,400 4,203,797 -- 4,203,797 Nissan Motor 61,700 126,000 187,700 620,579 1,267,308 1,887,887 Toyota Motor -- 58,500 58,500 -- 3,553,082 3,553,082 --------------------------------------------- Total 4,824,376 4,820,390 9,644,766 --------------------------------------------- BUILDING PRODUCTS (0.4%) Daikin Inds -- 33,093 33,093 -- 1,118,370 1,118,370 JS Group -- 24,500 24,500 -- 553,244 553,244 --------------------------------------------- Total -- 1,671,614 1,671,614 --------------------------------------------- CAPITAL MARKETS (0.2%) Nomura Holdings -- 55,200 55,200 -- 1,054,894 1,054,894 --------------------------------------------- CHEMICALS (0.3%) Kuraray -- 42,100 42,100 -- 467,818 467,818 Mitsui Chemicals 44,000 -- 44,000 365,129 -- 365,129 Sumitomo Chemical -- 13,000 13,000 -- 85,858 85,858 Teijin -- 108,600 108,600 -- 559,324 559,324 --------------------------------------------- Total 365,129 1,113,000 1,478,129 ---------------------------------------------
40
COMMON STOCKS (CONTINUED) ISSUER SHARES SHARES SHARES VALUE(A) VALUE(A) VALUE(A) RIVERSOURCE RIVERSOURCE DISCIPLINED DISCIPLINED RIVERSOURCE INTERNATIONAL RIVERSOURCE INTERNATIONAL DISCIPLINED RIVERSOURCE EQUITY FUND DISCIPLINED RIVERSOURCE EQUITY FUND INTERNATIONAL INTERNATIONAL PRO FORMA INTERNATIONAL INTERNATIONAL PRO FORMA EQUITY FUND EQUITY FUND COMBINED EQUITY FUND EQUITY FUND COMBINED COMMERCIAL BANKS (1.9%) 77 Bank -- 84,400 84,400 $ -- $ 553,306 $ 553,306 Mitsubishi UFJ Financial Group -- 137 137 -- 1,425,027 1,425,027 Mitsui Trust Holdings 22,000 178,400 200,400 198,750 1,611,679 1,810,429 Mizuho Financial Group -- 161 161 -- 968,815 968,815 Resona Holdings 177 -- 177 399,435 -- 399,435 Shinsei Bank 315,000 117,900 432,900 1,358,243 508,371 1,866,614 Sumitomo Mitsui Financial Group -- 210 210 -- 1,834,498 1,834,498 --------------------------------------------- Total 1,956,428 6,901,696 8,858,124 --------------------------------------------- COMMERCIAL SERVICES & SUPPLIES (0.2%) Dai Nippon Printing 53,000 -- 53,000 844,782 -- 844,782 --------------------------------------------- COMPUTERS & PERIPHERALS (0.1%) Seiko Epson 14,500 -- 14,500 439,160 -- 439,160 --------------------------------------------- CONSUMER FINANCE (0.2%) Credit Saison -- 23,600 23,600 -- 670,962 670,962 SFCG -- 1,810 1,810 -- 318,280 318,280 Takefuji -- 490 490 -- 16,468 16,468 --------------------------------------------- Total -- 1,005,710 1,005,710 --------------------------------------------- CONTAINERS & PACKAGING (0.1%) Toyo Seikan Kaisha 12,700 -- 12,700 252,719 -- 252,719 --------------------------------------------- ELECTRONIC EQUIPMENT & INSTRUMENTS (0.9%) Hitachi 442,000 -- 442,000 3,356,762 -- 3,356,762 Nippon Electric Glass -- 31,500 31,500 -- 539,088 539,088 --------------------------------------------- Total 3,356,762 539,088 3,895,850 --------------------------------------------- FOOD & STAPLES RETAILING (0.5%) AEON -- 74,100 74,100 -- 1,355,286 1,355,286 Lawson -- 12,800 12,800 -- 472,008 472,008 Matsumotokiyoshi -- 22,531 22,531 -- 529,398 529,398 --------------------------------------------- Total -- 2,356,692 2,356,692 --------------------------------------------- HOUSEHOLD DURABLES (0.5%) Funai Electric -- 2,500 2,500 -- 198,244 198,244 SANYO Electric 114,000 -- 114,000(b) 182,177 -- 182,177 Sekisui Chemical -- 108,900 108,900 -- 844,913 844,913 Sekisui House -- 71,200 71,200 -- 1,050,764 1,050,764 --------------------------------------------- Total 182,177 2,093,921 2,276,098 --------------------------------------------- HOUSEHOLD PRODUCTS (0.1%) Kao -- 11,100 11,100 -- 304,678 304,678 --------------------------------------------- LEISURE EQUIPMENT & PRODUCTS (0.2%) FUJIFILM Holdings 7,500 12,200 19,700 308,930 502,526 811,456 Sankyo -- 2,000 2,000 -- 87,657 87,657 --------------------------------------------- Total 308,930 590,183 899,113 --------------------------------------------- MACHINERY (0.3%) Hino Motors -- 153,700 153,700 -- 846,350 846,350 THK -- 20,100 20,100 -- 489,784 489,784 --------------------------------------------- Total -- 1,336,134 1,336,134 ---------------------------------------------
41
COMMON STOCKS (CONTINUED) ISSUER SHARES SHARES SHARES VALUE(A) VALUE(A) VALUE(A) RIVERSOURCE RIVERSOURCE DISCIPLINED DISCIPLINED RIVERSOURCE INTERNATIONAL RIVERSOURCE INTERNATIONAL DISCIPLINED RIVERSOURCE EQUITY FUND DISCIPLINED RIVERSOURCE EQUITY FUND INTERNATIONAL INTERNATIONAL PRO FORMA INTERNATIONAL INTERNATIONAL PRO FORMA EQUITY FUND EQUITY FUND COMBINED EQUITY FUND EQUITY FUND COMBINED MARINE (0.2%) Kawasaki Kisen Kaisha 30,000 -- 30,000 $ 325,811 $ -- $ 325,811 Mitsui OSK Lines 50,000 -- 50,000 630,098 -- 630,098 Nippon Yusen Kabushiki Kaisha 19,000 -- 19,000 163,394 -- 163,394 --------------------------------------------- Total 1,119,303 -- 1,119,303 --------------------------------------------- MEDIA (0.3%) Dentsu -- 418 418 -- 1,190,232 1,190,232 --------------------------------------------- METALS & MINING (0.3%) JFE Holdings 11,000 -- 11,000 604,622 -- 604,622 Nippon Steel 134,000 -- 134,000 864,480 -- 864,480 --------------------------------------------- Total 1,469,102 -- 1,469,102 --------------------------------------------- OFFICE ELECTRONICS (0.3%) Canon -- 11,006 11,006 -- 617,458 617,458 Ricoh -- 34,400 34,400 -- 754,988 754,988 --------------------------------------------- Total -- 1,372,446 1,372,446 --------------------------------------------- OIL, GAS & CONSUMABLE FUELS (0.1%) Nippon Oil 82,000 -- 82,000 629,666 -- 629,666 --------------------------------------------- PAPER & FOREST PRODUCTS (0.1%) Nippon Paper Group -- 187 187 -- 632,794 632,794 --------------------------------------------- PHARMACEUTICALS (0.8%) Astellas Pharma -- 13,900 13,900 -- 608,025 608,025 Chugai Pharmaceutical -- 90,800 90,800 -- 2,315,236 2,315,236 Daiichi Sankyo 21,300 -- 21,300 635,434 -- 635,434 --------------------------------------------- Total 635,434 2,923,261 3,558,695 --------------------------------------------- REAL ESTATE INVESTMENT TRUSTS (REITS) (0.2%) Nippon Building Fund 67 -- 67 1,082,958 -- 1,082,958 --------------------------------------------- REAL ESTATE MANAGEMENT & DEVELOPMENT (0.2%) Mitsubishi Estate 31,000 -- 31,000 961,068 -- 961,068 --------------------------------------------- ROAD & RAIL (0.3%) Nippon Express -- 202,600 202,600 -- 1,254,113 1,254,113 --------------------------------------------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (0.5%) Advantest -- 17,900 17,900 -- 792,223 792,223 Rohm -- 16,600 16,600 -- 1,499,283 1,499,283 --------------------------------------------- Total -- 2,291,506 2,291,506 --------------------------------------------- SOFTWARE (0.4%) Nintendo 6,400 -- 6,400 1,999,103 -- 1,999,103 --------------------------------------------- SPECIALTY RETAIL (0.3%) Yamada Denki -- 15,300 15,300 -- 1,413,649 1,413,649 --------------------------------------------- TRADING COMPANIES & DISTRIBUTORS (1.1%) Marubeni -- 270,000 270,000 -- 1,621,183 1,621,183 Mitsubishi 81,200 35,000 116,200 1,730,812 746,040 2,476,852 Mitsui & Co 38,000 -- 38,000 683,274 -- 683,274 Sojitz 52,000 -- 52,000 196,498 -- 196,498 --------------------------------------------- Total 2,610,584 2,367,223 4,977,807 --------------------------------------------- MEXICO (1.4%) BEVERAGES (0.4%) Coca-Cola Femsa ADR -- 12,450 12,450 -- 484,181 484,181 Fomento Economico Mexicano ADR -- 10,698 10,698 -- 1,152,067 1,152,067 --------------------------------------------- Total -- 1,636,248 1,636,248 ---------------------------------------------
42
COMMON STOCKS (CONTINUED) ISSUER SHARES SHARES SHARES VALUE(A) VALUE(A) VALUE(A) RIVERSOURCE RIVERSOURCE DISCIPLINED DISCIPLINED RIVERSOURCE INTERNATIONAL RIVERSOURCE INTERNATIONAL DISCIPLINED RIVERSOURCE EQUITY FUND DISCIPLINED RIVERSOURCE EQUITY FUND INTERNATIONAL INTERNATIONAL PRO FORMA INTERNATIONAL INTERNATIONAL PRO FORMA EQUITY FUND EQUITY FUND COMBINED EQUITY FUND EQUITY FUND COMBINED CONSTRUCTION MATERIALS (0.2%) CEMEX ADR -- 31,192 31,192(b) $ -- $ 1,013,740 $ 1,013,740 --------------------------------------------- MEDIA (0.4%) Grupo Televisa ADR -- 68,325 68,325 -- 1,916,516 1,916,516 --------------------------------------------- WIRELESS TELECOMMUNICATION SERVICES (0.4%) America Movil ADR Series L -- 37,011 37,011 -- 1,944,188 1,944,188 --------------------------------------------- NETHERLANDS (7.2%) CHEMICALS ( -- %) Akzo Nobel 2,676 -- 2,676 214,739 -- 214,739 --------------------------------------------- COMMERCIAL BANKS (1.4%) ABN AMRO Holding 135,665 -- 135,665 6,581,602 -- 6,581,602 --------------------------------------------- COMMERCIAL SERVICES & SUPPLIES (0.1%) Vedior -- 18,650 18,650 -- 495,308 495,308 --------------------------------------------- DIVERSIFIED FINANCIAL SERVICES (0.5%) ING Groep 46,202 -- 46,202 2,104,219 -- 2,104,219 --------------------------------------------- DIVERSIFIED TELECOMMUNICATION SERVICES (0.2%) Koninklijke (Royal) KPN 51,102 -- 51,102 867,530 -- 867,530 --------------------------------------------- FOOD & STAPLES RETAILING (0.1%) Koninklijke Ahold 22,956 -- 22,956(b) 292,364 -- 292,364 --------------------------------------------- FOOD PRODUCTS (0.3%) Unilever 44,718 -- 44,718 1,364,513 -- 1,364,513 --------------------------------------------- HOUSEHOLD DURABLES (0.1%) Koninklijke Philips Electronics -- 14,140 14,140 -- 580,613 580,613 --------------------------------------------- INSURANCE (0.5%) Aegon 76,983 44,717 121,700 1,588,695 922,823 2,511,518 --------------------------------------------- MEDIA (0.2%) Reed Elsevier 40,650 -- 40,650 764,007 -- 764,007 --------------------------------------------- METALS & MINING (0.9%) Arcelor Mittal 73,721 -- 73,721 3,940,039 -- 3,940,039 --------------------------------------------- OIL, GAS & CONSUMABLE FUELS (2.7%) Royal Dutch Shell Series A 289,097 52,341 341,438 10,041,371 1,817,600 11,858,971 Royal Dutch Shell Series B 14,689 -- 14,689 517,256 -- 517,256 --------------------------------------------- Total 10,558,627 1,817,600 12,376,227 --------------------------------------------- REAL ESTATE INVESTMENT TRUSTS (REITS) (0.2%) Corio 2,911 -- 2,911 257,850 -- 257,850 Rodamco Europe 1,983 -- 1,983 292,002 -- 292,002 Wereldhave 1,276 -- 1,276 184,570 -- 184,570 --------------------------------------------- Total 734,422 -- 734,422 --------------------------------------------- NORWAY (0.9%) CHEMICALS (0.1%) Yara Intl 16,100 -- 16,100 469,698 -- 469,698 --------------------------------------------- COMMERCIAL BANKS (0.2%) DNB NOR 60,300 -- 60,300 860,576 -- 860,576 --------------------------------------------- DIVERSIFIED TELECOMMUNICATION SERVICES (0.1%) Telenor 23,100 -- 23,100 430,025 -- 430,025 --------------------------------------------- INDUSTRIAL CONGLOMERATES (0.2%) Orkla 74,500 -- 74,500 1,188,013 -- 1,188,013 ---------------------------------------------
43
COMMON STOCKS (CONTINUED) ISSUER SHARES SHARES SHARES VALUE(A) VALUE(A) VALUE(A) RIVERSOURCE RIVERSOURCE DISCIPLINED DISCIPLINED RIVERSOURCE INTERNATIONAL RIVERSOURCE INTERNATIONAL DISCIPLINED RIVERSOURCE EQUITY FUND DISCIPLINED RIVERSOURCE EQUITY FUND INTERNATIONAL INTERNATIONAL PRO FORMA INTERNATIONAL INTERNATIONAL PRO FORMA EQUITY FUND EQUITY FUND COMBINED EQUITY FUND EQUITY FUND COMBINED OIL, GAS & CONSUMABLE FUELS (0.3%) Norsk Hydro 18,750 -- 18,750 $ 646,488 $ -- $ 646,488 Statoil 18,350 -- 18,350 513,716 -- 513,716 --------------------------------------------- Total 1,160,204 -- 1,160,204 --------------------------------------------- PORTUGAL (0.1%) ELECTRIC UTILITIES Energias de Portugal 73,517 -- 73,517 402,259 -- 402,259 --------------------------------------------- SINGAPORE (1.4%) AIRLINES (0.1%) Singapore Airlines 48,000 -- 48,000 571,578 -- 571,578 --------------------------------------------- COMMERCIAL BANKS (0.6%) DBS Group Holdings -- 81,020 81,020 -- 1,124,285 1,124,285 Oversea-Chinese Banking 197,000 -- 197,000 1,157,659 -- 1,157,659 United Overseas Bank -- 32,700 32,700 -- 457,203 457,203 --------------------------------------------- Total 1,157,659 1,581,488 2,739,147 --------------------------------------------- DIVERSIFIED FINANCIAL SERVICES (0.1%) Singapore Exchange 59,000 -- 59,000 282,864 -- 282,864 --------------------------------------------- DIVERSIFIED TELECOMMUNICATION SERVICES (0.1%) SingTel 199,000 -- 199,000 432,185 -- 432,185 --------------------------------------------- INDUSTRIAL CONGLOMERATES ( -- %) SembCorp Inds 53,000 -- 53,000 168,949 -- 168,949 --------------------------------------------- REAL ESTATE MANAGEMENT & DEVELOPMENT (0.5%) CapitaLand 73,000 293,000 366,000 403,847 1,620,919 2,024,766 City Developments 44,000 -- 44,000 460,804 -- 460,804 --------------------------------------------- Total 864,651 1,620,919 2,485,570 --------------------------------------------- SOUTH AFRICA (0.1%) COMMERCIAL BANKS Nedbank Group -- 27,545 27,545 -- 587,029 587,029 --------------------------------------------- SOUTH KOREA (0.6%) DIVERSIFIED TELECOMMUNICATION SERVICES (0.1%) KT ADR -- 23,980 23,980 -- 543,387 543,387 --------------------------------------------- ELECTRIC UTILITIES (0.1%) Korea Electric Power ADR -- 20,880 20,880 -- 431,798 431,798 --------------------------------------------- HOUSEHOLD DURABLES (0.1%) LG Electronics -- 5,380 5,380 -- 359,168 359,168 --------------------------------------------- METALS & MINING (0.1%) POSCO -- 1,260 1,260 -- 528,915 528,915 --------------------------------------------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (0.1%) Samsung Electronics -- 921 921 -- 563,791 563,791 --------------------------------------------- WIRELESS TELECOMMUNICATION SERVICES (0.1%) SK Telecom ADR -- 22,800 22,800 -- 566,124 566,124 --------------------------------------------- SPAIN (1.7%) AIRLINES ( -- %) Iberia Lineas Aereas de Espana 49,917 -- 49,917 256,654 -- 256,654 --------------------------------------------- COMMERCIAL BANKS (0.3%) Banco Bilbao Vizcaya Argentaria 8,719 -- 8,719 208,453 -- 208,453 Banco Popular Espanol 25,307 -- 25,307 501,208 -- 501,208 Banco Santander Central Hispano -- 42,690 42,690 -- 768,324 768,324 --------------------------------------------- Total 709,661 768,324 1,477,985 ---------------------------------------------
44
COMMON STOCKS (CONTINUED) ISSUER SHARES SHARES SHARES VALUE(A) VALUE(A) VALUE(A) RIVERSOURCE RIVERSOURCE DISCIPLINED DISCIPLINED RIVERSOURCE INTERNATIONAL RIVERSOURCE INTERNATIONAL DISCIPLINED RIVERSOURCE EQUITY FUND DISCIPLINED RIVERSOURCE EQUITY FUND INTERNATIONAL INTERNATIONAL PRO FORMA INTERNATIONAL INTERNATIONAL PRO FORMA EQUITY FUND EQUITY FUND COMBINED EQUITY FUND EQUITY FUND COMBINED CONSTRUCTION & ENGINEERING (0.2%) ACS Actividades de Construccion y Servicios 7,471 -- 7,471 $ 463,046 $ -- $ 463,046 Fomento de Construcciones y Contratas 1,383 -- 1,383 128,584 -- 128,584 Sacyr Vallehermoso 4,667 -- 4,667 243,697 -- 243,697 --------------------------------------------- Total 835,327 -- 835,327 --------------------------------------------- ELECTRIC UTILITIES (0.2%) Iberdrola 15,303 -- 15,303 758,493 -- 758,493 --------------------------------------------- ELECTRICAL EQUIPMENT ( -- %) Gamesa Tecnologica 7,349 -- 7,349 253,160 -- 253,160 --------------------------------------------- GAS UTILITIES (0.2%) Gas Natural SDG 15,346 -- 15,346 771,953 -- 771,953 --------------------------------------------- METALS & MINING ( -- %) Acerinox 9,847 -- 9,847 232,457 -- 232,457 --------------------------------------------- OIL, GAS & CONSUMABLE FUELS (0.6%) Repsol YPF 55,217 23,690 78,907 1,818,961 780,397 2,599,358 --------------------------------------------- SPECIALTY RETAIL (0.2%) Inditex 13,338 -- 13,338 820,451 -- 820,451 --------------------------------------------- SWEDEN (2.6%) COMMERCIAL BANKS (0.1%) Nordea Bank 9,500 -- 9,500 164,297 -- 164,297 Svenska Handelsbanken Series A 8,200 -- 8,200 250,029 -- 250,029 --------------------------------------------- Total 414,326 -- 414,326 --------------------------------------------- COMMUNICATIONS EQUIPMENT (0.1%) Telefonaktiebolaget LM Ericsson ADR -- 2,710 2,710 -- 103,441 103,441 Telefonaktiebolaget LM Ericsson Series B -- 89,500 89,500 -- 342,043 342,043 --------------------------------------------- Total -- 445,484 445,484 --------------------------------------------- DIVERSIFIED TELECOMMUNICATION SERVICES (0.2%) TeliaSonera 101,500 -- 101,500 821,600 -- 821,600 --------------------------------------------- HOUSEHOLD DURABLES (0.2%) Electrolux Series B 30,600 -- 30,600 795,606 -- 795,606 --------------------------------------------- MACHINERY (1.4%) Alfa Laval 5,000 -- 5,000 303,970 -- 303,970 Sandvik 88,600 -- 88,600 1,690,147 -- 1,690,147 Scania Series B 7,650 -- 7,650 731,029 -- 731,029 Volvo Series A 12,500 -- 12,500(b) 46,649 -- 46,649 Volvo Series A 62,500 -- 62,500 1,240,052 -- 1,240,052 Volvo Series B 89,000 34,240 123,240 1,747,051 672,124 2,419,175 Volvo Series B 17,800 6,848 24,648(b) 66,428 25,556 91,984 --------------------------------------------- Total 5,825,326 697,680 6,523,006 --------------------------------------------- PAPER & FOREST PRODUCTS (0.2%) Svenska Cellulosa Series B 16,200 2,440 18,640 833,310 125,511 958,821 --------------------------------------------- REAL ESTATE MANAGEMENT & DEVELOPMENT (0.1%) Fabege 11,200 -- 11,200 298,372 -- 298,372 --------------------------------------------- SPECIALTY RETAIL (0.3%) Hennes & Mauritz Series B 22,850 -- 22,850 1,510,793 -- 1,510,793 --------------------------------------------- SWITZERLAND (6.4%) BIOTECHNOLOGY (0.1%) Actelion -- 2,447 2,447(b) -- 581,389 581,389 ---------------------------------------------
45
COMMON STOCKS (CONTINUED) ISSUER SHARES SHARES SHARES VALUE(A) VALUE(A) VALUE(A) RIVERSOURCE RIVERSOURCE DISCIPLINED DISCIPLINED RIVERSOURCE INTERNATIONAL RIVERSOURCE INTERNATIONAL DISCIPLINED RIVERSOURCE EQUITY FUND DISCIPLINED RIVERSOURCE EQUITY FUND INTERNATIONAL INTERNATIONAL PRO FORMA INTERNATIONAL INTERNATIONAL PRO FORMA EQUITY FUND EQUITY FUND COMBINED EQUITY FUND EQUITY FUND COMBINED BUILDING PRODUCTS (0.1%) Geberit 171 -- 171 $ 303,695 $ -- $ 303,695 --------------------------------------------- CAPITAL MARKETS (0.9%) UBS -- 61,906 61,906 -- 4,023,371 4,023,371 --------------------------------------------- CHEMICALS (1.5%) Ciba Specialty Chemicals 3,922 19,347 23,269 259,135 1,278,297 1,537,432 Clairant -- 24,870 24,870(b) -- 411,230 411,230 Lonza Group -- 22,777 22,777 -- 2,225,983 2,225,983 Syngenta 1,478 11,494 12,972(b) 293,618 2,283,389 2,577,007 --------------------------------------------- Total 552,753 6,198,899 6,751,652 --------------------------------------------- CONSTRUCTION MATERIALS (0.6%) Holcim -- 24,691 24,691 -- 2,645,018 2,645,018 --------------------------------------------- ELECTRICAL EQUIPMENT (0.5%) ABB 47,280 61,814 109,094 944,822 1,235,263 2,180,085 --------------------------------------------- FOOD PRODUCTS (0.6%) Nestle -- 7,033 7,033 -- 2,784,258 2,784,258 --------------------------------------------- INSURANCE (0.7%) Swiss Reinsurance -- 22,854 22,854 -- 2,148,364 2,148,364 Zurich Financial Services 4,555 -- 4,555 1,321,781 -- 1,321,781 --------------------------------------------- Total 1,321,781 2,148,364 3,470,145 --------------------------------------------- MACHINERY ( -- %) Sulzer 201 -- 201 264,230 -- 264,230 --------------------------------------------- METALS & MINING (0.2%) Xstrata 18,858 -- 18,858 981,272 -- 981,272 --------------------------------------------- PHARMACEUTICALS (1.1%) Novartis -- 41,130 41,130 -- 2,389,576 2,389,576 Roche Holding -- 12,992 12,992 -- 2,446,587 2,446,587 --------------------------------------------- Total -- 4,836,163 4,836,163 --------------------------------------------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT ( -- %) OC Oerlikon 392 -- 392(b) 210,929 -- 210,929 --------------------------------------------- TEXTILES, APPAREL & LUXURY GOODS (0.1%) Swatch Group Series B 1,623 -- 1,623 465,059 -- 465,059 --------------------------------------------- TAIWAN (0.1%) SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT United Microelectronics ADR -- 183,525 183,525 -- 601,962 601,962 --------------------------------------------- UNITED KINGDOM (20.0%) AEROSPACE & DEFENSE (0.6%) BAE Systems -- 286,341 286,341 -- 2,595,559 2,595,559 --------------------------------------------- AIRLINES (0.1%) British Airways 27,460 -- 27,460(b) 276,233 -- 276,233 --------------------------------------------- AUTO COMPONENTS (0.1%) GKN 35,743 -- 35,743 273,249 -- 273,249 --------------------------------------------- BEVERAGES (0.5%) Diageo -- 51,550 51,550 -- 1,086,626 1,086,626 SABMiller -- 46,890 46,890 -- 1,108,350 1,108,350 --------------------------------------------- Total -- 2,194,976 2,194,976 ---------------------------------------------
46
COMMON STOCKS (CONTINUED) ISSUER SHARES SHARES SHARES VALUE(A) VALUE(A) VALUE(A) RIVERSOURCE RIVERSOURCE DISCIPLINED DISCIPLINED RIVERSOURCE INTERNATIONAL RIVERSOURCE INTERNATIONAL DISCIPLINED RIVERSOURCE EQUITY FUND DISCIPLINED RIVERSOURCE EQUITY FUND INTERNATIONAL INTERNATIONAL PRO FORMA INTERNATIONAL INTERNATIONAL PRO FORMA EQUITY FUND EQUITY FUND COMBINED EQUITY FUND EQUITY FUND COMBINED CAPITAL MARKETS (0.7%) 3i Group 8,612 -- 8,612 $ 197,820 $ -- $ 197,820 Man Group 86,165 189,896 276,061 964,746 2,126,168 3,090,914 --------------------------------------------- Total 1,162,566 2,126,168 3,288,734 --------------------------------------------- CHEMICALS (0.1%) Imperial Chemical Inds 62,954 -- 62,954 666,565 -- 666,565 --------------------------------------------- COMMERCIAL BANKS (3.0%) Barclays 152,776 -- 152,776 2,205,495 -- 2,205,495 HBOS 108,145 38,606 146,751 2,320,658 828,437 3,149,095 HSBC Holdings -- 130,857 130,857 -- 2,414,351 2,414,351 Lloyds TSB Group 194,132 -- 194,132 2,241,616 -- 2,241,616 Royal Bank of Scotland Group 46,598 45,873 92,471 1,784,108 1,756,350 3,540,458 --------------------------------------------- Total 8,551,877 4,999,138 13,551,015 --------------------------------------------- COMMERCIAL SERVICES & SUPPLIES (0.6%) Capita Group 12,930 -- 12,930 181,641 -- 181,641 Rentokil Initial -- 378,110 378,110 -- 1,303,125 1,303,125 Serco Group 21,455 -- 21,455 210,513 -- 210,513 --------------------------------------------- Total 392,154 1,303,125 1,695,279 --------------------------------------------- CONTAINERS & PACKAGING (0.1%) Rexam -- 45,800 45,800 -- 479,410 479,410 --------------------------------------------- DIVERSIFIED TELECOMMUNICATION SERVICES (0.8%) BT Group 451,685 -- 451,685 2,841,145 -- 2,841,145 Cable & Wireless 180,943 -- 180,943 665,896 -- 665,896 --------------------------------------------- Total 3,507,041 -- 3,507,041 --------------------------------------------- ELECTRIC UTILITIES (0.3%) British Energy Group -- 49,419 49,419(b) -- 508,918 508,918 Scottish & Southern Energy 32,868 -- 32,868 982,527 -- 982,527 --------------------------------------------- Total 982,527 508,918 1,491,445 --------------------------------------------- FOOD & STAPLES RETAILING (1.5%) Alliance Boots 29,784 -- 29,784 664,514 -- 664,514 J Sainsbury 95,120 -- 95,120 1,083,803 -- 1,083,803 Tesco 81,782 479,024 560,806 752,015 4,404,799 5,156,814 --------------------------------------------- Total 2,500,332 4,404,799 6,905,131 --------------------------------------------- FOOD PRODUCTS (0.8%) Tate & Lyle 14,211 -- 14,211 176,210 -- 176,210 Unilever 40,871 77,103 117,974 1,278,671 2,412,210 3,690,881 --------------------------------------------- Total 1,454,881 2,412,210 3,867,091 --------------------------------------------- HEALTH CARE EQUIPMENT & SUPPLIES (0.1%) Smith & Nephew 35,362 -- 35,362 441,212 -- 441,212 --------------------------------------------- HOTELS, RESTAURANTS & LEISURE (0.5%) Compass Group 108,935 -- 108,935 787,797 -- 787,797 Enterprise Inns 14,332 -- 14,332 182,553 -- 182,553 InterContinental Hotels Group 13,941 -- 13,941 336,331 -- 336,331 Ladbrokes 33,509 -- 33,509 271,625 -- 271,625 Punch Taverns 14,044 -- 14,044 362,678 -- 362,678 Whitbread 13,458 -- 13,458 505,337 -- 505,337 --------------------------------------------- Total 2,446,321 -- 2,446,321 ---------------------------------------------
47
COMMON STOCKS (CONTINUED) ISSUER SHARES SHARES SHARES VALUE(A) VALUE(A) VALUE(A) RIVERSOURCE RIVERSOURCE DISCIPLINED DISCIPLINED RIVERSOURCE INTERNATIONAL RIVERSOURCE INTERNATIONAL DISCIPLINED RIVERSOURCE EQUITY FUND DISCIPLINED RIVERSOURCE EQUITY FUND INTERNATIONAL INTERNATIONAL PRO FORMA INTERNATIONAL INTERNATIONAL PRO FORMA EQUITY FUND EQUITY FUND COMBINED EQUITY FUND EQUITY FUND COMBINED HOUSEHOLD DURABLES (0.3%) Barratt Developments 7,857 -- 7,857 $ 169,139 $ -- $ 169,139 Bellway 7,539 -- 7,539 227,008 -- 227,008 Berkeley Group Holdings Unit 5,875 -- 5,875(b) 202,252 -- 202,252 George Wimpey 34,569 -- 34,569 400,452 -- 400,452 Taylor Woodrow 53,729 -- 53,729 517,656 -- 517,656 --------------------------------------------- Total 1,516,507 -- 1,516,507 --------------------------------------------- HOUSEHOLD PRODUCTS (0.3%) Reckitt Benckiser -- 23,524 23,524 -- 1,286,863 1,286,863 --------------------------------------------- INDEPENDENT POWER PRODUCERS & ENERGY TRADERS ( -- %) Intl Power 25,692 -- 25,692 224,633 -- 224,633 --------------------------------------------- INDUSTRIAL CONGLOMERATES (0.2%) Smiths Group -- 32,210 32,210 -- 694,516 694,516 Tomkins 46,074 -- 46,074 242,892 -- 242,892 --------------------------------------------- Total 242,892 694,516 937,408 --------------------------------------------- INSURANCE (1.1%) Aviva 67,905 -- 67,905 1,065,307 -- 1,065,307 Friends Provident -- 268,490 268,490 -- 1,010,842 1,010,842 Legal & General Group 68,432 -- 68,432 209,854 -- 209,854 Old Mutual 411,237 313,830 725,067 1,459,418 1,113,735 2,573,153 --------------------------------------------- Total 2,734,579 2,124,577 4,859,156 --------------------------------------------- MACHINERY (0.1%) Invensys 49,165 -- 49,165(b) 322,726 -- 322,726 --------------------------------------------- MEDIA (1.1%) British Sky Broadcasting Group ADR -- 146,901 146,901 -- 1,682,462 1,682,462 Reed Elsevier 112,425 84,470 196,895 1,423,577 1,069,598 2,493,175 Reuters Group 33,011 -- 33,011 313,643 -- 313,643 Trinity Mirror -- 61,020 61,020 -- 649,513 649,513 --------------------------------------------- Total 1,737,220 3,401,573 5,138,793 --------------------------------------------- METALS & MINING (0.5%) BHP Billiton -- 34,100 34,100 -- 761,910 761,910 Rio Tinto -- 26,325 26,325 -- 1,599,572 1,599,572 --------------------------------------------- Total -- 2,361,482 2,361,482 --------------------------------------------- MULTILINE RETAIL (0.3%) Debenhams -- 196,530 196,530 -- 565,187 565,187 Marks & Spencer Group 51,132 -- 51,132 754,203 -- 754,203 --------------------------------------------- Total 754,203 565,187 1,319,390 --------------------------------------------- MULIT-UTILITIES (1.7%) Centrica 266,822 73,170 339,992 2,055,933 563,794 2,619,727 Natl Grid 83,758 -- 83,758 1,315,056 -- 1,315,056 United Utilities 39,907 -- 39,907 594,821 -- 594,821 --------------------------------------------- Total 3,965,810 563,794 4,529,604 --------------------------------------------- OIL, GAS & CONSUMABLE FUELS (0.9%) BP 168,895 207,927 376,822 1,894,692 2,332,560 4,227,252 --------------------------------------------- PHARMACEUTICALS (0.7%) AstraZeneca 18,650 -- 18,650 1,014,261 -- 1,014,261 GlaxoSmithKline -- 84,145 84,145 -- 2,426,919 2,426,919 --------------------------------------------- Total 1,014,261 2,426,919 3,441,180 ---------------------------------------------
48
COMMON STOCKS (CONTINUED) ISSUER SHARES SHARES SHARES VALUE(A) VALUE(A) VALUE(A) RIVERSOURCE RIVERSOURCE DISCIPLINED DISCIPLINED RIVERSOURCE INTERNATIONAL RIVERSOURCE INTERNATIONAL DISCIPLINED RIVERSOURCE EQUITY FUND DISCIPLINED RIVERSOURCE EQUITY FUND INTERNATIONAL INTERNATIONAL PRO FORMA INTERNATIONAL INTERNATIONAL PRO FORMA EQUITY FUND EQUITY FUND COMBINED EQUITY FUND EQUITY FUND COMBINED REAL ESTATE INVESTMENT TRUSTS (REITS) (0.3%) British Land 13,471 -- 13,471 $ 393,460 $ -- $ 393,460 Great Portland Estates 12,039 -- 12,039 172,235 -- 172,235 Hammerson 13,843 -- 13,843 418,634 -- 418,634 Land Securities Group 5,693 -- 5,693 221,621 -- 221,621 Liberty Intl 6,110 -- 6,110 146,501 -- 146,501 --------------------------------------------- Total 1,352,451 -- 1,352,451 --------------------------------------------- ROAD & RAIL (0.1%) FirstGroup 19,116 -- 19,116 250,986 -- 250,986 Natl Express Group 11,676 -- 11,676 283,706 -- 283,706 Stagecoach Group 41,900 -- 41,900 154,709 -- 154,709 --------------------------------------------- Total 689,401 -- 689,401 --------------------------------------------- SPECIALTY RETAIL (0.2%) DSG Intl 53,358 -- 53,358 170,801 -- 170,801 Kingfisher 125,771 -- 125,771 680,994 -- 680,994 --------------------------------------------- Total 851,795 -- 851,795 --------------------------------------------- TEXTILES, APPAREL & LUXURY GOODS (0.1%) Burberry Group 18,079 -- 18,079 248,361 -- 248,361 --------------------------------------------- THRIFTS & MORTGAGE FINANCE (0.3%) Northern Rock -- 70,320 70,320 -- 1,503,637 1,503,637 --------------------------------------------- TOBACCO (0.1%) Imperial Tobacco Group 9,014 -- 9,014 392,879 -- 392,879 --------------------------------------------- WATER UTILITIES ( -- %) Severn Trent 6,159 -- 6,159 182,160 -- 182,160 --------------------------------------------- WIRELESS TELECOMMUNICATION SERVICES (1.7%) Vodafone Group 2,179,708 584,840 2,764,548 6,200,927 1,663,778 7,864,705 --------------------------------------------- UNITED STATES (3.0%) DIVERSIFIED FINANCIAL SERVICES (2.5%) iShares MSCI Emerging Markets Index Fund 85,500 -- 85,500 10,302,749 -- 10,302,749 Vanguard Emerging Markets Index Fund 14,000 -- 14,000 1,142,400 -- 1,142,400 --------------------------------------------- Total 11,445,149 -- 11,445,149 --------------------------------------------- ENERGY EQUIPMENT & SERVICES (0.5%) Schlumberger -- 28,803 28,803 -- 2,126,525 2,126,525 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost: $382,035,005) $219,871,196 $208,896,469 $428,767,665 - -----------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCKS (0.4%) ISSUER SHARES SHARES SHARES VALUE(A) VALUE(A) VALUE(A) RIVERSOURCE RIVERSOURCE DISCIPLINED DISCIPLINED RIVERSOURCE INTERNATIONAL RIVERSOURCE INTERNATIONAL DISCIPLINED RIVERSOURCE EQUITY FUND DISCIPLINED RIVERSOURCE EQUITY FUND INTERNATIONAL INTERNATIONAL PRO FORMA INTERNATIONAL INTERNATIONAL PRO FORMA EQUITY FUND EQUITY FUND COMBINED EQUITY FUND EQUITY FUND COMBINED GERMANY Henkel 2,839 2,420 5,259 $ 446,304 $ 380,435 $ 826,739 Porsche 161 -- 161 269,641 -- 269,641 Volkswagen 7,945 -- 7,945 802,997 -- 802,997 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL PREFERRED STOCKS (Cost: $1,582,600) $ 1,518,942 $ 380,435 $ 1,899,377 - -----------------------------------------------------------------------------------------------------------------------------------
49
MONEY MARKET FUND (3.0%)(D) ISSUER SHARES SHARES SHARES VALUE(A) VALUE(A) VALUE(A) RIVERSOURCE RIVERSOURCE DISCIPLINED DISCIPLINED RIVERSOURCE INTERNATIONAL RIVERSOURCE INTERNATIONAL DISCIPLINED RIVERSOURCE EQUITY FUND DISCIPLINED RIVERSOURCE EQUITY FUND INTERNATIONAL INTERNATIONAL PRO FORMA INTERNATIONAL INTERNATIONAL PRO FORMA EQUITY FUND EQUITY FUND COMBINED EQUITY FUND EQUITY FUND COMBINED RiverSource Short-Term Cash Fund 10,506,574 3,243,442 13,750,016(e) $ 10,506,574 $ 3,243,442 $ 13,750,016 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL MONEY MARKET FUND (Cost: $13,750,016) $ 10,506,574 $ 3,243,442 $ 13,750,016 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $397,367,621)(f) $231,896,712 $212,520,346 $444,417,058 - ----------------------------------------------------------------------------------------------------------------------------------- NOTES TO COMBINED INVESTMENTS IN SECURITIES
(A) Securities are valued by procedures described in Note 1 to the financial statements in the annual report. (B) Non-income producing. (C) Foreign security values are stated in U.S. dollars. (D) Partially pledged as initial margin deposit on the following open stock index futures contracts:
TYPE OF SECURITY CONTRACTS - ---------------------------------------------------------------------------------------- PURCHASE CONTRACTS Dow Jones Euro STOXX 50, June 2007 159 Financial Times Stock Exchange 100 Index, June 2007 38 Nikkei 225, June 2007 53
(E) Affiliated Money Market Fund -- See Note 6 and/or 7 to the financial statements in the annual report. (F) At April 30, 2007, the approximate cost of securities for federal income tax purposes and the approximate aggregate gross unrealized appreciation and depreciation based on that cost was:
RIVERSOURCE DISCIPLINED RIVERSOURCE INTERNATIONAL DISCIPLINED RIVERSOURCE EQUITY FUND INTERNATIONAL INTERNATIONAL PRO FORMA EQUITY FUND EQUITY FUND COMBINED Cost of securities for federal income tax purposes: $215,984,000 $181,384,000 $397,368,000 Unrealized appreciation $ 17,531,000 $ 33,613,000 $ 51,144,000 Unrealized depreciation (1,618,000) (2,477,000) (4,095,000) - ----------------------------------------------------------------------------------------------------------- Net unrealized appreciation $ 15,913,000 $ 31,136,000 $ 47,049,000 - -----------------------------------------------------------------------------------------------------------
The Global Industry Classification Standard (GICS) 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. 50 PART C. OTHER INFORMATION Item 15. Indemnification The Articles of Incorporation of the registrant provide that the Fund shall indemnify any person who was or is a party or is threatened to be made a party, by reason of the fact that she or he is or was a director, officer, employee or agent of the Fund, or is or was serving at the request of the Fund as a director, officer, employee or agent of another company, partnership, joint venture, trust or other enterprise, to any threatened, pending or completed action, suit or proceeding, wherever brought, and the Fund may purchase liability insurance and advance legal expenses, all to the fullest extent permitted by the laws of the State of Minnesota, as now existing or hereafter amended. The By-laws of the registrant provide that present or former directors or officers of the Fund made or threatened to be made a party to or involved (including as a witness) in an actual or threatened action, suit or proceeding shall be indemnified by the Fund to the full extent authorized by the Minnesota Business Corporation Act, all as more fully set forth in the By-laws filed as an exhibit to this registration statement. Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Any indemnification hereunder shall not be exclusive of any other rights of indemnification to which the directors, officers, employees or agents might otherwise be entitled. No indemnification shall be made in violation of the Investment Company Act of 1940. Item 16. Exhibits (1)(a) Articles of Incorporation, as amended Oct. 17, 1988, filed electronically as Exhibit 1 to Registrant's Post-Effective Amendment No. 28 to Registration Statement No. 2-51586, are incorporated by reference. (1)(b) Articles of Amendment, dated June 16, 1999, filed electronically as Exhibit (a)(2) to Registrant's Post-Effective Amendment No. 53 to Registration Statement No. 2-51586 filed on or about Oct. 25, 2001 is incorporated by reference. (1)(c) Articles of Amendment, dated Nov. 14, 2002, filed electronically as Exhibit (a)(3) to Registrant's Post-Effective Amendment No. 55 to Registration Statement No. 2-51586 is incorporated by reference. (1)(d) Articles of Amendment, dated April 21, 2006, filed electronically on or about Aug. 25, 2006 as Exhibit (a)(4) to Registrant's Post-Effective Amendment No. 60 to Registration Statement No. 2-51586 are incorporated by reference. (1)(e) Certificate of Designation, dated Oct. 5, 2006, filed electronically on or about Oct. 30, 2007 as Exhibit (a)(5) to Registrant's Post-Effective Amendment No. 63 to Registration Statement No. 2-51586 is incorporated by reference. (2) By-laws, as amended Jan. 11, 2001, filed electronically as Exhibit (b) to Registrant's Post-Effective Amendment No. 53 to Registration Statement No. 2-51586 filed on or about Oct. 25, 2001 is incorporated by reference. (3) Not applicable. (4) Form of Agreement and Plan of Reorganization is included herein as Exhibit A to Part A of this Registration Statement. (5) Not applicable. (6) Investment Management Services Agreement, amended and restated, dated May 1, 2006, between Registrant and RiverSource Investments, LLC filed electronically on or about Aug. 25, 2006 as Exhibit (d) to Registrant's Post-Effective Amendment No. 60 to Registration Statement No. 2-51586 is incorporated by reference. (7)(a) Distribution Agreement, effective Aug. 1, 2006, amended and restated as of Sept. 11, 2007, between Registrant and RiverSource Distributors, Inc. filed electronically on or about Oct. 30, 2007 as Exhibit (e)(2) to Registrant's Post-Effective Amendment No. 63 to Registration Statement No. 2-51586 is incorporated by reference. (7)(b) Form of Service Agreement for RiverSource Distributors, Inc. and RiverSource Service Corporation filed electronically on or about Aug. 27, 2007 as Exhibit (e)(3) to RiverSource Sector Series, Inc. Post-Effective Amendment No. 39 to Registration Statement No. 33-20872 is incorporated by reference. (7)(c) Form of RiverSource Funds Dealer Agreement filed electronically on or about Aug. 27, 2007 as Exhibit (e)(4) to RiverSource Sector Series, Inc. Post-Effective Amendment No. 39 to Registration Statement No. 33-20872 is incorporated by reference. (8) Not applicable. (9)(a) Custody Agreement, dated Nov. 10, 2005, between Registrant and U.S. Bank National Association filed electronically on or about Jan. 27, 2006 as Exhibit (g) to AXP High Yield Tax-Exempt Series, Inc. Post-Effective Amendment No. 47 to Registration Statement No. 2-63552 is incorporated by reference. (9)(b) Amendment, dated July 13, 2006, to the Custody Agreement between Registrant and U.S. Bank National Association filed electronically on or about Oct. 25, 2006 as Exhibit (g)(2) to Registrant's Post-Effective Amendment No. 62 to Registration Statement No. 2-51586 is incorporated by reference. (10)(a) Plan and Agreement of Distribution, dated Aug. 1, 2006, amended and restated as of Sept. 11, 2007, between Registrant and RiverSource Distributors, Inc. filed electronically on or about Oct. 30, 2007 as Exhibit (m)(2) to Registrant's Post-Effective Amendment No. 63 to Registration Statement No. 2-51568 is incorporated by reference. (10)(b) Rule 18f - 3(d) Plan, amended and restated as of Sept. 11, 2007, filed electronically on or about Oct. 30, 2007 as Exhibit (n) to Registrant's Post-Effective Amendment No. 63 to Registration Statement No. 2-51568 is incorporated by reference. (11) Opinion and consent of counsel as to the legality of the securities being registered is filed electronically herewith as Exhibit (11). (12) Tax opinion to be filed by Amendment. (13)(a) Administrative Services Agreement, dated Oct. 1, 2005, amended and restated as of Sept. 11, 2007, between Registrant and Ameriprise Financial, Inc. filed electronically on or about Oct. 30, 2007 as Exhibit (h)(1) to Registrant's Post-Effective Amendment No. 63 to Registration Statement No. 2-51586 is incorporated by reference. (13)(b) Transfer Agency Agreement, dated Oct. 1, 2005, amended and restated as of Sept. 11, 2007, between Registrant and RiverSource Service Corporation filed electronically on or about Oct. 30, 2007 as Exhibit (h)(2) to Registrant's Post-Effective Amendment No. 63 to Registration Statement No. 2-51586 is incorporated by reference. (13)(c) Master Plan Administration Services Agreement, dated Dec. 1, 2006, amended and restated as of Sept. 11, 2007, between Registrant and RiverSource Service Corporation filed electronically on or about Oct. 30, 2007 as Exhibit (h)(3) to Registrant's Post-Effective Amendment No. 63 to Registration Statement No. 2-51586 is incorporated by reference. (13)(d) License Agreement, effective May 1, 2006, amended and restated as of Sept. 11, 2007, between Ameriprise Financial, Inc. and RiverSource Funds filed electronically on or about Oct. 30, 2007 as Exhibit (h)(7) to Registrant's Post-Effective Amendment No. 63 to Registration Statement No. 2-51586 is incorporated by reference. (13)(e) Master Fee Cap/Fee Waiver Agreement, dated, Oct. 1, 2005, amended and restated as of Sept. 11, 2007, between RiverSource Investments, LLC, Ameriprise Financial, Inc., RiverSource Service Corporation, Ameriprise Financial Services, Inc., RiverSource Distributors, Inc. and the RiverSource Funds filed electronically on or about Oct. 30, 2007 as Exhibit (h)(8) to Registrant's Post-Effective Amendment No. 63 to Registration Statement No. 2-51586 is incorporated by reference. (14)(a) Consent of Independent Registered Public Accounting Firm (KPMG LLP) for RiverSource Core Bond Fund, dated Sept. 26, 2007, filed electronically on or about Sept. 26, 2007, as Exhibit (j)(2) to RiverSource Bond Series, Inc. Post-Effective Amendment No. 57 to Registration Statement No. 2-72174 is incorporated by reference. (14)(b) Consent of Independent Registered Public Accounting Firm (KPMG LLP) for RiverSource Diversified Bond Fund, dated Oct. 29, 2007, filed electronically on or about Oct. 30, 2007, as Exhibit (j)(2) to Registrant's Post-Effective Amendment No. 63 to Registration Statement No. 2-51586 is incorporated by reference. (14)(c) Consent of Independent Registered Public Accounting Firm (Ernst & Young LLP) for RiverSource Core Bond Fund and RiverSource Diversified Bond Fund is filed electronically herewith. (15) Financial Statements: Not applicable. (16) Directors Power of Attorney to sign this Registration Statement and its amendments, dated Sept. 11, 2007, filed electronically on or about Oct. 12, 2007 as Exhibit (16) to Registration Statement No. 333-146689 is incorporated by reference. (17)(a) Code of Ethics adopted under Rule 17j-1 for Registrant filed electronically on or about Aug. 27, 2007 as Exhibit (p)(1) to RiverSource Sector Series, Inc. Post-Effective Amendment No. 39 to Registration Statement No. 33-20872 is incorporated by reference. (17)(b) Codes of Ethics adopted under Rule 17j-1 for Registrant's investment adviser and Registrant's principal underwriter, dated Jan. 2007 and April 2006, filed electronically on or about Jan. 26, 2007 as Exhibit (p)(2) to RiverSource Equity Series, Inc. Post-Effective Amendment No. 103 to Registration Statement No. 2-13188 are incorporated by reference. (17)(c) Prospectus, dated Oct. 30, 2007, for RiverSource Diversified Bond Fund is filed electronically herewith as Exhibit (17)(c). (17)(d) Prospectus, dated Sept. 28, 2007, for RiverSource Core Bond Fund is filed electronically herewith as Exhibit (17)(d). (17)(e) Statement of Additional Information, dated Nov. 29, 2007, for RiverSource Diversified Bond Fund and RiverSource Core Bond Fund is filed electronically herewith as Exhibit (17)(e). (17)(f) Annual Report for the period ended Aug. 31, 2007 for RiverSource Diversified Bond Fund is filed electronically herewith as Exhibit (17)(f). (17)(g) Annual Report for the period ended July 31, 2007 for RiverSource Core Bond Fund is filed electronically herewith as Exhibit (17)(g). Item 17. Undertakings. (1) The undersigned registrant agrees that prior to any public reoffering of the securities registered through the use of a prospectus which is a part of this registration statement by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c) of the Securities Act, the reoffering prospectus will contain the information called for by the applicable registration form for the reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. (2) The undersigned registrant agrees that every prospectus that is filed under paragraph (1) above will be filed as a part of an amendment to the registration statement and will not be used until the amendment is effective, and that, in determining any liability under the 1933 Act, each post-effective amendment shall be deemed to be a new registration statement for the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering of them. (3) The Registrant undertakes to file by Post-Effective Amendment an Opinion of Counsel supporting the tax consequences of the proposed reorganization within a reasonable time after receipt of such opinion. SIGNATURES As required by the Securities Act of 1933, as amended, this Amendment to the Registration Statement has been signed on behalf of the Registrant, in the City of Minneapolis, and State of Minnesota on the 26 day of Nov., 2007. RIVERSOURCE DIVERSIFIED INCOME SERIES, INC. By /s/ Patrick T. Bannigan -------------------------------- Patrick T. Bannigan President By /s/ Jeffrey P. Fox -------------------------------- Jeffrey P. Fox Treasurer As required by the Securities Act of 1933, this Amendment to the Registration Statement has been signed below by the following persons in the capacities indicated on the 26 day of Nov., 2007.
Signature Capacity - --------- -------- /s/ Stephen R. Lewis, Jr.* Chair of the Board - ----------------------------------- Stephen R. Lewis, Jr. /s/ Kathleen A. Blatz* Director - ----------------------------------- Kathleen A. Blatz /s/ Arne H. Carlson* Director - ----------------------------------- Arne H. Carlson /s/ Pamela G. Carlton* Director - ----------------------------------- Pamela G. Carlton /s/ Patricia M. Flynn* Director - ----------------------------------- Patricia M. Flynn /s/ Anne P. Jones* Director - ----------------------------------- Anne P. Jones /s/ Jeffrey Laikind* Director - ----------------------------------- Jeffrey Laikind /s/ Catherine James Paglia* Director - ----------------------------------- Catherine James Paglia /s/ Alison Taunton-Rigby* Director - ----------------------------------- Alison Taunton-Rigby /s/ William F. Truscott* Director - ----------------------------------- William F. Truscott
* Signed pursuant to Directors/Trustees Power of Attorney, dated Sept. 11, 2007, filed electronically on or about Oct. 12, 2007 as Exhibit (16) to Registration Statement No. 333-146689, by: /s/ Scott R. Plummer - ----------------------------------- Scott R. Plummer EXHIBIT INDEX (11) Opinion and consent of counsel as to the legality of the securities being registered. (14)(c) Consent of Independent Registered Public Accounting Firm (Ernst & Young LLP) for RiverSource Core Bond Fund and RiverSource Diversified Bond Fund. (17)(c) Prospectus, dated Oct. 30, 2007, for RiverSource Diversified Bond Fund. (17)(d) Prospectus, dated Sept. 28, 2007, for RiverSource Core Bond Fund. (17)(e) Statement of Additional Information, dated Nov. 29, 2007, for RiverSource Diversified Bond Fund and RiverSource Core Bond Fund. (17)(f) Annual Report for the period ended Aug. 31, 2007 for RiverSource Diversified Bond Fund. (17)(g) Annual Report for the period ended July 31, 2007 for RiverSource Core Bond Fund. EX-99.(11) 2 c18637b1exv99wx11y.txt OPINION AND CONSENT OF COUNSEL November 26, 2007 RiverSource Diversified Income Series, Inc. 50606 Ameriprise Financial Center Minneapolis, MN 55474 Gentlemen: I have examined the Articles of Incorporation and the By-Laws of RiverSource Diversified Income Series, Inc. (the Company) and all necessary certificates, permits, minute books, documents and records of the Company, and the applicable statutes of the State of Minnesota, and it is my opinion that the shares sold in accordance with applicable federal and state securities laws will be legally issued, fully paid, and nonassessable. This opinion may be used in connection with this Amendment to the Registration Statement. Sincerely, /s/ Scott R. Plummer - ----------------------------------- Scott R. Plummer General Counsel RiverSource Funds EX-99.(14)(C) 3 c18637b1exv99wx14yxcy.txt CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Consent of Independent Registered Public Accounting Firm We consent to the reference to our firm under the caption "Financial Highlights" in the Proxy Statement and to the incorporation by reference of our reports dated September 20, 2007 and October 18, 2007, with respect to the financial statements and financial highlights of RiverSource Core Bond Fund and RiverSource Diversified Bond Fund, respectively, included in the Annual Reports for the years ended July 31, 2007 and August 31, 2007, respectively, in the Registration Statement (Form N-14) of the RiverSource Diversified Income Series, Inc. filed with the Securities and Exchange Commission in this Pre-Effective Amendment No. 1 to the Registration Statement under the Securities Act of 1933 (Registration No. 333-146689). /s/ Ernst & Young LLP Minneapolis, Minnesota November 20, 2007 EX-99.(17)(C) 4 c18637b1exv99wx17yxcy.txt PROSPECTUS, DATED OCTOBER 30, 2007 Prospectus (RIVERSOURCE INVESTMENTS LOGO) RIVERSOURCE(R) DIVERSIFIED BOND FUND PROSPECTUS OCT. 30, 2007 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. Classes A, B, C, I, R2, R3, R4, R5 and W As with all mutual funds, the Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense. You may qualify for sales charge discounts on purchases of Class A shares. Please notify your financial institution if you have other accounts holding shares of RiverSource funds to determine whether you qualify for a sales charge discount. See "Buying and Selling Shares" for more information. NOT FDIC INSURED - MAY LOSE VALUE - NO BANK GUARANTEE TABLE OF CONTENTS THE FUND.................................................... 3P Objective................................................... 3p Principal Investment Strategies............................. 3p Principal Risks............................................. 4p Past Performance............................................ 7p Fees and Expenses........................................... 11p Other Investment Strategies and Risks....................... 13p Fund Management and Compensation............................ 15p FINANCIAL HIGHLIGHTS........................................ 17P BUYING AND SELLING SHARES................................... S.1 Description of Share Classes................................ S.1 Investment Options -- Classes of Shares ................. S.1 Sales Charges............................................ S.5 Opening an Account....................................... S.10 Exchanging or Selling Shares................................ S.13 Exchanges................................................ S.15 Selling Shares........................................... S.17 VALUING FUND SHARES......................................... S.18 DISTRIBUTIONS AND TAXES..................................... S.19 Dividends and Capital Gain Distributions.................... S.19 Reinvestments............................................... S.19 Taxes....................................................... S.19 GENERAL INFORMATION......................................... S.21
- -------------------------------------------------------------------------------- 2P RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 PROSPECTUS THE FUND OBJECTIVE RiverSource Diversified Bond Fund (the Fund) seeks to provide shareholders with a high level of current income while conserving the value of the investment for the longest period of time. Because any investment involves risk, there is no assurance this objective can be achieved. Only shareholders can change the Fund's objective. PRINCIPAL INVESTMENT STRATEGIES Under normal market conditions, the Fund invests at least 80% of its net assets in bonds and other debt securities. At least 50% of the Fund's net assets will be invested in securities like those included in the Lehman Brothers Aggregate Bond Index (the Index), which are investment grade and denominated in U.S. dollars. The Index includes securities issued by the U.S. government, corporate bonds, and mortgage- and asset-backed securities. Although the Fund emphasizes high- and medium-quality debt securities, it will assume some credit risk in an effort to achieve higher yield and/or capital appreciation by buying lower-quality (junk) bonds. Up to 25% of the Fund's net assets may be invested in foreign investments, which may include investments in emerging markets. The Fund will provide shareholders with at least 60 days' notice of any change in the 80% policy. The selection of debt obligations is the primary decision in building the investment portfolio. In pursuit of the Fund's objective, the investment manager (RiverSource Investments, LLC) chooses investments by: - - Evaluating the portfolio's total exposure to sectors, industries and securities relative to the Index. - - Analyzing factors such as credit quality, interest rate outlook and price in seeking to select the most attractive securities within each sector. - - Investing in lower-quality (junk) bonds and foreign investments as attractive opportunities arise. - - Targeting an average portfolio duration within one year of the duration of the Index which, as of Aug. 31, 2007, was 4.64 years. Duration measures the sensitivity of bond prices to changes in interest rates. The longer the duration of a bond, the longer it will take to repay the principal and interest obligations and the more sensitive it will be to changes in interest rates. For example, a five-year duration means a bond is expected to decrease in value by 5% if interest rates rise 1% and increase in value by 5% if interest rates fall 1%. In evaluating whether to sell a security, the investment manager considers, among other factors: - - Identification of more attractive investments based on relative value. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 PROSPECTUS 3P - - The portfolio's total exposure to sectors, industries and securities relative to the Index. - - Whether a security's rating has changed or is vulnerable to a change. - - Whether a sector or industry is experiencing change. - - Changes in the interest rate or economic outlook. The investment manager may use derivatives such as futures, options, forward contracts and swaps, including credit default swaps, in an effort to produce incremental earnings, to hedge existing positions, to increase market exposure and investment flexibility, or to obtain or reduce credit exposure. PRINCIPAL RISKS Please remember that with any mutual fund investment you may lose money. Principal risks associated with an investment in the Fund include: ACTIVE MANAGEMENT RISK. The Fund is actively managed and its performance therefore will reflect in part the ability of the portfolio managers to select securities and to make investment decisions that are suited to achieving the Fund's investment objective. Due to its active management, the Fund could underperform other mutual funds with similar investment objectives. CREDIT RISK. Credit risk is the risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable or unwilling to honor a financial obligation, such as payments due on a bond or a note. If the Fund purchases unrated securities, or if the rating of a security is reduced after purchase, the Fund will depend on the investment manager's analysis of credit risk more heavily than usual. Non-investment grade securities, commonly called "high-yield" or "junk" bonds, may react more to perceived changes in the ability of the issuing entity to pay interest and principal when due than to changes in interest rates. Non-investment grade securities have greater price fluctuations and are more likely to experience a default than investment grade bonds. DERIVATIVES RISK. Derivatives are financial instruments that have a value which depends upon, or is derived from, the value of something else, such as one or more underlying securities, pools of securities, options, futures, indexes or currencies. Gains or losses involving derivative instruments may be substantial, because a relatively small price movement in the underlying security(ies), instrument, currency or index may result in a substantial gain or loss for the Fund. Derivative instruments in which the Fund invests will typically increase the Fund's exposure to Principal Risks to which it is otherwise exposed, and may expose the Fund to additional risks, including counterparty credit risk, leverage risk, hedging risk, correlation risk, and liquidity risk. Hedging Risk. Hedging risk is the risk that derivative instruments used to hedge against an opposite position, may offset losses, but they may also offset gains. - -------------------------------------------------------------------------------- 4P RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 PROSPECTUS Correlation Risk. Correlation risk is related to hedging risk and is the risk that there may be an incomplete correlation between the hedge and the opposite position, which may result in increased or unanticipated losses. Liquidity Risk. Liquidity risk is the risk that the derivative instrument may be difficult or impossible to sell or terminate, which may cause the Fund to be in a position to do something the investment manager would not otherwise choose, including accepting a lower price for the derivative instrument, selling other investments or foregoing another, more appealing investment opportunity. Leverage Risk. Leverage risk is the risk that losses from the derivative instrument may be greater than the amount invested in the derivative instrument. Certain derivatives have the potential for unlimited losses, regardless of the size of the initial investment. See the SAI for more information on derivative instruments and related risks. FOREIGN/EMERGING MARKETS RISK. The following are all components of foreign/emerging markets risk: Country risk includes the political, economic, and other conditions of the country. These conditions include lack of publicly available information, less government oversight (including lack of accounting, auditing, and financial reporting standards), the possibility of government-imposed restrictions, and even the nationalization of assets. The liquidity of foreign investments may be more limited than for most U.S. investments, which means that, at times it may be difficult to sell foreign securities at desirable prices. Currency risk results from the constantly changing exchange rate between local currency and the U.S. dollar. Whenever the Fund holds securities valued in a foreign currency or holds the currency, changes in the exchange rate add to or subtract from the value of the investment. Custody risk refers to the process of clearing and settling trades. It also covers holding securities with local agents and depositories. Low trading volumes and volatile prices in less developed markets make trades harder to complete and settle. Local agents are held only to the standard of care of the local market. Governments or trade groups may compel local agents to hold securities in designated depositories that are not subject to independent evaluation. The less developed a country's securities market is, the greater the likelihood of problems occurring. Emerging markets risk includes the dramatic pace of change (economic, social and political) in these countries as well as the other considerations listed above. These markets are in early stages of development and are extremely volatile. They can be marked by extreme inflation, devaluation of currencies, dependence on trade partners and hostile relations with neighboring countries. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 PROSPECTUS 5P INTEREST RATE RISK. Interest rate risk is the risk of losses attributable to changes in interest rates. Interest rate risk is generally associated with bond prices: when interest rates rise, bond prices fall. In general, the longer the maturity or duration of a bond, the greater its sensitivity to changes in interest rates. LIQUIDITY RISK. The risk associated from a lack of marketability of securities which may make it difficult or impossible to sell at desirable prices in order to minimize loss. The Fund may have to lower the selling price, sell other investments, or forego another, more appealing investment opportunity. MARKET RISK. The market value of securities may fall or fail to rise. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of securities may fluctuate, sometimes rapidly and unpredictably. PREPAYMENT AND EXTENSION RISK. Prepayment and extension risk is the risk that a bond or other security might be called or otherwise converted, prepaid, or redeemed before maturity. This risk is primarily associated with asset-backed securities, including mortgage-backed securities. If a security is converted, prepaid, or redeemed before maturity, particularly during a time of declining interest rates, the investment manager may not be able to reinvest in securities providing as high a level of income, resulting in a reduced yield to the Fund. Conversely, as interest rates rise, the likelihood of prepayment decreases. The investment manager may be unable to capitalize on securities with higher interest rates because the Fund's investments are locked in at a lower rate for a longer period of time. - -------------------------------------------------------------------------------- 6P RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 PROSPECTUS PAST PERFORMANCE The following bar chart and table provide some illustration of the risks of investing in the Fund by showing, respectively: - - how the Fund's performance has varied for each full calendar year shown on the bar chart; and - - how the Fund's average annual total returns compare to recognized indexes shown on the table. Both the bar chart and the table assume that all distributions have been reinvested. The performance of different classes varies because of differences in sales charges and other fees and expenses. How the Fund has performed in the past (before and after taxes) does not indicate how the Fund will perform in the future. Performance reflects any fee waivers/expense caps in effect for the periods reported. In the absence of such fee waivers/expense caps, performance would have been lower. See "Fees and Expenses" for any current fee waivers/expense caps. Bar Chart. Class A share information is shown in the bar chart; the sales charge for Class A shares is not reflected in the bar chart. Table. The table shows total returns from hypothetical investments in Class A, Class B, Class C, Class I, and Class R4 shares of the Fund. These returns are compared to the indexes shown for the same periods. For purposes of the performance calculation in the table we assumed: - - the maximum sales charge for Class A shares; - - sales at the end of the period and deduction of the applicable contingent deferred sales charge (CDSC) for Class B and Class C shares; - - no sales charge for Class I, and Class R4 shares; and - - with the exception of Class A shares, no adjustments for taxes paid by an investor on the reinvested income and capital gains. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 PROSPECTUS 7P AFTER-TAX RETURNS After-tax returns are shown only for Class A shares. After-tax returns for the other classes will vary. After-tax returns are calculated using the highest historical individual federal marginal income tax rate and do not reflect the impact of state and local taxes. Actual after-tax returns will depend on your tax situation and most likely will differ from the returns shown in the table. If you hold your shares in a tax-deferred account, such as a 401(k) plan or an IRA, the after-tax returns do not apply to you since you will not incur taxes until you begin to withdraw from your account. The return after taxes on distributions for a period may be the same as the return before taxes for the same period if there were no distributions or if the distributions were small. The return after taxes on distributions and sale of Fund shares for a period may be greater than the return before taxes for the same period if there was a tax loss realized on sale of Fund shares. The benefit of the tax loss (since it can be used to offset other gains) may result in a higher return. - -------------------------------------------------------------------------------- CLASS A SHARE PERFORMANCE (BASED ON CALENDAR YEARS) (BAR CHART) +9.94% +5.86% -0.22% +7.03% +7.33% +5.63% +4.61% +4.41% +2.09% +5.37% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
During the periods shown in the bar chart, the highest return for a calendar quarter was +3.80% (quarter ended June 30, 1997) and the lowest return for a calendar quarter was -2.53% (quarter ended June 30, 2004). The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart; if reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The Fund's Class A year-to-date return at Sept. 30, 2007, was +3.34%. - -------------------------------------------------------------------------------- 8P RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 PROSPECTUS AVERAGE ANNUAL TOTAL RETURNS (FOR PERIODS ENDED DEC. 31, 2006)
SINCE SINCE INCEPTION INCEPTION 1 YEAR 5 YEARS 10 YEARS (CLASS C) (CLASS I) RiverSource Diversified Bond Fund: Class A Return before taxes +0.37% +3.40% +4.66% N/A N/A Return after taxes on distributions -1.16% +1.88% +2.45% N/A N/A Return after taxes on distributions and sale of fund shares +0.21% +1.98% +2.59% N/A N/A Class B Return before taxes -0.64% +3.28% +4.38% N/A N/A Class C Return before taxes +3.35% +3.62% N/A +4.68%(a) N/A Class I Return before taxes +5.73% N/A N/A N/A +4.05%(b) Class R4* Return before taxes +5.55% +4.58% +5.32% N/A N/A Lehman Brothers Aggregate Bond Index (reflects no deduction for fees, expenses or taxes) +4.33% +5.06% +6.24% +6.33%(c) +3.23%(d) Lipper Intermediate Investment Grade Index +4.47% +4.93% +5.87% +6.15%(c) +3.25%(d)
* Effective Dec. 11, 2006, Class Y was renamed Class R4. (a) Inception date is June 26, 2000. (b) Inception date is March 4, 2004. (c) Measurement period started July 1, 2000. (d) Measurement period started March 1, 2004. The Lehman Brothers Aggregate Bond Index, an unmanaged index, is made up of a representative list of government, corporate, asset-backed and mortgage-backed securities. The index is frequently used as a general measure of bond market performance. The index reflects reinvestment of all distributions and changes in market prices. 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. Classes R2, R3, R5 and W have not been in existence for a full calendar year and therefore performance information for these classes is not shown. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 PROSPECTUS 9P Past performance for Class R2 for the period prior to the beginning of operations for that class may be calculated based on the performance of Class B. Past performance for Class R3 and Class W for the period prior to the beginning of operations for that class may be calculated based on the performance of Class A. Past performance for Class R5 for the period prior to the beginning of operations for that class may be calculated based on the performance of Class R4. In each case, the blended class performance will be adjusted to reflect differences in sales charges, but not differences in annual Fund operating expenses (for example, 12b-1 fees). The use of blended performance generally results in higher performance for classes with higher operating expenses than those of the class with which they are blended, and lower performance for classes with lower operating expenses than those of the class with which they are blended. - -------------------------------------------------------------------------------- 10P RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 PROSPECTUS FEES AND EXPENSES Fund investors pay various expenses. The table below describes the fees and expenses that you may pay if you buy and hold shares of the Fund. Expenses are based on the Fund's most recent fiscal year, adjusted to reflect current fees. SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS I CLASS R2 CLASS R3 CLASS R4(b) CLASS R5 CLASS A CLASS B CLASS C CLASS W Maximum sales charge (load) imposed on purchases (as a percentage of offering price) 4.75%(a) None None None Maximum deferred sales charge (load) imposed on sales (as a percentage of offering price at time of purchase) None 5% 1% None
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS: CLASS A CLASS B CLASS C CLASS W Management fees 0.46% 0.46% 0.46% 0.46% Distribution (12b-1) fees 0.25% 1.00% 1.00% 0.25% Other expenses(c) 0.26% 0.27% 0.27% 0.30% Total annual fund operating expenses 0.97% 1.73% 1.73% 1.01% Fee waiver/expense reimbursement 0.08% 0.08% 0.08% 0.03% Total annual (net) fund operating expenses(d) 0.89% 1.65% 1.65% 0.98%
CLASS CLASS I CLASS R2 CLASS R3 R4(b) CLASS R5 Management fees 0.46% 0.46% 0.46% 0.46% 0.46% Distribution (12b-1) fees 0.00% 0.50% 0.25% 0.00% 0.00% Other expenses(c) 0.10% 0.40% 0.40% 0.40% 0.15% Total annual fund operating expenses 0.56% 1.36% 1.11% 0.86% 0.61% Fee waiver/expense reimbursement 0.03% 0.03% 0.03% 0.09% 0.03% Total annual (net) fund operating expenses(d) 0.53% 1.33% 1.08% 0.77% 0.58%
(a) This charge may be reduced depending on the value of your total investments in RiverSource Funds. See "Sales Charges." (b) Effective Dec. 11, 2006, the following changes were implemented: renaming Class Y as Class R4, terminating the shareholder servicing agreement, revising the fee structure under the transfer agent agreement from account-based to asset-based, and adopting a plan administration services agreement. (c) Other expenses include an administrative services fee, a transfer agency fee, a custody fee, other nonadvisory expenses and, for Class R2, Class R3 and Class R4, a plan administration services fee. Other expenses may also include fees and expenses of affiliated and unaffiliated funds (acquired funds) which the Fund indirectly bears when it invests in the acquired funds. Because acquired funds will 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 by the Fund with respect to such investments will vary. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 PROSPECTUS 11P (d) The investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until Aug. 31, 2008, unless sooner terminated at the discretion of the Fund's Board. Any amounts waived will not be reimbursed by the Fund. Under this agreement, net fund expenses (excluding fees and expenses of acquired funds), will not exceed 0.89% for Class A, 1.65% for Class B, 1.65% for Class C, 0.53% for Class I, 1.33% for Class R2, 1.08% for Class R3, 0.77% for Class R4, 0.58% for Class R5 and 0.98% for Class W. [(e) In addition to the Fund's total annual operating expenses that the Fund bears directly, the Fund's shareholders indirectly bear the expenses of the acquired funds (affiliated and unaffiliated funds) in which the Fund invests. The Fund's "Acquired fund fees and expenses," based on its investment in the acquired funds, is as shown. EXAMPLES These examples are intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. These examples assume that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. These examples also assume that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $561 $761 $ 978 $1,602 Class B $667(b) $937(b) $1,131(b) $1,834(c) Class C $267(b) $537 $ 931 $2,036 Class I $ 54 $176 $ 309 $ 698 Class R2 $135 $427 $ 741 $1,634 Class R3 $110 $349 $ 608 $1,350 Class R4 $ 78 $265 $ 467 $1,053 Class R5 $ 59 $192 $ 336 $ 759 Class W $100 $318 $ 554 $1,235
(a) Includes a 4.75% sales charge. (b) Includes the applicable CDSC. (c) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. - -------------------------------------------------------------------------------- 12P RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 PROSPECTUS You would pay the following expenses if you did not redeem your shares:
1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $561 $761 $978 $1,602 Class B $167 $537 $931 $1,834(b) Class C $167 $537 $931 $2,036 Class I $ 54 $176 $309 $ 698 Class R2 $135 $427 $741 $1,634 Class R3 $110 $349 $608 $1,350 Class R4 $ 78 $265 $467 $1,053 Class R5 $ 59 $192 $336 $ 759 Class W $100 $318 $554 $1,235
(a) Includes a 4.75% sales charge. (b) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. OTHER INVESTMENT STRATEGIES AND RISKS Other Investment Strategies. In addition to the principal investment strategies previously described, the Fund may utilize investment strategies that are not principal investment strategies, including investment in affiliated and non-affiliated pooled investment vehicles (including mutual funds and exchange traded funds(ETFs), also referred to as "acquired funds") ownership of which results in the Fund bearing its proportionate share of the acquired funds' fees and expenses. Although ETFs are designed to replicate the price and yield of a specified market index, there is no guarantee that an ETF will track its specified market index, which may result in a loss. For more information on strategies and holdings, and the risks of such strategies, including derivative instruments that the Fund may use, see the Fund's Statement of Additional Information (SAI) and its annual and semiannual reports. Unusual Market Conditions. During unusual market conditions, the Fund may temporarily invest more of its assets in money market securities than during normal market conditions. Although investing in these securities would serve primarily to attempt to avoid losses, this type of investing also could prevent the Fund from achieving its investment objective. During these times, the portfolio managers may make frequent securities trades that could result in increased fees, expenses and taxes, and decreased performance. Instead of investing in money market securities directly, the Fund may invest in shares of an affiliated money market fund. See "Cash Reserves" for more information. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 PROSPECTUS 13P Securities Transaction Commissions. Securities transactions involve the payment by the Fund of brokerage commissions to broker-dealers, on occasion as compensation for research or brokerage services (commonly referred to as "soft dollars"), as the portfolio managers buy and sell securities for the Fund in pursuit of its objective. A description of the policies governing the Fund's securities transactions and the dollar value of brokerage commissions paid by the Fund are set forth in the SAI. Funds that invest primarily in fixed income securities do not typically generate brokerage commissions that are used to pay for research or brokerage services. The brokerage commissions set forth in the SAI do not include implied commissions or mark-ups (implied commissions) paid by the Fund for principal transactions (transactions made directly with a dealer or other counterparty), including most fixed income securities (and certain other instruments, including derivatives). Brokerage commissions do not reflect other elements of transaction costs, including the extent to which the Fund's purchase and sale transactions may cause the market to move and change the market price for an investment. Although brokerage commissions and implied commissions are not reflected in the expense table under "Fees and Expenses," they are reflected in the total return of the Fund. Portfolio Turnover. Trading of securities may produce capital gains, which are taxable to shareholders when distributed. Active trading may also increase the amount of brokerage commissions paid or mark-ups to broker-dealers that the Fund pays when it buys and sells securities. Capital gains and increased brokerage commissions or mark-ups paid to broker-dealers may adversely affect a fund's performance. The Fund's historical portfolio turnover rate, which measures how frequently the Fund buys and sells investments, is shown in the "Financial Highlights." Directed Brokerage. The Fund's Board of Directors (Board) has adopted a policy prohibiting the investment manager, or any subadviser, from considering sales of shares of the Fund as a factor in the selection of broker-dealers through which to execute securities transactions. Additional information regarding securities transactions can be found in the SAI. - -------------------------------------------------------------------------------- 14P RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 PROSPECTUS FUND MANAGEMENT AND COMPENSATION INVESTMENT MANAGER RiverSource Investments, LLC (the investment manager or RiverSource Investments), 200 Ameriprise Financial Center, Minneapolis, Minnesota 55474, is the investment manager to the RiverSource funds, and is a wholly-owned subsidiary of Ameriprise Financial, Inc. (Ameriprise Financial). Ameriprise Financial is a financial planning and financial services company that has been offering solutions for clients' asset accumulation, income management and protection needs for more than 110 years. In addition to managing investments for all of the RiverSource funds, RiverSource Investments manages investments for itself and its affiliates. For institutional clients, RiverSource Investments and its affiliates provide investment management and related services, such as separate account asset management, and institutional trust and custody, as well as other investment products. For all of its clients, RiverSource Investments seeks to allocate investment opportunities in an equitable manner over time. See the SAI for more information. The Fund pays RiverSource Investments a fee for managing its assets. Under the Investment Management Services Agreement (Agreement), the fee for the most recent fiscal year was 0.46% of the Fund's average daily net assets. Under the Agreement, the Fund also pays taxes, brokerage commissions, and nonadvisory expenses. A discussion regarding the basis for the Board approving the Agreement is available in the Fund's most recent annual or semiannual shareholder report. Portfolio Manager(s). The portfolio managers responsible for the day-to-day management of the Fund are: Jamie Jackson, CFA, Portfolio Manager - - Co-managed the Fund since 2003. - - Leader of the liquid assets sector team. - - Joined RiverSource Investments in 2003. - - Co-head of U.S. Investment Grade Fixed Income, UBS Global Asset Management, 1997 to 2003. - - Began investment career in 1988. - - MBA, Marquette University. Scott Kirby, Portfolio Manager - - Co-managed the Fund since 2003. - - Leader of the structured assets sector team. - - Employed by RiverSource Investments from 1979 to 1985 and from 1987 to the present. - - Began investment career in 1979. - - MBA, University of Minnesota. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 PROSPECTUS 15P Tom Murphy, CFA, Portfolio Manager - - Co-managed the Fund since 2003. - - Leader of the investment grade corporate bond sector team. - - Joined RiverSource Investments in 2002. - - Managing Director and Portfolio Manager, BlackRock Financial Management, 2002; various positions, Zurich Scudder, 1992 to 2002. - - Began investment career in 1986. - - MBA, University of Michigan. Nicholas Pifer, CFA, Portfolio Manager - - Co-managed the Fund since 2003. - - Leader of the global sector team. - - Joined RiverSource Investments in 2000. - - Fixed Income Portfolio Manager, Investment Advisers, Inc., 1997 to 2000. - - Began investment career in 1990. - - MA, Johns Hopkins University School of Advanced International Studies. Jennifer Ponce de Leon, Portfolio Manager - - Co-managed the Fund since 2003. - - Leader of the high yield sector team. - - Joined RiverSource Investments in 1997. - - Began investment career in 1989. - - MBA, De Paul University. The fixed income department of RiverSource Investments is divided into six sector teams, each of which includes a portfolio manager or portfolio managers and several analysts, and each of which specializes in a specific sector of the fixed income market. The Fund's portfolio managers lead the teams that specialize in the sectors in which the Fund primarily invests, and collectively determine allocation of Fund assets among the sectors. The SAI provides additional information about portfolio manager compensation, management of other accounts and ownership of shares in the Fund. - -------------------------------------------------------------------------------- 16P RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 PROSPECTUS FINANCIAL HIGHLIGHTS THE FINANCIAL HIGHLIGHTS TABLES ARE INTENDED TO HELP YOU UNDERSTAND THE FUND'S FINANCIAL PERFORMANCE. CERTAIN INFORMATION REFLECTS FINANCIAL RESULTS FOR A SINGLE FUND SHARE. THE TOTAL RETURNS IN THE TABLES REPRESENT THE RATE THAT AN INVESTOR WOULD HAVE EARNED OR LOST ON AN INVESTMENT IN THE FUND (ASSUMING REINVESTMENT OF ALL DIVIDENDS AND DISTRIBUTIONS). THE INFORMATION FOR THE FISCAL YEAR ENDED AUG. 31, 2007 HAS BEEN DERIVED FROM THE FINANCIAL STATEMENTS AUDITED BY ERNST & YOUNG LLP, WHOSE REPORT, ALONG WITH THE FUND'S FINANCIAL STATEMENTS AND FINANCIAL HIGHLIGHTS, IS INCLUDED IN THE ANNUAL REPORT WHICH, IF NOT INCLUDED WITH THIS PROSPECTUS, IS AVAILABLE UPON REQUEST. THE INFORMATION FOR THE PERIODS ENDED ON OR BEFORE AUG. 31, 2006 HAS BEEN AUDITED BY KPMG LLP. CLASS A
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007 2006 2005 2004 2003 Net asset value, beginning of period $4.77 $4.89 $4.87 $4.78 $4.75 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .21(b) .19 .18 .18 .20 Net gains (losses) (both realized and unrealized) .05 (.11) .03 .08 .03 - ----------------------------------------------------------------------------------------------------------- Total from investment operations .26 .08 .21 .26 .23 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.21) (.20) (.19) (.17) (.20) Tax return of capital (.01) -- -- -- -- - ----------------------------------------------------------------------------------------------------------- Total distributions (.22) (.20) (.19) (.17) (.20) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.81 $4.77 $4.89 $4.87 $4.78 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $1,937 $2,013 $1,774 $1,933 $2,280 - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) .89%(e) .89%(e) .94%(e) .98%(e) .97% - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.43% 4.09% 3.67% 3.55% 4.16% - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% 281% 300% 279% 256% - ----------------------------------------------------------------------------------------------------------- Total return(f) 5.54% 1.64% 4.38% 5.54% 4.91% - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amount has been calculated using average shares outstanding method. (c) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. (d) 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. (e) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class A would have been 0.97%, 0.99%, 1.02% and 1.00% for the years ended Aug. 31, 2007, 2006, 2005 and 2004, respectively. (f) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 PROSPECTUS 17P CLASS B
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007 2006 2005 2004 2003 Net asset value, beginning of period $4.77 $4.89 $4.88 $4.78 $4.75 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .18(b) .16 .15 .14 .16 Net gains (losses) (both realized and unrealized) .04 (.12) .01 .09 .03 - ----------------------------------------------------------------------------------------------------------- Total from investment operations .22 .04 .16 .23 .19 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.18) (.16) (.15) (.13) (.16) Tax return of capital (.00) -- -- -- -- - ----------------------------------------------------------------------------------------------------------- Total distributions (.18) (.16) (.15) (.13) (.16) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.81 $4.77 $4.89 $4.88 $4.78 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $304 $402 $484 $628 $902 - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) 1.65%(e) 1.65%(e) 1.70%(e) 1.73%(e) 1.73% - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.66% 3.31% 2.92% 2.78% 3.40% - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% 281% 300% 279% 256% - ----------------------------------------------------------------------------------------------------------- Total return(f) 4.74% .88% 3.39% 4.95% 4.12% - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amount has been calculated using average shares outstanding method. (c) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. (d) 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. (e) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class B would have been 1.73%, 1.76%, 1.78% and 1.75% for the years ended Aug. 31, 2007, 2006, 2005 and 2004, respectively. (f) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 18P RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 PROSPECTUS CLASS C
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007 2006 2005 2004 2003 Net asset value, beginning of period $4.77 $4.90 $4.88 $4.78 $4.75 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .18(b) .16 .15 .14 .16 Net gains (losses) (both realized and unrealized) .04 (.13) .02 .09 .03 - ----------------------------------------------------------------------------------------------------------- Total from investment operations .22 .03 .17 .23 .19 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.18) (.16) (.15) (.13) (.16) Tax return of capital (.00) -- -- -- -- - ----------------------------------------------------------------------------------------------------------- Total distributions (.18) (.16) (.15) (.13) (.16) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.81 $4.77 $4.90 $4.88 $4.78 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $17 $17 $18 $21 $27 - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) 1.65%(e) 1.66%(e) 1.70%(e) 1.73%(e) 1.74% - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.67% 3.31% 2.93% 2.79% 3.34% - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% 281% 300% 279% 256% - ----------------------------------------------------------------------------------------------------------- Total return(f) 4.73% .66% 3.60% 4.95% 4.11% - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amount has been calculated using average shares outstanding method. (c) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. (d) 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. (e) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class C would have been 1.73%, 1.76%, 1.79% and 1.75% for the years ended Aug. 31, 2007, 2006, 2005 and 2004, respectively. (f) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 PROSPECTUS 19P CLASS I
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007 2006 2005 2004(B) Net asset value, beginning of period $4.78 $4.89 $4.88 $4.91 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .23(c) .21 .20 .11 Net gains (losses) (both realized and unrealized) .04 (.11) .02 (.04) - ----------------------------------------------------------------------------------------------------------- Total from investment operations .27 .10 .22 .07 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.22) (.21) (.21) (.10) Tax return of capital (.01) -- -- -- - ----------------------------------------------------------------------------------------------------------- Total distributions (.23) (.21) (.21) (.10) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.82 $4.78 $4.89 $4.88 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $386 $276 $-- $-- - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e) .54%(f) .54%(f) .60% .59%(g) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.80% 4.59% 4.01% 3.13%(g) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% 281% 300% 279% - ----------------------------------------------------------------------------------------------------------- Total return(h) 5.90% 2.19% 4.53% 1.43%(i) - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from March 4, 2004 (inception date) to Aug. 31, 2004. (c) Per share amount has been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. (e) 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. (f) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class I would have been 0.56% and 0.55% for the years ended Aug. 31, 2007 and 2006, respectively. (g) Adjusted to an annual basis. (h) Total return does not reflect payment of a sales charge. (i) Not annualized. - -------------------------------------------------------------------------------- 20P RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 PROSPECTUS CLASS R2
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007(B) Net asset value, beginning of period $4.81 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .14(c) Net gains (losses) (both realized and unrealized) (.02) - ----------------------------------------------------------------------------------------------------------- Total from investment operations .12 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.13) Tax return of capital (.00) - ----------------------------------------------------------------------------------------------------------- Total distributions (.13) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.80 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e) 1.32%(f) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.06%(f) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% - ----------------------------------------------------------------------------------------------------------- Total return(g) 2.70%(h) - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Dec. 11, 2006 (inception date) to Aug. 31, 2007. (c) Per share amount has been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. (e) 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. (f) Adjusted to an annual basis. (g) Total return does not reflect payment of a sales charge. (h) Not annualized. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 PROSPECTUS 21P CLASS R3
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007(B) Net asset value, beginning of period $4.81 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .15(c) Net gains (losses) (both realized and unrealized) (.02) - ----------------------------------------------------------------------------------------------------------- Total from investment operations .13 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.14) Tax return of capital (.00) - ----------------------------------------------------------------------------------------------------------- Total distributions (.14) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.80 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e) 1.06%(f) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.33%(f) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% - ----------------------------------------------------------------------------------------------------------- Total return(g) 2.90%(h) - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Dec. 11, 2006 (inception date) to Aug. 31, 2007. (c) Per share amount has been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. (e) 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. (f) Adjusted to an annual basis. (g) Total return does not reflect payment of a sales charge. (h) Not annualized. - -------------------------------------------------------------------------------- 22P RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 PROSPECTUS CLASS R4*
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007 2006 2005 2004 2003 Net asset value, beginning of period $4.77 $4.89 $4.88 $4.78 $4.75 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .22(b) .20 .19 .18 .21 Net gains (losses) (both realized and unrealized) .04 (.12) .02 .10 .03 - ----------------------------------------------------------------------------------------------------------- Total from investment operations .26 .08 .21 .28 .24 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.22) (.20) (.20) (.18) (.21) Tax return of capital (.01) -- -- -- -- - ----------------------------------------------------------------------------------------------------------- Total distributions (.23) (.20) (.20) (.18) (.21) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.80 $4.77 $4.89 $4.88 $4.78 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $78 $173 $202 $203 $268 - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) .73%(e) .73%(e) .78%(e) .81%(e) .81% - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.53% 4.24% 3.85% 3.70% 4.34% - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% 281% 300% 279% 256% - ----------------------------------------------------------------------------------------------------------- Total return(f) 5.49% 1.81% 4.34% 5.92% 5.08% - -----------------------------------------------------------------------------------------------------------
* Effective Dec. 11, 2006, Class Y was renamed Class R4. (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amount has been calculated using average shares outstanding method. (c) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. (d) 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. (e) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class R4 would have been 0.83%, 0.82%, 0.86% and 0.83% for the years ended Aug. 31, 2007, 2006, 2005 and 2004, respectively. (f) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 PROSPECTUS 23P CLASS R5
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007(B) Net asset value, beginning of period $4.81 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .17(c) Net gains (losses) (both realized and unrealized) (.02) - ----------------------------------------------------------------------------------------------------------- Total from investment operations .15 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.16) Tax return of capital (.00) - ----------------------------------------------------------------------------------------------------------- Total distributions (.16) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.80 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e),(f) .57%(g) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.81%(g) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% - ----------------------------------------------------------------------------------------------------------- Total return(h) 3.25%(i) - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Dec. 11, 2006 (inception date) to Aug. 31, 2007. (c) Per share amount has been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. (e) 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. (f) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratio of expenses for Class R5 would have been 0.59% for the period ended Aug. 31, 2007. (g) Adjusted to an annual basis. (h) Total return does not reflect payment of a sales charge. (i) Not annualized. - -------------------------------------------------------------------------------- 24P RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 PROSPECTUS CLASS W
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007(B) Net asset value, beginning of period $4.82 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .15(c) - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.16) Tax return of capital (.00) - ----------------------------------------------------------------------------------------------------------- Total distributions (.16) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.81 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $223 - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e),(f) .97%(g) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.32%(g) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% - ----------------------------------------------------------------------------------------------------------- Total return(h) 2.71%(i) - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Dec. 1, 2006 (inception date) to Aug. 31, 2007. (c) Per share amount has been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. (e) 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. (f) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratio of expenses for Class W would have been 0.98% for the period ended Aug. 31, 2007. (g) Adjusted to an annual basis. (h) Total return does not reflect payment of a sales charge. (i) Not annualized. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 PROSPECTUS 25P BUYING AND SELLING SHARES The RiverSource funds are available through broker-dealers, certain 401(k) or other qualified and nonqualified plans, banks, or other financial intermediaries or institutions (financial institutions). THESE FINANCIAL INSTITUTIONS MAY CHARGE YOU ADDITIONAL FEES FOR THE SERVICES THEY PROVIDE AND THEY MAY HAVE DIFFERENT POLICIES NOT DESCRIBED IN THIS PROSPECTUS. Some policy differences may include different minimum investment amounts, exchange privileges, fund choices and cutoff times for investments. Additionally, recordkeeping, transaction processing and payments of distributions relating to your account may be performed by the financial institutions through which shares are held. Since the fund may not have a record of your transactions, you should always contact the financial institution through which you purchased the fund to make changes to or give instructions concerning your account or to obtain information about your account. The fund, the distributor and the transfer agent are not responsible for the failure of one of these financial institutions to carry out its obligations to its customers. DESCRIPTION OF SHARE CLASSES INVESTMENT OPTIONS -- CLASSES OF SHARES The RiverSource funds offer different classes of shares. There are differences among the fees and expenses for each class. See the "Fees and Expenses" table for more information. Not everyone is eligible to buy every class. After determining which classes you are eligible to buy, decide which class best suits your needs. Your financial institution can help you with this decision. The following table shows the key features of each class. (The cover of this prospectus indicates which classes are currently offered for this Fund.) INVESTMENT OPTIONS SUMMARY See the "Fees and Expenses" table to determine which classes are offered by this fund.
CONTINGENT PLAN INITIAL DEFERRED SALES DISTRIBUTION AND ADMINISTRATION AVAILABILITY SALES CHARGE CHARGE (CDSC) SERVICE FEE(A) FEE - ------------------------------------------------------------------------------------------------------------- Class A Available to Yes. Payable at No. Yes. No. all investors. time of purchase. 0.25% Lower sales charge for larger investments. - ------------------------------------------------------------------------------------------------------------- Class Available to No. Entire Maximum 5% CDSC during Yes. No. B(b) all investors. purchase price is the first year decreasing 1.00% invested in to 0% after six years. shares of the fund. - -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- S.1 S-6400-6
INVESTMENT OPTIONS SUMMARY (CONTINUED) CONTINGENT PLAN INITIAL DEFERRED SALES DISTRIBUTION AND ADMINISTRATION AVAILABILITY SALES CHARGE CHARGE (CDSC) SERVICE FEE(A) FEE - ------------------------------------------------------------------------------------------------------------- Class C Available to No. Entire 1% CDSC may apply if you Yes. No. all investors. purchase price is sell shares within one 1.00% invested in year after purchase. shares of the fund. - ------------------------------------------------------------------------------------------------------------- Class I Limited to No. No. No. No. qualifying institutional investors. - ------------------------------------------------------------------------------------------------------------- Class R2 Limited to No. No. Yes. Yes. qualifying 0.50% 0.25% institutional investors. - ------------------------------------------------------------------------------------------------------------- Class R3 Limited to No. No. Yes. Yes. qualifying 0.25% 0.25% institutional investors. - ------------------------------------------------------------------------------------------------------------- Class R4 Limited to No. No. No. Yes. qualifying 0.25% institutional investors. - ------------------------------------------------------------------------------------------------------------- Class R5 Limited to No. No. No. No. qualifying institutional investors. - ------------------------------------------------------------------------------------------------------------- Class W Limited to No. No. Yes. No. qualifying 0.25% discretionary managed accounts. - -------------------------------------------------------------------------------------------------------------
(a) For Class A, Class B, Class C, Class R2, Class R3 and Class W shares, each fund has adopted a plan under Rule 12b-1 of the Investment Company Act of 1940, as amended, that allows it to pay distribution and shareholder servicing-related expenses for the sale of shares. Because these fees are paid out of a fund's assets on an on-going basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of distribution (sales) or servicing charges. (b) See "Buying and Selling Shares, Sales Charges, Class B and Class C -- contingent deferred sales charge alternative" for more information on the timing of conversion of Class B shares to Class A shares. Timing will vary depending on the date of your original purchase of the Class B shares. DISTRIBUTION AND SERVICE FEES The distribution and shareholder servicing fees for Class A, Class B, Class C, Class R2, Class R3 and Class W are subject to the requirements of Rule 12b-1 under the Investment Company Act of 1940, as amended, and are used to reimburse the distributor for certain expenses it incurs in connection with distributing a fund's shares and providing services to fund shareholders. These expenses include payment of distribution and shareholder servicing fees to financial institutions that sell shares of the fund, up to 0.50% of the average daily net assets of Class R2 shares sold and held through them and up to 0.25% of the average daily net assets of Class A, Class B, Class C, Class R3 and Class W shares sold and held through them. For Class A, Class B, Class R2, Class R3 and Class W shares, the distributor begins to pay these fees immediately after - -------------------------------------------------------------------------------- S.2 purchase. For Class C shares, the distributor begins to pay these fees one year after purchase. Financial institutions also receive distribution fees up to 0.75% of the average daily net assets of Class C shares sold and held through them, which the distributor begins to pay one year after purchase. For Class B shares, and, for the first year after sale only, for Class C shares, the fund's distributor retains the distribution fee of up to 0.75% in order to finance the payment of sales commissions to financial institutions that sell Class B shares, and to pay for other distribution related expenses. Financial institutions may compensate their financial advisors with the shareholder servicing and distribution fees paid to them by the distributor. PLAN ADMINISTRATION FEE Class R2, Class R3 and Class R4 pay an annual plan administration services fee for the provision of various administrative, recordkeeping, communication and educational services. The fee for Class R2, Class R3 and Class R4 is equal on an annual basis to 0.25% of assets attributable to the respective class. DETERMINING WHICH CLASS OF SHARES TO PURCHASE CLASS A, CLASS B AND CLASS C SHARES. If your investments in RiverSource funds total $100,000 or more, Class A shares may be the better option because the sales charge is reduced for larger purchases. If you invest less than $100,000, consider how long you plan to hold your shares. Class B shares have a higher annual distribution fee than Class A shares and a CDSC for six years. Class B shares convert to Class A shares in the ninth year of ownership. Class B shares purchased through reinvested dividends and distributions also will convert to Class A shares in the same proportion as the other Class B shares. Class C shares also have a higher annual distribution fee than Class A shares. Class C shares have no sales charge if you hold the shares for longer than one year. Unlike Class B shares, Class C shares do not convert to Class A. As a result, you will pay a distribution fee for as long as you hold Class C shares. If you choose a deferred sales charge option (Class B or Class C), you should consider the length of time you intend to hold your shares. To help you determine which investment is best for you, consult your financial institution. CLASS I SHARES. The following eligible investors may purchase Class I shares: - - Any fund distributed by RiverSource Distributors, Inc., if the fund seeks to achieve its investment objective by investing primarily in shares of the fund and other RiverSource funds. Class I shares may be purchased, sold or exchanged only through the distributor or an authorized financial institution. - -------------------------------------------------------------------------------- S.3 CLASS R SHARES. The following eligible institutional investors may purchase Class R2, Class R3, Class R4 and Class R5 shares: - - Qualified employee benefit plans. - - Trust companies or similar institutions, and charitable organizations that meet the definition in Section 501(c)(3) of the Internal Revenue Code. - - Non-qualified deferred compensation plans whose participants are included in a qualified employee benefit plan described above. - - State sponsored college savings plans established under Section 529 of the Internal Revenue Code. - - Health Savings Accounts (HSAs) created pursuant to public law 108-173. Additionally, if approved by the distributor, the following eligible institutional investors may purchase Class R5 shares: - - Institutional or corporate accounts above a threshold established by the distributor (currently $1 million per fund or $10 million in all RiverSource funds). - - Bank Trusts departments. Class R shares generally are not available to retail non-retirement accounts, traditional and Roth IRAs, Coverdell Educational Savings Accounts, SEPs, SAR- SEPs, SIMPLE IRAs and individual 403(b) plans. Class R shares may be purchased, sold or exchanged only through the distributor or an authorized financial institution. CLASS W SHARES. The following eligible investors may purchase Class W shares: - - Investors purchasing through authorized investment programs managed by investment professionals, including discretionary managed account programs. Class W shares may be purchased, sold or exchanged only through the distributor or an authorized financial institution. Shares originally purchased in a discretionary managed account may continue to be held in Class W outside of a discretionary managed account, but no additional Class W purchases may be made and no exchanges to Class W shares of another fund may be made outside of a discretionary managed account. IN ADDITION, FOR CLASS I, CLASS R AND CLASS W SHARES, THE DISTRIBUTOR, IN ITS SOLE DISCRETION, MAY ACCEPT INVESTMENTS FROM OTHER PURCHASERS NOT LISTED ABOVE. For more information, see the SAI. - -------------------------------------------------------------------------------- S.4 SALES CHARGES CLASS A -- INITIAL SALES CHARGE ALTERNATIVE: Your purchase price for Class A shares is generally the net asset value (NAV) plus a front-end sales charge. The distributor receives the sales charge and re-allows a portion of the sales charge to the financial institution through which you purchased the shares. The distributor retains the balance of the sales charge. Sales charges vary depending on the amount of your purchase. SALES CHARGE* FOR CLASS A SHARES
MAXIMUM REALLOWANCE AS A % OF AS A % OF AS A % OF TOTAL MARKET VALUE PURCHASE PRICE** NET AMOUNT INVESTED PURCHASE PRICE - -------------------------------------------------------------------------------------------- Up to $49,999 4.75% 4.99% 4.00% $50,000 -- $99,999 4.25 4.44 3.50 $100,000 -- $249,999 3.50 3.63 3.00 $250,000 -- $499,999 2.50 2.56 2.15 $500,000 -- $999,999 2.00 2.04 1.75 $1,000,000 or more 0.00 0.00 0.00***
* Because of rounding in the calculation of the offering price, the portion of the sales charge retained by the distributor may vary and the actual sales charge you pay may be more or less than the sales charge calculated using these percentages. ** Purchase price includes the sales charge. ***Although there is no sales charge for purchases with a total market value over $1,000,000, and therefore no re-allowance, the distributor may pay a financial institution the following: a sales commission of up to 1.00% for a sale with a total market value of $1,000,000 to $2,999,999; a sales commission up to 0.50% for a sale of $3,000,000 to $9,999,999; and a sales commission up to 0.25% for a sale of $10,000,000 or more. INITIAL SALES CHARGE -- RIGHTS OF ACCUMULATION. You may be able to reduce the sales charge on Class A shares, based on the combined market value of your accounts. The current market values of the following investments are eligible to be added together for purposes of determining the sales charge on your purchase: - - Your current investment in a fund; and - - Previous investments you and members of your primary household group have made in Class A, Class B or Class C shares in the fund and other RiverSource funds, provided your investment was subject to a sales charge. Your primary household group consists of you, your spouse or domestic partner and your unmarried children under age 21 sharing a mailing address. The following accounts are eligible to be included in determining the sales charge on your purchase: - - Individual or joint accounts; - - Roth and traditional IRAs, SEPs, SIMPLEs and TSCAs, provided they are invested in Class A, Class B or Class C shares that were subject to a sales charge; - -------------------------------------------------------------------------------- S.5 - - UGMA/UTMA accounts for which you, your spouse, or your domestic partner is parent or guardian of the minor child; - - Revocable trust accounts for which you or a member of your primary household group, individually, is the beneficial owner/grantor; - - Accounts held in the name of your, your spouse's, or your domestic partner's sole proprietorship or single owner limited liability company or S corporation; and - - Qualified retirement plan assets, provided that you are the sole owner of the business sponsoring the plan, are the sole participant (other than a spouse) in the plan, and have no intention of adding participants to the plan. The following accounts are not eligible to be included in determining the sales charge on your purchase: - - Accounts of pension and retirement plans with multiple participants, such as 401(k) plans (which are combined to reduce the sales charge for the entire pension or retirement plan and therefore are not used to reduce the sales charge for your individual accounts); - - Investments in Class A shares where the sales charge is waived, for example, purchases through wrap accounts; - - Investments in Class D, Class E, Class I, Class R2, Class R3, Class R4, Class R5, Class W or Class Y shares; - - Investments in 529 plans, donor advised funds, variable annuities, variable life insurance products, wrap accounts or managed separate accounts; and - - Charitable and irrevocable trust accounts. If you purchase RiverSource fund shares through different financial institutions, and you want to include those assets toward a reduced sales charge, you must inform your financial institution in writing about the other accounts when placing your purchase order. Contact your financial institution to determine what information is required. Unless you provide your financial institution in writing with information about all of the accounts that may count toward a sales charge reduction, there can be no assurance that you will receive all of the reductions for which you may be eligible. You should request that your financial institution provide this information to the fund when placing your purchase order. For more information on rights of accumulation, please see the SAI. - -------------------------------------------------------------------------------- S.6 INITIAL SALES CHARGE -- LETTER OF INTENT (LOI). Generally, if you intend to invest $50,000 or more over a period of 13 months or less, you may be able to reduce the front-end sales charges for investments in Class A shares by completing and filing a LOI form. The LOI becomes effective only after the form is processed in good order by the fund. An LOI can be backdated up to a maximum of 90 days. If the LOI is backdated, you may include prior investments in Class A shares that were charged a front-end sales load toward the LOI commitment amount. If the LOI is backdated, the 13-month period begins on the date of the earliest purchase included in the LOI. Holdings More than 90 Days Old. Purchases made more than 90 days before your LOI is processed by the fund will not be counted toward the commitment amount of the LOI and cannot be used as the starting point for the LOI. While these purchases cannot be included in an LOI, they may help you obtain a reduced sales charge on future purchases as described in "Initial Sales Charge -- Rights of Accumulation." Notification Obligation. You must request the reduced sales charge when you buy shares. If you do not complete and file the LOI form, or do not request the reduced sales charge at the time of purchase, you will not be eligible for the reduced sales charge. You should request that your financial institution provide this information to the fund when placing your purchase order. For more details on LOIs, please contact your financial institution or see the SAI. INITIAL SALES CHARGE -- WAIVERS OF THE SALES CHARGE FOR CLASS A SHARES. Sales charges do not apply to: - - current or retired Board members, officers or employees of RiverSource funds or RiverSource Investments or its affiliates, their spouses or domestic partners, children, parents and their spouse's or domestic partner's parents. - - current or retired Ameriprise Financial Services, Inc. (Ameriprise Financial Services) financial advisors, employees of financial advisors, their spouses or domestic partners, children, parents and their spouse's or domestic partner's parents. - - registered representatives and other employees of financial institutions having a selling agreement with the distributor, including their spouses, domestic partners, children, parents and their spouse's or domestic partner's parents. - - portfolio managers employed by subadvisers of the RiverSource funds, including their spouses or domestic partners, children, parents and their spouse's or domestic partner's parents. - - qualified employee benefit plans offering participants daily access to RiverSource funds. Eligibility must be determined in advance. For assistance, please contact your financial institution. - - direct rollovers from qualified employee benefit plans, provided that the rollover involves a transfer of Class R or Class Y shares in a fund to Class A shares in the same fund. - -------------------------------------------------------------------------------- S.7 - - purchases made: - with dividend or capital gain distributions from a fund or from the same class of another RiverSource fund; - through or under a wrap fee product or other investment product sponsored by a financial institution having a selling agreement with the distributor; - through state sponsored college savings plans established under Section 529 of the Internal Revenue Code; - through bank trust departments. - - shareholders whose original purchase was in a Strategist fund merged into a RiverSource fund in 2000. The distributor may, in its sole discretion, authorize the waiver of sales charges for additional purchases or categories of purchases. Policies related to reducing or waiving the sales charge may be modified or withdrawn at any time. Unless you provide your financial institution with information in writing about all of the factors that may count toward a waiver of the sales charge, there can be no assurance that you will receive all of the waivers for which you may be eligible. You should request that your financial institution provide this information to the fund when placing your purchase order. Because the current prospectus is available on RiverSource Investment's website free of charge, RiverSource Investments does not disclose this information separately on the website. CLASS B AND CLASS C -- CONTINGENT DEFERRED SALES CHARGE ALTERNATIVE FOR CLASS B, the CDSC is based on the sale amount and the number of years between purchase and sale. The following table shows how CDSC percentages on sales decline:
IF THE SALE IS MADE DURING THE: THE CDSC PERCENTAGE RATE IS:* First year 5% Second year 4% Third year 4% Fourth year 3% Fifth year 2% Sixth year 1% Seventh or eighth year 0%
* Because of rounding in the calculation, the portion of the CDSC retained by the distributor may vary and the actual CDSC you pay may be more or less than the CDSC calculated using these percentages. - -------------------------------------------------------------------------------- S.8 Although there is no front-end sales charge when you buy Class B shares, the distributor pays a sales commission of 4% to financial institutions that sell Class B shares. A portion of this commission may, in turn, be paid to your financial advisor. The distributor receives any CDSC imposed when you sell your Class B shares. Purchases made prior to May 21, 2005 age on a calendar year basis. Purchases made beginning May 21, 2005 age on a daily basis. For example, a purchase made on Nov. 12, 2004 completed its first year on Dec. 31, 2004 under calendar year aging. However, a purchase made on Nov. 12, 2005 completed its first year on Nov. 11, 2006 under daily aging. Class B shares purchased prior to May 21, 2005 will convert to Class A shares in the ninth calendar year of ownership. Class B shares purchased beginning May 21, 2005 will convert to Class A shares one month after the completion of the eighth year of ownership. FOR CLASS C, a 1% CDSC may be charged if you sell your shares within one year after purchase. Although there is no front-end sales charge when you buy Class C shares, the distributor pays a sales commission of 1% to financial institutions that sell Class C shares. A portion of this commission may, in turn, be paid to your financial advisor. The distributor receives any CDSC imposed when you sell your Class C shares. For both Class B and Class C, if the amount you sell causes the value of your investment to fall below the cost of the shares you have purchased, the CDSC will be based on the lower of the cost of those shares purchased or market value. Because the CDSC is imposed only on sales that reduce your total purchase payments, you do not have to pay a CDSC on any amount that represents appreciation in the value of your shares, income earned by your shares, or capital gains. In addition, the CDSC on your sale, if any, will be based on your oldest purchase payment. The CDSC on the next amount sold will be based on the next oldest purchase payment. EXAMPLE Assume you had invested $10,000 in Class B shares and that your investment had appreciated in value to $12,000 after 3 1/2 years, including reinvested dividends and capital gain distributions. You could sell up to $2,000 worth of shares without paying a CDSC ($12,000 current value less $10,000 purchase amount). If you sold $2,500 worth of shares, the CDSC would apply to the $500 representing part of your original purchase price. The CDSC rate would be 3% because the sale was made during the fourth year after the purchase. CDSC -- WAIVERS OF THE CDSC FOR CLASS B SHARES. The CDSC will be waived on sales of shares: - - in the event of the shareholder's death; - - held in trust for an employee benefit plan; or - -------------------------------------------------------------------------------- S.9 - - held in IRAs or certain qualified plans, such as Keogh plans, tax-sheltered custodial accounts or corporate pension plans, provided that the shareholder is: - at least 59 1/2 years old AND - taking a retirement distribution (if the sale is part of a transfer to an IRA or qualified plan, or a custodian-to-custodian transfer, the CDSC will not be waived) OR - selling under an approved substantially equal periodic payment arrangement. CDSC -- WAIVERS OF THE CDSC FOR CLASS C SHARES. The CDSC will be waived on sales of shares in the event of the shareholder's death. CLASS I, CLASS R2, CLASS R3, CLASS R4, CLASS R5 AND CLASS W -- NO SALES CHARGE. For Class I, Class R2, Class R3, Class R4, Class R5 and Class W there is no initial sales charge or CDSC. OPENING AN ACCOUNT Financial institutions are required by law to obtain certain personal information from each person who opens an account in order to verify the identity of the person. As a result, when you open an account you will be asked to provide your name, permanent street address, date of birth, and Social Security or Employer Identification number. You may also be asked for other identifying documents or information. If you do not provide this information, the financial institution through which you are investing in the fund may not be able to open an account for you. If the financial institution through which you are investing in the fund is unable to verify your identity, your account may be closed, or other steps may be taken, as deemed appropriate. When you buy shares, your order will be priced at the next NAV calculated after your order is accepted by the fund or an authorized financial institution. Your financial institution may establish and maintain your account directly or it may establish and maintain your account with the distributor. The distributor may appoint servicing agents to accept purchase orders and to accept exchange (and sale) orders on its behalf. Accounts maintained by the distributor will be supported by the fund's transfer agent. METHODS OF PURCHASING SHARES These methods of purchasing shares apply to Class A, Class B, and Class C shares. THROUGH AN ACCOUNT ESTABLISHED WITH YOUR FINANCIAL INSTITUTION ALL REQUESTS The financial institution through which you buy shares may have different policies not described in this prospectus, including different minimum investment amounts and minimum account balances. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- S.10 METHODS OF PURCHASING SHARES (CONTINUED) THROUGH AN ACCOUNT ESTABLISHED WITH THE FUND BY MAIL The financial institution through which you buy shares may establish an account directly with the fund. To establish an account in this fashion, complete a RiverSource funds account application with your financial advisor or investment professional, and mail the account application to the address below. Account applications may be requested by calling (888) 791-3380. Make your check payable to the fund. The fund does not accept cash, credit card convenience checks, money orders, traveler's checks, starter checks, third or fourth party checks, or other cash equivalents. Mail your check and completed application to: REGULAR MAIL RIVERSOURCE INVESTMENTS (FUNDS) P.O. BOX 8041 BOSTON, MA 02266-8041 EXPRESS MAIL RIVERSOURCE INVESTMENTS (FUNDS) C/O BFDS 30 DAN ROAD CANTON, MA 02021-2809 If you already have an account, include your name, account number and the name of the fund and class of shares along with your check. You can make scheduled investments in the fund by moving money from your checking account or savings account. See the Minimum Investment and Account Balance chart below for more information regarding scheduled investment plans. - -------------------------------------------------------------------------------- BY WIRE OR ACH Fund shares purchased through the distributor may be paid for by federal funds wire. Before sending a wire, call (888) 791-3380 to notify the distributor of the wire and to receive further instructions. If you are establishing an account with a wire purchase, you are required to send a signed account application to the address above. Please include the wire control number or your new account number on the application. Your bank or financial institution may charge additional fees for wire transactions. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- S.11 METHODS OF PURCHASING SHARES (CONTINUED) THROUGH AN ACCOUNT ESTABLISHED WITH THE FUND (CONT.) BY EXCHANGE Call (888) 791-3380 or send signed written instructions to the address above. - -------------------------------------------------------------------------------- MINIMUM INVESTMENT AND ACCOUNT BALANCE
RIVERSOURCE ABSOLUTE RETURN CURRENCY AND INCOME FUND FOR ALL FUNDS, RIVERSOURCE FLOATING CLASSES AND RATE FUND ACCOUNTS EXCEPT RIVERSOURCE INFLATION THOSE LISTED TO THE TAX QUALIFIED PROTECTED SECURITIES RIGHT (NONQUALIFIED) ACCOUNTS FUND CLASS W - ---------------------------------------------------------------------------------------------- INITIAL INVESTMENT $2,000 $1,000 $5,000 $500 - ---------------------------------------------------------------------------------------------- ADDITIONAL INVESTMENTS $100 $100 $100 None - ---------------------------------------------------------------------------------------------- ACCOUNT BALANCE* $300 None $2,500 $500
* If your fund account balance falls below the minimum account balance for any reason, including a market decline, you may be asked to increase it to the minimum account balance or establish a scheduled investment plan. If you do not do so within 30 days, your shares may be automatically redeemed and the proceeds mailed to you. - -------------------------------------------------------------------------------- MINIMUM INVESTMENT AND ACCOUNT BALANCE -- SCHEDULED INVESTMENT PLANS
RIVERSOURCE ABSOLUTE RETURN CURRENCY FOR ALL FUNDS, AND INCOME FUND CLASSES AND RIVERSOURCE FLOATING ACCOUNTS EXCEPT RATE FUND THOSE LISTED TO THE TAX QUALIFIED RIVERSOURCE INFLATION RIGHT (NONQUALIFIED) ACCOUNTS PROTECTED SECURITIES FUND CLASS W - ---------------------------------------------------------------------------------------------- INITIAL INVESTMENT $100 $100 $5,000 $500 - ---------------------------------------------------------------------------------------------- ADDITIONAL INVESTMENTS $100 $50 $100 None - ---------------------------------------------------------------------------------------------- ACCOUNT BALANCE** None None $2,500 $500
** If your fund account balance is below the minimum initial investment described above, you must make payments at least monthly. - -------------------------------------------------------------------------------- These minimums may be waived for accounts that are managed by an investment professional, for accounts held in approved discretionary or non-discretionary wrap accounts, for accounts that are part of an employer-sponsored retirement plan, or for other account types if approved by the distributor. The fund reserves the right to modify its minimum account requirements at any time, with or without prior notice. - -------------------------------------------------------------------------------- S.12 Please contact your financial institution for information regarding wire or electronic funds transfer. EXCHANGING OR SELLING SHARES You may exchange or sell shares by having your financial institution process your transaction. If your account is maintained directly with your financial institution, you must contact that financial institution to exchange or sell shares of the fund. If your account was established with the distributor, there are a variety of methods you may use to exchange or sell shares of the fund. WAYS TO REQUEST AN EXCHANGE OR SALE OF SHARES ACCOUNT ESTABLISHED WITH YOUR FINANCIAL INSTITUTION ALL REQUESTS You can exchange or sell shares by having your financial institution process your transaction. The financial institution through which you purchased shares may have different policies not described in this prospectus, including different transaction limits, exchange policies and sale procedures. - -------------------------------------------------------------------------------- ACCOUNT ESTABLISHED WITH THE FUND BY MAIL Mail your exchange or sale request to: REGULAR MAIL RIVERSOURCE INVESTMENTS (FUNDS) P.O. BOX 8041 BOSTON, MA 02266-8041 EXPRESS MAIL RIVERSOURCE INVESTMENTS (FUNDS) C/O BFDS 30 DAN ROAD CANTON, MA 02021-2809 Include in your letter: - your name - the name of the fund(s) - your account number - the class of shares to be exchanged or sold - your Social Security number or Employer Identification number - the dollar amount or number of shares you want to exchange or sell - specific instructions regarding delivery or exchange destination - signature(s) of registered account owner(s) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- S.13 WAYS TO REQUEST AN EXCHANGE OR SALE OF SHARES (CONTINUED) ACCOUNT ESTABLISHED WITH THE FUND (CONT.) BY MAIL (CONT.) - any special documents the transfer agent may require in order to process your order Corporate, trust or partnership accounts may need to send additional documents. Payment will be mailed to the address of record and made payable to the names listed on the account, unless your request specifies differently and is signed by all owners. A Medallion Signature Guarantee is required if: - Amount is over $50,000. - You want your check made payable to someone other than yourself. - Your address has changed within the last 30 days. - You want the check mailed to an address other than the address of record. - You want the proceeds sent to a bank account not on file. - You are the beneficiary of the account and the account owner is deceased (additional documents may be required). A Medallion Signature Guarantee assures that a signature is genuine and not a forgery. The financial institution providing the Guarantee is financially liable for the transaction if the signature is a forgery. Eligible guarantors include commercial banks, trust companies, savings associations, and credit unions as defined by the Federal Deposit Insurance Act. Note: A guarantee from a notary public is not acceptable. NOTE: Any express mail delivery charges you pay will vary depending on domestic or international delivery instructions. - -------------------------------------------------------------------------------- BY TELEPHONE Call (888) 791-3380. Unless you elect not to have telephone exchange and sale privileges, they will automatically be available to you. Reasonable procedures will be used to confirm authenticity of telephone exchange or sale requests. Telephone privileges may be modified or discontinued at any time. Telephone exchange and sale privileges automatically apply to all accounts except custodial, corporate or qualified retirement accounts. You may request that these privileges NOT apply by writing to the address above. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- S.14 WAYS TO REQUEST AN EXCHANGE OR SALE OF SHARES (CONTINUED) ACCOUNT ESTABLISHED WITH THE FUND (CONT.) Payment will be mailed to the address of record and made payable to the names listed on the account. Telephone sale requests are limited to $100,000 per day. - -------------------------------------------------------------------------------- BY WIRE OR ACH You can wire money from your fund account to your bank account. Make sure we have your bank account information on file. If we do not have this information, you will need to send written instructions with your bank's name and a voided check or savings account deposit slip. Call (888) 791-3380 or send a letter of instruction, with a Medallion Signature Guarantee if required, to the address above. A service fee may be charged against your account for each wire sent. Minimum amount: $100 Your bank or financial institution may charge additional fees for wire transactions. - -------------------------------------------------------------------------------- BY SCHEDULED PAYOUT PLAN You may elect to receive regular periodic payments through an automatic sale of shares. See the SAI for more information. - -------------------------------------------------------------------------------- IMPORTANT: Payments sent by a bank authorization or check that are not guaranteed may take up to ten days to clear. This may cause your sale request to fail to process if the requested amount includes unguaranteed funds. EXCHANGES Generally, you may exchange your fund shares for shares of the same class of any other publicly offered RiverSource fund without a sales charge. For complete information on the fund you are exchanging into, including fees and expenses, read that fund's prospectus carefully. Your exchange will be priced at the next NAV calculated after your transaction request is received in good order. - -------------------------------------------------------------------------------- S.15 MARKET TIMING IS FREQUENT OR SHORT-TERM TRADING BY CERTAIN SHAREHOLDERS INTENDED TO PROFIT AT THE EXPENSE OF OTHER SHAREHOLDERS BY SELLING SHARES OF A FUND SHORTLY AFTER PURCHASE. MARKET TIMING MAY ADVERSELY IMPACT A FUND'S PERFORMANCE BY PREVENTING THE INVESTMENT MANAGER FROM FULLY INVESTING THE ASSETS OF THE FUND, DILUTING THE VALUE OF SHARES HELD BY LONG-TERM SHAREHOLDERS, OR INCREASING THE FUND'S TRANSACTION COSTS. FUNDS THAT INVEST IN SECURITIES THAT TRADE INFREQUENTLY MAY BE VULNERABLE TO MARKET TIMERS WHO SEEK TO TAKE ADVANTAGE OF INEFFICIENCIES IN THE SECURITIES MARKETS. FUNDS THAT INVEST IN SECURITIES THAT TRADE ON OVERSEAS SECURITIES MARKETS MAY BE VULNERABLE TO MARKET TIMERS WHO SEEK TO TAKE ADVANTAGE OF CHANGES IN THE VALUES OF SECURITIES BETWEEN THE CLOSE OF OVERSEAS MARKETS AND THE CLOSE OF U.S. MARKETS, WHICH IS GENERALLY THE TIME AT WHICH A FUND'S NAV IS CALCULATED. TO THE EXTENT THAT A FUND HAS SIGNIFICANT HOLDINGS OF HIGH YIELD BONDS, TAX-EXEMPT SECURITIES OR FOREIGN SECURITIES, THE RISKS OF MARKET TIMING MAY BE GREATER FOR THE FUND THAN FOR OTHER FUNDS. SEE "PRINCIPAL INVESTMENT STRATEGIES" FOR A DISCUSSION OF THE TYPES OF SECURITIES IN WHICH YOUR FUND INVESTS. SEE "VALUING FUND SHARES" FOR A DISCUSSION OF THE RIVERSOURCE FUNDS' POLICY ON FAIR VALUE PRICING, WHICH IS INTENDED, IN PART, TO REDUCE THE FREQUENCY AND EFFECT OF MARKET TIMING. THE RIVERSOURCE FUNDS' BOARDS HAVE ADOPTED A POLICY THAT IS DESIGNED TO DETECT AND DETER MARKET TIMING THAT MAY BE HARMFUL TO THE FUNDS. EACH FUND SEEKS TO ENFORCE THIS POLICY THROUGH ITS SERVICE PROVIDERS AS FOLLOWS: - - The fund tries to distinguish market timing from trading that it believes is not harmful, such as periodic rebalancing for purposes of asset allocation or dollar cost averaging. Under the fund's procedures, there is no set number of transactions in the fund that constitutes market timing. Even one purchase and subsequent sale by related accounts may be market timing. Generally, the fund seeks to restrict the exchange privilege of an investor who makes more than three exchanges into or out of the fund in any 90-day period. Accounts held by a retirement plan or a financial institution for the benefit of its participants or clients, which typically engage in daily transactions, are not subject to this limit, although the fund seeks the assistance of financial institutions in applying similar restrictions on the sub-accounts of their participants or clients. - - If an investor's trading activity is determined to be market timing or otherwise harmful to existing shareholders, the fund reserves the right to modify or discontinue the investor's exchange privilege or reject the investor's purchases or exchanges, including purchases or exchanges accepted by a financial institution. The fund may treat accounts it believes to be under common control as a single account for these purposes, although it may not be able to identify all such accounts. - -------------------------------------------------------------------------------- S.16 - - Although the fund does not knowingly permit market timing, it cannot guarantee that it will be able to identify and restrict all short-term trading activity. The fund receives purchase and sale orders through financial institutions where market timing activity may not always be successfully detected. Other exchange policies: - - Exchanges must be made into the same class of shares of the new fund. - - Exchanges into RiverSource Tax-Exempt Money Market Fund may be made only from Class A shares. - - If your exchange creates a new account, it must satisfy the minimum investment amount for new purchases. - - Once the fund receives your exchange request, you cannot cancel it. - - Shares of the new fund may not be used on the same day for another exchange or sale. - - Shares of the Class W originally purchased, but no longer held in a discretionary managed account, may not be exchanged for Class W shares of another fund. You may continue to hold these shares in the fund. Changing your investment to a different fund will be treated as a sale and purchase, and you will be subject to applicable taxes on the sale and sales charges on the purchase of the new fund. SELLING SHARES You may sell your shares at any time. The payment will be sent within seven days after your request is received in good order. When you sell shares, the amount you receive may be more or less than the amount you invested. Your sale price will be the next NAV calculated after your request is received in good order, minus any applicable CDSC. REPURCHASES. You can change your mind after requesting a sale and use all or part of the sale proceeds to purchase new shares in the same account, fund and class from which you sold. If you reinvest in Class A, you will purchase the new shares at NAV, up to the amount of the sale proceeds, instead of paying a sales charge on the date of a new purchase. If you reinvest in Class B or Class C, any CDSC you paid on the amount you are reinvesting also will be reinvested. In order for you to take advantage of this repurchase waiver, you must notify your financial institution within 90 days of the date your sale request was processed. Contact your financial institution for information on required documentation. The repurchase privilege may be modified or discontinued at any time and use of this option may have tax consequences. Each fund reserves the right to redeem in kind. For more details and a description of other sales policies, please see the SAI. - -------------------------------------------------------------------------------- S.17 VALUING FUND SHARES For classes of shares sold with an initial sales charge, the public offering or purchase price is the net asset value plus the sales charge. For funds or classes of shares sold without an initial sales charge, the public offering price is the NAV. Orders in good form are priced at the NAV next determined after you place your order. Good form or good order means that your instructions have been received in the form required by the fund. This may include, for example, providing the fund name and account number, the amount of the transaction and all required signatures. For more information, contact your financial institution. The NAV is the value of a single share of a fund. The NAV is determined by dividing the value of a fund's assets, minus any liabilities, by the number of shares outstanding. The NAV is calculated as of the close of business on the New York Stock Exchange (NYSE), normally 4:00 p.m. Eastern time, on each day that the NYSE is open. Securities are valued primarily on the basis of market quotations and floating rate loans are valued primarily on the basis of indicative bids. Both market quotations and indicative bids are obtained from outside pricing services approved and monitored under procedures adopted by the Board. Certain short-term securities with maturities of 60 days or less are valued at amortized cost. When reliable market quotations or indicative bids are not readily available, investments are priced at fair value based on procedures adopted by the Board. These procedures are also used when the value of an investment held by a fund is materially affected by events that occur after the close of a securities market but prior to the time as of which the fund's NAV is determined. Valuing investments at fair value involves reliance on judgment. The fair value of an investment is likely to differ from any available quoted or published price. To the extent that a fund has significant holdings of high yield bonds, floating rate loans, tax-exempt securities or foreign securities that may trade infrequently, fair valuation may be used more frequently than for other funds. The funds use an unaffiliated service provider to assist in determining fair values for foreign securities. Foreign investments are valued in U.S. dollars. Some of a fund's securities may be listed on foreign exchanges that trade on weekends or other days when the fund does not price its shares. In that event, the NAV of the fund's shares may change on days when shareholders will not be able to purchase or sell the fund's shares. DISTRIBUTIONS AND TAXES As a shareholder you are entitled to your share of your fund's net income and net gains. Each fund distributes dividends and capital gains to qualify as a regulated investment company and to avoid paying corporate income and excise taxes. - -------------------------------------------------------------------------------- S.18 DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS Your fund's net investment income is distributed to you as dividends. Dividends may be composed of qualifying dividend income, which is eligible for preferential tax rates under current tax law, as well as other ordinary dividend income, which may include non-qualifying dividends, interest income and short-term capital gains. Because of the types of income earned by fixed income funds, it is unlikely the funds will distribute qualifying dividend income. Capital gains are realized when a security is sold for a higher price than was paid for it. Each realized capital gain or loss is long-term or short-term depending on the length of time the fund held the security. Realized capital gains and losses offset each other. The fund offsets any net realized capital gains by any available capital loss carryovers. Net short-term capital gains are included in net investment income. Net realized long-term capital gains, if any, are distributed by the end of the calendar year as capital gain distributions. REINVESTMENTS Dividends and capital gain distributions are automatically reinvested in additional shares in the same class of the fund unless you request distributions in cash. The financial institution through which you purchased shares may have different policies. Distributions are reinvested at the next calculated NAV after the distribution is paid. If you choose cash distributions, you will receive cash only for distributions declared after your request has been processed. TAXES If you buy shares shortly before the record date of a distribution, you may pay taxes on money earned by the fund before you were a shareholder. You will pay the full pre-distribution price for the shares, then receive a portion of your investment back as a distribution, which may be taxable. For tax purposes, an exchange is considered a sale and purchase, and may result in a gain or loss. A sale is a taxable transaction. Generally, if you sell shares for less than their cost, the difference is a capital loss or if you sell shares for more than their cost, the difference is a capital gain. Your gain may be short term (for shares held for one year or less) or long term (for shares held for more than one year). You may not create a tax loss, based on paying a sales charge, by exchanging shares before the 91(st) day after the day of purchase. If you buy Class A shares and exchange into another fund before the 91(st) day after the day of purchase, you may not include the sales charge in your calculation of tax gain or loss on the sale of the first fund you purchased. The sales charge may be included in the calculation of your tax gain or loss on a subsequent sale of the second fund you purchased. For more information, see the SAI. - -------------------------------------------------------------------------------- S.19 FOR TAXABLE FUNDS. Distributions of shares not held in IRAs or other retirement accounts are subject to federal income tax and may be subject to state and local taxes in the year they are declared. You must report distributions on your tax returns, even if they are reinvested in additional shares. Income received by a fund may be subject to foreign tax and withholding. Tax conventions between certain countries and the U.S. may reduce or eliminate these taxes. Shares held in an IRA or qualified retirement account are generally subject to different tax rules. Taking a distribution from your IRA or qualified retirement plan may subject you to federal taxes, penalties and reporting requirements. Please consult your tax advisor. FOR RIVERSOURCE INFLATION PROTECTED SECURITIES FUND. Any increase in principal for an inflation-protected security resulting from inflation adjustments is considered by Internal Revenue Service regulations to be taxable income in the year it occurs. The fund will distribute both interest income and the income attributable to principal adjustments, both of which are taxable to shareholders. FOR TAX-EXEMPT FUNDS. Dividends distributed from interest earned on tax-exempt securities (exempt-interest dividends) are exempt from federal income taxes but may be subject to state and local taxes. Dividends distributed from capital gain distributions and other income earned are not exempt from federal income taxes. Distributions are taxable in the year the fund declares them regardless of whether you take them in cash or reinvest them. Interest on certain private activity bonds is a preference item for purposes of the individual and corporate alternative minimum taxes. To the extent the fund earns such income, it will flow through to its shareholders and may be taxable to those shareholders who are subject to the alternative minimum tax. See the SAI for more information. Because interest on municipal bonds and notes is tax-exempt for federal income tax purposes, any interest on money you borrow that is used directly or indirectly to purchase fund shares is not deductible on your federal income tax return. You should consult a tax advisor regarding its deductibility for state and local income tax purposes. FOR STATE TAX-EXEMPT FUNDS. The Kentucky Court of Appeals recently held that Kentucky's tax exemption of interest on its own bonds and its taxation of interest on the bonds of other states is illegal. The United States Supreme Court (Supreme Court) has granted certiorari and if the Supreme Court affirms this decision or other state courts reach the same conclusion with respect to the states in which the State Tax-Exempt Funds invest, this decision could have implications for the tax treatment of the bonds held by the State Tax-Exempt Funds. For additional information regarding the Minnesota Tax-Exempt Fund, please see "Taxes" in the SAI. - -------------------------------------------------------------------------------- S.20 IMPORTANT: This information is a brief and selective summary of some of the tax rules that apply to an investment in a fund. Because tax matters are highly individual and complex, you should consult a qualified tax advisor. GENERAL INFORMATION AVAILABILITY AND TRANSFERABILITY OF FUND SHARES Please consult your financial institution to determine availability of RiverSource funds. Currently, RiverSource funds may be purchased or sold through affiliated broker-dealers of RiverSource Investments and through certain unaffiliated financial institutions. If you set up an account at a financial institution that does not have, and is unable to obtain, a selling agreement with the distributor of the RiverSource funds, you will not be able to transfer RiverSource fund holdings to that account. In that event, you must either maintain your RiverSource fund holdings with your current financial institution, find another financial institution with a selling agreement, or sell your shares, paying any applicable CDSC. Please be aware that transactions in taxable accounts are taxable events and may result in income tax liability. ADDITIONAL SERVICES AND COMPENSATION In addition to acting as the fund's investment manager, RiverSource Investments and its affiliates also receive compensation for providing other services to the funds. Administration Services. Ameriprise Financial, 200 Ameriprise Financial Center, Minneapolis, Minnesota 55474, provides or compensates others to provide administrative services to the RiverSource funds. These services include administrative, accounting, treasury, and other services. Fees paid by a fund for these services are included under "Other expenses" in the expense table under "Fees and Expenses." Custody Services. Ameriprise Trust Company, 200 Ameriprise Financial Center, Minneapolis, Minnesota 55474 (the custodian or Ameriprise Trust Company), provides custody services to all but a limited number of the RiverSource funds, for which U.S. Bank National Association provides custody services. In addition, Ameriprise Trust Company is paid for certain transaction fees and out-of-pocket expenses incurred while providing services to the funds. Fees paid by a fund for these services are included under "Other expenses" in the expense table under "Fees and Expenses." - -------------------------------------------------------------------------------- S.21 Distribution and Shareholder Services. RiverSource Distributors, Inc., 50611 Ameriprise Financial Center, Minneapolis, Minnesota 55474 (the distributor or RiverSource Distributors), provides underwriting and distribution services to the RiverSource funds. Under the Distribution Agreement and related distribution and shareholder servicing plans, the distributor receives distribution and shareholder servicing fees. The distributor may retain a portion of these fees to support its distribution and shareholder servicing activity. The distributor re-allows the remainder of these fees (or the full fee) to the financial institutions that sell fund shares and provide services to shareholders. Fees paid by a fund for these services are set forth under "Distribution (12b-1) fees" in the expense table under "Fees and Expenses." More information on how these fees are used is set forth under "Investment Options -- Classes of Shares" and in the SAI. The distributor also administers any sales charges paid by an investor at the time of purchase or at the time of sale. See "Shareholder Fees (fees paid directly from your investment)" under "Fees and Expenses" for the scheduled sales charge of each share class. See "Buying and Selling Shares: Sales Charges" for variations in the scheduled sales charges, and for how these sales charges are used by the distributor. See "Other Investment Strategies and Risks" for the RiverSource funds' policy regarding directed brokerage. Plan Administration Services. Under a Plan Administration Services Agreement the fund pays for plan administration services, including services such as implementation and conversion services, account set-up and maintenance, reconciliation and account recordkeeping, education services and administration to various plan types, including 529 plans, retirement plans and Health Savings Accounts (HSAs). Fees paid by a fund for these services are included under "Other expenses" in the expense table under "Fees and Expenses." Transfer Agency Services. RiverSource Service Corporation, 734 Ameriprise Financial Center, Minneapolis, Minnesota 55474 (the transfer agent or RiverSource Service Corporation), provides or compensates others to provide transfer agency services to the RiverSource funds. The RiverSource funds pay the transfer agent a fee that varies by class, as set forth in the SAI, and reimburses the transfer agent for its out-of-pocket expenses incurred while providing these transfer agency services to the funds. Fees paid by a fund for these services are included under "Other expenses" in the expense table under "Fees and Expenses." RiverSource Service Corporation pays a portion of these fees to financial institutions that provide sub-recordkeeping and other services to fund shareholders. The SAI provides additional information about the services provided and the fee schedules for the transfer agent agreements. - -------------------------------------------------------------------------------- S.22 PAYMENTS TO FINANCIAL INSTITUTIONS The distributor and its affiliates make or support additional cash payments out of their own resources (including profits earned from providing services to the fund) to financial institutions, including inter-company allocation of resources or payments to affiliated broker-dealers, in connection with agreements between the distributor and financial institutions pursuant to which these financial institutions sell fund shares and provide services to their clients who are shareholders of the fund. These payments and intercompany allocations (collectively, "payments") do not change the price paid by investors in the fund or fund shareholders for the purchase or ownership of fund shares of the fund, and these payments are not reflected in the fees and expenses of the fund, as they are not paid by the fund. In exchange for these payments, a financial institution may elevate the prominence or profile of the fund within the financial institution's organization, and may provide the distributor and its affiliates with preferred access to the financial institution's registered representatives or preferred access to the financial institution's customers. These arrangements are sometimes referred to as marketing and/or sales support payments, program and/or shareholder servicing payments, or revenue sharing payments. These arrangements create potential conflicts of interest between a financial institution's pecuniary interest and its duties to its customers, for example, if the financial institution receives higher payments from the sale of a certain fund than it receives from the sale of other funds, the financial institution or its representatives may be incented to recommend or sell shares of the fund where it receives or anticipates receiving the higher payment instead of other investment options that may be more appropriate for the customer. Employees of Ameriprise Financial and its affiliates, including employees of affiliated broker-dealers, may be separately incented to recommend or sell shares of the fund, as employee compensation and business unit operating goals at all levels are tied to the company's success. Certain employees, directly or indirectly, may receive higher compensation and other benefits as investment in the fund increases. In addition, management, sales leaders and other employees may spend more of their time and resources promoting Ameriprise Financial and its subsidiary companies, including RiverSource Investments, and the distributor, and the products they offer, including the fund. These payments are typically negotiated based on various factors including, but not limited to, the scope and quality of the services provided by the financial institution, its reputation in the industry, its ability to attract and retain assets, its access to target markets, its customer relationships, the profile the fund may obtain within the financial institution, and the access the distributor or other representatives of the fund may have within the financial institution for advertisement or education, including opportunities to present at or sponsor conferences for the registered representatives of the financial institution and its customers. - -------------------------------------------------------------------------------- S.23 These payments are usually calculated based on a percentage of fund assets owned through the financial institution and/or as a percentage of fund sales attributable to the financial institution. Certain financial institutions require flat fees instead of, or in addition to, these asset-based fees as compensation for including or maintaining a fund on their platforms, and, in certain situations, may require the reimbursement of ticket or operational charges -- fees that a financial institution charges its registered representatives for effecting transactions in the fund. The amount of payment varies by financial institution (e.g., initial platform set-up fees, ongoing maintenance or service fees, or asset or sales based fees). The amount of payments also varies by the type of sale. For instance, purchases of one type of fund may warrant a greater or lesser amount of payments than purchases of another type of fund. Additionally, sale and maintenance of shares on a retail basis may result in a greater or lesser amount of payments than for the sale and maintenance of shares made through a plan, wrap or other fee-based program. Payments to affiliates may include payments as compensation to employees of RiverSource Investments who are licensed by the distributor in respect of certain sales and solicitation activity on behalf of the fund. These payments may be and often are significant. Additional information concerning the amount and calculation of these payments is available in the fund's SAI. Payments to affiliated broker-dealers are within the range of the payments the distributor pays to similarly-situated third party financial institutions and the payments such affiliated broker-dealers receive from third party fund sponsors related to the sale of their sponsored funds. However, because of the large amount of RiverSource fund assets (in aggregate) currently held in customer accounts of the affiliated broker-dealers, the distributor and its affiliates, in the aggregate, pay significantly more in absolute dollars than other third-party fund sponsors pay to the affiliated broker-dealers for the sale and servicing of their sponsored funds. This level of payment creates potential conflicts of interest which the affiliated broker-dealers seek to mitigate by disclosure and implementation of internal controls, as well as the rules and regulations of applicable regulators. From time to time, to the extent permitted by SEC and NASD rules and by other applicable laws and regulations, the distributor and its affiliates may make other reimbursements or payments to financial institutions or their registered representatives, including non-cash compensation, in the form of gifts of nominal value, occasional meals, tickets, or other entertainment, support for due diligence trips, training and educational meetings or conference sponsorships, support for recognition programs, and other forms of non-cash compensation permissible under regulations to which these financial institutions and their representatives are subject. To the extent these are made as payments instead of reimbursement, they may provide profit to the financial institution to the extent the cost of such services was less than the actual expense of the service. - -------------------------------------------------------------------------------- S.24 The financial institution through which you are purchasing or own shares of the fund has been authorized directly or indirectly by the distributor to sell the fund and/or to provide services to you as a shareholder of the fund. Investors and current shareholders may wish to take such payment arrangements into account when considering and evaluating any recommendations they receive relating to fund shares. If you have questions regarding the specific details regarding the payments your financial institution may receive from the distributor or its affiliates related to your purchase or ownership of the fund, please contact your financial institution. The SAI contains additional detail regarding payments made by the distributor to financial institutions. The payments described in this section are in addition to fees paid by the fund to the distributor under 12b-1 plans, which fees may be used to compensate financial institutions for the distribution of fund shares and the servicing of fund shareholders, or paid by the fund to the transfer agent under the transfer agent agreement or plan administration agreement, which fees may be used to support networking or servicing fees to compensate financial institutions for supporting shareholder account maintenance, sub-accounting, plan recordkeeping or other services provided directly by the financial institution to shareholders or plans and plan participants, including retirement plans, 529 plans, Health Savings Account plans, or other plans, where participants beneficially own shares of the fund. Financial institutions may separately charge you additional fees. See "Buying and Selling Shares." ADDITIONAL MANAGEMENT INFORMATION MANAGER OF MANAGERS EXEMPTION. The RiverSource funds have received an order from the Securities and Exchange Commission that permits RiverSource Investments, subject to the approval of the Board, to appoint a subadviser or change the terms of a subadvisory agreement for a fund without first obtaining shareholder approval. The order permits the fund to add or change unaffiliated subadvisers or change the fees paid to subadvisers from time to time without the expense and delays associated with obtaining shareholder approval of the change. Before certain fixed income funds may rely on the order, holders of a majority of the fund's outstanding voting securities will need to approve operating the fund in this manner. There is no assurance shareholder approval will be received, and no changes will be made without shareholder approval until that time. For more information, see the SAI. - -------------------------------------------------------------------------------- S.25 RiverSource Investments or its affiliates may have other relationships, including significant financial relationships, with current or potential subadvisers or their affiliates, which may create a conflict of interest. In making recommendations to the Board to appoint or to change a subadviser, or to change the terms of a subadvisory agreement, RiverSource Investments does not consider any other relationship it or its affiliates may have with a subadviser, and RiverSource Investments discloses the nature of any material relationships it has with a subadviser to the Board. AFFILIATED PRODUCTS. RiverSource Investments also serves as investment manager to RiverSource funds that provide asset-allocation services to shareholders by investing in shares of other RiverSource funds (Funds of Funds) and to discretionary managed accounts (collectively referred to as "affiliated products"). A fund may experience relatively large purchases or redemptions from the affiliated products. Although RiverSource Investments seeks to minimize the impact of these transactions by structuring them over a reasonable period of time or through other measures, a fund may experience increased expenses as it buys and sells securities to manage transactions for the affiliated products. In addition, because the affiliated products may own a substantial portion of a fund, a redemption by one or more affiliated product could cause a fund's expense ratio to increase as the fund's fixed costs would be spread over a smaller asset base. RiverSource Investments monitors expense levels and is committed to offering funds that are competitively priced. RiverSource Investments will report to the Board on the steps it has taken to manage any potential conflicts. CASH RESERVES. A fund may invest its daily cash balance in RiverSource Short- Term Cash Fund (Short-Term Cash Fund), a money market fund established for the exclusive use of the RiverSource funds and other institutional clients of RiverSource Investments. While Short-Term Cash Fund does not pay an advisory fee to RiverSource Investments, it does incur other expenses, and is expected to operate at a very low expense ratio. A fund will invest in Short-Term Cash Fund only to the extent it is consistent with the fund's investment objectives and policies. Short-Term Cash Fund is not insured or guaranteed by the FDIC or any other government agency. FUND HOLDINGS DISCLOSURE. The Board has adopted policies and procedures that govern the timing and circumstances of disclosure to shareholders and third parties of information regarding the securities owned by a fund. A description of these policies and procedures is included in the SAI. - -------------------------------------------------------------------------------- S.26 LEGAL PROCEEDINGS. 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 fund is 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 fund or the ability of Ameriprise Financial or its affiliates to perform under their contracts with the fund. Information regarding certain pending and settled legal proceedings may be found in the Fund's shareholder reports and in the SAI. Additionally, 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. - -------------------------------------------------------------------------------- S.27 THIS PAGE LEFT BLANK INTENTIONALLY THIS PAGE LEFT BLANK INTENTIONALLY This fund can be purchased from Ameriprise Financial Services or from a limited number of other authorized financial institutions. The fund can be found under the "RiverSource" banner in most mutual fund quotations. Additional information about the fund and its investments is available in the fund's SAI, and annual and semiannual reports to shareholders. In the fund's annual report, you will find a discussion of market conditions and investment strategies that significantly affected the fund's performance during its most recent fiscal year. The SAI is incorporated by reference in this prospectus. For a free copy of the SAI, the annual report, or the semiannual report, or to request other information about the fund, contact RiverSource Funds or your financial institution. To make a shareholder inquiry, contact the financial institution through whom you purchased the fund. RiverSource Funds 734 Ameriprise Financial Center Minneapolis, MN 55474 (888) 791-3380 RiverSource Funds information available at RiverSource Investments website address: riversource.com/funds You may review and copy information about the fund, including the SAI, at the Securities and Exchange Commission's (Commission) Public Reference Room in Washington, D.C. (for information about the public reference room call 1-202-551-8090). Reports and other information about the fund are available on the EDGAR Database on the Commission's Internet site at www.sec.gov. Copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing to the Public Reference Section of the Commission, 100 F Street, N.E., Washington, D.C. 20549-0102. Investment Company Act File #811-2503 TICKER SYMBOL Class A: INBNX Class B: ININX Class C: AXBCX Class I: RDBIX Class R2: -- Class R3: RSDBX Class R4: IDBYX Class R5: RSVBX Class W: RVBWX
(RIVERSOURCE INVESTMENTS LOGO) S-6495-99 AA (10/07) EX-99.(17)(D) 5 c18637b1exv99wx17yxdy.txt PROSPECTUS, DATED SEPTEMBER 28, 2007 . . . (RIVERSOURCE INVESTMENTS LOGO) PROSPECTUS SUPPLEMENT -- SEPT. 17, 2007* RiverSource Core Bond Fund (Sept. 29, 2006/Sept. 28, 2007) S-6267-99 F/G
The Fund's Board of Directors has approved in principle the merger of the Fund into RiverSource Diversified Bond Fund, a fund that seeks to provide shareholders with a high level of current income while conserving the value of the investment for the longest period of time. RiverSource Core Bond Fund invests primarily, and RiverSource Diversified Bond Fund invests at least 50%, in securities included the Lehman Brothers Aggregate Bond Index, which are investment grade and denominated in U.S. dollars. Unlike RiverSource Core Bond Fund, which does not invest in securities rated below investment grade, RiverSource Diversified Bond Fund may invest up to 50% in lower-quality (junk) bonds. Completion of the merger is subject to approval by shareholders of the Fund. It is currently anticipated that, pending final approval from the Fund's Directors, proxy materials regarding the merger will be distributed to shareholders during the fourth quarter of 2007, and that a meeting of shareholders to consider the merger will be scheduled for the first quarter of 2008. For more information about RiverSource Diversified Bond Fund, please call 1-888-791-3380 for a prospectus. - -------------------------------------------------------------------------------- S-6267-2 A (9/07) * Valid until further notice. Prospectus (RIVERSOURCE INVESTMENTS LOGO) RIVERSOURCE(R) CORE BOND FUND PROSPECTUS SEPT. 28, 2007 RIVERSOURCE CORE BOND FUND SEEKS TO PROVIDE SHAREHOLDERS WITH A HIGH TOTAL RETURN THROUGH CURRENT INCOME AND CAPITAL APPRECIATION. Classes A, B, C, I, R2, R3, R4, R5 and W As with all mutual funds, the Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense. You may qualify for sales charge discounts on purchases of Class A shares. Please notify your financial institution if you have other accounts holding shares of RiverSource funds to determine whether you qualify for a sales charge discount. See "Buying and Selling Shares" for more information. NOT FDIC INSURED - MAY LOSE VALUE - NO BANK GUARANTEE TABLE OF CONTENTS THE FUND.................................................... 3P Objective................................................... 3p Principal Investment Strategies............................. 3p Principal Risks............................................. 4p Past Performance............................................ 7p Fees and Expenses........................................... 10p Other Investment Strategies and Risks....................... 13p Fund Management and Compensation............................ 15p FINANCIAL HIGHLIGHTS........................................ 17P BUYING AND SELLING SHARES................................... S.1 Description of Share Classes................................ S.1 Investment Options -- Classes of Shares ................. S.1 Sales Charges............................................ S.5 Opening an Account....................................... S.10 Exchanging or Selling Shares................................ S.13 Exchanges................................................ S.15 Selling Shares........................................... S.17 VALUING FUND SHARES......................................... S.18 DISTRIBUTIONS AND TAXES..................................... S.19 Dividends and Capital Gain Distributions.................... S.19 Reinvestments............................................... S.19 Taxes....................................................... S.19 GENERAL INFORMATION......................................... S.21
- -------------------------------------------------------------------------------- 2P RIVERSOURCE CORE BOND FUND -- 2007 PROSPECTUS THE FUND OBJECTIVE RiverSource Core Bond Fund (the Fund) seeks to provide shareholders with a high total return through current income and capital appreciation. Because any investment involves risk, achieving this objective cannot be guaranteed. Only shareholders can change the Fund's objective. PRINCIPAL INVESTMENT STRATEGIES Under normal market conditions, the Fund invests at least 80% of its net assets in bonds and other debt securities. Although the Fund is not an index fund, it invests primarily in securities like those included in the Lehman Brothers Aggregate Bond Index (the Index), which are investment grade and denominated in U.S. dollars. The Index includes securities issued by the U.S. government, corporate bonds, and mortgage- and asset-backed securities. The Fund will not invest in securities rated below investment grade, although it may hold securities that have been downgraded. The Fund will provide shareholders with at least 60 days' notice of any change in the 80% policy. In pursuit of the Fund's objective, the investment manager (RiverSource Investments, LLC) chooses investments by: - - Evaluating the portfolio's total exposure to sectors, industries and securities relative to the Index. - - Analyzing factors such as credit quality, interest rate outlook and price to select the most attractive securities within each sector (for example, identifying securities that have the opportunity to appreciate in value or provide income based on duration, expectations of changes in interest rates or credit quality). - - Targeting an average portfolio duration within one year of the duration of the Index which, as of July 31, 2007, was 4.67 years. Duration measures the sensitivity of bond prices to changes in interest rates. The longer the duration of a bond, the longer it will take to repay the principal and interest obligations and the more sensitive it will be to changes in interest rates. For example, a five-year duration means a bond is expected to decrease in value by 5% if interest rates rise 1% and increase in value by 5% if interest rates fall 1%. The Fund's investment process employs risk controls that are designed to maintain risk levels comparable to the Index. These controls include review of effective duration and limitation on sector allocations, industry concentration and the size of individual positions. In evaluating whether to sell a security, the investment manager considers, among other factors: - - The portfolio's total exposure to sectors, industries and securities relative to the Index. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 PROSPECTUS 3P - - Whether a security's rating has changed or is vulnerable to a change. - - Whether a sector or industry is experiencing change. - - Changes in the interest rate or economic outlook. - - Identification of a more attractive opportunity. The investment manager may use derivatives such as futures, options, forward contracts and swaps, including credit default swaps, in an effort to produce incremental earnings, to hedge existing positions, to increase market exposure and investment flexibility, or to obtain or reduce credit exposure. PRINCIPAL RISKS Please remember that with any mutual fund investment you may lose money. Principal risks associated with an investment in the Fund include: ACTIVE MANAGEMENT RISK. The Fund is actively managed and its performance therefore will reflect in part the ability of the portfolio managers to select securities and to make investment decisions that are suited to achieving the Fund's investment objective. Due to its active management, the Fund could underperform other mutual funds with similar investment objectives. CREDIT RISK. Credit risk is the risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable or unwilling to honor a financial obligation, such as payments due on a bond or a note. If the Fund purchases unrated securities, or if the rating of a security is reduced after purchase, the Fund will depend on the investment manager's analysis of credit risk more heavily than usual. - -------------------------------------------------------------------------------- 4P RIVERSOURCE CORE BOND FUND -- 2007 PROSPECTUS DERIVATIVES RISK. Derivatives are financial instruments that have a value which depends upon, or is derived from, the value of something else, such as one or more underlying securities, pools of securities, options, futures, indexes or currencies. Gains or losses involving derivative instruments may be substantial, because a relatively small price movement in the underlying security(ies), instrument, currency or index may result in a substantial gain or loss for the Fund. Derivative instruments in which the Fund invests will typically increase the Fund's exposure to Principal Risks to which it is otherwise exposed, and may expose the Fund to additional risks, including counterparty credit risk, leverage risk, hedging risk, correlation risk, and liquidity risk. Counterparty credit risk is the risk that a counterparty to the derivative instrument becomes bankrupt or otherwise fails to perform its obligations due to financial difficulties, and the Fund may obtain no recovery of its investment or may only obtain a limited recovery, and any recovery may be delayed. Hedging risk is the risk that derivative instruments used to hedge against an opposite position may offset losses, but they may also offset gains. Correlation risk is related to hedging risk and is the risk that there may be an incomplete correlation between the hedge and the opposite position, which may result in increased or unanticipated losses. Liquidity risk is the risk that the derivative instrument may be difficult or impossible to sell or terminate, which may cause the Fund to be in a position to do something the investment manager would not otherwise choose, including accepting a lower price for the derivative instrument, selling other investments or foregoing another, more appealing investment opportunity. Leverage risk is the risk that losses from the derivative instrument may be greater than the amount invested in the derivative instrument. Certain derivatives have the potential for unlimited losses, regardless of the size of the initial investment. See the SAI for more information on derivative instruments and related risks. INTEREST RATE RISK. Interest rate risk is the risk of losses attributable to changes in interest rates. Interest rate risk is generally associated with bond prices: when interest rates rise, bond prices fall. In general, the longer the maturity or duration of a bond, the greater its sensitivity to changes in interest rates. MARKET RISK. The market value of securities may fall or fail to rise. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of securities may fluctuate, sometimes rapidly and unpredictably. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 PROSPECTUS 5P PREPAYMENT AND EXTENSION RISK. Prepayment and extension rate is the risk that a bond or other security might be called or otherwise converted, prepaid, or redeemed before maturity. This risk is primarily associated with asset-backed securities, including mortgage-backed securities. If a security is converted, prepaid, or redeemed before maturity, particularly during a time of declining interest rates, the investment manager may not be able to reinvest in securities providing as high a level of income, resulting in a reduced yield to the Fund. Conversely, as interest rates rise, the likelihood of prepayment decreases. The investment manager may be unable to capitalize on securities with higher interest rates because the Fund's investments are locked in at a lower rate for a longer period of time. - -------------------------------------------------------------------------------- 6P RIVERSOURCE CORE BOND FUND -- 2007 PROSPECTUS PAST PERFORMANCE The following bar chart and table provide some illustration of the risks of investing in the Fund by showing, respectively: - - how the Fund's performance has varied for each full calendar year shown on the bar chart; and - - how the Fund's average annual total returns compare to recognized indexes shown on the table. Both the bar chart and the table assume that all distributions have been reinvested. The performance of different classes varies because of differences in sales charges and other fees and expenses. How the Fund has performed in the past (before and after taxes) does not indicate how the Fund will perform in the future. Performance reflects any fee waivers/expense caps in effect for the periods reported. In the absence of such fee waivers/expense caps, performance would have been lower. See "Fees and Expenses" for any current fee waivers/expense caps. Bar Chart. Class A share information is shown in the bar chart; the sales charge for Class A shares is not reflected in the bar chart. Table. The table shows total returns from hypothetical investments in Class A, Class B, Class C, Class I and Class R4 shares of the Fund. These returns are compared to the indexes shown for the same periods. For purposes of the performance calculation in the table we assumed: - - the maximum sales charge for Class A shares; - - sales at the end of the period and deduction of the applicable contingent deferred sales charge (CDSC) for Class B and Class C shares; - - no sales charge for Class I and Class R4 shares; and - - with the exception of Class A shares, no adjustments for taxes paid by an investor on the reinvested income and capital gains. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 PROSPECTUS 7P AFTER-TAX RETURNS After-tax returns are shown only for Class A shares. After-tax returns for the other classes will vary. After-tax returns are calculated using the highest historical individual federal marginal income tax rate and do not reflect the impact of state and local taxes. Actual after-tax returns will depend on your tax situation and most likely will differ from the returns shown in the table. If you hold your shares in a tax-deferred account, such as a 401(k) plan or an IRA, the after-tax returns do not apply to you since you will not incur taxes until you begin to withdraw from your account. The return after taxes on distributions for a period may be the same as the return before taxes for the same period if there were no distributions or if the distributions were small. The return after taxes on distributions and sale of Fund shares for a period may be greater than the return before taxes for the same period if there was a tax loss realized on sale of Fund shares. The benefit of the tax loss (since it can be used to offset other gains) may result in a higher return. - -------------------------------------------------------------------------------- CLASS A SHARE PERFORMANCE (BASED ON CALENDAR YEARS) (BAR CHART) +3.76% +1.86% +3.77% 2004 2005 2006
During the periods shown in the bar chart, the highest return for a calendar quarter was +3.38% (quarter ended Sept. 30, 2006) and the lowest return for a calendar quarter was -2.45% (quarter ended June 30, 2004). The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart; if reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The Fund's Class A year-to-date return at June 30, 2007 was +0.90%. - -------------------------------------------------------------------------------- 8P RIVERSOURCE CORE BOND FUND -- 2007 PROSPECTUS AVERAGE ANNUAL TOTAL RETURNS (FOR PERIODS ENDED DEC. 31, 2006)
SINCE INCEPTION SINCE (CLASSES A, INCEPTION 1 YEAR B, C & R4) (CLASS I) RiverSource Core Bond Fund: Class A Return before taxes -1.16% +0.91%(a) N/A Return after taxes on distributions -2.61% -0.27%(a) N/A Return after taxes on distributions and sale of fund shares -0.78% +0.09%(a) N/A Class B Return before taxes -2.00% +0.77%(a) N/A Class C Return before taxes +1.98% +1.56%(a) N/A Class I Return before taxes +4.12% N/A +3.05%(b) Class R4* Return before taxes +3.94% +2.46%(a) N/A Lehman Brothers Aggregate Bond Index (reflects no deduction for fees, expenses or taxes) +4.33% +3.21%(c) +3.23%(d) Lipper Intermediate Investment Grade Debt Funds Index +4.47% +3.30%(c) +3.25%(d)
* Effective Dec. 11, 2006, Class Y was renamed Class R4. (a) Inception date is June 19, 2003. (b) Inception date is March 4, 2004. (c) Measurement period started July 1, 2003. (d) Measurement period started March 1, 2004. The Lehman Brothers Aggregate Bond Index, an unmanaged index, is made up of a representative list of government, corporate, asset-backed and mortgage-backed securities. The index is frequently used as a general measure of bond market performance. The index reflects reinvestment of all distributions and changes in market prices. The Lipper Intermediate Investment Grade Debt Funds Index includes the 30 largest investment grade funds tracked by Lipper Inc. The index's returns include net reinvested dividends. Classes R2, R3, R5 and W have not been in existence for a full calendar year and therefore performance information for these classes is not shown. Past performance for Class R2 for the period prior to the beginning of operations for that class may be calculated based on the performance of Class B. Past performance for Class R3 and Class W for the period prior to the beginning of operations for that class may be calculated based on the performance of Class A. Past performance for Class R5 for the period prior to the beginning of operations for that class may be calculated based on the performance of Class R4. In each case, the blended class performance will be adjusted to reflect differences in sales charges, but not differences in annual Fund operating expenses (for example, 12b-1 fees). The use of blended performance generally results in higher performance for classes with higher operating expenses than those of the class with which they are blended, and lower performance for classes with lower operating expenses than those of the class with which they are blended. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 PROSPECTUS 9P FEES AND EXPENSES Fund investors pay various expenses. The table below describes the fees and expenses that you may pay if you buy and hold shares of the Fund. Expenses are based on the Fund's most recent fiscal year, adjusted to reflect current fees. SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS I CLASS R2 CLASS R3 CLASS R4(b) CLASS R5 CLASS A CLASS B CLASS C CLASS W Maximum sales charge (load) imposed on purchases (as a percentage of offering price) 4.75%(a) None None None Maximum deferred sales charge (load) imposed on sales (as a percentage of offering price at time of purchase) None 5% 1% None
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS: CLASS A CLASS B CLASS C CLASS W Management fees 0.48% 0.48% 0.48% 0.48% Distribution (12b-1) fees 0.25% 1.00% 1.00% 0.25% Other expenses(c) 0.36% 0.37% 0.37% 0.35% Total annual fund operating expenses 1.09% 1.85% 1.85% 1.08% Fee waiver/expense reimbursement 0.20% 0.20% 0.20% 0.13% Total annual (net) fund operating expenses(d) 0.89% 1.65% 1.65% 0.95%
CLASS CLASS I CLASS R2 CLASS R3 R4(b) CLASS R5 Management fees 0.48% 0.48% 0.48% 0.48% 0.48% Distribution (12b-1) fees 0.00% 0.50% 0.25% 0.00% 0.00% Other expenses(c) 0.18% 0.47% 0.46% 0.47% 0.23% Total annual fund operating expenses 0.66% 1.45% 1.19% 0.95% 0.71% Fee waiver/expense reimbursement 0.16% 0.15% 0.14% 0.18% 0.16% Total annual (net) fund operating expenses(d) 0.50% 1.30% 1.05% 0.77% 0.55%
(a) This charge may be reduced depending on the value of your total investments in RiverSource Funds. See "Sales Charges." (b) Effective Dec. 11, 2006, the following changes were implemented: renaming Class Y as Class R4, terminating the shareholder servicing agreement, revising the fee structure under the transfer agent agreement from account-based to asset-based, and adopting a plan administration services agreement. (c) Other expenses include an administrative services fee, a transfer agency fee, a custody fee, other nonadvisory expenses and, for Class R2, Class R3 and Class R4, a plan administration services fee. Other expenses may also include fees and expenses of affiliated and unaffiliated funds (acquired funds) which the Fund indirectly bears when it invests in the acquired funds. Because acquired funds will 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 by the Fund with respect to such investments will vary. - -------------------------------------------------------------------------------- 10P RIVERSOURCE CORE BOND FUND -- 2007 PROSPECTUS (d) The investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until July 31, 2008, unless sooner terminated at the discretion of the Fund's Board. Any amounts waived will not be reimbursed by the Fund. Under this agreement, net fund expenses (excluding fees and expenses of acquired funds), will not exceed 0.89% for Class A, 1.65% for Class B, 1.65% for Class C, 0.50% for Class I, 1.30% for Class R2, 1.05% for Class R3, 0.77% for Class R4, 0.55% for Class R5 and 0.95% for Class W. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 PROSPECTUS 11P EXAMPLES These examples are intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. These examples assume that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. These examples also assume that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $562 $786 $1,030 $1,728 Class B $668(b) $963(b) $1,183(b) $1,958(c) Class C $268(b) $563 $ 983 $2,158 Class I $ 51 $195 $ 353 $ 811 Class R2 $132 $444 $ 779 $1,728 Class R3 $107 $364 $ 642 $1,436 Class R4 $ 79 $285 $ 509 $1,154 Class R5 $ 56 $211 $ 380 $ 871 Class W $ 97 $331 $ 584 $1,310
(a) Includes a 4.75% sales charge. (b) Includes the applicable CDSC. (c) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. You would pay the following expenses if you did not redeem your shares:
1 YEAR 3 YEARS 5 YEARS 10 YEARS Class A(a) $562 $786 $1,030 $1,728 Class B $168 $563 $ 983 $1,958(b) Class C $168 $563 $ 983 $2,158 Class I $ 51 $195 $ 353 $ 811 Class R2 $132 $444 $ 779 $1,728 Class R3 $107 $364 $ 642 $1,436 Class R4 $ 79 $285 $ 509 $1,154 Class R5 $ 56 $211 $ 380 $ 871 Class W $ 97 $331 $ 584 $1,310
(a) Includes a 4.75% sales charge. (b) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. - -------------------------------------------------------------------------------- 12P RIVERSOURCE CORE BOND FUND -- 2007 PROSPECTUS OTHER INVESTMENT STRATEGIES AND RISKS Other Investment Strategies. In addition to the principal investment strategies previously described, the Fund may utilize investment strategies that are not principal investment strategies, including investment in affiliated and non-affiliated pooled investment vehicles (including mutual funds and exchange traded funds(ETFs), also referred to as "acquired funds") ownership of which results in the Fund bearing its proportionate share of the acquired funds' fees and expenses. Although ETFs are designed to replicate the price and yield of a specified market index, there is no guarantee that an ETF will track its specified market index, which may result in a loss. For more information on strategies and holdings, and the risks of such strategies, including derivative instruments that the Fund may use, see the Fund's Statement of Additional Information (SAI) and its annual and semiannual reports. Unusual Market Conditions. During unusual market conditions, the Fund may temporarily invest more of its assets in money market securities than during normal market conditions. Although investing in these securities would serve primarily to attempt to avoid losses, this type of investing also could prevent the Fund from achieving its investment objective. During these times, the portfolio managers may make frequent securities trades that could result in increased fees, expenses and taxes, and decreased performance. Instead of investing in money market securities directly, the Fund may invest in shares of an affiliated money market fund. See "Cash Reserves" for more information. Securities Transaction Commissions. Securities transactions involve the payment by the Fund of brokerage commissions to broker-dealers, on occasion as compensation for research or brokerage services (commonly referred to as "soft dollars"), as the portfolio managers buy and sell securities for the Fund in pursuit of its objective. A description of the policies governing the Fund's securities transactions and the dollar value of brokerage commissions paid by the Fund are set forth in the SAI. Funds that invest primarily in fixed income securities do not typically generate brokerage commissions that are used to pay for research or brokerage services. The brokerage commissions set forth in the SAI do not include implied commissions or mark-ups (implied commissions) paid by the Fund for principal transactions (transactions made directly with a dealer or other counterparty), including most fixed income securities (and certain other instruments, including derivatives). Brokerage commissions do not reflect other elements of transaction costs, including the extent to which the Fund's purchase and sale transactions may cause the market to move and change the market price for an investment. Although brokerage commissions and implied commissions are not reflected in the expense table under "Fees and Expenses," they are reflected in the total return of the Fund. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 PROSPECTUS 13P Portfolio Turnover. Trading of securities may produce capital gains, which are taxable to shareholders when distributed. Active trading may also increase the amount of brokerage commissions paid or mark-ups to broker-dealers that the Fund pays when it buys and sells securities. Capital gains and increased brokerage commissions or mark-ups paid to broker-dealers may adversely affect a fund's performance. The Fund's historical portfolio turnover rate, which measures how frequently the Fund buys and sells investments, is shown in the "Financial Highlights." Directed Brokerage. The Fund's Board of Directors (Board) has adopted a policy prohibiting the investment manager, or any subadviser, from considering sales of shares of the Fund as a factor in the selection of broker-dealers through which to execute securities transactions. Additional information regarding securities transactions can be found in the SAI. - -------------------------------------------------------------------------------- 14P RIVERSOURCE CORE BOND FUND -- 2007 PROSPECTUS FUND MANAGEMENT AND COMPENSATION INVESTMENT MANAGER RiverSource Investments, LLC (the investment manager or RiverSource Investments), 200 Ameriprise Financial Center, Minneapolis, Minnesota 55474, is the investment manager to the RiverSource funds, and is a wholly-owned subsidiary of Ameriprise Financial, Inc. (Ameriprise Financial). Ameriprise Financial is a financial planning and financial services company that has been offering solutions for clients' asset accumulation, income management and protection needs for more than 110 years. In addition to managing investments for all of the RiverSource funds, RiverSource Investments manages investments for itself and its affiliates. For institutional clients, RiverSource Investments and its affiliates provide investment management and related services, such as separate account asset management, and institutional trust and custody, as well as other investment products. For all of its clients, RiverSource Investments seeks to allocate investment opportunities in an equitable manner over time. See the SAI for more information. The Fund pays RiverSource Investments a fee for managing its assets. Under the Investment Management Services Agreement (Agreement), the fee for the most recent fiscal year was 0.48% of the Fund's average daily net assets. Under the Agreement, the Fund also pays taxes, brokerage commissions, and nonadvisory expenses. A discussion regarding the basis for the Board approving the Agreement is available in the Fund's most recent annual or semiannual shareholder report. Portfolio Manager(s). The portfolio managers responsible for the day-to-day management of the Fund are: Jamie Jackson, CFA, Portfolio Manager - - Co-managed the Fund since 2003. - - Leader of the liquid assets sector team. - - Joined RiverSource Investments in 2003. - - Co-head of U.S. Investment Grade Fixed Income, UBS Global Asset Management, 1997 to 2003. - - Began investment career in 1988. - - MBA, Marquette University. Scott Kirby, Portfolio Manager - - Co-managed the Fund since 2003. - - Leader of the structured assets sector team. - - Employed by RiverSource Investments from 1979 to 1985 and from 1987 to the present. - - Began investment career in 1979. - - MBA, University of Minnesota. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 PROSPECTUS 15P Tom Murphy, CFA, Portfolio Manager - - Co-managed the Fund since 2003. - - Leader of the investment grade corporate bond sector team. - - Joined RiverSource Investments in 2002. - - Managing Director and Portfolio Manager, BlackRock Financial Management, 2002; various positions, Zurich Scudder, 1992 to 2002. - - Began investment career in 1986. - - MBA, University of Michigan. The fixed income department of RiverSource Investments is divided into six sector teams, each of which includes a portfolio manager or portfolio managers and several analysts, and each of which specializes in a specific sector of the fixed income market. The Fund's portfolio managers lead the teams that specialize in the sectors in which the Fund primarily invests, and collectively determine allocation of Fund assets among the sectors. The SAI provides additional information about portfolio manager compensation, management of other accounts and ownership of shares in the Fund. - -------------------------------------------------------------------------------- 16P RIVERSOURCE CORE BOND FUND -- 2007 PROSPECTUS FINANCIAL HIGHLIGHTS THE FINANCIAL HIGHLIGHTS TABLES ARE INTENDED TO HELP YOU UNDERSTAND THE FUND'S FINANCIAL PERFORMANCE. CERTAIN INFORMATION REFLECTS FINANCIAL RESULTS FOR A SINGLE FUND SHARE. THE TOTAL RETURNS IN THE TABLES REPRESENT THE RATE THAT AN INVESTOR WOULD HAVE EARNED OR LOST ON AN INVESTMENT IN THE FUND (ASSUMING REINVESTMENT OF ALL DIVIDENDS AND DISTRIBUTIONS). THE INFORMATION FOR THE FISCAL YEAR ENDED JULY 31, 2007 HAS BEEN DERIVED FROM THE FINANCIAL STATEMENTS AUDITED BY ERNST & YOUNG LLP, WHOSE REPORT, ALONG WITH THE FUND'S FINANCIAL STATEMENTS AND FINANCIAL HIGHLIGHTS, IS INCLUDED IN THE ANNUAL REPORT WHICH, IF NOT INCLUDED WITH THIS PROSPECTUS, IS AVAILABLE UPON REQUEST. THE INFORMATION FOR THE PERIODS ENDED ON OR BEFORE JULY 31, 2006 HAS BEEN AUDITED BY KPMG LLP. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 PROSPECTUS 17P CLASS A
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED JULY 31, 2007 2006 2005 2004 2003(B) Net asset value, beginning of period $9.46 $9.72 $9.62 $9.49 $9.94 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .42(c) .36 .31 .26 .02 Net gains (losses) (both realized and unrealized) .02 (.26) .11 .13 (.45) - ----------------------------------------------------------------------------------------------------------- Total from investment operations .44 .10 .42 .39 (.43) - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.42) (.36) (.32) (.26) (.02) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $9.48 $9.46 $9.72 $9.62 $9.49 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $40 $36 $40 $65 $51 - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e),(f) .89% .90% .94% .97% .96%(g) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.39% 3.84% 3.09% 2.61% 1.80%(g) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 347% 301% 313% 310% 46% - ----------------------------------------------------------------------------------------------------------- Total return(h) 4.75% 1.13% 4.32% 4.06% (4.31%)(i) - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from June 19, 2003 (when shares became publicly available) to July 31, 2003. (c) Per share amounts have been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (e) 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. (f) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class A would have been 1.09%, 1.12%, 1.04%, 1.06% and 2.56% for the periods ended July 31, 2007, 2006, 2005, 2004 and 2003, respectively. (g) Adjusted to an annual basis. (h) Total return does not reflect payment of a sales charge. (i) Not annualized. - -------------------------------------------------------------------------------- 18P RIVERSOURCE CORE BOND FUND -- 2007 PROSPECTUS CLASS B
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED JULY 31, 2007 2006 2005 2004 2003(B) Net asset value, beginning of period $9.47 $9.72 $9.62 $9.50 $9.94 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .35(c) .29 .23 .18 .01 Net gains (losses) (both realized and unrealized) .01 (.25) .11 .12 (.44) - ----------------------------------------------------------------------------------------------------------- Total from investment operations .36 .04 .34 .30 (.43) - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.35) (.29) (.24) (.18) (.01) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $9.48 $9.47 $9.72 $9.62 $9.50 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $10 $11 $12 $8 $2 - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e),(f) 1.65% 1.66% 1.69% 1.74% 1.73%(g) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.62% 3.09% 2.39% 1.87% 1.37%(g) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 347% 301% 313% 310% 46% - ----------------------------------------------------------------------------------------------------------- Total return(h) 3.85% .42% 3.56% 3.18% (4.28%)(i) - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from June 19, 2003 (when shares became publicly available) to July 31, 2003. (c) Per share amounts have been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (e) 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. (f) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class B would have been 1.85%, 1.89%, 1.83%, 1.83% and 3.32% for the periods ended July 31, 2007, 2006, 2005, 2004 and 2003, respectively. (g) Adjusted to an annual basis. (h) Total return does not reflect payment of a sales charge. (i) Not annualized. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 PROSPECTUS 19P CLASS C
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED JULY 31, 2007 2006 2005 2004 2003(B) Net asset value, beginning of period $9.47 $9.72 $9.62 $9.50 $9.94 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .35(c) .29 .23 .18 .01 Net gains (losses) (both realized and unrealized) .01 (.26) .11 .12 (.44) - ----------------------------------------------------------------------------------------------------------- Total from investment operations .36 .03 .34 .30 (.43) - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.35) (.28) (.24) (.18) (.01) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $9.48 $9.47 $9.72 $9.62 $9.50 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $1 $1 $1 $-- $-- - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e),(f) 1.65% 1.67% 1.69% 1.72% 1.64%(g) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.63% 3.07% 2.40% 1.88% 1.51%(g) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 347% 301% 313% 310% 46% - ----------------------------------------------------------------------------------------------------------- Total return(h) 3.85% .42% 3.55% 3.17% (4.28%)(i) - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from June 19, 2003 (when shares became publicly available) to July 31, 2003. (c) Per share amounts have been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (e) 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. (f) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class C would have been 1.85%, 1.89%, 1.84%, 1.81% and 3.32% for the periods ended July 31, 2007, 2006, 2005, 2004 and 2003, respectively. (g) Adjusted to an annual basis. (h) Total return does not reflect payment of a sales charge. (i) Not annualized. - -------------------------------------------------------------------------------- 20P RIVERSOURCE CORE BOND FUND -- 2007 PROSPECTUS CLASS I
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED JULY 31, 2007 2006 2005 2004(B) Net asset value, beginning of period $9.45 $9.71 $9.61 $9.79 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .45(c) .39 .33 .12 Net gains (losses) (both realized and unrealized) .02 (.26) .11 (.18) - ----------------------------------------------------------------------------------------------------------- Total from investment operations .47 .13 .44 (.06) - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.46) (.39) (.34) (.12) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $9.46 $9.45 $9.71 $9.61 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $259 $174 $113 $63 - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e),(f) .54% .58% .70% .70%(g) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.75% 4.22% 3.42% 3.03%(g) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 347% 301% 313% 310% - ----------------------------------------------------------------------------------------------------------- Total return(h) 5.01% 1.47% 4.58% (.72%)(i) - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from March 4, 2004 (inception date) to July 31, 2004. (c) Per share amounts have been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (e) 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. (f) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class I would have been 0.66%, 0.69%, 0.72% and 0.73% for the periods ended July 31, 2007, 2006, 2005 and 2004, respectively. (g) Adjusted to an annual basis. (h) Total return does not reflect payment of a sales charge. (i) Not annualized. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 PROSPECTUS 21P CLASS R2
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED JULY 31, 2007(B) Net asset value, beginning of period $9.65 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .24(c) Net gains (losses) (both realized and unrealized) (.18) - ----------------------------------------------------------------------------------------------------------- Total from investment operations .06 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.23) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $9.48 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e),(f) 1.30%(g) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.04%(g) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 347% - ----------------------------------------------------------------------------------------------------------- Total return(h) .67%(i) - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Dec. 11, 2006 (inception date) to July 31, 2007. (c) Per share amounts have been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (e) 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. (f) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratio of expenses for Class R2 would have been 1.45% for the period ended July 31, 2007. (g) Adjusted to an annual basis. (h) Total return does not reflect payment of a sales charge. (i) Not annualized. - -------------------------------------------------------------------------------- 22P RIVERSOURCE CORE BOND FUND -- 2007 PROSPECTUS CLASS R3
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED JULY 31, 2007(B) Net asset value, beginning of period $9.65 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .26(c) Net gains (losses) (both realized and unrealized) (.19) - ----------------------------------------------------------------------------------------------------------- Total from investment operations .07 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.24) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $9.48 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e),(f) 1.05%(g) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.29%(g) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 347% - ----------------------------------------------------------------------------------------------------------- Total return(h) .83%(i) - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Dec. 11, 2006 (inception date) to July 31, 2007. (c) Per share amounts have been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (e) 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. (f) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratio of expenses for Class R3 would have been 1.18% for the period ended July 31, 2007. (g) Adjusted to an annual basis. (h) Total return does not reflect payment of a sales charge. (i) Not annualized. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 PROSPECTUS 23P CLASS R4*
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED JULY 31, 2007 2006 2005 2004 2003(B) Net asset value, beginning of period $9.46 $9.72 $9.62 $9.49 $9.94 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .43(c) .38 .32 .27 .02 Net gains (losses) (both realized and unrealized) .02 (.26) .11 .13 (.45) - ----------------------------------------------------------------------------------------------------------- Total from investment operations .45 .12 .43 .40 (.43) - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.44) (.38) (.33) (.27) (.02) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $9.47 $9.46 $9.72 $9.62 $9.49 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- $-- $-- $-- $-- - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e),(f) .73% .74% .78% .80% .82%(g) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.43% 4.01% 3.36% 2.78% 2.01%(g) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 347% 301% 313% 310% 46% - ----------------------------------------------------------------------------------------------------------- Total return(h) 4.81% 1.28% 4.49% 4.23% (4.30%)(i) - -----------------------------------------------------------------------------------------------------------
* Effective Dec. 11, 2006, Class Y was renamed Class R4. (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from June 19, 2003 (when shares became publicly available) to July 31, 2003. (c) Per share amounts have been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (e) 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. (f) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class R4 would have been 0.93%, 0.94%, 0.92%, 0.89% and 2.40% for the periods ended July 31, 2007, 2006, 2005, 2004 and 2003, respectively. (g) Adjusted to an annual basis. (h) Total return does not reflect payment of a sales charge. (i) Not annualized. - -------------------------------------------------------------------------------- 24P RIVERSOURCE CORE BOND FUND -- 2007 PROSPECTUS CLASS R5
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED JULY 31, 2007(B) Net asset value, beginning of period $9.65 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .29(c) Net gains (losses) (both realized and unrealized) (.19) - ----------------------------------------------------------------------------------------------------------- Total from investment operations .10 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.27) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $9.48 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e),(f) .55%(g) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.78%(g) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 347% - ----------------------------------------------------------------------------------------------------------- Total return(h) 1.14%(i) - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Dec. 11, 2006 (inception date) to July 31, 2007. (c) Per share amounts have been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (e) 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. (f) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratio of expenses for Class R5 would have been 0.71% for the period ended July 31, 2007. (g) Adjusted to an annual basis. (h) Total return does not reflect payment of a sales charge. (i) Not annualized. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 PROSPECTUS 25P CLASS W
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED JULY 31, 2007(B) Net asset value, beginning of period $9.69 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .28(c) Net gains (losses) (both realized and unrealized) (.23) - ----------------------------------------------------------------------------------------------------------- Total from investment operations .05 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.27) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $9.47 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e),(f) .95%(g) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.41%(g) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 347% - ----------------------------------------------------------------------------------------------------------- Total return(h) .58%(i) - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Dec. 1, 2006 (inception date) to July 31, 2007. (c) Per share amounts have been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (e) 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. (f) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratio of expenses for Class W would have been 1.08% for the period ended July 31, 2007. (g) Adjusted to an annual basis. (h) Total return does not reflect payment of a sales charge. (i) Not annualized. - -------------------------------------------------------------------------------- 26P RIVERSOURCE CORE BOND FUND -- 2007 PROSPECTUS BUYING AND SELLING SHARES The RiverSource funds are available through broker-dealers, certain 401(k) or other qualified and nonqualified plans, banks, or other financial intermediaries or institutions (financial institutions). THESE FINANCIAL INSTITUTIONS MAY CHARGE YOU ADDITIONAL FEES FOR THE SERVICES THEY PROVIDE AND THEY MAY HAVE DIFFERENT POLICIES NOT DESCRIBED IN THIS PROSPECTUS. Some policy differences may include different minimum investment amounts, exchange privileges, fund choices and cutoff times for investments. Additionally, recordkeeping, transaction processing and payments of distributions relating to your account may be performed by the financial institutions through which shares are held. Since the fund may not have a record of your transactions, you should always contact the financial institution through which you purchased the fund to make changes to or give instructions concerning your account or to obtain information about your account. The fund, the distributor and the transfer agent are not responsible for the failure of one of these financial institutions to carry out its obligations to its customers. DESCRIPTION OF SHARE CLASSES INVESTMENT OPTIONS -- CLASSES OF SHARES The RiverSource funds offer different classes of shares. There are differences among the fees and expenses for each class. See the "Fees and Expenses" table for more information. Not everyone is eligible to buy every class. After determining which classes you are eligible to buy, decide which class best suits your needs. Your financial institution can help you with this decision. The following table shows the key features of each class. (The cover of this prospectus indicates which classes are currently offered for this Fund.) INVESTMENT OPTIONS SUMMARY See the "Fees and Expenses" table to determine which classes are offered by this fund.
CONTINGENT PLAN INITIAL DEFERRED SALES DISTRIBUTION AND ADMINISTRATION AVAILABILITY SALES CHARGE CHARGE (CDSC) SERVICE FEE(A) FEE - ------------------------------------------------------------------------------------------------------------- Class A Available to Yes. Payable at No. Yes. No. all investors. time of purchase. 0.25% Lower sales charge for larger investments. - ------------------------------------------------------------------------------------------------------------- Class Available to No. Entire Maximum 5% CDSC during Yes. No. B(b) all investors. purchase price is the first year decreasing 1.00% invested in to 0% after six years. shares of the fund. - -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- S-6400-6 S.1
INVESTMENT OPTIONS SUMMARY (CONTINUED) CONTINGENT PLAN INITIAL DEFERRED SALES DISTRIBUTION AND ADMINISTRATION AVAILABILITY SALES CHARGE CHARGE (CDSC) SERVICE FEE(A) FEE - ------------------------------------------------------------------------------------------------------------- Class C Available to No. Entire 1% CDSC may apply if you Yes. No. all investors. purchase price is sell shares within one 1.00% invested in year after purchase. shares of the fund. - ------------------------------------------------------------------------------------------------------------- Class I Limited to No. No. No. No. qualifying institutional investors. - ------------------------------------------------------------------------------------------------------------- Class R2 Limited to No. No. Yes. Yes. qualifying 0.50% 0.25% institutional investors. - ------------------------------------------------------------------------------------------------------------- Class R3 Limited to No. No. Yes. Yes. qualifying 0.25% 0.25% institutional investors. - ------------------------------------------------------------------------------------------------------------- Class R4 Limited to No. No. No. Yes. qualifying 0.25% institutional investors. - ------------------------------------------------------------------------------------------------------------- Class R5 Limited to No. No. No. No. qualifying institutional investors. - ------------------------------------------------------------------------------------------------------------- Class W Limited to No. No. Yes. No. qualifying 0.25% discretionary managed accounts. - -------------------------------------------------------------------------------------------------------------
(a) For Class A, Class B, Class C, Class R2, Class R3 and Class W shares, each fund has adopted a plan under Rule 12b-1 of the Investment Company Act of 1940, as amended, that allows it to pay distribution and shareholder servicing-related expenses for the sale of shares. Because these fees are paid out of a fund's assets on an on-going basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of distribution (sales) or servicing charges. (b) See "Buying and Selling Shares, Sales Charges, Class B and Class C -- contingent deferred sales charge alternative" for more information on the timing of conversion of Class B shares to Class A shares. Timing will vary depending on the date of your original purchase of the Class B shares. DISTRIBUTION AND SERVICE FEES The distribution and shareholder servicing fees for Class A, Class B, Class C, Class R2, Class R3 and Class W are subject to the requirements of Rule 12b-1 under the Investment Company Act of 1940, as amended, and are used to reimburse the distributor for certain expenses it incurs in connection with distributing a fund's shares and providing services to fund shareholders. These expenses include payment of distribution and shareholder servicing fees to financial institutions that sell shares of the fund, up to 0.50% of the average daily net assets of Class R2 shares sold and held through them and up to 0.25% of the average daily net assets of Class A, Class B, Class C, Class R3 and Class W shares sold and held through them. For Class A, Class B, Class R2, Class R3 and Class W shares, the distributor begins to pay these fees immediately after - -------------------------------------------------------------------------------- S.2 purchase. For Class C shares, the distributor begins to pay these fees one year after purchase. Financial institutions also receive distribution fees up to 0.75% of the average daily net assets of Class C shares sold and held through them, which the distributor begins to pay one year after purchase. For Class B shares, and, for the first year after sale only, for Class C shares, the fund's distributor retains the distribution fee of up to 0.75% in order to finance the payment of sales commissions to financial institutions that sell Class B shares, and to pay for other distribution related expenses. Financial institutions may compensate their financial advisors with the shareholder servicing and distribution fees paid to them by the distributor. PLAN ADMINISTRATION FEE Class R2, Class R3 and Class R4 pay an annual plan administration services fee for the provision of various administrative, recordkeeping, communication and educational services. The fee for Class R2, Class R3 and Class R4 is equal on an annual basis to 0.25% of assets attributable to the respective class. DETERMINING WHICH CLASS OF SHARES TO PURCHASE CLASS A, CLASS B AND CLASS C SHARES. If your investments in RiverSource funds total $100,000 or more, Class A shares may be the better option because the sales charge is reduced for larger purchases. If you invest less than $100,000, consider how long you plan to hold your shares. Class B shares have a higher annual distribution fee than Class A shares and a CDSC for six years. Class B shares convert to Class A shares in the ninth year of ownership. Class B shares purchased through reinvested dividends and distributions also will convert to Class A shares in the same proportion as the other Class B shares. Class C shares also have a higher annual distribution fee than Class A shares. Class C shares have no sales charge if you hold the shares for longer than one year. Unlike Class B shares, Class C shares do not convert to Class A. As a result, you will pay a distribution fee for as long as you hold Class C shares. If you choose a deferred sales charge option (Class B or Class C), you should consider the length of time you intend to hold your shares. To help you determine which investment is best for you, consult your financial institution. CLASS I SHARES. The following eligible investors may purchase Class I shares: - - Any fund distributed by RiverSource Distributors, Inc. and Ameriprise Financial Services, if the fund seeks to achieve its investment objective by investing primarily in shares of the fund and other RiverSource funds. Class I shares may be purchased, sold or exchanged only through the distributor or an authorized financial institution. - -------------------------------------------------------------------------------- S.3 CLASS R SHARES. The following eligible institutional investors may purchase Class R2, Class R3, Class R4 and Class R5 shares: - - Qualified employee benefit plans. - - Trust companies or similar institutions, and charitable organizations that meet the definition in Section 501(c)(3) of the Internal Revenue Code. - - Non-qualified deferred compensation plans whose participants are included in a qualified employee benefit plan described above. - - State sponsored college savings plans established under Section 529 of the Internal Revenue Code. - - Health Savings Accounts (HSAs) created pursuant to public law 108-173. Additionally, if approved by the distributor, the following eligible institutional investors may purchase Class R5 shares: - - Institutional or corporate accounts above a threshold established by the distributor (currently $1 million per fund or $10 million in all RiverSource funds). - - Bank Trusts departments. Class R shares generally are not available to retail non-retirement accounts, traditional and Roth IRAs, Coverdell Educational Savings Accounts, SEPs, SAR- SEPs, SIMPLE IRAs and individual 403(b) plans. Class R shares may be purchased, sold or exchanged only through the distributor or an authorized financial institution. CLASS W SHARES. The following eligible investors may purchase Class W shares: - - Investors purchasing through authorized investment programs managed by investment professionals, including discretionary managed account programs. Class W shares may be purchased, sold or exchanged only through the distributor or an authorized financial institution. Shares originally purchased in a discretionary managed account may continue to be held in Class W outside of a discretionary managed account, but no additional Class W purchases may be made and no exchanges to Class W shares of another fund may be made outside of a discretionary managed account. IN ADDITION, FOR CLASS I, CLASS R AND CLASS W SHARES, THE DISTRIBUTOR, IN ITS SOLE DISCRETION, MAY ACCEPT INVESTMENTS FROM OTHER PURCHASERS NOT LISTED ABOVE. For more information, see the SAI. - -------------------------------------------------------------------------------- S.4 SALES CHARGES CLASS A -- INITIAL SALES CHARGE ALTERNATIVE: Your purchase price for Class A shares is generally the net asset value (NAV) plus a front-end sales charge. The distributor receives the sales charge and re-allows a portion of the sales charge to the financial institution through which you purchased the shares. The distributor retains the balance of the sales charge. Sales charges vary depending on the amount of your purchase. SALES CHARGE* FOR CLASS A SHARES
MAXIMUM REALLOWANCE AS A % OF AS A % OF AS A % OF TOTAL MARKET VALUE PURCHASE PRICE** NET AMOUNT INVESTED PURCHASE PRICE - -------------------------------------------------------------------------------------------- Up to $49,999 4.75% 4.99% 4.00% $50,000 -- $99,999 4.25 4.44 3.50 $100,000 -- $249,999 3.50 3.63 3.00 $250,000 -- $499,999 2.50 2.56 2.15 $500,000 -- $999,999 2.00 2.04 1.75 $1,000,000 or more 0.00 0.00 0.00***
* Because of rounding in the calculation of the offering price, the portion of the sales charge retained by the distributor may vary and the actual sales charge you pay may be more or less than the sales charge calculated using these percentages. ** Purchase price includes the sales charge. ***Although there is no sales charge for purchases with a total market value over $1,000,000, and therefore no re-allowance, the distributor may pay a financial institution the following: a sales commission of up to 1.00% for a sale with a total market value of $1,000,000 to $2,999,999; a sales commission up to 0.50% for a sale of $3,000,000 to $9,999,999; and a sales commission up to 0.25% for a sale of $10,000,000 or more. INITIAL SALES CHARGE -- RIGHTS OF ACCUMULATION. You may be able to reduce the sales charge on Class A shares, based on the combined market value of your accounts. The current market values of the following investments are eligible to be added together for purposes of determining the sales charge on your purchase: - - Your current investment in a fund; and - - Previous investments you and members of your primary household group have made in Class A, Class B or Class C shares in the fund and other RiverSource funds, provided your investment was subject to a sales charge. Your primary household group consists of you, your spouse or domestic partner and your unmarried children under age 21 sharing a mailing address. The following accounts are eligible to be included in determining the sales charge on your purchase: - - Individual or joint accounts; - - Roth and traditional IRAs, SEPs, SIMPLEs and TSCAs, provided they are invested in Class A, Class B or Class C shares that were subject to a sales charge; - -------------------------------------------------------------------------------- S.5 - - UGMA/UTMA accounts for which you, your spouse, or your domestic partner is parent or guardian of the minor child; - - Revocable trust accounts for which you or a member of your primary household group, individually, is the beneficiary; - - Accounts held in the name of your, your spouse's, or your domestic partner's sole proprietorship or single owner limited liability company or S corporation; and - - Qualified retirement plan assets, provided that you are the sole owner of the business sponsoring the plan, are the sole participant (other than a spouse) in the plan, and have no intention of adding participants to the plan. The following accounts are not eligible to be included in determining the sales charge on your purchase: - - Accounts of pension and retirement plans with multiple participants, such as 401(k) plans (which are combined to reduce the sales charge for the entire pension or retirement plan and therefore are not used to reduce the sales charge for your individual accounts); - - Investments in Class A shares where the sales charge is waived, for example, purchases through wrap accounts; - - Investments in Class D, Class E, Class I, Class R2, Class R3, Class R4, Class R5, Class W or Class Y shares; - - Investments in 529 plans, donor advised funds, variable annuities, variable life insurance products, wrap accounts or managed separate accounts; and - - Charitable and irrevocable trust accounts. If you purchase RiverSource fund shares through different financial institutions, and you want to include those assets toward a reduced sales charge, you must inform your financial institution in writing about the other accounts when placing your purchase order. Contact your financial institution to determine what information is required. Unless you provide your financial institution in writing with information about all of the accounts that may count toward a sales charge reduction, there can be no assurance that you will receive all of the reductions for which you may be eligible. You should request that your financial institution provide this information to the fund when placing your purchase order. For more information on rights of accumulation, please see the SAI. - -------------------------------------------------------------------------------- S.6 INITIAL SALES CHARGE -- LETTER OF INTENT (LOI). Generally, if you intend to invest $50,000 or more over a period of 13 months or less, you may be able to reduce the front-end sales charges for investments in Class A shares by completing and filing a LOI form. The LOI becomes effective only after the form is processed in good order by the fund. An LOI can be backdated up to a maximum of 90 days. If the LOI is backdated, you may include prior investments in Class A shares that were charged a front-end sales load toward the LOI commitment amount. If the LOI is backdated, the 13-month period begins on the date of the earliest purchase included in the LOI. Holdings More than 90 Days Old. Purchases made more than 90 days before your LOI is processed by the fund will not be counted toward the commitment amount of the LOI and cannot be used as the starting point for the LOI. While these purchases cannot be included in an LOI, they may help you obtain a reduced sales charge on future purchases as described in "Initial Sales Charge -- Rights of Accumulation." Notification Obligation. You must request the reduced sales charge when you buy shares. If you do not complete and file the LOI form, or do not request the reduced sales charge at the time of purchase, you will not be eligible for the reduced sales charge. You should request that your financial institution provide this information to the fund when placing your purchase order. For more details on LOIs, please contact your financial institution or see the SAI. INITIAL SALES CHARGE -- WAIVERS OF THE SALES CHARGE FOR CLASS A SHARES. Sales charges do not apply to: - - current or retired Board members, officers or employees of RiverSource funds or RiverSource Investments or its affiliates, their spouses or domestic partners, children, parents and their spouse's or domestic partner's parents. - - current or retired Ameriprise Financial Services, Inc. (Ameriprise Financial Services) financial advisors, employees of financial advisors, their spouses or domestic partners, children, parents and their spouse's or domestic partner's parents. - - registered representatives and other employees of financial institutions having a selling agreement with the distributor, including their spouses, domestic partners, children, parents and their spouse's or domestic partner's parents. - - portfolio managers employed by subadvisers of the RiverSource funds, including their spouses or domestic partners, children, parents and their spouse's or domestic partner's parents. - - qualified employee benefit plans offering participants daily access to RiverSource funds. Eligibility must be determined in advance. For assistance, please contact your financial institution. - - direct rollovers from qualified employee benefit plans, provided that the rollover involves a transfer of Class R or Class Y shares in a fund to Class A shares in the same fund. - -------------------------------------------------------------------------------- S.7 - - purchases made: - with dividend or capital gain distributions from a fund or from the same class of another RiverSource fund; - through or under a wrap fee product or other investment product sponsored by a financial institution having a selling agreement with the distributor; - through state sponsored college savings plans established under Section 529 of the Internal Revenue Code; - through bank trust departments. - - shareholders whose original purchase was in a Strategist fund merged into a RiverSource fund in 2000. The distributor may, in its sole discretion, authorize the waiver of sales charges for additional purchases or categories of purchases. Policies related to reducing or waiving the sales charge may be modified or withdrawn at any time. Unless you provide your financial institution with information in writing about all of the factors that may count toward a waiver of the sales charge, there can be no assurance that you will receive all of the waivers for which you may be eligible. You should request that your financial institution provide this information to the fund when placing your purchase order. Because the current prospectus is available on RiverSource Investment's website free of charge, RiverSource Investments does not disclose this information separately on the website. CLASS B AND CLASS C -- CONTINGENT DEFERRED SALES CHARGE ALTERNATIVE FOR CLASS B, the CDSC is based on the sale amount and the number of years between purchase and sale. The following table shows how CDSC percentages on sales decline:
IF THE SALE IS MADE DURING THE: THE CDSC PERCENTAGE RATE IS:* First year 5% Second year 4% Third year 4% Fourth year 3% Fifth year 2% Sixth year 1% Seventh or eighth year 0%
* Because of rounding in the calculation, the portion of the CDSC retained by the distributor may vary and the actual CDSC you pay may be more or less than the CDSC calculated using these percentages. - -------------------------------------------------------------------------------- S.8 Although there is no front-end sales charge when you buy Class B shares, the distributor pays a sales commission of 4% to financial institutions that sell Class B shares. A portion of this commission may, in turn, be paid to your financial advisor. The distributor receives any CDSC imposed when you sell your Class B shares. Purchases made prior to May 21, 2005 age on a calendar year basis. Purchases made beginning May 21, 2005 age on a daily basis. For example, a purchase made on Nov. 12, 2004 completed its first year on Dec. 31, 2004 under calendar year aging. However, a purchase made on Nov. 12, 2005 completed its first year on Nov. 11, 2006 under daily aging. Class B shares purchased prior to May 21, 2005 will convert to Class A shares in the ninth calendar year of ownership. Class B shares purchased beginning May 21, 2005 will convert to Class A shares one month after the completion of the eighth year of ownership. FOR CLASS C, a 1% CDSC may be charged if you sell your shares within one year after purchase. Although there is no front-end sales charge when you buy Class C shares, the distributor pays a sales commission of 1% to financial institutions that sell Class C shares. A portion of this commission may, in turn, be paid to your financial advisor. The distributor receives any CDSC imposed when you sell your Class C shares. For both Class B and Class C, if the amount you sell causes the value of your investment to fall below the cost of the shares you have purchased, the CDSC will be based on the lower of the cost of those shares purchased or market value. Because the CDSC is imposed only on sales that reduce your total purchase payments, you do not have to pay a CDSC on any amount that represents appreciation in the value of your shares, income earned by your shares, or capital gains. In addition, the CDSC on your sale, if any, will be based on your oldest purchase payment. The CDSC on the next amount sold will be based on the next oldest purchase payment. EXAMPLE Assume you had invested $10,000 in Class B shares and that your investment had appreciated in value to $12,000 after 3 1/2 years, including reinvested dividends and capital gain distributions. You could sell up to $2,000 worth of shares without paying a CDSC ($12,000 current value less $10,000 purchase amount). If you sold $2,500 worth of shares, the CDSC would apply to the $500 representing part of your original purchase price. The CDSC rate would be 3% because the sale was made during the fourth year after the purchase. CDSC -- WAIVERS OF THE CDSC FOR CLASS B SHARES. The CDSC will be waived on sales of shares: - - in the event of the shareholder's death; - - held in trust for an employee benefit plan; or - -------------------------------------------------------------------------------- S.9 - - held in IRAs or certain qualified plans, such as Keogh plans, tax-sheltered custodial accounts or corporate pension plans, provided that the shareholder is: - at least 59 1/2 years old AND - taking a retirement distribution (if the sale is part of a transfer to an IRA or qualified plan, or a custodian-to-custodian transfer, the CDSC will not be waived) OR - selling under an approved substantially equal periodic payment arrangement. CDSC -- WAIVERS OF THE CDSC FOR CLASS C SHARES. The CDSC will be waived on sales of shares in the event of the shareholder's death. CLASS I, CLASS R2, CLASS R3, CLASS R4, CLASS R5 AND CLASS W -- NO SALES CHARGE. For Class I, Class R2, Class R3, Class R4, Class R5 and Class W there is no initial sales charge or CDSC. OPENING AN ACCOUNT Financial institutions are required by law to obtain certain personal information from each person who opens an account in order to verify the identity of the person. As a result, when you open an account you will be asked to provide your name, permanent street address, date of birth, and Social Security or Employer Identification number. You may also be asked for other identifying documents or information. If you do not provide this information, the financial institution through which you are investing in the fund may not be able to open an account for you. If the financial institution through which you are investing in the fund is unable to verify your identity, your account may be closed, or other steps may be taken, as deemed appropriate. When you buy shares, your order will be priced at the next NAV calculated after your order is accepted by the fund or an authorized financial institution. Your financial institution may establish and maintain your account directly or it may establish and maintain your account with the distributor. The distributor may appoint servicing agents to accept purchase orders and to accept exchange (and sale) orders on its behalf. Accounts maintained by the distributor will be supported by the fund's transfer agent. METHODS OF PURCHASING SHARES These methods of purchasing shares apply to Class A, Class B, and Class C shares. THROUGH AN ACCOUNT ESTABLISHED WITH YOUR FINANCIAL INSTITUTION ALL REQUESTS The financial institution through which you buy shares may have different policies not described in this prospectus, including different minimum investment amounts and minimum account balances. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- S.10 METHODS OF PURCHASING SHARES (CONTINUED) THROUGH AN ACCOUNT ESTABLISHED WITH THE FUND BY MAIL The financial institution through which you buy shares may establish an account directly with the fund. To establish an account in this fashion, complete a RiverSource funds account application with your financial advisor or investment professional, and mail the account application to the address below. Account applications may be requested by calling (888) 791-3380. Make your check payable to the fund. The fund does not accept cash, credit card convenience checks, money orders, traveler's checks, starter checks, third or fourth party checks, or other cash equivalents. Mail your check and completed application to: REGULAR MAIL RIVERSOURCE INVESTMENTS (FUNDS) P.O. BOX 8041 BOSTON, MA 02266-8041 EXPRESS MAIL RIVERSOURCE INVESTMENTS (FUNDS) C/O BFDS 30 DAN ROAD CANTON, MA 02021-2809 If you already have an account, include your name, account number and the name of the fund and class of shares along with your check. You can make scheduled investments in the fund by moving money from your checking account or savings account. See the Minimum Investment and Account Balance chart below for more information regarding scheduled investment plans. - -------------------------------------------------------------------------------- BY WIRE OR ACH Fund shares purchased through the distributor may be paid for by federal funds wire. Before sending a wire, call (888) 791-3380 to notify the distributor of the wire and to receive further instructions. If you are establishing an account with a wire purchase, you are required to send a signed account application to the address above. Please include the wire control number or your new account number on the application. Your bank or financial institution may charge additional fees for wire transactions. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- S.11 METHODS OF PURCHASING SHARES (CONTINUED) THROUGH AN ACCOUNT ESTABLISHED WITH THE FUND (CONT.) BY EXCHANGE Call (888) 791-3380 or send signed written instructions to the address above. - -------------------------------------------------------------------------------- MINIMUM INVESTMENT AND ACCOUNT BALANCE
RIVERSOURCE ABSOLUTE RETURN CURRENCY FOR ALL FUNDS, AND INCOME FUND CLASSES AND RIVERSOURCE FLOATING ACCOUNTS EXCEPT RATE FUND THOSE LISTED TO THE TAX QUALIFIED RIVERSOURCE INFLATION RIGHT (NONQUALIFIED) ACCOUNTS PROTECTED SECURITIES FUND CLASS W - ---------------------------------------------------------------------------------------------- INITIAL INVESTMENT $2,000 $1,000 $5,000 $500 - ---------------------------------------------------------------------------------------------- ADDITIONAL INVESTMENTS $100 $100 $100 None - ---------------------------------------------------------------------------------------------- ACCOUNT BALANCE* $300 None $2,500 $500
* If your fund account balance falls below the minimum account balance for any reason, including a market decline, you may be asked to increase it to the minimum account balance or establish a scheduled investment plan. If you do not do so within 30 days, your shares may be automatically redeemed and the proceeds mailed to you. - -------------------------------------------------------------------------------- MINIMUM INVESTMENT AND ACCOUNT BALANCE -- SCHEDULED INVESTMENT PLANS
RIVERSOURCE ABSOLUTE RETURN CURRENCY FOR ALL FUNDS, AND INCOME FUND CLASSES AND RIVERSOURCE FLOATING ACCOUNTS EXCEPT RATE FUND THOSE LISTED TO THE TAX QUALIFIED RIVERSOURCE INFLATION RIGHT (NONQUALIFIED) ACCOUNTS PROTECTED SECURITIES FUND CLASS W - ---------------------------------------------------------------------------------------------- INITIAL INVESTMENT $100 $100 $5,000 $500 - ---------------------------------------------------------------------------------------------- ADDITIONAL INVESTMENTS $100 $50 $100 None - ---------------------------------------------------------------------------------------------- ACCOUNT BALANCE** None None $2,500 $500
** If your fund account balance is below the minimum initial investment described above, you must make payments at least monthly. - -------------------------------------------------------------------------------- These minimums may be waived for accounts that are managed by an investment professional, for accounts held in approved discretionary or non-discretionary wrap accounts, for accounts that are part of an employer-sponsored retirement plan, or for other account types if approved by the distributor. The fund reserves the right to modify its minimum account requirements at any time, with or without prior notice. - -------------------------------------------------------------------------------- S.12 Please contact your financial institution for information regarding wire or electronic funds transfer. EXCHANGING OR SELLING SHARES You may exchange or sell shares by having your financial institution process your transaction. If your account is maintained directly with your financial institution, you must contact that financial institution to exchange or sell shares of the fund. If your account was established with the distributor, there are a variety of methods you may use to exchange or sell shares of the fund. WAYS TO REQUEST AN EXCHANGE OR SALE OF SHARES ACCOUNT ESTABLISHED WITH YOUR FINANCIAL INSTITUTION ALL REQUESTS You can exchange or sell shares by having your financial institution process your transaction. The financial institution through which you purchased shares may have different policies not described in this prospectus, including different transaction limits, exchange policies and sale procedures. - -------------------------------------------------------------------------------- ACCOUNT ESTABLISHED WITH THE FUND BY MAIL Mail your exchange or sale request to: REGULAR MAIL RIVERSOURCE INVESTMENTS (FUNDS) P.O. BOX 8041 BOSTON, MA 02266-8041 EXPRESS MAIL RIVERSOURCE INVESTMENTS (FUNDS) C/O BFDS 30 DAN ROAD CANTON, MA 02021-2809 Include in your letter: - your name - the name of the fund(s) - your account number - the class of shares to be exchanged or sold - your Social Security number or Employer Identification number - the dollar amount or number of shares you want to exchange or sell - specific instructions regarding delivery or exchange destination - signature(s) of registered account owner(s) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- S.13 WAYS TO REQUEST AN EXCHANGE OR SALE OF SHARES (CONTINUED) ACCOUNT ESTABLISHED WITH THE FUND (CONT.) BY MAIL (CONT.) - any special documents the transfer agent may require in order to process your order Corporate, trust or partnership accounts may need to send additional documents. Payment will be mailed to the address of record and made payable to the names listed on the account, unless your request specifies differently and is signed by all owners. A Medallion Signature Guarantee is required if: - Amount is over $50,000. - You want your check made payable to someone other than yourself. - Your address has changed within the last 30 days. - You want the check mailed to an address other than the address of record. - You want the proceeds sent to a bank account not on file. - You are the beneficiary of the account and the account owner is deceased (additional documents may be required). A Medallion Signature Guarantee assures that a signature is genuine and not a forgery. The financial institution providing the Guarantee is financially liable for the transaction if the signature is a forgery. Eligible guarantors include commercial banks, trust companies, savings associations, and credit unions as defined by the Federal Deposit Insurance Act. Note: A guarantee from a notary public is not acceptable. NOTE: Any express mail delivery charges you pay will vary depending on domestic or international delivery instructions. - -------------------------------------------------------------------------------- BY TELEPHONE Call (888) 791-3380. Unless you elect not to have telephone exchange and sale privileges, they will automatically be available to you. Reasonable procedures will be used to confirm authenticity of telephone exchange or sale requests. Telephone privileges may be modified or discontinued at any time. Telephone exchange and sale privileges automatically apply to all accounts except custodial, corporate or qualified retirement accounts. You may request that these privileges NOT apply by writing to the address above. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- S.14 WAYS TO REQUEST AN EXCHANGE OR SALE OF SHARES (CONTINUED) ACCOUNT ESTABLISHED WITH THE FUND (CONT.) Payment will be mailed to the address of record and made payable to the names listed on the account. Telephone sale requests are limited to $100,000 per day. - -------------------------------------------------------------------------------- BY WIRE OR ACH You can wire money from your fund account to your bank account. Make sure we have your bank account information on file. If we do not have this information, you will need to send written instructions with your bank's name and a voided check or savings account deposit slip. Call (888) 791-3380 or send a letter of instruction, with a Medallion Signature Guarantee if required, to the address above. A service fee may be charged against your account for each wire sent. Minimum amount: $100 Your bank or financial institution may charge additional fees for wire transactions. - -------------------------------------------------------------------------------- BY SCHEDULED PAYOUT PLAN You may elect to receive regular periodic payments through an automatic sale of shares. See the SAI for more information. - -------------------------------------------------------------------------------- IMPORTANT: Payments sent by a bank authorization or check that are not guaranteed may take up to ten days to clear. This may cause your sale request to fail to process if the requested amount includes unguaranteed funds. EXCHANGES Generally, you may exchange your fund shares for shares of the same class of any other publicly offered RiverSource fund without a sales charge. For complete information on the fund you are exchanging into, including fees and expenses, read that fund's prospectus carefully. Your exchange will be priced at the next NAV calculated after your transaction request is received in good order. MARKET TIMING IS FREQUENT OR SHORT-TERM TRADING BY CERTAIN SHAREHOLDERS INTENDED TO PROFIT AT THE EXPENSE OF OTHER SHAREHOLDERS BY SELLING SHARES OF A FUND SHORTLY AFTER PURCHASE. MARKET TIMING MAY ADVERSELY IMPACT A FUND'S PERFORMANCE BY PREVENTING THE INVESTMENT MANAGER FROM FULLY INVESTING THE ASSETS OF THE FUND, DILUTING THE VALUE OF SHARES HELD BY LONG-TERM SHAREHOLDERS, OR INCREASING THE FUND'S TRANSACTION COSTS. - -------------------------------------------------------------------------------- S.15 FUNDS THAT INVEST IN SECURITIES THAT TRADE INFREQUENTLY MAY BE VULNERABLE TO MARKET TIMERS WHO SEEK TO TAKE ADVANTAGE OF INEFFICIENCIES IN THE SECURITIES MARKETS. FUNDS THAT INVEST IN SECURITIES THAT TRADE ON OVERSEAS SECURITIES MARKETS MAY BE VULNERABLE TO MARKET TIMERS WHO SEEK TO TAKE ADVANTAGE OF CHANGES IN THE VALUES OF SECURITIES BETWEEN THE CLOSE OF OVERSEAS MARKETS AND THE CLOSE OF U.S. MARKETS, WHICH IS GENERALLY THE TIME AT WHICH A FUND'S NAV IS CALCULATED. TO THE EXTENT THAT A FUND HAS SIGNIFICANT HOLDINGS OF HIGH YIELD BONDS, TAX-EXEMPT SECURITIES OR FOREIGN SECURITIES, THE RISKS OF MARKET TIMING MAY BE GREATER FOR THE FUND THAN FOR OTHER FUNDS. SEE "PRINCIPAL INVESTMENT STRATEGIES" FOR A DISCUSSION OF THE TYPES OF SECURITIES IN WHICH YOUR FUND INVESTS. SEE "VALUING FUND SHARES" FOR A DISCUSSION OF THE RIVERSOURCE FUNDS' POLICY ON FAIR VALUE PRICING, WHICH IS INTENDED, IN PART, TO REDUCE THE FREQUENCY AND EFFECT OF MARKET TIMING. THE RIVERSOURCE FUNDS' BOARDS HAVE ADOPTED A POLICY THAT IS DESIGNED TO DETECT AND DETER MARKET TIMING THAT MAY BE HARMFUL TO THE FUNDS. EACH FUND SEEKS TO ENFORCE THIS POLICY THROUGH ITS SERVICE PROVIDERS AS FOLLOWS: - - The fund tries to distinguish market timing from trading that it believes is not harmful, such as periodic rebalancing for purposes of asset allocation or dollar cost averaging. Under the fund's procedures, there is no set number of transactions in the fund that constitutes market timing. Even one purchase and subsequent sale by related accounts may be market timing. Generally, the fund seeks to restrict the exchange privilege of an investor who makes more than three exchanges into or out of the fund in any 90-day period. Accounts held by a retirement plan or a financial institution for the benefit of its participants or clients, which typically engage in daily transactions, are not subject to this limit, although the fund seeks the assistance of financial institutions in applying similar restrictions on the sub-accounts of their participants or clients. - - If an investor's trading activity is determined to be market timing or otherwise harmful to existing shareholders, the fund reserves the right to modify or discontinue the investor's exchange privilege or reject the investor's purchases or exchanges, including purchases or exchanges accepted by a financial institution. The fund may treat accounts it believes to be under common control as a single account for these purposes, although it may not be able to identify all such accounts. - - Although the fund does not knowingly permit market timing, it cannot guarantee that it will be able to identify and restrict all short-term trading activity. The fund receives purchase and sale orders through financial institutions where market timing activity may not always be successfully detected. Other exchange policies: - - Exchanges must be made into the same class of shares of the new fund. - -------------------------------------------------------------------------------- S.16 - - Exchanges into RiverSource Tax-Exempt Money Market Fund may be made only from Class A shares. - - If your exchange creates a new account, it must satisfy the minimum investment amount for new purchases. - - Once the fund receives your exchange request, you cannot cancel it. - - Shares of the new fund may not be used on the same day for another exchange or sale. - - Shares of the Class W originally purchased, but no longer held in a discretionary managed account, may not be exchanged for Class W shares of another fund. You may continue to hold these shares in the fund. Changing your investment to a different fund will be treated as a sale and purchase, and you will be subject to applicable taxes on the sale and sales charges on the purchase of the new fund. SELLING SHARES You may sell your shares at any time. The payment will be sent within seven days after your request is received in good order. When you sell shares, the amount you receive may be more or less than the amount you invested. Your sale price will be the next NAV calculated after your request is received in good order, minus any applicable CDSC. REPURCHASES. You can change your mind after requesting a sale and use all or part of the sale proceeds to purchase new shares in the same account, fund and class from which you sold. If you reinvest in Class A, you will purchase the new shares at NAV, up to the amount of the sale proceeds, instead of paying a sales charge on the date of a new purchase. If you reinvest in Class B or Class C, any CDSC you paid on the amount you are reinvesting also will be reinvested. In order for you to take advantage of this repurchase waiver, you must notify your financial institution within 90 days of the date your sale request was processed. Contact your financial institution for information on required documentation. The repurchase privilege may be modified or discontinued at any time and use of this option may have tax consequences. Each fund reserves the right to redeem in kind. For more details and a description of other sales policies, please see the SAI. - -------------------------------------------------------------------------------- S.17 VALUING FUND SHARES For classes of shares sold with an initial sales charge, the public offering or purchase price is the net asset value plus the sales charge. For funds or classes of shares sold without an initial sales charge, the public offering price is the NAV. Orders in good form are priced at the NAV next determined after you place your order. Good form or good order means that your instructions have been received in the form required by the fund. This may include, for example, providing the fund name and account number, the amount of the transaction and all required signatures. For more information, contact your financial institution. The NAV is the value of a single share of a fund. The NAV is determined by dividing the value of a fund's assets, minus any liabilities, by the number of shares outstanding. The NAV is calculated as of the close of business on the New York Stock Exchange (NYSE), normally 4:00 p.m. Eastern time, on each day that the NYSE is open. Securities are valued primarily on the basis of market quotations and floating rate loans are valued primarily on the basis of indicative bids. Both market quotations and indicative bids are obtained from outside pricing services approved and monitored under procedures adopted by the Board. Certain short-term securities with maturities of 60 days or less are valued at amortized cost. When reliable market quotations or indicative bids are not readily available, investments are priced at fair value based on procedures adopted by the Board. These procedures are also used when the value of an investment held by a fund is materially affected by events that occur after the close of a securities market but prior to the time as of which the fund's NAV is determined. Valuing investments at fair value involves reliance on judgment. The fair value of an investment is likely to differ from any available quoted or published price. To the extent that a fund has significant holdings of high yield bonds, floating rate loans, tax-exempt securities or foreign securities that may trade infrequently, fair valuation may be used more frequently than for other funds. The funds use an unaffiliated service provider to assist in determining fair values for foreign securities. Foreign investments are valued in U.S. dollars. Some of a fund's securities may be listed on foreign exchanges that trade on weekends or other days when the fund does not price its shares. In that event, the NAV of the fund's shares may change on days when shareholders will not be able to purchase or sell the fund's shares. - -------------------------------------------------------------------------------- S.18 DISTRIBUTIONS AND TAXES As a shareholder you are entitled to your share of your fund's net income and net gains. Each fund distributes dividends and capital gains to qualify as a regulated investment company and to avoid paying corporate income and excise taxes. DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS Your fund's net investment income is distributed to you as dividends. Dividends may be composed of qualifying dividend income, which is eligible for preferential tax rates under current tax law, as well as other ordinary dividend income, which may include non-qualifying dividends, interest income and short-term capital gains. Because of the types of income earned by fixed income funds, it is unlikely the funds will distribute qualifying dividend income. Capital gains are realized when a security is sold for a higher price than was paid for it. Each realized capital gain or loss is long-term or short-term depending on the length of time the fund held the security. Realized capital gains and losses offset each other. The fund offsets any net realized capital gains by any available capital loss carryovers. Net short-term capital gains are included in net investment income. Net realized long-term capital gains, if any, are distributed by the end of the calendar year as capital gain distributions. REINVESTMENTS Dividends and capital gain distributions are automatically reinvested in additional shares in the same class of the fund unless you request distributions in cash. The financial institution through which you purchased shares may have different policies. Distributions are reinvested at the next calculated NAV after the distribution is paid. If you choose cash distributions, you will receive cash only for distributions declared after your request has been processed. TAXES If you buy shares shortly before the record date of a distribution, you may pay taxes on money earned by the fund before you were a shareholder. You will pay the full pre-distribution price for the shares, then receive a portion of your investment back as a distribution, which may be taxable. For tax purposes, an exchange is considered a sale and purchase, and may result in a gain or loss. A sale is a taxable transaction. If you sell shares for less than their cost, the difference is a capital loss. If you sell shares for more than their cost, the difference is a capital gain. Your gain may be short term (for shares held for one year or less) or long term (for shares held for more than one year). - -------------------------------------------------------------------------------- S.19 You may not create a tax loss, based on paying a sales charge, by exchanging shares within 91 days of purchase. If you buy Class A shares and within 91 days exchange into another fund, you may not include the sales charge in your calculation of tax gain or loss on the sale of the first fund you purchased. The sales charge may be included in the calculation of your tax gain or loss on a subsequent sale of the second fund you purchased. For more information, see the SAI. FOR TAXABLE FUNDS. Distributions are subject to federal income tax and may be subject to state and local taxes in the year they are declared. You must report distributions on your tax returns, even if they are reinvested in additional shares. Income received by a fund may be subject to foreign tax and withholding. Tax conventions between certain countries and the U.S. may reduce or eliminate these taxes. Selling shares held in an IRA or qualified retirement account may subject you to federal taxes, penalties and reporting requirements upon the withdrawal of the sales proceeds from such accounts. Please consult your tax advisor. FOR RIVERSOURCE INFLATION PROTECTED SECURITIES FUND. Any increase in principal for an inflation-protected security resulting from inflation adjustments is considered by Internal Revenue Service regulations to be taxable income in the year it occurs. The fund will distribute both interest income and the income attributable to principal adjustments, both of which are taxable to shareholders. FOR TAX-EXEMPT FUNDS. Dividends distributed from interest earned on tax-exempt securities (exempt-interest dividends) are exempt from federal income taxes but may be subject to state and local taxes. Dividends distributed from capital gain distributions and other income earned are not exempt from federal income taxes. Distributions are taxable in the year the fund declares them regardless of whether you take them in cash or reinvest them. Interest on certain private activity bonds is a preference item for purposes of the individual and corporate alternative minimum taxes. To the extent the fund earns such income, it will flow through to its shareholders and may be taxable to those shareholders who are subject to the alternative minimum tax. See the SAI for more information. Because interest on municipal bonds and notes is tax-exempt for federal income tax purposes, any interest on money you borrow that is used directly or indirectly to purchase fund shares is not deductible on your federal income tax return. You should consult a tax advisor regarding its deductibility for state and local income tax purposes. IMPORTANT: This information is a brief and selective summary of some of the tax rules that apply to an investment in a fund. Because tax matters are highly individual and complex, you should consult a qualified tax advisor. - -------------------------------------------------------------------------------- S.20 GENERAL INFORMATION AVAILABILITY AND TRANSFERABILITY OF FUND SHARES Please consult your financial institution to determine availability of RiverSource funds. Currently, RiverSource funds may be purchased or sold through affiliated broker-dealers of RiverSource Investments and through certain unaffiliated financial institutions. If you set up an account at a financial institution that does not have, and is unable to obtain, a selling agreement with the distributor of the RiverSource funds, you will not be able to transfer RiverSource fund holdings to that account. In that event, you must either maintain your RiverSource fund holdings with your current financial institution, find another financial institution with a selling agreement, or sell your shares, paying any applicable CDSC. Please be aware that transactions in taxable accounts are taxable events and may result in income tax liability. ADDITIONAL SERVICES AND COMPENSATION In addition to acting as the fund's investment manager, RiverSource Investments and its affiliates also receive compensation for providing other services to the funds. Administration Services. Ameriprise Financial, 200 Ameriprise Financial Center, Minneapolis, Minnesota 55474, provides or compensates others to provide administrative services to the RiverSource funds. These services include administrative, accounting, treasury, and other services. Fees paid by a fund for these services are included under "Other expenses" in the expense table under "Fees and Expenses." Custody Services. Ameriprise Trust Company, 200 Ameriprise Financial Center, Minneapolis, Minnesota 55474 (the custodian or Ameriprise Trust Company), provides custody services to all but a limited number of the RiverSource funds, for which U.S. Bank National Association provides custody services. In addition, Ameriprise Trust Company is paid for certain transaction fees and out-of-pocket expenses incurred while providing services to the funds. Fees paid by a fund for these services are included under "Other expenses" in the expense table under "Fees and Expenses." - -------------------------------------------------------------------------------- S.21 Distribution and Shareholder Services. RiverSource Distributors, Inc., 50611 Ameriprise Financial Center, Minneapolis, Minnesota 55474, and Ameriprise Financial Services, 70100 Ameriprise Financial Center, Minneapolis, Minnesota 55474 (collectively, the distributor), provide underwriting and distribution services to the RiverSource funds. Under the Distribution Agreement and related distribution and shareholder servicing plans, the distributor receives distribution and shareholder servicing fees. The distributor may retain a portion of these fees to support its distribution and shareholder servicing activity. The distributor re-allows the remainder of these fees (or the full fee) to the financial institutions that sell fund shares and provide services to shareholders. Fees paid by a fund for these services are set forth under "Distribution (12b-1) fees" in the expense table under "Fees and Expenses." More information on how these fees are used is set forth under "Investment Options -- Classes of Shares" and in the SAI. The distributor also administers any sales charges paid by an investor at the time of purchase or at the time of sale. See "Shareholder Fees (fees paid directly from your investment)" under "Fees and Expenses" for the scheduled sales charge of each share class. See "Buying and Selling Shares: Sales Charges" for variations in the scheduled sales charges, and for how these sales charges are used by the distributor. See "Other Investment Strategies and Risks" for the RiverSource funds' policy regarding directed brokerage. Plan Administration Services. Under a Plan Administration Services Agreement the fund pays for plan administration services, including services such as implementation and conversion services, account set-up and maintenance, reconciliation and account recordkeeping, education services and administration to various plan types, including 529 plans, retirement plans and Health Savings Accounts (HSAs). Fees paid by a fund for these services are included under "Other expenses" in the expense table under "Fees and Expenses." Transfer Agency Services. RiverSource Service Corporation, 734 Ameriprise Financial Center, Minneapolis, Minnesota 55474 (the transfer agent or RiverSource Service Corporation), provides or compensates others to provide transfer agency services to the RiverSource funds. The RiverSource funds pay the transfer agent a fee that varies by class, as set forth in the SAI, and reimburses the transfer agent for its out-of-pocket expenses incurred while providing these transfer agency services to the funds. Fees paid by a fund for these services are included under "Other expenses" in the expense table under "Fees and Expenses." RiverSource Service Corporation pays a portion of these fees to financial institutions that provide sub-recordkeeping and other services to fund shareholders. The SAI provides additional information about the services provided and the fee schedules for the transfer agent agreements. - -------------------------------------------------------------------------------- S.22 PAYMENTS TO FINANCIAL INSTITUTIONS RiverSource Investments and its affiliates may make or support additional cash payments out of their own resources to financial institutions, including inter- company allocation of resources to affiliated broker-dealers such as Ameriprise Financial Services (and its licensed representatives), in connection with selling fund shares or providing services to the fund or its shareholders. These inter-company allocations may include payment as compensation to employees of RiverSource Investments who are licensed by Ameriprise Financial Services, in respect of certain sales and solicitation activity on behalf of the funds. These payments and inter-company allocations are in addition to any 12b-1 distribution and/or shareholder service fees or other amounts paid by the fund to the distributor under distribution and shareholder servicing plans, or paid by the fund to the transfer agent under its transfer agency agreement or plan administration agreement, which fees may be used by these entities to support shareholder account maintenance, sub-accounting, recordkeeping or other services provided directly by the financial institution to shareholders or 529 and retirement plans and the plan participants. In exchange for these payments and inter-company allocations, RiverSource Investments and its affiliates may receive preferred access to registered representatives of a financial institution (for example, the ability to make presentations in branch offices or at conferences) or preferred access to customers of the financial institution (for example, the ability to advertise or directly interact with the financial institution's customers in order to sell the fund). These arrangements are sometimes referred to as "revenue sharing payments." In some cases, these arrangements may create an incentive for a financial institution or its representatives to recommend or sell shares of a fund and may create a conflict of interest between a financial institution's financial interest and its duties to its customers. Please contact the financial institution through which you are purchasing shares of the fund for details about any payments it may receive in connection with the solicitation and sale of fund shares or providing services to the fund or its shareholders. These payments and inter-company allocations are usually calculated based on a percentage of fund sales and/or as a percentage of fund assets attributable to a particular financial institution. These payments may also be negotiated based on other criteria or factors including, but not limited to, the financial institution's affiliation with the investment manager, its reputation in the industry, its ability to attract and retain assets, its access to target markets, its customer relationships and the scope and quality of services it provides. The amount of payment or inter-company allocation may vary by financial institution and by type of sale (e.g., purchases of different share classes or purchases of the fund through a qualified plan or through a wrap program), and may be significant. - -------------------------------------------------------------------------------- S.23 From time to time, RiverSource Investments and its affiliates may make other reimbursements or payment to financial institutions or their representatives, including non-cash compensation, in the form of gifts of nominal value, occasional meals, tickets, or other entertainment, support for due diligence trips, training and educational meetings or conference sponsorships, support for recognition programs, and other forms of non-cash compensation permissible under regulations to which these financial institutions and their representatives are subject. ADDITIONAL MANAGEMENT INFORMATION MANAGER OF MANAGERS EXEMPTION. The RiverSource funds have received an order from the Securities and Exchange Commission that permits RiverSource Investments, subject to the approval of the Board, to appoint a subadviser or change the terms of a subadvisory agreement for a fund without first obtaining shareholder approval. The order permits the fund to add or change unaffiliated subadvisers or change the fees paid to subadvisers from time to time without the expense and delays associated with obtaining shareholder approval of the change. Before certain fixed income funds may rely on the order, holders of a majority of the fund's outstanding voting securities will need to approve operating the fund in this manner. There is no assurance shareholder approval will be received, and no changes will be made without shareholder approval until that time. For more information, see the SAI. RiverSource Investments or its affiliates may have other relationships, including significant financial relationships, with current or potential subadvisers or their affiliates, which may create a conflict of interest. In making recommendations to the Board to appoint or to change a subadviser, or to change the terms of a subadvisory agreement, RiverSource Investments does not consider any other relationship it or its affiliates may have with a subadviser, and RiverSource Investments discloses the nature of any material relationships it has with a subadviser to the Board. - -------------------------------------------------------------------------------- S.24 AFFILIATED PRODUCTS. RiverSource Investments also serves as investment manager to RiverSource funds that provide asset-allocation services to shareholders by investing in shares of other RiverSource funds (Funds of Funds) and to discretionary managed accounts (collectively referred to as "affiliated products"). A fund may experience relatively large purchases or redemptions from the affiliated products. Although RiverSource Investments seeks to minimize the impact of these transactions by structuring them over a reasonable period of time or through other measures, a fund may experience increased expenses as it buys and sells securities to manage transactions for the affiliated products. In addition, because the affiliated products may own a substantial portion of a fund, a redemption by one or more affiliated product could cause a fund's expense ratio to increase as the fund's fixed costs would be spread over a smaller asset base. RiverSource Investments monitors expense levels and is committed to offering funds that are competitively priced. RiverSource Investments will report to the Board on the steps it has taken to manage any potential conflicts. CASH RESERVES. A fund may invest its daily cash balance in RiverSource Short- Term Cash Fund (Short-Term Cash Fund), a money market fund established for the exclusive use of the RiverSource funds and other institutional clients of RiverSource Investments. While Short-Term Cash Fund does not pay an advisory fee to RiverSource Investments, it does incur other expenses, and is expected to operate at a very low expense ratio. A fund will invest in Short-Term Cash Fund only to the extent it is consistent with the fund's investment objectives and policies. Short-Term Cash Fund is not insured or guaranteed by the FDIC or any other government agency. FUND HOLDINGS DISCLOSURE. The Board has adopted policies and procedures that govern the timing and circumstances of disclosure to shareholders and third parties of information regarding the securities owned by a fund. A description of these policies and procedures is included in the SAI. LEGAL PROCEEDINGS. 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 fund is 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 fund or the ability of Ameriprise Financial or its affiliates to perform under their contracts with the fund. Information regarding certain pending and settled legal proceedings may be found in the Fund's shareholder reports and in the SAI. Additionally, 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. - -------------------------------------------------------------------------------- S.25 THIS PAGE LEFT BLANK INTENTIONALLY THIS PAGE LEFT BLANK INTENTIONALLY THIS PAGE LEFT BLANK INTENTIONALLY This fund can be purchased from Ameriprise Financial Services or from a limited number of other authorized financial institutions. The fund can be found under the "RiverSource" banner in most mutual fund quotations. Additional information about the fund and its investments is available in the fund's SAI, and annual and semiannual reports to shareholders. In the fund's annual report, you will find a discussion of market conditions and investment strategies that significantly affected the fund's performance during its most recent fiscal year. The SAI is incorporated by reference in this prospectus. For a free copy of the SAI, the annual report, or the semiannual report, or to request other information about the fund, contact RiverSource Funds or your financial institution. To make a shareholder inquiry, contact the financial institution through whom you purchased the fund. RiverSource Funds 734 Ameriprise Financial Center Minneapolis, MN 55474 (888) 791-3380 RiverSource Funds information available at RiverSource Investments website address: riversource.com/funds You may review and copy information about the fund, including the SAI, at the Securities and Exchange Commission's (Commission) Public Reference Room in Washington, D.C. (for information about the public reference room call 1-202-551-8090). Reports and other information about the fund are available on the EDGAR Database on the Commission's Internet site at www.sec.gov. Copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing to the Public Reference Section of the Commission, 100 F Street, N.E., Washington, D.C. 20549-0102. Investment Company Act File #811-3178 TICKER SYMBOL Class A: ACBAX Class B: ABOBX Class C: -- Class I: ABDIX Class R2: -- Class R3: -- Class R4: RSCFX Class R5: -- Class W: RCBWX
(RIVERSOURCE INVESTMENTS LOGO) S-6267-99 G (9/07) EX-99.(17)(E) 6 c18637b1exv99wx17yxey.txt STATEMENT OF ADDITIONAL INFORMATION STATEMENT OF ADDITIONAL INFORMATION NOV. 29, 2007 RIVERSOURCE(R) BOND SERIES, INC. RiverSource Core Bond Fund RiverSource Floating Rate Fund RiverSource Income Opportunities Fund RiverSource Inflation Protected Securities Fund RiverSource Limited Duration Bond Fund RIVERSOURCE CALIFORNIA TAX-EXEMPT TRUST RiverSource California Tax-Exempt Fund RIVERSOURCE DIMENSIONS SERIES, INC. RiverSource Disciplined Small and Mid Cap Equity Fund RiverSource Disciplined Small Cap Value Fund RIVERSOURCE DIVERSIFIED INCOME SERIES, INC. RiverSource Diversified Bond Fund RIVERSOURCE EQUITY SERIES, INC. RiverSource Mid Cap Growth Fund RIVERSOURCE GLOBAL SERIES, INC. RiverSource Absolute Return Currency and Income Fund RiverSource Emerging Markets Bond Fund RiverSource Emerging Markets Fund RiverSource Global Bond Fund RiverSource Global Equity Fund RiverSource Global Technology Fund RIVERSOURCE GOVERNMENT INCOME SERIES, INC. RiverSource Short Duration U.S. Government Fund RiverSource U.S. Government Mortgage Fund RIVERSOURCE HIGH YIELD INCOME SERIES, INC. RiverSource High Yield Bond Fund RIVERSOURCE INCOME SERIES, INC. RiverSource Income Builder Basic Income Fund RiverSource Income Builder Enhanced Income Fund RiverSource Income Builder Moderate Income Fund RIVERSOURCE INTERNATIONAL MANAGERS SERIES, INC. RiverSource International Aggressive Growth Fund RiverSource International Equity Fund RiverSource International Select Value Fund RiverSource International Small Cap Fund RIVERSOURCE INTERNATIONAL SERIES, INC. RiverSource Disciplined International Equity Fund RiverSource European Equity Fund RiverSource International Opportunity Fund RIVERSOURCE INVESTMENT SERIES, INC. RiverSource Balanced Fund RiverSource Disciplined Large Cap Growth Fund RiverSource Diversified Equity Income Fund RiverSource Mid Cap Value Fund RIVERSOURCE LARGE CAP SERIES, INC. RiverSource Disciplined Equity Fund RiverSource Growth Fund RiverSource Large Cap Equity Fund RiverSource Large Cap Value Fund RIVERSOURCE MANAGERS SERIES, INC. RiverSource Aggressive Growth Fund RiverSource Fundamental Growth Fund RiverSource Fundamental Value Fund RiverSource Select Value Fund RiverSource Small Cap Equity Fund RiverSource Small Cap Value Fund RiverSource Value Fund RIVERSOURCE MARKET ADVANTAGE SERIES, INC. RiverSource Portfolio Builder Aggressive Fund RiverSource Portfolio Builder Conservative Fund RiverSource Portfolio Builder Moderate Aggressive Fund RiverSource Portfolio Builder Moderate Conservative Fund RiverSource Portfolio Builder Moderate Fund RiverSource Portfolio Builder Total Equity Fund RiverSource S&P 500 Index Fund RiverSource Small Company Index Fund RIVERSOURCE MONEY MARKET SERIES, INC. RiverSource Cash Management Fund RIVERSOURCE SECTOR SERIES, INC. RiverSource Dividend Opportunity Fund RiverSource Real Estate Fund RIVERSOURCE SELECTED SERIES, INC. RiverSource Precious Metals and Mining Fund RIVERSOURCE SERIES TRUST RiverSource Retirement Plus(SM) 2010 Fund RiverSource Retirement Plus 2015 Fund RiverSource Retirement Plus 2020 Fund RiverSource Retirement Plus 2025 Fund RiverSource Retirement Plus 2030 Fund RiverSource Retirement Plus 2035 Fund RiverSource Retirement Plus 2040 Fund RiverSource Retirement Plus 2045 Fund RIVERSOURCE SPECIAL TAX-EXEMPT SERIES TRUST RiverSource Massachusetts Tax-Exempt Fund RiverSource Michigan Tax-Exempt Fund RiverSource Minnesota Tax-Exempt Fund RiverSource New York Tax-Exempt Fund RiverSource Ohio Tax-Exempt Fund RIVERSOURCE STRATEGIC ALLOCATION SERIES, INC. RiverSource Strategic Allocation Fund RiverSource Strategic Income Allocation Fund RIVERSOURCE STRATEGY SERIES, INC. RiverSource Equity Value Fund RiverSource Small Cap Advantage Fund RiverSource Small Cap Growth Fund RIVERSOURCE TAX-EXEMPT INCOME SERIES, INC. RiverSource Tax-Exempt High Income Fund RIVERSOURCE TAX-EXEMPT MONEY MARKET SERIES, INC. RiverSource Tax-Exempt Money Market Fund RIVERSOURCE TAX-EXEMPT SERIES, INC. RiverSource Intermediate Tax-Exempt Fund RiverSource Tax-Exempt Bond Fund
This is the Statement of Additional Information (SAI) for each of the funds listed on the previous page. This SAI is not a prospectus. It should be read together with the appropriate current fund prospectus, the date of which can be found in Table 1 of this SAI. Each fund's financial statements for its most recent fiscal period are contained in the fund's Annual or Semiannual Report to shareholders. The Independent Registered Public Accounting Firm's Report and the Financial Statements, including Notes to the Financial Statements and the Schedule of Investments in Securities and any applicable Schedule of Affiliated Funds, contained in the Annual Report, are incorporated in this SAI by reference. No other portion of the Annual Report is incorporated by reference. For a free copy of a fund prospectus, annual or semiannual report, contact your financial institution or write to RiverSource Funds, 734 Ameriprise Financial Center, Minneapolis, MN 55474, call (888) 791-3380 or visit riversource.com/funds. Each fund is governed by a Board of Directors/Trustees ("Board") that meets regularly to review a wide variety of matters affecting the funds. Detailed information about fund governance, the funds' investment manager, RiverSource Investments, LLC (the "investment manager" or "RiverSource Investments"), a wholly-owned subsidiary of Ameriprise Financial, Inc. ("Ameriprise Financial"), and other aspects of fund management can be found by referencing the Table of Contents below. TABLE OF CONTENTS Fundamental and Nonfundamental Investment Policies.............................. p. 6 Investment Strategies and Types of Investments.................................. p. 11 Information Regarding Risks and Investment Strategies........................... p. 13 Securities Transactions......................................................... p. 36 Brokerage Commissions Paid to Brokers Affiliated with the Investment Manager.... p. 51 Valuing Fund Shares............................................................. p. 55 Portfolio Holdings Disclosure................................................... p. 65 Proxy Voting.................................................................... p. 67 Investing in a Fund............................................................. p. 69 Selling Shares.................................................................. p. 74 Pay-out Plans................................................................... p. 74 Capital Loss Carryover.......................................................... p. 75 Taxes........................................................................... p. 79 Service Providers............................................................... p. 84 Investment Management Services................................................ p. 84 Administrative Services....................................................... p. 137 Transfer Agency Services...................................................... p. 141 Plan Administration Services.................................................. p. 142 Distribution Services......................................................... p. 142 Plan and Agreement of Distribution............................................ p. 145 Payment to Financial Institutions............................................. p. 148 Custodian Services............................................................ p. 149 Board Services Corporation.................................................... p. 150 Organizational Information...................................................... p. 150 Board Members and Officers...................................................... p. 155 Control Persons and Principal Holders of Securities............................. p. 169 Information Regarding Pending and Settled Legal Proceedings..................... p. 187 Independent Registered Public Accounting Firm................................... p. 188 Appendix A: Description of Ratings.............................................. p. A-1 Appendix B: State Risk Factors.................................................. p. B-1 Appendix C: Additional Information about the S&P 500 Index...................... p. C-1
Statement of Additional Information - Nov. 29, 2007 Page 2 LIST OF TABLES 1. Fund Fiscal Year Ends, Prospectus Date and Investment Categories............. p. 4 2. Fundamental Policies......................................................... p. 6 3. Investment Strategies and Types of Investments............................... p. 11 4. Total Brokerage Commissions.................................................. p. 38 5. Brokerage Directed for Research and Turnover Rates........................... p. 41 6. Securities of Regular Brokers or Dealers..................................... p. 44 7. Brokerage Commissions Paid to Investment Manager or Affiliates............... p. 51 8. Valuing Fund Shares.......................................................... p. 55 9. Class A Sales Charge......................................................... p. 69 10. Public Offering Price........................................................ p. 70 11. Capital Loss Carryover....................................................... p. 75 12. Corporate Deduction and Qualified Dividend Income............................ p. 80 13. Investment Management Services Agreement Fee Schedule........................ p. 84 14. Lipper Indexes............................................................... p. 92 15. Performance Incentive Adjustment Calculation................................. p. 94 16. Management Fees and Nonadvisory Expenses..................................... p. 95 17. Subadvisers and Subadvisory Agreement Fee Schedules.......................... p. 98 18. Subadvisory Fees............................................................. p. 101 19. Portfolio Managers........................................................... p. 104 20. Administrative Services Agreement Fee Schedule............................... p. 137 21. Administrative Fees.......................................................... p. 139 22. Sales Charges Paid to Distributor............................................ p. 142 23. 12b-1 Fees................................................................... p. 146 24. Fund History Table for RiverSource Funds..................................... p. 151 25. Board Members................................................................ p. 155 26. Fund Officers................................................................ p. 156 27. Committee Meetings........................................................... p. 158 28. Board Member Holdings........................................................ p. 158 29. Board Member Holdings -- Individual Holdings as of Quarter End............... p. 161 30. Board Member Compensation -- All Funds....................................... p. 163 31. Supplemental Board Member Retirement Benefits -- All Funds................... p. 164 32. Board Member Compensation -- Individual Funds................................ p. 164 33. Control Persons and Principal Holders of Securities.......................... p. 169
Statement of Additional Information - Nov. 29, 2007 Page 3 TABLE 1. FUND FISCAL YEAR ENDS, PROSPECTUS DATE AND INVESTMENT CATEGORIES
FUND FISCAL YEAR END PROSPECTUS DATE FUND INVESTMENT CATEGORY* - --------------------------------------------------------------------------------------------------------------- Absolute Return Currency and Income October 31 Dec. 29, 2006 Taxable fixed income - --------------------------------------------------------------------------------------------------------------- Aggressive Growth May 31 July 30, 2007 Equity - --------------------------------------------------------------------------------------------------------------- Balanced September 30 Nov. 29, 2007 Balanced - --------------------------------------------------------------------------------------------------------------- California Tax-Exempt** August 31 Oct. 30, 2007 State tax-exempt fixed income - --------------------------------------------------------------------------------------------------------------- Cash Management July 31 Sept. 28, 2007 Taxable money market - --------------------------------------------------------------------------------------------------------------- Core Bond July 31 Sept. 28, 2007 Taxable fixed income - --------------------------------------------------------------------------------------------------------------- Disciplined Equity July 31 Sept. 28, 2007 Equity - --------------------------------------------------------------------------------------------------------------- Disciplined International Equity October 31 Dec. 29, 2006 Equity - --------------------------------------------------------------------------------------------------------------- Disciplined Large Cap Growth September 30 Nov. 29, 2007 Equity - --------------------------------------------------------------------------------------------------------------- Disciplined Small and Mid Cap Equity July 31 Sept. 28, 2007 Equity - --------------------------------------------------------------------------------------------------------------- Disciplined Small Cap Value July 31 Sept. 28, 2007 Equity - --------------------------------------------------------------------------------------------------------------- Diversified Bond August 31 Oct. 30, 2007 Taxable fixed income - --------------------------------------------------------------------------------------------------------------- Diversified Equity Income September 30 Nov. 29, 2007 Equity - --------------------------------------------------------------------------------------------------------------- Dividend Opportunity June 30 Aug. 29, 2007 Equity - --------------------------------------------------------------------------------------------------------------- Emerging Markets October 31 Dec. 29, 2006 Equity - --------------------------------------------------------------------------------------------------------------- Emerging Markets Bond October 31 Dec. 29, 2006 Taxable fixed income - --------------------------------------------------------------------------------------------------------------- Equity Value March 31 May 30, 2007 Equity - --------------------------------------------------------------------------------------------------------------- European Equity October 31 Dec. 29, 2006 Equity - --------------------------------------------------------------------------------------------------------------- Floating Rate July 31 Sept. 28, 2007 Taxable fixed income - --------------------------------------------------------------------------------------------------------------- Fundamental Growth May 31 July 30, 2007 Equity - --------------------------------------------------------------------------------------------------------------- Fundamental Value May 31 July 30, 2007 Equity - --------------------------------------------------------------------------------------------------------------- Global Bond October 31 Dec. 29, 2006 Taxable fixed income - --------------------------------------------------------------------------------------------------------------- Global Equity October 31 Dec. 29, 2006 Equity - --------------------------------------------------------------------------------------------------------------- Global Technology October 31 Dec. 29, 2006 Equity - --------------------------------------------------------------------------------------------------------------- Growth July 31 Sept. 28, 2007 Equity - --------------------------------------------------------------------------------------------------------------- High Yield Bond May 31 July 30, 2007 Taxable fixed income - --------------------------------------------------------------------------------------------------------------- Income Builder Basic Income May 31 July 30, 2007 Funds-of-funds - fixed income - --------------------------------------------------------------------------------------------------------------- Income Builder Enhanced Income May 31 July 30, 2007 Funds-of-funds - fixed income - --------------------------------------------------------------------------------------------------------------- Income Builder Moderate Income May 31 July 30, 2007 Funds-of-funds - fixed income - --------------------------------------------------------------------------------------------------------------- Income Opportunities July 31 Sept. 28, 2007 Taxable fixed income - --------------------------------------------------------------------------------------------------------------- Inflation Protected Securities July 31 Sept. 28, 2007 Taxable fixed income - --------------------------------------------------------------------------------------------------------------- Intermediate Tax-Exempt November 30 Jan. 29, 2007 Tax-exempt fixed income - --------------------------------------------------------------------------------------------------------------- International Aggressive Growth October 31 Dec. 29, 2006 Equity - --------------------------------------------------------------------------------------------------------------- International Equity October 31 Dec. 29, 2006 Equity - --------------------------------------------------------------------------------------------------------------- International Opportunity October 31 Dec. 29, 2006 Equity - --------------------------------------------------------------------------------------------------------------- International Select Value October 31 Dec. 29, 2006 Equity - --------------------------------------------------------------------------------------------------------------- International Small Cap October 31 Dec. 29, 2006 Equity - --------------------------------------------------------------------------------------------------------------- Large Cap Equity July 31 Sept. 28, 2007 Equity - --------------------------------------------------------------------------------------------------------------- Large Cap Value July 31 Sept. 28, 2007 Equity - --------------------------------------------------------------------------------------------------------------- Limited Duration Bond July 31 Sept. 28, 2007 Taxable fixed income - --------------------------------------------------------------------------------------------------------------- Massachusetts Tax-Exempt** August 31 Oct. 30, 2007 State tax-exempt fixed income - --------------------------------------------------------------------------------------------------------------- Michigan Tax-Exempt** August 31 Oct. 30, 2007 State tax-exempt fixed income - --------------------------------------------------------------------------------------------------------------- Mid Cap Growth November 30 Jan. 29, 2007 Equity - --------------------------------------------------------------------------------------------------------------- Mid Cap Value September 30 Nov. 29, 2007 Equity - --------------------------------------------------------------------------------------------------------------- Minnesota Tax-Exempt** August 31 Oct. 30, 2007 State tax-exempt fixed income - --------------------------------------------------------------------------------------------------------------- New York Tax-Exempt** August 31 Oct. 30, 2007 State tax-exempt fixed income - --------------------------------------------------------------------------------------------------------------- Ohio Tax-Exempt** August 31 Oct. 30, 2007 State tax-exempt fixed income - --------------------------------------------------------------------------------------------------------------- Portfolio Builder Aggressive January 31 March 30, 2007 Funds-of-funds - equity - --------------------------------------------------------------------------------------------------------------- Portfolio Builder Conservative January 31 March 30, 2007 Funds-of-funds - fixed income - --------------------------------------------------------------------------------------------------------------- Portfolio Builder Moderate January 31 March 30, 2007 Funds-of-funds - equity - --------------------------------------------------------------------------------------------------------------- Portfolio Builder Moderate Aggressive January 31 March 30, 2007 Funds-of-funds - equity - --------------------------------------------------------------------------------------------------------------- Portfolio Builder Moderate Conservative January 31 March 30, 2007 Funds-of-funds - fixed income - --------------------------------------------------------------------------------------------------------------- Portfolio Builder Total Equity January 31 March 30, 2007 Funds-of-funds - equity - ---------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 4
FUND FISCAL YEAR END PROSPECTUS DATE FUND INVESTMENT CATEGORY* - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- Precious Metals and Mining March 31 May 30, 2007 Equity - --------------------------------------------------------------------------------------------------------------- Real Estate June 30 Aug. 29, 2007 Equity - --------------------------------------------------------------------------------------------------------------- Retirement Plus 2010 April 30 June 29, 2007 Funds-of-funds - equity - --------------------------------------------------------------------------------------------------------------- Retirement Plus 2015 April 30 June 29, 2007 Funds-of-funds - equity - --------------------------------------------------------------------------------------------------------------- Retirement Plus 2020 April 30 June 29, 2007 Funds-of-funds - equity - --------------------------------------------------------------------------------------------------------------- Retirement Plus 2025 April 30 June 29, 2007 Funds-of-funds - equity - --------------------------------------------------------------------------------------------------------------- Retirement Plus 2030 April 30 June 29, 2007 Funds-of-funds - equity - --------------------------------------------------------------------------------------------------------------- Retirement Plus 2035 April 30 June 29, 2007 Funds-of-funds - equity - --------------------------------------------------------------------------------------------------------------- Retirement Plus 2040 April 30 June 29, 2007 Funds-of-funds - equity - --------------------------------------------------------------------------------------------------------------- Retirement Plus 2045 April 30 June 29, 2007 Funds-of-funds - equity - --------------------------------------------------------------------------------------------------------------- S&P 500 Index January 31 March 30, 2007 Equity - --------------------------------------------------------------------------------------------------------------- Select Value May 31 July 30, 2007 Equity - --------------------------------------------------------------------------------------------------------------- Short Duration U.S. Government May 31 July 30, 2007 Taxable fixed income - --------------------------------------------------------------------------------------------------------------- Small Cap Advantage March 31 May 30, 2007 Equity - --------------------------------------------------------------------------------------------------------------- Small Cap Equity May 31 July 30, 2007 Equity - --------------------------------------------------------------------------------------------------------------- Small Cap Growth March 31 May 30, 2007 Equity - --------------------------------------------------------------------------------------------------------------- Small Cap Value May 31 July 30, 2007 Equity - --------------------------------------------------------------------------------------------------------------- Small Company Index January 31 March 30, 2007 Equity - --------------------------------------------------------------------------------------------------------------- Strategic Allocation September 30 Nov. 29, 2007 Balanced - --------------------------------------------------------------------------------------------------------------- Strategic Income Allocation September 30 Nov. 29, 2007 Taxable fixed income - --------------------------------------------------------------------------------------------------------------- Tax-Exempt Bond November 30 Jan. 29, 2007 Tax-exempt fixed income - --------------------------------------------------------------------------------------------------------------- Tax-Exempt High Income November 30 Jan. 29, 2007 Tax-exempt fixed income - --------------------------------------------------------------------------------------------------------------- Tax-Exempt Money Market December 31 March 1, 2007 Tax-exempt money market - --------------------------------------------------------------------------------------------------------------- U.S. Government Mortgage May 31 July 30, 2007 Taxable fixed income - --------------------------------------------------------------------------------------------------------------- Value May 31 July 30, 2007 Equity - ---------------------------------------------------------------------------------------------------------------
* The taxable fixed income fund investment category includes Absolute Return Currency and Income Fund, which is an alternative investment strategy. Although Strategic Income Allocation Fund is a taxable fixed income fund, it may invest up to 10% of its portfolio in equity securities. ** The fund changed its fiscal period end in 2006 from June 30 to Aug. 31. For 2006, the information shown is for the period from July 1, 2005 through Aug. 31, 2006. For years prior to 2006, the fiscal period ended June 30. FUNDS-OF-FUNDS Funds-of-funds invest in a combination of underlying funds. These underlying funds have their own investment policies that may be more or less restrictive than the policies of the funds-of-funds. The policies of the underlying funds may permit funds-of-funds to engage in investment strategies indirectly that would otherwise be prohibited under the investment restrictions of the funds-of- funds. Statement of Additional Information - Nov. 29, 2007 Page 5 FUNDAMENTAL AND NONFUNDAMENTAL INVESTMENT POLICIES Fundamental investment policies adopted by a fund cannot be changed without the approval of a majority of the outstanding voting securities of the fund as defined in the Investment Company Act of 1940, as amended (the 1940 Act). Nonfundamental investment policies may be changed by the Board at any time. Notwithstanding any of a fund's other investment policies, each fund may invest its assets in an open-end management investment company having substantially the same investment objectives, policies, and restrictions as the fund for the purpose of having those assets managed as part of a combined pool. FUNDAMENTAL POLICIES Fundamental policies are policies that can be changed only with shareholder approval. FOR EACH FUND: The fund will not: - Act as an underwriter (sell securities for others). However, under the securities laws, the fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. - Lend securities or participate in an interfund lending program if the total of all such loans would exceed 33 1/3% of the fund's total assets except this fundamental investment policy shall not prohibit the fund from purchasing money market securities, loans, loan participation or other debt securities, or from entering into repurchase agreements. For funds- of-funds - equity, under current Board policy, the fund has no current intention to lend to a material extent. - Borrow money, except for temporary purposes (not for leveraging or investment) in an amount not exceeding 33 1/3% of its total assets (including the amount borrowed) less liabilities (other than borrowings) immediately after the borrowings. For funds-of-funds - equity, under current Board policy, the fund has no current intention to borrow to a material extent. - Issue senior securities, except as permitted under the 1940 Act. ADDITIONALLY FOR CASH MANAGEMENT THE FUND WILL NOT: - Buy on margin or sell short or deal in options to buy or sell securities. - Purchase common stocks, preferred stocks, warrants, other equity securities, corporate bonds or debentures, state bonds, municipal bonds, or industrial revenue bonds. ADDITIONALLY FOR TAX-EXEMPT MONEY MARKET THE FUND WILL NOT: - Buy on margin or sell short. In addition to the policies described above and any fundamental policy described in the prospectus, the chart below shows fund-specific policies that may be changed only with shareholder approval. The chart indicates whether or not the fund has a policy on a particular topic. A shaded box indicates that the fund does not have a policy on a particular topic. The specific policy is stated in the paragraphs that follow the table. TABLE 2. FUNDAMENTAL POLICIES The fund will not:
A C D E BUY OR BUY MORE INVEST CONCEN- F SELL B THAN MORE THAN TRATE IN INVEST REAL BUY OR SELL 10% OF AN 5% IN AN ANY ONE LESS FUND ESTATE COMMODITIES ISSUER ISSUER INDUSTRY THAN 80% - ----------------------------------------------------------------------------------------------------- Absolute Return Currency and A1 B1 -- -- E7 -- Income - - Aggressive Growth A1 B1 C1 D1 E1 -- - - Balanced A1 B1 C1 D1 E1 -- - - California Tax-Exempt A1 B1 -- -- -- F1 - - Cash Management A3 A3 C1 D1 -- - - Core Bond A1 B1 C1 D1 E1 -- - - Disciplined Equity A1 B1 C1 D1 E1 -- - - Disciplined International Equity A1 B4 C1 D1 E1 -- - - Disciplined Large Cap Growth A1 B3 C1 D1 E1 -- - - Disciplined Small and Mid Cap A1 B4 C1 D1 E1 -- Equity - - Disciplined Small Cap Value A1 B4 C1 D1 E1 -- - -
Statement of Additional Information - Nov. 29, 2007 Page 6
A C D E BUY OR BUY MORE INVEST CONCEN- F SELL B THAN MORE THAN TRATE IN INVEST REAL BUY OR SELL 10% OF AN 5% IN AN ANY ONE LESS FUND ESTATE COMMODITIES ISSUER ISSUER INDUSTRY THAN 80% - ----------------------------------------------------------------------------------------------------- Diversified Bond A1 B1 C1 D1 E1 -- - - Diversified Equity Income A1 B1 C1 D1 E1 -- - - Dividend Opportunity A1 B1 C1 D1 -- - - Emerging Markets A1 B1 C1 D1 E1 -- - - Emerging Markets Bond A1 B4 -- -- E5 -- - - Equity Value A1 B1 C1 D1 E1 -- - - European Equity A1 B1 -- -- E1 -- - - Floating Rate A1 B4 C1 D1 E6 -- - - Fundamental Growth A1 B1 C1 D1 E1 -- - - Fundamental Value A1 B3 C1 D1 E1 -- - - Global Bond A1 B1 C1 -- E1 -- - - Global Equity A1 B1 C1 D1 E1 -- - - Global Technology A1 B1 -- - - Growth A1 B1 C1 D1 E1 -- - - High Yield Bond A1 B1 C1 D1 E1 -- - - Income Builder Basic Income* A1 B4 -- -- E2 -- - - Income Builder Enhanced Income* A1 B4 -- -- E2 -- - - Income Builder Moderate Income* A1 B4 -- -- E2 -- - - Income Opportunities A1 B1 C1 D1 E1 -- - - Inflation Protected Securities A1 B1 -- -- E1 -- - - Intermediate Tax-Exempt A1 B1 C1 D1 -- F3(i) - - International Aggressive Growth A1 B3 C1 D1 E1 -- - - International Equity A1 B3 C1 D1 E1 -- - - International Opportunity A1 B1 C1 D1 E1 -- - - International Select Value A1 B3 C1 D1 E1 -- - - International Small Cap A1 B3 C1 D1 E1 -- - - Large Cap Equity A1 B1 C1 D1 E1 -- - - Large Cap Value A1 B3 C1 D1 E1 -- - - Limited Duration Bond A1 B1 C1 D1 E1 -- - - Massachusetts Tax-Exempt A1 B1 -- -- -- F1 - - Michigan Tax-Exempt A1 B1 -- -- -- F1 - - Mid Cap Growth A1 B1 C1 D1 E1 -- - - Mid Cap Value A1 B1 C1 D1 E1 -- - - Minnesota Tax-Exempt A1 B1 -- -- -- F1 - - New York Tax-Exempt A1 B1 -- -- -- F1 - - Ohio Tax-Exempt A1 B1 -- -- -- F1 - - Portfolio Builder Aggressive* A1 B1 -- -- E2 -- - - Portfolio Builder Conservative* A1 B1 -- -- E2 -- - - Portfolio Builder Moderate* A1 B1 -- -- E2 -- - - Portfolio Builder Moderate A1 B1 -- -- E2 -- Aggressive* - -
Statement of Additional Information - Nov. 29, 2007 Page 7
A C D E BUY OR BUY MORE INVEST CONCEN- F SELL B THAN MORE THAN TRATE IN INVEST REAL BUY OR SELL 10% OF AN 5% IN AN ANY ONE LESS FUND ESTATE COMMODITIES ISSUER ISSUER INDUSTRY THAN 80% - ----------------------------------------------------------------------------------------------------- Portfolio Builder Moderate A1 B1 -- -- E2 -- Conservative* - - Portfolio Builder Total Equity* A1 B1 -- -- E2 -- - - Precious Metals and Mining A1 B1(ii) -- -- E3 -- - - Real Estate A1 B1 -- - - Retirement Plus 2010* A1 B4 -- -- E2 -- - - Retirement Plus 2015* A1 B4 -- -- E2 -- - - Retirement Plus 2020* A1 B4 -- -- E2 -- - - Retirement Plus 2025* A1 B4 -- -- E2 -- - - Retirement Plus 2030* A1 B4 -- -- E2 -- - - Retirement Plus 2035* A1 B4 -- -- E2 -- - - Retirement Plus 2040* A1 B4 -- -- E2 -- - - Retirement Plus 2045* A1 B4 -- -- E2 -- - - S&P 500 Index A1 B1 -- -- E4 -- - - Select Value A1 B3 C1 D1 E1 -- - - Short Duration U.S. Government A1 B1 C1 D1 E1 -- - - Small Cap Advantage A1 B1 C1 D1 E1 -- - - Small Cap Equity A1 B3 C1 D1 E1 -- - - Small Cap Growth A1 B1 C1 D1 E1 -- - - Small Cap Value A1 B3 -- -- E1 -- - - Small Company Index A1 B1 C1 D1 E1 -- - - Strategic Allocation A1 B1 C1 D1 E1 -- - - Strategic Income Allocation A1 B3 C1 D1 E1 -- - - Tax-Exempt Bond A1 B1 C1 D1 -- F3(iii) - - Tax-Exempt High Income A1 B1 C1 D1 -- F2 - - Tax-Exempt Money Market A2 B2 C1 D1 -- F3 - - U.S. Government Mortgage A1 B1 C1 D1 E1 -- - - Value A1 B3 C1 D1 E1 -- - -
* The fund invests in a combination of underlying funds. These underlying funds have adopted their own investment policies that may be more or less restrictive than those of the fund. The policies of the underlying funds may permit a fund to engage in investment strategies indirectly that would otherwise be prohibited under the fund's investment restrictions. (i) For purposes of this policy, the fund will not include any investments subject to the alternative minimum tax. (ii) Additionally, the fund may purchase gold, silver, or other precious metals, strategic metals or other metals occurring naturally with such metals. (iii) The fund does not intend to purchase bonds or other debt securities the interest from which is subject to the alternative minimum tax. A. BUY OR SELL REAL ESTATE A1 - The fund will not buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. A2 - The fund will not invest in real estate, but the fund can invest in municipal bonds and notes secured by real estate or interest therein. For purposes of this policy, real estate includes real estate limited partnerships. A3 - The fund will not buy or sell real estate, commodities or commodity contracts. For purposes of this policy, real estate includes real estate limited partnerships. B. BUY OR SELL PHYSICAL COMMODITIES B1 - The fund will not buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the fund from buying or selling options and futures contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. Statement of Additional Information - Nov. 29, 2007 Page 8 B2 - The fund will not invest in commodities or commodity contracts. B3 - The fund will not buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the fund from buying or selling options, futures contracts and foreign currency or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. B4 - The fund will not buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the fund from buying or selling options, futures contracts and foreign currency or from entering into forward currency contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. C. BUY MORE THAN 10% OF AN ISSUER C1 - The fund will not purchase more than 10% of the outstanding voting securities of an issuer, except that up to 25% of the fund's assets may be invested without regard to this 10% limitation. For tax-exempt funds, for purposes of this policy, the terms of a municipal security determine the issuer. D. INVEST MORE THAN 5% IN AN ISSUER D1 - The fund will not invest more than 5% of its total assets in securities of any company, government, or political subdivision thereof, except the limitation will not apply to investments in securities issued or guaranteed by the U.S. government, its agencies, or instrumentalities, or other investment companies, and except that up to 25% of the fund's total assets may be invested without regard to this 5% limitation. For tax-exempt funds, for purposes of this policy, the terms of a municipal security determine the issuer. E. CONCENTRATE E1 - The fund will not concentrate in any one industry. According to the present interpretation by the Securities and Exchange Commission (SEC), this means that up to 25% of the fund's total assets, based on current market value at time of purchase, can be invested in any one industry. E2 - The fund will not concentrate in any one industry. According to the present interpretation by the SEC, this means that up to 25% of the fund's total assets, based on current market value at time of purchase, can be invested in any one industry. The fund itself does not intend to concentrate, however the aggregation of holdings of the underlying funds may result in the fund indirectly investing more than 25% of its assets in a particular industry. The fund does not control the investments of the underlying funds and any indirect concentration will occur only as a result of the fund following its investment objectives by investing in the underlying funds. E3 - The fund will not invest less than 25% of its total assets in the precious metals industry, based on current market value at the time of purchase, unless market conditions temporarily require a defensive investment strategy. E4 - The fund will not concentrate in any one industry unless that industry represents more than 25% of the index tracked by the fund. For all other industries, in accordance with the current interpretation by the SEC, this means that up to 25% of the fund's total assets, based on current market value at time of purchase, can be invested in any one industry. E5 - While the fund may invest 25% or more of its total assets in the securities of foreign governmental and corporate entities located in the same country, it will not invest 25% or more of its total assets in any single foreign governmental issuer. E6 - The fund will not concentrate in any one industry. According to the present interpretation by the SEC, this means that up to 25% of the fund's total assets, based on current market value at time of purchase, can be invested in any one industry. For purposes of this restriction, loans will be considered investments in the industry of the underlying borrower, rather than that of the seller of the loan. E7 - Concentrate in any one industry, provided however, that this restriction shall not apply to securities or obligations issued or guaranteed by the U.S. Government, banks or bank holding companies or finance companies. For all other industries, this means that up to 25% of the fund's total assets, based on current market value at the time of purchase, can be invested in any one industry. F. INVEST LESS THAN 80% F1 - The fund will not under normal market conditions, invest less than 80% of its net assets in municipal obligations that are generally exempt from federal income tax as well as respective state and local income tax. Statement of Additional Information - Nov. 29, 2007 Page 9 F2 - The fund will not under normal market conditions, invest less than 80% of its net assets in bonds and notes issued by or on behalf of state and local governmental units whose interest, in the opinion of counsel for the issuer, is exempt from federal income tax and is not subject to the alternative minimum tax. F3 - The fund will not under normal market conditions, invest less than 80% of its net assets in bonds and other debt securities issued by or on behalf of state or local governmental units whose interest, in the opinion of counsel for the issuer, is exempt from federal income tax. NONFUNDAMENTAL POLICIES Nonfundamental policies are policies that can be changed by the Board without shareholder approval. The following nonfundamental policies are in addition to those described in the prospectus. FOR FUNDS OTHER THAN MONEY MARKET FUNDS: - No more than 15% of the fund's net assets will be held in securities and other instruments that are illiquid. FOR MONEY MARKET FUNDS: - No more than 10% of the fund's net assets will be held in securities and other instruments that are illiquid. ADDITIONALLY, REGARDING LIMITING INVESTMENTS IN FOREIGN SECURITIES: FOR AGGRESSIVE GROWTH, BALANCED, CORE BOND, DISCIPLINED EQUITY, DISCIPLINED LARGE CAP GROWTH, DISCIPLINED SMALL AND MID CAP EQUITY, DISCIPLINED SMALL CAP VALUE, DIVERSIFIED BOND, DIVERSIFIED EQUITY INCOME, DIVIDEND OPPORTUNITY, EQUITY VALUE, FLOATING RATE, FUNDAMENTAL GROWTH, FUNDAMENTAL VALUE, GROWTH, HIGH YIELD BOND, INCOME OPPORTUNITIES, INFLATION PROTECTED SECURITIES, LARGE CAP EQUITY, LARGE CAP VALUE, LIMITED DURATION BOND, MID CAP GROWTH, MID CAP VALUE, REAL ESTATE, SELECT VALUE, SMALL CAP ADVANTAGE, SMALL CAP EQUITY, SMALL CAP GROWTH, SMALL CAP VALUE, AND VALUE: - Up to 25% of the fund's net assets may be invested in foreign investments. FOR PRECIOUS METALS AND MINING: - Under normal market conditions, the fund intends to invest at least 50% of its total assets in foreign investments. FOR SHORT DURATION U.S. GOVERNMENT AND U.S. GOVERNMENT MORTGAGE: - Up to 20% of the fund's net assets may be invested in foreign investments. FOR STRATEGIC ALLOCATION: - The fund may invest its total assets, up to 50%, in foreign investments. Fund-of-fund's invest in a combination of underlying funds. These underlying funds have adopted their own investment policies that may be more or less restrictive than those of the fund. The policies of the underlying funds may permit a fund to engage in investment strategies indirectly that would otherwise be prohibited under the funds investment structure. Statement of Additional Information - Nov. 29, 2007 Page 10 INVESTMENT STRATEGIES AND TYPES OF INVESTMENTS This table shows many of the various investment strategies and investments that many funds are allowed to engage in and purchase. It is intended to show the breadth of investments that the investment manager or subadviser (individually and collectively, the "investment manager") may make on behalf of a fund. For a description of principal risks for an individual fund, please see the applicable prospectus for that fund. Notwithstanding a fund's ability to utilize these strategies and techniques, the investment manager is not obligated to use them at any particular time. For example, even though the investment manager is authorized to adopt temporary defensive positions and is authorized to attempt to hedge against certain types of risk, these practices are left to the investment manager's sole discretion. INVESTMENT STRATEGIES AND TYPES OF INVESTMENTS: A black circle indicates that the investment strategy or type of investment generally is authorized for a category of funds. Exceptions are noted in the footnotes to the table. See Table 1 for fund categories. TABLE 3. INVESTMENT STRATEGIES AND TYPES OF INVESTMENTS
FUNDS-OF-FUNDS - TAXABLE TAXABLE TAX-EXEMPT TAX-EXEMPT STATE EQUITY AND FIXED MONEY MONEY FIXED TAX-EXEMPT INVESTMENT STRATEGY BALANCED EQUITY FIXED INCOME INCOME MARKET MARKET INCOME FIXED INCOME - --------------------------------------------------------------------------------------------------------------------------------- Agency and government securities - - - - - - - - - --------------------------------------------------------------------------------------------------------------------------------- Borrowing - - - - - -- - - - --------------------------------------------------------------------------------------------------------------------------------- Cash/money market instruments - - - - - - - - - --------------------------------------------------------------------------------------------------------------------------------- Collateralized bond obligations - - A -- - -- -- - - - --------------------------------------------------------------------------------------------------------------------------------- Commercial paper - - - - - - - - - --------------------------------------------------------------------------------------------------------------------------------- Common stock - - -- - B -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Convertible securities - - -- - C -- -- - - - --------------------------------------------------------------------------------------------------------------------------------- Corporate bonds - - -- - - -- - - - --------------------------------------------------------------------------------------------------------------------------------- Debt obligations - - -- - - - - - - --------------------------------------------------------------------------------------------------------------------------------- Depositary receipts - - -- - -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Derivative instruments (including options and futures) - - - - -- -- - - - --------------------------------------------------------------------------------------------------------------------------------- Exchange-traded funds - - -- - -- -- - - - --------------------------------------------------------------------------------------------------------------------------------- Floating rate loans - -- -- - -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Foreign currency transactions - - -- - -- -- - - --------------------------------------------------------------------------------------------------------------------------------- Foreign securities - - -- - - -- - - - --------------------------------------------------------------------------------------------------------------------------------- Funding agreements - - - - - - - - - --------------------------------------------------------------------------------------------------------------------------------- High yield debt securities (junk bonds) - - -- - -- -- - - - --------------------------------------------------------------------------------------------------------------------------------- Illiquid and restricted securities - - - - - - - - - --------------------------------------------------------------------------------------------------------------------------------- Indexed securities - - -- - -- -- - - - --------------------------------------------------------------------------------------------------------------------------------- Inflation protected securities - - -- - -- -- - - - --------------------------------------------------------------------------------------------------------------------------------- Inverse floaters - D -- - -- -- - - - --------------------------------------------------------------------------------------------------------------------------------- Investment companies - - - - - -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Lending of portfolio securities - - - - - - - - - --------------------------------------------------------------------------------------------------------------------------------- Loan participations - - -- - -- -- - - - --------------------------------------------------------------------------------------------------------------------------------- Mortgage- and asset-backed securities - - E -- - - - - - - --------------------------------------------------------------------------------------------------------------------------------- Mortgage dollar rolls - F -- - -- -- - - - --------------------------------------------------------------------------------------------------------------------------------- Municipal obligations - - -- - -- - - - - --------------------------------------------------------------------------------------------------------------------------------- Preferred stock - - -- - G -- -- - G - - --------------------------------------------------------------------------------------------------------------------------------- Real estate investment trusts - - -- - -- -- - - - --------------------------------------------------------------------------------------------------------------------------------- Repurchase agreements - - -- - - - - - - --------------------------------------------------------------------------------------------------------------------------------- Reverse repurchase agreements - - -- - - -- - - - --------------------------------------------------------------------------------------------------------------------------------- Short sales H H H H -- -- H H - ---------------------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 11
FUNDS-OF-FUNDS - TAXABLE TAXABLE TAX-EXEMPT TAX-EXEMPT STATE EQUITY AND FIXED MONEY MONEY FIXED TAX-EXEMPT INVESTMENT STRATEGY BALANCED EQUITY FIXED INCOME INCOME MARKET MARKET INCOME FIXED INCOME - --------------------------------------------------------------------------------------------------------------------------------- Sovereign debt - - -- - - -- - - - --------------------------------------------------------------------------------------------------------------------------------- Structured investments - - -- - -- -- - - - --------------------------------------------------------------------------------------------------------------------------------- Swap agreements - - -- - -- -- - - - --------------------------------------------------------------------------------------------------------------------------------- Variable- or floating-rate securities - - - - - - - - - --------------------------------------------------------------------------------------------------------------------------------- Warrants - - -- - -- -- - - - --------------------------------------------------------------------------------------------------------------------------------- When-issued securities and forward commitments - - -- - -- -- - - - --------------------------------------------------------------------------------------------------------------------------------- Zero-coupon, step-coupon and pay-in- kind securities - - -- - -- -- - - - ---------------------------------------------------------------------------------------------------------------------------------
A. The following funds are not authorized to invest in collateralized bond obligations: International Aggressive Growth, International Equity, International Select Value, International Small Cap, Select Value, Small Cap Equity, Small Cap Growth, Small Cap Value, and Small Cap Advantage. B. The following funds are not authorized to invest in common stock: Short Duration U.S. Government, U.S. Government Mortgage. C. The following funds are not authorized to invest in convertible securities: Short Duration U.S. Government, U.S. Government Mortgage. D. The following funds are authorized to invest in inverse floaters: Real Estate. E. The following funds are not authorized to invest in mortgage- and asset- backed securities: Small Cap Growth, Value, S&P 500 Index, Small Cap Advantage, Small Company Index. F. The following funds are authorized to invest in mortgage dollar rolls: Real Estate. G. The following funds are not authorized to invest in preferred stock: Tax- Exempt High Income, Intermediate Tax-Exempt, Tax-Exempt Bond, Short Duration U.S. Government, U.S. Government Mortgage. H. The funds are not prohibited from engaging in short sales, however, each fund will seek Board approval prior to utilizing short sales as an active part of its investment strategy. Statement of Additional Information - Nov. 29, 2007 Page 12 INFORMATION REGARDING RISKS AND INVESTMENT STRATEGIES RISKS The following is a summary of common risk characteristics. Following this summary is a description of certain investments and investment strategies and the risks most commonly associated with them (including certain risks not described below and, in some cases, a more comprehensive discussion of how the risks apply to a particular investment or investment strategy). A mutual fund's risk profile is largely defined by the fund's primary securities and investment strategies. However, most mutual funds are allowed to use certain other strategies and investments that may have different risk characteristics. Accordingly, one or more of the following types of risk may be associated with a fund at any time (for a description of principal risks for an individual fund, please see that fund's prospectus): ACTIVE MANAGEMENT RISK. For a fund that is actively managed, its performance will reflect in part the ability of the portfolio managers to select securities and to make investment decisions that are suited to achieving the fund's investment objective. Due to its active management, a fund could underperform other mutual funds with similar investment objectives. AFFILIATED FUND RISK. For funds-of-funds, the risk that the investment manager may have potential conflicts of interest in selecting underlying funds because the fees paid to it by some underlying funds are higher than the fees paid by other underlying funds. However, the investment manager is a fiduciary to the funds and is legally obligated to act in their best interests when selecting underlying funds, without taking fees into consideration. ALLOCATION RISK. For funds-of-funds, the risk that the investment manager's evaluations regarding asset classes or underlying funds may be incorrect. There is no guarantee that the underlying funds will achieve their investment objectives. There is also a risk that the selected underlying funds' performance may be lower than the performance of the asset class they were selected to represent or may be lower than the performance of alternative underlying funds that could have been selected to represent the asset class. CREDIT RISK. Credit risk is the risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable or unwilling to honor a financial obligation, such as payments due on a bond or a note. If the fund purchases unrated securities, or if the rating of a security is reduced after purchase, the fund will depend on the investment manager's analysis of credit risk more heavily than usual. CONFIDENTIAL INFORMATION ACCESS RISK. For funds investing in floating rate loans, the investment manager normally will seek to avoid the receipt of material, non-public information (Confidential Information) about the issuers of floating rate loans being considered for acquisition by the fund, or held in the fund. In many instances, issuers of floating rate loans offer to furnish Confidential Information to prospective purchasers or holders of the issuer's floating rate loans to help potential investors assess the value of the loan. The investment manager's decision not to receive Confidential Information from these issuers may disadvantage the fund as compared to other floating rate loan investors, and may adversely affect the price the fund pays for the loans it purchases, or the price at which the fund sells the loans. Further, in situations when holders of floating rate loans are asked, for example, to grant consents, waivers or amendments, the investment manager's ability to assess the desirability of such consents, waivers or amendments may be compromised. For these and other reasons, it is possible that the investment manager's decision under normal circumstances not to receive Confidential Information could adversely affect the fund's performance. COUNTERPARTY RISK. Counterparty risk is the risk that a counterparty to a financial instrument entered into by the fund or held by a special purpose or structured vehicle becomes bankrupt or otherwise fails to perform its obligations due to financial difficulties. The fund may experience significant delays in obtaining any recovery in a bankruptcy or other reorganization proceeding. The fund may obtain only limited recovery or may obtain no recovery in such circumstances. The fund will typically enter into financial instrument transactions with counterparties whose credit rating is investment grade, or, if unrated, determined to be of comparable quality by the investment manager. DERIVATIVES RISK. Derivatives are financial instruments that have a value which depends upon, or is derived from, the value of something else, such as one or more underlying securities, pools of securities, options, futures, indexes or currencies. Gains or losses involving derivative instruments may be substantial, because a relatively small price movement in the underlying security(ies), instrument, currency or index may result in a substantial gain or loss for the Fund. Derivative instruments in which the Fund invests will typically increase the Fund's exposure to Principal Risks to which it is otherwise exposed, and may expose the Fund to additional risks, including counterparty credit risk, hedging risk, correlation risk, leverage risk, and liquidity risk. Statement of Additional Information - Nov. 29, 2007 Page 13 Counterparty credit risk is the risk that a counterparty to the derivative instrument becomes bankrupt or otherwise fails to perform its obligations due to financial difficulties, and the Fund may obtain no recovery of its investment or may only obtain a limited recovery, and any recovery may be delayed. Hedging risk is the risk that derivative instruments used to hedge against an opposite position may offset losses, but they may also offset gains. Correlation risk is related to hedging risk and is the risk that there may be an incomplete correlation between the hedge and the opposite position, which may result in increased or unanticipated losses. Leverage risk is the risk that losses from the derivative instrument may be greater than the amount invested in the derivative instrument. Certain derivatives have the potential for unlimited losses, regardless of the size of the initial investment. Liquidity risk is the risk that the derivative instrument may be difficult or impossible to sell or terminate, which may cause the Fund to be in a position to do something the investment manager would not otherwise choose, including accepting a lower price for the derivative instrument, selling other investments or foregoing another, more appealing investment opportunity. DIVERSIFICATION RISK. A non-diversified fund may invest more of its assets in fewer companies than if it were a diversified fund. Because each investment has a greater effect on the fund's performance, the fund may be more exposed to the risks of loss and volatility than a fund that invests more broadly. For funds-of-funds, although most of the underlying funds are diversified funds, because the fund invests in a limited number of underlying funds, it is considered a non-diversified fund. FOREIGN/EMERGING MARKETS RISK. The following are all components of foreign/emerging markets risk: Country risk includes the political, economic, and other conditions of the country. These conditions include lack of publicly available information, less government oversight (including lack of accounting, auditing, and financial reporting standards), the possibility of government-imposed restrictions, and even the nationalization of assets. The liquidity of foreign investments may be more limited than for most U.S. investments, which means that, at times it may be difficult to sell foreign securities at desirable prices. Currency risk results from the constantly changing exchange rates between local currency and the U.S. dollar. Whenever the fund holds securities valued in a foreign currency or holds the currency, changes in the exchange rate add to or subtract from the value of the investment. Custody risk refers to the process of clearing and settling trades. It also covers holding securities with local agents and depositories. Low trading volumes and volatile prices in less developed markets make trades harder to complete and settle. Local agents are held only to the standard of care of the local market. Governments or trade groups may compel local agents to hold securities in designated depositories that are not subject to independent evaluation. The less developed a country's securities market is, the greater the likelihood of problems occurring. Emerging markets risk includes the dramatic pace of change (economic, social, and political) in these countries as well as the other considerations listed above. These markets are in early stages of development and are extremely volatile. They can be marked by extreme inflation, devaluation of currencies, dependence on trade partners, and hostile relations with neighboring countries. GEOGRAPHIC CONCENTRATION RISK. The fund may be particularly susceptible to economic, political or regulatory events affecting companies and countries within the specific geographic region in which the fund focuses its investments. Currency devaluations could occur in countries that have not yet experienced currency devaluation to date, or could continue to occur in countries that have already experienced such devaluations. As a result, the fund may be more volatile than a more geographically diversified fund. For state-specific funds. Because state-specific tax-exempt funds invest primarily in the municipal securities issued by the state and political sub- divisions of the state, each fund will be particularly affected by political and economic conditions and developments in the state in which it invests. This vulnerability to factors affecting the state's tax-exempt investments will be significantly greater than that of a more geographically diversified fund, which may result in greater losses and volatility. See Appendix B for details. The value of municipal securities owned by a fund also may be adversely affected by future changes in federal or state income tax laws. In addition, because of the relatively small number of issuers of tax-exempt securities, the fund may invest a higher percentage of its assets in a single issuer and, therefore, be more exposed to the risk of loss by investing in a few issuers than a fund that invests more broadly. At times, the fund and other accounts managed by the investment manager may own all or most of the debt of a particular issuer. This concentration of ownership may make it more difficult to sell, or to determine the fair value of, these investments. Statement of Additional Information - Nov. 29, 2007 Page 14 HIGHLY LEVERAGED TRANSACTIONS RISK. Certain corporate loans and corporate debt securities involve refinancings, recapitalizations, mergers and acquisitions, and other financings for general corporate purposes. These investments also may include senior obligations of a borrower issued in connection with a restructuring pursuant to Chapter 11 of the U.S. Bankruptcy Code (commonly known as "debtor-in-possession" financings), provided that such senior obligations are determined by the fund's investment manager upon its credit analysis to be a suitable investment by the fund. In such highly leveraged transactions, the borrower assumes large amounts of debt in order to have the financial resources to attempt to achieve its business objectives. Such business objectives may include but are not limited to: management's taking over control of a company (leveraged buy-out); reorganizing the assets and liabilities of a company (leveraged recapitalization); or acquiring another company. Loans or securities that are part of highly leveraged transactions involve a greater risk (including default and bankruptcy) than other investments. IMPAIRMENT OF COLLATERAL RISK. The value of collateral, if any, securing a floating rate loan can decline, and may be insufficient to meet the borrower's obligations or difficult to liquidate. In addition, the fund's access to collateral may be limited by bankruptcy or other insolvency laws. Further, certain floating rate loans may not be fully collateralized and may decline in value. INDEXING RISK. For funds that are managed to an index, the fund's performance will rise and fall as the performance of the index rises and falls. INFLATION PROTECTED SECURITIES RISK. Inflation-protected debt securities tend to react to change in real interest rates. Real interest rates can be described as nominal interest rates minus the expected impact of inflation. In general, the price of an inflation-protected debt security falls when real interest rates rise, and rises when real interest rates fall. Interest payments on inflation- protected debt securities will vary as the principal and/or interest is adjusted for inflation and may be more volatile than interest paid on ordinary bonds. In periods of deflation, the fund may have no income at all. Income earned by a shareholder depends on the amount of principal invested and that principal will not grow with inflation unless the investor reinvests the portion of fund distributions that comes from inflation adjustments. INTEREST RATE RISK. The securities in the portfolio are subject to the risk of losses attributable to changes in interest rates. Interest rate risk is generally associated with bond prices: when interest rates rise, bond prices fall. In general, the longer the maturity or duration of a bond, the greater its sensitivity to changes in interest rates. INITIAL PUBLIC OFFERING (IPO) RISK. IPOs are subject to many of the same risks as investing in companies with smaller market capitalizations. To the extent a fund determines to invest in IPOs it may not be able to invest to the extent desired, because, for example, only a small portion (if any) of the securities being offered in an IPO may be made available. The investment performance of a fund during periods when it is unable to invest significantly or at all in IPOs may be lower than during periods when the fund is able to do so. In addition, as a fund increases in size, the impact of IPOs on the fund's performance will generally decrease. IPOs will frequently be sold within 12 months of purchase. This may result in increased short-term capital gains, which will be taxable to shareholders as ordinary income. ISSUER RISK. An issuer, or the value of its stocks or bonds, may perform poorly. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures, or other factors. LIQUIDITY RISK. The risk associated from a lack of marketability of securities which may make it difficult or impossible to sell at desirable prices in order to minimize loss. The Fund may have to lower the selling price, sell other investments, or forego another, more appealing investment opportunity. MARKET RISK. The market value of securities may fall or fail to rise. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of securities may fluctuate, sometimes rapidly and unpredictably. This risk is generally greater for small and mid-sized companies, which tend to be more vulnerable to adverse developments. In addition, focus on a particular style, for example, investment in growth or value securities, may cause the Fund to underperform other mutual funds if that style falls out of favor with the market. PREPAYMENT AND EXTENSION RISK. The risk that a bond or other security might be called, or otherwise converted, prepaid, or redeemed, before maturity. This risk is primarily associated with asset-backed securities, including mortgage backed securities. If a security is converted, prepaid, or redeemed, before maturity, particularly during a time of declining interest rates, the portfolio managers may not be able to reinvest in securities providing as high a level of income, resulting in a reduced yield to the fund. Conversely, as interest rates rise, the likelihood of prepayment decreases. The portfolio managers may be unable to capitalize on securities with higher interest rates because the Fund's investments are locked in at a lower rate for a longer period of time. QUANTITATIVE MODEL RISK. Securities selected using quantitative methods may perform differently from the market as a whole as a result of the factors used in the quantitative method, the weight placed on each factor, and changes in the factors' Statement of Additional Information - Nov. 29, 2007 Page 15 historical trends. The quantitative methodology employed by the investment manager has been extensively tested using historical securities market data, but has only recently begun to be used to manage open-end mutual funds. There can be no assurance that the methodology will enable the fund to achieve its objective. REINVESTMENT RISK. The risk that an investor will not be able to reinvest income or principal at the same rate it currently is earning. SECTOR RISK. Investments that are concentrated in a particular issuer, geographic region, or sector will be more susceptible to changes in price. The more a fund diversifies, the more it spreads risk and potentially reduces the risks of loss and volatility. SMALL AND MID-SIZED COMPANY RISK. Investments in small and medium companies often involve greater risks than investments in larger, more established companies because small and medium companies may lack the management experience, financial resources, product diversification, experience, and competitive strengths of larger companies. Additionally, in many instances the securities of small and medium companies are traded only over-the-counter or on regional securities exchanges and the frequency and volume of their trading is substantially less and may be more volatile than is typical of larger companies. TAX RISK. As a regulated investment company, a fund must derive at least 90% of its gross income for each taxable year from sources treated as "qualifying income" under the Internal Revenue Code of 1986, as amended. The Fund currently intends to take positions in forward currency contracts with notional value up to the Fund's total net assets. Although foreign currency gains currently constitute "qualifying income" the Treasury Department has the authority to issue regulations excluding from the definition of "qualifying incomes" a fund's foreign currency gains not "directly related" to its "principal business" of investing in stocks or securities (or options and futures with respect thereto). Such regulations might treat gains from some of the Fund's foreign currency- denominated positions as not "qualifying income" and there is a remote possibility that such regulations might be applied retroactively, in which case, the Fund might not qualify as a regulated investment company for one or more years. In the event the Treasury Department issues such regulations, the Fund's Board of Directors may authorize a significant change in investment strategy or Fund liquidation. TRACKING ERROR RISK. For funds that are managed to an index, the fund may not track the index perfectly because differences between the index and the fund's portfolio can cause differences in performance. The investment manager purchases securities and other instruments in an attempt to replicate the performance of the index. However, the tools that the investment manager uses to replicate the index are not perfect and the fund's performance is affected by factors such as the size of the fund's portfolio, transaction costs, management fees and expenses, brokerage commissions and fees, the extent and timing of cash flows in and out of the fund and changes in the index. In addition, the returns from a specific type of security (for example, mid-cap stocks) may trail returns from other asset classes or the overall market. Each type of security will go through cycles of doing better or worse than stocks or bonds in general. These periods may last for several years. UNDERLYING FUND SELECTION RISK. For funds-of-funds, the risk that the selected underlying funds' performance may be lower than the performance of the asset class they were selected to represent or may be lower than the performance of alternative underlying funds that could have been selected to represent the investment category. INVESTMENT STRATEGIES The following information supplements the discussion of each fund's investment objectives, policies, and strategies that are described in the prospectus and in this SAI. The following describes strategies that many mutual funds use and types of securities that they purchase. Please refer to the table titled Investment Strategies and Types of Investments to see which are applicable to various categories of funds. AGENCY AND GOVERNMENT SECURITIES The U.S. government and its agencies issue many different types of securities. U.S. Treasury bonds, notes, and bills and securities, including mortgage pass through certificates of the Government National Mortgage Association (GNMA), are guaranteed by the U.S. government. Other U.S. government securities are issued or guaranteed by federal agencies or government-sponsored enterprises but are not guaranteed by the U.S. government. This may increase the credit risk associated with these investments. Government- sponsored entities issuing securities include privately owned, publicly chartered entities created to reduce borrowing costs for certain sectors of the economy, such as farmers, homeowners, and students. They include the Federal Farm Credit Bank System, Farm Credit Financial Assistance Corporation, Federal Home Loan Bank, Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA), Student Loan Marketing Association (SLMA), and Resolution Trust Corporation (RTC). Government-sponsored entities may issue discount notes (with maturities ranging from overnight to Statement of Additional Information - Nov. 29, 2007 Page 16 360 days) and bonds. Agency and government securities are subject to the same concerns as other debt obligations. (See also Debt Obligations and Mortgage- and Asset-Backed Securities.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with agency and government securities include: Inflation Risk, Interest Rate Risk, Prepayment and Extension Risk, and Reinvestment Risk. BORROWING A fund may borrow money for temporary purposes or to engage in transactions permissible under the 1940 Act that may be considered a borrowing (such as derivative instruments). Borrowings are subject to costs (in addition to any interest that may be paid) and typically reduce a fund's total return. Except as noted in the nonfundamental policies, however, a fund may not buy securities on margin. Although one or more of the other risks described in this SAI may apply, the largest risks associated with borrowing include: Inflation Risk. CASH/MONEY MARKET INSTRUMENTS Cash-equivalent investments include short-term U.S. and Canadian government securities and negotiable certificates of deposit, non-negotiable fixed-time deposits, bankers' acceptances, and letters of credit of banks or savings and loan associations having capital, surplus, and undivided profits (as of the date of its most recently published annual financial statements) in excess of $100 million (or the equivalent in the instance of a foreign branch of a U.S. bank) at the date of investment. A fund also may purchase short-term notes and obligations of U.S. and foreign banks and corporations and may use repurchase agreements with broker-dealers registered under the Securities Exchange Act of 1934 and with commercial banks. (See also Commercial Paper, Debt Obligations, Repurchase Agreements, and Variable- or Floating-Rate Securities.) These types of instruments generally offer low rates of return and subject a fund to certain costs and expenses. See Appendix A for a discussion of securities ratings. Bankers' acceptances are marketable short-term credit instruments used to finance the import, export, transfer or storage of goods. They are termed "accepted" when a bank guarantees their payment at maturity. Bank certificates of deposit are certificates issued against funds deposited in a bank (including eligible foreign branches of U.S. banks), are for a definite period of time, earn a specified rate of return and are normally negotiable. A fund may invest its daily cash balance in RiverSource Short-Term Cash Fund, a money market fund established for the exclusive use of the RiverSource funds and other institutional clients of RiverSource Investments. Although one or more of the other risks described in this SAI may apply, the largest risks associated with cash/money market instruments include: Credit Risk and Inflation Risk. COLLATERALIZED BOND OBLIGATIONS Collateralized bond obligations (CBOs) are investment grade bonds backed by a pool of bonds, which may include junk bonds. CBOs are similar in concept to collateralized mortgage obligations (CMOs), but differ in that CBOs represent different degrees of credit quality rather than different maturities. (See also Mortgage- and Asset-Backed Securities.) Underwriters of CBOs package a large and diversified pool of high-risk, high-yield junk bonds, which is then separated into "tiers." Typically, the first tier represents the higher quality collateral and pays the lowest interest rate; the second tier is backed by riskier bonds and pays a higher rate; the third tier represents the lowest credit quality and instead of receiving a fixed interest rate receives the residual interest payments -- money that is left over after the higher tiers have been paid. CBOs, like CMOs, are substantially overcollateralized and this, plus the diversification of the pool backing them, may earn certain of the tiers investment-grade bond ratings. Holders of third-tier CBOs stand to earn high yields or less money depending on the rate of defaults in the collateral pool. (See also High-Yield Debt Securities (Junk Bonds).) Although one or more of the other risks described in this SAI may apply, the largest risks associated with CBOs include: Credit Risk, Interest Rate Risk and Prepayment and Extension Risk. COMMERCIAL PAPER Commercial paper is a short-term debt obligation with a maturity ranging from 2 to 270 days issued by banks, corporations, and other borrowers. It is sold to investors with temporary idle cash as a way to increase returns on a short-term basis. These instruments are generally unsecured, which increases the credit risk associated with this type of investment. (See also Debt Obligations and Illiquid and Restricted Securities.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with commercial paper include: Credit Risk and Liquidity Risk. Statement of Additional Information - Nov. 29, 2007 Page 17 COMMON STOCK Common stock represents units of ownership in a corporation. Owners typically are entitled to vote on the selection of directors and other important matters as well as to receive dividends on their holdings. In the event that a corporation is liquidated, the claims of secured and unsecured creditors and owners of bonds and preferred stock take precedence over the claims of those who own common stock. The price of common stock is generally determined by corporate earnings, type of products or services offered, projected growth rates, experience of management, liquidity, and general market conditions for the markets on which the stock trades. Although one or more of the other risks described in this SAI may apply, the largest risks associated with common stock include: Issuer Risk, Market Risk, and Small and Mid-Sized Company Risk. CONVERTIBLE SECURITIES Convertible securities are bonds, debentures, notes, preferred stocks, or other securities that may be converted into common, preferred or other securities of the same or a different issuer within a particular period of time at a specified price. Some convertible securities, such as preferred equity-redemption cumulative stock (PERCs), have mandatory conversion features. Others are voluntary. A convertible security entitles the holder to receive interest normally paid or accrued on debt or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted, or exchanged. Convertible securities have unique investment characteristics in that they generally (i) have higher yields than common stocks but lower yields than comparable non-convertible securities, (ii) are less subject to fluctuation in value than the underlying stock since they have fixed income characteristics, and (iii) provide the potential for capital appreciation if the market price of the underlying common stock increases. The value of a convertible security is a function of its "investment value" (determined by its yield in comparison with the yields of other securities of comparable maturity and quality that do not have a conversion privilege) and its "conversion value" (the security's worth, at market value, if converted into the underlying common stock). The investment value of a convertible security is influenced by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors also may have an effect on the convertible security's investment value. The conversion value of a convertible security is determined by the market price of the underlying common stock. If the conversion value is low relative to the investment value, the price of the convertible security is governed principally by its investment value. Generally, the conversion value decreases as the convertible security approaches maturity. To the extent the market price of the underlying common stock approaches or exceeds the conversion price, the price of the convertible security will be increasingly influenced by its conversion value. A convertible security generally will sell at a premium over its conversion value by the extent to which investors place value on the right to acquire the underlying common stock while holding a fixed income security. Although one or more of the other risks described in this SAI may apply, the largest risks associated with convertible securities include: Interest Rate Risk, Issuer Risk, Market Risk, Prepayment and Extension Risk, and Reinvestment Risk. CORPORATE BONDS Corporate bonds are debt obligations issued by private corporations, as distinct from bonds issued by a government agency or a municipality. Corporate bonds typically have four distinguishing features: (1) they are taxable; (2) they have a par value of $1,000; (3) they have a term maturity, which means they come due all at once; and (4) many are traded on major exchanges. Corporate bonds are subject to the same concerns as other debt obligations. (See also Debt Obligations and High-Yield Debt Securities (Junk Bonds).) Corporate bonds may be either secured or unsecured. Unsecured corporate bonds are generally referred to as "debentures." See Appendix A for a discussion of securities ratings. Although one or more of the other risks described in this SAI may apply, the largest risks associated with corporate bonds include: Credit Risk, Interest Rate Risk, Issuer Risk, Prepayment and Extension Risk, and Reinvestment Risk. DEBT OBLIGATIONS Many different types of debt obligations exist (for example, bills, bonds, or notes). Issuers of debt obligations have a contractual obligation to pay interest at a fixed, variable or floating rate on specified dates and to repay principal on a specified maturity date. Certain debt obligations (usually intermediate- and long-term bonds) have provisions that allow the issuer to redeem or "call" a bond before its maturity. Issuers are most likely to call these securities during periods of falling interest rates. When this happens, an investor may have to replace these securities with lower yielding securities, which could result in a lower return. The market value of debt obligations is affected primarily by changes in prevailing interest rates and the issuers perceived ability to repay the debt. The market value of a debt obligation generally reacts inversely to interest rate changes. When prevailing interest rates decline, the price usually rises, and when prevailing interest rates rise, the price usually declines. Statement of Additional Information - Nov. 29, 2007 Page 18 In general, the longer the maturity of a debt obligation, the higher its yield and the greater the sensitivity to changes in interest rates. Conversely, the shorter the maturity, the lower the yield but the greater the price stability. As noted, the values of debt obligations also may be affected by changes in the credit rating or financial condition of their issuers. Generally, the lower the quality rating of a security, the higher the degree of risk as to the payment of interest and return of principal. To compensate investors for taking on such increased risk, those issuers deemed to be less creditworthy generally must offer their investors higher interest rates than do issuers with better credit ratings. (See also Agency and Government Securities, Corporate Bonds, and High- Yield Debt Securities (Junk Bonds).) Generally, debt obligations that are investment grade are those that have been rated in one of the top four credit quality categories by two out of the three independent rating agencies. In the event that a debt obligation has been rated by only two agencies, the most conservative, or lower, rating must be in one of the top four credit quality categories in order for the security to be considered investment grade. If only one agency has rated the debt obligation, that rating must be in one of the top four credit quality categories for the security to be considered investment grade. See Appendix A for a discussion of securities ratings. All ratings limitations are applied at the time of purchase. Subsequent to purchase, a debt security may cease to be rated or its rating may be reduced below the minimum required for purchase by a fund. Neither event will require the sale of such a security, but it will be a factor in considering whether to continue to hold the security. To the extent that ratings change as a result of changes in a rating agency or its rating system, a fund will attempt to use comparable ratings as standards for selecting investments. Although one or more of the other risks described in this SAI may apply, the largest risks associated with debt obligations include: Credit Risk, Interest Rate Risk, Issuer Risk, Prepayment and Extension Risk, and Reinvestment Risk. DEPOSITARY RECEIPTS Some foreign securities are traded in the form of American Depositary Receipts (ADRs). ADRs are receipts typically issued by a U.S. bank or trust company evidencing ownership of the underlying securities of foreign issuers. European Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs) are receipts typically issued by foreign banks or trust companies, evidencing ownership of underlying securities issued by either a foreign or U.S. issuer. Generally, depositary receipts in registered form are designed for use in the U.S. and depositary receipts in bearer form are designed for use in securities markets outside the U.S. Depositary receipts may not necessarily be denominated in the same currency as the underlying securities into which they may be converted. Depositary receipts involve the risks of other investments in foreign securities. In addition, ADR holders may not have all the legal rights of shareholders and may experience difficulty in receiving shareholder communications. (See also Common Stock and Foreign Securities.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with depositary receipts include: Foreign/Emerging Markets Risk, Issuer Risk, and Market Risk. DERIVATIVE INSTRUMENTS Derivative instruments are commonly defined to include securities or contracts whose values depend, in whole or in part, on (or "derive" from) the value of one or more other assets, such as securities, currencies, or commodities. A derivative instrument generally consists of, is based upon, or exhibits characteristics similar to options or forward contracts. Such instruments may be used to maintain cash reserves while remaining fully invested, to offset anticipated declines in values of investments, to facilitate trading, to reduce transaction costs, or to pursue higher investment returns. Derivative instruments are characterized by requiring little or no initial payment. Their value changes daily based on a security, a currency, a group of securities or currencies, or an index. A small change in the value of the underlying security, currency, or index can cause a sizable percentage gain or loss in the price of the derivative instrument. Options and forward contracts are considered to be the basic "building blocks" of derivatives. For example, forward-based derivatives include forward contracts, swap contracts, and exchange-traded futures. Forward-based derivatives are sometimes referred to generically as "futures contracts." Option-based derivatives include privately negotiated, over-the-counter (OTC) options (including caps, floors, collars, and options on futures) and exchange- traded options on futures. Diverse types of derivatives may be created by combining options or futures in different ways, and by applying these structures to a wide range of underlying assets. Options. An option is a contract. A person who buys a call option for a security has the right to buy the security at a set price for the length of the contract. A person who sells a call option is called a writer. The writer of a call option agrees for the length of the contract to sell the security at the set price when the buyer wants to exercise the option, no matter what the market price of the security is at that time. A person who buys a put option has the right to sell a security at a set price for the length of the contract. A person who writes a put option agrees to buy the security at the set price if the purchaser wants Statement of Additional Information - Nov. 29, 2007 Page 19 to exercise the option during the length of the contract, no matter what the market price of the security is at that time. An option is covered if the writer owns the security (in the case of a call) or sets aside the cash or securities of equivalent value (in the case of a put) that would be required upon exercise. The price paid by the buyer for an option is called a premium. In addition to the premium, the buyer generally pays a broker a commission. The writer receives a premium, less another commission, at the time the option is written. The premium received by the writer is retained whether or not the option is exercised. A writer of a call option may have to sell the security for a below- market price if the market price rises above the exercise price. A writer of a put option may have to pay an above-market price for the security if its market price decreases below the exercise price. When an option is purchased, the buyer pays a premium and a commission. It then pays a second commission on the purchase or sale of the underlying security when the option is exercised. For record keeping and tax purposes, the price obtained on the sale of the underlying security is the combination of the exercise price, the premium, and both commissions. One of the risks an investor assumes when it buys an option is the loss of the premium. To be beneficial to the investor, the price of the underlying security must change within the time set by the option contract. Furthermore, the change must be sufficient to cover the premium paid, the commissions paid both in the acquisition of the option and in a closing transaction or in the exercise of the option and sale (in the case of a call) or purchase (in the case of a put) of the underlying security. Even then, the price change in the underlying security does not ensure a profit since prices in the option market may not reflect such a change. Options on many securities are listed on options exchanges. If a fund writes listed options, it will follow the rules of the options exchange. Options are valued at the close of the New York Stock Exchange. An option listed on a national exchange, Chicago Board Options Exchange, or NASDAQ will be valued at the last quoted sales price or, if such a price is not readily available, at the mean of the last bid and ask prices. Options on certain securities are not actively traded on any exchange, but may be entered into directly with a dealer. These options may be more difficult to close. If an investor is unable to effect a closing purchase transaction, it will not be able to sell the underlying security until the call written by the investor expires or is exercised. Futures Contracts. A futures contract is a sales contract between a buyer (holding the "long" position) and a seller (holding the "short" position) for an asset with delivery deferred until a future date. The buyer agrees to pay a fixed price at the agreed future date and the seller agrees to deliver the asset. The seller hopes that the market price on the delivery date is less than the agreed upon price, while the buyer hopes for the contrary. Many futures contracts trade in a manner similar to the way a stock trades on a stock exchange and the commodity exchanges. Generally, a futures contract is terminated by entering into an offsetting transaction. An offsetting transaction is effected by an investor taking an opposite position. At the time a futures contract is made, a good faith deposit called initial margin is set up. Daily thereafter, the futures contract is valued and the payment of variation margin is required so that each day a buyer would pay out cash in an amount equal to any decline in the contract's value or receive cash equal to any increase. At the time a futures contract is closed out, a nominal commission is paid, which is generally lower than the commission on a comparable transaction in the cash market. Futures contracts may be based on various securities, securities indexes (such as the S&P 500 Index), foreign currencies and other financial instruments and indexes. A fund may engage in futures and related options transactions to produce incremental earnings, to hedge existing positions, and to increase flexibility. The fund intends to comply with Rule 4.5 of the Commodity Futures Trading Commission (CFTC), under which a mutual fund is exempt from the definition of a "commodity pool operator." The fund, therefore, is not subject to registration or regulation as a pool operator, meaning that the fund may invest in futures contracts without registering with the CFTC. Options on Futures Contracts. Options on futures contracts give the holder a right to buy or sell futures contracts in the future. Unlike a futures contract, which requires the parties to the contract to buy and sell a security on a set date (some futures are settled in cash), an option on a futures contract merely entitles its holder to decide on or before a future date (within nine months of the date of issue) whether to enter into a contract. If the holder decides not to enter into the contract, all that is lost is the amount (premium) paid for the option. Further, because the value of the option is fixed at the point of sale, there are no daily payments of cash to reflect the change in the value of the underlying contract. However, since an option gives the buyer the right to enter into a contract at a set price for a fixed period of time, its value does change daily. One of the risks in buying an option on a futures contract is the loss of the premium paid for the option. The risk involved in writing options on futures contracts an investor owns, or on securities held in its portfolio, is that there could be an increase in the market value of these contracts or securities. If that occurred, the option would be exercised and the asset sold at a Statement of Additional Information - Nov. 29, 2007 Page 20 lower price than the cash market price. To some extent, the risk of not realizing a gain could be reduced by entering into a closing transaction. An investor could enter into a closing transaction by purchasing an option with the same terms as the one previously sold. The cost to close the option and terminate the investor's obligation, however, might still result in a loss. Further, the investor might not be able to close the option because of insufficient activity in the options market. Purchasing options also limits the use of monies that might otherwise be available for long-term investments. Options on Stock Indexes. Options on stock indexes are securities traded on national securities exchanges. An option on a stock index is similar to an option on a futures contract except all settlements are in cash. A fund exercising a put, for example, would receive the difference between the exercise price and the current index level. Tax and Accounting Treatment. As permitted under federal income tax laws and to the extent a fund is allowed to invest in futures contracts, a fund would intend to identify futures contracts as part of a mixed straddle and not mark them to market, that is, not treat them as having been sold at the end of the year at market value. If a fund is using short futures contracts for hedging purposes, the fund may be required to defer recognizing losses incurred on short futures contracts and on underlying securities. Any losses incurred on securities that are part of a straddle may be deferred to the extent there is unrealized appreciation on the offsetting position until the offsetting position is sold. Federal income tax treatment of gains or losses from transactions in options, options on futures contracts and indexes will depend on whether the option is a section 1256 contract. If the option is a non-equity option, a fund would either make a 1256(d) election and treat the option as a mixed straddle or mark to market the option at fiscal year end and treat the gain/loss as 40% short-term and 60% long-term. The IRS has ruled publicly that an exchange-traded call option is a security for purposes of the 50%-of-assets test and that its issuer is the issuer of the underlying security, not the writer of the option, for purposes of the diversification requirements. Accounting for futures contracts will be according to generally accepted accounting principles. Initial margin deposits will be recognized as assets due from a broker (a fund's agent in acquiring the futures position). During the period the futures contract is open, changes in value of the contract will be recognized as unrealized gains or losses by marking to market on a daily basis to reflect the market value of the contract at the end of each day's trading. Variation margin payments will be made or received depending upon whether gains or losses are incurred. All contracts and options will be valued at the last- quoted sales price on their primary exchange. Other Risks of Derivatives. The primary risk of derivatives is the same as the risk of the underlying asset, namely that the value of the underlying asset may go up or down. Adverse movements in the value of an underlying asset can expose an investor to losses. Derivative instruments may include elements of leverage and, accordingly, the fluctuation of the value of the derivative instrument in relation to the underlying asset may be magnified. The successful use of derivative instruments depends upon a variety of factors, particularly the investment manager's ability to predict movements of the securities, currencies, and commodity markets, which requires different skills than predicting changes in the prices of individual securities. There can be no assurance that any particular strategy will succeed. Another risk is the risk that a loss may be sustained as a result of the failure of a counterparty to comply with the terms of a derivative instrument. The counterparty risk for exchange-traded derivative instruments is generally less than for privately-negotiated or OTC derivative instruments, since generally a clearing agency, which is the issuer or counterparty to each exchange-traded instrument, provides a guarantee of performance. For privately-negotiated instruments, there is no similar clearing agency guarantee. In all transactions, an investor will bear the risk that the counterparty will default, and this could result in a loss of the expected benefit of the derivative transaction and possibly other losses. When a derivative transaction is used to completely hedge another position, changes in the market value of the combined position (the derivative instrument plus the position being hedged) result from an imperfect correlation between the price movements of the two instruments. With a perfect hedge, the value of the combined position remains unchanged for any change in the price of the underlying asset. With an imperfect hedge, the values of the derivative instrument and its hedge are not perfectly correlated. For example, if the value of a derivative instrument used in a short hedge (such as writing a call option, buying a put option, or selling a futures contract) increased by less than the decline in value of the hedged investment, the hedge would not be perfectly correlated. Such a lack of correlation might occur due to factors unrelated to the value of the investments being hedged, such as speculative or other pressures on the markets in which these instruments are traded. Derivatives also are subject to the risk that they cannot be sold, closed out, or replaced quickly at or very close to their fundamental value. Generally, exchange contracts are very liquid because the exchange clearinghouse is the counterparty of every contract. OTC transactions are less liquid than exchange- traded derivatives since they often can only be closed out with the other party to the transaction. Another risk is caused by the legal unenforcibility of a party's obligations under the derivative. A counterparty that has lost money in a derivative transaction may try to avoid payment by exploiting various legal uncertainties about certain derivative products. Statement of Additional Information - Nov. 29, 2007 Page 21 (See also Foreign Currency Transactions.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with derivative instruments include: Derivatives Risk and Liquidity Risk. EXCHANGE-TRADED FUNDS Exchange-traded funds (ETFs) represent shares of ownership in mutual funds, unit investment trusts or depositary receipts. ETFs hold portfolios of securities that are designed to replicate, as closely as possible before expenses, the price and yield of a specified market index. The performance results of ETFs will not replicate exactly the performance of the pertinent index due to transaction and other expenses, including fees to service providers, borne by ETFs. ETF shares are sold and redeemed at net asset value only in large blocks called creation units and redemption units, respectively. ETF shares also may be purchased and sold in secondary market trading on national securities exchanges, which allows investors to purchase and sell ETF shares at their market price throughout the day. Although one or more of the other risks described in this SAI may apply, investments in ETFs involve the same risks associated with a direct investment in the types of securities included in the indices the ETFs are designed to replicate, including Market Risk. Shares of an ETF may trade at a market price that is less than their net asset value and an active trading market in such shares may not develop or continue. Finally, there can be no assurance that the portfolio of securities purchased by an ETF to replicate a particular index will replicate such index. FLOATING RATE LOANS Most floating rate loans are acquired directly from the agent bank or from another holder of the loan by assignment. Most such loans are secured, and most impose restrictive covenants which must be met by the borrower. These loans are typically made by a syndicate of banks and institutional investors, represented by an agent bank which has negotiated and structured the loan and which is responsible generally for collecting interest, principal, and other amounts from the borrower on its own behalf and on behalf of the other lending institutions in the syndicate, and for enforcing its and their other rights against the borrower. Each of the lending institutions, including the agent bank, lends to the borrower a portion of the total amount of the loan, and retains the corresponding interest in the loan. Floating rate loans may include delayed draw term loans and prefunded or synthetic letters of credit. A fund's ability to receive payments of principal and interest and other amounts in connection with loans held by it will depend primarily on the financial condition of the borrower. The failure by the fund to receive scheduled interest or principal payments on a loan would adversely affect the income of the fund and would likely reduce the value of its assets, which would be reflected in a reduction in the fund's net asset value. Banks and other lending institutions generally perform a credit analysis of the borrower before originating a loan or purchasing an assignment in a loan. In selecting the loans in which the fund will invest, however, the investment manager will not rely on that credit analysis of the agent bank, but will perform its own investment analysis of the borrowers. The investment manager's analysis may include consideration of the borrower's financial strength and managerial experience, debt coverage, additional borrowing requirements or debt maturity schedules, changing financial conditions, and responsiveness to changes in business conditions and interest rates. The majority of loans the fund will invest in will be rated by one or more of the nationally recognized rating agencies. Investments in loans may be of any quality, including "distressed" loans, and will be subject to the fund's credit quality policy. Loans may be structured in different forms, including assignments and participations. In an assignment, a fund purchases an assignment of a portion of a lender's interest in a loan. In this case, the fund may be required generally to rely upon the assigning bank to demand payment and enforce its rights against the borrower, but would otherwise be entitled to all of such bank's rights in the loan. The borrower of a loan may, either at its own election or pursuant to terms of the loan documentation, prepay amounts of the loan from time to time. There is no assurance that a fund will be able to reinvest the proceeds of any loan prepayment at the same interest rate or on the same terms as those of the original loan. Corporate loans in which a fund may purchase a loan assignment are made generally to finance internal growth, mergers, acquisitions, recapitalizations, stock repurchases, leveraged buy-outs, dividend payments to sponsors and other corporate activities. Under current market conditions, most of the corporate loans purchased by the fund will represent loans made to highly leveraged corporate borrowers. The highly leveraged capital structure of the borrowers in such transactions may make such loans especially vulnerable to adverse changes in economic or market conditions. The fund may hold investments in loans for a very short period of time when opportunities to resell the investments that the investment manager believes are attractive arise. Certain of the loans acquired by a fund may involve revolving credit facilities under which a borrower may from time to time borrow and repay amounts up to the maximum amount of the facility. In such cases, the fund would have an obligation Statement of Additional Information - Nov. 29, 2007 Page 22 to advance its portion of such additional borrowings upon the terms specified in the loan assignment. To the extent that the fund is committed to make additional loans under such an assignment, it will at all times designate cash or securities in an amount sufficient to meet such commitments. Notwithstanding its intention in certain situations to not receive material, non-public information with respect to its management of investments in floating rate loans, the investment manager may from time to time come into possession of material, non-public information about the issuers of loans that may be held in a fund's portfolio. Possession of such information may in some instances occur despite the investment manager's efforts to avoid such possession, but in other instances the investment manager may choose to receive such information (for example, in connection with participation in a creditors' committee with respect to a financially distressed issuer). As, and to the extent, required by applicable law, the investment manager's ability to trade in these loans for the account of the fund could potentially be limited by its possession of such information. Such limitations on the investment manager's ability to trade could have an adverse effect on the fund by, for example, preventing the fund from selling a loan that is experiencing a material decline in value. In some instances, these trading restrictions could continue in effect for a substantial period of time. In some instances, other accounts managed by the investment manager may hold other securities issued by borrowers whose floating rate loans may be held in a fund's portfolio. These other securities may include, for example, debt securities that are subordinate to the floating rate loans held in the fund's portfolio, convertible debt or common or preferred equity securities. In certain circumstances, such as if the credit quality of the issuer deteriorates, the interests of holders of these other securities may conflict with the interests of the holders of the issuer's floating rate loans. In such cases, the investment manager may owe conflicting fiduciary duties to the fund and other client accounts. The investment manager will endeavor to carry out its obligations to all of its clients to the fullest extent possible, recognizing that in some cases certain clients may achieve a lower economic return, as a result of these conflicting client interests, than if the investment manager's client accounts collectively held only a single category of the issuer's securities. Although one or more of the other risks described in this SAI may apply, the largest risks associated with floating rate loans include: Credit Risk and Prepayment and Extension Risk. FOREIGN CURRENCY TRANSACTIONS Investments in foreign countries usually involve currencies of foreign countries. In addition, a fund may hold cash and cash equivalent investments in foreign currencies. As a result, the value of a fund's assets as measured in U.S. dollars may be affected favorably or unfavorably by changes in currency exchange rates and exchange control regulations. Also, a fund may incur costs in connection with conversions between various currencies. Currency exchange rates may fluctuate significantly over short periods of time causing a fund's NAV (Net Asset Value) to fluctuate. Currency exchange rates are generally determined by the forces of supply and demand in the foreign exchange markets, actual or anticipated changes in interest rates, and other complex factors. Currency exchange rates also can be affected by the intervention of U.S. or foreign governments or central banks, or the failure to intervene, or by currency controls or political developments. Spot Rates and Derivative Instruments. A fund may conduct its foreign currency exchange transactions either at the spot (cash) rate prevailing in the foreign currency exchange market or by entering into forward currency exchange contracts (forward contracts). (See also Derivative Instruments.) These contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. Because foreign currency transactions occurring in the interbank market might involve substantially larger amounts than those involved in the use of such derivative instruments, a fund could be disadvantaged by having to deal in the odd lot market for the underlying foreign currencies at prices that are less favorable than for round lots. A fund may enter into forward contracts for a variety of reasons, but primarily it will enter into such contracts for risk management (hedging) or for investment purposes. A fund may enter into forward contracts to settle a security transaction or handle dividend and interest collection. When a fund enters into a contract for the purchase or sale of a security denominated in a foreign currency or has been notified of a dividend or interest payment, it may desire to lock in the price of the security or the amount of the payment, usually in U.S. dollars, although it could desire to lock in the price of the security in another currency. By entering into a forward contract, a fund would be able to protect itself against a possible loss resulting from an adverse change in the relationship between different currencies from the date the security is purchased or sold to the date on which payment is made or received or when the dividend or interest is actually received. A fund may enter into forward contracts when management of the fund believes the currency of a particular foreign country may decline in value relative to another currency. When selling currencies forward in this fashion, a fund may seek to hedge the value of foreign securities it holds against an adverse move in exchange rates. The precise matching of forward contract amounts and the value of securities involved generally will not be possible since the future value of securities in foreign Statement of Additional Information - Nov. 29, 2007 Page 23 currencies more than likely will change between the date the forward contract is entered into and the date it matures. The projection of short-term currency market movements is extremely difficult and successful execution of a short-term hedging strategy is highly uncertain. Unless specifically permitted, a fund would not enter into such forward contracts or maintain a net exposure to such contracts when consummating the contracts would obligate it to deliver an amount of foreign currency in excess of the value of its securities or other assets denominated in that currency. This method of protecting the value of the fund's securities against a decline in the value of a currency does not eliminate fluctuations in the underlying prices of the securities. It simply establishes a rate of exchange that can be achieved at some point in time. Although forward contracts tend to minimize the risk of loss due to a decline in value of hedged currency, they tend to limit any potential gain that might result should the value of such currency increase. A fund may also enter into forward contracts when its management believes the currency of a particular country will increase in value relative to another currency. A fund may buy currencies forward to gain exposure to a currency without incurring the additional costs of purchasing securities denominated in that currency. Absolute Return Currency and Income Fund is designed to invest in a combination of forward currency contracts and U.S. dollar-denominated market instruments in an attempt to obtain an investment result that is substantially the same as a direct investment in a foreign currency-denominated instrument. For example, the combination of U.S. dollar-denominated instruments with long forward currency exchange contracts creates a position economically equivalent to a position in the foreign currency, in anticipation of an increase in the value of the foreign currency against the U.S. dollar. Conversely, the combination of U.S. dollar- denominated instruments with short forward currency exchange contracts is economically equivalent to borrowing the foreign currency for delivery at a specified date in the future, in anticipation of a decrease in the value of the foreign currency against the U.S. dollar. This strategy may also be employed by other funds. Unanticipated changes in the currency exchange results could result in poorer performance for funds that enter into these types of transactions. A fund may designate cash or securities in an amount equal to the value of the fund's total assets committed to consummating forward contracts entered into under the circumstance set forth above. If the value of the securities declines, additional cash or securities will be designated on a daily basis so that the value of the cash or securities will equal the amount of the fund's commitments on such contracts. At maturity of a forward contract, a fund may either deliver (if a contract to sell) or take delivery of (if a contract to buy) the foreign currency or terminate its contractual obligation by entering into an offsetting contract with the same currency trader, the same maturity date, and covering the same amount of foreign currency. If a fund engages in an offsetting transaction, it would incur a gain or loss to the extent there has been movement in forward contract prices. If a fund engages in an offsetting transaction, it may subsequently enter into a new forward contract to buy or sell the foreign currency. Although a fund values its assets each business day in terms of U.S. dollars, it may not intend to convert its foreign currencies into U.S. dollars on a daily basis. It would do so from time to time, and shareholders should be aware of currency conversion costs. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference (spread) between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to a fund at one rate, while offering a lesser rate of exchange should a fund desire to resell that currency to the dealer. For Absolute Return Currency and Income Fund, it is possible, under certain circumstances, including entering into forward currency contracts for investment purposes, that the fund may have to limit or restructure its forward contract currency transactions to qualify as a "regulated investment company" under the Internal Revenue Code. Options on Foreign Currencies. A fund may buy put and call options and write covered call and cash-secured put options on foreign currencies for hedging purposes and to gain exposure to foreign currencies. For example, a decline in the dollar value of a foreign currency in which securities are denominated will reduce the dollar value of such securities, even if their value in the foreign currency remains constant. In order to protect against the diminutions in the value of securities, a fund may buy put options on the foreign currency. If the value of the currency does decline, a fund would have the right to sell the currency for a fixed amount in dollars and would offset, in whole or in part, the adverse effect on its portfolio that otherwise would have resulted. Conversely, where a change in the dollar value of a currency would increase the cost of securities a fund plans to buy, or where a fund would benefit from increased exposure to the currency, a fund may buy call options on the foreign currency. The purchase of the options could offset, at least partially, the changes in exchange rates. Statement of Additional Information - Nov. 29, 2007 Page 24 As in the case of other types of options, however, the benefit to a fund derived from purchases of foreign currency options would be reduced by the amount of the premium and related transaction costs. In addition, where currency exchange rates do not move in the direction or to the extent anticipated, a fund could sustain losses on transactions in foreign currency options that would require it to forego a portion or all of the benefits of advantageous changes in rates. A fund may write options on foreign currencies for the same types of purposes. For example, when a fund anticipates a decline in the dollar value of foreign- denominated securities due to adverse fluctuations in exchange rates it could, instead of purchasing a put option, write a call option on the relevant currency. If the expected decline occurs, the option would most likely not be exercised and the diminution in value of securities would be fully or partially offset by the amount of the premium received. Similarly, instead of purchasing a call option when a foreign currency is expected to appreciate, a fund could write a put option on the relevant currency. If rates move in the manner projected, the put option would expire unexercised and allow the fund to hedge increased cost up to the amount of the premium. As in the case of other types of options, however, the writing of a foreign currency option will constitute only a partial hedge up to the amount of the premium, and only if rates move in the expected direction. If this does not occur, the option may be exercised and the fund would be required to buy or sell the underlying currency at a loss that may not be offset by the amount of the premium. Through the writing of options on foreign currencies, the fund also may be required to forego all or a portion of the benefits that might otherwise have been obtained from favorable movements on exchange rates. All options written on foreign currencies will be covered. An option written on foreign currencies is covered if a fund holds currency sufficient to cover the option or has an absolute and immediate right to acquire that currency without additional cash consideration upon conversion of assets denominated in that currency or exchange of other currency held in its portfolio. An option writer could lose amounts substantially in excess of its initial investments, due to the margin and collateral requirements associated with such positions. Options on foreign currencies are traded through financial institutions acting as market-makers, although foreign currency options also are traded on certain national securities exchanges, such as the Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to SEC regulation. In an over-the- counter trading environment, many of the protections afforded to exchange participants will not be available. For example, there are no daily price fluctuation limits, and adverse market movements could therefore continue to an unlimited extent over a period of time. Although the purchaser of an option cannot lose more than the amount of the premium plus related transaction costs, this entire amount could be lost. Foreign currency option positions entered into on a national securities exchange are cleared and guaranteed by the Options Clearing Corporation (OCC), thereby reducing the risk of counterparty default. Further, a liquid secondary market in options traded on a national securities exchange may be more readily available than in the over-the-counter market, potentially permitting a fund to liquidate open positions at a profit prior to exercise or expiration, or to limit losses in the event of adverse market movements. The purchase and sale of exchange-traded foreign currency options, however, is subject to the risks of availability of a liquid secondary market described above, as well as the risks regarding adverse market movements, margining of options written, the nature of the foreign currency market, possible intervention by governmental authorities and the effects of other political and economic events. In addition, exchange-traded options on foreign currencies involve certain risks not presented by the over-the-counter market. For example, exercise and settlement of such options must be made exclusively through the OCC, which has established banking relationships in certain foreign countries for that purpose. As a result, the OCC may, if it determines that foreign governmental restrictions or taxes would prevent the orderly settlement of foreign currency option exercises, or would result in undue burdens on OCC or its clearing member, impose special procedures on exercise and settlement, such as technical changes in the mechanics of delivery of currency, the fixing of dollar settlement prices or prohibitions on exercise. Foreign Currency Futures and Related Options. A fund may enter into currency futures contracts to buy or sell currencies. It also may buy put and call options and write covered call and cash-secured put options on currency futures. Currency futures contracts are similar to currency forward contracts, except that they are traded on exchanges (and have margin requirements) and are standardized as to contract size and delivery date. Most currency futures call for payment of delivery in U.S. dollars. A fund may use currency futures for the same purposes as currency forward contracts, subject to CFTC limitations. Currency futures and options on futures values can be expected to correlate with exchange rates, but will not reflect other factors that may affect the value of the fund's investments. A currency hedge, for example, should protect a Yen- denominated bond against a decline in the Yen, but will not protect a fund against price decline if the issuer's creditworthiness deteriorates. Because the value of a fund's investments denominated in foreign currency will change in Statement of Additional Information - Nov. 29, 2007 Page 25 response to many factors other than exchange rates, it may not be possible to match the amount of a forward contract to the value of a fund's investments denominated in that currency over time. A fund will hold securities or other options or futures positions whose values are expected to offset its obligations. The fund would not enter into an option or futures position that exposes the fund to an obligation to another party unless it owns either (i) an offsetting position in securities or (ii) cash, receivables and short-term debt securities with a value sufficient to cover its potential obligations. (See also Derivative Instruments and Foreign Securities.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with foreign currency transactions include: Derivatives Risk, Interest Rate Risk, and Liquidity Risk. FOREIGN SECURITIES Foreign securities, foreign currencies, and securities issued by U.S. entities with substantial foreign operations involve special risks, including those set forth below, which are not typically associated with investing in U.S. securities. Foreign companies are not generally subject to uniform accounting, auditing, and financial reporting standards comparable to those applicable to domestic companies. Additionally, many foreign stock markets, while growing in volume of trading activity, have substantially less volume than the New York Stock Exchange, and securities of some foreign companies are less liquid and more volatile than securities of domestic companies. Similarly, volume and liquidity in most foreign bond markets are less than the volume and liquidity in the U.S. and, at times, volatility of price can be greater than in the U.S. Further, foreign markets have different clearance, settlement, registration, and communication procedures and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions making it difficult to conduct such transactions. Delays in such procedures could result in temporary periods when assets are uninvested and no return is earned on them. The inability of an investor to make intended security purchases due to such problems could cause the investor to miss attractive investment opportunities. Payment for securities without delivery may be required in certain foreign markets and, when participating in new issues, some foreign countries require payment to be made in advance of issuance (at the time of issuance, the market value of the security may be more or less than the purchase price). Some foreign markets also have compulsory depositories (i.e., an investor does not have a choice as to where the securities are held). Fixed commissions on some foreign stock exchanges are generally higher than negotiated commissions on U.S. exchanges. Further, an investor may encounter difficulties or be unable to pursue legal remedies and obtain judgments in foreign courts. There is generally less government supervision and regulation of business and industry practices, stock exchanges, brokers, and listed companies than in the U.S. It may be more difficult for an investor's agents to keep currently informed about corporate actions such as stock dividends or other matters that may affect the prices of portfolio securities. Communications between the U.S. and foreign countries may be less reliable than within the U.S., thus increasing the risk of delays or loss of certificates for portfolio securities. In addition, with respect to certain foreign countries, there is the possibility of nationalization, expropriation, the imposition of additional withholding or confiscatory taxes, political, social, or economic instability, diplomatic developments that could affect investments in those countries, or other unforeseen actions by regulatory bodies (such as changes to settlement or custody procedures). The risks of foreign investing may be magnified for investments in emerging markets, which may have relatively unstable governments, economies based on only a few industries, and securities markets that trade a small number of securities. The introduction of a single currency, the euro, on Jan. 1, 1999 for participating European nations in the Economic and Monetary Union (EU) presents unique uncertainties, including the legal treatment of certain outstanding financial contracts after Jan. 1, 1999 that refer to existing currencies rather than the euro; the establishment and maintenance of exchange rates; the fluctuation of the euro relative to non-euro currencies; whether the interest rate, tax or labor regimes of European countries participating in the euro will converge over time; and whether the admission of other countries such as Poland, Latvia, and Lithuania as members of the EU may have an impact on the euro. Although one or more of the other risks described in this SAI may apply, the largest risks associated with foreign securities include: Foreign/Emerging Markets Risk and Issuer Risk. FUNDING AGREEMENTS A fund may invest in funding agreements issued by domestic insurance companies. Funding agreements are short-term, privately placed, debt obligations of insurance companies that offer a fixed- or floating-rate of interest. These investments are not readily marketable and therefore are considered to be illiquid securities. (See also Illiquid and Restricted Securities.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with funding agreements include: Credit Risk and Liquidity Risk. Statement of Additional Information - Nov. 29, 2007 Page 26 HIGH-YIELD DEBT SECURITIES (JUNK BONDS) High yield (high-risk) debt securities are sometimes referred to as junk bonds. They are non-investment grade (lower quality) securities that have speculative characteristics. Lower quality securities, while generally offering higher yields than investment grade securities with similar maturities, involve greater risks, including the possibility of default or bankruptcy. They are regarded as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal. The special risk considerations in connection with investments in these securities are discussed below. See Appendix A for a discussion of securities ratings. (See also Debt Obligations.) All fixed rate interest-bearing securities typically experience appreciation when interest rates decline and depreciation when interest rates rise. The market values of lower-quality and comparable unrated securities tend to reflect individual corporate developments to a greater extent than do higher rated securities, which react primarily to fluctuations in the general level of interest rates. Lower-quality and comparable unrated securities also tend to be more sensitive to economic conditions than are higher-rated securities. As a result, they generally involve more credit risks than securities in the higher- rated categories. During an economic downturn or a sustained period of rising interest rates, highly leveraged issuers of lower-quality securities may experience financial stress and may not have sufficient revenues to meet their payment obligations. The issuer's ability to service its debt obligations also may be adversely affected by specific corporate developments, the issuer's inability to meet specific projected business forecasts, or the unavailability of additional financing. The risk of loss due to default by an issuer of these securities is significantly greater than a default by issuers of higher-rated securities because such securities are generally unsecured and are often subordinated to other creditors. Further, if the issuer of a lower quality security defaulted, an investor might incur additional expenses to seek recovery. Credit ratings issued by credit rating agencies are designed to evaluate the safety of principal and interest payments of rated securities. They do not, however, evaluate the market value risk of lower-quality securities and, therefore, may not fully reflect the true risks of an investment. In addition, credit rating agencies may or may not make timely changes in a rating to reflect changes in the economy or in the condition of the issuer that affect the market value of the securities. Consequently, credit ratings are used only as a preliminary indicator of investment quality. An investor may have difficulty disposing of certain lower-quality and comparable unrated securities because there may be a thin trading market for such securities. Because not all dealers maintain markets in all lower quality and comparable unrated securities, there is no established retail secondary market for many of these securities. To the extent a secondary trading market does exist, it is generally not as liquid as the secondary market for higher- rated securities. The lack of a liquid secondary market may have an adverse impact on the market price of the security. The lack of a liquid secondary market for certain securities also may make it more difficult for an investor to obtain accurate market quotations. Market quotations are generally available on many lower-quality and comparable unrated issues only from a limited number of dealers and may not necessarily represent firm bids of such dealers or prices for actual sales. Legislation may be adopted from time to time designed to limit the use of certain lower quality and comparable unrated securities by certain issuers. Although one or more of the other risks described in this SAI may apply, the largest risks associated with high-yield debt securities include: Credit Risk, Interest Rate Risk, and Prepayment and Extension Risk. ILLIQUID AND RESTRICTED SECURITIES Illiquid securities are securities that are not readily marketable. These securities may include, but are not limited to, certain securities that are subject to legal or contractual restrictions on resale, certain repurchase agreements, and derivative instruments. To the extent a fund invests in illiquid or restricted securities, it may encounter difficulty in determining a market value for the securities. Disposing of illiquid or restricted securities may involve time-consuming negotiations and legal expense, and it may be difficult or impossible for a fund to sell the investment promptly and at an acceptable price. In determining the liquidity of all securities and derivatives, such as Rule 144A securities, which are unregistered securities offered to qualified institutional buyers, and interest-only and principal-only fixed mortgage-backed securities (IOs and POs) issued by the U.S. government or its agencies and instrumentalities the investment manager, under guidelines established by the Board, will consider any relevant factors including the frequency of trades, the number of dealers willing to purchase or sell the security and the nature of marketplace trades. Although one or more of the other risks described in this SAI may apply, the largest risks associated with illiquid and restricted securities include: Liquidity Risk. INDEXED SECURITIES The value of indexed securities is linked to currencies, interest rates, commodities, indexes, or other financial indicators. Most indexed securities are short- to intermediate-term fixed income securities whose values at maturity or interest rates rise Statement of Additional Information - Nov. 29, 2007 Page 27 or fall according to the change in one or more specified underlying instruments. Indexed securities may be more volatile than the underlying instrument itself and they may be less liquid than the securities represented by the index. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with indexed securities include: Liquidity Risk and Market Risk. INFLATION PROTECTED SECURITIES Inflation is a general rise in prices of goods and services. Inflation erodes the purchasing power of an investor's assets. For example, if an investment provides a total return of 7% in a given year and inflation is 3% during that period, the inflation-adjusted, or real, return is 4%. Inflation-protected securities are debt securities whose principal and/or interest payments are adjusted for inflation, unlike debt securities that make fixed principal and interest payments. One type of inflation-protected debt security is issued by the U.S. Treasury. The principal of these securities is adjusted for inflation as indicated by the Consumer Price Index for Urban Consumers (CPI) and interest is paid on the adjusted amount. The CPI is a measurement of changes in the cost of living, made up of components such as housing, food, transportation and energy. If the CPI falls, the principal value of inflation-protected securities will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Conversely, if the CPI rises, the principal value of inflation-protected securities will be adjusted upward, and consequently the interest payable on these securities will be increased. Repayment of the original bond principal upon maturity is guaranteed in the case of U.S. Treasury inflation-protected securities, even during a period of deflation. However, the current market value of the inflation-protected securities is not guaranteed and will fluctuate. Other inflation-indexed securities include inflation-related bonds, which may or may not provide a similar guarantee. If a guarantee of principal is not provided, the adjusted principal value of the bond repaid at maturity may be less than the original principal. Other issuers of inflation-protected debt securities include other U.S. government agencies or instrumentalities, corporations and foreign governments. There can be no assurance that the CPI or any foreign inflation index will accurately measure the real rate of inflation in the prices of goods and services. Moreover, there can be no assurance that the rate of inflation in a foreign country will be correlated to the rate of inflation in the United States. If interest rates rise due to reasons other than inflation (for example, due to changes in currency exchange rates), investors in these securities may not be protected to the extent that the increase is not reflected in the bond's inflation measure. Any increase in principal for an inflation-protected security resulting from inflation adjustments is considered by IRS regulations to be taxable income in the year it occurs. For direct holders of an inflation-protected security, this means that taxes must be paid on principal adjustments even though these amounts are not received until the bond matures. By contrast, a fund holding these securities distributes both interest income and the income attributable to principal adjustments in the form of cash or reinvested shares, which are taxable to shareholders. Although one or more of the other risks described in this SAI may apply, the largest risks associated with inflation-protected securities include: Interest Rate Risk and Market Risk. INITIAL PUBLIC OFFERINGS (IPOS) Companies issuing IPOs generally have limited operating histories, and their prospects for future profitability are uncertain. These companies often are engaged in new and evolving businesses and are particularly vulnerable to competition and to changes in technology, markets and economic conditions. They may be dependent on certain key managers and third parties, need more personnel and other resources to manage growth and require significant additional capital. They may also be dependent on limited product lines and uncertain property rights and need regulatory approvals. Funds that invest in IPOs can be affected by sales of additional shares and by concentration of control in existing management and principal shareholders. Stock prices of IPOs can also be highly unstable, due to the absence of a prior public market, the small number of shares available for trading and limited investor information. Most IPOs involve a high degree of risk not normally associated with offerings of more seasoned companies. Although one or more risks described in this SAI may apply, the largest risks associated with IPOs include: Small and Mid-Sized Company Risk and Initial Public Offering (IPO) Risk. INVERSE FLOATERS Inverse floaters or inverse floating rate securities are a type of derivative long-term fixed income obligation with a floating or variable interest rate that moves in the opposite direction of short-term interest rates. As short-term interest rates go down, the holders of the inverse floaters receive more income and, as short-term interest rates go up, the holders of the inverse floaters receive less income. As with all long-term fixed income securities, the price of the inverse floater moves inversely Statement of Additional Information - Nov. 29, 2007 Page 28 with long-term interest rates; as long-term interest rates go down, the price of the inverse floater moves up and, when long-term interest rates go up, the price of the inverse floater moves down. While inverse floater securities tend to provide more income than similar term and credit quality fixed-rate bonds, they also exhibit greater volatility in price movement (both up and down). In the municipal market an inverse floater is typically created when the owner of a municipal fixed rate bond transfers that bond to a trust in exchange for cash and a residual interest in the trust's assets and cash flows (inverse floater certificates). The trust funds the purchase of the bond by issuing two classes of certificates: short-term floating rate notes (typically sold to third parties) and the inverse floaters (also known as residual certificates). No additional income beyond that provided by the trust's underlying bond is created; rather, that income is merely divided-up between the two classes of certificates. The holder of the inverse floating rate securities typically has the right to (1) cause the holders of the short-term floating rate notes to tender their notes at par ($100) and (2) to return the inverse floaters and withdraw the underlying bonds, thereby collapsing the trust. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with transactions in inverse floaters include: Interest Rate Risk, Credit Risk, Liquidity Risk and Market Risk. INVESTMENT COMPANIES Investing in securities issued by registered and unregistered investment companies may involve the duplication of advisory fees and certain other expenses. Although one or more of the other risks described in this SAI may apply, the largest risks associated with the securities of other investment companies include: Market Risk. LENDING OF PORTFOLIO SECURITIES A fund may lend certain of its portfolio securities. The current policy of the Board is to make these loans, either long- or short-term, to broker-dealers. Loans will be structured in a manner that will enable a fund to call the loan in order to vote in a proxy solicitation if the fund has knowledge of a material event to be voted on that would affect the fund's investment in the loaned security. In making loans, the lender receives the market price in cash, U.S. government securities, letters of credit, or such other collateral as may be permitted by regulatory agencies and approved by the Board. If the market price of the loaned securities goes up, the lender will get additional collateral on a daily basis. If the market price of the loaned securities goes down, the borrower may request that some collateral be returned. The risks are that the borrower may not provide additional collateral when required or return the securities when due. During the existence of the loan, the lender receives cash payments equivalent to all interest or other distributions paid on the loaned securities. The lender may pay reasonable administrative and custodial fees in connection with a loan and may pay a negotiated portion of the interest earned on the cash or money market instruments held as collateral to the borrower or placing broker. The lender will receive reasonable interest on the loan or a flat fee from the borrower and amounts equivalent to any dividends, interest, or other distributions on the securities loaned. Although one or more of the other risks described in this SAI may apply, the largest risks associated with the lending of portfolio securities include: Credit Risk. LOAN PARTICIPATIONS Loans, loan participations, and interests in securitized loan pools are interests in amounts owed by a corporate, governmental, or other borrower to a lender or consortium of lenders (typically banks, insurance companies, investment banks, government agencies, or international agencies). Loans involve a risk of loss in case of default or insolvency of the borrower and may offer less legal protection to an investor in the event of fraud or misrepresentation. Although one or more of the other risks described in this SAI may apply, the largest risks associated with loan participations include: Credit Risk. MORTGAGE- AND ASSET-BACKED SECURITIES Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property, and include single- and multi-class pass-through securities and Collateralized Mortgage Obligations (CMOs). These securities may be issued or guaranteed by U.S. government agencies or instrumentalities (see also Agency and Government Securities), or by private issuers, generally originators and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers, and special purpose entities. Mortgage-backed securities issued by private lenders may be supported by pools of mortgage loans or other mortgage-backed securities that are guaranteed, directly or indirectly, by the U.S. government or one of its agencies or instrumentalities, or they may be issued without any governmental guarantee of the underlying mortgage assets but with some form of non-governmental Statement of Additional Information - Nov. 29, 2007 Page 29 credit enhancement. Commercial mortgage-backed securities (CMBS) are a specific type of mortgage-backed security collateralized by a pool of mortgages on commercial real estate. Stripped mortgage-backed securities are a type of mortgage-backed security that receive differing proportions of the interest and principal payments from the underlying assets. Generally, there are two classes of stripped mortgage-backed securities: Interest Only (IO) and Principal Only (PO). IOs entitle the holder to receive distributions consisting of all or a portion of the interest on the underlying pool of mortgage loans or mortgage-backed securities. POs entitle the holder to receive distributions consisting of all or a portion of the principal of the underlying pool of mortgage loans or mortgage-backed securities. The cash flows and yields on IOs and POs are extremely sensitive to the rate of principal payments (including prepayments) on the underlying mortgage loans or mortgage- backed securities. A rapid rate of principal payments may adversely affect the yield to maturity of IOs. A slow rate of principal payments may adversely affect the yield to maturity of POs. If prepayments of principal are greater than anticipated, an investor in IOs may incur substantial losses. If prepayments of principal are slower than anticipated, the yield on a PO will be affected more severely than would be the case with a traditional mortgage-backed security. CMOs are hybrid mortgage-related instruments secured by pools of mortgage loans or other mortgage-related securities, such as mortgage pass through securities or stripped mortgage-backed securities. CMOs may be structured into multiple classes, often referred to as "tranches," with each class bearing a different stated maturity and entitled to a different schedule for payments of principal and interest, including prepayments. Principal prepayments on collateral underlying a CMO may cause it to be retired substantially earlier than its stated maturity. The yield characteristics of mortgage-backed securities differ from those of other debt securities. Among the differences are that interest and principal payments are made more frequently on mortgage-backed securities, usually monthly, and principal may be repaid at any time. These factors may reduce the expected yield. Asset-backed securities have structural characteristics similar to mortgage- backed securities. Asset-backed debt obligations represent direct or indirect participation in, or secured by and payable from, assets such as motor vehicle installment sales contracts, other installment loan contracts, home equity loans, leases of various types of property, and receivables from credit card or other revolving credit arrangements. The credit quality of most asset-backed securities depends primarily on the credit quality of the assets underlying such securities, how well the entity issuing the security is insulated from the credit risk of the originator or any other affiliated entities, and the amount and quality of any credit enhancement of the securities. Payments or distributions of principal and interest on asset-backed debt obligations may be supported by non-governmental credit enhancements including letters of credit, reserve funds, overcollateralization, and guarantees by third parties. The market for privately issued asset-backed debt obligations is smaller and less liquid than the market for government sponsored mortgage-backed securities. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with mortgage and asset-backed securities include: Credit Risk, Interest Rate Risk, Liquidity Risk, and Prepayment and Extension Risk. MORTGAGE DOLLAR ROLLS Mortgage dollar rolls are investments in which an investor sells mortgage-backed securities for delivery in the current month and simultaneously contracts to purchase substantially similar securities on a specified future date. While an investor foregoes principal and interest paid on the mortgage-backed securities during the roll period, the investor is compensated by the difference between the current sales price and the lower price for the future purchase as well as by any interest earned on the proceeds of the initial sale. The investor also could be compensated through the receipt of fee income equivalent to a lower forward price. Although one or more of the other risks described in this SAI may apply, the largest risks associated with mortgage dollar rolls include: Credit Risk and Interest Rate Risk. MUNICIPAL OBLIGATIONS Municipal obligations include debt obligations issued by or on behalf of states, territories, possessions, or sovereign nations within the territorial boundaries of the United States (including the District of Columbia and Puerto Rico). The interest on these obligations is generally exempt from federal income tax. Municipal obligations are generally classified as either "general obligations" or "revenue obligations." General obligation bonds are secured by the issuer's pledge of its full faith, credit, and taxing power for the payment of interest and principal. Revenue bonds are payable only from the revenues derived from a project or facility or from the proceeds of a specified revenue source. Industrial development bonds are generally revenue bonds secured by payments from and the credit of private users. Municipal notes are issued to meet the short-term funding requirements of state, regional, and local governments. Municipal notes include tax anticipation notes, bond anticipation notes, revenue anticipation notes, tax Statement of Additional Information - Nov. 29, 2007 Page 30 and revenue anticipation notes, construction loan notes, short-term discount notes, tax-exempt commercial paper, demand notes, and similar instruments. Municipal lease obligations may take the form of a lease, an installment purchase, or a conditional sales contract. They are issued by state and local governments and authorities to acquire land, equipment, and facilities. An investor may purchase these obligations directly, or it may purchase participation interests in such obligations. Municipal leases may be subject to greater risks than general obligation or revenue bonds. State constitutions and statutes set forth requirements that states or municipalities must meet in order to issue municipal obligations. Municipal leases may contain a covenant by the state or municipality to budget for and make payments due under the obligation. Certain municipal leases may, however, provide that the issuer is not obligated to make payments on the obligation in future years unless funds have been appropriated for this purpose each year. Yields on municipal bonds and notes depend on a variety of factors, including money market conditions, municipal bond market conditions, the size of a particular offering, the maturity of the obligation, and the rating of the issue. The municipal bond market has a large number of different issuers, many having smaller sized bond issues, and a wide choice of different maturities within each issue. For these reasons, most municipal bonds do not trade on a daily basis and many trade only rarely. Because many of these bonds trade infrequently, the spread between the bid and offer may be wider and the time needed to develop a bid or an offer may be longer than other security markets. See Appendix A for a discussion of securities ratings. (See also Debt Obligations.) Taxable Municipal Obligations. There is another type of municipal obligation that is subject to federal income tax for a variety of reasons. These municipal obligations do not qualify for the federal income exemption because (a) they did not receive necessary authorization for tax-exempt treatment from state or local government authorities, (b) they exceed certain regulatory limitations on the cost of issuance for tax-exempt financing or (c) they finance public or private activities that do not qualify for the federal income tax exemption. These non- qualifying activities might include, for example, certain types of multi-family housing, certain professional and local sports facilities, refinancing of certain municipal debt, and borrowing to replenish a municipality's underfunded pension plan. Although one or more of the other risks described in this SAI may apply, the largest risks associated with municipal obligations include: Credit Risk, Inflation Risk, Interest Rate Risk, and Market Risk. PREFERRED STOCK Preferred stock is a type of stock that pays dividends at a specified rate and that has preference over common stock in the payment of dividends and the liquidation of assets. Preferred stock does not ordinarily carry voting rights. The price of a preferred stock is generally determined by earnings, type of products or services, projected growth rates, experience of management, liquidity, and general market conditions of the markets on which the stock trades. Although one or more of the other risks described in this SAI may apply, the largest risks associated with preferred stock include: Issuer Risk and Market Risk. REAL ESTATE INVESTMENT TRUSTS Real estate investment trusts (REITs) are pooled investment vehicles that manage a portfolio of real estate or real estate related loans to earn profits for their shareholders. REITs are generally classified as equity REITs, mortgage REITs or a combination of equity and mortgage REITs. Equity REITs invest the majority of their assets directly in real property, such as shopping centers, nursing homes, office buildings, apartment complexes, and hotels, and derive income primarily from the collection of rents. Equity REITs can also realize capital gains by selling properties that have appreciated in value. Mortgage REITs invest the majority of their assets in real estate mortgages and derive income from the collection of interest payments. REITs can be subject to extreme volatility due to fluctuations in the demand for real estate, changes in interest rates, and adverse economic conditions. Similar to investment companies, REITs are not taxed on income distributed to shareholders provided they comply with certain requirements under the tax law. The failure of a REIT to continue to qualify as a REIT for tax purposes can materially affect its value. A fund will indirectly bear its proportionate share of any expenses paid by a REIT in which it invests. REITs often do not provide complete tax information until after the calendar year-end. Consequently, because of the delay, it may be necessary for a fund investing in REITs to request permission to extend the deadline for issuance of Forms 1099-DIV beyond January 31. In the alternative, amended Forms 1099-DIV may be sent. Although one or more of the other risks described in this SAI may apply, the largest risks associated with REITs include: Interest Rate Risk, Issuer Risk and Market Risk. Statement of Additional Information - Nov. 29, 2007 Page 31 REPURCHASE AGREEMENTS Repurchase agreements may be entered into with certain banks or non-bank dealers. In a repurchase agreement, the purchaser buys a security at one price, and at the time of sale, the seller agrees to repurchase the obligation at a mutually agreed upon time and price (usually within seven days). The repurchase agreement determines the yield during the purchaser's holding period, while the seller's obligation to repurchase is secured by the value of the underlying security. Repurchase agreements could involve certain risks in the event of a default or insolvency of the other party to the agreement, including possible delays or restrictions upon the purchaser's ability to dispose of the underlying securities. Although one or more of the other risks described in this SAI may apply, the largest risks associated with repurchase agreements include: Credit Risk. REVERSE REPURCHASE AGREEMENTS In a reverse repurchase agreement, an investor sells a security and enters into an agreement to repurchase the security at a specified future date and price. The investor generally retains the right to interest and principal payments on the security. Since the investor receives cash upon entering into a reverse repurchase agreement, it may be considered a borrowing. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with reverse repurchase agreements include: Credit Risk and Interest Rate Risk. SHORT SALES With short sales, an investor sells a security that it does not own in anticipation of a decline in the market value of the security. To complete the transaction, the investor must borrow the security to make delivery to the buyer. The investor is obligated to replace the security that was borrowed by purchasing it at the market price at the time of replacement. The price at such time may be more or less than the price at which the investor sold the security. A fund that is allowed to engage in short sales will designate cash or liquid securities to cover its open short positions. Those funds also may engage in "short sales against the box," a form of short-selling that involves selling a security that an investor owns (or has an unconditioned right to purchase) for delivery at a specified date in the future. This technique allows an investor to hedge protectively against anticipated declines in the market of its securities. If the value of the securities sold short increased between the date of the short sale and the date on which the borrowed security is replaced, the investor loses the opportunity to participate in the gain. A "short sale against the box" will result in a constructive sale of appreciated securities thereby generating capital gains to a fund. Although one or more of the other risks described in this SAI may apply, the largest risks associated with short sales include: Market Risk. SOVEREIGN DEBT A sovereign debtor's willingness or ability to repay principal and pay interest in a timely manner may be affected by a variety of factors, including its cash flow situation, the extent of its reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtor's policy toward international lenders, and the political constraints to which a sovereign debtor may be subject. (See also Foreign Securities.) With respect to sovereign debt of emerging market issuers, investors should be aware that certain emerging market countries are among the largest debtors to commercial banks and foreign governments. At times, certain emerging market countries have declared moratoria on the payment of principal and interest on external debt. Certain emerging market countries have experienced difficulty in servicing their sovereign debt on a timely basis that led to defaults and the restructuring of certain indebtedness. Sovereign debt includes Brady Bonds, which are securities issued under the framework of the Brady Plan, an initiative announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to restructure their outstanding external commercial bank indebtedness. Although one or more of the other risks described in this SAI may apply, the largest risks associated with sovereign debt include: Credit Risk and Foreign/Emerging Markets Risk. STRUCTURED INVESTMENTS A structured investment is a security whose return is tied to an underlying index or to some other security or pool of assets. Structured investments generally are individually negotiated agreements and may be traded over-the- counter. Structured investments are created and operated to restructure the investment characteristics of the underlying security. This Statement of Additional Information - Nov. 29, 2007 Page 32 restructuring involves the deposit with or purchase by an entity, such as a corporation or trust, of specified instruments, such as commercial bank loans, and the issuance by that entity of one or more classes of debt obligations ("structured securities") backed by, or representing interests in, the underlying instruments. The cash flow on the underlying instruments may be apportioned among the newly issued structured securities to create securities with different investment characteristics, such as varying maturities, payment priorities, and interest rate provisions. The extent of the payments made with respect to structured securities is dependent on the extent of the cash flow on the underlying instruments. Because structured securities typically involve no credit enhancement, their credit risk generally will be equivalent to that of the underlying instruments. Structured securities are often offered in different classes. As a result a given class of a structured security may be either subordinated or unsubordinated to the right of payment of another class. Subordinated structured securities typically have higher yields and present greater risks than unsubordinated structured securities. Structured securities are typically sold in private placement transactions, and at any given time there may be no active trading market for a particular structured security. Although one or more of the other risks described in this SAI may apply, the largest risks associated with structured investments include: Credit Risk and Liquidity Risk. SWAP AGREEMENTS Swap agreements are typically individually negotiated agreements that obligate two parties to exchange payments based on a reference to a specified asset, reference rate or index. Swap agreements will tend to shift a party's investment exposure from one type of investment to another. A swap agreement can increase or decrease the volatility of a fund's investments and its net asset value. Swap agreements are traded in the over-the-counter market and may be considered to be illiquid. Swap agreements entail the risk that a party will default on its payment obligations. A fund will enter into a swap agreement only if the claims- paying ability of the other party or its guarantor is considered to be investment grade by the investment manager. Generally, the unsecured senior debt or the claims-paying ability of the other party or its guarantor must be rated in one of the three highest rating categories of at least one Nationally Recognized Statistical Rating Organization (NRSRO) at the time of entering into the transaction. If there is a default by the other party to such a transaction, a fund will have to rely on its contractual remedies (which may be limited by bankruptcy, insolvency or similar laws) pursuant to the agreements related to the transaction. In certain circumstances, a fund may seek to minimize counterparty risk by requiring the counterparty to post collateral. Swap agreements are usually entered into without an upfront payment because the value of each party's position is the same. The market values of the underlying commitments will change over time resulting in one of the commitments being worth more than the other and the net market value creating a risk exposure for one counterparty or the other. Interest Rate Swaps. Interest rate swap agreements are often used to obtain or preserve a desired return or spread at a lower cost than through a direct investment in an instrument that yields the desired return or spread. They are financial instruments that involve the exchange of one type of interest rate for another type of interest rate cash flow on specified dates in the future. In a standard interest rate swap transaction, two parties agree to exchange their respective commitments to pay fixed or floating rates on a predetermined specified (notional) amount. The swap agreement notional amount is the predetermined basis for calculating the obligations that the swap counterparties have agreed to exchange. Under most swap agreements, the obligations of the parties are exchanged on a net basis. The two payment streams are netted out, with each party receiving or paying, as the case may be, only the net amount of the two payments. Interest rate swaps can be based on various measures of interest rates, including LIBOR, swap rates, treasury rates and other foreign interest rates. Cross Currency Swaps. Cross currency swaps are similar to interest rate swaps, except that they involve multiple currencies. A fund may enter into a currency swap when it has exposure to one currency and desires exposure to a different currency. Typically the interest rates that determine the currency swap payments are fixed, although occasionally one or both parties may pay a floating rate of interest. Unlike an interest rate swap, however, the principal amounts are exchanged at the beginning of the contract and returned at the end of the contract. In addition to paying and receiving amounts at the beginning and termination of the agreements, both sides will also have to pay in full periodically based upon the currency they have borrowed. Change in foreign exchange rates and changes in interest rates, as described above, may negatively affect currency swaps. Total Return Swaps. Total return swaps are contracts in which one party agrees to make periodic payments based on the change in market value of the underlying assets, which may include a specified security, basket of securities or security indexes during the specified period, in return for periodic payments based on a fixed or variable interest rate of the total return from other underlying assets. Total return swap agreements may be used to obtain exposure to a security or market without owning or taking physical custody of such security or market. For example, CMBS total return swaps are bilateral financial contracts designed to replicate synthetically the total returns of commercial mortgage- backed securities. In a typical Statement of Additional Information - Nov. 29, 2007 Page 33 total return equity swap, payments made by the fund or the counterparty are based on the total return of a particular reference asset or assets (such as an equity security, a combination of such securities, or an index). That is, one party agrees to pay another party the return on a stock, basket of stocks, or stock index in return for a specified interest rate. By entering into an equity index swap, for example, the index receiver can gain exposure to stocks making up the index of securities without actually purchasing those stocks. Total return swaps involve not only the risk associated with the investment in the underlying securities, but also the risk of the counterparty not fulfilling its obligations under the agreement. Swaption Transaction. A swaption is an option on a swap agreement and a contract that gives a counterparty the right (but not the obligation) to enter into a new swap agreement or to shorten, extend, cancel or otherwise modify an existing swap agreement, at some designated future time on specified terms, in return for payment of the purchase price (the "premium") of the option. The fund may write (sell) and purchase put and call swaptions to the same extent it may make use of standard options on securities or other instruments. The writer of the contract receives the premium and bears the risk of unfavorable changes in the market value on the underlying swap agreement. Swaptions can be bundled and sold as a package. These are commonly called interest rate caps, floors and collars. In interest rate cap transactions, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate, or cap. Interest rate floor transactions require one party, in exchange for a premium to agree to make payments to the other to the extent that interest rates fall below a specified level, or floor. In interest rate collar transactions, one party sells a cap and purchases a floor, or vice versa, in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels or collar amounts. Credit Default Swaps. Credit default swaps are contracts in which third party credit risk is transferred from one party to another party by one party, the protection buyer, making payments to the other party, the protection seller, in return for the ability of the protection buyer to deliver a reference obligation, or portfolio of reference obligations, to the protection seller upon the occurrence of certain credit events relating to the issuer of the reference obligation and receive the notional amount of the reference obligation from the protection seller. A fund may use credit default swaps for various purposes including to increase or decrease its credit exposure to various issuers. For example, as a seller in a transaction, a fund could use credit default swaps as a way of increasing investment exposure to a particular issuer's bonds in lieu of purchasing such bonds directly. Similarly, as a buyer in a transaction, a fund may use credit default swaps to hedge its exposure on bonds that it owns or in lieu of selling such bonds. A credit default swap agreement may have as reference obligations one or more securities that are not currently held by the fund. The fund may be either the buyer or seller in the transaction. Credit default swaps may also be structured based on the debt of a basket of issuers, rather than a single issuer, and may be customized with respect to the default event that triggers purchase or other factors. As a seller, the fund generally receives an up front payment or a fixed rate of income throughout the term of the swap, which typically is between six months and three years, provided that there is no credit event. If a credit event occurs, generally the seller must pay the buyer the full face amount of deliverable obligations of the reference obligations that may have little or no value. If the fund is a buyer and no credit event occurs, the fund recovers nothing if the swap is held through its termination date. However, if a credit event occurs, the buyer may elect to receive the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference obligation that may have little or no value. Credit default swap agreements 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. A fund will enter into credit default swap agreements only with counterparties that meet certain standards of creditworthiness. A buyer generally also will lose its investment and recover nothing should no credit event occur and the swap is held to its termination date. If a credit event were to occur, the value of any deliverable obligation received by the seller, coupled with the upfront or periodic payments previously received, may be less than the full notional value it pays to the buyer, resulting in a loss of value to the seller. A fund's obligations under a credit default swap agreement will be accrued daily (offset against any amounts owing to the fund). In connection with credit default swaps in which a fund is the buyer, the fund will segregate or "earmark" cash or other liquid assets, or enter into certain offsetting positions, with a value at least equal to the fund's exposure (any accrued but unpaid net amounts owed by the fund to any counterparty), on a marked-to-market basis. In connection with credit default swaps in which a fund is the seller, the fund will segregate or "earmark" cash or other liquid assets, or enter into offsetting positions, with a value at least equal to the full notional amount of the swap (minus any amounts owed to the fund). Such segregation or "earmarking" will ensure that the fund has assets available to satisfy its obligations with respect to the transaction. Such segregation or "earmarking" will not limit the fund's exposure to loss. The use of swap agreements by a fund entails certain risks, which may be different from, or possibly greater than, the risks associated with investing directly in the securities and other investments that are the referenced asset for the swap agreement. Swaps are highly specialized instruments that require investment techniques, risk analyses, and tax planning different from those associated with stocks, bonds, and other traditional investments. The use of a swap requires an understanding not only Statement of Additional Information - Nov. 29, 2007 Page 34 of the referenced asset, reference rate, or index, but also of the swap itself, without the benefit of observing the performance of the swap under all the possible market conditions. Because some swap agreements have a leverage component, adverse changes in the value or level of the underlying asset, reference rate, or index can result in a loss substantially greater than the amount invested in the swap itself. Certain swaps have the potential for unlimited loss, regardless of the size of the initial investment. Although one or more of the other risks described in this SAI may apply, the largest risks associated with swaps include: Credit Risk, Liquidity Risk and Market Risk. VARIABLE- OR FLOATING-RATE SECURITIES Variable-rate securities provide for automatic establishment of a new interest rate at fixed intervals (daily, monthly, semiannually, etc.). Floating-rate securities generally provide for automatic adjustment of the interest rate whenever some specified interest rate index changes. Variable- or floating-rate securities frequently include a demand feature enabling the holder to sell the securities to the issuer at par. In many cases, the demand feature can be exercised at any time. Some securities that do not have variable or floating interest rates may be accompanied by puts producing similar results and price characteristics. Variable-rate demand notes include master demand notes that are obligations that permit the investor to invest fluctuating amounts, which may change daily without penalty, pursuant to direct arrangements between the investor as lender, and the borrower. The interest rates on these notes fluctuate from time to time. The issuer of such obligations normally has a corresponding right, after a given period, to prepay in its discretion the outstanding principal amount of the obligations plus accrued interest upon a specified number of days' notice to the holders of such obligations. Because these obligations are direct lending arrangements between the lender and borrower, it is not contemplated that such instruments generally will be traded. There generally is not an established secondary market for these obligations. Accordingly, where these obligations are not secured by letters of credit or other credit support arrangements, the lender's right to redeem is dependent on the ability of the borrower to pay principal and interest on demand. Such obligations frequently are not rated by credit rating agencies and may involve heightened risk of default by the issuer. Although one or more of the other risks described in this SAI may apply, the largest risks associated with variable- or floating-rate securities include: Credit Risk. WARRANTS Warrants are securities giving the holder the right, but not the obligation, to buy the stock of an issuer at a given price (generally higher than the value of the stock at the time of issuance) during a specified period or perpetually. Warrants may be acquired separately or in connection with the acquisition of securities. Warrants do not carry with them the right to dividends or voting rights and they do not represent any rights in the assets of the issuer. Warrants may be considered to have more speculative characteristics than certain other types of investments. In addition, the value of a warrant does not necessarily change with the value of the underlying securities, and a warrant ceases to have value if it is not exercised prior to its expiration date. Although one or more of the other risks described in this SAI may apply, the largest risks associated with warrants include: Market Risk. WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS When-issued securities and forward commitments involve a commitment to purchase or sell specific securities at a predetermined price or yield in which payment and delivery take place after the customary settlement period for that type of security. Normally, the settlement date occurs within 45 days of the purchase although in some cases settlement may take longer. The investor does not pay for the securities or receive dividends or interest on them until the contractual settlement date. Such instruments involve the risk of loss if the value of the security to be purchased declines prior to the settlement date and the risk that the security will not be issued as anticipated. If the security is not issued as anticipated, a fund may lose the opportunity to obtain a price and yield considered to be advantageous. Although one or more of the other risks described in this SAI may apply, the largest risks associated with when-issued securities and forward commitments include: Credit Risk. ZERO-COUPON, STEP-COUPON, AND PAY-IN-KIND SECURITIES These securities are debt obligations that do not make regular cash interest payments (see also Debt Obligations). Zero-coupon and step-coupon securities are sold at a deep discount to their face value because they do not pay interest until maturity. Pay-in-kind securities pay interest through the issuance of additional securities. Because these securities do not pay current cash income, the price of these securities can be extremely volatile when interest rates fluctuate. See Appendix A for a discussion of securities ratings. Statement of Additional Information - Nov. 29, 2007 Page 35 Although one or more of the other risks described in this SAI may apply, the largest risks associated with zero-coupon, step-coupon, and pay-in-kind securities include: Credit Risk and Interest Rate Risk. A fund cannot issue senior securities but this does not prohibit certain investment activities for which assets of the fund are set aside, or margin, collateral or escrow arrangements are established, to cover the related obligations. Examples of those activities include borrowing money, delayed- delivery and when-issued securities transactions, and contracts to buy or sell options, derivatives, and hedging instruments. SECURITIES TRANSACTIONS Except as otherwise noted, the description of policies and procedures in this section also applies to any fund subadviser. Subject to policies set by the Board, as well as the terms of the investment management agreements, the investment manager or subadviser is authorized to determine, consistent with a fund's investment objective and policies, which securities will be purchased, held, or sold. In determining where the buy and sell orders are to be placed, the investment manager has been directed to use its best efforts to obtain the best available price and the most favorable execution except where otherwise authorized by the Board. Each fund, the investment manager, any subadviser and RiverSource Distributors, Inc. (each a principal underwriter and distributor of the Funds) has a strict Code of Ethics that prohibits affiliated personnel from engaging in personal investment activities that compete with or attempt to take advantage of planned portfolio transactions for the fund. A fund's securities may be traded on an agency basis with brokers or dealers or on a principal basis with dealers. In an agency trade, the broker-dealer generally is paid a commission. In a principal trade, the investment manager will trade directly with the issuer or with a dealer who buys or sells for its own account, rather than acting on behalf of another client. The investment manager generally does not pay the dealer a commission. Instead, the dealer's profit, if any, is the difference, or spread, between the dealer's purchase and sale price for the security. BROKER-DEALER SELECTION In selecting broker-dealers to execute transactions, the investment manager and each subadviser will consider from among such factors as the ability to minimize trading costs, trading expertise, infrastructure, ability to provide information or services, financial condition, confidentiality, competitiveness of commission rates, evaluations of execution quality, promptness of execution, past history, ability to prospect for and find liquidity, difficulty of trade, security's trading characteristics, size of order, liquidity of market, block trading capabilities, quality of settlement, specialized expertise, overall responsiveness, willingness to commit capital and research services provided. The Board has adopted a policy prohibiting the investment manager, or any subadviser, from considering sales of shares of the funds as a factor in the selection of broker-dealers through which to execute securities transactions. On a periodic basis, the investment manager makes a comprehensive review of the broker-dealers and the overall reasonableness of their commissions, including review by an independent third-party evaluator. The review evaluates execution, operational efficiency, and research services. COMMISSION DOLLARS Broker-dealers typically provide a bundle of services including research and execution of transactions. The research provided can be either proprietary (created and provided by the broker-dealer) or third party (created by a third party but provided by the broker-dealer). Consistent with the interests of the fund, the investment manager and each subadviser may use broker-dealers who provide both types of research products and services in exchange for commissions, known as "soft dollars," generated by transactions in fund accounts. The receipt of research and brokerage products and services is used by the investment manager, and by each subadviser, to the extent it engages in such transactions, to supplement its own research and analysis activities, by receiving the views and information of individuals and research staffs of other securities firms, and by gaining access to specialized expertise on individual companies, industries, areas of the economy and market factors. Research and brokerage products and services may include reports on the economy, industries, sectors and individual companies or issuers; statistical information; accounting and tax law interpretations; political analyses; reports on legal developments affecting portfolio securities; information on technical market actions; credit analyses; on-line quotation systems; risk measurement; analyses of corporate responsibility issues; on-line news services; and financial and market database services. Research services may be used by the investment manager in providing advice to all RiverSource funds (or by any subadviser to any other client of the subadviser) even though it is not possible to relate the benefits to any particular fund. Statement of Additional Information - Nov. 29, 2007 Page 36 On occasion, it may be desirable to compensate a broker for research services or for brokerage services by paying a commission that might not otherwise be charged or a commission in excess of the amount another broker might charge. The Board has adopted a policy authorizing the investment manager to do so, to the extent authorized by law, if the investment manager or subadviser determines, in good faith, that such commission is reasonable in relation to the value of the brokerage or research services provided by a broker or dealer, viewed either in the light of that transaction or the investment manager's or subadviser's overall responsibilities with respect to a fund and the other funds or accounts for which it acts as investment manager (or by any subadviser to any other client of that subadviser). As a result of these arrangements, some portfolio transactions may not be effected at the lowest commission, but overall execution may be better. The investment manager and each subadviser have represented that under its procedures the amount of commission paid will be reasonable and competitive in relation to the value of the brokerage services and research products and services provided. The investment manager or a subadviser may use step-out transactions. A "step- out" is an arrangement in which the investment manager or subadviser executes a trade through one broker-dealer but instructs that broker-dealer to step-out all or a part of the trade to another broker-dealer. The second broker-dealer will clear and settle, and receive commissions for, the stepped-out portion. The investment manager or subadviser may receive research products and services in connection with step-out transactions. Use of fund commissions may create potential conflicts of interest between the investment manager or subadviser and a fund. However, the investment manager and each subadviser has policies and procedures in place intended to mitigate these conflicts and ensure that the use of soft dollars falls within the "safe harbor" of Section 28(e) of the Securities Exchange Act of 1934. Some products and services may be used for both investment decision-making and non-investment decision-making purposes ("mixed use" items). The investment manager and each subadviser, to the extent it has mixed use items, has procedures in place to assure that soft dollars pay only for the investment decision-making portion of a mixed-use item. TRADE AGGREGATION AND ALLOCATION Generally, orders are processed and executed in the order received. When a fund buys or sells the same security as another portfolio, fund, or account, the investment manager or subadviser carries out the purchase or sale pursuant to policies and procedures designed in such a way believed to be fair to the fund. Purchase and sale orders may be combined or aggregated for more than one account if it is believed it would be consistent with best execution. Aggregation may reduce commission costs or market impact on a per-share and per-dollar basis, although aggregation may have the opposite effect. There may be times when not enough securities are received to fill an aggregated order, including in an initial public offering, involving multiple accounts. In that event, the investment manager and each subadviser has policies and procedures designed in such a way believed to result in a fair allocation among accounts, including the fund. From time to time, different portfolio managers with the investment manager may make differing investment decisions related to the same security. However, with certain exceptions for funds managed using strictly quantitative methods, a portfolio manager or portfolio management team may not sell a security short if the security is owned in another portfolio managed by that portfolio manager or portfolio management team. On occasion, a fund may purchase and sell a security simultaneously in order to profit from short-term price disparities. The investment manager has portfolio management teams in its Minneapolis and Los Angeles offices that may share research information regarding leveraged loans. The investment manager operates separate and independent trading desks in these locations for the purpose of purchasing and selling leveraged loans. As a result, the investment manager does not aggregate orders in leveraged loans across portfolio management teams. For example, funds and other client accounts being managed by these portfolio management teams may purchase and sell the same leveraged loan in the secondary market on the same day at different times and at different prices. There is also the potential for a particular account or group of accounts, including a fund, to forego an opportunity or to receive a different allocation (either larger or smaller) than might otherwise be obtained if the investment manager were to aggregate trades in leveraged loans across the portfolio management teams. Although the investment manager does not aggregate orders in leveraged loans across its portfolio management teams in Minneapolis and Los Angeles, it operates in this structure subject to its duty to seek best execution. Statement of Additional Information - Nov. 29, 2007 Page 37 The following table shows total brokerage commissions paid in the last three fiscal periods. Substantially all firms through whom transactions were executed provide research services. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1. TABLE 4. TOTAL BROKERAGE COMMISSIONS
- ------------------------------------------------------------------------------------------------- TOTAL BROKERAGE COMMISSIONS - ------------------------------------------------------------------------------------------------- FUND 2007 2006 2005 - ------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JANUARY 31 - ------------------------------------------------------------------------------------------------- Portfolio Builder Aggressive $ 0 $ 0 $ 0(a) - ------------------------------------------------------------------------------------------------- Portfolio Builder Conservative 0 0 0(a) - ------------------------------------------------------------------------------------------------- Portfolio Builder Moderate 0 0 0(a) - ------------------------------------------------------------------------------------------------- Portfolio Builder Moderate Aggressive 0 0 0(a) - ------------------------------------------------------------------------------------------------- Portfolio Builder Moderate Conservative 0 0 0(a) - ------------------------------------------------------------------------------------------------- Portfolio Builder Total Equity 0 0 0(a) - ------------------------------------------------------------------------------------------------- S&P 500 Index 21,050 22,575 49,048 - ------------------------------------------------------------------------------------------------- Small Company Index 56,843 78,951 37,118 - ------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING MARCH 31 - ------------------------------------------------------------------------------------------------- Equity Value 773,828 721,284 858,846 - ------------------------------------------------------------------------------------------------- Precious Metals and Mining 494,184 801,550 1,245,421 - ------------------------------------------------------------------------------------------------- Small Cap Advantage 7,171,421 3,938,697 3,294,757 - ------------------------------------------------------------------------------------------------- Small Cap Growth 1,543,208 1,410,791 2,105,168 - ------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING APRIL 30 - ------------------------------------------------------------------------------------------------- Retirement Plus 2010 0(b) N/A N/A - ------------------------------------------------------------------------------------------------- Retirement Plus 2015 0(b) N/A N/A - ------------------------------------------------------------------------------------------------- Retirement Plus 2020 0(b) N/A N/A - ------------------------------------------------------------------------------------------------- Retirement Plus 2025 0(b) N/A N/A - ------------------------------------------------------------------------------------------------- Retirement Plus 2030 0(b) N/A N/A - ------------------------------------------------------------------------------------------------- Retirement Plus 2035 0(b) N/A N/A - ------------------------------------------------------------------------------------------------- Retirement Plus 2040 0(b) N/A N/A - ------------------------------------------------------------------------------------------------- Retirement Plus 2045 0(b) N/A N/A - ------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING MAY 31 - ------------------------------------------------------------------------------------------------- Aggressive Growth 2,321,264 964,028 181,981 - ------------------------------------------------------------------------------------------------- Fundamental Growth 450,943 178,639 180,023 - ------------------------------------------------------------------------------------------------- Fundamental Value 217,139 346,840 314,501 - ------------------------------------------------------------------------------------------------- High Yield Bond 0 0 0 - ------------------------------------------------------------------------------------------------- Income Builder Basic Income 0 0(c) N/A - ------------------------------------------------------------------------------------------------- Income Builder Enhanced Income 0 0(c) N/A - ------------------------------------------------------------------------------------------------- Income Builder Moderate Income 0 0(c) N/A - ------------------------------------------------------------------------------------------------- Select Value 3,361,507 445,429 310,913 - ------------------------------------------------------------------------------------------------- Short Duration U.S. Government 42,504 24,483 95,868 - ------------------------------------------------------------------------------------------------- Small Cap Equity 910,341 703,172 429,969 - ------------------------------------------------------------------------------------------------- Small Cap Value 2,844,320 2,860,490 2,439,209 - ------------------------------------------------------------------------------------------------- U.S. Government Mortgage 10,386 6,379 10,708 - ------------------------------------------------------------------------------------------------- Value 355,088 297,507 363,273 - ------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JUNE 30 - ------------------------------------------------------------------------------------------------- Dividend Opportunity 576,524 456,446 621,168 - ------------------------------------------------------------------------------------------------- Real Estate 187,309 152,782 185,877 - -------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 38
- ------------------------------------------------------------------------------------------------- TOTAL BROKERAGE COMMISSIONS - ------------------------------------------------------------------------------------------------- FUND 2007 2006 2005 - ------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JULY 31 - ------------------------------------------------------------------------------------------------- Cash Management 0 0 0 - ------------------------------------------------------------------------------------------------- Core Bond 7,599 4,241 3,612 - ------------------------------------------------------------------------------------------------- Disciplined Equity 1,577,337 987,624 35,948 - ------------------------------------------------------------------------------------------------- Disciplined Small and Mid Cap Equity 156,759 8,916(d) N/A - ------------------------------------------------------------------------------------------------- Disciplined Small Cap Value 64,928 33,110(e) N/A - ------------------------------------------------------------------------------------------------- Floating Rate 0 0(e) N/A - ------------------------------------------------------------------------------------------------- Growth 12,096,184 10,375,981 15,623,111 - ------------------------------------------------------------------------------------------------- Income Opportunities 0 0 0 - ------------------------------------------------------------------------------------------------- Inflation Protected Securities 0 0 0 - ------------------------------------------------------------------------------------------------- Large Cap Equity 15,040,354 7,940,223 6,832,334 - ------------------------------------------------------------------------------------------------- Large Cap Value 88,935 138,363 189,029 - ------------------------------------------------------------------------------------------------- Limited Duration Bond 5,172 4,006 3,268 - ------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING AUGUST 31 - ------------------------------------------------------------------------------------------------- California Tax-Exempt(f) 4,143 666 0 - ------------------------------------------------------------------------------------------------- Diversified Bond 91,815 108,055 161,336 - ------------------------------------------------------------------------------------------------- Massachusetts Tax-Exempt(f) 1,191 225 0 - ------------------------------------------------------------------------------------------------- Michigan Tax-Exempt(f) 1,029 189 0 - ------------------------------------------------------------------------------------------------- Minnesota Tax-Exempt(f) 7,293 1,254 0 - ------------------------------------------------------------------------------------------------- New York Tax-Exempt(f) 1,524 255 0 - ------------------------------------------------------------------------------------------------- Ohio Tax-Exempt(f) 1,020 180 0 - ------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING SEPTEMBER 30 - ------------------------------------------------------------------------------------------------- Balanced 567,773 1,071,452 1,135,795 - ------------------------------------------------------------------------------------------------- Disciplined Large Cap Growth 45,978(g) N/A N/A - ------------------------------------------------------------------------------------------------- Diversified Equity Income 3,790,954 2,923,490 3,191,513 - ------------------------------------------------------------------------------------------------- Mid Cap Value 1,219,474 1,354,225 919,813 - ------------------------------------------------------------------------------------------------- Strategic Allocation 1,425,483 1,494,804 502,448 - ------------------------------------------------------------------------------------------------- Strategic Income Allocation 6,639(g) N/A N/A - ------------------------------------------------------------------------------------------------- 2006 2005 2004 - ------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING OCTOBER 31 - ------------------------------------------------------------------------------------------------- Absolute Return Currency and Income 0(h) N/A N/A - ------------------------------------------------------------------------------------------------- Disciplined International Equity 60,738(i) N/A N/A - ------------------------------------------------------------------------------------------------- Emerging Markets 3,017,380 2,388,169 2,022,969 - ------------------------------------------------------------------------------------------------- Emerging Markets Bond 0(j) N/A N/A - ------------------------------------------------------------------------------------------------- European Equity 160,239 211,729 324,079 - ------------------------------------------------------------------------------------------------- Global Bond 9,664 8,856 7,760 - ------------------------------------------------------------------------------------------------- Global Equity 1,249,847 1,393,982 1,992,985 - ------------------------------------------------------------------------------------------------- Global Technology 1,237,181 1,170,244 4,193,021 - ------------------------------------------------------------------------------------------------- International Aggressive Growth 1,179,455 673,010 598,644 - ------------------------------------------------------------------------------------------------- International Equity 405,405 556,407 315,047 - ------------------------------------------------------------------------------------------------- International Opportunity 989,118 1,320,088 1,303,677 - ------------------------------------------------------------------------------------------------- International Select Value 1,533,794 1,027,065 839,270 - ------------------------------------------------------------------------------------------------- International Small Cap 405,190 241,558 179,076 - -------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 39
- ------------------------------------------------------------------------------------------------- TOTAL BROKERAGE COMMISSIONS - ------------------------------------------------------------------------------------------------- FUND 2006 2005 2004 - ------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING NOVEMBER 30 - ------------------------------------------------------------------------------------------------- Intermediate Tax-Exempt 438 0 0 - ------------------------------------------------------------------------------------------------- Mid Cap Growth 1,867,241 1,764,250 1,630,670 - ------------------------------------------------------------------------------------------------- Tax-Exempt Bond 4,257 0 0 - ------------------------------------------------------------------------------------------------- Tax-Exempt High Income 17,679 0 0 - ------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING DECEMBER 31 - ------------------------------------------------------------------------------------------------- Tax-Exempt Money Market 0 0 0 - -------------------------------------------------------------------------------------------------
(a) For the period from March 4, 2004 (when shares became publicly available) to Jan. 31, 2005. (b) For the period from May 18, 2006 (when shares became publicly available) to April 30, 2007. (c) For the period from Feb. 16, 2006 (when shares became publicly available) to May 31, 2006. (d) For the period from May 18, 2006 (when shares became publicly available) to July 31, 2006. (e) For the period from Feb. 16, 2006 (when shares became publicly available) to July 31, 2006. (f) The fund changed its fiscal year end in 2006 from June 30 to Aug. 31. For 2006, the information shown is for the period from July 1, 2005 through Aug. 31, 2006. For years prior to 2006, the fiscal period ended on June 30. (g) For the period from May 17, 2007 (when shares became publicly available) to Sept. 30, 2007. (h) For the period from June 15, 2006 (when the Fund became available) to Oct. 31, 2006. (i) For the period from May 18, 2006 (when shares became publicly available) to Oct. 31, 2006. (j) For the period from Feb. 16, 2006 (when shares became publicly available) to Oct. 31, 2006. Statement of Additional Information - Nov. 29, 2007 Page 40 For the last fiscal period, transactions were specifically directed to firms in exchange for research services as shown in the following table. The table also shows portfolio turnover rates for the last two fiscal periods. Higher turnover rates may result in higher brokerage expenses and taxes. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1. TABLE 5. BROKERAGE DIRECTED FOR RESEARCH AND TURNOVER RATES
- ---------------------------------------------------------------------------------------------------- BROKERAGE DIRECTED FOR RESEARCH* --------------------------------------------- AMOUNT OF COMMIS- SIONS TURNOVER RATES AMOUNT OF IMPUTED OR ----------------------- FUND TRANSACTIONS PAID 2007 2006 - ---------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JANUARY 31 - ---------------------------------------------------------------------------------------------------- Portfolio Builder Aggressive $ 0 $ 0 40% 24% - ---------------------------------------------------------------------------------------------------- Portfolio Builder Conservative 0 0 54 23 - ---------------------------------------------------------------------------------------------------- Portfolio Builder Moderate 0 0 24 15 - ---------------------------------------------------------------------------------------------------- Portfolio Builder Moderate Aggressive 0 0 29 20 - ---------------------------------------------------------------------------------------------------- Portfolio Builder Moderate Conservative 0 0 24 19 - ---------------------------------------------------------------------------------------------------- Portfolio Builder Total Equity 0 0 27 17 - ---------------------------------------------------------------------------------------------------- S&P 500 Index 0 0 20 7 - ---------------------------------------------------------------------------------------------------- Small Company Index 0 0 11 14 - ---------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING MARCH 31 - ---------------------------------------------------------------------------------------------------- Equity Value 149,974,876 177,268 37 28 - ---------------------------------------------------------------------------------------------------- Precious Metals and Mining 50,835,902 81,165 114 111 - ---------------------------------------------------------------------------------------------------- Small Cap Advantage 101,241,760 195,280 158 110 - ---------------------------------------------------------------------------------------------------- Small Cap Growth 22,409,122 241,054 119 152 - ---------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING APRIL 30 - ---------------------------------------------------------------------------------------------------- Retirement Plus 2010 0(a) 0(a) 80(a) N/A - ---------------------------------------------------------------------------------------------------- Retirement Plus 2015 0(a) 0(a) 48(a) N/A - ---------------------------------------------------------------------------------------------------- Retirement Plus 2020 0(a) 0(a) 40(a) N/A - ---------------------------------------------------------------------------------------------------- Retirement Plus 2025 0(a) 0(a) 37(a) N/A - ---------------------------------------------------------------------------------------------------- Retirement Plus 2030 0(a) 0(a) 32(a) N/A - ---------------------------------------------------------------------------------------------------- Retirement Plus 2035 0(a) 0(a) 38(a) N/A - ---------------------------------------------------------------------------------------------------- Retirement Plus 2040 0(a) 0(a) 33(a) N/A - ---------------------------------------------------------------------------------------------------- Retirement Plus 2045 0(a) 0(a) 57(a) N/A - ---------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING MAY 31 - ---------------------------------------------------------------------------------------------------- Aggressive Growth 96,699,167 94,353 163 202 - ---------------------------------------------------------------------------------------------------- Fundamental Growth 6,695,654 5,849 85 62 - ---------------------------------------------------------------------------------------------------- Fundamental Value 0 0 12 20 - ---------------------------------------------------------------------------------------------------- High Yield Bond 0 0 95 93 - ---------------------------------------------------------------------------------------------------- Income Builder Basic Income 0 0 27 1(b) - ---------------------------------------------------------------------------------------------------- Income Builder Enhanced Income 0 0 27 N/A(b) - ---------------------------------------------------------------------------------------------------- Income Builder Moderate Income 0 0 29 N/A(b) - ---------------------------------------------------------------------------------------------------- Select Value 187,860,272 553,344 159(c) 7 - ---------------------------------------------------------------------------------------------------- Short Duration U.S. Government 0 0 168 194 - ---------------------------------------------------------------------------------------------------- Small Cap Equity 5,987,119 7,391 70 88 - ---------------------------------------------------------------------------------------------------- Small Cap Value 61,919,111 69,119 58 77 - ---------------------------------------------------------------------------------------------------- U.S. Government Mortgage 0 0 306(d) 178 - ---------------------------------------------------------------------------------------------------- Value 0 0 77 46 - ----------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 41
- ---------------------------------------------------------------------------------------------------- BROKERAGE DIRECTED FOR RESEARCH* --------------------------------------------- AMOUNT OF COMMIS- SIONS TURNOVER RATES AMOUNT OF IMPUTED OR ----------------------- FUND TRANSACTIONS PAID 2007 2006 - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JUNE 30 - ---------------------------------------------------------------------------------------------------- Dividend Opportunity $ 58,801,149 $ 66,674 17% 19% - ---------------------------------------------------------------------------------------------------- Real Estate 3,614,424 3,275 38 47 - ---------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JULY 31 - ---------------------------------------------------------------------------------------------------- Cash Management 0 0 N/A N/A - ---------------------------------------------------------------------------------------------------- Core Bond 0 0 347(d) 301(d) - ---------------------------------------------------------------------------------------------------- Disciplined Equity 0 0 62 137 - ---------------------------------------------------------------------------------------------------- Disciplined Small and Mid Cap Equity 0 0 84 14(e) - ---------------------------------------------------------------------------------------------------- Disciplined Small Cap Value 0 0 127 40((f)) - ---------------------------------------------------------------------------------------------------- Floating Rate 0 0 91 49(f) - ---------------------------------------------------------------------------------------------------- Growth 762,587,614 1,162,241 98 134 - ---------------------------------------------------------------------------------------------------- Income Opportunities 0 0 122 130 - ---------------------------------------------------------------------------------------------------- Inflation Protected Securities 0 0 76 58 - ---------------------------------------------------------------------------------------------------- Large Cap Equity 1,230,239,400 1,509,554 66 116 - ---------------------------------------------------------------------------------------------------- Large Cap Value 11,935,452 14,090 35 46 - ---------------------------------------------------------------------------------------------------- Limited Duration Bond 0 0 263 328(d) - ---------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING AUGUST 31 - ---------------------------------------------------------------------------------------------------- California Tax-Exempt(g) 0 0 62 7 - ---------------------------------------------------------------------------------------------------- Diversified Bond 0 0 295 281(d) - ---------------------------------------------------------------------------------------------------- Massachusetts Tax-Exempt(g) 0 0 24 5 - ---------------------------------------------------------------------------------------------------- Michigan Tax-Exempt(g) 0 0 20 6 - ---------------------------------------------------------------------------------------------------- Minnesota Tax-Exempt(g) 0 0 26 3 - ---------------------------------------------------------------------------------------------------- New York Tax-Exempt(g) 0 0 28 7 - ---------------------------------------------------------------------------------------------------- Ohio Tax-Exempt(g) 0 0 27 7 - ---------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING SEPTEMBER 30 - ---------------------------------------------------------------------------------------------------- Balanced 15,439,643 25,217 124 126 - ---------------------------------------------------------------------------------------------------- Disciplined Large Cap Growth 0(h) 0(h) 21 N/A - ---------------------------------------------------------------------------------------------------- Diversified Equity Income 51,961,586 37,213 31 28 - ---------------------------------------------------------------------------------------------------- Mid Cap Value 46,244,554 41,155 24 44 - ---------------------------------------------------------------------------------------------------- Strategic Allocation 0 0 123 122 - ---------------------------------------------------------------------------------------------------- Strategic Income Allocation 0(h) 0(h) 70 N/A - ----------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 42
- ---------------------------------------------------------------------------------------------------- BROKERAGE DIRECTED FOR RESEARCH* --------------------------------------------- AMOUNT OF COMMIS- SIONS TURNOVER RATES AMOUNT OF IMPUTED OR ----------------------- FUND TRANSACTIONS PAID 2006 2005 - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING OCTOBER 31 - ---------------------------------------------------------------------------------------------------- Absolute Return Currency and Income $ 0(i) $ 0(i) 12%((i)) N/A - ---------------------------------------------------------------------------------------------------- Disciplined International Equity 0(j) 0(j) 10(j) N/A - ---------------------------------------------------------------------------------------------------- Emerging Markets 0 0 145 124% - ---------------------------------------------------------------------------------------------------- Emerging Markets Bond 0(k) 0(k) 32(k) N/A - ---------------------------------------------------------------------------------------------------- European Equity 0 0 64 56 - ---------------------------------------------------------------------------------------------------- Global Bond 0 0 68 73 - ---------------------------------------------------------------------------------------------------- Global Equity 0 0 112 93 - ---------------------------------------------------------------------------------------------------- Global Technology 46,300,781 102,562 196 115 - ---------------------------------------------------------------------------------------------------- International Aggressive Growth 161,063,936 322,717 124 67 - ---------------------------------------------------------------------------------------------------- International Equity 10,571,131 11,011 89 110 - ---------------------------------------------------------------------------------------------------- International Opportunity 0 0 79 93 - ---------------------------------------------------------------------------------------------------- International Select Value 1,621,115 3,763 31 22 - ---------------------------------------------------------------------------------------------------- International Small Cap 2,518,662 4,542 157 80 - ---------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING NOVEMBER 30 - ---------------------------------------------------------------------------------------------------- Intermediate Tax-Exempt 0 0 35 16 - ---------------------------------------------------------------------------------------------------- Mid Cap Growth 605,235,287 656,125 45 27 - ---------------------------------------------------------------------------------------------------- Tax-Exempt Bond 0 0 32 29 - ---------------------------------------------------------------------------------------------------- Tax-Exempt High Income 0 0 30 30 - ---------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING DECEMBER 31 - ---------------------------------------------------------------------------------------------------- Tax-Exempt Money Market 0 0 N/A N/A - ----------------------------------------------------------------------------------------------------
* Reported numbers include third party soft dollar commissions and portfolio manager directed commissions directed for research. RiverSource also receives proprietary research from brokers, but because these are bundled commissions for which the research portion is not distinguishable from the execution portion, their amounts have not been included in the table. (a) For the period from May 18, 2006 (when shares became publicly available) to April 30, 2007. (b) For the period from Feb. 16, 2006 (when shares became publicly available) to May 31, 2006. (c) The turnover rate increase from 2006 was the result of a change in subadvisers during the fiscal period. (d) A significant portion of the turnover was the result of "roll" transactions in the liquid derivatives and Treasury securities. In the derivative transactions, positions in expiring contracts are liquidated and simultaneously replaced with positions in new contracts with equivalent characteristics. In the Treasury transactions, existing holdings are sold to purchase newly issued securities with slightly longer maturity dates. Although these transactions affect the turnover rate of the portfolio, they do not change the risk exposure or result in material transaction costs. The remaining turnover resulted from strategic reallocations and relative value trading. After transaction costs, we expect this activity to enhance the returns on the overall fund. (e) For the period from May 18, 2006 (when shares became publicly available) to July 31, 2006. (f) For the period from Feb. 16, 2006 (when shares became publicly available) to July 31, 2006. (g) The fund changed its fiscal year end in 2006 from June 30 to Aug. 31. For 2006, the information shown is for the period from July 1, 2005 through Aug. 31, 2006. For years prior to 2006, the fiscal period ended on June 30. (h) For the period from May 17, 2007 (when shares became publicly available) to Sept. 30, 2007. (i) For the period from June 15, 2006 (when the Fund became available) to Oct. 31, 2006. (j) For the period from May 18, 2006 (when shares became publicly available) to Oct. 31, 2006. (k) For the period from Feb. 16, 2006 (when shares became publicly available) to Oct. 31, 2006. Statement of Additional Information - Nov. 29, 2007 Page 43 As of the end of the most recent fiscal period, the fund held securities of its regular brokers or dealers or of the parent of those brokers or dealers that derived more than 15% of gross revenue from securities-related activities as presented below. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1. TABLE 6. SECURITIES OF REGULAR BROKERS OR DEALERS
VALUE OF SECURITIES OWNED AT FUND ISSUER END OF FISCAL PERIOD - -------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JANUARY 31 - -------------------------------------------------------------------------------------------------------------------- Portfolio Builder Aggressive None N/A - -------------------------------------------------------------------------------------------------------------------- Portfolio Builder Conservative None N/A - -------------------------------------------------------------------------------------------------------------------- Portfolio Builder Moderate None N/A - -------------------------------------------------------------------------------------------------------------------- Portfolio Builder Moderate Aggressive None N/A - -------------------------------------------------------------------------------------------------------------------- Portfolio Builder Moderate Conservative None N/A - -------------------------------------------------------------------------------------------------------------------- Portfolio Builder Total Equity None N/A - -------------------------------------------------------------------------------------------------------------------- S&P 500 Index Ameriprise Financial $ 323,985 -------------------------------------------------------------------- Bear Stearns Companies 439,490 -------------------------------------------------------------------- Charles Schwab 439,549 -------------------------------------------------------------------- Citigroup 6,152,453 -------------------------------------------------------------------- E*Trade Financial 236,486 -------------------------------------------------------------------- Franklin Resources 450,831 -------------------------------------------------------------------- Goldman Sachs Group 2,051,800 -------------------------------------------------------------------- Legg Mason 312,453 -------------------------------------------------------------------- Lehman Brothers Holdings 990,499 -------------------------------------------------------------------- JP Morgan Chase & Co. 4,012,826 -------------------------------------------------------------------- Merrill Lynch & Co. 1,878,217 -------------------------------------------------------------------- Morgan Stanley 1,990,354 -------------------------------------------------------------------- PNC Financial Services Group 492,267 - -------------------------------------------------------------------------------------------------------------------- Small Company Index Investment Technology Group 3,392,515 -------------------------------------------------------------------- LaBranche & Co. 884,769 -------------------------------------------------------------------- Piper Jaffray Companies 2,287,085 - -------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING MARCH 31 - -------------------------------------------------------------------------------------------------------------------- Equity Value Citigroup 41,244,194 -------------------------------------------------------------------- Goldman Sachs Group 4,048,708 -------------------------------------------------------------------- Lehman Brothers Holdings 7,011,695 -------------------------------------------------------------------- Merrill Lynch & Co. 14,403,403 -------------------------------------------------------------------- Morgan Stanley 6,529,834 - -------------------------------------------------------------------------------------------------------------------- Precious Metals and Mining None N/A - -------------------------------------------------------------------------------------------------------------------- Small Cap Advantage Knight Capital Group CI A 1,919,159 -------------------------------------------------------------------- Piper Jaffray Companies 1,300,740 - -------------------------------------------------------------------------------------------------------------------- Small Cap Growth None N/A - -------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING APRIL 30 - -------------------------------------------------------------------------------------------------------------------- Retirement Plus 2010 None N/A - -------------------------------------------------------------------------------------------------------------------- Retirement Plus 2015 None N/A - -------------------------------------------------------------------------------------------------------------------- Retirement Plus 2020 None N/A - -------------------------------------------------------------------------------------------------------------------- Retirement Plus 2025 None N/A - -------------------------------------------------------------------------------------------------------------------- Retirement Plus 2030 None N/A - -------------------------------------------------------------------------------------------------------------------- Retirement Plus 2035 None N/A - -------------------------------------------------------------------------------------------------------------------- Retirement Plus 2040 None N/A - -------------------------------------------------------------------------------------------------------------------- Retirement Plus 2045 None N/A - --------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 44
VALUE OF SECURITIES OWNED AT FUND ISSUER END OF FISCAL PERIOD - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING MAY 31 - -------------------------------------------------------------------------------------------------------------------- Aggressive Growth Affiliated Managers Group $ 3,679,452 - -------------------------------------------------------------------------------------------------------------------- Fundamental Growth Charles Schwab 3,187,594 -------------------------------------------------------------------- Franklin Resources 2,099,898 -------------------------------------------------------------------- Goldman Sachs Group 888,657 -------------------------------------------------------------------- Legg Mason 2,427,751 -------------------------------------------------------------------- Morgan Stanley 1,225,426 - -------------------------------------------------------------------------------------------------------------------- Fundamental Value Citigroup 23,790,334 -------------------------------------------------------------------- E*TRADE Financial 1,609,440 -------------------------------------------------------------------- JP Morgan Chase & Co. 48,483,855 -------------------------------------------------------------------- Morgan Stanley 8,342,424 - -------------------------------------------------------------------------------------------------------------------- High Yield Bond LaBranche & Co. 9,982,753 - -------------------------------------------------------------------------------------------------------------------- Income Builder Basic Income None N/A - -------------------------------------------------------------------------------------------------------------------- Income Builder Enhanced Income None N/A - -------------------------------------------------------------------------------------------------------------------- Income Builder Moderate Income None N/A - -------------------------------------------------------------------------------------------------------------------- Select Value AG Edwards 5,069,200 - -------------------------------------------------------------------------------------------------------------------- Short Duration U.S. Government None N/A - -------------------------------------------------------------------------------------------------------------------- Small Cap Equity optionsXpress Holdings 1,681,680 - -------------------------------------------------------------------------------------------------------------------- Small Cap Value Knight Capital Group Cl A 2,333,388 - -------------------------------------------------------------------------------------------------------------------- U.S. Government Mortgage None N/A - -------------------------------------------------------------------------------------------------------------------- Value Charles Schwab 3,076,143 -------------------------------------------------------------------- Citigroup 17,197,044 -------------------------------------------------------------------- JP Morgan Chase & Co. 7,665,450 - -------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JUNE 30 - -------------------------------------------------------------------------------------------------------------------- Dividend Opportunity Citigroup 70,149,025 -------------------------------------------------------------------- Goldman Sachs Group 40,014,728 -------------------------------------------------------------------- JP Morgan Chase & Co. 30,705,333 -------------------------------------------------------------------- PNC Financial Services Group 4,844,463 - -------------------------------------------------------------------------------------------------------------------- Real Estate None N/A - -------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JULY 31 - -------------------------------------------------------------------------------------------------------------------- Cash Management Bear Stearns Companies $100,000,000 -------------------------------------------------------------------- Citigroup Funding 201,473,973 -------------------------------------------------------------------- Credit Suisse NY 149,000,000 -------------------------------------------------------------------- Goldman Sachs Group 25,000,000 -------------------------------------------------------------------- Lehman Brothers 40,000,000 -------------------------------------------------------------------- Merrill Lynch & Co. 118,000,000 - --------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 45
VALUE OF SECURITIES OWNED AT FUND ISSUER END OF FISCAL PERIOD - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Core Bond Bear Stearns Adjustable Rate Mortgage Trust $ 432,111 -------------------------------------------------------------------- Bear Stearns Commercial Mtg Securities 1,066,250 -------------------------------------------------------------------- Citigroup 2,280,910 -------------------------------------------------------------------- Citigroup Commercial Mtge Trust 216,042 -------------------------------------------------------------------- Citigroup/Deutsche Bank Commercial Mtge Trust 171,454 -------------------------------------------------------------------- Credit Suisse Mortgage Capital Ctfs 370,162 -------------------------------------------------------------------- CS First Boston Mtge Securities 261,282 -------------------------------------------------------------------- Goldman Sachs Group 1,222,356 -------------------------------------------------------------------- GS Mtge Securities II 2,711,489 -------------------------------------------------------------------- JP Morgan Chase Commercial Mtge Securities 4,093,282 -------------------------------------------------------------------- JP Morgan Chase & Co. 2,055,760 -------------------------------------------------------------------- LB-UBS Commercial Mtge Trust 3,404,979 -------------------------------------------------------------------- Lehman Brothers Holdings 2,683,709 -------------------------------------------------------------------- Merrill Lynch & Co. 1,810,546 -------------------------------------------------------------------- Merrill Lynch Mtge Trust 1,241,879 -------------------------------------------------------------------- Morgan Stanley 2,631,963 -------------------------------------------------------------------- Morgan Stanley Capital I 1,795,243 - -------------------------------------------------------------------------------------------------------------------- Disciplined Equity Bear Stearns Companies 3,879,525 -------------------------------------------------------------------- Citigroup 45,535,774 -------------------------------------------------------------------- Franklin Resources 19,854,945 -------------------------------------------------------------------- Legg Mason 2,387,070 -------------------------------------------------------------------- Lehman Brothers Holdings 20,371,030 -------------------------------------------------------------------- Merrill Lynch & Co. 31,642,070 -------------------------------------------------------------------- Morgan Stanley 18,527,729 - -------------------------------------------------------------------------------------------------------------------- Disciplined Small Cap Value Knight Capital Group Cl A 89,817 - -------------------------------------------------------------------------------------------------------------------- Disciplined Small and Mid Cap Equity Eaton Vance 456,022 -------------------------------------------------------------------- Knight Capital Group Cl A 328,402 -------------------------------------------------------------------- Raymond James Financial 233,061 - -------------------------------------------------------------------------------------------------------------------- Floating Rate Ameritrade Holding Corp. 738,427 -------------------------------------------------------------------- Lehman Brothers Holdings 998,702 - -------------------------------------------------------------------------------------------------------------------- Growth Goldman Sachs Group 12,504,458 - -------------------------------------------------------------------------------------------------------------------- Income Opportunities None N/A - -------------------------------------------------------------------------------------------------------------------- Inflation Protected Securities None N/A - -------------------------------------------------------------------------------------------------------------------- Large Cap Equity Bear Stearns Companies 2,330,697 -------------------------------------------------------------------- Charles Schwab 2,492,859 -------------------------------------------------------------------- Citigroup 106,570,927 -------------------------------------------------------------------- Franklin Resources 8,476,601 -------------------------------------------------------------------- Goldman Sachs Group 26,394,909 -------------------------------------------------------------------- JP Morgan Chase & Co. 63,976,941 -------------------------------------------------------------------- Lehman Brothers Holdings 25,839,616 -------------------------------------------------------------------- Merrill Lynch & Co. 29,621,901 -------------------------------------------------------------------- Morgan Stanley 30,252,473 -------------------------------------------------------------------- PNC Financial Services Group 10,560,693 - -------------------------------------------------------------------------------------------------------------------- Large Cap Value Citigroup 3,230,654 -------------------------------------------------------------------- Franklin Resources 97,948 -------------------------------------------------------------------- Goldman Sachs Group 277,425 -------------------------------------------------------------------- JP Morgan Chase & Co. 1,855,242 -------------------------------------------------------------------- Lehman Brothers Holdings 969,617 -------------------------------------------------------------------- Merrill Lynch & Co. 896,559 -------------------------------------------------------------------- Morgan Stanley 910,020 -------------------------------------------------------------------- PNC Financial Services Group 323,119 - --------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 46
VALUE OF SECURITIES OWNED AT FUND ISSUER END OF FISCAL PERIOD - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Limited Duration Bond Bear Stearns Adjustable Rate Mortgage Trust $ 336,086 -------------------------------------------------------------------- Bear Stearns Commercial Mtg Securities 657,725 -------------------------------------------------------------------- ChaseFlex Trust 298,088 -------------------------------------------------------------------- Citigroup 954,800 -------------------------------------------------------------------- Citigroup Commercial Mtge Trust 243,047 -------------------------------------------------------------------- Citigroup/Deutsche Bank Commercial Mtge Trust 171,454 -------------------------------------------------------------------- Credit Suisse Mortgage Capital Ctfs 345,484 -------------------------------------------------------------------- CS First Boston Mtge Securities 599,807 -------------------------------------------------------------------- Goldman Sachs Group 487,995 -------------------------------------------------------------------- JP Morgan Chase Commercial Mtge Securities 2,601,062 -------------------------------------------------------------------- JP Morgan Chase & Co. 878,139 -------------------------------------------------------------------- LB-UBS Commercial Mtge Trust 1,509,848 -------------------------------------------------------------------- Lehman Brothers Holdings 1,376,086 -------------------------------------------------------------------- Merrill Lynch & Co. 796,261 -------------------------------------------------------------------- Morgan Stanley 1,480,778 -------------------------------------------------------------------- Morgan Stanley Capital 1 560,613 - -------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING AUGUST 31 - -------------------------------------------------------------------------------------------------------------------- California Tax-Exempt None N/A - -------------------------------------------------------------------------------------------------------------------- Diversified Bond Bear Stearns Adjustable Rate Mortgage Trust 19,075,663 -------------------------------------------------------------------- Bear Stearns Commercial Mtg Securities 7,716,075 -------------------------------------------------------------------- Citigroup 13,476,047 -------------------------------------------------------------------- Citigroup Commercial Mtge Trust 17,776,577 -------------------------------------------------------------------- Citigroup/Deutsche Bank Commercial Mtge Trust 3,011,088 -------------------------------------------------------------------- Credit Suisse Mortgage Capital Ctfs 10,812,580 -------------------------------------------------------------------- CS First Boston Mtge Securities 12,942,077 -------------------------------------------------------------------- GS Mortgate Securities II 30,427,394 -------------------------------------------------------------------- JP Morgan Chase Commercial Mtge Securities 57,292,644 -------------------------------------------------------------------- JP Morgan Chase & Co. 10,280,773 -------------------------------------------------------------------- LB-UBS Commercial Mtge Trust 44,205,393 -------------------------------------------------------------------- Lehman Brothers Holdings 22,673,032 -------------------------------------------------------------------- Morgan Stanley 10,666,759 -------------------------------------------------------------------- Morgan Stanley Capital 1 18,466,575 -------------------------------------------------------------------- Morgan Stanley Mtge Loan Trust 16,611,510 - -------------------------------------------------------------------------------------------------------------------- Massachusetts Tax-Exempt None N/A - -------------------------------------------------------------------------------------------------------------------- Michigan Tax-Exempt None N/A - -------------------------------------------------------------------------------------------------------------------- Minnesota Tax-Exempt None N/A - -------------------------------------------------------------------------------------------------------------------- New York Tax-Exempt None N/A - -------------------------------------------------------------------------------------------------------------------- Ohio Tax-Exempt None N/A - --------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 47
VALUE OF SECURITIES OWNED AT FUND ISSUER END OF FISCAL PERIOD - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING SEPTEMBER 30 - -------------------------------------------------------------------------------------------------------------------- Balanced Bear Stearns Adjustable Rate Mortgage Trust $ 2,496,100 -------------------------------------------------------------------- -------------------------------------------------------------------- Bear Stearns Commercial Mtg Securities 1,691,784 -------------------------------------------------------------------- Bear Stearns Companies 1,085,518 -------------------------------------------------------------------- ChaseFlex Trust 1,218,953 -------------------------------------------------------------------- Citigroup 22,798,902 -------------------------------------------------------------------- Citigroup Commercial Mtge Trust 2,222,407 -------------------------------------------------------------------- Citigroup/Deutsche Bank Commercial Mtge Trust 373,105 -------------------------------------------------------------------- Credit Suisse Mortgage Capital Ctfs 2,277,560 -------------------------------------------------------------------- CS First Boston Mtge Securities 1,532,621 -------------------------------------------------------------------- Franklin Resources 690,285 -------------------------------------------------------------------- Goldman Sachs Group 3,073,590 -------------------------------------------------------------------- GS Mortgage Securities II 3,840,950 -------------------------------------------------------------------- JP Morgan Chase & Co. 13,601,575 -------------------------------------------------------------------- JP Morgan Chase Commercial Mtge Securities 8,999,129 -------------------------------------------------------------------- LB-UBS Commercial Mtge Trust 4,585,816 -------------------------------------------------------------------- Lehman Brothers Holdings 10,279,588 -------------------------------------------------------------------- Merrill Lynch & Co. 6,435,372 -------------------------------------------------------------------- Morgan Stanley 5,171,103 -------------------------------------------------------------------- Morgan Stanley Capital 1 2,460,214 -------------------------------------------------------------------- PNC Financial Services Group 2,325,002 - -------------------------------------------------------------------------------------------------------------------- Disciplined Large Cap Growth Eaton Vance 188,771 -------------------------------------------------------------------- Franklin Resources 182,070 -------------------------------------------------------------------- Goldman Sachs Group 749,704 -------------------------------------------------------------------- Lehman Brothers Holdings 82,286 -------------------------------------------------------------------- Merrill Lynch & Co. 599,892 -------------------------------------------------------------------- Morgan Stanley 817,425 - -------------------------------------------------------------------------------------------------------------------- Diversified Equity Income Citigroup 217,740,612 -------------------------------------------------------------------- JP Morgan Chase & Co. 55,352,255 - -------------------------------------------------------------------------------------------------------------------- Mid Cap Value None N/A - -------------------------------------------------------------------------------------------------------------------- Strategic Allocation Bear Stearns Commercial Mtg Securities 1,397,521 -------------------------------------------------------------------- Bear Stearns Companies 904,987 -------------------------------------------------------------------- Citigroup 28,526,072 -------------------------------------------------------------------- Citigroup Commercial Mtge Trust 2,200,339 -------------------------------------------------------------------- Citigroup/Deutsche Bank Commercial Mtge Trust 174,116 -------------------------------------------------------------------- Credit Suisse Mortgage Capital Ctfs 1,214,049 -------------------------------------------------------------------- CS First Boston Mtge Securities 1,832,214 -------------------------------------------------------------------- Eaton Vance 820,099 -------------------------------------------------------------------- Franklin Resources 5,384,835 -------------------------------------------------------------------- Goldman Sachs Group 1,481,635 -------------------------------------------------------------------- GS Mortgage Securities II 3,878,742 -------------------------------------------------------------------- JP Morgan Chase & Co. 9,615,770 -------------------------------------------------------------------- JP Morgan Chase Commercial Mtge Securities 7,866,478 -------------------------------------------------------------------- LB-UBS Commercial Mtge Trust 4,808,011 -------------------------------------------------------------------- Lehman Brothers Holdings 6,303,744 -------------------------------------------------------------------- Merrill Lynch & Co. 10,556,567 -------------------------------------------------------------------- Morgan Stanley 9,273,978 -------------------------------------------------------------------- Morgan Stanley Capital 1 1,643,239 -------------------------------------------------------------------- Morgan Stanley Mtge Loan Trust 1,963,655 -------------------------------------------------------------------- Raymond James Financial - subsidiary 773,618 - --------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 48
VALUE OF SECURITIES OWNED AT FUND ISSUER END OF FISCAL PERIOD - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Strategic Income Allocation Bear Stearns Adjustable Rate Mortgage Trust $ 268,001 -------------------------------------------------------------------- Bear Stearns Companies 15,965 -------------------------------------------------------------------- Citigroup 391,364 -------------------------------------------------------------------- Franklin Resources 43,478 -------------------------------------------------------------------- JP Morgan Chase & Co. 62,178 -------------------------------------------------------------------- JP Morgan Chase Commercial Mtge Securities 1,498,628 -------------------------------------------------------------------- Lehman Brothers Holdings 736,283 -------------------------------------------------------------------- Merrill Lynch & Co. 381,792 -------------------------------------------------------------------- Merrill Lynch Mtge Trust 487,267 -------------------------------------------------------------------- Morgan Stanley 706,627 -------------------------------------------------------------------- Morgan Stanley Capital 1 350,598 -------------------------------------------------------------------- Morgan Stanley Mtge Loan Trust 981,827 - -------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING OCTOBER 31 - -------------------------------------------------------------------------------------------------------------------- Absolute Return Currency and Income Citigroup 641,723 -------------------------------------------------------------------- Credit Suisse First Boston USA 641,038 -------------------------------------------------------------------- Lehman Brothers Holdings 640,627 -------------------------------------------------------------------- JP Morgan Chase & Co. 400,500 -------------------------------------------------------------------- JP Morgan Chase Commercial Mtge Securities 208,077 -------------------------------------------------------------------- Merrill Lynch & Co. 640,623 -------------------------------------------------------------------- Morgan Stanley 640,788 - -------------------------------------------------------------------------------------------------------------------- Disciplined International Equity None N/A - -------------------------------------------------------------------------------------------------------------------- Emerging Markets None N/A - -------------------------------------------------------------------------------------------------------------------- Emerging Markets Bond None N/A - -------------------------------------------------------------------------------------------------------------------- European Equity Credit Suisse Group 1,561,254 - -------------------------------------------------------------------------------------------------------------------- Global Bond Bear Stearns Commercial Mtge Securities 1,928,687 -------------------------------------------------------------------- Citigroup 3,072,505 -------------------------------------------------------------------- Citigroup Commercial Mtge Trust 1,142,977 -------------------------------------------------------------------- Credit Suisse Mortgage Capital Ctfs 927,081 -------------------------------------------------------------------- CS First Boston Mtge Securities 580,252 -------------------------------------------------------------------- GS Mortgage Securities II 942,552 -------------------------------------------------------------------- JP Morgan Chase Commercial Mtge Securities 8,255,847 -------------------------------------------------------------------- LaBranche & Co. 172,800 -------------------------------------------------------------------- LB-UBS Commercial Mtge Trust 4,108,805 -------------------------------------------------------------------- Morgan Stanley 360,721 -------------------------------------------------------------------- Morgan Stanley Capital 1 3,233,127 -------------------------------------------------------------------- Morgan Stanley, Dean Witter Capital 1 2,279,259 - -------------------------------------------------------------------------------------------------------------------- Global Equity Bear Stearns Companies 5,957,741 -------------------------------------------------------------------- Citigroup 5,305,273 -------------------------------------------------------------------- E*TRADE Financial 6,023,397 -------------------------------------------------------------------- Goldman Sachs Group 8,934,554 - -------------------------------------------------------------------------------------------------------------------- Global Technology None N/A - -------------------------------------------------------------------------------------------------------------------- International Aggressive Growth None N/A - -------------------------------------------------------------------------------------------------------------------- International Equity Credit Suisse Group 699,960 - -------------------------------------------------------------------------------------------------------------------- International Opportunity Credit Suisse Group 6,803,658 - -------------------------------------------------------------------------------------------------------------------- International Select Value Credit Suisse Group 21,282,154 - -------------------------------------------------------------------------------------------------------------------- International Small Cap None N/A - --------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 49
VALUE OF SECURITIES OWNED AT FUND ISSUER END OF FISCAL PERIOD - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING NOVEMBER 30 - -------------------------------------------------------------------------------------------------------------------- Intermediate Tax-Exempt None N/A - -------------------------------------------------------------------------------------------------------------------- Mid Cap Growth Ameritrade Holding $ 14,356,863 -------------------------------------------------------------------- Legg Mason - subsidiary 7,086,678 - -------------------------------------------------------------------------------------------------------------------- Tax-Exempt Bond None N/A - -------------------------------------------------------------------------------------------------------------------- Tax-Exempt High Income None N/A - -------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING DECEMBER 31 - -------------------------------------------------------------------------------------------------------------------- Tax-Exempt Money Market None N/A - --------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 50 BROKERAGE COMMISSIONS PAID TO BROKERS AFFILIATED WITH THE INVESTMENT MANAGER Affiliates of the investment manager may engage in brokerage and other securities transactions on behalf of a fund according to procedures adopted by the Board and to the extent consistent with applicable provisions of the federal securities laws. Subject to approval by the Board, the same conditions apply to transactions with broker-dealer affiliates of any subadviser. The investment manager will use an affiliate only if (i) the investment manager determines that the fund will receive prices and executions at least as favorable as those offered by qualified independent brokers performing similar brokerage and other services for the fund and (ii) the affiliate charges the fund commission rates consistent with those the affiliate charges comparable unaffiliated customers in similar transactions and if such use is consistent with terms of the Investment Management Services Agreement. Information about any brokerage commissions paid by a fund in the last three fiscal periods to brokers affiliated with the fund's investment manager is contained in the following table. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1. TABLE 7. BROKERAGE COMMISSIONS PAID TO INVESTMENT MANAGER OR AFFILIATES
PERCENT OF AGGREGATE AGGREGATE DOLLAR AGGREGATE AGGREGATE DOLLAR AMOUNT OF DOLLAR DOLLAR AMOUNT OF PERCENT OF TRANSACTIONS AMOUNT OF AMOUNT OF COMMISSIONS AGGREGATE INVOLVING COMMISSIONS COMMISSIONS NATURE OF PAID TO BROKERAGE PAYMENT OF PAID TO PAID TO BROKER AFFILIATION BROKER COMMISSIONS COMMISSIONS BROKER BROKER FUND ------------------------------------------------------------------------------------------- 2007 2006 2005 - -------------------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JANUARY 31 - -------------------------------------------------------------------------------------------------------------------------------- Portfolio Builder Aggressive None -- -- -- -- $ 0 $ 0(a) - -------------------------------------------------------------------------------------------------------------------------------- Portfolio Builder Conservative None -- -- -- -- 0 0(a) - -------------------------------------------------------------------------------------------------------------------------------- Portfolio Builder Moderate None -- -- -- -- 0 0(a) - -------------------------------------------------------------------------------------------------------------------------------- Portfolio Builder Moderate None -- -- -- -- 0 0(a) Aggressive - -------------------------------------------------------------------------------------------------------------------------------- Portfolio Builder Moderate None -- -- -- -- 0 0(a) Conservative - -------------------------------------------------------------------------------------------------------------------------------- Portfolio Builder Total Equity None -- -- -- -- 0 0(a) - -------------------------------------------------------------------------------------------------------------------------------- S&P 500 Index None -- -- -- -- 0 0 - -------------------------------------------------------------------------------------------------------------------------------- Small Company Index None 0 0 - -------------------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING MARCH 31 - -------------------------------------------------------------------------------------------------------------------------------- Equity Value None -- -- -- -- 0 10,142* - -------------------------------------------------------------------------------------------------------------------------------- Precious Metals and Mining None -- -- -- -- 0 3,614* - -------------------------------------------------------------------------------------------------------------------------------- Small Cap Advantage None -- -- -- -- 0 0 - -------------------------------------------------------------------------------------------------------------------------------- Small Cap Growth None -- -- -- -- 0 0 - --------------------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 51
PERCENT OF AGGREGATE AGGREGATE DOLLAR AGGREGATE AGGREGATE DOLLAR AMOUNT OF DOLLAR DOLLAR AMOUNT OF PERCENT OF TRANSACTIONS AMOUNT OF AMOUNT OF COMMISSIONS AGGREGATE INVOLVING COMMISSIONS COMMISSIONS NATURE OF PAID TO BROKERAGE PAYMENT OF PAID TO PAID TO BROKER AFFILIATION BROKER COMMISSIONS COMMISSIONS BROKER BROKER FUND ------------------------------------------------------------------------------------------- 2007 2006 2005 - -------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING APRIL 30 - -------------------------------------------------------------------------------------------------------------------------------- Retirement Plus 2010 None(b) -- -- -- -- N/A N/A - -------------------------------------------------------------------------------------------------------------------------------- Retirement Plus 2015 None(b) -- -- -- -- N/A N/A - -------------------------------------------------------------------------------------------------------------------------------- Retirement Plus 2020 None(b) -- -- -- -- N/A N/A - -------------------------------------------------------------------------------------------------------------------------------- Retirement Plus 2025 None(b) -- -- -- -- N/A N/A - -------------------------------------------------------------------------------------------------------------------------------- Retirement Plus 2030 None(b) -- -- -- -- N/A N/A - -------------------------------------------------------------------------------------------------------------------------------- Retirement Plus 2035 None(b) -- -- -- -- N/A N/A - -------------------------------------------------------------------------------------------------------------------------------- Retirement Plus 2040 None(b) -- -- -- -- N/A N/A - -------------------------------------------------------------------------------------------------------------------------------- Retirement Plus 2045 None(b) -- -- -- -- N/A N/A - -------------------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING MAY 31 - -------------------------------------------------------------------------------------------------------------------------------- Aggressive Growth 4 $ 23 0.00% 0.00% $ 57* $ 27 JPMorgan Securities, Inc. - -------------------------------------------------------------------------------------------------------------------------------- Fundamental Value None -- -- -- -- 0 0 - -------------------------------------------------------------------------------------------------------------------------------- Fundamental Growth 5 0 -- -- 0 38 Goldman Sachs & Co. - -------------------------------------------------------------------------------------------------------------------------------- High Yield Bond None ---- -- -- -- 0 0 - -------------------------------------------------------------------------------------------------------------------------------- Income Builder None -- -- -- -- 0((c)) N/A Basic Income - -------------------------------------------------------------------------------------------------------------------------------- Income Builder None ---- -- -- -- 0((c)) N/A Enhanced Income - -------------------------------------------------------------------------------------------------------------------------------- Income Builder None -- -- -- -- 0((c)) N/A Moderate Income - -------------------------------------------------------------------------------------------------------------------------------- Select Value 7 7,352 0.42 0.51 14,216 143,463 Gabelli & Co. - -------------------------------------------------------------------------------------------------------------------------------- Short Duration None -- -- -- -- 0 0 U.S. Government - -------------------------------------------------------------------------------------------------------------------------------- Small Cap Equity 4 568 0.12 0.03 0 0 JPMorgan Securities, Inc. - -------------------------------------------------------------------------------------------------------------------------------- Small Cap Value 5 0 -- -- 1,821 1,943 Goldman Sachs & Co. - -------------------------------------------------------------------------------------------------------------------------------- 8 0 -- -- 0 2,700 Legg Mason Wood Walker, Inc. - -------------------------------------------------------------------------------------------------------------------------------- 9 0 -- -- 0 0 M.J. Whitman - -------------------------------------------------------------------------------------------------------------------------------- U.S. Gov't Mortgage None -- -- -- -- 0 0 - -------------------------------------------------------------------------------------------------------------------------------- Value None -- -- -- -- 0 0 - -------------------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JUNE 30 - -------------------------------------------------------------------------------------------------------------------------------- Dividend Opportunity 1 0 -- -- 0 20,898* AEIS - -------------------------------------------------------------------------------------------------------------------------------- Real Estate None -- -- -- -- 0 0 - --------------------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 52
PERCENT OF AGGREGATE AGGREGATE DOLLAR AGGREGATE AGGREGATE DOLLAR AMOUNT OF DOLLAR DOLLAR AMOUNT OF PERCENT OF TRANSACTIONS AMOUNT OF AMOUNT OF COMMISSIONS AGGREGATE INVOLVING COMMISSIONS COMMISSIONS NATURE OF PAID TO BROKERAGE PAYMENT OF PAID TO PAID TO BROKER AFFILIATION BROKER COMMISSIONS COMMISSIONS BROKER BROKER FUND ------------------------------------------------------------------------------------------- 2007 2006 2005 - -------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JULY 31 - -------------------------------------------------------------------------------------------------------------------------------- Cash Management None -- -- -- -- $ 0 $ 0 - -------------------------------------------------------------------------------------------------------------------------------- Core Bond None -- -- -- -- 0 0 - -------------------------------------------------------------------------------------------------------------------------------- Disciplined Equity None 0 0 - -------------------------------------------------------------------------------------------------------------------------------- Disciplined Small and None -- -- -- -- None((d)) N/A Mid Cap Equity - -------------------------------------------------------------------------------------------------------------------------------- Disciplined Small None -- -- -- -- None((e)) N/A Cap Value - -------------------------------------------------------------------------------------------------------------------------------- Floating Rate None -- -- -- -- None((e)) N/A - -------------------------------------------------------------------------------------------------------------------------------- Growth 1 $ 0 -- -- 0 13,720* AEIS - -------------------------------------------------------------------------------------------------------------------------------- Income Opportunities None -- -- -- -- 0 0 - -------------------------------------------------------------------------------------------------------------------------------- Inflation Protected Securities None -- -- -- -- 0 0 - -------------------------------------------------------------------------------------------------------------------------------- Large Cap Equity 1 0 -- -- 0 10,214* AEIS - -------------------------------------------------------------------------------------------------------------------------------- Large Cap Value 1 0 -- -- 0 276* AEIS - -------------------------------------------------------------------------------------------------------------------------------- Limited Duration Bond None -- -- -- -- 0 0 - -------------------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING AUGUST 31 - -------------------------------------------------------------------------------------------------------------------------------- California Tax-Exempt(f) None -- -- -- -- 0 0 - -------------------------------------------------------------------------------------------------------------------------------- Diversified Bond None -- -- -- -- 0 0 - -------------------------------------------------------------------------------------------------------------------------------- Massachusetts Tax-Exempt(f) None -- -- -- -- 0 0 - -------------------------------------------------------------------------------------------------------------------------------- Michigan Tax-Exempt(f) None -- -- -- -- 0 0 - -------------------------------------------------------------------------------------------------------------------------------- Minnesota Tax-Exempt(f) None -- -- -- -- 0 0 - -------------------------------------------------------------------------------------------------------------------------------- New York Tax-Exempt(f) None -- -- -- -- 0 0 - -------------------------------------------------------------------------------------------------------------------------------- Ohio Tax-Exempt(f) None -- -- -- -- 0 0 - -------------------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING SEPTEMBER 30 - -------------------------------------------------------------------------------------------------------------------------------- Balanced -- -- -- -- 0 0 None - -------------------------------------------------------------------------------------------------------------------------------- Disciplined Large Cap Growth None(g) -- -- -- -- N/A N/A - -------------------------------------------------------------------------------------------------------------------------------- Diversified Equity Income 1 0 -- -- 0 1,716* AEIS - -------------------------------------------------------------------------------------------------------------------------------- Mid Cap Value -- -- -- -- 0 0 None - -------------------------------------------------------------------------------------------------------------------------------- Strategic Allocation None -- -- -- -- 0 0 - -------------------------------------------------------------------------------------------------------------------------------- Strategic Income Allocation None(g) -- -- -- -- N/A N/A - --------------------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 53
PERCENT OF AGGREGATE AGGREGATE DOLLAR AGGREGATE AGGREGATE DOLLAR AMOUNT OF DOLLAR DOLLAR AMOUNT OF PERCENT OF TRANSACTIONS AMOUNT OF AMOUNT OF COMMISSIONS AGGREGATE INVOLVING COMMISSIONS COMMISSIONS NATURE OF PAID TO BROKERAGE PAYMENT OF PAID TO PAID TO BROKER AFFILIATION BROKER COMMISSIONS COMMISSIONS BROKER BROKER FUND ------------------------------------------------------------------------------------------- 2007 2006 2005 - -------------------------------------------------------------------------------------------------------------------------------- PERCENT OF AGGREGATE AGGREGATE DOLLAR AGGREGATE AGGREGATE DOLLAR AMOUNT OF DOLLAR DOLLAR AMOUNT OF PERCENT OF TRANSACTIONS AMOUNT OF AMOUNT OF COMMISSIONS AGGREGATE INVOLVING COMMISSIONS COMMISSIONS NATURE OF PAID TO BROKERAGE PAYMENT OF PAID TO PAID TO BROKER AFFILIATION BROKER COMMISSIONS COMMISSIONS BROKER BROKER FUND ------------------------------------------------------------------------------------------- 2006 2005 2004 - -------------------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING OCTOBER 31 - -------------------------------------------------------------------------------------------------------------------------------- Absolute Return Currency and Income None(h) -- -- -- -- N/A N/A - -------------------------------------------------------------------------------------------------------------------------------- Disciplined International Equity None(i) -- -- -- -- N/A N/A - -------------------------------------------------------------------------------------------------------------------------------- Emerging Markets None -- -- -- -- $ 0 $ 0 - -------------------------------------------------------------------------------------------------------------------------------- Emerging Markets Bond None(j) -- -- -- -- N/A N/A - -------------------------------------------------------------------------------------------------------------------------------- European Equity None -- -- -- -- 0 0 - -------------------------------------------------------------------------------------------------------------------------------- Global Bond None -- -- -- -- 0 0 - -------------------------------------------------------------------------------------------------------------------------------- Global Equity None -- -- -- -- 0 0 - -------------------------------------------------------------------------------------------------------------------------------- Global Technology 1 0 0 0 0 97,718* AEIS - -------------------------------------------------------------------------------------------------------------------------------- International Aggressive Growth JPMorgan 4 $8,149 1.24% 0.66% 9,426 22,343 Securities, Inc. - -------------------------------------------------------------------------------------------------------------------------------- 4 0 0 0 339 0 Cazenove, Inc. - -------------------------------------------------------------------------------------------------------------------------------- International Equity None -- -- -- -- 0 0 - -------------------------------------------------------------------------------------------------------------------------------- International Opportunity None -- -- -- -- 0 0 - -------------------------------------------------------------------------------------------------------------------------------- International Select Value 10 0 0 0 8,829 20,637 Sanford C. Bernstein & Co. LLC - -------------------------------------------------------------------------------------------------------------------------------- International Small Cap None -- -- -- -- 0 0 - -------------------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING NOVEMBER 30 - -------------------------------------------------------------------------------------------------------------------------------- Intermediate Tax-Exempt None -- -- -- -- 0 0 - -------------------------------------------------------------------------------------------------------------------------------- Mid Cap Growth 1 0 0 0 0 17,994* AEIS - -------------------------------------------------------------------------------------------------------------------------------- Tax-Exempt Bond None -- -- -- -- 0 0 - -------------------------------------------------------------------------------------------------------------------------------- Tax-Exempt High Income None -- -- -- -- 0 0 - -------------------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING DECEMBER 31 - -------------------------------------------------------------------------------------------------------------------------------- Tax-Exempt Money Market None -- -- -- 0 0 -- - --------------------------------------------------------------------------------------------------------------------------------
* Represents brokerage clearing fees. (1) American Enterprise Investment Services, Inc., a wholly-owned subsidiary of Ameriprise Financial. (2) Affiliate of UBS, a subadviser. (3) Affiliate of Neuberger Berman Management, Inc., a former subadviser, terminated July 24, 2003. (4) Affiliate of American Century, a subadviser. (5) Affiliate of Goldman Sachs Asset Management, L.P., a subadviser. (6) Affiliate of Eagle Asset Management, Inc., a former subadviser, terminated April 2005. (7) Affiliate of GAMCO Investors, Inc. a former subadviser, terminated Sept. 29, 2006. (8) Affiliate of Royce & Associates, LLC., a former subadviser, terminated April 24, 2006. (9) Affiliate of Third Avenue Management, LLC., a former subadviser, terminated March 15, 2004. (10) Affiliate of AllianceBernstein, a subadviser. (a) For the period from March 4, 2004 (when shares became publicly available) to Jan. 31, 2005. (b) For the period from May 18, 2006 (when shares became publicly available) to April 30, 2007. (c) For the period from Feb. 16, 2006 (when shares became publicly available) to May 31, 2006. (d) For the period from May 18, 2006 (when shares became publicly available) to July 31, 2006. (e) For the period from Feb. 16, 2006 (when shares became publicly available) to July 31, 2006. Statement of Additional Information - Nov. 29, 2007 Page 54 (f) The fund changed its fiscal year end in 2006 from June 30 to Aug. 31. For 2006, the information shown is for the period from July 1, 2005 through Aug. 31, 2006. For years prior to 2006, the fiscal period ended on June 30. (g) For the period from May 17, 2007 (when shares became publicly available) to Sept. 30, 2007. (h) For the period from June 15, 2006 (when the Fund became available) to Oct. 31, 2006. (i) For the period from May 18, 2006 (when shares became publicly available) to Oct. 31, 2006. (j) For the period from Feb. 16, 2006 (when shares became publicly available) to Oct. 31, 2006. VALUING FUND SHARES As of the end of the most recent fiscal period, the computation of net asset value was based on net assets divided by shares outstanding as shown in the following table. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1. TABLE 8. VALUING FUND SHARES
FUND NET ASSETS SHARES OUTSTANDING NET ASSET VALUE OF ONE SHARE - ----------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JANUARY 31 - ----------------------------------------------------------------------------------------------------------------- Portfolio Builder Aggressive Class A $ 400,073,034 32,781,390 $12.20 Class B 98,479,846 8,131,609 12.11 Class C 12,215,638 1,011,229 12.08 Class R4(a) 76,765 6,275 12.23 - ----------------------------------------------------------------------------------------------------------------- Portfolio Builder Conservative Class A 82,673,511 7,926,810 10.43 Class B 35,957,945 3,458,347 10.40 Class C 5,208,785 500,413 10.41 Class R4(a) 23,731 2,296 10.34 - ----------------------------------------------------------------------------------------------------------------- Portfolio Builder Moderate Class A 600,269,888 52,846,837 11.36 Class B 188,670,967 16,679,954 11.31 Class C 27,189,749 2,401,836 11.32 Class R4(a) 111,556 9,835 11.34 - ----------------------------------------------------------------------------------------------------------------- Portfolio Builder Moderate Aggressive Class A 801,243,094 68,285,569 11.73 Class B 202,093,816 17,295,309 11.68 Class C 25,618,875 2,193,231 11.68 Class R4(a) 339,106 28,867 11.75 - ----------------------------------------------------------------------------------------------------------------- Portfolio Builder Moderate Conservative Class A 197,884,478 18,243,067 10.85 Class B 70,978,040 6,562,786 10.82 Class C 12,991,707 1,200,747 10.82 Class R4(a) 28,252 2,615 10.80 - ----------------------------------------------------------------------------------------------------------------- Portfolio Builder Total Equity Class A 364,207,385 28,873,885 12.61 Class B 91,174,410 7,283,997 12.52 Class C 11,361,042 909,754 12.49 Class R4(a) 194,364 15,365 12.65 - ----------------------------------------------------------------------------------------------------------------- S&P 500 Index Class D 57,268,626 10,342,190 5.54 Class E 241,190,686 43,377,282 5.56 - ----------------------------------------------------------------------------------------------------------------- Small Company Index Class A 834,954,281 99,373,376 8.40 Class B 229,997,889 30,755,493 7.48 Class R4(a) 10,300,727 1,199,527 8.59
Statement of Additional Information - Nov. 29, 2007 Page 55
FUND NET ASSETS SHARES OUTSTANDING NET ASSET VALUE OF ONE SHARE - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING MARCH 31 - ----------------------------------------------------------------------------------------------------------------- Equity Value Class A $1,038,420,343 77,344,252 $13.43 Class B 185,258,605 13,764,180 13.46 Class C 6,274,898 470,398 13.34 Class I 14,387 1,070 13.45 Class R2 5,024 374 13.43 Class R3 5,024 374 13.43 Class R4(a) 11,834,082 880,545 13.44 Class R5 5,024 374 13.43 Class W 5,102 380 13.43 - ----------------------------------------------------------------------------------------------------------------- Precious Metals and Mining Class A 97,644,562 6,936,869 14.08 Class B 17,659,188 1,336,794 13.21 Class C 1,801,852 137,792 13.08 Class I 14,068 989 14.22 Class R4(a) 90,369 6,356 14.22 - ----------------------------------------------------------------------------------------------------------------- Small Cap Advantage Class A 441,693,595 73,720,330 5.99 Class B 129,336,345 23,611,177 5.48 Class C 8,769,589 1,600,573 5.48 Class I 9,161 1,484 6.17 Class R2 4,138 679 6.09 Class R3 4,143 679 6.10 Class R4(a) 407,304 66,765 6.10 Class R5 4,149 679 6.11 - ----------------------------------------------------------------------------------------------------------------- Small Cap Growth Class A 113,612,985 22,851,570 4.97 Class B 43,605,178 9,235,700 4.72 Class C 4,604,901 974,784 4.72 Class I 51,300,183 10,105,257 5.08 Class R2 4,770 951 5.02 Class R3 4,771 951 5.02 Class R4(a) 270,967 53,975 5.02 Class R5 4,779 951 5.03 - ----------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING APRIL 30 - ----------------------------------------------------------------------------------------------------------------- Retirement Plus 2010 Class A 570,807 52,343 10.91 Class R2 5,101 468 10.90 Class R3 5,102 468 10.90 Class R4 5,103 468 10.90 Class R5 5,103 468 10.90 Class Y 17,027,528 1,561,292 10.91 - ----------------------------------------------------------------------------------------------------------------- Retirement Plus 2015 Class A 1,558,139 141,208 11.03 Class R2 5,124 465 11.02 Class R3 5,128 465 11.03 Class R4 5,133 465 11.04 Class R5 5,137 465 11.05 Class Y 24,335,322 2,202,953 11.05 - ----------------------------------------------------------------------------------------------------------------- Retirement Plus 2020 Class A 1,811,990 163,746 11.07 Class R2 5,138 464 11.07 Class R3 5,142 464 11.08 Class R4 5,147 464 11.09 Class R5 5,152 464 11.10 Class Y 36,822,853 3,319,542 11.09
Statement of Additional Information - Nov. 29, 2007 Page 56
FUND NET ASSETS SHARES OUTSTANDING NET ASSET VALUE OF ONE SHARE - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- Retirement Plus 2025 Class A $ 1,626,912 146,790 $11.08 Class R2 5,166 466 11.09 Class R3 5,171 466 11.10 Class R4 5,168 465 11.11 Class R5 5,173 465 11.12 Class Y 36,511,597 3,284,899 11.11 - ----------------------------------------------------------------------------------------------------------------- Retirement Plus 2030 Class A 1,234,023 110,886 11.13 Class R2 5,159 464 11.12 Class R3 5,164 464 11.13 Class R4 5,169 464 11.14 Class R5 5,173 464 11.15 Class Y 34,804,136 3,120,579 11.15 - ----------------------------------------------------------------------------------------------------------------- Retirement Plus 2035 Class A 856,259 77,424 11.06 Class R2 5,163 467 11.06 Class R3 5,168 467 11.07 Class R4 5,173 467 11.08 Class R5 5,177 467 11.09 Class Y 20,424,143 1,842,764 11.08 - ----------------------------------------------------------------------------------------------------------------- Retirement Plus 2040 Class A 408,307 36,765 11.11 Class R2 5,152 464 11.10 Class R3 5,157 464 11.11 Class R4 5,161 464 11.12 Class R5 5,166 464 11.13 Class Y 26,163,420 2,350,709 11.13 - ----------------------------------------------------------------------------------------------------------------- Retirement Plus 2045 Class A 449,557 40,512 11.10 Class R2 5,165 466 11.08 Class R3 5,170 466 11.09 Class R4 5,174 466 11.10 Class R5 5,179 466 11.11 Class Y 6,194,498 557,075 11.12 - ----------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING MAY 31 - ----------------------------------------------------------------------------------------------------------------- Aggressive Growth Class A 399,711,131 40,595,431 9.85 Class B 97,376,249 10,200,166 9.55 Class C 1,777,567 186,186 9.55 Class I 98,651,692 9,896,891 9.97 Class R2 5,658 572 9.89 Class R3 5,665 572 9.90 Class R4(a) 90,912 9,173 9.91 Class R5 5,679 572 9.93 - ----------------------------------------------------------------------------------------------------------------- Fundamental Growth Class A 18,943,663 2,707,778 7.00 Class B 5,745,289 848,868 6.77 Class C 758,297 111,896 6.78 Class I 212,413,837 29,927,715 7.10 Class R4(a) 48,276 6,836 7.06 - ----------------------------------------------------------------------------------------------------------------- Fundamental Value Class A 822,766,661 117,196,079 7.02 Class B 257,797,220 37,969,190 6.79 Class C 19,629,840 2,880,002 6.82 Class I 90,894,421 12,814,095 7.09 Class R4(a) 1,044,983 148,002 7.06
Statement of Additional Information - Nov. 29, 2007 Page 57
FUND NET ASSETS SHARES OUTSTANDING NET ASSET VALUE OF ONE SHARE - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- High Yield Bond Class A $1,462,714,531 484,680,021 $ 3.02 Class B 320,767,041 106,329,088 3.02 Class C 25,659,465 8,557,601 3.00 Class I 97,100,427 32,190,847 3.02 Class R2 5,120 1,695 3.02 Class R3 5,119 1,695 3.02 Class R4(a) 1,252,245 415,365 3.01 Class R5 5,120 1,695 3.02 Class W 30,060,498 10,016,119 3.00 - ----------------------------------------------------------------------------------------------------------------- Income Builder Basic Income Class A 197,480,474 18,306,514 10.79 Class B 33,369,169 3,098,661 10.77 Class C 8,088,151 750,276 10.78 Class R4(a) 106,546 9,868 10.80 - ----------------------------------------------------------------------------------------------------------------- Income Builder Enhanced Income Class A 266,493,709 24,047,577 11.08 Class B 38,769,941 3,502,670 11.07 Class C 10,729,906 969,089 11.07 Class R4(a) 39,068 3,524 11.09 - ----------------------------------------------------------------------------------------------------------------- Income Builder Moderate Income Class A 458,497,113 41,715,177 10.99 Class B 68,996,638 6,291,731 10.97 Class C 15,332,314 1,396,682 10.98 Class R4(a) 19,870 1,806 11.00 - ----------------------------------------------------------------------------------------------------------------- Select Value Class A 448,392,699 75,595,343 5.93 Class B 125,804,793 22,107,427 5.69 Class C 8,953,531 1,574,251 5.69 Class I 30,305,964 5,025,259 6.03 Class R4(a) 95,049 15,886 5.98 - ----------------------------------------------------------------------------------------------------------------- Short Duration U.S. Government Class A 513,555,337 108,496,677 4.73 Class B 216,252,753 45,676,904 4.73 Class C 10,269,796 2,169,685 4.73 Class I 54,815,256 11,563,982 4.74 Class R4(a) 3,856,258 814,685 4.73 Class W 4,980 1,053 4.73 - ----------------------------------------------------------------------------------------------------------------- Small Cap Equity Class A 274,668,755 40,475,947 6.79 Class B 43,661,999 6,746,392 6.47 Class C 3,367,966 521,089 6.46 Class I 11,768 1,724 6.83 Class R4(a) 4,055,830 590,525 6.87 - ----------------------------------------------------------------------------------------------------------------- Small Cap Value Class A 682,266,694 104,074,892 6.56 Class B 260,475,063 41,623,621 6.26 Class C 18,231,415 2,907,017 6.27 Class I 26,529,768 3,966,668 6.69 Class R2 4,526 685 6.61 Class R3 4,532 685 6.62 Class R4(a) 349,188 52,748 6.62 Class R5 4,543 685 6.63 - ----------------------------------------------------------------------------------------------------------------- U.S. Government Mortgage Class A 110,626,774 22,121,800 5.00 Class B 44,391,082 8,873,574 5.00 Class C 4,878,851 975,139 5.00 Class I 207,377,398 41,508,753 5.00 Class R4(a) 39,842,143 7,972,479 5.00
Statement of Additional Information - Nov. 29, 2007 Page 58
FUND NET ASSETS SHARES OUTSTANDING NET ASSET VALUE OF ONE SHARE - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- Value Class A $ 211,688,779 37,389,078 $ 5.66 Class B 88,890,354 16,146,970 5.51 Class C 6,587,937 1,193,612 5.52 Class I 60,205,362 10,545,615 5.71 Class R4(a) 126,927 22,309 5.69 - ----------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JUNE 30 - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- Dividend Opportunity Class A 1,452,870,794 150,496,501 9.65 Class B 303,235,001 31,632,609 9.59 Class C 25,821,807 2,697,582 9.57 Class I 241,944,888 25,013,097 9.67 Class R4(a) 1,327,869 137,249 9.67 Class W 5,493 568 9.67 - ----------------------------------------------------------------------------------------------------------------- Real Estate Class A 146,543,348 9,256,921 15.83 Class B 29,348,848 1,867,016 15.72 Class C 2,336,410 148,656 15.72 Class I 94,663,945 5,966,761 15.87 Class R4(a) 189,682 12,014 15.79 Class W 4,340 275 15.78 - ----------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JULY 31 - ----------------------------------------------------------------------------------------------------------------- Cash Management Class A 4,662,135,661 4,661,926,326 1.00 Class B 75,691,552 75,887,752 1.00 Class C 3,601,400 3,602,252 1.00 Class I 49,244,173 49,241,684 1.00 Class R5 4,999 5,000 1.00 Class W 120,154,895 120,156,352 1.00 Class Y 43,544,377 43,630,241 1.00 - ----------------------------------------------------------------------------------------------------------------- Core Bond Class A 39,913,930 4,212,416 9.48 Class B 10,154,475 1,070,928 9.48 Class C 587,688 61,965 9.48 Class I 259,104,810 27,376,402 9.46 Class R2 4,912 518 9.48 Class R3 4,912 518 9.48 Class R4(a) 9,474 1,000 9.47 Class R5 4,912 518 9.48 Class W 4,889 516 9.47 - ----------------------------------------------------------------------------------------------------------------- Disciplined Equity Class A 1,410,073,147 195,317,511 7.22 Class B 62,090,519 8,724,783 7.12 Class C 3,322,979 467,585 7.11 Class I 441,406,784 60,689,061 7.27 Class R2 4,763 661 7.21 Class R3 4,770 661 7.22 Class R4(a) 157,584,051 21,739,173 7.25 Class R5 4,783 661 7.24 Class W 744,887,615 103,164,030 7.22 - ----------------------------------------------------------------------------------------------------------------- Disciplined Small and Mid Cap Equity Class A 18,372,667 1,924,399 9.55 Class B 1,365,013 144,191 9.47 Class C 183,734 19,407 9.47 Class I 38,785,276 4,051,418 9.57 Class R4(a) 15,157 1,586 9.56 Class W 57,063,032 5,979,419 9.54
Statement of Additional Information - Nov. 29, 2007 Page 59
FUND NET ASSETS SHARES OUTSTANDING NET ASSET VALUE OF ONE SHARE - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- Disciplined Small Cap Value Class A $ 13,618,506 1,361,629 $10.00 Class B 551,233 55,679 9.90 Class C 46,126 4,657 9.90 Class I 25,166,988 2,509,791 10.03 Class R2 4,536 455 9.97 Class R3 4,544 455 9.99 Class R4(a) 10,004 1,000 10.00 Class R5 4,557 455 10.02 - ----------------------------------------------------------------------------------------------------------------- Floating Rate Class A 426,098,639 43,927,296 9.70 Class B 48,127,927 4,961,642 9.70 Class C 23,742,707 2,447,587 9.70 Class I 186,030,163 19,185,525 9.70 Class R4(a) 294,089 30,330 9.70 Class W 4,822 497 9.70 - ----------------------------------------------------------------------------------------------------------------- Growth Class A 2,392,774,288 73,100,079 32.73 Class B 369,487,313 12,401,019 29.79 Class C 20,332,352 682,923 29.77 Class I 298,304,650 8,893,003 33.54 Class R2 5,135 155 33.13 Class R3 5,143 155 33.18 Class R4(a) 145,831,935 4,373,779 33.34 Class R5 5,159 155 33.28 Class W 5,214 157 33.21 - ----------------------------------------------------------------------------------------------------------------- Income Opportunities Class A 177,438,822 17,763,829 9.99 Class B 43,356,468 4,342,532 9.98 Class C 4,788,510 479,660 9.98 Class I 85,512,402 8,550,686 10.00 Class R4(a) 152,957 15,307 9.99 - ----------------------------------------------------------------------------------------------------------------- Inflation Protected Securities Class A 65,959,818 6,807,001 9.69 Class B 16,143,740 1,666,752 9.69 Class C 1,784,275 184,194 9.69 Class I 310,160,205 32,014,702 9.69 Class R4(a) 9,661 1,000 9.66 Class W 4,932 509 9.69 - ----------------------------------------------------------------------------------------------------------------- Large Cap Equity Class A 5,038,950,020 833,522,641 6.05 Class B 833,234,754 140,889,101 5.91 Class C 31,622,901 5,341,167 5.92 Class I 67,937,053 11,159,673 6.09 Class R2 5,001 822 6.08 Class R3 5,009 822 6.09 Class R4(a) 330,120,266 53,887,010 6.13 Class R5 25,375,778 4,153,053 6.11 - ----------------------------------------------------------------------------------------------------------------- Large Cap Value Class A 62,421,177 10,928,420 5.71 Class B 15,116,287 2,672,256 5.66 Class C 1,041,705 184,547 5.64 Class I 16,865,439 2,934,662 5.75 Class R2 4,345 763 5.69 Class R3 4,352 763 5.70 Class R4(a) 37,830 6,589 5.74 Class R5 4,364 763 5.72
Statement of Additional Information - Nov. 29, 2007 Page 60
FUND NET ASSETS SHARES OUTSTANDING NET ASSET VALUE OF ONE SHARE - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- Limited Duration Bond Class A $ 61,546,982 6,425,229 $ 9.58 Class B 9,671,171 1,009,974 9.58 Class C 1,598,714 167,013 9.57 Class I 78,906,235 8,234,187 9.58 Class R4(a) 9,580 1,000 9.58 Class W 4,907 512 9.58 - ----------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING AUGUST 31 - ----------------------------------------------------------------------------------------------------------------- California Tax-Exempt Class A 164,203,362 32,628,583 5.03 Class B 6,098,994 1,212,728 5.03 Class C 1,892,236 375,541 5.04 - ----------------------------------------------------------------------------------------------------------------- Diversified Bond Class A 1,936,988,090 402,638,195 4.81 Class B 303,507,236 63,093,643 4.81 Class C 16,840,412 3,499,861 4.81 Class I 386,010,354 80,134,097 4.82 Class R2 4,993 1,040 4.80 Class R3 4,993 1,040 4.80 Class R4(a) 77,835,688 16,200,659 4.80 Class R5 4,993 1,040 4.80 Class W 223,104,264 46,359,028 4.81 - ----------------------------------------------------------------------------------------------------------------- Massachusetts Tax-Exempt Class A 40,717,606 7,820,119 5.21 Class B 5,814,908 1,116,878 5.21 Class C 544,269 104,584 5.20 - ----------------------------------------------------------------------------------------------------------------- Michigan Tax-Exempt Class A 37,592,746 7,275,112 5.17 Class B 1,227,309 237,390 5.17 Class C 1,036,661 200,598 5.17 - ----------------------------------------------------------------------------------------------------------------- Minnesota Tax-Exempt Class A 287,817,910 55,944,378 5.14 Class B 19,653,652 3,819,066 5.15 Class C 7,032,169 1,366,714 5.15 - ----------------------------------------------------------------------------------------------------------------- New York Tax-Exempt Class A 58,346,141 11,846,759 4.93 Class B 4,552,447 924,299 4.93 Class C 792,261 160,882 4.92 - ----------------------------------------------------------------------------------------------------------------- Ohio Tax-Exempt Class A 37,930,078 7,353,281 5.16 Class B 3,179,195 616,144 5.16 Class C 946,879 183,489 5.16 - ----------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING SEPTEMBER 30 - ----------------------------------------------------------------------------------------------------------------- Balanced Class A 928,530,399 80,993,116 11.46 Class B 51,600,913 4,530,330 11.39 Class C 5,095,786 447,856 11.38 Class R4(a) 66,243,594 5,777,310 11.47 - ----------------------------------------------------------------------------------------------------------------- Disciplined Large Cap Growth Class A 4,279,021 413,231 10.36 Class B 326,632 31,617 10.33 Class C 31,221 3,023 10.33 Class I 76,002,552 7,326,008 10.37 Class R2 10,341 1,000 10.34 Class R3 10,351 1,000 10.35 Class R4 10,361 1,000 10.36 Class R5 10,371 1,000 10.37
Statement of Additional Information - Nov. 29, 2007 Page 61
FUND NET ASSETS SHARES OUTSTANDING NET ASSET VALUE OF ONE SHARE - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- Diversified Equity Income Class A $6,501,873,578 453,432,458 $14.34 Class B 1,113,206,377 77,559,340 14.35 Class C 113,516,275 7,925,624 14.32 Class I 131,741,947 9,192,333 14.33 Class R2 30,353 2,118 14.33 Class R3 118,360,158 8,262,415 14.33 Class R4(a) 209,638,131 14,606,415 14.35 Class R5 9,908,675 690,653 14.35 Class W 5,179 361 14.35 - ----------------------------------------------------------------------------------------------------------------- Mid Cap Value Class A 2,025,925,988 199,669,660 10.15 Class B 306,040,101 31,110,273 9.84 Class C 41,928,292 4,260,232 9.84 Class I 29,272,035 2,842,058 10.30 Class R2 286,713 28,176 10.18 Class R3 1,378,297 135,282 10.19 Class R4(a) 157,136,066 15,373,885 10.22 Class R5 11,647 1,138 10.23 Class W 5,162 506 10.20 - ----------------------------------------------------------------------------------------------------------------- Strategic Allocation Class A 1,871,507,235 150,019,394 12.48 Class B 243,036,227 19,659,018 12.36 Class C 66,994,896 5,441,062 12.31 Class I 5,413 434 12.47 Class R2 5,412 434 12.47 Class R3 5,412 434 12.47 Class R4(a) 16,864,439 1,351,237 12.48 Class R5 5,413 434 12.47 - ----------------------------------------------------------------------------------------------------------------- Strategic Income Allocation Class A 111,724,275 11,351,342 9.84 Class B 7,178,608 729,232 9.84 Class C 2,293,610 233,160 9.84 - ----------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING OCTOBER 31 - ----------------------------------------------------------------------------------------------------------------- Absolute Return Currency and Income Class A 10,053,611 996,000 10.09 Class B 10,093 1,000 10.09 Class C 10,093 1,000 10.09 Class I 68,129,549 6,743,149 10.10 Class R4(a) 10,094 1,000 10.09 Class W N/A N/A N/A - ----------------------------------------------------------------------------------------------------------------- Disciplined International Equity Class A 10,874,410 1,107,013 9.82 Class B 190,838 19,499 9.79 Class C 31,275 3,195 9.79 Class I 62,926,083 6,399,203 9.83 Class R4(a) 11,885 1,209 9.83 Class W N/A N/A N/A - ----------------------------------------------------------------------------------------------------------------- Emerging Markets Class A 425,229,317 37,571,472 11.32 Class B 76,605,821 7,204,484 10.63 Class C 4,798,555 450,159 10.66 Class I 41,144,243 3,576,427 11.50 Class R4(a) 5,734,130 498,653 11.50
Statement of Additional Information - Nov. 29, 2007 Page 62
FUND NET ASSETS SHARES OUTSTANDING NET ASSET VALUE OF ONE SHARE - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- Emerging Markets Bond Class A $ 11,663,305 1,147,539 $10.16 Class B 510,005 50,209 10.16 Class C 38,734 3,818 10.15 Class I 47,400,407 4,663,886 10.16 Class R4(a) 14,378 1,415 10.16 Class W N/A N/A N/A - ----------------------------------------------------------------------------------------------------------------- European Equity Class A 85,143,488 15,798,323 5.39 Class B 29,438,905 5,546,040 5.31 Class C 1,489,197 280,865 5.30 Class I 15,461 2,865 5.40 Class R4(a) 4,340 802 5.41 - ----------------------------------------------------------------------------------------------------------------- Global Bond Class A 276,081,128 41,822,802 6.60 Class B 63,316,660 9,495,713 6.67 Class C 3,116,080 470,447 6.62 Class I 144,623,214 21,955,114 6.59 Class R4(a) 80,561 12,204 6.60 Class W N/A N/A N/A - ----------------------------------------------------------------------------------------------------------------- Global Equity Class A 608,153,308 80,859,119 7.52 Class B 110,122,992 15,600,152 7.06 Class C 5,663,445 807,287 7.02 Class R2 N/A N/A N/A Class R3 N/A N/A N/A Class R4(a) 9,464,690 1,246,167 7.60 Class R5 N/A N/A N/A Class W N/A N/A N/A - ----------------------------------------------------------------------------------------------------------------- Global Technology Class A 122,944,396 50,874,610 2.42 Class B 42,498,835 20,342,056 2.09 Class C 3,415,678 1,630,088 2.10 Class I 14,460 5,882 2.46 Class R4(a) 544,605 223,793 2.43 - ----------------------------------------------------------------------------------------------------------------- International Aggressive Growth Class A 293,775,958 31,171,014 9.42 Class B 66,512,481 7,289,751 9.12 Class C 4,436,253 486,251 9.12 Class I 127,665,491 13,394,495 9.53 Class R4(a) 830,516 87,614 9.48 - ----------------------------------------------------------------------------------------------------------------- International Equity Class A 99,431,354 11,739,511 8.47 Class B 25,438,560 3,052,687 8.33 Class C 1,752,171 210,053 8.34 Class I 68,401,947 8,030,624 8.52 Class R4(a) 208,406 24,590 8.48 - ----------------------------------------------------------------------------------------------------------------- International Opportunity Class A 464,197,404 48,662,459 9.54 Class B 77,061,945 8,313,137 9.27 Class C 3,350,335 364,611 9.19 Class I 105,055,917 10,892,334 9.64 Class R2 N/A N/A N/A Class R3 N/A N/A N/A Class R4(a) 814,767 83,796 9.72 Class R5 N/A N/A N/A
Statement of Additional Information - Nov. 29, 2007 Page 63
FUND NET ASSETS SHARES OUTSTANDING NET ASSET VALUE OF ONE SHARE - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- International Select Value Class A $1,541,660,931 140,143,797 $11.00 Class B 380,209,275 35,755,399 10.63 Class C 25,603,920 2,411,018 10.62 Class I 89,262,817 8,020,468 11.13 Class R4(a) 1,779,472 160,592 11.08 - ----------------------------------------------------------------------------------------------------------------- International Small Cap Class A 66,757,092 7,136,008 9.35 Class B 16,957,050 1,862,179 9.11 Class C 992,519 108,850 9.12 Class I 15,421,576 1,630,325 9.46 Class R4(a) 105,171 11,180 9.41 - ----------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING NOVEMBER 30 - ----------------------------------------------------------------------------------------------------------------- Intermediate Tax-Exempt Class A 79,222,404 14,870,237 5.33 Class B 10,105,406 1,898,265 5.32 Class C 3,889,860 730,718 5.32 - ----------------------------------------------------------------------------------------------------------------- Mid Cap Growth Class A 1,092,797,106 75,865,923 14.40 Class B 207,104,427 15,809,072 13.10 Class C 8,971,125 684,902 13.10 Class I 5,584 379 14.73 Class R4(a) 28,734,870 1,966,443 14.61 - ----------------------------------------------------------------------------------------------------------------- Tax-Exempt Bond Class A 788,062,658 202,199,047 3.90 Class B 42,861,116 10,998,990 3.90 Class C 6,544,550 1,678,589 3.90 - ----------------------------------------------------------------------------------------------------------------- Tax-Exempt High Income Class A 3,042,227,492 684,487,152 4.44 Class B 126,941,031 28,569,339 4.44 Class C 17,942,164 4,035,449 4.45 - ----------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING DECEMBER 31 - ----------------------------------------------------------------------------------------------------------------- Tax-Exempt Money Market 117,705,960 117,733,876 1.00 - -----------------------------------------------------------------------------------------------------------------
(a) Effective Dec. 11, 2006, Class Y was renamed Class R4. FOR FUNDS OTHER THAN MONEY MARKET FUNDS. In determining net assets before shareholder transactions, a fund's securities are valued as follows as of the close of business of the New York Stock Exchange (the Exchange): - Securities traded on a securities exchange for which a last-quoted sales price is readily available are valued at the last-quoted sales price on the exchange where such security is primarily traded. - Securities traded on a securities exchange for which a last-quoted sales price is not readily available are valued at the mean of the closing bid and asked prices, looking first to the bid and asked prices on the exchange where the security is primarily traded and, if none exist, to the over-the-counter market. - Securities included in the NASDAQ National Market System are valued at the last-quoted sales price in this market. - Securities included in the NASDAQ National Market System for which a last- quoted sales price is not readily available, and other securities traded over-the-counter but not included in the NASDAQ National Market System are valued at the mean of the closing bid and asked prices. - Futures and options traded on major exchanges are valued at the last- quoted sales price on their primary exchange. - Foreign securities traded outside the United States are generally valued as of the time their trading is complete, which is usually different from the close of the Exchange. Foreign securities quoted in foreign currencies are translated into U.S. dollars utilizing spot exchange rates at the close of regular trading on the NYSE. - Occasionally, events affecting the value of securities occur between the time the primary market on which the securities are traded closes and the close of the Exchange. If events materially affect the value of securities, the securities will be valued at their fair value according to procedures decided upon in good faith by the Board. This Statement of Additional Information - Nov. 29, 2007 Page 64 occurs most commonly with foreign securities, but may occur in other cases. The fair value of a security is likely to be different from the quoted or published price. - Short-term securities maturing more than 60 days from the valuation date are valued at the readily available market price or approximate market value based on current interest rates. Short-term securities maturing in 60 days or less that originally had maturities of more than 60 days at acquisition date are valued at amortized cost using the market value on the 61st day before maturity. Short-term securities maturing in 60 days or less at acquisition date are valued at amortized cost. Amortized cost is an approximation of market value determined by systematically increasing the carrying value of a security if acquired at a discount, or reducing the carrying value if acquired at a premium, so that the carrying value is equal to maturity value on the maturity date. - Securities without a readily available market price and securities for which the price quotations or valuations received from other sources are deemed unreliable or not reflective of market value are valued at fair value as determined in good faith by the Board. The Board is responsible for selecting methods it believes provide fair value. - When possible, bonds are valued by a pricing service independent from the funds. If a valuation of a bond is not available from a pricing service, the bond will be valued by a dealer knowledgeable about the bond if such a dealer is available. The assets of funds-of-funds consist primarily of shares of the underlying funds, which are valued at their NAVs. Other securities held by funds-of-funds are valued as described above. FOR MONEY MARKET FUNDS. In accordance with Rule 2a-7 of the 1940 Act, all of the securities in the fund's portfolio are valued at amortized cost. The amortized cost method of valuation is an approximation of market value determined by systematically increasing the carrying value of a security if acquired at a discount, or reducing the carrying value if acquired at a premium, so that the carrying value is equal to maturity value on the maturity date. Amortized cost does not take into consideration unrealized capital gains or losses. The Board has established procedures designed to stabilize the fund's price per share for purposes of sales and redemptions at $1, to the extent that it is reasonably possible to do so. These procedures include review of the fund's securities by the Board, at intervals deemed appropriate by it, to determine whether the fund's net asset value per share computed by using available market quotations deviates from a share value of $1 as computed using the amortized cost method. The Board must consider any deviation that appears and, if it exceeds 0.5%, it must determine what action, if any, needs to be taken. If the Board determines a deviation exists that may result in a material dilution of the holdings of current shareholders or investors, or in any other unfair consequences for shareholders, it must undertake remedial action that it deems necessary and appropriate. Such action may include withholding dividends, calculating net asset value per share for purposes of sales and redemptions using available market quotations, making redemptions in kind, and selling securities before maturity in order to realize capital gains or losses or to shorten average portfolio maturity. While the amortized cost method provides certainty and consistency in portfolio valuation, it may result in valuations of securities that are either somewhat higher or lower than the prices at which the securities could be sold. This means that during times of declining interest rates the yield on the fund's shares may be higher than if valuations of securities were made based on actual market prices and estimates of market prices. Accordingly, if using the amortized cost method were to result in a lower portfolio value, a prospective investor in the fund would be able to obtain a somewhat higher yield than the investor would get if portfolio valuations were based on actual market values. Existing shareholders, on the other hand, would receive a somewhat lower yield than they would otherwise receive. The opposite would happen during a period of rising interest rates. PORTFOLIO HOLDINGS DISCLOSURE Each fund's Board and the investment manager believe that the investment ideas of the investment manager with respect to management of a fund should benefit the fund and its shareholders, and do not want to afford speculators an opportunity to profit by anticipating fund trading strategies or by using fund portfolio holdings information for stock picking. However, each fund's Board also believes that knowledge of the fund's portfolio holdings can assist shareholders in monitoring their investments, making asset allocation decisions, and evaluating portfolio management techniques. Each fund's Board has therefore adopted the investment manager's policies and approved the investment manager's procedures, including the investment manager's oversight of subadviser practices, relating to disclosure of the fund's portfolio securities. These policies and procedures are intended to protect the confidentiality of fund portfolio holdings information and generally prohibit the release of such information until such information is made public, unless such persons have been authorized to receive such information on a selective basis, as described below. It is the policy of the fund not to provide or Statement of Additional Information - Nov. 29, 2007 Page 65 permit others to provide holdings information on a selective basis, and the investment manager does not intend to selectively disclose holdings information or expect that such holdings information will be selectively disclosed, except where necessary for the fund's operation or where there are legitimate business purposes for doing so and, in any case, where conditions are met that are designed to protect the interests of the fund and its shareholders. Although the investment manager seeks to limit the selective disclosure of portfolio holdings information and such selective disclosure is monitored under the fund's compliance program for conformity with the policies and procedures, there can be no assurance that these policies will protect the fund from the potential misuse of holdings information by individuals or firms in possession of that information. Under no circumstances may the investment manager, its affiliates or any employee thereof receive any consideration or compensation for disclosing such holdings information. A complete schedule of each fund's portfolio holdings is available semi-annually and annually in shareholder reports filed on Form N-CSR and, after the first and third fiscal quarters, in regulatory filings on Form N-Q. These shareholder reports and regulatory filings are filed with the SEC in accordance with federal securities laws and are generally available within sixty (60) days of the end of a fund's fiscal quarter, on the SEC's website. Once holdings information is filed with the SEC, it will also be posted on the funds' website (riversource.com/funds), and it may be mailed, e-mailed or otherwise transmitted to any person. In addition, the investment manager makes publicly available information regarding a fund's top ten holdings (including name and percentage of a fund's assets invested in each such holding) and the percentage breakdown of a fund's investments by country, sector and industry, as applicable. This holdings information is generally made available through the website, marketing communications (including printed advertisements and sales literature), and/or telephone customer service centers that support the fund. This holdings information is generally as of a month-end and is not released until it is at least thirty (30) days old. From time to time, the investment manager may make partial or complete fund holdings information that is not publicly available on the website or otherwise available in advance of the time restrictions noted above (1) to its affiliated and unaffiliated service providers that require the information in the normal course of business in order to provide services to the fund (including, without limitation entities identified by name in the fund's prospectus or this SAI, such as custodians, auditors, subadvisers, financial printers (Cenveo, Inc., Vestek), pricing services (including Reuters Pricing Service, FT Interactive Data Corporation, Bear Stearns Pricing Service, and Kenny S&P), proxy voting services (Institutional Shareholder Services), and companies that deliver or support systems that provide analytical or statistical information (including Factset Research Systems, Bloomberg, L.P.), (2) to facilitate the review and/or rating of the fund by ratings and rankings agencies (including Morningstar, Inc., Thomson Financial and Lipper Inc.), (3) entities that provide trading, research or other investment related services (including Citigroup, Lehman Brothers Holdings, Merrill Lynch & Co., and Morgan Stanley), and (4) fund intermediaries that include the funds in discretionary wrap or other investment programs that request such information in order to support the services provided to investors in the programs. In such situations, the information is released subject to confidentiality agreements, duties imposed under applicable policies and procedures (for example, applicable codes of ethics) designed to prevent the misuse of confidential information, general duties under applicable laws and regulations, or other such duties of confidentiality. In addition, the fund discloses holdings information as required by federal, state or international securities laws, and may disclose holdings information in response to requests by governmental authorities, or in connection with litigation or potential litigation, a restructuring of a holding, where such disclosure is necessary to participate or explore participation in a restructuring of the holding (e.g., as part of a bondholder group), or to the issuer of a holding, pursuant to a request of the issuer or any other party who is duly authorized by the issuer. Each fund's Board has adopted the policies of the investment manager and approved the procedures Ameriprise Financial has established to ensure that the fund's holdings information is only disclosed in accordance with these policies. Before any selective disclosure of holdings information is permitted, the person seeking to disclose such holdings information must submit a written request to the Portfolio Holdings Committee ("PHC"). The PHC is comprised of members from the investment manager's General Counsel's Office, Compliance, and Communications. The PHC has been authorized by the fund's Board to perform an initial review of requests for disclosure of holdings information to evaluate whether there is a legitimate business purpose for selective disclosure, whether selective disclosure is in the best interests of a fund and its shareholders, to consider any potential conflicts of interest between the fund, the investment manager, and its affiliates, and to safeguard against improper use of holdings information. Factors considered in this analysis are whether the recipient has agreed to or has a duty to keep the holdings information confidential and whether risks have been mitigated such that the recipient has agreed or has a duty to use the holdings information only as necessary to effectuate the purpose for which selective disclosure was authorized, including a duty not to trade on such information. Before portfolio holdings may be selectively disclosed, requests approved by the PHC must also be authorized by a fund's Chief Compliance Officer or the fund's General Counsel. On at least an annual basis the PHC reviews the approved recipients of selective disclosure and, where appropriate, requires a resubmission of the request, in order to re-authorize any ongoing arrangements. These procedures are intended to be reasonably designed to protect the confidentiality of fund holdings information and to prohibit Statement of Additional Information - Nov. 29, 2007 Page 66 their release to individual investors, institutional investors, intermediaries that distribute the fund's shares, and other parties, until such holdings information is made public or unless such persons have been authorized to receive such holdings information on a selective basis, as set forth above. Although the investment manager has set up these procedures to monitor and control selective disclosure of holdings information, there can be no assurance that these procedures will protect a fund from the potential misuse of holdings information by individuals or firms in possession of that information. PROXY VOTING GENERAL GUIDELINES, POLICIES AND PROCEDURES The funds uphold a long tradition of supporting sound and principled corporate governance. For over 30 years, the Board, which consists of a majority of independent Board members, has determined policies and voted proxies. The funds' investment manager, RiverSource Investments, and the funds' administrator, Ameriprise Financial, provide support to the Board in connection with the proxy voting process. GENERAL GUIDELINES CORPORATE GOVERNANCE MATTERS -- The Board supports proxy proposals that it believes are tied to the interests of shareholders and votes against proxy proposals that appear to entrench management. For example: - The Board generally votes in favor of proposals for an independent chairman or, if the chairman is not independent, in favor of a lead independent director. - The Board supports annual election of all directors and proposals to eliminate classes of directors. - In a routine election of directors, the Board will generally vote with management's recommendations because the Board believes that management and nominating committees of independent directors are in the best position to know what qualifications are required of directors to form an effective board. However, the Board will generally vote against a nominee who has been assigned to the audit, compensation, or nominating committee if the nominee is not independent of management based on established criteria. The Board will also withhold support for any director who fails to attend 75% of meetings or has other activities that appear to interfere with his or her ability to commit sufficient attention to the company and, in general, will vote against nominees who are determined to have been involved in options backdating. - The Board generally supports proposals requiring director nominees to receive a majority of affirmative votes cast in order to be elected to the board, and opposes cumulative voting based on the view that each director elected should represent the interests of all shareholders. - Votes in a contested election of directors are evaluated on a case-by-case basis. In general, the Board believes that incumbent management and nominating committees, with access to more and better information, are in the best position to make strategic business decisions. However, the Board will consider an opposing slate if it makes a compelling business case for leading the company in a new direction. SHAREHOLDER RIGHTS PLANS -- The Board generally supports shareholder rights plans based on a belief that such plans force uninvited bidders to negotiate with a company's board. The Board believes these negotiations allow time for the company to maximize value for shareholders by forcing a higher premium from a bidder, attracting a better bid from a competing bidder or allowing the company to pursue its own strategy for enhancing shareholder value. The Board supports proposals to submit shareholder rights plans to shareholders and supports limiting the vote required for approval of such plans to a majority of the votes cast. AUDITORS -- The Board values the independence of auditors based on established criteria. The Board supports a reasonable review of matters that may raise concerns regarding an auditor's service that may cause the Board to vote against a management recommendation, including, for example, auditor involvement in significant financial restatements, options backdating, material weaknesses in control, attempts to limit auditor liability or situations where independence has been compromised. STOCK OPTION PLANS AND OTHER MANAGEMENT COMPENSATION ISSUES -- The Board expects company management to give thoughtful consideration to providing competitive long-term employee incentives directly tied to the interest of shareholders. The Board votes against proxy proposals that it believes dilute shareholder value excessively. Statement of Additional Information - Nov. 29, 2007 Page 67 The Board believes that equity compensation awards can be a useful tool, when not abused, for retaining employees and giving them incentives to engage in conduct that will improve the performance of the company. In this regard, the Board generally favors minimum holding periods of stock obtained by senior management pursuant to an option plan and will vote against compensation plans for executives that it deems excessive. SOCIAL AND CORPORATE POLICY ISSUES -- The Board believes proxy proposals should address the business interests of the corporation. Shareholder proposals sometime seek to have the company disclose or amend certain business practices based purely on social or environmental issues rather than compelling business arguments. In general, the Board recognizes our fund shareholders are likely to have differing views of social and environmental issues and believes that these matters are primarily the responsibility of a company's management and its board of directors. POLICIES AND PROCEDURES The policy of the Board is to vote all proxies of the companies in which a fund holds investments. Because of the volume and complexity of the proxy voting process, including inherent inefficiencies in the process that are outside the control of the Board or the Proxy Team (below), not all proxies may be voted. The Board has implemented policies and procedures that have been reasonably designed to vote proxies and to ensure that there are no conflicts between interests of a fund's shareholders and those of the funds' principal underwriters, RiverSource Investments, or other affiliated persons. In exercising its proxy voting responsibilities, the Board may rely upon the research or recommendations of one or more third party service providers. The administration of the proxy voting process is handled by the RiverSource Proxy Administration Team ("Proxy Team"). In exercising its responsibilities, the Proxy Team may rely upon one or more third party service providers. The Proxy Team assists the Board in identifying situations where its guidelines do not clearly require a vote in a particular manner and assists in researching matters and making voting recommendations. RiverSource Investments may recommend that a proxy be voted in a manner contrary to the Board's guidelines. In making recommendations to the Board about voting on a proposal, the investment manager relies on its own investment personnel (or the investment personnel of a fund's subadviser(s)) and information obtained from an independent research firm. The investment manager makes the recommendation in writing. The process requires that Board members who are independent from the investment manager consider the recommendation and decide how to vote the proxy proposal or establish a protocol for voting the proposal. On an annual basis, or more frequently as determined necessary, the Board reviews recommendations to revise the existing guidelines or add new guidelines. Recommendations are based on, among other things, industry trends and the frequency that similar proposals appear on company ballots. The Board considers management's recommendations as set out in the company's proxy statement. In each instance in which a fund votes against management's recommendation (except when withholding votes from a nominated director), the Board sends a letter to senior management of the company explaining the basis for its vote. This permits both the company's management and the Board to have an opportunity to gain better insight into issues presented by the proxy proposal(s). VOTING IN COUNTRIES OUTSIDE THE UNITED STATES (NON-U.S. COUNTRIES) -- Voting proxies for companies not domiciled in the United States may involve greater effort and cost due to the variety of regulatory schemes and corporate practices. For example, certain non-U.S. countries require securities to be blocked prior to a vote, which means that the securities to be voted may not be traded within a specified number of days before the shareholder meeting. The Board typically will not vote securities in non-U.S. countries that require securities to be blocked as the need for liquidity of the securities in the funds will typically outweigh the benefit of voting. There may be additional costs associated with voting in non-U.S. countries such that the Board may determine that the cost of voting outweighs the potential benefit. SECURITIES ON LOAN -- The Board will generally refrain from recalling securities on loan based upon its determination that the costs and lost revenue to the funds, combined with the administrative effects of recalling the securities, generally outweigh the benefit of voting the proxy. While neither the Board nor the funds' administrator assesses the economic impact and benefits of voting loaned securities on a case-by-case basis, situations may arise where the Board requests that loaned securities be recalled in order to vote a proxy. In this regard, if a proxy relates to matters that may impact the nature of a company, such as a proposed merger or acquisition, and the funds' ownership position is more significant, the Board has established a guideline to direct the funds' administrator to use its best efforts to recall such securities based upon its determination that, in these situations, the benefits of voting such proxies generally outweigh the costs or lost revenue to the funds, or any potential adverse administrative effects to the funds, of not recalling such securities. INVESTMENT IN AFFILIATED FUNDS -- Certain RiverSource funds may invest in shares of other RiverSource funds (referred to in this context as "underlying funds") and may own substantial portions of these underlying funds. The proxy policy of the funds is to ensure that direct public shareholders of underlying funds control the outcome of any shareholder vote. To help Statement of Additional Information - Nov. 29, 2007 Page 68 manage this potential conflict of interest, recognizing that the direct public shareholders of these underlying funds may represent only a minority interest, the policy of the funds is to vote proxies of the underlying funds in the same proportion as the vote of the direct public shareholders. If there are no direct public shareholders of an underlying fund, the policy is to cast votes in accordance with instructions from the independent members of the Board. OBTAIN A PROXY VOTING RECORD Each year the RiverSource funds file their proxy voting records with the SEC and make them available by August 31 for the 12-month period ending June 30 of that year. The records can be obtained without charge through riversource.com/funds or searching the website of the SEC at www.sec.gov. INVESTING IN A FUND Absolute Return Currency and Income Fund is available to investors purchasing Classes A, C, I, R4, R5 and W shares in authorized investment programs managed by investment professionals, including discretionary managed account programs. Class B shares are closed to investors. SALES CHARGE Investors should understand that the purpose and function of the initial sales charge and distribution fee for Class A shares is the same as the purpose and function of the contingent deferred sales charge (CDSC) and distribution fee for Class B and Class C shares. The sales charges and distribution fees applicable to each class pay for the distribution of shares of a fund. Shares of a fund are sold at the public offering price. The public offering price is the NAV of one share adjusted for the sales charge for Class A. For Class B, Class C, Class D, Class E, Class I, Class R2, Class R3, Class R4, Class R5, Class W and Class Y there is no initial sales charge so the public offering price is the same as the NAV. CLASS A - CALCULATION OF THE SALES CHARGE Sales charges are determined as shown in the following tables. The first table is organized by investment category. You can find your fund's investment category in Table 1. TABLE 9. CLASS A SALES CHARGE For all funds EXCEPT Absolute Return Currency and Income
- --------------------------------------------------------------------------------- FUND OF FUNDS - FIXED INCOME, STATE TAX-EXEMPT FIXED INCOME, TAXABLE FIXED BALANCED, EQUITY, FUND OF INCOME, TAX-EXEMPT FIXED FUNDS - EQUITY INCOME ---------------------------------------------------------- FUND CATEGORY SALES CHARGE* AS A PERCENTAGE OF: - --------------------------------------------------------------------------------- PUBLIC PUBLIC OFFERING NET AMOUNT OFFERING NET AMOUNT TOTAL MARKET VALUE PRICE** INVESTED PRICE** INVESTED - --------------------------------------------------------------------------------- Up to $49,999 5.75% 6.10% 4.75% 4.99% - --------------------------------------------------------------------------------- $50,000 - $99,999 4.75% 4.99% 4.25% 4.44% - --------------------------------------------------------------------------------- $100,000 - $249,999 3.50% 3.63% 3.50% 3.63% - --------------------------------------------------------------------------------- $250,000 - $499,999 2.50% 2.56% 2.50% 2.56% - --------------------------------------------------------------------------------- $500,000 - $999,999 2.00% 2.04% 2.00% 2.04% - --------------------------------------------------------------------------------- $1,000,000 or more*** 0.00% 0.00% 0.00% 0.00% - ---------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 69 For Absolute Return Currency and Income
- ----------------------------------------------------------------------------------------- SALES CHARGE* AS A PERCENTAGE OF SALES CHARGE* AS A PUBLIC OFFERING PERCENTAGE OF TOTAL MARKET VALUE PRICE** NET AMOUNT INVESTED - ----------------------------------------------------------------------------------------- Up to $49,999 3.00% 3.09% - ----------------------------------------------------------------------------------------- $50,000 - $99,999 3.00% 3.09% - ----------------------------------------------------------------------------------------- $100,000 - $249,999 2.50% 2.56% - ----------------------------------------------------------------------------------------- $250,000 - $499,999 2.00% 2.04% - ----------------------------------------------------------------------------------------- $500,000 - $999,999 1.50% 1.52% - ----------------------------------------------------------------------------------------- $1,000,000 or more*** 0.00% 0.00% - -----------------------------------------------------------------------------------------
* Because of rounding in the calculation of purchase price, the portion of the sales charge retained by the distributor may vary and the actual sales charge you pay may be more or less than the sales charge calculated using these percentages. ** Purchase price includes the sales charge. *** Although there is no sales charge for purchases with a total market value over $1,000,000, and therefore no re-allowance, the distributor may pay a financial institution the following: a sales commission of up to 1.00% for a sale with a total market value of $1,000,000 to $2,999,999; a sales commission up to 0.50% for a sale of $3,000,000 to $9,999,999; and a sales commission up to 0.25% for a sale of $10,000,000 or more. Using the sales charge schedule in the table above, for Class A, the public offering price for an investment of less than $50,000, made on the last day of the most recent fiscal period, was determined as shown in the following table. The sales charge is paid to the distributor by the person buying the shares. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1. TABLE 10. PUBLIC OFFERING PRICE
1.0 MINUS PUBLIC NET ASSET MAXIMUM OFFERING FUND VALUE SALES CHARGE PRICE - ----------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JANUARY 31 - ----------------------------------------------------------------------------------------- Portfolio Builder Aggressive $12.20 0.9425 $12.94 - ----------------------------------------------------------------------------------------- Portfolio Builder Conservative 10.43 0.9525 10.95 - ----------------------------------------------------------------------------------------- Portfolio Builder Moderate 11.36 0.9425 12.05 - ----------------------------------------------------------------------------------------- Portfolio Builder Moderate Aggressive 11.73 0.9425 12.45 - ----------------------------------------------------------------------------------------- Portfolio Builder Moderate Conservative 10.85 0.9525 11.39 - ----------------------------------------------------------------------------------------- Portfolio Builder Total Equity 12.61 0.9425 13.38 - ----------------------------------------------------------------------------------------- S&P 500 Index (for Class D) No sales 5.54 charge 5.54 - ----------------------------------------------------------------------------------------- Small Company Index 8.40 0.9425 8.91 - ----------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING MARCH 31 - ----------------------------------------------------------------------------------------- Equity Value 13.43 0.9425 14.25 - ----------------------------------------------------------------------------------------- Precious Metals and Mining 14.08 0.9425 14.94 - ----------------------------------------------------------------------------------------- Small Cap Advantage 5.99 0.9425 6.36 - ----------------------------------------------------------------------------------------- Small Cap Growth 4.97 0.9425 5.27 - ----------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING APRIL 30 - ----------------------------------------------------------------------------------------- Retirement Plus 2010 10.91 0.9425 11.58 - ----------------------------------------------------------------------------------------- Retirement Plus 2015 11.03 0.9425 11.70 - ----------------------------------------------------------------------------------------- Retirement Plus 2020 11.07 0.9425 11.75 - ----------------------------------------------------------------------------------------- Retirement Plus 2025 11.08 0.9425 11.76 - ----------------------------------------------------------------------------------------- Retirement Plus 2030 11.13 0.9425 11.81 - ----------------------------------------------------------------------------------------- Retirement Plus 2035 11.06 0.9425 11.73 - ----------------------------------------------------------------------------------------- Retirement Plus 2040 11.11 0.9425 11.79 - ----------------------------------------------------------------------------------------- Retirement Plus 2045 11.10 0.9425 11.78 - -----------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 70
1.0 MINUS PUBLIC NET ASSET MAXIMUM OFFERING FUND VALUE SALES CHARGE PRICE - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING MAY 31 - ----------------------------------------------------------------------------------------- Aggressive Growth $ 9.85 0.9425 $10.45 - ----------------------------------------------------------------------------------------- Fundamental Growth 7.00 0.9425 7.43 - ----------------------------------------------------------------------------------------- Fundamental Value 7.02 0.9425 7.45 - ----------------------------------------------------------------------------------------- High Yield Bond 3.02 0.9525 3.17 - ----------------------------------------------------------------------------------------- Income Builder Basic Income 10.79 0.9525 11.33 - ----------------------------------------------------------------------------------------- Income Builder Enhanced Income 11.08 0.9525 11.63 - ----------------------------------------------------------------------------------------- Income Builder Moderate Income 10.99 0.9525 11.54 - ----------------------------------------------------------------------------------------- Select Value 5.93 0.9425 6.29 - ----------------------------------------------------------------------------------------- Short Duration U.S. Government 4.73 0.9525 4.97 - ----------------------------------------------------------------------------------------- Small Cap Equity 6.79 0.9425 7.20 - ----------------------------------------------------------------------------------------- Small Cap Value 6.56 0.9425 6.96 - ----------------------------------------------------------------------------------------- U.S. Government Mortgage 5.00 0.9525 5.25 - ----------------------------------------------------------------------------------------- Value 5.66 0.9425 6.01 - ----------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JUNE 30 - ----------------------------------------------------------------------------------------- Dividend Opportunity 9.65 0.9425 10.24 - ----------------------------------------------------------------------------------------- Real Estate 15.83 0.9425 16.80 - ----------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JULY 31 - ----------------------------------------------------------------------------------------- Cash Management No sales 1.00 charge 1.00 - ----------------------------------------------------------------------------------------- Core Bond 9.48 0.9525 9.95 - ----------------------------------------------------------------------------------------- Disciplined Equity 7.22 0.9425 7.66 - ----------------------------------------------------------------------------------------- Disciplined Small and Mid Cap Equity 9.55 0.9425 10.13 - ----------------------------------------------------------------------------------------- Disciplined Small Cap Value 10.00 0.9425 10.61 - ----------------------------------------------------------------------------------------- Floating Rate 9.70 0.9525 10.18 - ----------------------------------------------------------------------------------------- Growth 32.73 0.9425 34.73 - ----------------------------------------------------------------------------------------- Income Opportunities 9.99 0.9525 10.49 - ----------------------------------------------------------------------------------------- Inflation Protected Securities 9.69 0.9525 10.17 - ----------------------------------------------------------------------------------------- Large Cap Equity 6.05 0.9425 6.42 - ----------------------------------------------------------------------------------------- Large Cap Value 5.71 0.9425 6.06 - ----------------------------------------------------------------------------------------- Limited Duration Bond 9.58 0.9525 10.06 - ----------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING AUGUST 31 - ----------------------------------------------------------------------------------------- California Tax-Exempt 5.03 0.9525 5.28 - ----------------------------------------------------------------------------------------- Diversified Bond 4.81 0.9525 5.05 - ----------------------------------------------------------------------------------------- Massachusetts Tax-Exempt 5.21 0.9525 5.47 - ----------------------------------------------------------------------------------------- Michigan Tax-Exempt 5.17 0.9525 5.43 - ----------------------------------------------------------------------------------------- Minnesota Tax-Exempt 5.14 0.9525 5.40 - ----------------------------------------------------------------------------------------- New York Tax-Exempt 4.93 0.9525 5.18 - ----------------------------------------------------------------------------------------- Ohio Tax-Exempt 5.16 0.9525 5.42 - ----------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING SEPTEMBER 30 - ----------------------------------------------------------------------------------------- Balanced 11.46 0.9425 12.16 - ----------------------------------------------------------------------------------------- Disciplined Large Cap Growth 10.36 0.9425 10.99 - ----------------------------------------------------------------------------------------- Diversified Equity Income 14.34 0.9425 15.21 - ----------------------------------------------------------------------------------------- Mid Cap Value 10.15 0.9425 10.77 - ----------------------------------------------------------------------------------------- Strategic Allocation 12.48 0.9425 13.24 - ----------------------------------------------------------------------------------------- Strategic Income Allocation 9.84 0.9525 10.33 - -----------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 71
1.0 MINUS PUBLIC NET ASSET MAXIMUM OFFERING FUND VALUE SALES CHARGE PRICE - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING OCTOBER 31 - ----------------------------------------------------------------------------------------- Absolute Return Currency and Income $10.09 0.9525 $10.59 - ----------------------------------------------------------------------------------------- Disciplined International Equity 9.82 0.9425 10.42 - ----------------------------------------------------------------------------------------- Emerging Markets 11.32 0.9425 12.01 - ----------------------------------------------------------------------------------------- Emerging Markets Bond 10.16 0.9525 10.67 - ----------------------------------------------------------------------------------------- European Equity 5.39 0.9425 5.72 - ----------------------------------------------------------------------------------------- Global Bond 6.60 0.9525 6.93 - ----------------------------------------------------------------------------------------- Global Equity 7.52 0.9425 7.98 - ----------------------------------------------------------------------------------------- Global Technology 2.42 0.9425 2.57 - ----------------------------------------------------------------------------------------- International Aggressive Growth 9.42 0.9425 9.99 - ----------------------------------------------------------------------------------------- International Equity 8.47 0.9425 8.99 - ----------------------------------------------------------------------------------------- International Opportunity 9.54 0.9425 10.12 - ----------------------------------------------------------------------------------------- International Select Value 11.00 0.9425 11.67 - ----------------------------------------------------------------------------------------- International Small Cap 9.35 0.9425 9.92 - ----------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING NOVEMBER 30 - ----------------------------------------------------------------------------------------- Intermediate Tax-Exempt 5.33 0.9525 5.60 - ----------------------------------------------------------------------------------------- Mid Cap Growth 14.40 0.9425 15.28 - ----------------------------------------------------------------------------------------- Tax-Exempt Bond 3.90 0.9525 4.09 - ----------------------------------------------------------------------------------------- Tax-Exempt High Income 4.44 0.9525 4.66 - ----------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING DECEMBER 31 - ----------------------------------------------------------------------------------------- Tax-Exempt Money Market No sales 1.00 charge 1.00 - -----------------------------------------------------------------------------------------
CLASS A - LETTER OF INTENT (LOI) If you intend to invest $50,000 or more over a period of time, you may be able to reduce the sales charge for investments in Class A by completing a LOI form and committing to invest a certain amount. The LOI must be filed with and accepted in good order by the distributor. The LOI can start at any time and you will have up to 13 months to fulfill your commitment. The LOI start date can be backdated by up to 90 days, but backdating the LOI will shorten the going forward window by the length of the backdating. Your holdings in RiverSource funds acquired more than 90 days before your financial institution receives your signed LOI will not be counted towards the LOI commitment amount and cannot be used as the starting point for the LOI. While these purchases cannot be included within an LOI, you may still be able to take advantage of a reduced sales charge on future purchases because the historic purchases may count toward the combined market value for Rights of Accumulation. For example, if you made an investment more than 90 days ago, and that investment's current market value is $75,000, the sales charge you would pay on additional investment is 4.5% until the market value of your accounts is $100,000, at which point your sales charge will be reduced to 3.5%. If you plan to invest another $50,000 over the next 13 month period, you may not rely on a letter of intent to take immediate advantage of the lower 3.5% sales charge, but instead would naturally realize the lower sales charge of 3.5% (under Rights of Accumulation) after you invested $25,000. To take immediate advantage of the 3.5% sales charge level, you would need to sign a $100,000 LOI and then invest another $100,000. Your investments will be charged the sales charge that applies to the amount you have committed to invest under the LOI. Five percent of the commitment amount will be placed in escrow. The LOI will remain in effect for the entire 13 months, even if you reach your commitment amount. At the end of the 13-month period, the LOI will end and the shares will be released from escrow. Once the LOI has ended, future sales charges will be determined by Rights of Accumulation or the total value of the new investment combined with the market value of the existing RiverSource fund investments as described in the prospectus. If you do not invest the commitment amount by the end of the 13 months, the remaining unpaid sales charge will be redeemed from the escrowed shares and the remaining balance released from escrow. The commitment amount does not include purchases in any class of RiverSource funds other than Class A; does not include reinvested dividends and directed dividends earned in any RiverSource funds; purchases in RiverSource funds held within a wrap product; and purchases of RiverSource Cash Management Fund and RiverSource Tax-Exempt Money Market Fund unless they are subsequently exchanged to Class A shares of a RiverSource fund within the 13 month period. A LOI is not an option (absolute right) to buy shares. If you purchase shares through different channels, for example, in a brokerage account or through a third party, you must inform your financial institution in writing about the LOI when placing any purchase orders during the period of the LOI. If you do not complete and file the LOI form, or do not request the reduced sales charge at the time of purchase, you will not be eligible for the reduced sales charge. Statement of Additional Information - Nov. 29, 2007 Page 72 CLASS B SHARES Class B shares have a CDSC for six years. For Class B shares purchased prior to May 21, 2005, those shares will convert to Class A shares in the ninth calendar year of ownership. For Class B shares purchased beginning May 21, 2005, those shares will convert to Class A shares one month after the eighth year of ownership. CLASS C SHARES Class C shares are available to all investors. Class C shares are sold without a front-end sales charge. For Class C shares, a 1% CDSC may apply if shares are sold within one year after purchase. Class C shares are subject to a distribution fee. CLASS D SHARES Class D shares are offered through wrap fee programs or other investment products. Class D shares are sold without a front-end sales charge or CDSC. Class D shares are subject to a distribution fee. CLASS E SHARES Class E shares are offered to qualifying institutional investors and brokerage accounts. Class E shares are sold without a front-end sales charge or CDSC. Class E shares are subject to a plan administration fee. CLASS I SHARES Class I shares are offered to qualifying institutional investors. Class I shares are sold without a front-end sales charge or CDSC. CLASS R SHARES Class R2, Class R3, Class R4 and Class R5 shares are offered to certain institutional investors. Class R2, Class R3, Class R4 and Class R5 shares are sold without a front-end sales charge or a CDSC. Class R2 and Class R3 shares are subject to a distribution fee. Class R2, Class R3 and R4 shares are subject to a plan administration fee. The following investors are eligible to purchase Class R2, Class R3, Class R4 and Class R5 shares: - Qualified employee benefit plans; - Trust companies or similar institutions, and charitable organizations that meet the definition in Section 501(c)(3) of the Internal Revenue Code; - Nonqualified deferred compensation plans; - State sponsored college savings plans established under Section 529 of the Internal Revenue Code; - Health Savings Accounts (HSAs) created pursuant to public law 108-173. Additionally, the following eligible investors may purchase Class R5 shares: - Institutional or corporate accounts above a threshold established by the distributor (currently $1 million per fund or $10 million in all RiverSource funds); and - Bank Trusts. CLASS W SHARES Class W shares are offered to qualifying discretionary accounts. Class W shares are sold without a front-end sales charge or CDSC. Class W shares are subject to a distribution fee. CLASS Y SHARES Class Y shares are offered to certain institutional investors. Class Y shares are sold without a front-end sales charge or a CDSC. Class Y shares are subject to a plan administration fee. The following investors are eligible to purchase Class Y shares: - Qualified employee benefit plans; - Trust companies or similar institutions, and charitable organizations that meet the definition in Section 501(c)(3) of the Internal Revenue Code; - Nonqualified deferred compensation plans; and - State sponsored college savings plans established under Section 529 of the Internal Revenue Code. MONEY MARKET FUNDS The minimum purchase amount for Board members, officers and employees of the fund or the investment manager and Ameriprise Financial Services financial advisors is $1,000 (except payroll deduction plans), with a minimum additional Statement of Additional Information - Nov. 29, 2007 Page 73 purchase amount of $100 on a monthly systematic purchase plan. The minimum amount for additional purchases in a direct-at-fund account is $25 monthly. SYSTEMATIC INVESTMENT PROGRAMS You decide how often to make payments - monthly, quarterly, or semiannually. Provided your account meets the minimum balance requirement, you are not obligated to make any payments. You can omit payments or discontinue the investment program altogether. A fund also can change the program or end it at any time. REJECTION OF BUSINESS Each fund and RiverSource Service Corporation reserve the right to reject any business, in its sole discretion. SELLING SHARES You have a right to sell your shares at any time. For an explanation of sales procedures, please see the applicable prospectus. During an emergency, the Board can suspend the computation of NAV, stop accepting payments for purchase of shares, or suspend the duty of a fund to redeem shares for more than seven days. Such emergency situations would occur if: - The Exchange closes for reasons other than the usual weekend and holiday closings or trading on the Exchange is restricted, or - Disposal of a fund's securities is not reasonably practicable or it is not reasonably practicable for the fund to determine the fair value of its net assets, or, - The SEC, under the provisions of the 1940 Act, declares a period of emergency to exist. Should a fund stop selling shares, the Board may make a deduction from the value of the assets held by the fund to cover the cost of future liquidations of the assets so as to distribute these costs fairly among all shareholders. Each fund has elected to be governed by Rule 18f-1 under the 1940 Act, which obligates the fund to redeem shares in cash, with respect to any one shareholder during any 90-day period, up to the lesser of $250,000 or 1% of the net assets of the fund at the beginning of the period. Although redemptions in excess of this limitation would normally be paid in cash, the fund reserves the right to make these payments in whole or in part in securities or other assets in case of an emergency, or if the payment of a redemption in cash would be detrimental to the existing shareholders of the fund as determined by the Board. In these circumstances, the securities distributed would be valued as set forth in this SAI. Should a fund distribute securities, a shareholder may incur brokerage fees or other transaction costs in converting the securities to cash. PAY-OUT PLANS You can use any of several pay-out plans to redeem your investment in regular installments. If you redeem shares, you may be subject to a contingent deferred sales charge as discussed in the prospectus. While the plans differ on how the pay-out is figured, they all are based on the redemption of your investment. Net investment income dividends and any capital gain distributions will automatically be reinvested, unless you elect to receive them in cash. If you redeem an IRA or a qualified retirement account, certain restrictions, federal tax penalties, and special federal income tax reporting requirements may apply. You should consult your tax advisor about this complex area of the tax law. Applications for a systematic investment in a class of a fund subject to a sales charge normally will not be accepted while a pay-out plan for any of those funds is in effect. Occasional investments, however, may be accepted. To start any of these plans, please consult your financial institution. Your authorization must be received at least five days before the date you want your payments to begin. Payments will be made on a monthly, bimonthly, quarterly, semiannual, or annual basis. Your choice is effective until you change or cancel it. The following pay-out plans are designed to take care of the needs of most shareholders in a way that can be handled efficiently and at a reasonable cost. If you need a more irregular schedule of payments, it may be necessary for you to make a series of individual redemptions, in which case you will have to send in a separate redemption request for each pay-out. Each fund reserves the right to change or stop any pay-out plan and to stop making such plans available. PLAN #1: PAY-OUT FOR A FIXED PERIOD OF TIME If you choose this plan, a varying number of shares will be redeemed at regular intervals during the time period you choose. This plan is designed to end in complete redemption of all shares in your account by the end of the fixed period. Statement of Additional Information - Nov. 29, 2007 Page 74 PLAN #2: REDEMPTION OF A FIXED NUMBER OF SHARES If you choose this plan, a fixed number of shares will be redeemed for each payment and that amount will be sent to you. The length of time these payments continue is based on the number of shares in your account. PLAN #3: REDEMPTION OF A FIXED DOLLAR AMOUNT If you decide on a fixed dollar amount, whatever number of shares is necessary to make the payment will be redeemed in regular installments until the account is closed. PLAN #4: REDEMPTION OF A PERCENTAGE OF NET ASSET VALUE Payments are made based on a fixed percentage of the net asset value of the shares in the account computed on the day of each payment. Percentages range from 0.25% to 0.75%. For example, if you are on this plan and arrange to take 0.5% each month, you will get $100 if the value of your account is $20,000 on the payment date. CAPITAL LOSS CARRYOVER For federal income tax purposes, certain funds had total capital loss carryovers at the end of the most recent fiscal period that, if not offset by subsequent capital gains, will expire as follows. Because the measurement periods for a regulated investment company's income are different for excise tax purposes verses 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 funds are permitted to treat net capital losses realized between November 1 and its fiscal year end ("post-October loss") as occurring on the first day of the following tax year. The total capital loss carryovers below include post- October losses, if applicable. It is unlikely that the Board will authorize a distribution of any net realized capital gains until the available capital loss carryover has been offset or has expired except as required by Internal Revenue Service rules. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1. TABLE 11. CAPITAL LOSS CARRYOVER
TOTAL AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT CAPITAL EXPIRING EXPIRING EXPIRING EXPIRING EXPIRING EXPIRING EXPIRING EXPIRING EXPIRING LOSS IN IN IN IN IN IN IN IN IN FUND CARRYOVERS 2008 2009 2010 2011 2012 2013 2014 2015 2016 - ----------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JANUARY 31 - ----------------------------------------------------------------------------------------------------------------------- Portfolio Builder Aggressive $ 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Portfolio Builder Conservative 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Portfolio Builder Moderate 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Portfolio Builder Moderate Aggressive 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Portfolio Builder Moderate Conservative 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Portfolio Builder Total Equity 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- 10,331,1- 2,387,- 5,430,- 2,512,- S&P 500 Index 19 0 603 872 0 0 644 0 0 0 - ----------------------------------------------------------------------------------------------------------------------- Small Company Index 0 -- -- -- -- -- -- -- -- --
Statement of Additional Information - Nov. 29, 2007 Page 75
TOTAL AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT CAPITAL EXPIRING EXPIRING EXPIRING EXPIRING EXPIRING EXPIRING EXPIRING EXPIRING EXPIRING LOSS IN IN IN IN IN IN IN IN IN FUND CARRYOVERS 2008 2009 2010 2011 2012 2013 2014 2015 2016 - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING MARCH 31 - ----------------------------------------------------------------------------------------------------------------------- Equity Value $ 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Precious Metals and Mining 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Small Cap Advantage 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Small Cap Growth 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING APRIL 30 - ----------------------------------------------------------------------------------------------------------------------- Retirement Plus 2010 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Retirement Plus 2015 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Retirement Plus 2020 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Retirement Plus 2025 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Retirement Plus 2030 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Retirement Plus 2035 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Retirement Plus 2040 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Retirement Plus 2045 0 -- -- -- -- -- -- -- -- --
Statement of Additional Information - Nov. 29, 2007 Page 76
TOTAL AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT CAPITAL EXPIRING EXPIRING EXPIRING EXPIRING EXPIRING EXPIRING EXPIRING EXPIRING EXPIRING LOSS IN IN IN IN IN IN IN IN IN FUND CARRYOVERS 2008 2009 2010 2011 2012 2013 2014 2015 2016 - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING MAY 31 - ----------------------------------------------------------------------------------------------------------------------- $1,192,60- 826,40- 315,34- 23,741- 27,111- Aggressive Growth 7,972 0 6,866 8,051 ,111 ,944 0 0 0 0 - ----------------------------------------------------------------------------------------------------------------------- Fundamental Growth 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Fundamental Value 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- 1,365,33- 50,473- 226,00- 517,12- 552,66- 19,078- High Yield Bond 9,132 ,765 1,198 1,802 4,309 0 0 ,058 0 0 - ----------------------------------------------------------------------------------------------------------------------- Income Builder 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Basic Income -- -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Income Builder Enhanced Income 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Income Builder Moderate Income 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- 2,366,- 2,508,- Select Value 4,875,220 0 0 0 790 430 0 0 0 0 - ----------------------------------------------------------------------------------------------------------------------- Short Duration 220,701,- 35,174- 117,35- 36,267- 20,469- 9,579,- 1,854,- U.S. Government 443 ,077 6,906 0 0 0 ,962 ,230 187 081 - ----------------------------------------------------------------------------------------------------------------------- 28,072,0- 28,072- Small Cap Equity 92 0 0 ,092 0 0 0 0 0 0 - ----------------------------------------------------------------------------------------------------------------------- Small Cap Value 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- U.S. Government Mortgage 1,209,634 0 0 0 0 0 0 545,026 664,608 0 - ----------------------------------------------------------------------------------------------------------------------- Value 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JUNE 30 - ----------------------------------------------------------------------------------------------------------------------- Dividend 398,074,- 398,07- Opportunity 003 0 0 0 4,003 0 0 0 0 0 - ----------------------------------------------------------------------------------------------------------------------- Real Estate 0 -- -- -- -- -- -- -- -- --
Statement of Additional Information - Nov. 29, 2007 Page 77
TOTAL AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT CAPITAL EXPIRING EXPIRING EXPIRING EXPIRING EXPIRING EXPIRING EXPIRING EXPIRING EXPIRING LOSS IN IN IN IN IN IN IN IN IN FUND CARRYOVERS 2008 2009 2010 2011 2012 2013 2014 2015 2016 - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JULY 31 - ----------------------------------------------------------------------------------------------------------------------- Cash Management $ 6,554 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 6,554 - ----------------------------------------------------------------------------------------------------------------------- 1,632,- Core Bond 2,830,266 0 0 0 0 0 0 526,700 056 671,570 - ----------------------------------------------------------------------------------------------------------------------- Disciplined Equity 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Disciplined Small and Mid Cap Equity 121,627 0 0 0 0 0 0 93,125 21,904 6,598 - ----------------------------------------------------------------------------------------------------------------------- Disciplined Small Cap Value 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- 1,885,- Floating Rate 1,918,822 0 0 0 0 0 0 0 33,562 260 - ----------------------------------------------------------------------------------------------------------------------- 284,278,- 284,27- Growth 656 0 0 0 8,656 0 0 0 0 0 - ----------------------------------------------------------------------------------------------------------------------- Income Opportunities 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Inflation Protected 2,136,- 1,836,- Securities 3,973,349 0 0 0 0 0 0 0 395 954 - ----------------------------------------------------------------------------------------------------------------------- 158,388,- 51,243- 70,190- 24,231- 12,722- Large Cap Equity 854 ,861 ,395 ,893 ,705 0 0 0 0 0 - ----------------------------------------------------------------------------------------------------------------------- Large Cap Value 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Limited Duration 2,946,- Bond 3,394,837 0 0 0 0 0 0 388,116 394 60,327 - ----------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING AUGUST 31 - ----------------------------------------------------------------------------------------------------------------------- California Tax- Exempt 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- 154,484,- 75,831- 49,658- 5,227,- 12,836- 10,930- Diversified Bond 363 0 ,798 ,521 0 159 0 ,807 0 ,078 - ----------------------------------------------------------------------------------------------------------------------- Massachusetts Tax-Exempt 121,051 0 0 0 0 0 0 32,687 0 88,364 - ----------------------------------------------------------------------------------------------------------------------- Michigan Tax- Exempt 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Minnesota Tax- Exempt 2,437,360 0 0 0 0 0 993,611 913,006 -- 530,743 - ----------------------------------------------------------------------------------------------------------------------- New York Tax- Exempt 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Ohio Tax-Exempt 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING SEPTEMBER 30 - ----------------------------------------------------------------------------------------------------------------------- 695,010,- 300,68- 368,67- 24,886- Balanced 276 0 757,502 8,916 6,980 ,878 0 0 0 0 - ----------------------------------------------------------------------------------------------------------------------- Disciplined Large Cap Growth 245,720 0 0 0 0 0 0 0 245,720 0 - ----------------------------------------------------------------------------------------------------------------------- Diversified Equity Income 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Mid Cap Value 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Strategic Allocation 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Strategic Income Allocation 27,193 0 0 0 0 0 0 0 27,193 0
Statement of Additional Information - Nov. 29, 2007 Page 78
TOTAL AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT CAPITAL EXPIRING EXPIRING EXPIRING EXPIRING EXPIRING EXPIRING EXPIRING EXPIRING EXPIRING LOSS IN IN IN IN IN IN IN IN IN FUND CARRYOVERS 2008 2009 2010 2011 2012 2013 2014 2015 2016 - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING OCTOBER 31 - ----------------------------------------------------------------------------------------------------------------------- Absolute Return Currency and Income $ 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Disciplined International Equity 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Emerging Markets 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- Emerging Markets Bond 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- 70,998,6- 49,462- 16,514- 5,021,- European Equity 33 0 ,900 ,518 215 0 0 0 0 0 - ----------------------------------------------------------------------------------------------------------------------- 6,100,- Global Bond 6,599,145 0 0 374 498,771 0 0 0 0 0 - ----------------------------------------------------------------------------------------------------------------------- 468,974,- 294,82- 143,63- 30,509- Global Equity 678 0 9,842 4,885 ,951 0 0 0 0 0 - ----------------------------------------------------------------------------------------------------------------------- 362,948,- 281,64- 81,299- Global Technology 879 0 9,652 ,227 0 0 0 0 0 0 - ----------------------------------------------------------------------------------------------------------------------- International Aggressive Growth 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- International Equity 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- International 338,762,- 241,26- 59,231- 38,262- Opportunity 980 0 8,010 ,998 ,972 0 0 0 0 0 - ----------------------------------------------------------------------------------------------------------------------- International Select Value 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- International Small Cap 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING NOVEMBER 30 - ----------------------------------------------------------------------------------------------------------------------- Intermediate Tax- Exempt 393,731 0 0 0 0 0 0 393,731 0 0 - ----------------------------------------------------------------------------------------------------------------------- Mid Cap Growth 0 -- -- -- -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------- 2,385,- Tax-Exempt Bond 2,385,866 0 0 0 0 0 0 866 0 0 - ----------------------------------------------------------------------------------------------------------------------- Tax-Exempt High 9,460,- Income 9,460,668 0 0 0 0 0 0 668 0 0 - ----------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING DECEMBER 31 - ----------------------------------------------------------------------------------------------------------------------- Tax-Exempt Money Market 22,784 166 0 18,331 0 0 4,287 0 0 0 - -----------------------------------------------------------------------------------------------------------------------
TAXES For tax purposes, an exchange is considered a sale and purchase, and may result in a gain or loss. A sale is a taxable transaction. If you sell shares for less than their cost, the difference is a capital loss. If you sell shares for more than their cost, the difference is a capital gain. Your gain may be short term (for shares held for one year or less) or long term (for shares held more than one year). If you buy Class A shares and within 91 days exchange into another fund, you may not include the sales charge in your calculation of tax gain or loss on the sale of the first fund you purchased. The sales charge may be included in the calculation of your tax gain or loss on a subsequent sale of the second fund you purchased. Statement of Additional Information - Nov. 29, 2007 Page 79 FOR EXAMPLE You purchase 100 shares of an Equity Fund having a public offering price of $10.00 per share. With a sales load of 5.75%, you pay $57.50 in sales load. With a NAV of $9.425 per share, the value of your investment is $942.50. Within 91 days of purchasing that fund, you decide to exchange out of that fund, now at a NAV of $11.00 per share, up from the original NAV of $9.425, and purchase a second fund, at a NAV of $15.00 per share. The value of your investment is now $1,100.00 ($11.00 x 100 shares). You cannot use the $57.50 paid as a sales load when calculating your tax gain or loss in the sale of the first fund shares. So instead of having a $100.00 gain ($1,100.00 - $1,000.00), you have a $157.50 gain ($1,100.00 - $942.50). You can include the $57.50 sales load in the calculation of your tax gain or loss when you sell shares in the second fund. The following paragraphs provide information based on a fund's investment category. You can find your fund's investment category in Table 1. FOR STATE TAX-EXEMPT FIXED INCOME AND TAX-EXEMPT FIXED INCOME FUNDS, all distributions of net investment income during the year will have the same percentage designated as tax-exempt. This annual percentage is expected to be substantially the same as the percentage of tax-exempt income actually earned during any particular distribution period. FOR BALANCED, EQUITY, FUNDS-OF-FUNDS, TAXABLE MONEY MARKET AND TAXABLE FIXED INCOME FUNDS, if you have a nonqualified investment in a fund and you wish to move part or all of those shares to an IRA or qualified retirement account in the fund, you can do so without paying a sales charge. However, this type of exchange is considered a redemption of shares and may result in a gain or loss for tax purposes. In addition, this type of exchange may result in an excess contribution under IRA or qualified plan regulations if the amount exchanged exceeds annual contribution limitations. You should consult your tax advisor for further details about this complex subject. Net investment income dividends received should be treated as dividend income for federal income tax purposes. Corporate shareholders are generally entitled to a deduction equal to 70% of that portion of a fund's dividend that is attributable to dividends the fund received from domestic (U.S.) securities. If there is debt-financed portfolio stock, that is, bank financing is used to purchase long securities, the 70% dividends received deduction would be reduced by the average amount of portfolio indebtedness divided by the average adjusted basis in the stock. This does not impact the qualified dividend income available to individual shareholders. For the most recent fiscal period, net investment income dividends qualified for the corporate deduction as shown in the following table. Only certain qualified dividend income (QDI) will be subject to the 15% and 5% (and 0%) tax rates. QDI is dividends earned from domestic corporations and qualified foreign corporations. Qualified foreign corporations are corporations incorporated in a U.S. possession, corporations whose stock is readily tradable on an established U.S. securities market (ADRs), and certain other corporations eligible for relief under an income tax treaty with the U.S. that includes an exchange of information agreement. Excluded are passive foreign investment companies (PFICs), foreign investment companies and foreign personal holding companies. Holding periods for shares must also be met to be eligible for QDI treatment (more than 60 days for common stock and more than 90 days for certain preferred's dividends). The QDI for individuals for the most recent fiscal period is shown in the table below. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1. TABLE 12. CORPORATE DEDUCTION AND QUALIFIED DIVIDEND INCOME
PERCENT OF DIVIDENDS QUALIFYING QUALIFIED DIVIDEND INCOME FUND FOR CORPORATE DEDUCTION FOR INDIVIDUALS - -------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JANUARY 31 - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- Portfolio Builder Aggressive 27.35% 36.66% - -------------------------------------------------------------------------------------------------- Portfolio Builder Conservative 7.60 10.38 - -------------------------------------------------------------------------------------------------- Portfolio Builder Moderate 17.05 23.07 - -------------------------------------------------------------------------------------------------- Portfolio Builder Moderate Aggressive 24.15 32.29 - -------------------------------------------------------------------------------------------------- Portfolio Builder Moderate Conservative 12.62 16.99 - -------------------------------------------------------------------------------------------------- Portfolio Builder Total Equity 41.49 55.64 - -------------------------------------------------------------------------------------------------- S&P 500 Index 100.00 100.00 - -------------------------------------------------------------------------------------------------- Small Company Index 100.00 100.00
Statement of Additional Information - Nov. 29, 2007 Page 80
PERCENT OF DIVIDENDS QUALIFYING QUALIFIED DIVIDEND INCOME FUND FOR CORPORATE DEDUCTION FOR INDIVIDUALS - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING MARCH 31 - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- Equity Value 100.00% 100.00% - -------------------------------------------------------------------------------------------------- Precious Metals and Mining 1.78 10.69 - -------------------------------------------------------------------------------------------------- Small Cap Advantage 20.49 20.53 - -------------------------------------------------------------------------------------------------- Small Cap Growth 18.94 19.28 - -------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING APRIL 30 - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- Retirement Plus 2010 9.72 13.21 - -------------------------------------------------------------------------------------------------- Retirement Plus 2015 12.59 17.30 - -------------------------------------------------------------------------------------------------- Retirement Plus 2020 15.32 21.40 - -------------------------------------------------------------------------------------------------- Retirement Plus 2025 17.48 24.42 - -------------------------------------------------------------------------------------------------- Retirement Plus 2030 17.11 24.03 - -------------------------------------------------------------------------------------------------- Retirement Plus 2035 16.97 23.78 - -------------------------------------------------------------------------------------------------- Retirement Plus 2040 17.24 24.10 - -------------------------------------------------------------------------------------------------- Retirement Plus 2045 16.31 22.81 - -------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING MAY 31 - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- Aggressive Growth 20.97 24.18 - -------------------------------------------------------------------------------------------------- Fundamental Growth 35.34 44.28 - -------------------------------------------------------------------------------------------------- Fundamental Value 100.00 100.00 - -------------------------------------------------------------------------------------------------- High Yield Bond 0 0 - -------------------------------------------------------------------------------------------------- Income Builder Basic Income 9.45 10.91 - -------------------------------------------------------------------------------------------------- Income Builder Enhanced Income 9.71 11.64 - -------------------------------------------------------------------------------------------------- Income Builder Moderate Income 11.65 13.13 - -------------------------------------------------------------------------------------------------- Select Value 100.00 100.00 - -------------------------------------------------------------------------------------------------- Short Duration U.S. Government 0 0 - -------------------------------------------------------------------------------------------------- Small Cap Equity 0 0 - -------------------------------------------------------------------------------------------------- Small Cap Value 18.32 19.93 - -------------------------------------------------------------------------------------------------- U.S. Government Mortgage 0 0 - -------------------------------------------------------------------------------------------------- Value 97.77 100.00 - -------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JUNE 30 - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- Dividend Opportunity 99.84 100.00 - -------------------------------------------------------------------------------------------------- Real Estate 1.61 3.93 - -------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JULY 31 - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- Cash Management 0 0 - -------------------------------------------------------------------------------------------------- Core Bond 0 0 - -------------------------------------------------------------------------------------------------- Disciplined Equity 25.90 26.15 - -------------------------------------------------------------------------------------------------- Disciplined Small and Mid Cap Equity 100.00 100.00 - -------------------------------------------------------------------------------------------------- Disciplined Small Cap Value 18.44 18.71 - -------------------------------------------------------------------------------------------------- Floating Rate 0 0 - -------------------------------------------------------------------------------------------------- Growth 100.00 100.00 - -------------------------------------------------------------------------------------------------- Income Opportunities 0 0 - -------------------------------------------------------------------------------------------------- Inflation Protected Securities 0 0
Statement of Additional Information - Nov. 29, 2007 Page 81
PERCENT OF DIVIDENDS QUALIFYING QUALIFIED DIVIDEND INCOME FUND FOR CORPORATE DEDUCTION FOR INDIVIDUALS - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- Large Cap Equity 48.37% 51.53% - -------------------------------------------------------------------------------------------------- Large Cap Value 79.11 85.37 - -------------------------------------------------------------------------------------------------- Limited Duration Bond 0 0 - -------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING AUGUST 31 - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- California Tax-Exempt 0 0 - -------------------------------------------------------------------------------------------------- Diversified Bond 0 0 - -------------------------------------------------------------------------------------------------- Massachusetts Tax-Exempt 0 0 - -------------------------------------------------------------------------------------------------- Michigan Tax-Exempt 0 0 - -------------------------------------------------------------------------------------------------- Minnesota Tax-Exempt 0 0 - -------------------------------------------------------------------------------------------------- New York Tax-Exempt 0 0 - -------------------------------------------------------------------------------------------------- Ohio Tax-Exempt 0 0 - -------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING SEPTEMBER 30 - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- Balanced 58.30 62.48 - -------------------------------------------------------------------------------------------------- Disciplined Large Cap Growth 0 0 - -------------------------------------------------------------------------------------------------- Diversified Equity Income 100.00 100.00 - -------------------------------------------------------------------------------------------------- Mid Cap Value 65.46 80.61 - -------------------------------------------------------------------------------------------------- Strategic Allocation 53.06 87.46 - -------------------------------------------------------------------------------------------------- Strategic Income Allocation 4.92 4.92 - -------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING OCTOBER 31 - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- Absolute Return Currency and Income 0 0 - -------------------------------------------------------------------------------------------------- Disciplined International Equity 0 0 - -------------------------------------------------------------------------------------------------- Emerging Markets 0 100.00 - -------------------------------------------------------------------------------------------------- Emerging Markets Bond 0 0 - -------------------------------------------------------------------------------------------------- European Equity 0 100.00 - -------------------------------------------------------------------------------------------------- Global Bond 0 0 - -------------------------------------------------------------------------------------------------- Global Equity 99.99 100.00 - -------------------------------------------------------------------------------------------------- Global Technology 0 0 - -------------------------------------------------------------------------------------------------- International Aggressive Growth 0.11 77.83 - -------------------------------------------------------------------------------------------------- International Equity 0 39.74 - -------------------------------------------------------------------------------------------------- International Opportunity 0 100.00 - -------------------------------------------------------------------------------------------------- International Select Value 0 52.44 - -------------------------------------------------------------------------------------------------- International Small Cap 0 31.95 - -------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING NOVEMBER 30 - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- Intermediate Tax-Exempt 0 0 - -------------------------------------------------------------------------------------------------- Mid Cap Growth 0 0 - -------------------------------------------------------------------------------------------------- Tax-Exempt Bond 0 0 - -------------------------------------------------------------------------------------------------- Tax-Exempt High Income 0 0 - -------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING DECEMBER 31 - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- Tax-Exempt Money Market 0 0 - --------------------------------------------------------------------------------------------------
A fund may be subject to U.S. taxes resulting from holdings in a PFIC. To avoid taxation, a fund may make an election to mark to market. A foreign corporation is a PFIC when 75% or more of its gross income for the taxable year is passive income or 50% or more of the average value of its assets consists of assets that produce or could produce passive income. Statement of Additional Information - Nov. 29, 2007 Page 82 Income earned by a fund may have had foreign taxes imposed and withheld on it in foreign countries. Tax conventions between certain countries and the U.S. may reduce or eliminate such taxes. If more than 50% of a fund's total assets at the close of its fiscal year consists of securities of foreign corporations, the fund will be eligible to file an election with the Internal Revenue Service under which shareholders of the fund would be required to include their pro rata portions of foreign taxes withheld by foreign countries as gross income in their federal income tax returns. These pro rata portions of foreign taxes withheld may be taken as a credit or deduction in computing the shareholders' federal income taxes. If the election is filed, the fund will report to its shareholders the per share amount of such foreign taxes withheld and the amount of foreign tax credit or deduction available for federal income tax purposes. Capital gain distributions, if any, received by shareholders should be treated as long-term capital gains regardless of how long shareholders owned their shares. Short-term capital gains earned by a fund are paid to shareholders as part of their ordinary income dividend and are taxable. Special rates on capital gains may apply to sales of precious metals, if any, owned directly by a fund and to investments in REITs. Under the Internal Revenue Code of 1986 (the Code), gains or losses attributable to fluctuations in exchange rates that occur between the time a fund accrues interest or other receivables, or accrues expenses or other liabilities denominated in a foreign currency and the time the fund actually collects such receivables or pays such liabilities generally are treated as ordinary income or ordinary loss. Similarly, gains or losses on disposition of debt securities denominated in a foreign currency attributable to fluctuations in the value of the foreign currency between the date of acquisition of the security and the date of disposition also are treated as ordinary gains or losses. These gains or losses, referred to under the Code as "section 988" gains or losses, may increase or decrease the amount of a fund's investment company taxable income to be distributed to its shareholders as ordinary income. Under federal tax law, by the end of a calendar year a fund must declare and pay dividends representing 98% of ordinary income for that calendar year and 98% of net capital gains (both long-term and short-term) for the 12-month period ending Oct. 31 of that calendar year. The fund is subject to an excise tax equal to 4% of the excess, if any, of the amount required to be distributed over the amount actually distributed. Each fund intends to comply with federal tax law and avoid any excise tax. For purposes of the excise tax distributions, section 988 ordinary gains and losses are distributable based on an Oct. 31 year end. This is an exception to the general rule that ordinary income is paid based on a calendar year end. The Code imposes two asset diversification rules that apply to each fund as of the close of each quarter. First, as to 50% of its holdings, the fund may hold no more than 5% of its assets in securities of one issuer and no more than 10% of any one issuer's outstanding voting securities. Second, a fund cannot have more than 25% of its assets in any one issuer. If a mutual fund is the holder of record of any share of stock on the record date for any dividend payable with respect to the stock, the dividend will be included in gross income by the fund as of the later of (1) the date the share became ex-dividend or (2) the date the fund acquired the share. Because the dividends on some foreign equity investments may be received some time after the stock goes ex-dividend, and in certain rare cases may never be received by the fund, this rule may cause a fund to pay income to its shareholders that it has not actually received. To the extent that the dividend is never received, the fund will take a loss at the time that a determination is made that the dividend will not be received. Distributions, if any, that are in excess of a fund's current or accumulated earnings and profits will first reduce a shareholder's tax basis in the fund and, after the basis is reduced to zero, will generally result in capital gains to a shareholder. This is a brief summary that relates to federal income taxation only. Shareholders should consult their tax advisor as to the application of federal, state, and local income tax laws to fund distributions. The 1995 Minnesota Legislature enacted a statement of intent (codified at Minn. Stat. sec. 289A.50, subdivision 10) that interest on obligations of Minnesota governmental units and Indian tribes be included in net income of individuals, estates and trusts for Minnesota income tax purposes if a court determines that Minnesota's exemption of such interest unlawfully discriminates against interstate commerce because interest on obligations of governmental issuers located in other states is so included. This provision applies to taxable years that begin during or after the calendar year in which any such court decision becomes final, irrespective of the date on which the obligations were issued. Only two states have addressed whether a state's exemption of interest on its own bonds or those of its political subdivisions, but not of interest on the bonds of other states or their political subdivisions, unlawfully discriminates against interstate commerce or otherwise contravenes the United States Constitution. A court in Ohio decided in 1994 that the Ohio law was not unconstitutional. However, the Kentucky Court of Appeals held early in 2006 that the Kentucky law violated the Commerce Clause. The Kentucky Supreme Court declined to review this decision, however, the U.S. Supreme Court accepted certiorari in May 2007, and is expected to review the case in the fall of 2007. The Funds cannot predict the likelihood that interest on the Minnesota bonds held by the Funds would become taxable for Minnesota income tax purposes under Section 289A.50, subdivision 10. Similarly, the other State Tax-Exempt Funds cannot predict the likelihood that interest on state and municipal bonds held in such funds would become taxable under such applicable state law. See Appendix B for more information regarding state tax-exempt funds. Statement of Additional Information - Nov. 29, 2007 Page 83 SERVICE PROVIDERS INVESTMENT MANAGEMENT SERVICES RiverSource Investments is the investment manager for each fund. Under the Investment Management Services Agreement, the investment manager, subject to the policies set by the Board, provides investment management services. For its services, the investment manager is paid a fee based on the following schedule. Each class of a fund pays its proportionate share of the fee. The fee is calculated for each calendar day on the basis of net assets as of the close of the preceding day. TABLE 13. INVESTMENT MANAGEMENT SERVICES AGREEMENT FEE SCHEDULE
DAILY RATE ON ASSETS ANNUAL RATE AT LAST DAY OF MOST FUND (BILLIONS) EACH ASSET LEVEL RECENT FISCAL PERIOD - --------------------------------------------------------------------------------------------------------------------- Absolute Return Currency and Income First $1.0 0.890% 0.890% Next 1.0 0.865 Next 1.0 0.840 Next 3.0 0.815 Next 1.5 0.790 Next 1.5 0.775 Next 1.0 0.770 Next 5.0 0.760 Next 5.0 0.750 Next 4.0 0.740 Next 26.0 0.720 Over 50.0 0.700 - --------------------------------------------------------------------------------------------------------------------- Aggressive Growth First $0.50 0.890 0.886 Next 0.50 0.865 Next 1.0 0.840 Next 1.0 0.815 Next 3.0 0.790 Over 6.0 0.765 - --------------------------------------------------------------------------------------------------------------------- Balanced First $1.0 0.530 0.529 Next 1.0 0.505 Next 1.0 0.480 Next 3.0 0.455 Next 1.5 0.430 Next 2.5 0.410 Next 5.0 0.390 Next 9.0 0.370 Over 24.0 0.350 - --------------------------------------------------------------------------------------------------------------------- California Tax-Exempt First $0.25 0.410 California - 0.410 Massachusetts Tax-Exempt Next 0.25 0.385 Massachusetts - 0.410 Michigan Tax-Exempt Next 0.25 0.360 Michigan - 0.410 Minnesota Tax-Exempt Next 0.25 0.345 Minnesota - 0.405 New York Tax-Exempt Next 6.5 0.320 New York - 0.410 Ohio Tax-Exempt Next 2.5 0.310 Ohio - 0.410 Next 5.0 0.300 Next 9.0 0.290 Next 26.0 0.270 Over 50.0 0.250 - ---------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 84
DAILY RATE ON ASSETS ANNUAL RATE AT LAST DAY OF MOST FUND (BILLIONS) EACH ASSET LEVEL RECENT FISCAL PERIOD - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Cash Management First $1.0 0.330% 0.285% Next 0.5 0.313 Next 0.5 0.295 Next 0.5 0.278 Next 2.5 0.260 Next 1.0 0.240 Next 1.5 0.220 Next 1.5 0.215 Next 1.0 0.190 Next 5.0 0.180 Next 5.0 0.170 Next 4.0 0.160 Over 24.0 0.150 - --------------------------------------------------------------------------------------------------------------------- Core Bond First $1.0 0.480 Core Bond - 0.480 Diversified Bond Next 1.0 0.455 Diversified Bond - 0.455 Limited Duration Bond Next 1.0 0.430 Limited Duration Bond - 0.480 Next 3.0 0.405 Next 1.5 0.380 Next 1.5 0.365 Next 1.0 0.360 Next 5.0 0.350 Next 5.0 0.340 Next 4.0 0.330 Next 26.0 0.310 Over 50.0 0.290 - --------------------------------------------------------------------------------------------------------------------- Disciplined Equity First $1.0 0.600 Disciplined Equity - 0.577 Disciplined Large Cap Growth Next 1.0 0.575 Disciplined Large Cap Growth - 0.600 Diversified Equity Income Next 1.0 0.550 Diversified Equity Income - 0.535 Growth Next 3.0 0.525 Growth - 0.571 Large Cap Equity Next 1.5 0.500 Large Cap Equity - 0.547 Large Cap Value Next 2.5 0.485 Large Cap Value - 0.600 Next 5.0 0.470 Next 5.0 0.450 Next 4.0 0.425 Next 26.0 0.400 Over 50.0 0.375 - --------------------------------------------------------------------------------------------------------------------- Disciplined International Equity First $0.25 0.800 Disciplined International Equity - 0.800 European Equity Next 0.25 0.775 European Equity - 0.800 Global Equity Next 0.25 0.750 Global Equity - 0.776 International Opportunity Next 0.25 0.725 International Opportunity - 0.779 Next 1.0 0.700 Next 5.5 0.675 Next 2.5 0.660 Next 5.0 0.645 Next 5.0 0.635 Next 4.0 0.610 Next 26.0 0.600 Over 50.0 0.570 - ---------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 85
DAILY RATE ON ASSETS ANNUAL RATE AT LAST DAY OF MOST FUND (BILLIONS) EACH ASSET LEVEL RECENT FISCAL PERIOD - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Disciplined Small and Mid Cap Equity First $1.0 0.700% Disciplined Small and Mid Cap Mid Cap Growth Next 1.0 0.675 Equity - 0.700% Next 1.0 0.650 Mid Cap Growth - 0.694 Next 3.0 0.625 Next 1.5 0.600 Next 2.5 0.575 Next 5.0 0.550 Next 9.0 0.525 Next 26.0 0.500 Over 50.0 0.475 - --------------------------------------------------------------------------------------------------------------------- Disciplined Small Cap Value First $0.25 0.850 0.850 Next 0.25 0.825 Next 0.25 0.800 Next 0.25 0.775 Next 1.0 0.750 Over 2.0 0.725 - --------------------------------------------------------------------------------------------------------------------- Dividend Opportunity First $0.50 0.610 0.578 Next 0.50 0.585 Next 1.0 0.560 Next 1.0 0.535 Next 3.0 0.510 Next 4.0 0.480 Next 5.0 0.470 Next 5.0 0.450 Next 4.0 0.425 Next 26.0 0.400 Over 50.0 0.375 - --------------------------------------------------------------------------------------------------------------------- Emerging Markets First $0.25 1.100 1.087 Next 0.25 1.080 Next 0.25 1.060 Next 0.25 1.040 Next 1.0 1.020 Next 5.5 1.000 Next 2.5 0.985 Next 5.0 0.970 Net 5.0 0.960 Next 4.0 0.935 Next 26.0 0.920 Over 50.0 0.900 - --------------------------------------------------------------------------------------------------------------------- Emerging Markets Bond First $0.25 0.720 Emerging Markets Bond - 0.720 Global Bond Next 0.25 0.695 Global Bond - 0.708 Next 0.25 0.670 Next 0.25 0.645 Next 6.5 0.620 Next 2.5 0.605 Next 5.0 0.590 Next 5.0 0.580 Next 4.0 0.560 Next 26.0 0.540 Over 50.0 0.520 - ---------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 86
DAILY RATE ON ASSETS ANNUAL RATE AT LAST DAY OF MOST FUND (BILLIONS) EACH ASSET LEVEL RECENT FISCAL PERIOD - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Equity Value First $0.50 0.530% 0.510% Next 0.50 0.505 Next 1.0 0.480 Next 1.0 0.455 Next 3.0 0.430 Over 6.0 0.400 - --------------------------------------------------------------------------------------------------------------------- Floating Rate First $1.0 0.610 0.610 Income Opportunities Next 1.0 0.585 Next 1.0 0.560 Next 3.0 0.535 Next 1.5 0.510 Next 1.5 0.495 Next 1.0 0.470 Next 5.0 0.455 Next 5.0 0.445 Next 4.0 0.420 Next 26.0 0.405 Over 50.0 0.380 - --------------------------------------------------------------------------------------------------------------------- Fundamental Growth First $1.0 0.780 0.780 Next 1.0 0.755 Next 1.0 0.730 Next 3.0 0.705 Over 6.0 0.680 - --------------------------------------------------------------------------------------------------------------------- Fundamental Value First $0.50 0.730 Fundamental Value - 0.711 Value Next 0.50 0.705 Value - 0.730 Next 1.0 0.680 Next 1.0 0.655 Next 3.0 0.630 Over 6.0 0.600 - --------------------------------------------------------------------------------------------------------------------- Global Technology First $0.25 0.720 0.720 Next 0.25 0.695 Next 0.25 0.670 Next 0.25 0.645 Next 1.0 0.620 Over 2.0 0.595 - --------------------------------------------------------------------------------------------------------------------- High Yield Bond First $1.0 0.590 0.578 Next 1.0 0.565 Next 1.0 0.540 Next 3.0 0.515 Next 1.5 0.490 Next 1.5 0.475 Next 1.0 0.450 Next 5.0 0.435 Next 5.0 0.425 Next 4.0 0.400 Next 26.0 0.385 Over 50.0 0.360 - ---------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 87
DAILY RATE ON ASSETS ANNUAL RATE AT LAST DAY OF MOST FUND (BILLIONS) EACH ASSET LEVEL RECENT FISCAL PERIOD - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Income Builder Basic Income N/A N/A N/A Income Builder Enhanced Income Income Builder Moderate Income Portfolio Builder Aggressive Portfolio Builder Conservative Portfolio Builder Moderate Portfolio Builder Moderate Aggressive Portfolio Builder Moderate Conservative Portfolio Builder Total Equity Retirement Plus 2010 Retirement Plus 2015 Retirement Plus 2020 Retirement Plus 2025 Retirement Plus 2030 Retirement Plus 2035 Retirement Plus 2040 Retirement Plus 2045 - --------------------------------------------------------------------------------------------------------------------- Inflation Protected Securities First $1.0 0.440% 0.440% Next 1.0 0.415 Next 1.0 0.390 Next 3.0 0.365 Next 1.5 0.340 Next 1.5 0.325 Next 1.0 0.320 Next 5.0 0.310 Next 5.0 0.300 Next 4.0 0.290 Next 26.0 0.270 Over 50.0 0.250 - --------------------------------------------------------------------------------------------------------------------- Intermediate Tax-Exempt First $1.0 0.390 0.390 Next 1.0 0.365 Next 1.0 0.340 Next 3.0 0.315 Next 1.5 0.290 Next 2.5 0.280 Next 5.0 0.270 Next 35.0 0.260 Over 50.0 0.250 - --------------------------------------------------------------------------------------------------------------------- International Aggressive Growth First $0.25 1.000 0.988 Next 0.25 0.975 Next 0.25 0.950 Next 0.25 0.925 Next 1.0 0.900 Over 2.0 0.875 - --------------------------------------------------------------------------------------------------------------------- International Equity First $0.25 0.970 0.970 Next 0.25 0.945 Next 0.25 0.920 Next 0.25 0.895 Next 1.0 0.870 Over 2.0 0.845 - ---------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 88
DAILY RATE ON ASSETS ANNUAL RATE AT LAST DAY OF MOST FUND (BILLIONS) EACH ASSET LEVEL RECENT FISCAL PERIOD - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- International Select Value First $0.25 0.900% 0.830% Next 0.25 0.875 Next 0.25 0.850 Next 0.25 0.825 Next 1.0 0.800 Over 2.0 0.775 - --------------------------------------------------------------------------------------------------------------------- International Small Cap First $0.25 1.120 1.120 Next 0.25 1.095 Next 0.25 1.070 Next 0.25 1.045 Next 1.0 1.020 Over 2.0 0.995 - --------------------------------------------------------------------------------------------------------------------- Mid Cap Value First $1.0 0.700 0.679 Next 1.0 0.675 Next 1.0 0.650 Next 3.0 0.625 Next 1.5 0.600 Next 2.5 0.575 Next 5.0 0.550 Next 9.0 0.525 Next 26.0 0.500 Over 50.0 0.475 - --------------------------------------------------------------------------------------------------------------------- Precious Metals and Mining First $0.25 0.800 0.800 Next 0.25 0.775 Next 0.25 0.750 Next 0.25 0.725 Next 1.0 0.700 Over 2.0 0.675 - --------------------------------------------------------------------------------------------------------------------- Real Estate First $1.0 0.840 0.840 Next 1.0 0.815 Next 1.0 0.790 Next 3.0 0.765 Next 6.0 0.740 Next 12.0 0.730 Over 24.0 0.720 - --------------------------------------------------------------------------------------------------------------------- S&P 500 Index First $1.0 0.220 0.220 Next 1.0 0.210 Next 1.0 0.200 Next 4.5 0.190 Next 2.5 0.180 Next 5.0 0.170 Next 9.0 0.160 Next 26.0 0.140 Over 50.0 0.120 - --------------------------------------------------------------------------------------------------------------------- Select Value First $0.50 0.780 0.775 Next 0.50 0.755 Next 1.0 0.730 Next 1.0 0.705 Next 3.0 0.680 Over 6.0 0.650 - ---------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 89
DAILY RATE ON ASSETS ANNUAL RATE AT LAST DAY OF MOST FUND (BILLIONS) EACH ASSET LEVEL RECENT FISCAL PERIOD - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Short Duration U.S. Government First $1.0 0.480% 0.480% Next 1.0 0.455 Next 1.0 0.430 Next 3.0 0.405 Next 1.5 0.380 Next 1.5 0.365 Next 1.0 0.340 Next 5.0 0.325 Next 5.0 0.315 Next 4.0 0.290 Next 26.0 0.275 Over 50.0 0.250 - --------------------------------------------------------------------------------------------------------------------- Small Cap Advantage First $0.25 0.790 0.772 Next 0.25 0.765 Next 0.25 0.740 Next 0.25 0.715 Next 1.0 0.690 Over 2.0 0.665 - --------------------------------------------------------------------------------------------------------------------- Small Cap Equity First $0.25 0.970 0.964 Next 0.25 0.945 Next 0.25 0.920 Next 0.25 0.895 Over 1.0 0.870 - --------------------------------------------------------------------------------------------------------------------- Small Cap Growth First $0.25 0.920 0.920 Next 0.25 0.895 Next 0.25 0.870 Next 0.25 0.845 Next 1.0 0.820 Over 2.0 0.795 - --------------------------------------------------------------------------------------------------------------------- Small Cap Value First $0.25 0.970 0.933 Next 0.25 0.945 Next 0.25 0.920 Next 0.25 0.895 Over 1.0 0.870 - --------------------------------------------------------------------------------------------------------------------- Small Company Index First $0.25 0.360 0.343 Next 0.25 0.350 Next 0.25 0.340 Next 0.25 0.330 Next 6.5 0.320 Next 7.5 0.300 Next 9.0 0.280 Next 26.0 0.260 Over 50.0 0.240 - ---------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 90
DAILY RATE ON ASSETS ANNUAL RATE AT LAST DAY OF MOST FUND (BILLIONS) EACH ASSET LEVEL RECENT FISCAL PERIOD - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Strategic Allocation First $1.0 0.570% 0.554 Next 1.0 0.545 Next 1.0 0.520 Next 3.0 0.495 Next 1.5 0.470 Next 2.5 0.450 Next 5.0 0.430 Next 9.0 0.410 Over 24.0 0.390 - --------------------------------------------------------------------------------------------------------------------- Strategic Income Allocation First $0.25 0.550 0.550 Next 0.25 0.525 Next 0.25 0.500 Over 0.75 0.475 - --------------------------------------------------------------------------------------------------------------------- Tax-Exempt Bond First $1.0 0.410 0.410 Next 1.0 0.385 Next 1.0 0.360 Next 3.0 0.335 Next 1.5 0.310 Next 2.5 0.300 Next 5.0 0.290 Next 9.0 0.280 Next 26.0 0.260 Over 50.0 0.250 - --------------------------------------------------------------------------------------------------------------------- Tax-Exempt High Income First $1.0 0.470 0.442 Next 1.0 0.445 Next 1.0 0.420 Next 3.0 0.395 Next 1.5 0.370 Next 2.5 0.360 Next 5.0 0.350 Next 9.0 0.340 Next 26.0 0.320 Over 50.0 0.300 - --------------------------------------------------------------------------------------------------------------------- Tax-Exempt Money Market First $1.0 0.330 0.330 Next 0.5 0.313 Next 0.5 0.295 Next 0.5 0.278 Next 2.5 0.260 Next 1.0 0.240 Next 1.5 0.220 Next 1.5 0.215 Next 1.0 0.190 Next 5.0 0.180 Next 5.0 0.170 Next 4.0 0.160 Over 24.0 0.150 - ---------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 91
DAILY RATE ON ASSETS ANNUAL RATE AT LAST DAY OF MOST FUND (BILLIONS) EACH ASSET LEVEL RECENT FISCAL PERIOD - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- U.S. Government Mortgage First $1.0 0.480% 0.480% Next 1.0 0.455 Next 1.0 0.430 Next 3.0 0.405 Next 1.5 0.380 Next 1.5 0.365 Next 1.0 0.360 Next 5.0 0.350 Next 5.0 0.340 Next 4.0 0.330 Next 26.0 0.310 Over 50.0 0.290 - ---------------------------------------------------------------------------------------------------------------------
The management fee is paid monthly. Under the agreement, a fund also pays taxes, brokerage commissions and nonadvisory expenses, which include custodian fees and charges; fidelity bond premiums; certain legal fees; registration fees for shares; consultants' fees; compensation of Board members, officers and employees not employed by the investment manager or its affiliates; corporate filing fees; organizational expenses; expenses incurred in connection with lending securities; interest and fee expense related to a fund's participation in inverse floater structures; and expenses properly payable by a fund, approved by the Board. For Equity and Balanced Funds, except for S&P 500 Index and Small Company Index, before the fee based on the asset charge is paid, it is adjusted for the fund's investment performance relative to a Lipper Index (Index) as shown in the table below. The adjustment increased or decreased the fee for the last fiscal period as shown in the following table. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1. TABLE 14. LIPPER INDEXES
FEE INCREASE OR FUND LIPPER INDEX (DECREASE) - ---------------------------------------------------------------------------------------------- FISCAL YEAR ENDING MARCH 31 - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- Equity Value Lipper Large-Cap Value Funds $ 842,685 - ---------------------------------------------------------------------------------------------- Precious Metals and Mining Lipper Gold Funds (20,073) - ---------------------------------------------------------------------------------------------- Small Cap Advantage Lipper Small-Cap Core Funds (506,105) - ---------------------------------------------------------------------------------------------- Small Cap Growth Lipper Small-Cap Growth Funds 74,739 - ---------------------------------------------------------------------------------------------- FISCAL YEAR ENDING MAY 31 - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- Aggressive Growth Lipper Mid-Cap Growth Funds (363,354) - ---------------------------------------------------------------------------------------------- Fundamental Growth Lipper Large-Cap Growth Funds 3,495 - ---------------------------------------------------------------------------------------------- Fundamental Value Lipper Large-Cap Value Funds (596,440) - ---------------------------------------------------------------------------------------------- Select Value Lipper Multi-Cap Value Funds 151,566 - ---------------------------------------------------------------------------------------------- Small Cap Equity Lipper Small-Cap Core Funds (259,546) - ---------------------------------------------------------------------------------------------- Small Cap Value Lipper Small-Cap Value Funds 77,314 - ---------------------------------------------------------------------------------------------- Value Lipper Large-Cap Value Funds (29,980) - ---------------------------------------------------------------------------------------------- FISCAL YEAR ENDING JUNE 30 - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- Dividend Opportunity Lipper Equity Income Funds 1,238,194 - ---------------------------------------------------------------------------------------------- Real Estate Lipper Real Estate Funds 155,486 - ---------------------------------------------------------------------------------------------- FISCAL YEAR ENDING JULY 31 - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- Disciplined Equity Lipper Large-Cap Core Funds 716,428 - ---------------------------------------------------------------------------------------------- Disciplined Small and Mid Cap Equity Lipper Mid-Cap Core Funds (17,062) - ---------------------------------------------------------------------------------------------- Disciplined Small Cap Value Lipper Small-Cap Value Funds (13,668) - ---------------------------------------------------------------------------------------------- Growth Lipper Large-Cap Growth Funds 2,987,141 - ----------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 92
FEE INCREASE OR FUND LIPPER INDEX (DECREASE) - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- Large Cap Equity Lipper Large-Cap Core Funds $ 788,515 - ---------------------------------------------------------------------------------------------- Large Cap Value Lipper Large-Cap Value Funds (3,332) - ---------------------------------------------------------------------------------------------- FISCAL YEAR ENDING SEPTEMBER 30 - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- Balanced Lipper Balanced Funds 520,967 - ---------------------------------------------------------------------------------------------- Disciplined Large Cap Growth Lipper Large-Cap Growth Funds 0(a) - ---------------------------------------------------------------------------------------------- Diversified Equity Income Lipper Equity Income Funds 1,134,237 - ---------------------------------------------------------------------------------------------- Mid Cap Value Lipper Mid-Cap Value Funds 578,014 - ---------------------------------------------------------------------------------------------- Strategic Allocation Lipper Flexible Portfolio Funds 929,457 - ---------------------------------------------------------------------------------------------- FISCAL YEAR ENDING OCTOBER 31 - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- Lipper International Large-Cap Core Disciplined International Equity Funds 0(b) - ---------------------------------------------------------------------------------------------- Emerging Markets Lipper Emerging Markets Funds 105,658 - ---------------------------------------------------------------------------------------------- European Equity Lipper European Funds (71,748) - ---------------------------------------------------------------------------------------------- Global Equity Lipper Global Funds 527,514 - ---------------------------------------------------------------------------------------------- Global Technology Lipper Science and Technology Funds 113,421 - ---------------------------------------------------------------------------------------------- Lipper International Multi-Cap International Aggressive Growth Growth Funds (262,382) - ---------------------------------------------------------------------------------------------- International Equity Lipper International Funds (3,284) - ---------------------------------------------------------------------------------------------- Lipper International Large-Cap Core International Opportunity Funds 194,820 - ---------------------------------------------------------------------------------------------- Lipper International Multi-Cap Value International Select Value Funds 1,234,231 - ---------------------------------------------------------------------------------------------- International Small Cap Lipper International Small-Cap Funds (117,356) - ---------------------------------------------------------------------------------------------- FISCAL YEAR ENDING NOVEMBER 30 - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- Mid Cap Growth Lipper Mid-Cap Growth Funds (1,683,464) - ----------------------------------------------------------------------------------------------
(a) For the period from May 17, 2007 (when shares became publicly available) to Sept. 30, 2007. (b) For the period from May 18, 2006 (when shares became publicly available) to Oct. 31, 2006. The adjustment will be determined monthly by measuring the percentage difference over a rolling 12-month period between the performance of one Class A share of the fund and the change in the Index. The performance difference is then used to determine the adjustment rate. The adjustment rate, computed to five decimal places, is determined in accordance with the following table. The table is organized by fund category. You can find your fund's category in Table 1. Statement of Additional Information - Nov. 29, 2007 Page 93 TABLE 15. PERFORMANCE INCENTIVE ADJUSTMENT CALCULATION
- -------------------------------------------------------------------------------------------------------- EQUITY FUNDS BALANCED FUNDS - -------------------------------------------------------------------------------------------------------- PERFORMANCE PERFORMANCE DIFFERENCE ADJUSTMENT RATE DIFFERENCE ADJUSTMENT RATE - -------------------------------------------------------------------------------------------------------- 0.00% - 0.50% 0 0.00% - 0.50% 0 - -------------------------------------------------------------------------------------------------------- 0.50% - 1.00% 6 basis points times the 0.50% - 1.00% 6 basis points times the performance difference over 0.50%, performance difference over 0.50%, times 100 (maximum of 3 basis times 100 (maximum of 3 basis points if a 1% performance points if a 1% performance difference) difference) - -------------------------------------------------------------------------------------------------------- 1.00% - 2.00% 3 basis points, plus 3 basis points 1.00% - 2.00% 3 basis points, plus 3 basis points times the performance difference times the performance difference over 1.00%, times 100 (maximum 6 over 1.00%, times 100 (maximum 6 basis points if a 2% performance basis points if a 2% performance difference) difference) - -------------------------------------------------------------------------------------------------------- 2.00% - 4.00% 6 basis points, plus 2 basis points 2.00% - 3.00% 6 basis points, plus 2 basis points times the performance difference times the performance difference over 2.00%, times 100 (maximum 10 over 2.00%, times 100 (maximum 8 basis points if a 4% performance basis points if a 3% performance difference) difference) - -------------------------------------------------------------------------------------------------------- 4.00% - 6.00% 10 basis points, plus 1 basis point 3.00% or 8 basis points times the performance difference more over 4.00%, times 100 (maximum 12 basis points if a 6% performance difference) - -------------------------------------------------------------------------------------------------------- 6.00% or more 12 basis points - --------------------------------------------------------------------------------------------------------
For example, if the performance difference for an Equity Fund is 2.38%, the adjustment rate is 0.000676 (0.0006 [6 basis points] plus 0.0038 [the 0.38% performance difference over 2.00%] x 0.0002 [2 basis points] x 100 (0.000076)). Rounded to five decimal places, the adjustment rate is 0.00068. The maximum adjustment rate for the fund is 0.0012 per year. Where the fund's Class A performance exceeds that of the Index, the fee paid to the investment manager will increase. Where the performance of the Index exceeds the performance of the fund's Class A shares, the fee paid to the investment manager will decrease. The 12-month comparison period rolls over with each succeeding month, so that it always equals 12 months, ending with the month for which the performance adjustment is being computed. CHANGE IN INDEX If an Index ceases to be published for a period of more than 90 days, changes in any material respect, otherwise becomes impracticable or, at the discretion of the Board, is no longer appropriate to use for purposes of a performance incentive adjustment, for example, if Lipper reclassifies the fund from one peer group to another, the Board may take action it deems appropriate and in the best interests of shareholders, including: (1) discontinuance of the performance incentive adjustment until such time as it approves a substitute index; or (2) adoption of a methodology to transition to a substitute index it has approved. In the case of a change in index, a fund's performance will be compared to a 12 month blended index return that reflects the performance of the current index for the portion of the 12 month performance measurement period beginning the effective date of the current index and the performance of the prior index for the remainder of the measurement period. At the conclusion of the transition period, the performance of the prior index will be eliminated from the performance incentive adjustment calculation, and the calculation will include only the performance of the current index. TRANSITION PERIOD The performance incentive adjustment will not be calculated for the first 6 months from the inception of the fund. After 6 full calendar months, the performance fee adjustment will be determined using the average assets and performance difference over the first 6 full calendar months, and the adjustment rate will be applied in full. Each successive month an additional calendar month will be added to the performance adjustment computation. After 12 full calendar months, the full rolling 12-month period will take affect. Statement of Additional Information - Nov. 29, 2007 Page 94 The table below shows the total management fees paid by each fund for the last three fiscal periods as well as nonadvisory expenses, net of earnings credits, waivers and expenses reimbursed by the investment manager and its affiliates. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1. TABLE 16. MANAGEMENT FEES AND NONADVISORY EXPENSES
- --------------------------------------------------------------------------------------------------------------------- MANAGEMENT FEES NONADVISORY EXPENSES - --------------------------------------------------------------------------------------------------------------------- FUND 2007 2006 2005 2007 2006 2005 - --------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JANUARY 31 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Portfolio Builder Aggressive N/A* $ 204,941 $ 55,141(a)$ 209,004 $ 154,484 $ 34,746(a) - --------------------------------------------------------------------------------------------------------------------- Portfolio Builder Conservative N/A* 71,579 23,875(a) 134,788 117,318 43,296(a) - --------------------------------------------------------------------------------------------------------------------- Portfolio Builder Moderate N/A* 342,180 93,838(a) 246,216 251,538 142,907(a) - --------------------------------------------------------------------------------------------------------------------- Portfolio Builder Moderate Aggressive N/A* 418,633 112,009(a) 355,360 269,480 116,480(a) - --------------------------------------------------------------------------------------------------------------------- Portfolio Builder Moderate Conservative N/A* 137,483 43,118(a) 140,615 144,243 75,264(a) - --------------------------------------------------------------------------------------------------------------------- Portfolio Builder Total Equity N/A* 165,740 43,835(a) 188,843 122,935 27,696(a) - --------------------------------------------------------------------------------------------------------------------- S&P 500 Index $ 566,109 706,270 933,587 (272,996) (357,906) (402,204) - --------------------------------------------------------------------------------------------------------------------- Small Company Index 3,889,499 4,419,815 4,547,058 (662,392) 471,768 536,282 - --------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING MARCH 31 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Equity Value 6,969,436 7,043,854 6,836,800 361,720 400,520 465,953 - --------------------------------------------------------------------------------------------------------------------- Precious Metals and Mining 876,127 579,779 659,595 144,337 207,159 176,012 - --------------------------------------------------------------------------------------------------------------------- Small Cap Advantage 4,703,119 5,845,601 6,341,134 (252,816) 510,707 533,489 - --------------------------------------------------------------------------------------------------------------------- Small Cap Growth 2,066,992 1,878,991 2,276,290 111,014 343,335 421,008 - --------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING APRIL 30 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Retirement Plus 2010 N/A(b) N/A N/A 4,075(b) N/A N/A - --------------------------------------------------------------------------------------------------------------------- Retirement Plus 2015 N/A(b) N/A N/A 3,927(b) N/A N/A - --------------------------------------------------------------------------------------------------------------------- Retirement Plus 2020 N/A(b) N/A N/A 6,231(b) N/A N/A - --------------------------------------------------------------------------------------------------------------------- Retirement Plus 2025 N/A(b) N/A N/A 4,478(b) N/A N/A - --------------------------------------------------------------------------------------------------------------------- Retirement Plus 2030 N/A(b) N/A N/A 2,766(b) N/A N/A - --------------------------------------------------------------------------------------------------------------------- Retirement Plus 2035 N/A(b) N/A N/A 878(b) N/A N/A - --------------------------------------------------------------------------------------------------------------------- Retirement Plus 2040 N/A(b) N/A N/A 2,640(b) N/A N/A - --------------------------------------------------------------------------------------------------------------------- Retirement Plus 2045 N/A(b) N/A N/A (2,522)(b) N/A N/A - --------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING MAY 31 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Aggressive Growth 4,627,106 1,950,153 399,501 (1,047,823) (167,264) 82,999 - --------------------------------------------------------------------------------------------------------------------- Fundamental Growth 1,824,581 987,877 410,475 158,403 191,085 177,899 - --------------------------------------------------------------------------------------------------------------------- Fundamental Value 7,530,722 7,971,622 5,556,219 (215,041) 501,862 488,580 - --------------------------------------------------------------------------------------------------------------------- High Yield Bond 11,401,845 12,713,321 14,973,845 481,606 688,374 817,018 - --------------------------------------------------------------------------------------------------------------------- Income Builder Basic Income N/A N/A N/A 145,971 3,184(c) N/A - --------------------------------------------------------------------------------------------------------------------- Income Builder Enhanced Income N/A N/A N/A 153,282 6,657(c) N/A - --------------------------------------------------------------------------------------------------------------------- Income Builder Moderate Income N/A N/A N/A 202,410 7,419(c) N/A - --------------------------------------------------------------------------------------------------------------------- Select Value 4,807,861 5,211,061 5,256,934 (162,440) 330,794 423,030 - --------------------------------------------------------------------------------------------------------------------- Short Duration U.S. Government 4,419,003 6,683,201 10,141,504 (1,025,939) (1,688,300) (958,143) - --------------------------------------------------------------------------------------------------------------------- Small Cap Equity 2,964,236 2,525,974 1,560,155 (464,274) (134,739) 6,490 - --------------------------------------------------------------------------------------------------------------------- Small Cap Value 9,159,989 9,285,758 9,857,858 (878,605) 735,477 788,885 - --------------------------------------------------------------------------------------------------------------------- U.S. Government Mortgage 1,348,887 1,327,433 1,532,464 (438,473) (549,885) (188,134) - --------------------------------------------------------------------------------------------------------------------- Value 2,884,225 3,018,867 3,311,867 (12,895) 275,068 285,856 - ---------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 95
- --------------------------------------------------------------------------------------------------------------------- MANAGEMENT FEES NONADVISORY EXPENSES - --------------------------------------------------------------------------------------------------------------------- FUND 2007 2006 2005 2007 2006 2005 - --------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JUNE 30 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Dividend Opportunity $10,678,661 $ 7,688,134 $ 6,201,403 $ 540,349 $ 480,473 $ 453,329 - --------------------------------------------------------------------------------------------------------------------- Real Estate 2,299,121 1,398,778 725,491 207,925 153,244 133,564 - --------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JULY 31 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Cash Management 12,713,351 10,801,723 12,052,160 859,062 (1,747,535) 1,220,672 - --------------------------------------------------------------------------------------------------------------------- Core Bond 1,096,973 991,804 846,872 (66,961) (58,636) 99,940 - --------------------------------------------------------------------------------------------------------------------- Disciplined Equity 14,110,274 5,175,451 408,720 (202,920) (83,131) 130,016 - --------------------------------------------------------------------------------------------------------------------- Disciplined Small and Mid Cap Equity 273,481 13,335(d) N/A 91,799 4,577(d) N/A - --------------------------------------------------------------------------------------------------------------------- Disciplined Small Cap Value 206,071 49,035(e) N/A 37,535 9,684(e) N/A - --------------------------------------------------------------------------------------------------------------------- Floating Rate 3,332,472 412,667(e) N/A 151,486 19,402(e) N/A - --------------------------------------------------------------------------------------------------------------------- Growth 22,705,786 19,922,079 18,968,320 954,358 1,214,759 1,217,404 - --------------------------------------------------------------------------------------------------------------------- Income Opportunities 2,116,555 2,229,460 1,954,757 187,627 198,512 214,865 - --------------------------------------------------------------------------------------------------------------------- Inflation Protected Securities 1,313,892 1,078,635 552,220 (126,032) (45,905) 28,432 - --------------------------------------------------------------------------------------------------------------------- Large Cap Equity 39,667,264 20,724,477 9,680,873 1,168,504 682,652 161,534 - --------------------------------------------------------------------------------------------------------------------- Large Cap Value 602,406 715,200 803,736 184,710 186,504 293,194 - --------------------------------------------------------------------------------------------------------------------- Limited Duration Bond 726,809 990,881 960,788 (73,339) (96,959) 57,170 - --------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING AUGUST 31 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- California Tax-Exempt(f) 717,999 1,008,174 1,010,591 20,854 (8,449) 116,440 - --------------------------------------------------------------------------------------------------------------------- Diversified Bond 12,770,016 12,388,294 13,003,467 (1,129,485) (1,870,049) (1,032,114) - --------------------------------------------------------------------------------------------------------------------- Massachusetts Tax-Exempt(f) 220,140 347,506 372,649 5,447 19,719(g) 74,396(g) - --------------------------------------------------------------------------------------------------------------------- Michigan Tax-Exempt(f) 186,717 286,107 294,025 3,199 (9,110)(g) 36,732 - --------------------------------------------------------------------------------------------------------------------- Minnesota Tax-Exempt(f) 1,351,439 1,898,065 1,895,714 676,782 599,362(g) 580,040(g) - --------------------------------------------------------------------------------------------------------------------- New York Tax-Exempt(f) 279,438 402,241 434,449 134,099 133,306(g) 146,336(g) - --------------------------------------------------------------------------------------------------------------------- Ohio Tax-Exempt(f) 187,674 285,080 307,214 1,386 (12,492)(g) 43,253(g) - --------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING SEPTEMBER 30 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Balanced 6,315,077 5,690,832 7,169,932 368,447 563,493 651,610 - --------------------------------------------------------------------------------------------------------------------- Disciplined Large Cap Growth 114,048(h) N/A N/A 54,709(h) N/A N/A - --------------------------------------------------------------------------------------------------------------------- Diversified Equity Income 42,530,087 37,321,661 24,183,415 1,561,033 1,761,776 1,530,714 - --------------------------------------------------------------------------------------------------------------------- Mid Cap Value 15,908,732 11,459,838 5,816,781 826,273 728,841 531,095 - --------------------------------------------------------------------------------------------------------------------- Strategic Allocation 11,025,000 7,064,937 5,960,581 921,198 665,164 642,432 - --------------------------------------------------------------------------------------------------------------------- Strategic Income Allocation 168,875(h) N/A N/A 76,656(h) N/A N/A - --------------------------------------------------------------------------------------------------------------------- 2006 2005 2004 2006 2005 2004 - --------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING OCTOBER 31 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Absolute Return Currency and Income 176,149(i) N/A N/A 28,907(i) N/A N/A - --------------------------------------------------------------------------------------------------------------------- Disciplined International Equity 147,388(j) N/A N/A 48,716(j) N/A N/A - --------------------------------------------------------------------------------------------------------------------- Emerging Markets 5,659,680 3,801,760 2,770,886 745,246 636,569 519,598 - --------------------------------------------------------------------------------------------------------------------- Emerging Markets Bond 191,237(k) N/A N/A 77,772(k) N/A N/A - --------------------------------------------------------------------------------------------------------------------- European Equity 821,750 837,577 872,149 182,061 224,833 236,203 - --------------------------------------------------------------------------------------------------------------------- Global Bond 3,734,676 4,359,713 4,143,713 (159,716) 408,133 427,277 - --------------------------------------------------------------------------------------------------------------------- Global Equity 5,791,016 4,471,632 3,302,062 517,920 485,178 506,708 - ---------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 96
- --------------------------------------------------------------------------------------------------------------------- Management Fees Nonadvisory expenses - --------------------------------------------------------------------------------------------------------------------- FUND 2006 2005 2004 2006 2005 2004 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Global Technology $ 1,327,883 $ 1,574,791 $ 1,812,789 $ 249,939 $ 282,889 $ 304,625 - --------------------------------------------------------------------------------------------------------------------- International Aggressive Growth 4,039,162 3,119,859 1,878,346 530,707 384,996 250,484 - --------------------------------------------------------------------------------------------------------------------- International Equity 1,767,556 1,431,433 1,015,577 265,839 323,432 316,320 - --------------------------------------------------------------------------------------------------------------------- International Opportunity 4,840,788 3,988,205 2,926,933 505,513 566,027 442,832 - --------------------------------------------------------------------------------------------------------------------- International Select Value 15,936,398 10,340,380 6,467,621 990,734 812,998 473,274 - --------------------------------------------------------------------------------------------------------------------- International Small Cap 1,050,011 933,818 600,389 246,920 333,478 208,586 - --------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING NOVEMBER 30 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Intermediate Tax-Exempt 435,316 644,499 752,882 (25,206) 67,781 136,017 - --------------------------------------------------------------------------------------------------------------------- Mid Cap Growth 9,852,112 10,413,718 10,550,526 670,574 901,194 744,839 - --------------------------------------------------------------------------------------------------------------------- Tax-Exempt Bond 3,345,629 3,066,023 3,457,986 905,255 661,982(l) 510,620(l) - --------------------------------------------------------------------------------------------------------------------- Tax-Exempt High Income 15,027,647 17,998,361 20,079,644 8,025,340 7,139,120(l) 5,135,426(l) - --------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING DECEMBER 31 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Tax-Exempt Money Market 390,170 423,253 515,265 118,441 116,613 177,477 - ---------------------------------------------------------------------------------------------------------------------
* Effective Feb. 1, 2006, this fee was eliminated. (a) For the period from March 4, 2004 (when shares became publicly available) to Jan. 31, 2005. (b) For the period from May 18, 2006 (when shares became publicly available) to April 30, 2007. (c) For the period from Feb. 16, 2006 (when shares became publicly available) to May 31, 2006. (d) For the period from May 18, 2006 (when shares became publicly available) to July 31, 2006. (e) For the period from Feb. 16, 2006 (when shares became publicly available) to July 31, 2006. (f) The fund changed its fiscal year end in 2006 from June 30 to Aug. 31. For 2006, the information shown is from July 1, 2005 through Aug. 31, 2006. For years prior to 2006, the fiscal period ended June 30. (g) During 2006, the Fund changed the method of accounting for its participation in inverse floater structures. Previously, nonadvisory expenses for fiscal year end 2006, 2005 and 2004 were reported as $(22,871), $43,112 and $52,958 for Massachusetts Tax-Exempt Fund, $(13,107), $36,732 and $43,425 for Michigan Tax-Exempt Fund, $(68,320), $161,536 and $182,884 for Minnesota Tax-Exempt Fund, $(21,864), $54,945 and $62,139 for New York Tax-Exempt Fund and $(16,487), $38,356 and $43,070 for Ohio Tax-Exempt Fund, respectively. (h) For the period from May 17, 2007 (when shares became publicly available) to Sept. 30, 2007. (i) For the period from June 15, 2006 (when the Fund became available) to Oct. 31, 2006. (j) For the period from May 18, 2006 (when shares became publicly available) to Oct. 31, 2006. (k) For the period from Feb. 16, 2006 (when shares became publicly available) to Oct. 31, 2006. (l) During 2006, the Fund changed the method of accounting for its participation in inverse floater structures. Previously, nonadvisory expenses for fiscal year end 2005 and 2004 were reported as $136,155 and $248,267 for Tax-Exempt Bond Fund, and $308,271 and $976,647 for Tax- Exempt High Income Fund, respectively. MANAGER OF MANAGERS EXEMPTION The RiverSource funds have received an order from the SEC that permits RiverSource Investments, subject to the approval of the Board, to appoint a subadviser or change the terms of a subadvisory agreement for a fund without first obtaining shareholder approval. The order permits the fund to add or change unaffiliated subadvisers or the fees paid to subadvisers from time to time without the expense and delays associated with obtaining shareholder approval of the change. For California Tax-Exempt, Cash Management, Diversified Bond, Global Bond, High Yield Bond, Intermediate Tax-Exempt, Massachusetts Tax-Exempt, Michigan Tax- Exempt, Minnesota Tax-Exempt, New York Tax-Exempt, Ohio Tax-Exempt, Short Duration U.S. Government, Tax-Exempt Bond, Tax-Exempt High Income, Tax-Exempt Money Market and U.S. Government Mortgage funds: before the fund may rely on the order, holders of a majority of the fund's outstanding voting securities will need to approve operating the fund in this manner. There is no assurance shareholder approval will be received, and no changes will be made without shareholder approval until that time. SUBADVISORY AGREEMENTS The assets of certain funds are managed by subadvisers that have been selected by the investment manager, subject to the review and approval of the Board. The investment manager has recommended the subadvisers to the Board based upon its assessment of the skills of the subadvisers in managing other assets with objectives and investment strategies substantially similar to those of the applicable fund. Short-term investment performance is not the only factor in selecting or terminating a subadviser, and the investment manager does not expect to make frequent changes of subadvisers. Certain subadvisers, affiliated with the investment manager, have been directly approved by shareholders. These subadvisers are noted in Table 18. Statement of Additional Information - Nov. 29, 2007 Page 97 The investment manager allocates the assets of a fund with multiple subadvisers among the subadvisers. Each subadviser has discretion, subject to oversight by the Board and the investment manager, to purchase and sell portfolio assets, consistent with the fund's investment objectives, policies, and restrictions. Generally, the services that a subadviser provides to the fund are limited to asset management and related recordkeeping services. The investment manager has entered into an advisory agreement with each subadviser under which the subadviser provides investment advisory assistance and day-to-day management of some or all of the fund's portfolio, as well as investment research and statistical information. A subadviser may also serve as a discretionary or non-discretionary investment adviser to management or advisory accounts that are unrelated in any manner to the investment manager or its affiliates. The following table shows the advisory fee schedules for fees paid by the investment manager to subadvisers for funds that have subadvisers. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1. TABLE 17. SUBADVISERS AND SUBADVISORY AGREEMENT FEE SCHEDULES
PARENT COMPANY, FUND SUBADVISER NAME IF ANY FEE SCHEDULE - -------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING MARCH 31 - --------------------------------------------------------------------------- Small Cap Advantage Kenwood Capital Management LLC A 0.60% on the first $100 million, reducing to (Kenwood)(a), (c) 0.45% as assets increase, and (effective May 4, 1999) subject to a performance incentive adjustment(b) - --------------------------------------------------------------------------- Small Cap Growth Essex Investment Management B 0.70% on the first $20 million, Company, LLC reducing to 0.60% as assets increase (effective Sept. 23, 2005) ---------------------------------------------------------------------------------- Federated MDTA, LLC (MDTA) C 0.60% on all assets (effective Sept. 23, 2005) ---------------------------------------------------------------------------------- Turner Investment Partners, LLC N/A 0.60% on the first $50 million, reducing to (Turner) 0.50% as assets increase (effective Aug. 18, 2003) ---------------------------------------------------------------------------------- UBS Global Asset N/A 0.55% on the first $150 million, Management (Americas) (UBS) reducing to 0.50% as assets increase (effective Aug. 18, 2003) - --------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING MAY 31 - --------------------------------------------------------------------------- Aggressive Growth American Century D 0.50% on the first $100 million, reducing to (effective April 24, 2003) 0.38% as assets increase ---------------------------------------------------------------------------------- Turner N/A 0.55% on the first $100 million, (effective April 24, 2003) reducing to 0.38% as assets increase - --------------------------------------------------------------------------- Fundamental Growth Goldman Sachs Asset Management, E 0.50% on the first $50 million, L.P. (Goldman) reducing to 0.30% as assets (effective April 24, 2003) increase ---------------------------------------------------------------------------------- Wellington Management Company, LLP N/A 0.50% on the first $50 million, (Wellington Management) reducing to 0.40% as assets (effective April 26, 2005) increase - --------------------------------------------------------------------------- Fundamental Value Davis Selected Advisers, N/A 0.45% on the first $100 million, LP (Davis)(a), (c) reducing to (effective June 18, 2001) 0.25% as assets increase - --------------------------------------------------------------------------- Select Value Systematic Financial Management, F 0.50% on the first $50 million, L.P. (Systematic)(c) reducing to 0.30% as assets (effective Sept. 29, 2006) increase ---------------------------------------------------------------------------------- WEDGE Capital Management L.L.P. N/A 0.75% on the first $10 million, (WEDGE)(c) reducing to 0.30% as assets (effective Sept. 29, 2006) increase - ---------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 98
PARENT COMPANY, FUND SUBADVISER NAME IF ANY FEE SCHEDULE - -------------------------------------------------------------------------------------------------------------- Small Cap Equity American Century D 0.65% on the first $25 million, (effective Dec. 12, 2003) reducing to 0.55% as assets increase ---------------------------------------------------------------------------------- Lord, Abbett & Co. LLC N/A 0.65% on the first $100 million, (Lord Abbett) reducing to (effective Dec. 12, 2003) 0.55% as assets increase ---------------------------------------------------------------------------------- Wellington Management N/A 0.60%, subject to a performance (effective March 8, 2002) incentive adjustment(d) - --------------------------------------------------------------------------- Small Cap Value Barrow, Hanley, Mewhinney & G 1.00% on the first $10 million, Strauss (BHMS)(c) reducing to 0.30% as assets (effective March 12, 2004) increase ---------------------------------------------------------------------------------- Donald Smith & Co., Inc. N/A 0.60% on the first $175 million, (Donald Smith)(c) reducing to (effective March 12, 2004) 0.55% as assets increase ---------------------------------------------------------------------------------- Franklin Portfolio Associates H 0.60% on the first $100 million, LLC(c) (Franklin Portfolio reducing to Associates) 0.55% as assets increase (effective March 12, 2004) ---------------------------------------------------------------------------------- Metropolitan West Capital I 0.50% on all assets Management, LLC (MetWest Capital) (effective April 24, 2006) - --------------------------------------------------------------------------- Value Lord Abbett N/A 0.35% on the first $200 million, (effective June 18, 2001) reducing to 0.25% as assets increase - --------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING OCTOBER 31 - --------------------------------------------------------------------------- Emerging Markets Threadneedle International J 0.45% of the first $150 million, Limited(a) reducing to (Threadneedle) 0.30% as assets increase, and (effective July 9, 2004) subject to a performance incentive adjustment(e) - --------------------------------------------------------------------------- European Equity Threadneedle(a) J 0.35% of the first $150 million, (effective July 9, 2004) reducing to 0.20% as assets increase, and subject to a performance incentive adjustment(e) - --------------------------------------------------------------------------- Global Equity Threadneedle(a) J 0.35% of the first $150 million, (effective July 9, 2004) reducing to 0.20% as assets increase, and subject to a performance incentive adjustment(e) - --------------------------------------------------------------------------- International Columbia Wanger Asset Management K 0.70% on the first $100 million, Aggressive Growth L.P. reducing to (Columbia WAM) 0.50% as assets increase (effective Sept. 5, 2001) ---------------------------------------------------------------------------------- Principal Global Investors, N/A 0.55% on the first $100 million, LLC (Principal) reducing to (effective April 24, 2006) 0.42% as assets increase - --------------------------------------------------------------------------- International Equity The Boston Company Asset L 0.50% on the first $150 million, Management, LLC reducing to (Boston Company) 0.35% as assets increase (effective Sept. 25, 2002) ---------------------------------------------------------------------------------- Marsico Capital Management, M 0.55% on the first $100 million, LLC (Marsico) reducing to 0.45% as assets (effective Oct. 1, 2004) increase - --------------------------------------------------------------------------- International Opportunity Threadneedle(a) J 0.35% of the first $150 million, (effective July 9, 2004) reducing to 0.20% as assets increase, and subject to a performance incentive adjustment(e) - ---------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 99
PARENT COMPANY, FUND SUBADVISER NAME IF ANY FEE SCHEDULE - -------------------------------------------------------------------------------------------------------------- International Select Value Alliance Capital Management L.P. N/A 0.65% on the first $75 million, (Alliance Capital) reducing to 0.30% as assets (effective Sept. 17, 2001) increase - --------------------------------------------------------------------------- International Small Cap AIG Global Investment Corp. N 0.75% on the first $100 million, (AIGGIC) reducing to (effective April 24, 2006) 0.70% as assets increase ---------------------------------------------------------------------------------- Batterymarch Financial Management, O 0.75% on the first $100 million, Inc. reducing to (Batterymarch) 0.70% as assets increase (effective April 24, 2006) - ---------------------------------------------------------------------------
(a) Davis is a 1940 Act affiliate of the investment manager because it owns or has owned more than 5% of the public issued securities of the investment manager's parent company, Ameriprise Financial. Kenwood is an affiliate of the investment manager as an indirect partially-owned subsidiary of Ameriprise Financial. Threadneedle is an affiliate of the investment manager as an indirect wholly-owned subsidiary of Ameriprise Financial. (b) The adjustment will increase or decrease based on the performance of the subadviser's allocated portion of the fund compared to the performance of the Russell 2000 Index, up to a maximum adjustment of 12 basis points (0.12%). (c) The fee is calculated based on the combined net assets subject to the subadviser's investment management. (d) The adjustment will increase or decrease based on the performance of the subadviser's allocated portion of the fund compared to the performance of the Russell 2000 Index, up to a maximum adjustment of 10 basis points (0.10%). (e) The adjustment for Threadneedle is based on the performance of one Class A share of the fund and the change in the Lipper Index described in Table 15. The performance of the fund and the Index will be calculated using the method described above for the performance incentive adjustment paid to the investment manager under the terms of the Investment Management Services Agreement. The amount of the adjustment to Threadneedle's fee, whether positive or negative, shall be equal to one-half of the performance incentive adjustment made to the investment management fee payable to the investment manager under the terms of the Investment Management Services Agreement. The performance incentive adjustment was effective Dec. 1, 2004. (f) These rates are retroactive. When average daily net assets fall within this range, the corresponding rate applies to all the assets in the fund, e.g., if average daily net assets are $200 million, the fee rate of 0.60% applies to the entire $200 million balance. A - Kenwood is an indirect partially-owned subsidiary of Ameriprise Financial. B - Essex is majority owned by Affiliated Managers Group. C - Federated MDTA LLC is an indirect subsidiary of Federated Investors, Inc. D - American Century Investment Management, Inc. is a direct, wholly-owned subsidiary of American Century Companies, Inc. E - Goldman is an affiliate of Goldman Sachs & Co. F - Systematic is an affiliate of Affiliated Managers Group. G - BHMS is an independent-operating subsidiary of Old Mutual Asset Management. H - Franklin Portfolio Associates is an indirect wholly-owned subsidiary of Mellon Financial Corporation. I - MetWest Capital is a majority-owned subsidiary of Evergreen Investments and Wachovia Corporation. J - Threadneedle is an indirect wholly-owned subsidiary of Ameriprise Financial. K - Columbia WAM is an indirect wholly-owned subsidiary of Columbia Management Group, Inc., which in turn is a wholly-owned subsidiary of Bank of America Corporation. L - Boston Company is a subsidiary of Mellon Financial Corporation and an affiliate of The Dreyfus Corporation. M - Marsico is an indirect wholly-owned subsidiary of Bank of America Corporation. N - AIGGIC is an indirect wholly-owned subsidiary of American International Group, Inc. (AIG). O - Batterymarch is a wholly-owned, independent subsidiary of Legg Mason, Inc. Statement of Additional Information - Nov. 29, 2007 Page 100 The following table shows the subadvisory fees paid by the investment manager to subadvisers in the last three fiscal periods. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1. TABLE 18. SUBADVISORY FEES
SUBADVISORY FEES PAID ----------------------------------------- FUND SUBADVISER 2007 2006 2005 - ----------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING MARCH 31 - ----------------------------------------------------------------------------------------------------------------- Small Cap Advantage Kenwood $3,180,483 $2,856,138 $3,089,403 - ----------------------------------------------------------------------------------------------------------------- Small Cap Growth Essex 281,295 120,556(a) N/A ------------------------------------------------------------------------------------- MDTA 411,034 165,110(a) N/A ------------------------------------------------------------------------------------- Turner 265,516 321,406 371,758 ------------------------------------------------------------------------------------- UBS 342,871 371,341 342,815 ------------------------------------------------------------------------------------- Former Subadviser: Bjurman, Barry & Associates (from Aug. 18, 2003 to Sept. 23, 2005) N/A 175,818(b) 366,178 ------------------------------------------------------------------------------------- Former Subadviser: RS Investment Management, L.P. (from Jan. 24, 2001 to Sept. 23, 2005) N/A 257,675(b) 581,602 - ----------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING MAY 31 - ----------------------------------------------------------------------------------------------------------------- Aggressive Growth American Century 1,321,245 512,880 114,981 ------------------------------------------------------------------------------------- Turner 1,304,994 525,422 119,529 - ----------------------------------------------------------------------------------------------------------------- Fundamental Growth Goldman 524,246 322,470 143,448 ------------------------------------------------------------------------------------- Wellington Management* 511,380 323,866 21,015(c) ------------------------------------------------------------------------------------- Former subadviser: Eagle Asset Management, Inc., a subsidiary of Raymond James Financial, Inc. (from inception to April 26, 2005) N/A N/A 139,312(d) - ----------------------------------------------------------------------------------------------------------------- Fundamental Value Davis 3,673,544 3,787,565 2,834,365 - ----------------------------------------------------------------------------------------------------------------- Select Value Systematic 753,292(e) N/A N/A ------------------------------------------------------------------------------------- WEDGE 776,260(e) N/A N/A ------------------------------------------------------------------------------------- Former subadviser: GAMCO Asset Management Inc. (from inception to September 28, 2006) 786,466(f) 2,763,925 2,709,039 - ----------------------------------------------------------------------------------------------------------------- Small Cap Equity American Century 662,396 457,181 302,079 ------------------------------------------------------------------------------------- Lord Abbett 677,462 433,241 278,497 ------------------------------------------------------------------------------------- Wellington Management* 650,960 614,053 388,922 - -----------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 101
SUBADVISORY FEES PAID ----------------------------------------- FUND SUBADVISER 2007 2006 2005 - ----------------------------------------------------------------------------------------------------------------- Small Cap Value BHMS $ 970,241 $1,008,072 $ 823,441 ------------------------------------------------------------------------------------- Donald Smith 1,180,183 1,242,221 992,659 ------------------------------------------------------------------------------------- Franklin Portfolio Associates 1,198,029 1,289,120 957,263 ------------------------------------------------------------------------------------- MetWest Capital 1,769,553 225,545(g) N/A ------------------------------------------------------------------------------------- Former subadviser: Royce & Associates, LLC (from inception to April 24, 2006) N/A 1,395,487(h) 2,287,184 ------------------------------------------------------------------------------------- Former subadviser: Goldman Sachs Asset Management, L.P. (from Aug. 2002 to April 24, 2006) 38,601 1,312,424(h) 1,599,715 - ----------------------------------------------------------------------------------------------------------------- Value Lord Abbett 1,236,484 1,369,949 1,389,323 - ----------------------------------------------------------------------------------------------------------------- 2006 2005 2004 - ----------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING OCTOBER 31 - ----------------------------------------------------------------------------------------------------------------- Emerging Markets Threadneedle 2,170,719 1,556,386 361,626(i) ------------------------------------------------------------------------------------- Former subadviser: American Express Asset Management International Inc. (AEAMI) (from inception until July 8, 2004) N/A N/A 942,983(j) - ----------------------------------------------------------------------------------------------------------------- European Equity Threadneedle 356,308 432,362 131,177 ------------------------------------------------------------------------------------- Former subadviser: AEAMI (from inception until July 8, 2004) N/A N/A 316,031(j) - ----------------------------------------------------------------------------------------------------------------- Global Equity Threadneedle 2,358,731 1,621,159 449,149 ------------------------------------------------------------------------------------- Former subadviser: AEAMI (from inception until July 8, 2004) N/A N/A 484,676(j) - ----------------------------------------------------------------------------------------------------------------- International Aggressive Columbia WAM 1,264,808 985,095 709,378 ------------------------------------------------------------------------------------- Growth Principal 632,882(k) N/A N/A ------------------------------------------------------------------------------------- Former subadviser: American Century Global Investment Management** (from Jan. 2005 to April 24, 2006) 821,124(l) 959,879 542,561 - ----------------------------------------------------------------------------------------------------------------- International Equity Boston Company 463,380 412,238 288,191 ------------------------------------------------------------------------------------- Marsico 495,063 410,005 30,840(m) ------------------------------------------------------------------------------------- Former subadviser: Putnam Investment Management, LLC (from inception until Sept. 30, 2004) N/A N/A 308,350(n) - ----------------------------------------------------------------------------------------------------------------- International Opportunity Threadneedle 1,948,352 1,720,351 434,968(i) ------------------------------------------------------------------------------------- Former subadviser: AEAMI (from inception until July 8, 2004) N/A N/A 1,000,707(j) - ----------------------------------------------------------------------------------------------------------------- International Select Value AllianceBernstein 6,022,579 4,126,134 2,869,277 - ----------------------------------------------------------------------------------------------------------------- International Small Cap AIGGIC 201,650(k) N/A N/A ------------------------------------------------------------------------------------- Batterymarch 205,659(k) N/A N/A ------------------------------------------------------------------------------------- Former subadviser: Templeton Investment Counsel, LLC (Franklin Templeton) (from Oct. 3, 2002 to April 24, 2006) 226,154(l) 317,358 200,710 ------------------------------------------------------------------------------------- Former subadviser: Wellington Management Company, LLP together with its affiliate Wellington Management International Ltd (from Oct. 3, 2002 to April 24, 2006) 243,185(l) 331,593 215,256 - -----------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 102 * Beginning on July 1, 2006, under the Subadvisory Agreement, RiverSource Investments is subject to a minimum annual fee of $350,000, payable to Wellington Management. ** American Century Global Investment Management managed the portion of the Fund's portfolio previously managed by American Century since Sept. 2001. The change of subadviser is the result of corporate restructuring of American Century and did not result in any modifications to the investment objective, principal investment strategies, portfolio managers, or the fees paid by the Fund. (a) For the fiscal period from Sept. 23, 2005 to March 31, 2006. (b) For the fiscal period from April 1, 2005 to Sept. 23, 2005. (c) For the fiscal period from April 26, 2005 to May 31, 2005. (d) For the fiscal period from June 1, 2004 to April 26, 2005. (e) For the fiscal period from Sept. 29, 2006 to May 31, 2007. (f) For the fiscal period from June 1, 2006 to Sept. 28, 2006. (g) For the fiscal period from April 24, 2006 to May 31, 2006. (h) For the fiscal period from June 1, 2005 to April 24, 2006. (i) For the fiscal period from July 9, 2004 to Oct. 31, 2004. (j) For the fiscal period from Nov. 1, 2003 to July 8, 2004. (k) For the fiscal period from April 24, 2006 to Oct. 31, 2006. (l) For the fiscal period from Nov. 1, 2005 to April 24, 2006. (m) For the fiscal period from Oct. 1, 2004 to Oct. 31, 2004. (n) For the fiscal period from Nov. 1, 2003 to Sept. 30, 2004. Statement of Additional Information - Nov. 29, 2007 Page 103 PORTFOLIO MANAGERS. For funds other than money market funds, the following table provides information about the fund's portfolio managers as of the end of the most recent fiscal period. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1. TABLE 19. PORTFOLIO MANAGERS
OTHER ACCOUNTS MANAGED (EXCLUDING THE FUND) ------------------------------------------------------- POTENTIAL APPROXIMATE OWNERSHIP CONFLICTS NUMBER AND TYPE TOTAL NET PERFORMANCE BASED OF FUND OF STRUCTURE OF FUND PORTFOLIO MANAGER OF ACCOUNT* ASSETS ACCOUNTS(A) SHARES INTEREST COMPENSATION - ---------------------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JANUARY 31 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Portfolio Kent M. Bergene(b) $10,001 - Builder $50,000 Aggressive ------------------------- ---------- David M. Joy 5 RICs $2.72 billion None None (1) (29) ------------------------- ---------- Michelle M. Keeley(c) None ------------------------- ---------- William F. Truscott(c) None - ---------------------------------------------------------------------------------------------------------------------------------- Portfolio Kent M. Bergene $10,001 - Builder $50,000 Conservative ------------------------- ---------- David M. Joy 5 RICs $3.11 billion None None (1) (29) ------------------------- ---------- Michelle M. Keeley None ------------------------- ---------- William F. Truscott None - ---------------------------------------------------------------------------------------------------------------------------------- Portfolio Kent M. Bergene $10,001 - Builder $50,000 Moderate ------------------------- ---------- David M. Joy 5 RICs $2.41 billion None None (1) (29) ------------------------- ---------- Michelle M. Keeley $100,001 - $500,000 ------------------------- ---------- William F. Truscott None - ---------------------------------------------------------------------------------------------------------------------------------- Portfolio Kent M. Bergene $10,001 - Builder $50,000 Moderate Aggressive ------------------------- ---------- David M. Joy 5 RICs $2.2 billion None $100,001 - (1) (29) $500,000 ------------------------- ---------- Michelle M. Keeley None ------------------------- ---------- William F. Truscott $100,001 - $500,000 - ---------------------------------------------------------------------------------------------------------------------------------- Portfolio Kent M. Bergene $10,001 - Builder $50,000 Moderate Conservative ------------------------- ---------- David M. Joy 5 RICs $2.95 billion None None (1) (29) ------------------------- ---------- Michelle M. Keeley None ------------------------- ---------- William F. Truscott None - ---------------------------------------------------------------------------------------------------------------------------------- Portfolio Kent M. Bergene $10,001 - Builder $50,000 Total Equity ------------------------- ---------- David M. Joy 5 RICs $2.76 billion None None (1) (29) ------------------------- ---------- Michelle M. Keeley None ------------------------- ---------- William F. Truscott None - ---------------------------------------------------------------------------------------------------------------------------------- S&P 500 Index David Factor 2 RICs $1.5 billion None None (2) (30) 2 PIVs $2.4 billion - ---------------------------------------------------------------------------------------------------------------------------------- Small Company David Factor 2 RICs $0.7 billion None None (2) (30) Index 2 PIVs $2.4 billion - ---------------------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING MARCH 31 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Equity Value Warren Spitz $10,001 - $50,000 ------------------------- ---------- Steve Schroll 8 RICs $16.03 billion $50,001 - 1 PIV $104.55 million 5 RICs $100,000 (2) (30) ------------------------- ---------- Laton Spahr 3 other accounts(f) $390.11 million ($15.64 B) $100,001 - $500,000 ------------------------- ---------- Paul Stocking $100,001 - $500,000 - ---------------------------------------------------------------------------------------------------------------------------------- Precious Clay Hoes 1 PIV $62.62 million None $1 - (2), (3) (30) Metals and $10,000 Mining - ----------------------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 104
OTHER ACCOUNTS MANAGED (EXCLUDING THE FUND) ------------------------------------------------------- POTENTIAL APPROXIMATE OWNERSHIP CONFLICTS NUMBER AND TYPE TOTAL NET PERFORMANCE BASED OF FUND OF STRUCTURE OF FUND PORTFOLIO MANAGER OF ACCOUNT* ASSETS ACCOUNTS(A) SHARES INTEREST COMPENSATION - ---------------------------------------------------------------------------------------------------------------------------------- Small Cap UBS: Paul A. Graham 6 RICs $931.0 million Growth 2 PIVs $236.0 million 8 other accounts $470.0 million 1 other account None (4) (31) -------------------------------------------------------------- UBS: David N. Wabnik 6 RICs $931.0 million ($56 M) 2 PIVs $236.0 million 28 other accounts $461.0 million ------------------------------------------------------------------------------------------------------------------- Turner: William C. McVail 7 RICs $1.1 billion 1 RIC ($35 M); 9 PIVs $166.0 million 3 other 48 other accounts $3.6 billion accounts ($124 M) --------------------------------------------------------------------------------- Turner: 18 RICs $4.1 billion 3 RICs Christopher K. McHugh 35 PIVs $687.0 million ($797 M); 77 other accounts $5.5 billion 5 other accounts ($249 M) None (5) (32) --------------------------------------------------------------------------------- Turner: 5 RICs $1.0 billion 1 RIC Frank L. Sustersic 7 PIVs $95.0 million ($46 M); 47 other accounts $2.4 billion 3 other accounts ($124 M) --------------------------------------------------------------------------------- Turner: 13 RICs $3.2 billion 1 RIC Jason D. Schrotberger 27 PIVs $500.0 million ($20 M); 55 other accounts $2.9 billion 5 other accounts ($249 M) ------------------------------------------------------------------------------------------------------------------- Essex: Nancy B. Prial 1 RIC $63.1 million None None (6) (33) 1 PIV $85.5 million 26 other accounts $310.1 million ------------------------------------------------------------------------------------------------------------------- MDTA: David Goldsmith ------------------------- MDTA: Frederick L. Konopka ------------------------- MDTA: Sarah A. Stahl ------------------------- MDTA: Stephen R. Griscom ------------------------- MDTA: Daniel J. Mahr 7 RICs $448.34 million None None (7) (34) 34 other accounts $7.28 billion ------------------------- MDTA: Douglas K. Thunen ------------------------- MDTA: Brian M. Greenberg ------------------------- MDTA: David N. Esch ------------------------- MDTA: Alok Bhushan ------------------------- MDTA: David A. Troiano - ---------------------------------------------------------------------------------------------------------------------------------- Small Cap Kenwood: 1 RIC $201.34 million 1 RIC $100,001 - Advantage Jake Hurwitz 1 PIV $111.48 million ($201.34 M); $500,000 ------------------------- ---------- Kenwood: 22 other accounts $702.14 million 1 other $100,001 - (8) (35) Kent Kelley account $500,000 ($106.42 M) - ---------------------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING APRIL 30 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Retirement Dimitris Bertsimas 15 RICs $5.87 billion 5 RICs Plus 2010 3 PIVs $229.57 million ($4.67 B) 18 other accounts $742.89 million None (9) (30) --------------------------------------------------------------------------------- Colin Lundgren 11 RICs $1.87 billion None ------------------------- Erol Sonderegger - ----------------------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 105
OTHER ACCOUNTS MANAGED (EXCLUDING THE FUND) ------------------------------------------------------- POTENTIAL APPROXIMATE OWNERSHIP CONFLICTS NUMBER AND TYPE TOTAL NET PERFORMANCE BASED OF FUND OF STRUCTURE OF FUND PORTFOLIO MANAGER OF ACCOUNT* ASSETS ACCOUNTS(A) SHARES INTEREST COMPENSATION - ---------------------------------------------------------------------------------------------------------------------------------- Retirement Dimitris Bertsimas 15 RICs $5.86 billion 5 RICs Plus 2015 3 PIVs $229.57 million ($4.67 B) 18 other accounts $743.89 million None (9) (30) --------------------------------------------------------------------------------- Colin Lundgren 11 RICs $1.87 billion ------------------------- Erol Sonderegger - ---------------------------------------------------------------------------------------------------------------------------------- Retirement Dimitris Bertsimas 15 RICs $5.85 billion 5 RICs Plus 2020 3 PIVs $229.57 million ($4.67 B) 18 other accounts $743.89 million None (9) (30) --------------------------------------------------------------------------------- Colin Lundgren 11 RICs $1.85 billion ------------------------- Erol Sonderegger - ---------------------------------------------------------------------------------------------------------------------------------- Retirement Dimitris Bertsimas 15 RICs $5.85 billion 5 RICs Plus 2025 3 PIVs $229.57 million ($4.67 B) 18 other accounts $743.89 million None (9) (30) --------------------------------------------------------------------------------- Colin Lundgren 11 RICs $1.85 billion ------------------------- Erol Sonderegger - ---------------------------------------------------------------------------------------------------------------------------------- Retirement Dimitris Bertsimas 15 RICs $5.85 billion 5 RICs Plus 2030 3 PIVs $229.57 million ($4.67 B) 18 other accounts $743.89 million None (9) (30) --------------------------------------------------------------------------------- Colin Lundgren 11 RICs $1.86 billion ------------------------- Erol Sonderegger - ---------------------------------------------------------------------------------------------------------------------------------- Retirement Dimitris Bertsimas 15 RICs $5.87 billion 5 RICs Plus 2035 3 PIVs $229.57 million ($4.67 B) 18 other accounts $742.89 million None (9) (30) --------------------------------------------------------------------------------- Colin Lundgren 11 RICs $1.87 billion ------------------------- Erol Sonderegger - ---------------------------------------------------------------------------------------------------------------------------------- Retirement Dimitris Bertsimas 15 RICs $5.86 billion 5 RICs Plus 2040 3 PIVs $229.57 million ($4.67 B) 18 other accounts $743.89 million None (9) (30) --------------------------------------------------------------------------------- Colin Lundgren 11 RICs $1.87 billion ------------------------- Erol Sonderegger - ---------------------------------------------------------------------------------------------------------------------------------- Retirement Dimitris Bertsimas 15 RICs $5.88 billion 5 RICs Plus 2045 3 PIVs $229.57 million ($4.67 B) 18 other accounts $743.89 million None (9) (30) --------------------------------------------------------------------------------- Colin Lundgren 11 RICs $1.89 billion ------------------------- Erol Sonderegger - ---------------------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING MAY 31 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Aggressive Turner: 18 RICs $4.2 billion 3 RICs Growth Christopher K. McHugh 43 PIVs $626.0 million ($836 M); 58 other accounts $4.6 billion 2 PIVs ($4 M); 5 other accounts ($273 M) --------------------------------------------------------------------------------- Turner: 9 RICs $2.8 billion 1 RIC ($21 M); None (5) (32) Tara Hedlund 23 PIVs $330.0 million 2 PIVs ($4 M); 16 other accounts $875.0 million 2 other accounts ($139 M) --------------------------------------------------------------------------------- Turner: 14 RICs $3.3 billion 1 RIC ($21 M); Jason Schrotberger 38 PIVs $543.0 million 2 PIVs ($4 M); 53 other accounts $3.1 billion 5 other accounts ($273 M) ------------------------------------------------------------------------------------------------------------------- American Century: 8 RICs $6.7 billion Glen A. Fogle 2 other accounts $147.92 million ------------------------- American Century: None None (10) (36) David M. Holland -------------------------------------------------------------- American Century: 5 RICs $3.22 billion Bradley X. Eixmann 2 other accounts $147.92 million - ----------------------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 106
OTHER ACCOUNTS MANAGED (EXCLUDING THE FUND) ------------------------------------------------------- POTENTIAL APPROXIMATE OWNERSHIP CONFLICTS NUMBER AND TYPE TOTAL NET PERFORMANCE BASED OF FUND OF STRUCTURE OF FUND PORTFOLIO MANAGER OF ACCOUNT* ASSETS ACCOUNTS(A) SHARES INTEREST COMPENSATION - ---------------------------------------------------------------------------------------------------------------------------------- Fundamental Goldman: Growth Steven M. Barry ------------------------- Goldman: 22 RICs $9.46 billion 14 other accounts David G. Shell 1 PIV $10.54 million ($2.98 B) None (11) (37) ------------------------- Goldman: 373 other accounts $18.98 billion Gregory H. Ekizian ------------------------------------------------------------------------------------------------------------------- Wellington Management: 5 RICs $2.30 billion 1 PIV ($312 M); None (12) (38) Andrew J. Shilling 9 PIVs $2.05 billion 2 other accounts 41 other accounts $9.03 billion ($439 M) - ---------------------------------------------------------------------------------------------------------------------------------- Fundamental Christopher C. Davis 28 RICs $83.75 billion Value 12 PIVs $1.34 billion 49,000 other $16.61 billion accounts(f) -------------------------------------------------------------- Kenneth C. Feinberg 26 RICs $83.71 billion None None((g)) (13) (39) 12 PIVs $1.34 billion 49,000 other $16.61 billion accounts(f) - ---------------------------------------------------------------------------------------------------------------------------------- High Yield Scott Schroepfer 1 RIC $1.25 billion None $100,001 - Bond $500,000 -------------------------------------------------------------------------------------------- Jennifer Ponce de Leon 5 RICs $8.3 billion None None (2) (30) 1 PIV $19.62 million 8 other accounts $2.31 billion - ---------------------------------------------------------------------------------------------------------------------------------- Income Builder Dimitris Bertsimas 17 RICs $6.27 billion 6 RICs None Basic Income 3 PIVs $233.07 million ($5.13 B) 19 other accounts $1.09 billion (9) (30) -------------------------------------------------------------------------------------------- Colin Lundgren ------------------------- None Erol Sonderegger 12 RICs $1.86 billion None $10,001 - $50,000 - ---------------------------------------------------------------------------------------------------------------------------------- Income Builder Dimitris Bertsimas 17 RICs $6.19 billion 6 RICs Enhanced 3 PIVs $233.07 million ($5.13 B) Income 19 other accounts $1.09 billion --------------------------------------------------------------------------------- Colin Lundgren None None (9) (30) ------------------------- Erol Sonderegger 12 RICs $1.79 billion - ---------------------------------------------------------------------------------------------------------------------------------- Income Builder Dimitris Bertsimas 17 RICs $5.96 billion 6 RICs $500,001 - Moderate 3 PIVs $233.07 million ($5.13 B) $1,000,000 Income 19 other accounts $1.09 billion -------------------------------------------------------------------------------------------- Colin Lundgren $100,001 - (9) (30) $500,000 ------------------------- ---------- Erol Sonderegger 12 RICs $1.56 billion None $10,001 - $50,000 - ---------------------------------------------------------------------------------------------------------------------------------- Select Value Systematic: 5 RICs $1.06 billion None Ron Mushock 2 PIVs $26.9 million 1,422 other accounts $1.30 billion None (27) (53) --------------------------------------------------------------------------------- Systematic: 6 RICs $1.19 billion 1 other Kevin McCreesh 6 PIVs $832.1 million account 257 other accounts $4.64 billion ($365.0 M) ------------------------------------------------------------------------------------------------------------------- WEDGE: R. Michael James ------------------------- WEDGE: 2 RICs $143.2 million None None (28) (54) Peter F. Bridge 1 PIV $6.7 million ------------------------- WEDGE: 231 other accounts $3.9 billion Paul M. VeZolles - ---------------------------------------------------------------------------------------------------------------------------------- Short Duration Scott Kirby 10 RICs $12.60 billion 3 RICs ($5.16 B); $10,001 - U.S. 5 PIVs $1.99 billion 1 other account $50,000 Government 44 other accounts(d) $20.83 billion ($19.48 M) (2) (30) -------------------------------------------------------------------------------------------- Jamie Jackson 12 RICs $16.63 billion 3 RICs ($5.16 B); $10,001 - 6 PIVs $2.71 billion 1 other account $50,000 29 other accounts(d) $7.58 billion ($40.58 M) - ----------------------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 107
OTHER ACCOUNTS MANAGED (EXCLUDING THE FUND) ------------------------------------------------------- POTENTIAL APPROXIMATE OWNERSHIP CONFLICTS NUMBER AND TYPE TOTAL NET PERFORMANCE BASED OF FUND OF STRUCTURE OF FUND PORTFOLIO MANAGER OF ACCOUNT* ASSETS ACCOUNTS(A) SHARES INTEREST COMPENSATION - ---------------------------------------------------------------------------------------------------------------------------------- Small Cap American Century: 10 RICs $7.05 billion Equity Thomas P. Vaiana 2 PIVs $121.07 million 3 other accounts $285.37 million -------------------------------------------------------------- American Century: 6 RICs $2.31 billion Wihelmine von Turk 1 PIV $67.39 million None None (10) (36) 2 other accounts $270.92 million -------------------------------------------------------------- American Century: 7 RICs $2.34 billion Brian Ertley 1 PIV $67.39 million 2 other accounts $270.92 million ------------------------------------------------------------------------------------------------------------------- Lord Abbett: 3 RICs $1.86 billion None None(h) (14) (40) Michael T. Smith 14 other accounts $966.20 million ------------------------------------------------------------------------------------------------------------------- Wellington Management: 3 RICs $1.89 billion Kenneth L. Abrams 5 PIVs $1.19 billion 1 RIC 9 other accounts $2.27 billion ($1.67 B); -------------------------------------------------------------- Wellington Management: 3 RICs $1.89 billion 1 other account None (12) (38) Daniel J. Fitzpatrick 3 PIVs $1.18 billion 9 other accounts $2.27 billion ($364 M) - ---------------------------------------------------------------------------------------------------------------------------------- Small Cap Donald Smith: Value Donald G. Smith 2 RICs $1.79 billion ------------------------- Donald Smith: 1 PIV $197.0 million None None (15) (41) Richard L. Greenberg 33 other accounts $2.83 billion ------------------------------------------------------------------------------------------------------------------- Franklin Portfolio Associates: John S. Cone ------------------------- Franklin Portfolio Associates: Michael F. Dunn ------------------------- Franklin Portfolio 19 RICs $16.8 billion 2 RICs None Associates: 5 PIVs $784.9 million ($10.6 B); 18 (16) (42) Oliver E. Buckley 98 other accounts $18.3 billion other accounts ($5.5 B) ------------------------- Franklin Portfolio Associates: Kristin J. Crawford ------------------------- Franklin Portfolio Associates: Langton Garvin ------------------------- Franklin Portfolio Associates: Patrick Slattery ------------------------------------------------------------------------------------------------------------------- BHMS: James S. McClure 3 RICs $6.92 million ------------------------- BHMS: John P. 1 PIV $5.5 million None None (17) (43) Harloe 16 other accounts $811.0 million ------------------------------------------------------------------------------------------------------------------- MetWest Capital: Gary W. Lisenbee 4 RICs $326.9 million ------------------------- 4 PIVs $64.2 million MetWest Capital: 9 other accounts $58.1 million None None (18) (44) Samir Sikka - ---------------------------------------------------------------------------------------------------------------------------------- U.S. Scott Kirby 10 RICs $12.99 billion 3 RICs $10,001 - (2) (30) Government 5 PIVs $1.99 billion ($5.16 B); $50,000 Mortgage 44 other accounts(d) $20.83 billion 1 other account ($19.48 M) - ---------------------------------------------------------------------------------------------------------------------------------- Value Lord, Abbett: 10 RICs $29.34 billion 1 other Eli M. Salzmann 9 PIVs $847.8 million account ------------------------- Lord, Abbett: 43,988 other $19.04 million ($316.3 M) None(i) (14) (40) Sholom Dinsky - ----------------------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 108
OTHER ACCOUNTS MANAGED (EXCLUDING THE FUND) ------------------------------------------------------- POTENTIAL APPROXIMATE OWNERSHIP CONFLICTS NUMBER AND TYPE TOTAL NET PERFORMANCE BASED OF FUND OF STRUCTURE OF FUND PORTFOLIO MANAGER OF ACCOUNT* ASSETS ACCOUNTS(A) SHARES INTEREST COMPENSATION - ---------------------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JUNE 30 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Dividend Warren Spitz $500,001 - Opportunity $1,000,000 ------------------------- ---------- Steve Schroll 8 RICs $17.07 billion $100,001 - 1 PIV $82.40 billion 5 RICs $500,000 ------------------------- ---------- Laton Spahr 5 other accounts(d) $489.88 million ($16.61) $100,001 - (2) (30) $500,000 ------------------------- ---------- Paul Stocking $50,001 - $100,000 - ---------------------------------------------------------------------------------------------------------------------------------- Real Estate Julene Melquist None N/A N/A $10,001 - (2),(3) (30) $50,000 - ---------------------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JULY 31 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Core Bond Tom Murphy 7 RICs $11.77 billion 3 RICs $10,001 - 3 PIVs $1.02 billion ($4.96 B) $50,000 13 other accounts $13.24 billion -------------------------------------------------------------------------------------------- Jamie Jackson 12 RICs $17.27 billion 3 RICs $10,001 - 6 PIVs $2.49 billion ($4.96 B); $50,000 29 other accounts(d) $8.82 billion 1 other account (2) (30) ($27.78 M) -------------------------------------------------------------------------------------------- Scott Kirby 10 RICs $13.39 billion 3 RICs $10,001 - 6 PIVs $1.93 billion ($4.96 B); $50,000 44 other accounts(d) $20.24 billion 1 other account ($94.02 M) - ---------------------------------------------------------------------------------------------------------------------------------- Disciplined Dimitris Bertsimas 17 RICs $4.11 billion 5 RICs $100,001 - Equity 3 PIVs $207.45 million ($2.64 B) $500,000 21 other accounts(d) $1.71 billion (2) (30) -------------------------------------------------------------------------------------------- Gina Mourtzinou 4 RICs $2.27 billion 4 RICs $50,001 - 5 other accounts $158.02 million ($2.27 B) $100,000 - ---------------------------------------------------------------------------------------------------------------------------------- Disciplined Dimitris Bertsimas 17 RICs $6.80 billion 5 RICs $100,001 - Small and Mid Cap Equity 3 PIVs $207.45 million ($2.64 B) $500,000 21 other accounts(d) $1.71 billion -------------------------------------------------------------------------------------------- Gina Mourtzinou 4 RICs $4.96 billion 4 RICs None (2) (30) 5 other accounts $158.02 million ($2.27 B) -------------------------------------------------------------------------------------------- Steve Kokkotos 2 RICs $2.08 billion 2 RICs $10,001 - 1 other account $10.86 million ($2.08 B) $50,000 - ---------------------------------------------------------------------------------------------------------------------------------- Disciplined Dimitris Bertsimas 17 RICs $6.88 billion 5 RICs $100,001 - Small Cap Value 3 PIVs $207.45 million ($2.64 B) $500,000 21 other accounts(d) $1.71 billion -------------------------------------------------------------------------------------------- Gina Mourtzinou 4 RICs $5.04 billion 4 RICs $10,001 - (2) (30) 5 other accounts $158.02 million ($2.27 B) $50,000 -------------------------------------------------------------------------------------------- Steve Kokkotos 2 RICs $2.15 billion 2 RICs $10,001 - 1 other account $10.86 million ($2.08 B) $50,000 - ---------------------------------------------------------------------------------------------------------------------------------- Floating Rate Lynn Hopton 14 PIVs $6.21 billion None None ------------------------- Yvonne Stevens 1 other account $66.22 million -------------------------------------------------------------------------------------------- Erol Sonderegger $10,001 - 12 RICs $1.47 billion None $50,000 (2) (30) ------------------------- ---------- Colin Lundgren None - ---------------------------------------------------------------------------------------------------------------------------------- Growth Nick Thakore 6 RICs $12.92 billion 5 RICs None (2) (30) 2 PIVs $1.22 million ($12.52 B) 2 other accounts(d) $90.78 million - ---------------------------------------------------------------------------------------------------------------------------------- Income Brian Lavin 1 RIC $584.56 million $50,001 - Opportunity 1 PIV $15.02 million $100,000 1 other account $510.78 million -------------------------------------------------------------- ---------- Jennifer Ponce de Leon 5 RICs $10.07 billion None $10,001 - (2) (30) 1 PIV $15.02 million $50,000 8 other accounts $2.04 billion - ---------------------------------------------------------------------------------------------------------------------------------- Inflation Jamie Jackson 12 RICs $17.19 billion 3 RICs $10,001 - (2) (30) Protected Securities 6 PIVs $2.49 billion ($4.96 B); $50,000 29 other accounts(d) $8.82 billion 1 other account ($27.78 M) - ----------------------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 109
OTHER ACCOUNTS MANAGED (EXCLUDING THE FUND) ------------------------------------------------------- POTENTIAL APPROXIMATE OWNERSHIP CONFLICTS NUMBER AND TYPE TOTAL NET PERFORMANCE BASED OF FUND OF STRUCTURE OF FUND PORTFOLIO MANAGER OF ACCOUNT* ASSETS ACCOUNTS(A) SHARES INTEREST COMPENSATION - ---------------------------------------------------------------------------------------------------------------------------------- Large Cap Nick Thakore 5 RICs $6.59 billion 4 RICs Equity 2 PIVs $1.22 million ($6.19 B) 2 other accounts(d) $90.78 million --------------------------------------------------------------------------------- Bob Ewing 7 RICs $6.93 billion 6 RICs None (2) (30) 2 PIVs $1.22 million ($6.54 B) 2 other accounts(d) $90.78 million - ---------------------------------------------------------------------------------------------------------------------------------- Large Cap Bob Ewing 7 RICs $13.17 billion 6 RICs None (2) (30) Value 2 PIVs $1.22 million ($12.77 B) 2 other accounts(d) $90.78 million - ---------------------------------------------------------------------------------------------------------------------------------- Limited Tom Murphy 7 RICs $11.92 billion 3 RICs $50,001 - Duration Bond 3 PIVs $1.02 billion ($4.96 B) $100,000 13 other accounts $13.24 billion -------------------------------------------------------------------------------------------- Jamie Jackson 12 RICs $17.43 billion 3 RICs $10,001 - 6 PIVs $2.49 billion ($4.96 B); $50,000 (2) (30) 29 other accounts(d) $8.82 billion 1 other account ($27.78 M) -------------------------------------------------------------------------------------------- Scott Kirby 10 RICs $13.55 billion 3 RICs $10,001 - 6 PIVs $1.93 billion ($4.96 B); $50,000 44 other accounts(d) $20.24 billion 1 other account ($94.02 M) - ---------------------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING AUGUST 31 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- California 8 RICs $4.07 billion Tax-Exempt 14 other accounts $8.07 billion - -------------- ------------------------------------ Massachusetts 8 RICs $4.20 billion Tax-Exempt 14 other accounts $8.07 billion - -------------- ------------------------------------ Michigan Tax- 8 RICs $4.21 billion Exempt 14 other accounts $8.07 billion - -------------- ------------------------------------ Minnesota Tax- Catherine Stienstra 8 RICs $3.93 billion None None (2) (30) Exempt 14 other accounts $8.07 billion - -------------- ------------------------------------ New York Tax- 8 RICs $4.18 billion Exempt 14 other accounts $8.07 billion - -------------- ------------------------------------ Ohio Tax- 8 RICs $4.20 billion Exempt 14 other accounts $8.07 billion - ---------------------------------------------------------------------------------------------------------------------------------- Diversified Tom Murphy 7 RICs $9.41 billion 3 RICs ($4.99 B) $100,001 - Bond 3 PIVs $1.02 billion $500,000 13 other accounts $13.18 billion -------------------------------------------------------------------------------------------- Jamie Jackson 13 RICs $14.50 billion 3 RICs ($5.4 B); $50,001 - 6 PIVs $2.62 billion 1 other account $100,000 29 other accounts(d) $8.43 billion ($43.92 M) -------------------------------------------------------------------------------------------- Scott Kirby 10 RICs $11.07 billion 3 RICs ($4.99 B); $50,001 - 6 PIVs $1.93 billion 1 other account $100,000 (2) (30) 44 other accounts(d) $20.03 billion ($78.43 M) -------------------------------------------------------------------------------------------- Jennifer Ponce de 5 RICs $7.68 billion None $50,001 - Leon 1 PIV $14.63 million $100,000 8 other accounts $2.11 billion -------------------------------------------------------------------------------------------- Nicolas Pifer 6 RICs $6.45 billion 1 other account $10,001 - 6 PIVs $728.27 million ($538.24 M) $50,000 11 other accounts $3.79 billion - ---------------------------------------------------------------------------------------------------------------------------------- FOR FUND WITH FISCAL PERIOD ENDING SEPTEMBER 30 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Balanced Tom Murphy 7 RICs $8.55 billion 2 RICs ($1.0 B) $10,001 - 3 PIVs $1.01 billion $50,000 13 other accounts $12.78 billion -------------------------------------------------------------------------------------------- Jamie Jackson 12 RICs $14.43 billion 2 RICs ($1.0 B); $10,001 - 6 PIVs $2.68 billion 1 other account $50,000 29 other accounts(d) $9.19 billion ($45.13 M) -------------------------------------------------------------------------------------------- Scott Kirby 10 RICs $10.20 billion 2 RICs ($1.0 B); None (2) (30) 6 PIVs $1.92 billion 1 other account 44 other accounts(d) $19.12 billion ($71.78 M) -------------------------------------------------------------------------------------------- Bob Ewing 7 RICs $11.72 billion 6 RICs ($11.32 B) $100,001 - 1 PIV $10.55 million $500,000(n) 2 other accounts $89.12 million - ----------------------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 110
OTHER ACCOUNTS MANAGED (EXCLUDING THE FUND) ------------------------------------------------------- POTENTIAL APPROXIMATE OWNERSHIP CONFLICTS NUMBER AND TYPE TOTAL NET PERFORMANCE BASED OF FUND OF STRUCTURE OF FUND PORTFOLIO MANAGER OF ACCOUNT* ASSETS ACCOUNTS(A) SHARES INTEREST COMPENSATION - ---------------------------------------------------------------------------------------------------------------------------------- Disciplined Dimitris Bertsimas 17 RICs $7.30 billion 5 RICs ($5.81 B) None Large Cap Growth 3 PIVs $242.83 million 16 other accounts $2.42 billion (2) (30) -------------------------------------------------------------------------------------------- Gina Mourtzinou 4 RICs $5.22 billion 4 RICs ($5.22 B) None 5 other accounts $188.6 million - ---------------------------------------------------------------------------------------------------------------------------------- Diversified Warren Spitz $50,001 - Equity Income $100,000 ------------------------- ---------- Laton Spahr 8 RICs $10.85 billion $100,001 - 1 PIV $61.27 million 5 RICs ($10.36 B) $500,000 ------------------------- ---------- Steve Schroll 5 other accounts(d) $490.56 million $50,001 - (2) (30) $100,000 ------------------------- ---------- Paul Stocking $100,001 - $500,000 - ---------------------------------------------------------------------------------------------------------------------------------- Mid Cap Value Warren Spitz $50,001 - $100,000 ------------------------- ---------- Laton Spahr 8 RICs $16.49 billion $100,001 - 1 PIV $61.27 million 5 RICs ($16.0 B) $500,000 ------------------------- ---------- Steve Schroll 5 other accounts(d) $490.56 million $50,001 - (2) (30) $100,000 ------------------------- ---------- Paul Stocking $100,001 - $500,000 - ---------------------------------------------------------------------------------------------------------------------------------- Strategic Tom Murphy 7 RICs $8.56 billion 2 RICs ($1.01 B) $100,001 - Allocation 3 PIVs $1.01 billion $500,000 13 other accounts $12.78 billion -------------------------------------------------------------------------------------------- Jamie Jackson 12 RICs $14.43 billion 2 RICs ($1.01 B); $10,001 - 6 PIVs $2.68 billion 1 other account $50,000 29 other accounts(d) $9.19 billion ($45.13 M) -------------------------------------------------------------------------------------------- Scott Kirby 10 RICs $10.21 billion 2 RICs ($1.01 B); $10,001 - 6 PIVs $1.92 billion 1 other account $50,000 44 other accounts(d) $19.12 billion ($71.78 M) -------------------------------------------------------------------------------------------- Dimitris Bertsimas 17 RICs $5.54 billion 5 RICs ($4.04 B) Over (2) (30) 3 PIVs $242.83 million $1,000,000 16 other accounts $2.42 billion -------------------------------------------------------------------------------------------- Gina Mourtzinou 4 RICs $3.46 billion 4 RICs ($3.46 B) $100,001 - 5 other accounts $188.6 million $500,000 -------------------------------------------------------------------------------------------- Alex Sauer-Budge 1 RIC $586.36 million 1 RIC ($586.36 M) None -------------------------------------------------------------------------------------------- Steve E. Kokkotos 2 RICs $138.37 million 2 RICs ($138.37 M) $100,001 - 1 other account $11.12 million $500,000 - ---------------------------------------------------------------------------------------------------------------------------------- Strategic Dimitris Bertsimas 17 RICs $7.37 billion 6 RICs ($5.89 B) None Income Allocation 3 PIVs $242.83 million 16 other accounts $2.42 billion (2) (30) -------------------------------------------------------------------------------------------- Colin Lundgren None ------------------------- ---------- Erol Sonderegger 12 RICs $2.12 billion None $10,001 - $50,000 - ---------------------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING OCTOBER 31 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Absolute Nicholas Pifer 6 RICs $6.99 billion None None (2) (30) Return Currency and 6 PIVs $738.12 million Income 13 other accounts $3.77 billion - ---------------------------------------------------------------------------------------------------------------------------------- Disciplined Dimitris Bertsimas 15 RICs $3.79 billion 4 RICs International Equity 1 PIV $118.90 million ($3.24 B) 11 other accounts $229.10 million None (2) (30) --------------------------------------------------------------------------------- Alex Sauer-Budge 1 RIC $1.22 billion 2 RICs ($1.3 B) - ---------------------------------------------------------------------------------------------------------------------------------- Emerging Threadneedle: 1 RIC $0.47 billion Markets Julian A.S. Thompson 1 PIV $0.03 billion 3 other accounts $0.34 billion -------------------------------------------------------------- Threadneedle: 1 RIC $0.47 billion None None(k) (19) (45) Jules Mort 1 PIV $1.56 billion 1 other account $0.84 billion - ---------------------------------------------------------------------------------------------------------------------------------- Emerging Nicholas Pifer 6 RICs $7.01 billion None $10,0001 - (2) (30) Markets Bond 6 PICs $738.12 million $50,000 13 other accounts $3.77 billion - ----------------------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 111
OTHER ACCOUNTS MANAGED (EXCLUDING THE FUND) ------------------------------------------------------- POTENTIAL APPROXIMATE OWNERSHIP CONFLICTS NUMBER AND TYPE TOTAL NET PERFORMANCE BASED OF FUND OF STRUCTURE OF FUND PORTFOLIO MANAGER OF ACCOUNT* ASSETS ACCOUNTS(A) SHARES INTEREST COMPENSATION - ---------------------------------------------------------------------------------------------------------------------------------- European Threadneedle: None N/A N/A None(k) (19) (45) Equity Rob Jones - ---------------------------------------------------------------------------------------------------------------------------------- Global Bond Nicholas Pifer 6 RICs $6.55 billion None $50,000 - (2) (30) 6 PIVs $738.12 million $100,000 13 other accounts $3.77 billion - ---------------------------------------------------------------------------------------------------------------------------------- Global Equity Threadneedle: 2 RICs $1.93 billion Dominic Rossi 1 other account $0.10 billion None None(k) (19) (45) ------------------------- Threadneedle: 2 PIVs $0.17 billion Stephen Thornber - ---------------------------------------------------------------------------------------------------------------------------------- Global Bob Ewing(l) 7 RICs $13.77 billion 6 RICs Technology 2 PIVs $33.78 million ($13.36 B); 2 other accounts(d) $95.17 million None (2) (30) --------------------------------------------------------------------------------- Nick Thakore(l) 5 RICs $14.70 billion 4 RICs 2 PIVs $33.78 million ($14.29 B) 2 other accounts(d) $95.17 million - ---------------------------------------------------------------------------------------------------------------------------------- International Columbia WAM: 1 RIC $4.0 billion Aggressive P. Zachary Egan Growth -------------------------------------------------------------- Columbia WAM: 2 RICs $5.3 billion None None (20) (46) Louis J. Mendes ------------------------------------------------------------------------------------------------------------------- Principal: John Pihlblad 1 RIC $1.27 billion 1 other account $5.31 million ------------------------- Principal: Steven Larson None None (21) (47) - ---------------------------------------------------------------------------------------------------------------------------------- International Boston Company: Equity 11 RICs $4.86 billion 1 other account D. Kirk Henry 8 PIVs $4.96 billion ($323.0 M) None (22) (48) ------------------------- 55 other accounts $16.76 billion Boston Company: Clifford A. Smith ------------------------------------------------------------------------------------------------------------------- Marsico: 14 RICs $8.17 billion None None (23) (49) James G. Gendelman 8 other accounts $535.08 million - ---------------------------------------------------------------------------------------------------------------------------------- International Threadneedle: 1 RIC $1.27 billion Opportunity Alex Lyle 25 PIVs $1.74 billion None None(k) (19) (45) -------------------------------------------------------------- Threadneedle: 2 RICs $2.01 billion Dominic Rossi 1 other account $0.10 billion - ---------------------------------------------------------------------------------------------------------------------------------- International AllianceBernstein: Select Value Kevin F. Simms ------------------------- AllianceBernstein: 2 RICs Henry S. D'Auria ($3.77 B); ------------------------- 78 RICs $32.93 billion 1 PIV AllianceBernstein: 134 PIVs $24.49 billion ($813.0 M); None (24) (50) Sharon E. Fay 751 other accounts $125.03 billion 106 other accounts ------------------------- AllianceBernstein: ($20.71 B) Marilyn G. Fedak ------------------------- AllianceBernstein: John P. Mahedy - ---------------------------------------------------------------------------------------------------------------------------------- International AIGGIC: 4 RICs $60.6 million 1 other account Small Cap Hans K. Danielsson 5 PIVs $906.08 million ($100.01 M) 6 other accounts $1.68 billion --------------------------------------------------------------------------------- AIGGIC: 3 PIVs $432.26 million Chantal Brennan -------------------------------------------------------------- AIGGIC: 3 PIVs $66.75 million None None (25) (51) Ming Hsu 5 other accounts $270.73 million --------------------------------------------------------------------------------- AIGGIC: 2 PIVs $309.58 million 1 other account Noriko Umino 1 other account $270.36 million ($270.36 M) ------------------------------------------------------------------------------------------------------------------- Batterymarch: 12 RICs $2.43 billion 2 other accounts Charles F. Lovejoy 10 PIVs $971.76 million ($53.8 B) None (26) (52) ------------------------- Batterymarch: 20 other accounts $3.38 billion Christopher W. Floyd - ---------------------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING NOVEMBER 30 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Intermediate Catherine 8 RICs $4.17 billion None None (2) (30) Tax-Exempt Stienstra(j) 14 other accounts $8.07 billion - ----------------------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 112
OTHER ACCOUNTS MANAGED (EXCLUDING THE FUND) ------------------------------------------------------- POTENTIAL APPROXIMATE OWNERSHIP CONFLICTS NUMBER AND TYPE TOTAL NET PERFORMANCE BASED OF FUND OF STRUCTURE OF FUND PORTFOLIO MANAGER OF ACCOUNT* ASSETS ACCOUNTS(A) SHARES INTEREST COMPENSATION - ---------------------------------------------------------------------------------------------------------------------------------- Mid Cap John K. Schonberg 1 RIC $683.4 million 1 RIC None (2) (30) Growth 2 PIVs $102.8 million ($683.4 M) 7 other accounts $38.8 million ------------------------------------------------------------------------------------------------------------------- Sam Murphy(m) 1 RIC $653.03 million 1 RIC None (2), (3) (30) ------------------------- Mike Marzolf(m) ($653.03 M) - ---------------------------------------------------------------------------------------------------------------------------------- Tax-Exempt Catherine Stienstra(j) 8 RICs $3.51 billion None None (2) (30) Bond 14 other accounts $8.07 billion - ---------------------------------------------------------------------------------------------------------------------------------- Tax-Exempt Catherine Stienstra(j) 8 RICs $1.49 billion None None (2) (30) High Income 14 other accounts $8.07 billion - ----------------------------------------------------------------------------------------------------------------------------------
* RIC refers to a Registered Investment Company; PIV refers to a Pooled Investment Vehicle. (a) Number of accounts for which the advisory fee paid is based in part or wholly on performance and the aggregate net assets in those accounts. (b) Mr. Bergene has overall accountability for the group that monitors the subadvisers for RiverSource funds and for making recommendations to the Boards of Directors on changes to those subadvisers. (c) Ms. Keeley, who serves as Executive Vice President -- Equity and Fixed Income for RiverSource Investments, and Mr. Truscott, who serves as Chief Investment Officer for RiverSource Investments, oversee the portfolio managers who manage other accounts for RiverSource Investments, including the underlying funds in which the Funds-of-Funds invest, and other accounts managed by RiverSource Investments and its affiliates including institutional assets, proprietary assets and hedge funds. (d) Reflects each wrap program strategy as a single client, rather than counting each participant in the program as a separate client. (e) Ms. Hedlund and Mr. Schrotberger began managing the fund as of Oct. 1, 2006; therefore reporting information is as of Oct. 31, 2006. (f) Primarily managed money/wrap accounts generally requiring a minimum deposit of $100,000. (g) Neither Christopher Davis nor Kenneth Feinberg own any shares of RiverSource Fundamental Value Fund. However, both portfolio managers have over $1 million invested in the Davis Funds, which are managed in a similar style. (h) Michael T. Smith does not own any shares of RiverSource Small Cap Equity Fund. However, he invests in the Lord Abbett Small Cap Blend Fund, which is managed in a similar style. (i) Eli M. Salzmann and Sholom Dinsky do not own any shares of RiverSource Value Fund. However, they invest in the Lord Abbett Affiliated Fund, which is managed in a similar style. (j) Ms. Stienstra began managing the fund as of Aug. 31, 2007; therefore reporting information is as of Aug. 31, 2007. (k) The fund is available for sale only in the U.S. The portfolio managers do not reside in the U.S. and therefore do not hold any shares of the fund. (l) The portfolio manager began managing the fund after its last fiscal year end; therefor reporting information is as of June 30, 2007. (m) The portfolio manager began managing the fund as of June 20, 2007, therefore reporting information is as of June 30, 2007. (n) The portfolio manager participates in a mandatory deferred compensation plan where deferred compensation is treated as if it was invested in shares of one or more RiverSource funds and the amount paid to the portfolio manager will be determined based on the performance of such investments. POTENTIAL CONFLICTS OF INTEREST (1) Management of Funds-of-Funds differs from that of the other RiverSource funds. The portfolio management process is set forth generally below and in more detail in the funds' prospectus. Management of the portfolios is based on initial asset class guidance provided by the Capital Markets Committee, a group of RiverSource Investments investment professionals, and subsequent allocation determinations by the Asset Allocation Committee and Fund Selection Committee within established guidelines set forth in the prospectus. The Asset Allocation Committee, comprised of portfolio managers Joy, Keeley and Truscott, determines each funds-of-fund's allocation among the three main asset classes (equity, fixed income and cash) and allocation among investment categories within each asset class. The Fund Selection Committee, comprised portfolio managers Bergene, Joy, Keeley and Truscott, determines each funds-of-fund's allocation among the underlying funds. These allocation determinations are reviewed by the Asset Allocation Committee and Fund Selection Committee at least quarterly. Because of the structure of the funds-of-funds, the potential conflicts of interest for the portfolio managers may be different than the potential conflicts of interest for portfolio managers who manage other funds. These potential conflicts of interest include - The portfolio managers of the underlying funds are under the supervision of portfolio managers Keeley and Truscott. Keeley and Truscott may have influence over the management of the underlying funds through their supervision of the underlying funds' portfolio managers and/or through their ability, as part of the Asset Allocation Committee and Fund Selection Committee, to influence the allocation of funds-of-funds assets to or away from the underlying funds. - Portfolio managers Joy, Keeley and Truscott also serve as members of the Capital Markets Committee. As described above, the Capital Markets Committee provides initial guidance with respect to asset allocation, and its view may Statement of Additional Information - Nov. 29, 2007 Page 113 play a significant role in the asset class determinations made by the Asset Allocation Committee and, as a result, in the underlying fund determinations made by the Fund Selection Committee. In addition to the accounts above, portfolio managers may manage accounts in a personal capacity that may include holdings that are similar to, or the same as, those of the fund. The investment manager has in place a Code of Ethics that is designed to address conflicts and that, among other things, imposes restrictions on the ability of the portfolio managers and other "investment access persons" to invest in securities that may be recommended or traded in the fund and other client accounts. (2) RiverSource Investments portfolio managers may manage one or more mutual funds as well as other types of accounts, including hedge funds, proprietary accounts, separate accounts for institutions and individuals, and other pooled investment vehicles. Portfolio managers make investment decisions for an account or portfolio based on its investment objectives and policies, and other relevant investment considerations. A portfolio manager may manage another account whose fees may be materially greater than the management fees paid by the Fund and may include a performance-based fee. Management of multiple funds and accounts may create potential conflicts of interest relating to the allocation of investment opportunities, and the aggregation and allocation of trades. In addition, RiverSource Investments monitors a variety of areas (e.g., allocation of investment opportunities) and compliance with the firm's Code of Ethics, and places additional investment restrictions on portfolio managers who manage hedge funds and certain other accounts. RiverSource Investments has a fiduciary responsibility to all of the clients for which it manages accounts. RiverSource Investments seeks to provide best execution of all securities transactions and to aggregate securities transactions and then allocate securities to client accounts in a fair and equitable basis over time. RiverSource Investments has developed policies and procedures, including brokerage and trade allocation policies and procedures, designed to mitigate and manage the potential conflicts of interest that may arise from the management of multiple types of accounts for multiple clients. In addition to the accounts above, portfolio managers may manage accounts in a personal capacity that may include holdings that are similar to, or the same as, those of the fund. The investment manager's Code of Ethics is designed to address conflicts and, among other things, imposes restrictions on the ability of the portfolio managers and other "investment access persons" to invest in securities that may be recommended or traded in the fund and other client accounts. (3) The portfolio manager's responsibilities also include working as a securities analyst. This dual role may give rise to conflicts with respect to making investment decisions for accounts that the portfolio manager manages versus communicating his or her analyses to other portfolio managers concerning securities that he or she follows as an analyst. (4) The management of a portfolio and other accounts by a portfolio manager could result in potential conflicts of interest if the portfolio and other accounts have different objectives, benchmarks and fees because the portfolio manager and his team must allocate time and investment expertise across multiple accounts, including the portfolio. The portfolio manager and his team manage the portfolio and other accounts utilizing a model portfolio approach that groups similar accounts within a model portfolio. UBS Global Asset Management (Americas) Inc. manages accounts according to the appropriate model portfolio, including where possible, those accounts that have specific investment restrictions. Accordingly, portfolio holdings, position sizes, and industry and sector exposures tend to be similar across accounts, which may minimize the potential for conflicts of interest. If a portfolio manager identifies a limited investment opportunity that may be suitable for more than one account or model portfolio, the portfolio may not be able to take full advantage of that opportunity due to an allocation or filled purchase or sale orders across all eligible model portfolios and accounts. To deal with these situations, UBS Global Asset Management (Americas) Inc. has adopted procedures for allocating portfolio trades among multiple accounts to provide fair treatment to all accounts. The management of personal accounts by a portfolio manager may also give rise to potential conflicts of interest. UBS Global Asset Management (Americas) Inc. has adopted Codes of Ethics that govern such personal trading, but there is no assurance that the Codes will adequately address all such conflicts. (5) As is typical for many money managers, potential conflicts of interest may arise related to Turner's management of accounts including the Fund where not all accounts are able to participate in a desired IPO, or other limited opportunity, relating to use of soft dollars and other brokerage practices, related to the voting of proxies, employee personal securities trading, and relating to a variety of other circumstances. In all cases, however, Turner believes it has written policies and procedures in place reasonably designed to prevent violations of the federal securities laws and to prevent material conflicts of interest from arising. Please also see Turner's Form ADV, Part II for a description of some of its policies and procedures in this regard. (6) To ensure that Essex addresses compliance and control issues, an open dialogue exists between the portfolio managers, the trading desk, and our account services groups. This allows Essex to monitor compliance among these parties to Statement of Additional Information - Nov. 29, 2007 Page 114 accommodate both our clients' and the firm's investment guidelines. In order to prevent and detect violations, we have the following checks and balances built into our compliance process: - The client service group and the Compliance Officer - Christopher P. McConnell, Chief Executive Officer - interpret each compliance restriction. - Portfolio Managers review each trade for appropriateness. - Our trading systems are state of the art and have been developed to prevent an inappropriate security or position from being purchased in a portfolio once the system is coded. - Our administrative group reviews each trade on a daily basis for reconciliation purposes. - Each member of our firm has signed our Code of Ethics policy which outlines authorized trading activity and procedures. (7) As a general matter, certain conflicts of interest may arise in connection with a portfolio manager's management of a fund's investments, on the one hand, and the investments of other accounts for which the portfolio manager is responsible, on the other. For example, it is possible that the various accounts managed could have different investment strategies that, at times, might conflict with one another to the possible detriment of the Fund. Alternatively, to the extent that the same investment opportunities might be desirable for more than one account, possible conflicts could arise in determining how to allocate them. Other potential conflicts might include conflicts created by specific portfolio manager compensation arrangements, and conflicts relating to selection of brokers or dealers to execute fund portfolio trades and/or specific uses of commissions from Fund portfolio trades (for example, research, or "soft dollars"). The Adviser has structured the portfolio managers' compensation in a manner, and the Fund has adopted policies and procedures, reasonably designed to safeguard the Fund from being negatively affected as a result of any such potential conflicts. (8) Kenwood, an indirect partially-owned subsidiary of Ameriprise Financial, is an affiliate of RiverSource Investments. Kenwood portfolio managers may manage one or more mutual funds as well as other types of accounts, including proprietary accounts, separate accounts for institutions and individuals, and other pooled investment vehicles. Portfolio managers make investment decisions for an account or portfolio based on its investment objectives and policies, and other relevant investment considerations. A portfolio manager may manage a separate account or other pooled investment vehicle whose fees may be materially greater than the management fees paid by the Fund and may include a performance- based fee. Management of multiple funds and accounts may create potential conflicts of interest relating to the allocation of investment opportunities, and the aggregation and allocation of trades. Kenwood has a fiduciary responsibility to all of the clients for which it manages accounts. Kenwood seeks to provide best execution of all securities transactions. Where possible, security transactions are aggregated and allocated to client accounts in a fair and timely manner. Kenwood has developed policies and procedures, including brokerage and trade allocation policies and procedures, designed to mitigate and manage the potential conflicts of interest that may arise from the management of multiple types of accounts for multiple clients. In addition to monitoring these policies and procedures, Kenwood monitors compliance with the firm's Code of Ethics and places additional investment restrictions on portfolio managers who manage certain other accounts. (9) Management of the Income Builder and Retirement Plus Funds-of-Funds differs from that of the other RiverSource funds. The portfolio management process is set forth generally below and in more detail in the funds' prospectus. Management of the portfolios is based on proprietary, quantitative techniques and qualitative review of the quantitative output. Using these methodologies, a group of RiverSource investment professionals allocates each fund's assets within and across different asset classes in an effort to achieve the fund's objective of providing a high level of current income and growth of capital. After the initial allocation, the fund will be rebalanced monthly in an effort to maximize the level of income and capital growth, incorporating various measures of relative value subject to constraints that set minimum or maximum exposure within asset classes, as set forth in the prospectus. Within the equity and fixed income asset classes, the quantitative model establishes allocations for the funds, seeking to achieve each fund's objective by investing in defined investment categories. The target allocation range constraints are intended, in part, to promote diversification within the asset classes. Because of the structure of the funds-of-funds, the potential conflicts of interest for the portfolio managers may be different than the potential conflicts of interest for portfolio managers who manage other funds. These potential conflicts of interest include: - In certain cases, the portfolio managers of the underlying funds are the same as the portfolio managers of the Income Builder and Retirement Plus Funds-of-Funds, and could influence the allocation of funds-of-funds assets to or away from the underlying funds that they manage. - RiverSource Investments, LLC and its affiliates may receive higher compensation as a result of allocations to underlying funds with higher fees. Statement of Additional Information - Nov. 29, 2007 Page 115 - RiverSource Investments, LLC monitors the performance of the underlying funds and may, from time to time, recommend to the board of directors of the funds a change in portfolio management or fund strategy or the closure or merger of an underlying fund. In addition, RiverSource Investments, LLC may believe that certain RiverSource funds may benefit from additional assets or could be harmed by redemptions. All of these factors may also influence decisions in connection with the allocation of funds-of-funds assets to or away from certain underlying funds. In addition to the accounts above, portfolio managers may manage accounts in a personal capacity that may include holdings that are similar to, or the same as, those of the fund. The investment manager has in place a Code of Ethics that is designed to address conflicts and that, among other things, imposes restrictions on the ability of the portfolio managers and other "investment access persons" to invest in securities that may be recommended or traded in the fund and other client accounts. (10) Certain conflicts of interest may arise in connection with the management of multiple portfolios. Potential conflicts include, for example, conflicts among investment strategies and conflicts in the allocation of investment opportunities. American Century has adopted policies and procedures that are designed to minimize the effects of these conflicts. Responsibility for managing American Century client portfolios is organized according to investment discipline. Investment disciplines include, for example, quantitative equity, small- and mid-cap growth, large-cap growth, value, international, fixed income, asset allocation, and sector funds. Within each discipline are one or more portfolio teams responsible for managing specific client portfolios. Generally, client portfolios with similar strategies are managed by the same team using the same objective, approach, and philosophy. Accordingly, portfolio holdings, position sizes, and industry and sector exposures tend to be similar across similar portfolios, which minimizes the potential for conflicts of interest. For each investment strategy, one portfolio is generally designated as the "policy portfolio." Other portfolios with similar investment objectives, guidelines and restrictions are referred to as "tracking portfolios." When managing policy and tracking portfolios, a portfolio team typically purchases and sells securities across all portfolios that the team manages. American Century's trading systems include various order entry programs that assist in the management of multiple portfolios, such as the ability to purchase or sell the same relative amount of one security across several funds. In some cases a tracking portfolio may have additional restrictions or limitations that cause it to be managed separately from the policy portfolio. Portfolio managers make purchase and sale decisions for such portfolios alongside the policy portfolio to the extent the overlap is appropriate, and separately, if the overlap is not. American Century may aggregate orders to purchase or sell the same security for multiple portfolios when it believes such aggregation is consistent with its duty to seek best execution on behalf of its clients. Orders of certain client portfolios may, by investment restriction or otherwise, be determined not available for aggregation. American Century has adopted policies and procedures to minimize the risk that a client portfolio could be systematically advantaged or disadvantaged in connection with the aggregation of orders. To the extent equity trades are aggregated, shares purchased or sold are generally allocated to the participating portfolios pro rata based on order size. Because initial public offerings (IPOs) are usually available in limited supply and in amounts too small to permit across- the-board pro rata allocations, American Century has adopted special procedures designed to promote a fair and equitable allocation of IPO securities among clients over time. Fixed income securities transactions are not executed through a centralized trading desk. Instead, portfolio teams are responsible for executing trades with broker/dealers in a predominantly dealer marketplace. Trade allocation decisions are made by the portfolio manager at the time of trade execution and orders entered on the fixed income order management system. Finally, investment of American Century's corporate assets in proprietary accounts may raise additional conflicts of interest. To mitigate these potential conflicts of interest, American Century has adopted policies and procedures intended to provide that trading in proprietary accounts is performed in a manner that does not give improper advantage to American Century to the detriment of client portfolios. (11) Goldman Sachs Asset Management, L.P. ("GSAM") portfolio managers are often responsible for managing one or more Funds as well as other accounts, including proprietary accounts, separate accounts and other pooled investment vehicles, such as unregistered hedge funds. A portfolio manager may manage a separate account or other pooled investment vehicle which may have materially higher fee arrangements than the Fund and may also have a performance-based fee. The side-by- side management of these funds may raise potential conflicts of interest relating to cross trading, the allocation of investment opportunities and the aggregation and allocation of trades. GSAM has a fiduciary responsibility to manage all client accounts in a fair and equitable manner. It seeks to provide best execution of all securities transactions and aggregate and then allocate securities to client accounts in a fair and timely manner. To this end, GSAM has developed policies and procedures designed to mitigate and manage the potential conflicts of interest that may arise from side-by-side management. In addition, GSAM has adopted policies limiting the circumstances under which cross-trades may be affected between a Fund and another client account. GSAM conducts periodic reviews of trades for consistency with these policies. Statement of Additional Information - Nov. 29, 2007 Page 116 (12) Individual investment professionals at Wellington Management manage multiple portfolios for multiple clients. These accounts may include mutual funds, separate accounts (assets managed on behalf of institutions such as pension funds, insurance companies, foundations, or separately managed account programs sponsored by financial intermediaries), bank common trust accounts, and hedge funds. The investment professionals primarily responsible for the day-to-day management of the funds ("Investment Professionals") generally manage portfolios in several different investment styles. These portfolios may have investment objectives, strategies, time horizons, tax considerations and risk profiles that differ from those of the funds. The Investment Professionals make investment decisions for the funds based on the investment objectives, policies, practices, benchmarks, cash flows, tax and other relevant investment considerations applicable to that portfolio. Consequently, the Investment Professionals may purchase or sell securities, including IPOs, for one portfolio and not another portfolio, and the performance of securities purchased for the fund may vary from the performance of securities purchased for other portfolios. Alternatively, these portfolios may be managed in a similar fashion to the relevant fund and thus the portfolio may have similar, and in some cases nearly identical, objectives, strategies and/or holdings to that of the relevant fund. The Investment Professionals or other investment professionals at Wellington Management may place transactions on behalf of other accounts that are directly or indirectly contrary to investment decisions made on behalf of the fund, or make investment decisions that are similar to those made for the funds, both of which have the potential to adversely impact the funds depending on market conditions. For example, the Investment Professionals may purchase a security in one portfolio while appropriately selling that same security in another portfolio. Similarly, an Investment Professional may purchase the same security for the relevant fund and one or more other portfolios at or about the same time, and in those instances the other portfolios will have access to their respective holdings prior to the public disclosure of the relevant fund's holdings. In addition, some of these portfolios have fee structures, including performance fees, that are or have the potential to be higher, in some cases significantly higher, than the fees paid by the funds to Wellington Management. Because incentive payments are tied to revenues earned by Wellington Management, and where noted, to the performance achieved by the manager in each account, the incentives associated with any given account may be significantly higher or lower than those associated with other accounts managed by the Investment Professional. Finally, the Investment Professionals may hold shares or investments in the other pooled investment vehicles and/or other accounts identified above. Wellington Management's goal is to meet its fiduciary obligation to treat all clients fairly and provide high quality investment services to all of its clients. Wellington Management has adopted and implemented policies and procedures, including brokerage and trade allocation policies and procedures that it believes address the conflicts associated with managing multiple accounts for multiple clients. In addition, Wellington Management monitors a variety of areas, including compliance with primary fund guidelines, the allocation of IPOs, and compliance with the firm's Code of Ethics, and places additional investment restrictions on Investment Professionals who manage hedge funds and certain other accounts. Furthermore, senior investment and business personnel at Wellington Management periodically review the performance of Wellington Management's Investment Professionals. Although Wellington Management does not track the time an Investment Professional spends on a single portfolio, Wellington Management does periodically assess whether an Investment Professional has adequate time and resources to effectively manage the Investment Professional's various client mandates. (13) Actual or apparent conflicts of interest may arise when a portfolio manager has day-to-day management responsibilities with respect to more than one portfolio or other account. More specifically, portfolio managers who manage multiple portfolios and /or other accounts are presented with the following potential conflicts: - The management of multiple portfolios and/or other accounts may result in a portfolio manager devoting unequal time and attention to the management of each portfolio and/or other account. Davis Advisors seeks to manage such competing interests for the time and attention of portfolio managers by having portfolio managers focus on a particular investment discipline. Most other accounts managed by a portfolio manager are managed using the same investment models that are used in connection with the management of the portfolios. - If a portfolio manager identifies a limited investment opportunity which may be suitable for more than one portfolio or other account, a portfolio may not be able to take full advantage of that opportunity due to an allocation of filled purchase or sale orders across all eligible portfolios and other accounts. To deal with these situations, Davis Advisors has adopted procedures for allocating portfolio transactions across multiple accounts. - With respect to securities transactions for the portfolios, Davis Advisors determines which broker to use to execute each order, consistent with its duty to seek best execution of the transaction. However, with respect to certain other accounts (such as mutual funds, other pooled investment vehicles that are not registered mutual funds, and other accounts managed for organizations and individuals), Davis Advisors may be limited by the client with respect to the selection of brokers or may be instructed to direct trades through a particular broker. In these cases, Davis Advisors may place separate, non- simultaneous, transactions for a portfolio and another account which may temporarily affect Statement of Additional Information - Nov. 29, 2007 Page 117 the market price of the security or the execution of the transaction, or both, to the detriment of the portfolio or the other account. - Finally, substantial investment of Davis Advisor or Davis Family assets in certain mutual funds may lead to conflicts of interest. To mitigate these potential conflicts of interest, Davis Advisors has adopted policies and procedures intended to ensure that all clients are treated fairly over time. Davis Advisors does not receive an incentive based fee on any account. (14) Conflicts of interest may arise in connection with the investment manager's management of the investments of the relevant fund and the investments of the other accounts. Such conflicts may arise with respect to the allocation of investment opportunities among the relevant fund and other accounts Conflicts of interest may arise in connection with the portfolio managers' management of the investments of the relevant fund and the investments of the other accounts included in the table above. Such conflicts may arise with respect to the allocation of investment opportunities among the relevant fund and other accounts with similar investment objectives and policies. A portfolio manager potentially could use information concerning the relevant fund's transactions to the advantage of other accounts and to the detriment of the relevant fund. To address these potential conflicts of interest, Lord Abbett has adopted and implemented a number of policies and procedures. Lord Abbett has adopted Policies and Procedures for Evaluating Best Execution of Equity Transactions, as well as Trading Practices/Best Execution Procedures. The objective of these policies and procedures is to ensure the fair and equitable treatment of transactions and allocation of investment opportunities on behalf of all accounts managed by Lord Abbett. In addition, Lord Abbett's Code of Ethics sets forth general principles for the conduct of employee personal securities transactions in a manner that avoids any actual or potential conflicts of interest with the interests of Lord Abbett's clients including the relevant fund. Moreover, Lord Abbett's Statement of Policy and Procedures on Receipt and Use of Inside Information sets forth procedures for personnel to follow when they have inside information. Lord Abbett is not affiliated with a full service broker-dealer and therefore does not execute any portfolio transactions through such an entity, a structure that could give rise to additional conflicts. Lord Abbett does not conduct any investment bank functions and does not manage any hedge funds. Lord Abbett does not believe that any material conflicts of interest exist in connection with the portfolio managers' management of the investments of the relevant fund and the investments of the other accounts referenced in the table above. (15) Donald Smith & Co., Inc. is very sensitive to conflicts of interest that could possibly arise in its capacity of serving as an investment adviser. It remains committed to resolving any and all conflicts in the best interest of its clients. Donald Smith & Co., Inc. is an independent investment advisor with no parent or subsidiary organizations. Additionally, it has no affiliated organizations, brokerage, nor any investment banking activities. Clients include mutual funds, public and corporate pension plans, endowments and foundations, and other separate accounts. Donald Smith & Co., Inc. has put in place systems, policies and procedures, which have been designed to maintain fairness in portfolio management across all clients. Potential conflicts between funds or with other types of accounts are managed via allocation policies and procedures, internal review processes, and direct oversight by Donald G. Smith, President. (16) Portfolio Managers at Franklin Portfolio Associates (FPA) may manage one or more mutual funds as well as other types of accounts, including proprietary accounts, separate accounts for institutions and individuals, and other pooled investment vehicles. Portfolio managers make investment decisions for an account or portfolio based on its investment objectives and policies, and other relevant investment considerations. A portfolio manager may manage a separate account or other pooled investment vehicle whose fees may be materially greater than the management fees paid by Small Cap Value Fund and may include a performance-based fee. Management of multiple funds and accounts may create potential conflicts of interest relating to the allocation of investment opportunities, and the aggregation and allocation of trades. FPA has a fiduciary responsibility to all of the clients for which it manages accounts. FPA seeks to provide best execution of all securities transactions and to aggregate securities transactions and then allocate securities to client accounts in a fair and timely manner. FPA has developed policies and procedures, including brokerage and trade allocation policies and procedures, designed to mitigate and manage the potential conflicts of interest that may arise from the management of multiple types of accounts for multiple clients. (17) Actual or potential conflicts of interest may arise when a portfolio manager has management responsibilities to more than one account (including the Fund). BHMS manages potential conflicts between funds or with other types of accounts through allocation policies and procedures, internal review processes and oversight by directors and independent third parties to ensure that no client, regardless of type or fee structure, is intentionally favored at the expense of another. Allocation policies are designed to address potential conflicts in situations where two or more funds or accounts participate in investment decisions involving the same securities. Statement of Additional Information - Nov. 29, 2007 Page 118 (18) Certain conflicts of interest may arise in connection with the management of multiple portfolios and investment strategies. Potential conflicts include the allocation of investment opportunities across client accounts and the allocation of similar investments across different strategies. MetWest Capital has adopted policies and procedures designed to minimize the effects of these conflicts. Responsibility for managing MetWest Capital client portfolios is organized according to investment strategy. All accounts in each strategy are managed to a model portfolio, as specified by the investment team. The investment team implements the model consistently across client portfolios. Consequently, position sizes and industry and sector allocations are similar across our clients' portfolios. Typically, no positions differ from portfolio to portfolio, except in the case of client-imposed restrictions. For such a portfolio, the investment team determines the position(s) that comply with client requirements. This process minimizes the potential for conflicts of interest. MetWest Capital's allocation policy allocates all investment opportunities among clients in the fairest possible way, taking into account clients' best interests. We have adopted policies and procedures designed to ensure that allocations do not involve a practice of favoring or disfavoring any strategy, client or group of clients. Account and strategy performance is never a factor in trade allocations. When necessary, we address known conflicts of interests in our trading practices by disclosure to clients and/or in our Form ADV or other appropriate action. The decision to buy or sell a position in the model portfolio is based on the direction of the investment team. Once the decision is made, traders prepare the trade "blocks." All participating strategies and client portfolios (those without pending cash flows or prohibited transactions) are block-traded together, typically grouped either by custodian or trade broker according to best-execution practices. Orders are placed to ensure random fills so that no one strategy, client or group of clients is favored or disfavored on a systematic basis. Each portfolio/relationship manager is responsible for reviewing the blocks and implementing all buy and sell orders for his/her accounts, taking into consideration client-specific factors. Both the lead strategist and the portfolio/relationship manager review trade reports for all accounts on a daily basis. (19) Threadneedle Investments portfolio managers may manage one or more mutual funds as well as other types of accounts, including proprietary accounts, separate accounts for institutions, and other pooled investment vehicles. Portfolio managers make investment decisions for an account or portfolio based on its investment objectives and policies, and other relevant investment considerations. A portfolio manager may manage a separate account or other pooled investment vehicle whose fees may be materially greater than the management fees paid by the Fund and may include a performance-based fee. Management of multiple funds and accounts may create potential conflicts of interest relating to the allocation of investment opportunities, and the aggregation and allocation of trades. In addition, the portfolio manager's responsibilities at Threadneedle Investments include working as a securities analyst. This dual role may give rise to conflicts with respect to making investment decisions for accounts that he/she manages versus communicating his/her analyses to other portfolio managers concerning securities that he/she follows as an analyst. Threadneedle Investments has a fiduciary responsibility to all of the clients for which it manages accounts. Threadneedle Investments seeks to provide best execution of all securities transactions and to aggregate securities transactions and then allocate securities to client accounts in a fair and timely manner. Threadneedle Investments has developed policies and procedures, including brokerage and trade allocation policies and procedures, designed to mitigate and manage the potential conflicts of interest that may arise from the management of multiple types of accounts for multiple clients. (20) Like other investment professionals with multiple clients, a portfolio manager for a Fund may face certain potential conflicts of interest in connection with managing both the Fund and other accounts at the same time. The paragraphs below describe some of these potential conflicts that Columbia WAM believes are faced by investment professionals at most major financial firms. Columbia WAM and the Trustees of the Funds have adopted compliance policies and procedures that attempt to address certain of these potential conflicts. The management of accounts with different advisory fee rates and/or fee structures may raise potential conflicts of interest by creating an incentive to favor higher-fee accounts. These potential conflicts may include, among others: - The most attractive investments could be allocated to higher-fee accounts. - The trading of higher-fee accounts could be favored as to timing and/or execution price. For example, higher-fee accounts could be permitted to sell securities earlier than other accounts when a prompt sale is desirable or to buy securities at an earlier and more opportune time. - The trading of other accounts could be used to benefit higher-fee accounts (front-running). - The investment management team could focus their time and efforts primarily on higher-fee accounts due to a personal stake in compensation. Statement of Additional Information - Nov. 29, 2007 Page 119 Potential conflicts of interest may also arise when the portfolio managers have personal investments in other accounts that may create an incentive to favor those accounts. As a general matter and subject to limited exceptions, Columbia WAM's investment professionals do not have the opportunity to invest in client accounts, other than the Funds. A potential conflict of interest may arise when a Fund and other accounts purchase or sell the same securities. On occasions when a portfolio manager considers the purchase or sale of a security to be in the best interests of a Fund as well as other accounts, Columbia WAM's trading desk may, to the extent permitted by applicable laws and regulations, aggregate the securities to be sold or purchased in order to obtain the best execution and lower brokerage commissions, if any. Aggregation of trades may create the potential for unfairness to the Fund or another account if one account is favored over another in allocating the securities purchased or sold - for example, by allocating a disproportionate amount of a security that is likely to increase in value to a favored account. "Cross trades," in which one Columbia account sells a particular security to another account (potentially saving transaction costs for both accounts), may also pose a potential conflict of interest. Cross trades may be seen to involve a potential conflict of interest if, for example, one account is permitted to sell a security to another account at a higher price than an independent third party would pay. Columbia WAM and the Funds' Trustees have adopted compliance procedures that provide that any transactions between the Funds and another Columbia- advised account are to be made at an independent current market price, as required by law. Another potential conflict of interest may arise based on the different investment objectives and strategies of the Funds and other accounts. For example, another account may have a shorter-term investment horizon or different investment objectives, policies or restrictions than a Fund. Depending on another account's objectives or other factors, a portfolio manager may give advice and make decisions that may differ from advice given, or the timing or nature of decisions made, with respect to a Fund. In addition, investment decisions are the product of many factors in addition to basic suitability for the particular account involved. Thus, a particular security may be bought or sold for certain accounts even though it could have been bought or sold for other accounts at the same time. More rarely, a particular security may be bought for one or more accounts managed by a portfolio manager when one or more other accounts are selling the security (including short sales). There may be circumstances when purchases or sales of portfolio securities for one or more accounts may have an adverse effect on other accounts. A Fund's portfolio manager who is responsible for managing multiple funds and/or accounts may devote unequal time and attention to the management of those funds and/or accounts. As a result, the portfolio manager may not be able to formulate as complete a strategy or identify equally attractive investment opportunities for each of those accounts as might be the case if he or she were to devote substantially more attention to the management of a single fund. The effects of this potential conflict may be more pronounced where funds and/or accounts overseen by a particular portfolio manager have different investment strategies. The Funds' portfolio managers may be able to select or influence the selection of the brokers and dealers that are used to execute securities transactions for the Funds. In addition to executing trades, some brokers and dealers provide portfolio managers with brokerage and research services (as those terms are defined in Section 28(e) of the Securities Exchange Act of 1934), which may result in the payment of higher brokerage fees than might have otherwise be available. These services may be more beneficial to certain funds or accounts than to others. Although the payment of brokerage commissions is subject to the requirement that the portfolio manager determine in good faith that the commissions are reasonable in relation to the value of the brokerage and research services provided to a Fund, a portfolio manager's decision as to the selection of brokers and dealers could yield disproportionate costs and benefits among the Funds and/or accounts that he or she manages. Columbia WAM or an affiliate may provide more services (such as distribution or recordkeeping) for some types of funds or accounts than for others. In such cases, a portfolio manager may benefit, either directly or indirectly, by devoting disproportionate attention to the management of a Fund and/or accounts that provide greater overall returns to the investment manager and its affiliates. The Funds' portfolio managers may also face other potential conflicts of interest in managing the Funds, and the description above is not a complete description of every conflict that could be deemed to exist in managing both a Fund and other accounts. In addition, the Funds' portfolio managers may also manage other accounts (including their personal assets or the assets of family members) in their personal capacity. The management of these accounts may also involve certain of the potential conflicts described above. Investment personnel at Columbia WAM, including the Funds' portfolio managers, are subject to restrictions on engaging in personal securities transactions pursuant to Codes of Ethics adopted by Columbia WAM and the Funds, which contain provisions and requirements designed to identify and address certain conflicts of interest between personal investment activities and the interests of the Funds. (21) Principal Global Investors provides investment advisory services to numerous clients other than the Fund. The investment objectives and policies of these accounts may differ from those of the Fund. Based on these differing circumstances, potential conflicts of interest may arise because the subadviser may be required to pursue different Statement of Additional Information - Nov. 29, 2007 Page 120 investment strategies on behalf of the Fund and other client accounts. For example, a subadviser may be required to consider an individual client's existing positions, personal tax situation, suitability, personal biases and investment time horizon, which considerations would not affect his investment decisions on behalf of the Fund. This means that research on securities to determine the merits of including them in the Fund's portfolio are similar, but not identical, to those employed in building private client portfolios. As a result, there may be instances in which a subadviser purchases or sells an investment for one or more private accounts and not for the Fund, or vice versa. To the extent the Fund and other clients seek to acquire the same security at about the same time, the Fund may not be able to acquire as large a position in such security as it desires or it may have to pay a higher price for the security. Similarly, the Fund may not be able to obtain as large an execution of an order to sell or as high a price for any particular security if the subadviser desires to sell the same portfolio security at the same time on behalf of other clients. On the other hand, if the same securities are bought or sold at the same time by more than one client, the resulting participation in volume transactions could produce better executions for the Fund. (22) INTRODUCTION A conflict of interest is generally defined as a single person or entity having two or more interests that are inconsistent. The Boston Company Asset Management, LLC ("The Boston Company") has implemented various policies and procedures that are intended to address the conflicts of interest that may exist or be perceived to exist at The Boston Company. These conflicts may include, but are not limited to when a portfolio manager is responsible for the management of more than one account; the potential arises for the portfolio manager to favor one account over another. Generally, the risk of such conflicts of interest could increase if a portfolio manager has a financial incentive to favor one account over another. This disclosure statement is not intended to cover all of the conflicts that exist within The Boston Company, but rather to highlight the general categories of conflicts and the associated mitigating controls. Other conflicts are addressed within the policies of The Boston Company. Further, the Chief Compliance Officer of The Boston Company shall maintain a Conflicts Matrix that further defines the conflicts specific to The Boston Company. NEW INVESTMENT OPPORTUNITIES Potential Conflict: A portfolio manager could favor one account over another in allocating new investment opportunities that have limited supply, such as initial public offerings and private placements. If, for example, an initial public offering that was expected to appreciate in value significantly shortly after the offering was allocated to a single account, that account may be expected to have better investment performance than other accounts that did not receive an allocation. - The Boston Company has policies that require a portfolio manager to allocate such investment opportunities in an equitable manner and generally to allocate such investments proportionately among all accounts with similar investment objectives. COMPENSATION Potential Conflict: A portfolio manager may favor an account if the portfolio manager's compensation is tied to the performance of that account rather than all accounts managed by the portfolio manager. If, for example, the portfolio manager receives a bonus based upon the performance of certain accounts relative to a benchmark while other accounts are disregarded for this purpose, the portfolio manager will have a financial incentive to seek to have the accounts that determine the bonus achieve the best possible performance to the possible detriment of other accounts. Similarly, if The Boston Company receives a performance-based advisory fee, the portfolio manager may favor that account, regardless of whether the performance of that account directly determines the portfolio manager's compensation. - The investment performance on specific accounts is not a factor in determining the portfolio manager's compensation. INVESTMENT OBJECTIVES Potential Conflict: Where different accounts managed by the same portfolio manager have materially and potentially conflicting investment objectives or strategies, a conflict of interest may arise. For example, if a portfolio manager purchases a security for one account and sells the same security short for another account, such a trading pattern could potentially disadvantage either account. - To mitigate the conflict in this scenario The Boston Company has in places a restriction in the order management system and requires a written explanation from the portfolio manager before determining whether to lift the restriction. However, where a portfolio manager is responsible for accounts with differing investment objectives and policies, it is possible that the portfolio manager will conclude that it is in the best interest of one account to sell a portfolio security while another account continues to hold or increase the holding in such security. Statement of Additional Information - Nov. 29, 2007 Page 121 TRADING Potential Conflict: A portfolio manager could favor one account over another in the order in which trades for the accounts are placed. If a portfolio manager determines to purchase a security for more than one account in an aggregate amount that may influence the market price of the security, accounts that purchased or sold the security first may receive a more favorable price than accounts that make subsequent transactions. The less liquid the market for the security or the greater the percentage that the proposed aggregate purchases or sales represent of average daily trading volume, the greater the potential for accounts that make subsequent purchases or sales to receive a less favorable price. - When a portfolio manager intends to trade the same security for more than one account, the policies of The Boston Company generally require that such trades be "bunched," which means that the trades for the individual accounts are aggregated and each account receives the same price. Some accounts may not be eligible for bunching for contractual reasons (such as directed brokerage arrangements). Circumstances may also arise where the trader believes that bunching the orders may not result in the best possible price. Where those accounts or circumstances are involved, The Boston Company will place the order in a manner intended to result in as favorable a price as possible for such client. PERSONAL INTEREST Potential Conflict: A portfolio manager may favor an account if the portfolio manager has a beneficial interest in the account, in order to benefit a large client or to compensate a client that had poor returns. For example, if the portfolio manager held an interest in a mutual fund that was one of the accounts managed by the portfolio manager, the portfolio manager would have an economic incentive to favor the account in which the portfolio manager held an interest. - All accounts with the same or similar investment objectives are part of a trading group. All accounts in a particular trading group are managed and traded identically taking into account client imposed restrictions or cash flows. As a result of this management and trading style an account in a trading group cannot be treated any differently than any other account in that trading group. OUTSIDE DIRECTORSHIP Potential Conflict: Employees may serve as directors, officers or general partners of certain outside entities after obtaining the appropriate approvals in compliance with the Code of Conduct and Mellon Corporate Policy on Outside Directorships and Offices (CPP-805-I). However, in view of the potential conflicts of interest and the possible liability for The Boston Company, its affiliates and its employees, employees are urged to be cautious when considering serving as directors, officers, or general partners of outside entities. - In addition to completing the reporting requirements set forth in the Mellon corporate policies, employees should ensure that their service as an outside director, officer or general partner does not interfere with the discharge of their job responsibilities and must recognize that their primary obligation is to complete their assigned responsibilities at The Boston Company in a timely manner. PROXY VOTING Potential Conflict: Whenever The Boston Company owns the securities of client or prospective client in fiduciary accounts there is a potential conflict between the interests of the firm and the interests of the beneficiaries of our client accounts. - Material conflicts of interest are addressed through the establishment of our parent company's Proxy Committee structure. It applies detailed, pre-determined proxy voting guidelines in an objective and consistent manner across client accounts, based on internal and external research and recommendations provided by a third party vendor, and without consideration of any client relationship factors. Further, we engage a third party as an independent fiduciary to vote all proxies for Mellon securities and Fund securities. PERSONAL TRADING Potential Conflict: There is an inherent conflict where a portfolio manager manages personal accounts alongside client accounts. Further, there is a conflict where other employees in the firm know of portfolio decisions in advance of trade execution and could potentially use this information to their advantage and to the disadvantage of The Boston Company's clients. - Subject to the personal Securities Trading Policy, employees of The Boston Company may buy and sell securities which are recommended to its clients; however, no employee is permitted to do so (a) where such purchase or sale would affect the market price of such securities, or (b) in anticipation of the effect of such recommendation on the market price. - Consistent with the Securities Trading Policy relating to Investment Employees (which includes all Access Persons), approval will be denied for sales/purchases of securities for which investment transactions are pending and, at minimum, for two business days after transactions for the security were completed for client accounts. Portfolio Statement of Additional Information - Nov. 29, 2007 Page 122 managers are prohibited from trading in a security for seven days before and after transactions in that security are completed for client accounts managed by that Portfolio Manager. SOFT DOLLARS Potential Conflict: Use of client commissions to pay for services that benefit The Boston Company and not client accounts. - It is the policy of The Boston Company to enter into soft-dollar arrangements in a manner which will ensure the availability of the safe harbor provided by Section 28(e) of the Securities Exchange Act of 1934 and which will ensure that the firm meets its fiduciary obligations for seeking to obtain best execution for its clients. All soft dollar services are justified in writing by the user specifically noting how the service will assist in the investment decision making process and approved in advance by the Soft Dollar Committee. CONSULTANT BUSINESS Potential Conflict: Many of our clients retain consulting firms to assist them in selecting investment managers. Some of these consulting firms provide services to both those who hire investment managers (i.e., clients) and to investment management firms. The Boston Company may pay to attend conferences sponsored by consulting firms and/or purchase services from consulting firms where it believes those services will be useful to it in operating its investment management business. - The Boston Company does not pay referral fees to consultants. GIFTS Potential Conflict: Where investment personnel are offered gifts or entertainment by business associates that assist them in making or executing portfolio decisions or recommendations for client accounts a potential conflict exists. The Code of Conduct sets forth broad requirements for accepting gifts and entertainment. The Boston Company's Gift Policy supplements the Code of Conduct and provides further clarification for The Boston Company employees. - The Boston Company has established a Gift Policy that supplements the Mellon Code of Conduct. Gifts received with a face value under $100 may be accepted so long as they are not intended to influence. It is imperative that common sense and good judgment be used when accepting gifts in the course of business. For gifts accepted in accordance with the Gift Policy and the Mellon Code of Conduct with a face value over $100, The Boston Company has determined that it is in the best interest of the firm and its employees that any amount over $100 shall be donated to a 501(c)(3) charitable organization of the employee's choice. (23) Portfolio managers at Marsico Capital Management, LLC (MCM) typically manage multiple accounts. These accounts may include, among others, mutual funds, separate accounts (assets managed on behalf of institutions such as pension funds, colleges and universities, foundations, and accounts managed on behalf of individuals), and commingled trust accounts. Portfolio managers make investment decisions for each portfolio based on the investment objectives, policies, practices and other relevant investment considerations that the managers believe are applicable to that portfolio. Consequently, portfolio managers may purchase (or sell) securities for one portfolio and not another portfolio, or may take similar actions for different portfolios at different times. As a result, the mix of securities purchased in one portfolio may perform better than the mix of securities purchased for another portfolio. Similarly, the sale of securities from one portfolio may cause that portfolio to perform better than others if the value of those securities decline. Potential conflicts of interest may also arise when allocating and/or aggregating trades. MCM often aggregates into a single trade order several individual contemporaneous client trade orders in a single security. Under MCM's trade management policy and procedures, when trades are aggregated on behalf of more than one account, such transactions will be allocated to all participating client accounts in a fair and equitable manner. With respect to IPOs and other syndicated or limited offerings, it is MCM's policy to seek to ensure that over the long term, accounts with the same or similar investment objectives will receive an equitable opportunity to participate meaningfully and will not be unfairly disadvantaged. To deal with these situations, MCM has adopted policies and procedures for allocating transactions across multiple accounts. MCM's policies also seek to ensure that portfolio managers do not systematically allocate other types of trades in a manner that would be more beneficial to one account than another. MCM's compliance department monitors transactions made on behalf of multiple clients to seek to ensure adherence to its policies. As discussed above, MCM has adopted and implemented policies and procedures that seek to minimize potential conflicts of interest that may arise as a result of a portfolio manager advising multiple accounts. In addition, MCM monitors a variety of areas, including compliance with primary Fund guidelines, the allocation of securities, and compliance with its Code of Ethics. (24) As an investment adviser and fiduciary, AllianceBernstein owes its clients and shareholders an undivided duty of loyalty. We recognize that conflicts of interest are inherent in our business and accordingly have developed policies and procedures (including oversight monitoring) reasonably designed to detect, manage and mitigate the effects of actual or Statement of Additional Information - Nov. 29, 2007 Page 123 potential conflicts of interest in the area of employee personal trading, managing multiple accounts for multiple clients, including AllianceBernstein Mutual Funds, and allocating investment opportunities. Investment professionals, including portfolio managers and research analysts, are subject to the above-mentioned policies and oversight monitoring to ensure that all clients are treated equitably. We place the interests of our clients first and expect all of our employees to meet their fiduciary duties. Employee Personal Trading AllianceBernstein has adopted a Code of Business Conduct and Ethics that is designed to detect and prevent conflicts of interest when investment professionals and other personnel of AllianceBernstein own, buy or sell securities which may be owned by, or bought or sold for, clients. Personal securities transactions by an employee may raise a potential conflict of interest when an employee owns or trades in a security that is owned or considered for purchase or sale by a client, or recommended for purchase or sale by an employee to a client. Subject to the reporting requirements and other limitations of its Code of Business Conduct and Ethics, AllianceBernstein permits its employees to engage in personal securities transactions, and also allows them to acquire investments in the AllianceBernstein Mutual Funds through direct purchase, 401K/profit sharing plan investment and/or notionally in connection with deferred incentive compensation awards. AllianceBernstein's Code of Ethics and Business Conduct requires disclosure of all personal accounts and maintenance of brokerage accounts with designated broker-dealers approved by AllianceBernstein. The Code also requires preclearance of all securities transactions and imposes a one-year holding period for securities purchased by employees to discourage short-term trading. Managing Multiple Accounts for Multiple Clients AllianceBernstein has compliance policies and oversight monitoring in place to address conflicts of interest relating to the management of multiple accounts for multiple clients. Conflicts of interest may arise when an investment professional has responsibilities for the investments of more than one account because the investment professional may be unable to devote equal time and attention to each account. The investment professional or investment professional teams for each client may have responsibilities for managing all or a portion of the investments of multiple accounts with a common investment strategy, including other registered investment companies, unregistered investment vehicles, such as hedge funds, pension plans, separate accounts, collective trusts and charitable foundations. Among other things, AllianceBernstein's policies and procedures provide for the prompt dissemination to investment professionals of initial or changed investment recommendations by analysts so that investment professionals are better able to develop investment strategies for all accounts they manage. In addition, investment decisions by investment professionals are reviewed for the purpose of maintaining uniformity among similar accounts and ensuring that accounts are treated equitably. No investment professional that manages client accounts carrying performance fees is compensated directly or specifically for the performance of those accounts. Investment professional compensation reflects a broad contribution in multiple dimensions to long-term investment success for our clients and is not tied specifically to the performance of any particular client's account, nor is it directly tied to the level or change in the level of assets under management. Allocating Investment Opportunities AllianceBernstein has policies and procedures intended to address conflicts of interest relating to the allocation of investment opportunities. These policies and procedures are designed to ensure that information relevant to investment decisions is disseminated promptly within its portfolio management teams and investment opportunities are allocated equitably among different clients. The investment professionals at AllianceBernstein routinely are required to select and allocate investment opportunities among accounts. Portfolio holdings, position sizes, and industry and sector exposures tend to be similar across similar accounts, which minimizes the potential for conflicts of interest relating to the allocation of investment opportunities. Nevertheless, investment opportunities may be allocated differently among accounts due to the particular characteristics of an account, such as size of the account, cash position, tax status, risk tolerance and investment restrictions or for other reasons. AllianceBernstein's procedures are also designed to prevent potential conflicts of interest that may arise when AllianceBernstein has a particular financial incentive, such as a performance-based management fee, relating to an account. An investment professional may perceive that he or she has an incentive to devote more time to developing and analyzing investment strategies and opportunities or allocating securities preferentially to accounts for which AllianceBernstein could share in investment gains. To address these conflicts of interest, AllianceBernstein's policies and procedures require, among other things, the prompt dissemination to investment professionals of any initial or changed investment recommendations by analysts; the aggregation of orders to facilitate best execution for all accounts; price averaging for all aggregated orders; objective allocation for limited investment opportunities (e.g., on a rotational basis) to ensure fair and equitable allocation among accounts; and limitations on short sales of securities. These procedures also require documentation and review of Statement of Additional Information - Nov. 29, 2007 Page 124 justifications for any decisions to make investments only for select accounts or in a manner disproportionate to the size of the account. (25) AIG Global Investment Corp. ("AIGGIC") aims to conduct its activities in such a manner that permits it to deal fairly with each of its clients on an overall basis in accordance with applicable securities laws and fiduciary obligations. In that regard, AIGGIC has adopted and implemented policies and procedures, including brokerage and trade allocation policies and procedures, which AIGGIC believes address the conflicts associated with managing multiple accounts for multiple clients (including affiliated clients). AIGGIC also monitors a variety of areas, including compliance with guidelines of the Fund and other accounts it manages and compliance with AIGGIC's Code of Ethics. Furthermore, AIGGIC's management periodically reviews the performance of a portfolio manager. Although AIGGIC does not track the time a portfolio manager spends on a single portfolio, AIGGIC does periodically assess whether a portfolio manager has adequate time and resources to effectively manage all of such portfolio manager's accounts. (26) Actual or potential conflicts may arise in managing multiple client accounts. A brief description of some of the potential conflicts of interest and compliance factors that may arise as a result is included below. We do not believe any of these potential conflicts of interest and compliance factors pose significant risk to any client account. Allocation of Limited Investment Opportunities If an investment team identifies a limited investment opportunity (including initial public offerings) that may be suitable for multiple client accounts, each account may not be able to take full advantage of that opportunity due to liquidity constraints or other factors. Batterymarch has adopted policies and procedures designed to ensure that allocations of limited investment opportunities are conducted in a fair and equitable manner between client accounts. Although Batterymarch strives to ensure that client accounts managed under similar investment mandates have similar portfolio characteristics, Batterymarch does not "clone" client accounts (i.e., assemble multiple client accounts with identical portfolios of securities). As a result, the portfolio of securities held in any single client account may perform better or worse than the portfolio of securities held in another similarly managed client account. Allocation of Partially-Filled Transactions in Securities Batterymarch often aggregates for execution as a single transaction orders for the purchase or sale of a particular security for multiple client accounts. If Batterymarch is unable to fill an aggregated order completely, but receives a partial fill, Batterymarch will typically allocate the transactions relating to the partially filled order to clients on a pro-rata basis with a minimum fill size. Batterymarch may make exceptions from this general policy from time to time based on factors such as the availability of cash, country/regional/sector allocation decisions, investment guidelines and restrictions, and the costs for minimal allocation actions. Opposite (i.e., Contradictory) Transactions in Securities Batterymarch provides investment advisory services for various clients and under various investment mandates and may give advice, and take action, with respect to any of those clients that may differ from the advice given, or the timing or nature of action taken, with respect to any other individual client account. In the course of providing advisory services, Batterymarch may simultaneously recommend the sale of a particular security for one client account while recommending the purchase of the same or a similar security for another account. This may occur for a variety of reasons. For example, in order to raise cash to handle a redemption/withdrawal from a client account, Batterymarch may be forced to sell a security that is ranked a "buy" by its stock selection model. Certain Batterymarch portfolio managers that manage long-only portfolios also manage portfolios that sell securities short. As such, Batterymarch may purchase or sell a security in one or more of its long-only portfolios under management during the same day it executes an opposite transaction in the same or a similar security for one or more of its portfolios under management that hold securities short, and certain Batterymarch client account portfolios may contain securities sold short that are simultaneously held as long positions in certain of the long- only portfolios managed by Batterymarch. The stock selection model(s), risk controls and portfolio construction rules used by Batterymarch to manage its clients' long-only portfolios differ from the model and rules that are used to manage client account portfolios that hold securities short. Because different stock selection models, risk controls and portfolio construction rules are used, it is possible that the same or similar securities may be ranked differently for different mandates and that the timing of trading in such securities may differ. Batterymarch has created certain compliance policies and procedures designed to minimize harm from such contradictory activities/events. Selection of Brokers/Dealers In selecting a broker or dealer, Batterymarch may choose a broker whose commission rate is in excess of that which another broker might have charged for the same transaction, based upon Batterymarch's judgment of that broker's superior execution capabilities and/or as a result of Batterymarch's perceived value of the broker's research services. Statement of Additional Information - Nov. 29, 2007 Page 125 Although Batterymarch does not participate in any traditional soft dollar arrangements whereby a broker purchases research from a third party on Batterymarch's behalf, Batterymarch does receive proprietary research services from brokers. Batterymarch generally seeks to achieve trade executions with brokers of the highest quality and at the lowest possible cost, although there can be no assurance that this objective will always be achieved. Batterymarch does not enter into any arrangements with brokers, formal or otherwise, regarding order flow as a result of research received. Clients should consider that there is a potential conflict of interest between their interests in obtaining best execution and an investment adviser's receipt of research from brokers selected by the investment adviser for trade executions. The proprietary research services which Batterymarch obtains from brokers may be used to service all of Batterymarch's clients and not just those clients paying commissions to brokers providing those research services, and not all proprietary research may be used by Batterymarch for the benefit of the one or more client accounts which paid commissions to a broker providing such research. Personal Securities Transactions Batterymarch allows its employees to trade in securities that it recommends to advisory clients. Batterymarch's supervised persons, to the extent not prohibited by Batterymarch's Code of Ethics, may buy, hold or sell securities or investment products (including interests in partnerships and investment companies) at or about the same time that Batterymarch is purchasing, holding or selling the same or similar securities or investment products for client account portfolios and the actions taken by such persons on a personal basis may be, or may be deemed to be, inconsistent with the actions taken by Batterymarch for its client accounts. Clients should understand that these activities may create a conflict of interest between Batterymarch, its supervised persons and its clients. Batterymarch employees may also invest in mutual funds that are managed by Batterymarch. This may result in a potential conflict of interest since Batterymarch employees have knowledge of such funds' investment holdings, which is non-public information. To address this, Batterymarch has adopted a written Code of Ethics designed to prevent and detect personal trading activities that may interfere or conflict with client interests (including shareholders' interests in funds managed by Batterymarch). Batterymarch and certain Batterymarch employees may also have ownership interests in certain other client accounts, including pooled investment vehicles, that invest in long and short positions. Firm and employee ownership of such accounts may create additional potential conflicts of interest for Batterymarch. Although Batterymarch believes that its policies and procedures are appropriate to prevent, eliminate or minimize the harm of many potential conflicts of interest between Batterymarch, its related persons and clients, clients should be aware that no set of policies and procedures can possibly anticipate or relieve all potential conflicts of interest. Moreover, it is possible that additional potential conflicts of interest may exist that Batterymarch has not identified in the summary above. (27) Systematic Financial Management, L.P. is an affiliated firm of Affiliated Managers Group, Inc. (AMG). The AMG Affiliates do not formulate advice for Systematic's clients and do not, in Systematic's view, present any potential conflict of interest with Systematic's clients. Portfolio managers oversee the investment of various types of accounts in the same strategy such as mutual funds, pooled investment vehicle and separate accounts for individuals and institutions. Investment decisions generally are applied to all accounts utilizing that particular strategy taking into consideration client restrictions, instructions and individual needs. A portfolio manager may manage an account whose fees may be higher or lower than the basic fee schedule to provide for varying client circumstances. Management of multiple funds and accounts may create potential conflicts of interest relating to the allocation of investment opportunities, and the aggregation and allocation of client trades. Conflicts of interest, including employee personal securities trading, security selection, proxy voting and security allocation, those more material in nature, may arise as a result of providing advisory services to a diverse group of clients invested in various strategies. To avoid such potential conflicts and harm to Systematic's clients, Systematic has adopted policies and procedures, including but not limited to, its Code of Ethics, which addresses personal securities trading, Proxy Voting and Trade Error Policies, which are accompanied by periodic testing and reviews, and are reasonably designed to detect such conflicts and protect the interests of its clients. (28) During the normal course of managing assets for multiple clients of varying types and asset levels, WEDGE will inevitably encounter conflicts of interest that could, if not properly addressed, be harmful to one or more of its clients. Those of a material nature that are encountered most frequently surround security selection, brokerage selection, employee personal securities trading, proxy voting and the allocation of securities. WEDGE is therefore forced to consider the possible personal conflicts that occur for an analyst and portfolio manager as well as those for the firm when a security is recommended for purchase or sale. When trading securities, WEDGE must address the issues surrounding the selection of brokers to execute trades considering the personal conflicts of the trader and the firm's conflict to obtain best execution of client transactions versus offsetting the cost of research or selfishly enhancing its Statement of Additional Information - Nov. 29, 2007 Page 126 relationship with a broker/consultant for potential future gain. And finally, WEDGE must consider the implications that a limited supply or demand for a particular security poses on the allocation of that security across accounts. To mitigate these conflicts and ensure its clients are not negatively impacted by the adverse actions of WEDGE or its employees, WEDGE has implemented a series of policies including its Personal Security Trading Policy, Proxy Voting Policy, Equity Trading Policy, Trading Error Policy, and others designed to prevent and detect conflicts when they occur. WEDGE reasonably believes that these and other policies combined with the periodic review and testing performed by its compliance professionals adequately protects the interests of its clients. STRUCTURE OF COMPENSATION (29) The compensation of RiverSource Investments employees consists of (i) a base salary, (ii) an annual cash bonus, and (iii) equity incentive awards in the form of stock options and/or restricted stock. The annual cash bonus is based on management's assessment of the employee's performance relative to individual and business unit goals and objectives which, for portfolio managers Joy, Keeley and Truscott, may be based, in part, on achieving certain investment performance goals and retaining and attracting assets under management, and for portfolio manager Bergene, on developing competitive products, managing existing products, and selecting and monitoring subadvisers for RiverSource funds. In addition, subject to certain vesting requirements, the compensation of portfolio managers Joy, Keeley and Truscott, includes an annual award based on the performance of Ameriprise Financial over rolling three-year periods. RiverSource Investments' portfolio managers are provided with a benefit package including life insurance, health insurance and participation in the company's 401(k) plan comparable to that received by other RiverSource Investments employees. Depending upon their job level, RiverSource Investments' portfolio managers may also be eligible for other benefits or perquisites that are available to all RiverSource Investments employees at the same job level. (30) Portfolio manager compensation is typically comprised of (i) a base salary, (ii) an annual cash bonus, a portion of which may be subject to a mandatory deferral program, and may include (iii) an equity incentive award in the form of stock options and/or restricted stock. The annual bonus is paid from a team bonus pool that is based on the performance of the accounts managed by the portfolio management team, which might include mutual funds, institutional portfolios and hedge funds. Funding for the bonus pool for equity portfolio managers is determined by a percentage of the aggregate assets under management in the accounts managed by the portfolio managers, including the fund, plus, where applicable, a percentage of the assets of the funds they support as research analysts*, and by the short term (typically one-year) and long- term (typically three year) performance of those accounts in relation to the relevant peer group universe. Funding for the bonus pool for fixed income portfolio managers is determined by the aggregate market competitive bonus targets for the teams of which the portfolio manager is a member and by the short-term (typically one year) and long-term (typically three year) performance of those accounts in relation to applicable benchmarks or the relevant peer group universe. Bonus pool funding for Lynn Hopton and Yvonne Stevens, is based upon a percentage of profits generated by the institutional portfolios they manage. Lynn Hopton and Yvonne Stevens may also be paid from a bonus pool based upon the performance of the mutual fund(s) they manage. Funding for this bonus pool is determined by a percentage of the aggregate assets under management in the mutual fund(s) they manage, and by the short term (typically one-year) and long-term (typically three year) performance of the mutual fund(s) in relation to the relevant peer group universe. With respect to hedge funds and separately managed accounts that follow a hedge fund mandate, funding for the bonus pool is a percentage of performance fees earned on the hedge funds or accounts managed by the portfolio managers, plus, where applicable, a percentage of performance fees earned on the hedge funds or accounts they support as research analysts*. Senior management of RiverSource Investments has the discretion to increase or decrease the size of the part of the bonus pool and to determine the exact amount of each portfolio manager's bonus paid from this portion of the bonus pool based on his/her performance as an employee. In addition, where portfolio managers invest in a hedge fund managed by the investment manager, they receive a cash reimbursement for the fees charged on their hedge fund investments. Senior management of RiverSource Investments does not have discretion over the size of the bonus pool related to institutional portfolios managed by Lynn Hopton and Yvonne Stevens. RiverSource Investments portfolio managers are provided with a benefits package, including life insurance, health insurance, and participation in a company 401(k) plan, comparable to that received by other RiverSource Investments employees. Depending upon their job level, RiverSource Investments portfolio managers may also be eligible for other benefits or perquisites that are available to all RiverSource Investments employees at the same job level. (31) As an employer, UBS Global Asset Management operates within a highly competitive compensation environment. To review industry comparatives, we measure our compensation structures against benchmark data of competitors provided - ---------- * The portfolio managers that currently support funds as research analysts are: Clay Hoes, Julene Melquist, Sam Murphy and Mike Marzolf. Statement of Additional Information - Nov. 29, 2007 Page 127 by McLagan Partners, the industry standard provider for compensation measurement and assessment, on an annual basis. We also perform compensation analysis on an as-needed basis, e.g., when bringing new employees into the organization, or when the market shifts and we need to consider adjustments for retention purposes. Our Global Head of Compensation works closely with our parent company and various data sources to validate our procedures and assumptions. Our compensation and benefits programs are designed to provide our investment professionals with incentives to excel, and to promote an entrepreneurial, performance-oriented culture. They also align the interests of our investment professionals with the interests of our clients. Overall compensation can be grouped into four categories: 1. Competitive salary, benchmarked annually to maintain very competitive compensation opportunities. 2. Annual bonus, tied to individual contributions and investment performance. 3. Analyst incentives, tied to performance of model portfolios. 4. UBS equity awards, promoting company-wide success and employee retention. Base salary is used to recognize the experience, skills and knowledge that our investment professionals bring to their roles. Salary levels are monitored and adjusted periodically in order to remain competitive within the investment management industry. Annual bonuses are strictly and rigorously correlated with performance. As such, annual incentives can be highly variable, and are based on three components: 1) the firm's overall business success; 2) the performance of the respective asset class and/or investment mandate; and 3) an individual's specific contribution to the firm's results. We strongly believe that tying bonuses to both long-term (3-year) and shorter-term (1-year) portfolio performance closely aligns our investment professionals' interests with those of our clients. Analyst Incentives. Because we value our proprietary research, we have designed a compensation system that has made investment analysis a highly regarded career within our firm. Grouped into 12 global sector teams, our analysts manage model portfolios in global and local sectors. Our portfolio managers use the model sector portfolios to build actual client portfolios. Analyst incentives are tied to the performance of the model portfolios, which we evaluate over rolling three-year periods. One-third of each analyst's rating is based upon the performance of the model global sector portfolio; one-third on the model local sector portfolio; and one-third is a qualitative assessment of their contribution. We believe that this system closely aligns our analysts' incentives with our clients. UBS AG equity. Many of our senior investment professionals are required to defer a portion of their annual performance-based incentive in the form of deferred or restricted UBS AG shares or employee stock options. Not only does this reinforce the critical importance of creating long- term business value, it also serves as an effective retention tool as the equity shares typically vest over a number of years. Broader equity share ownership is encouraged for all employees through "Equity Plus". This long-term incentive program gives employees the opportunity to purchase UBS stock with after-tax funds from their bonus or salary. Two UBS stock options are given for each share acquired and held for two years. We feel this engages our employees as partners in the firm's success, and helps to maximize our integrated business strategy. (32) Turner's investment professionals receive a base salary commensurate with their level of experience. Turner's goal is to maintain competitive base salaries through review of industry standards, market conditions, and salary surveys. Bonus compensation, which is a multiple of base salary, is based on the performance of each individual's sector and portfolio assignments relative to appropriate market benchmarks. In addition, each employee is eligible for equity ownership and equity owners share the firm's profits. Most of the members of the Investment Team and all Portfolio Managers for The Funds, are equity owners of Turner. This compensation and ownership structure provides incentive to attract and retain highly qualified people, as each member of the firm has the opportunity to share directly in the accomplishments of the business. The objective performance criteria noted above accounts for 90% of the bonus calculation. The remaining 10% is based upon subjective, "good will" factors including teamwork, interpersonal relations, the individual's contribution to overall success of the firm, media and client relations, presentation skills, and professional development. Portfolio managers/analysts are reviewed on an annual basis. The Chief Investment Officer is responsible for setting base salaries, bonus targets, and making all subjective judgments related to an investment professionals' compensation. The CIO is also responsible for identifying investment professionals that should be considered for equity ownership on an annual basis. (33) The professionals at Essex are compensated by a three-tiered approach. First, all of the investment professionals have industry-competitive base salaries and receive a percentage of the firm's profits through a profit-sharing/pension plan. Second, Essex's professionals receive a year-end bonus based on the portfolio's performance on an absolute basis as well as relative to our peers and benchmarks. Third, Essex offers a competitive benefit package including comprehensive family health coverage. Statement of Additional Information - Nov. 29, 2007 Page 128 Portfolio managers, specifically those that are Principals of the firm, are evaluated on the basis of two components: (1) overall performance of the firm and (2) performance of his or her managed portfolios. Overall performance of the firm is the overriding measure by which Principals are evaluated. A lesser weighting, but certainly one of importance, is the portfolio's performance, which is measured in terms of absolute, benchmark-relative and competitor-relative performance. An analyst's evaluation consists of three components: the performance of the portfolio, production/work ethic/communications, and teamwork. The performance of the portfolio is measured in terms of both absolute performance, as well as relative performance to that of the comparative benchmark and peer group. Productivity, work ethic, and communication is very much a qualitative measure and is first and foremost a comprehensive assessment of how individual analysts generate stock ideas. It is an assessment of the number of names that are looked at, knowledge of those names, the frequency with which the analyst's recommendations are incorporated into the portfolio and the analyst's overall preparedness for coverage meetings. Teamwork is another rather qualitative element of the evaluation. It is a measurement of an individual analyst's functioning within the team largely in terms of cooperation, collaboration, and the sharing of ideas. An analyst's evaluation plays a part, in addition to the performance of the overall firm, in determining the size of his or her bonus, which typically ranges from 25% - 150% of base salary. Each trader at Essex is evaluated annually by the firm's Chief Executive Officers. The two Chief Executive Officers examine several factors such as: number of errors, obtaining best execution, opinions of our portfolio managers, etc. A trader's performance evaluation contributes to 25% - 30% of his or her total pay. As an added retention mechanism, Essex offers ownership to both existing and prospective employees. The current ownership structure allows Essex to capitalize a portion of its free cash flow each year and transform it into stock ownership. Essex envisions granting ownership as an additional incentive to the employees who contribute the greatest to the firm's future success. We feel that our compensation structure is extremely competitive when compared with other firms in the industry. Finally, Essex offers a deferred compensation plan for certain employees by way of granting them a Special Recognition Award. Essex maintains a fundamental team approach that encourages continuity among its investment professionals and makes a conscious effort to reward its team members accordingly. Our investment professionals are continuously motivated by our compensation structure, competitive personnel benefit packages, and entrepreneurial-like culture. (34) Dr. David Goldsmith is paid a fixed base salary and a variable annual incentive. Base salary is determined within a market competitive position-specific salary range, based on the portfolio manager's experience and performance. For purposes of calculating the annual incentive amount, each mutual fund and institutional account managed by the Adviser is categorized as reflecting one of several designated "Strategies." The annual incentive amount is based on current calendar year asset-weighted composite investment performance of each Strategy, which is measured on a total return basis gross of fees and expenses vs. the Strategy's designated benchmark (i.e., with respect to the Fund's Strategy, Russell 2000 Growth Index). Dr. Goldsmith is also the portfolio manager for other accounts in addition to the Fund. Such other accounts may be categorized as reflecting different Strategies, which may have different benchmarks. Although the performance of each Strategy composite is considered in calculating the annual incentive amount, their relative weightings differ. The performance of one of the other Strategies (which does not include the Fund in its composite performance) represents a significant portion of the calculation. The remaining Strategies are divided into two groups, with each Strategy within a group receiving equal weighting. The Strategy to which the Fund is assigned and the other Strategies in the same group receive higher weighting than Strategies in the other group. As a separate matter, pursuant to the terms of a business acquisition agreement, investment professionals hired before the acquisition may receive additional consideration based on the achievement of specified revenue targets. (35) Messrs. Hurwitz and Kelley are both equity owners of Kenwood. Their compensation consists of a salary, plus a pro rata share of the annual net earnings of Kenwood, some of which derives from fees paid by the fund. Messrs. Hurwitz and Kelley are provided with a benefits package, including life insurance, health insurance, and participation in a company 401(k) plan, comparable to that received by other employees of Kenwood. Messrs. Hurwitz and Kelley are also eligible for certain benefits that are available to all equity owners of Kenwood. (36) The compensation of American Century's portfolio managers is structured to align the interests of portfolio managers with those of the shareholders whose assets they manage. It includes the components described below, each of which is determined with reference to a number of factors, such as overall performance, market competition, and internal equity. Compensation is not directly tied to the value of assets held in client portfolios. Base Salary Portfolio managers receive base pay in the form of a fixed annual salary. Statement of Additional Information - Nov. 29, 2007 Page 129 Bonus A significant portion of portfolio manager compensation takes the form of an annual incentive bonus tied to performance. Bonus payments are determined by a combination of factors. One factor is fund investment performance. For policy portfolios, investment performance is measured by a combination of one- and three-year pre-tax performance relative to a pre-established, internally-customized peer group and/or market benchmark. Custom peer groups are constructed using all the funds in appropriate Lipper or Morningstar categories as a starting point. Funds are then eliminated from the peer group based on a standardized methodology designed to result in a final peer group that more closely represents the fund's true peers based on internal investment mandates and that is more stable (i.e., has less peer turnover) over the long- term. In cases where a portfolio manager has responsibility for more than one policy portfolio, the performance of each is assigned a percentage weight commensurate with the portfolio manager's level of responsibility. With regard to tracking portfolios, investment performance may be measured in a number of ways. The performance of the tracking portfolio may be measured against a customized peer group and/or market benchmark as described above for policy portfolios. Alternatively, the tracking portfolio may be evaluated relative to the performance of its policy portfolio, with the goal of matching the policy portfolio's performance as closely as possible. This is the case for the Small Cap Equity Fund. In some cases, the performance of a tracking portfolio is not separately considered. Rather, the performance of the policy portfolio is the key metric. This is the case for the Aggressive Growth Fund. A second factor in the bonus calculation relates to the performance of all American Century funds managed according to a particular investment style, such as U.S. growth or value. Performance is measured for each product individually as described above and then combined to create an overall composite for the product group. These composites may measure one-year performance (equal weighted) or a combination of one- and three-year performance (asset weighted) depending on the portfolio manager's responsibilities and products managed. This feature is designed to encourage effective teamwork among portfolio management teams in achieving long-term investment success for similarly styled portfolios. A portion of some portfolio managers' bonuses may be tied to individual performance goals, such as research projects and the development of new products. Finally, portfolio manager bonuses may occasionally be affected by extraordinarily positive or negative financial performance by American Century Companies, Inc. (ACC), the advisor's privately-held parent company. This feature has been designed to maintain investment performance as the primary component of portfolio manager bonuses while also providing a link to the advisor's ability to pay. Restricted Stock Plans Portfolio managers are eligible for grants of restricted stock of ACC. These grants are discretionary, and eligibility and availability can vary from year to year. The size of an individual's grant is determined by individual and product performance as well as other product-specific considerations. Grants can appreciate/depreciate in value based on the performance of the ACC stock during the restriction period (generally three years). Deferred Compensation Plans Portfolio managers are eligible for grants of deferred compensation. These grants are used in very limited situations, primarily for retention purposes. Grants are fixed and can appreciate/depreciate in value based on the performance of the American Century mutual funds in which the portfolio manager chooses to invest them. (37) GSAM's Growth Team's (the "Growth Team") compensation packages for its portfolio managers are comprised of a base salary and performance bonus. The performance bonus is first and foremost tied to the Growth Team's pre-tax performance for its clients and the Growth Team's total revenues for the past year which in part is derived from advisory fees and for certain accounts, performance based fees. The Growth Team measures its performance on a market cycle basis which is typically measured over a three to seven year period, rather than being focused on short term gains in its strategies or short term contributions from a portfolio manager in any given year. The performance bonus for portfolio managers is significantly influenced by the following criteria: (1) whether the team performed consistently with objectives and client commitments; (2) whether the team's performance exceeded performance benchmarks over a market cycle; (3) consistency of performance across accounts with similar profiles; and (4) communication with other portfolio managers within the research process. Benchmarks for measuring performance can either be broad based or narrow based indices which will vary based on client expectations. The Growth Team also considers each portfolio manager's individual performance, his or her contribution to the overall performance of the strategy long-term and his/her ability to work as a member of the Team. The Growth Team's Statement of Additional Information - Nov. 29, 2007 Page 130 decision may also be influenced by the following: the performance of GSAM, the profitability of Goldman, Sachs & Co. ("Goldman Sachs") and anticipated compensation levels among competitor firms. Other Compensation. In addition to base salary and performance bonus, GSAM has a number of additional benefits/deferred compensation programs for all portfolio managers in place including: (i) a 401k program that enables employees to direct a percentage of their pretax salary and bonus income into a tax-qualified retirement plan; (ii) a profit sharing program to which Goldman Sachs makes a pretax contribution; and (iii) investment opportunity programs in which certain professionals are eligible to participate subject to certain net worth requirements. Portfolio managers may also receive grants of restricted stock units and/or stock options as part of their compensation. Certain GSAM portfolio managers may also participate in the firm's Partner Compensation Plan, which covers many of the firm's senior executives. In general, under the Partner Compensation Plan, participants receive a base salary and a bonus (which may be paid in cash or in the form of an equity-based award) that is linked to Goldman Sachs' overall financial performance. (38) The funds pay Wellington Management a fee based on the assets under management of the fund as set forth in the Subadvisory Agreement between Wellington Management and Ameriprise Financial, Inc. with respect to each fund. Wellington Management pays its investment professionals out of its total revenues and other resources, including the advisory fees earned with respect to each fund. The following information relates to the fiscal year ended May 31, 2007. Wellington Management's compensation structure is designed to attract and retain high-caliber investment professionals necessary to deliver high quality investment management services to its clients. Wellington Management's compensation of the Investment Professionals includes a base salary and incentive components. The base salary for each Investment Professional who is a partner of Wellington Management is determined by the Managing Partners of the firm. A partner's base salary is generally a fixed amount that may change as a result of an annual review. The base salary for all other Investment Professionals is determined by their experience and performance in their role as an Investment Professional. Base salaries for employees are reviewed annually and may be adjusted based on the recommendation of the Investment Professional's business manager, using guidelines established by Wellington Management's Compensation Committee, which has final oversight responsibility for base salaries for employees of the firm. Each Investment Professional is eligible to receive an incentive payment based on the revenues earned by Wellington Management from the fund managed by the Investment Professional and generally each other portfolio managed by such Investment Professional. Each Investment Professional's incentive payment relating to the Funds is linked to the gross pre-tax performance of the Funds compared to the benchmark or peer group identified below over one and three year periods, with an emphasis on three year results. Wellington Management applies similar incentive structures (although the benchmarks or peer groups, time periods and rates may differ) to other portfolios managed by the Investment Professional, including portfolios with performance fees. Portfolio- based incentives across all portfolios managed by an Investment Professional can, and typically do, represent a significant portion of a Investment Professional's overall compensation; incentive compensation varies significantly by individual and can vary significantly from year to year. Some Investment Professionals are also eligible for bonus payments based on their overall contribution to Wellington Management's business operations. Senior management at Wellington Management may reward individuals as it deems appropriate based on factors other than portfolio performance. Each partner of Wellington Management is also eligible to participate in a partner-funded tax qualified retirement plan, the contributions to which are made pursuant to an actuarial formula, as a partner of the firm. Mr. Abrams, Boselli and Shilling are partners of the firm.
- ------------------------------------------------------------------ BENCHMARK INDEX AND/OR PEER GROUP FOR FUND INCENTIVE PERIOD - ------------------------------------------------------------------ Small Cap Equity Fund Russell 2000 Index - ------------------------------------------------------------------ Fundamental Growth Fund Russell 1000 Growth Index - ------------------------------------------------------------------
(39) Kenneth Feinberg's compensation as a Davis Advisors employee consists of (i) a base salary, (ii) an annual bonus equal to a percentage of growth in Davis Advisors' profits, (iii) awards of equity ("Units") in Davis Advisors including Units, options on Units, and/or phantom Units, and (iv) an incentive plan whereby Davis Advisors purchases shares in selected funds managed by Davis Advisors. At the end of specified periods, generally five years following the date of purchase, some, all, or none of the fund shares will be registered in the employee's name based on fund performance after expenses on a pre-tax basis versus the S&P 500 Index and versus peer groups as defined by Morningstar or Lipper. Davis Advisors' portfolio managers are provided benefits packages including life insurance, health insurance, and participation in company 401(k) plan comparable to that received by other company employees. Statement of Additional Information - Nov. 29, 2007 Page 131 Christopher Davis's annual compensation as an employee of Davis Advisors consists of a base salary. Davis Advisors' portfolio managers are provided benefits packages including life insurance, health insurance, and participation in company 401(k) plan comparable to that received by other company employees. (40) Lord Abbett compensates its portfolio managers on the basis of salary, bonus and profit sharing plan contributions. The level of compensation takes into account the portfolio manager's experience, reputation and competitive market rates. Fiscal year-end bonuses, which can be a substantial percentage of base level compensation, are determined after an evaluation of various factors. These factors include the portfolio manager's investment results and style consistency, the dispersion among funds with similar objectives, the risk taken to achieve the fund returns, and similar factors. Investment results are evaluated based on an assessment of the portfolio manager's three- and five-year investment returns on a pre-tax basis vs. both the appropriate style benchmarks and the appropriate peer group rankings. Finally, there is a component of the bonus that reflects leadership and management of the investment team. The evaluation does not follow a formulaic approach, but rather is reached following a review of these factors. No part of the bonus payment is based on the portfolio manager's assets under management, the revenues generated by those assets, or the profitability of the portfolio manager's unit. Lord Abbett does not manage hedge funds. Lord Abbett may designate a bonus payment of a manager for participation in the firm's senior incentive compensation plan, which provides for a deferred payout over a five-year period. The plan's earnings are based on the overall asset growth of the firm as a whole. Lord Abbett believes this incentive focuses portfolio managers on the impact their fund's performance has on the overall reputation of the firm as a whole and encourages exchanges of investment ideas among investment professionals managing different mandates. Lord Abbett provides a 401(k) profit-sharing plan for all eligible employees. Contributions to a portfolio manager's profit-sharing account are based on a percentage of the portfolio manager's total base and bonus paid during the fiscal year, subject to a specified maximum amount. The assets of this profit-sharing plan are entirely invested in Lord Abbett-sponsored funds. (41) All employees at Donald Smith & Co., Inc. are compensated on incentive plans. The compensation for portfolio managers, analysts and traders at Donald Smith consists of a base salary, a partnership interest in the firm's profits, and possibly an additional, discretionary bonus. This discretionary bonus can exceed 100% of the base salary if performance for clients exceeds established benchmarks. The current benchmark utilized is the Russell 2000 Value Index. Additional distribution of firm ownership is a strong motivation for continued employment at Donald Smith & Co., Inc. Administrative personnel are also given a bonus as a function of their contribution and the profitability of the firm. (42) FPA's portfolio managers are encouraged and expected to work as a team. Compensation is commensurate with their performance and that of the firm. The percentage of compensation derived from base salary, bonus and other incentives varies widely across the firm and is dependent on the area of responsibility and seniority of the employee. FPA feels that the salary component of its compensation structure is competitive with other investment managers. All of our investment professionals participate in a deferred compensation arrangement; they receive a share of the firm's profits which are allocated to an account, payable at a future point in time, provided they remain with the firm. (43) In addition to base salary, all portfolio managers and analysts share in a bonus pool that is distributed semi-annually. Analysts and portfolio managers are rated on their value added to the team-oriented investment process. Overall compensation applies with respect to all accounts managed and compensation does not differ with respect to distinct accounts managed by a portfolio manager. Compensation is not tied to a published or private benchmark. It is important to understand that contributions to the overall investment process may include not recommending securities in an analyst's sector if there are no compelling opportunities in the industries covered by that analyst. The compensation of portfolio managers is not directly tied to fund performance or growth in assets for any fund or other account managed by a portfolio manager and portfolio managers are not compensated for bringing in new business. Of course, growth in assets from the appreciation of existing assets and/or growth in new assets will increase revenues and profit. The consistent, long-term growth in assets at any investment firm is to a great extent, dependent upon the success of the portfolio management team. The compensation of the portfolio management team at the Adviser will increase over time, if and when assets continue to grow through competitive performance. (44) MetWest Capital's compensation system is designed not only to attract and retain experienced, highly qualified investment personnel, but also to closely align employees' interests with clients' interests. Compensation for investment professionals consists of a base salary, bonus, and generous benefits. Benefits include a comprehensive insurance benefits program (medical, vision and dental), 401(k) plan with an employer-matched contribution. A material portion of each such professional's annual compensation is in the form of a bonus tied to results relative to clients' benchmarks and overall client satisfaction. Bonuses may range from 20% to over 100% of salary. MetWest Capital's compensation system is not determined on an account- specific basis. Rather, bonuses are tied to overall firm profitability and composite performance relative to the benchmark. The primary benchmark for the Small Statement of Additional Information - Nov. 29, 2007 Page 132 Cap Intrinsic Value strategy is the Russell 2000 Value Index. To reinforce long-term focus, performance is measured over MetWest Capital's investment horizon (typically two to three years). Analysts are encouraged to maintain a long-term focus and are not compensated for the number of their recommendations that are purchased in the portfolio. Rather, their bonuses are tied to overall strategy performance. Mr. Lisenbee is an owner of MetWest Capital. As such, his compensation consists of a fixed salary and participation in the firm's profits. (45) The portfolio manager's compensation as a Threadneedle Investments employee consists of (i) a base salary, (ii) an annual cash bonus, and (iii) an equity incentive award in the form of stock options and/or restricted stock. The annual bonus is paid from a team bonus pool that is based on both mutual fund and institutional portfolio performance. Funding for the bonus pool is determined by the aggregate market competitive bonus targets for the teams of which the portfolio manager is a member and by the short-term (typically one year) and long-term (typically three year) performance of the accounts compared to applicable benchmarks. Senior management of Threadneedle Investments has the discretion to increase or decrease the size of the bonus pool and to determine the exact amount of each portfolio manager's bonus based on his/her performance as an employee. Threadneedle Investments portfolio managers are provided with a benefits package, including life insurance, health insurance, and participation in a company pension plan, comparable to that received by other Threadneedle Investments employees. Depending upon their job level, Threadneedle Investments portfolio managers may also be eligible for other benefits or perquisites that are available to all Threadneedle Investments employees at the same job level. (46) As of October 31, 2006, the portfolio managers receive all of their compensation from Columbia WAM and its parent company. P. Zachary Egan, and Louis J. Mendes each received compensation in the form of salary and bonus. In addition, Mr. Egan received a distribution in connection with his association with Columbia WAM prior to its acquisition in September 2000 and Columbia WAM's recent performance. Mr. Mendes participated in a supplemental pool for Columbia WAM employees that was established in connection with the acquisition of Columbia WAM and was based on Columbia WAM's recent performance. All analysts and portfolio managers have performance benchmarks. Analyst performance is compared to assigned industry or region stock performance within benchmark indices while portfolio manager performance is compared to entire benchmark indices. Performance compared to benchmark indices is the dominant performance evaluation factor for all analysts and managers. Industry (or country) weighting recommendations are the second most important factor for analysts. Other factors are assets managed, new analyst mentoring, teamwork, and managerial, marketing, compliance and other qualitative contributions. Analysts and managers are positioned in a number of compensation tiers based on cumulative performance. Excellent performance results in advancement to a higher tier each two or three years, until the highest tier is reached. Higher tiers have higher base compensation levels and wider bonus ranges. While cumulative performance places analysts and managers in tiers, current year performance drives changes in cash bonus levels. Cash incentive bonuses vary by tier, and can range between a fraction of base pay to several times base pay; the objective being to provide very competitive total compensation for high performers. Typically, a very high proportion of an analyst's or manager's bonus is paid in cash with a smaller proportion going into an investment program where the employee can select Columbia mutual funds as their investment vehicle. Bank of America restricted stock or options may also be part of an individual's compensation. These mutual fund investments and Bank of America restricted stock or options vest over three years. (47) Principal Global Investors offers all employees a competitive salary and incentive compensation plan that is evaluated annually. Percentages of base salary versus performance bonus vary by position but are based on nationally competitive market data and are consistent with industry standards. Total cash compensation is targeted at the median of the market and benefits are targeted slightly above median. The investment staff is compensated under a base salary plus variable annual bonus (incentive compensation). The incentive compensation plan for equity portfolio managers is 90% weighted to investment performance and 10% weighted to Principal Global Investors annual performance score. The target incentive for equity portfolio managers ranges from 150% to 350% of actual base earnings, depending on job level. - Investment performance is based on gross performance versus a benchmark, peer group or both, depending on the client mandate. - Performance versus peers is measured for a period up to three years (shorter if the portfolio manager has managed the respective portfolio for a period less than three years). - Versus the peer group, incentive payout starts at 49th percentile and reaches 100% at the 25th percentile for the 1, 2, and 3-year periods. 15% of incentive payout is achieved at 49th percentile. No payout is realized if performance is below 50th percentile. Statement of Additional Information - Nov. 29, 2007 Page 133 As a wholly owned subsidiary of Principal Financial Group, all Principal Global employees are eligible to participate in our Employee Stock Purchase Plan that allows them to purchase company stock at a 15% discount each quarter. In addition, through our 401(k) plan, employees are able to contribute to an Employee Stock Ownership Plan (ESOP) through which they can buy additional company stock. (48) The portfolio managers' cash compensation is comprised primarily of a market-based salary and incentive compensation plans (annual and long term incentive). Funding for the TBCAM Annual Incentive Plan and Long Term Incentive Plan is through a pre-determined fixed percentage of overall TBCAM profitability. Therefore, all bonus awards are based initially on TBCAM's financial performance. The portfolio managers are eligible to receive annual cash bonus awards from the Annual Incentive Plan. Annual incentive opportunities are pre-established for each individual, expressed as a percentage of base salary ("target awards"). Annual awards are determined by applying multiples to this target award (0-2 times target award represents a portfolio manager's range of opportunity) and are capped at a maximum range of incentive opportunity for the job category. Awards are 100% discretionary and regardless of performance will be subject to pool funding availability. Awards are paid in cash on an annual basis. A significant portion of the target opportunity awarded is based upon the one-year and three-year (weighted more heavily) pre-tax performance of the portfolio manager's accounts relative to the performance of the appropriate Lipper and Callan peer groups. Other factors considered in determining the award are individual qualitative performance and the asset size and revenue growth of the products managed. For research analysts and other investment professionals, awards are distributed to the respective product teams (in the aggregate) based upon product performance relative to TBCAM-wide performance measured on the same basis as described above. Further allocations are made to specific team members by the product portfolio manager based upon sector contribution and other qualitative factors. All portfolio managers and analysts are also eligible to participate in the TBCAM Long Term Incentive Plan. This plan provides for an annual award, payable in cash after a three-year cliff vesting period. The value of the award increases during the vesting period based upon the growth in TBCAM's net income (capped at 20% and with a minimum payout of the Mellon 3 year CD rate). (49) MCM's portfolio managers are generally subject to the compensation structure applicable to all MCM employees. As such, Mr. Gendelman's compensation consists of a base salary (reevaluated at least annually), and periodic cash bonuses. Bonuses are typically based on two primary factors: (1) MCM's overall profitability for the period, and (2) individual achievement and contribution. Portfolio manager compensation takes into account, among other factors, the overall performance of all accounts for which the manager provides investment advisory services. Portfolio managers do not receive special consideration based on the performance of particular accounts. Exceptional individual efforts are rewarded through greater participation in the bonus pool. Portfolio manager compensation comes solely from MCM. Although MCM may compare account performance with relevant benchmark indices, portfolio manager compensation is not directly tied to achieving any pre-determined or specified level of performance. In order to encourage a long-term time horizon for managing portfolios, MCM seeks to evaluate the portfolio manager's individual performance over periods longer than the immediate compensation period. In addition, portfolio managers are compensated based on other criteria, including effectiveness of leadership within MCM's Investment Team, contributions to MCM's overall investment performance, discrete securities analysis, and other factors. In addition to his salary and bonus, Mr. Gendelman may participate in other MCM benefits to the same extent and on the same basis as other MCM employees. (50) AllianceBernstein's compensation program for investment professionals is designed to be competitive and effective in order to attract and retain the highest caliber employees. The compensation program for investment professionals is designed to reflect their ability to generate long-term investment success for our clients, including shareholders of the AllianceBernstein Mutual Funds. Investment professionals do not receive any direct compensation based upon the investment returns of any individual client account, nor is compensation tied directly to the level or change in the level of assets under management. Investment professionals' annual compensation is comprised of the following: (i) Fixed base salary: This is generally the smallest portion of compensation. The base salary is a relatively low, fixed salary within a similar range for all investment professionals. The base salary (determined at the outset of employment based on level of experience), does not change significantly from year-to-year, and hence, is not particularly sensitive to performance. (ii) Discretionary incentive compensation in the form of an annual cash bonus: AllianceBernstein's overall profitability determines the total amount of incentive compensation available to investment professionals. This portion of compensation is determined subjectively based on qualitative and quantitative factors. In evaluating this component of an investment professional's compensation, AllianceBernstein considers the contribution to his/her team or Statement of Additional Information - Nov. 29, 2007 Page 134 discipline as it relates to that team's overall contribution to the long-term investment success, business results and strategy of AllianceBernstein. Quantitative factors considered include, among other things, relative investment performance (e.g., by comparison to competitor or peer group funds or similar styles of investments, and appropriate, broad-based or specific market indices), and consistency of performance. There are no specific formulas used to determine this part of an investment professional's compensation and the compensation is not tied to any pre-determined or specified level of performance. AllianceBernstein also considers qualitative factors such as the complexity and risk of investment strategies involved in the style or type of assets managed by the investment professional; success of marketing/business development efforts and client servicing; seniority/length of service with the firm; management and supervisory responsibilities; and fulfillment of AllianceBernstein's leadership criteria. (iii) Discretionary incentive compensation in the form of awards under AllianceBernstein's Partners Compensation Plan ("deferred awards"): AllianceBernstein's overall profitability determines the total amount of deferred awards available to investment professionals. The deferred awards are allocated among investment professionals based on criteria similar to those used to determine the annual cash bonus. There is no fixed formula for determining these amounts. Deferred awards, for which there are various investment options, vest over a four-year period and are generally forfeited if the employee resigns or AllianceBernstein terminates his/her employment. Investment options under the deferred awards plan include many of the same AllianceBernstein Mutual Funds offered to mutual fund investors, thereby creating a close alignment between the financial interests of the investment professionals and those of AllianceBernstein's clients and mutual fund shareholders with respect to the performance of those mutual funds. AllianceBernstein also permits deferred award recipients to allocate up to 50% of their award to investments in AllianceBernstein's publicly traded equity securities (prior to 2002, investment professional compensation also included discretionary long-term incentive in the form of restricted grants of AllianceBernstein's Master Limited Partnership Units). (iv) Contributions under AllianceBernstein's Profit Sharing/401(k) Plan: The contributions are based on AllianceBernstein's overall profitability. The amount and allocation of the contributions are determined at the sole discretion of AllianceBernstein. (51) Compensation for AIGGIC portfolio managers has both a salary and a bonus component. The salary component is a fixed base salary, which is generally based upon several factors, including experience and market levels of salary for such position. The bonus component is based both on a portfolio manager's individual performance and the organizational performance of AIGGIC. The bonus component is generally calculated as follows: (1) 60% is linked to the management of a portfolio manager's funds; (2) 20% is based on AIGGIC's profitability; and (3) 20% is determined on a discretionary basis (including individual qualitative goals). For the 60% component, the measures for a portfolio manager may vary according to the day-to-day responsibilities of a particular portfolio manager. The measures comprise any combination of (a) total return measures, (b) benchmark measures and (c) peer group measures. Any long-term compensation may include stock options and restricted stock units, both having vesting schedules. (52) Portfolio manager compensation includes a combination of base salary, annual bonus and long-term incentive compensation, as well as a generous benefits package made available to all Batterymarch employees on a non- discretionary basis. The bonus and long term incentive compensation is discretionary compensation; the amount of such awards is determined on an annual basis following the completion of the firm's fiscal year. The overall "pool" of discretionary compensation is based on the profitability of the firm for each fiscal year. Individual allocation to portfolio managers is based on several factors, including: - Short term and longer term investment performance of the product that the portfolio manager works on. Longer term performance is generally three to five year performance. Performance is evaluated on an aggregate product basis that the portfolio manager is responsible for and is not analyzed by any individual client portfolio, such as the Fund. The analysis of this performance is based on comparison to an appropriate published index for a particular product as well as a comparison to a group of peer managers. There is no fixed formula used in this analysis; - Portfolio manager assistance in servicing clients; and - Portfolio manager contribution to new business development. Portfolio manager compensation is not tied to, nor increased or decreased as the result of, any performance fees that may be earned by Batterymarch. As noted above, compensation is not impacted by the investment performance of any one client account; all performance analysis is reviewed on an aggregate product basis. Portfolio managers do not receive a percentage of the revenue earned on any of Batterymarch's client portfolios. (53) Ron Mushock and Kevin McCreesh are partners of the firm and co-Portfolio managers for the strategy. Employee-owners receive income distributions scaled to the company's profit margins. Other investment professionals are compensated with both a competitive salary and an annual performance bonus determined by their contribution to our Statement of Additional Information - Nov. 29, 2007 Page 135 investment process and its results. Other factors influencing the performance bonus include overall growth and profitability of the firm and client service responsibilities. Systematic's ability to offer equity ownership to senior professionals also provides a significant incentive for our investment team. Moreover, Messrs. Mushock and McCreesh are provided with a benefits package, including health insurance, and participation in a company 401(k) plan, comparable to that received by other Systematic employees. (54) WEDGE's incentive compensation has been structured to reward all professionals for their contribution to the growth and profitability of the firm. General Partners are compensated via a percentage of the firm's net profitability following a peer review, which focuses on performance in their specific area of responsibility, as well as their contribution to the general management of the firm, and their importance to the firm in the future. Other investment professionals' compensation is based on similar criteria including relative short and long-term portfolio performance as compared to both the index and a universe of peer managers. Statement of Additional Information - Nov. 29, 2007 Page 136 ADMINISTRATIVE SERVICES Each fund listed in the table below has an Administrative Services Agreement with Ameriprise Financial. Under this agreement, the fund pays Ameriprise Financial for providing administration and accounting services. The fee is calculated as follows: TABLE 20. ADMINISTRATIVE SERVICES AGREEMENT FEE SCHEDULE
ASSET LEVELS AND BREAKPOINTS IN APPLICABLE FEES ------------------------------------------------------------------------------------------ $500,000,001 - $1,000,000,001 - $3,000,000,001 - FUND $0 - 500,000,000 1,000,000,000 3,000,000,000 $12,000,000,000 12,000,000,001 + - ------------------------------------------------------------------------------------------------------------------------------ Absolute Return Currency and Income 0.080% 0.075% 0.070% 0.060% 0.050% Disciplined International Equity Disciplined Small Cap Value Emerging Markets Emerging Markets Bond European Equity Global Bond Global Equity International Aggressive Growth International Equity International Opportunity International Select Value International Small Cap Small Cap Advantage Small Cap Equity Small Cap Growth Small Cap Value Small Company Index Strategic Allocation - ------------------------------------------------------------------------------------------------------------------------------ California Tax-Exempt 0.070% 0.065% 0.060% 0.050% 0.040% Core Bond Diversified Bond Floating Rate High-Yield Bond Income Opportunities Inflation Protected Intermediate Tax-Exempt Limited Duration Bond Massachusetts Tax-Exempt Michigan Tax-Exempt Minnesota Tax-Exempt New York Tax-Exempt Ohio Tax-Exempt Short Duration U.S. Government Strategic Income Allocation Tax-Exempt Bond Tax-Exempt High Income U.S. Government Mortgage - ------------------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 137
ASSET LEVELS AND BREAKPOINTS IN APPLICABLE FEES ------------------------------------------------------------------------------------------ $500,000,001 - $1,000,000,001 - $3,000,000,001 - FUND $0 - 500,000,000 1,000,000,000 3,000,000,000 $12,000,000,000 12,000,000,001 + - ------------------------------------------------------------------------------------------------------------------------------ Aggressive Growth 0.060% 0.055% 0.050% 0.040% 0.030% Balanced Cash Management Disciplined Equity Disciplined Large Cap Growth Disciplined Small and Mid Cap Equity Diversified Equity Income Dividend Opportunity Equity Value Fundamental Growth Fundamental Value Global Technology Growth Large Cap Equity Large Cap Value Mid Cap Growth Mid Cap Value Precious Metals and Mining Real Estate S&P 500 Index Select Value Tax-Exempt Money Market Value - ------------------------------------------------------------------------------------------------------------------------------ Income Builder Basic Income 0.020% 0.020% 0.020% 0.020% 0.020% Income Builder Enhanced Income Income Builder Moderate Income Portfolio Builder Aggressive Portfolio Builder Conservative Portfolio Builder Moderate Portfolio Builder Moderate Aggressive Portfolio Builder Moderate Conservative Portfolio Builder Total Equity Retirement Plus 2010 Retirement Plus 2015 Retirement Plus 2020 Retirement Plus 2025 Retirement Plus 2030 Retirement Plus 2035 Retirement Plus 2040 Retirement Plus 2045 - ------------------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 138 The fee is calculated for each calendar day on the basis of net assets as of the close of the preceding day. Fees paid in each of the last three fiscal periods are shown in the table below. The table also shows the daily rate applied to each fund's net assets as of the last day of the most recent fiscal period. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1. TABLE 21. ADMINISTRATIVE FEES
- ------------------------------------------------------------------------------------------------------------- Administrative services fees paid in: Daily rate --------------------------------------- applied to FUND 2007 2006 2005 fund assets - ------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JANUARY 31 - ------------------------------------------------------------------------------------------------------------ Portfolio Builder Aggressive $ 86,301 $ 51,235 $ 13,785(a) 0.020% - ------------------------------------------------------------------------------------------------------------ Portfolio Builder Conservative 24,051 17,895 5,969(a) 0.020 - ------------------------------------------------------------------------------------------------------------ Portfolio Builder Moderate 138,034 85,545 23,460(a) 0.020 - ------------------------------------------------------------------------------------------------------------ Portfolio Builder Moderate Aggressive 172,602 104,658 28,002(a) 0.020 - ------------------------------------------------------------------------------------------------------------ Portfolio Builder Moderate Conservative 50,763 34,371 10,779(a) 0.020 - ------------------------------------------------------------------------------------------------------------ Portfolio Builder Total Equity 76,312 41,435 10,959(a) 0.020 - ------------------------------------------------------------------------------------------------------------ S&P 500 Index 153,231 222,321 319,791 0.060 - ------------------------------------------------------------------------------------------------------------ Small Company Index 867,030 861,455 784,439 0.077 - ------------------------------------------------------------------------------------------------------------ FOR FUNDS WITH FISCAL PERIOD ENDING MARCH 31 - ------------------------------------------------------------------------------------------------------------ Equity Value 674,042 558,514 454,202 0.056 - ------------------------------------------------------------------------------------------------------------ Precious Metals and Mining 67,215 50,123 51,848 0.060 - ------------------------------------------------------------------------------------------------------------ Small Cap Advantage 534,163 568,712 491,869 0.079 - ------------------------------------------------------------------------------------------------------------ Small Cap Growth 173,239 180,537 224,042 0.080 - ------------------------------------------------------------------------------------------------------------ FOR FUNDS WITH FISCAL PERIOD ENDING APRIL 30 - ------------------------------------------------------------------------------------------------------------ Retirement Plus 2010 1,779(b) N/A N/A 0.020 - ------------------------------------------------------------------------------------------------------------ Retirement Plus 2015 1,861(b) N/A N/A 0.020 - ------------------------------------------------------------------------------------------------------------ Retirement Plus 2020 2,961(b) N/A N/A 0.020 - ------------------------------------------------------------------------------------------------------------ Retirement Plus 2025 2,293(b) N/A N/A 0.020 - ------------------------------------------------------------------------------------------------------------ Retirement Plus 2030 2,579(b) N/A N/A 0.020 - ------------------------------------------------------------------------------------------------------------ Retirement Plus 2035 1,548(b) N/A N/A 0.020 - ------------------------------------------------------------------------------------------------------------ Retirement Plus 2040 2,928(b) N/A N/A 0.020 - ------------------------------------------------------------------------------------------------------------ Retirement Plus 2045 586(b) N/A N/A 0.020 - ------------------------------------------------------------------------------------------------------------ FOR FUNDS WITH FISCAL PERIOD ENDING MAY 31 - ------------------------------------------------------------------------------------------------------------ Aggressive Growth 334,364 130,418 24,630 0.059 - ------------------------------------------------------------------------------------------------------------ Fundamental Growth 140,084 83,643 31,978 0.060 - ------------------------------------------------------------------------------------------------------------ Fundamental Value 645,012 658,982 458,121 0.056 - ------------------------------------------------------------------------------------------------------------ High Yield Bond 1,259,292 1,328,295 1,219,476 0.064 - ------------------------------------------------------------------------------------------------------------ Income Builder Basic Income 25,671 581(c) N/A 0.020 - ------------------------------------------------------------------------------------------------------------ Income Builder Enhanced Income 37,153 1,226(c) N/A 0.020 - ------------------------------------------------------------------------------------------------------------ Income Builder Moderate Income 58,560 1,394(c) N/A 0.020 - ------------------------------------------------------------------------------------------------------------ Select Value 355,085 443,873 427,460 0.059 - ------------------------------------------------------------------------------------------------------------ Short Duration U.S. Government 623,283 821,082 960,018 0.068 - ------------------------------------------------------------------------------------------------------------ Small Cap Equity 267,622 205,335 129,820 0.080 - ------------------------------------------------------------------------------------------------------------ Small Cap Value 754,675 858,118 824,914 0.078 - ------------------------------------------------------------------------------------------------------------ U.S. Government Mortgage 196,713 172,175 152,145 0.070 - ------------------------------------------------------------------------------------------------------------ Value 239,524 285,079 285,752 0.060 - ------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 139
- ------------------------------------------------------------------------------------------------------------- Administrative services fees paid in: Daily rate --------------------------------------- applied to FUND 2007 2006 2005 fund assets - ------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JUNE 30 - ------------------------------------------------------------------------------------------------------------ Dividend Opportunity 884,333 658,242 406,110 0.054 - ------------------------------------------------------------------------------------------------------------ Real Estate 153,117 91,341 41,449 0.060 - ------------------------------------------------------------------------------------------------------------ FOR FUNDS WITH FISCAL PERIOD ENDING JULY 31 - ------------------------------------------------------------------------------------------------------------ Cash Management 2,141,669 1,741,492 1,016,703 0.048 - ------------------------------------------------------------------------------------------------------------ Core Bond 159,975 133,655 78,241 0.070 - ------------------------------------------------------------------------------------------------------------ Disciplined Equity 1,224,572 496,810 29,441 0.053 - ------------------------------------------------------------------------------------------------------------ Disciplined Small and Mid Cap Equity 24,904 1,143(d) N/A 0.060 - ------------------------------------------------------------------------------------------------------------ Disciplined Small Cap Value 20,681 4,615(e) N/A 0.080 - ------------------------------------------------------------------------------------------------------------ Floating Rate 378,190 46,916(e) N/A 0.069 - ------------------------------------------------------------------------------------------------------------ Growth 1,763,087 1,791,547 1,370,094 0.052 - ------------------------------------------------------------------------------------------------------------ Income Opportunities 242,883 253,936 164,038 0.070 - ------------------------------------------------------------------------------------------------------------ Inflation Protected Securities 209,028 169,778 61,197 0.070 - ------------------------------------------------------------------------------------------------------------ Large Cap Equity 3,245,953 2,119,930 860,387 0.046 - ------------------------------------------------------------------------------------------------------------ Large Cap Value 60,574 78,248 67,667 0.060 - ------------------------------------------------------------------------------------------------------------ Limited Duration Bond 105,993 133,102 88,881 0.070 - ------------------------------------------------------------------------------------------------------------ FOR FUNDS WITH FISCAL PERIOD ENDING AUGUST 31 - ------------------------------------------------------------------------------------------------------------ California Tax-Exempt(f) 122,586 149,235 87,771 0.070 - ------------------------------------------------------------------------------------------------------------ Diversified Bond 1,752,212 1,698,244 1,259,427 0.063 - ------------------------------------------------------------------------------------------------------------ Massachusetts Tax-Exempt(f) 37,586 49,506 30,362 0.070 - ------------------------------------------------------------------------------------------------------------ Michigan Tax-Exempt(f) 31,880 40,475 23,283 0.070 - ------------------------------------------------------------------------------------------------------------ Minnesota Tax-Exempt(f) 234,353 286,050 163,503 0.070 - ------------------------------------------------------------------------------------------------------------ New York Tax-Exempt(f) 47,710 57,973 36,031 0.070 - ------------------------------------------------------------------------------------------------------------ Ohio Tax-Exempt(f) 32,042 40,235 24,486 0.070 - ------------------------------------------------------------------------------------------------------------ FOR FUNDS WITH FISCAL PERIOD ENDING SEPTEMBER 30 - ------------------------------------------------------------------------------------------------------------ Balanced 623,784 697,753 524,986 0.057 - ------------------------------------------------------------------------------------------------------------ Disciplined Large Cap Growth 11,405(g) N/A N/A 0.060 - ------------------------------------------------------------------------------------------------------------ Diversified Equity Income 3,449,519 2,960,505 1,216,876 0.045 - ------------------------------------------------------------------------------------------------------------ Mid Cap Value 1,196,773 854,082 385,071 0.053 - ------------------------------------------------------------------------------------------------------------ Strategic Allocation 1,340,234 948,662 383,942 0.073 - ------------------------------------------------------------------------------------------------------------ Strategic Income Allocation 21,493(g) N/A N/A 0.070 - ------------------------------------------------------------------------------------------------------------ 2006 2005 2004 - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------ FOR FUNDS WITH FISCAL PERIOD ENDING OCTOBER 31 - ------------------------------------------------------------------------------------------------------------ Absolute Return Currency and Income 15,823(h) N/A N/A 0.080 - ------------------------------------------------------------------------------------------------------------ Disciplined International Equity 14,739(i) N/A N/A 0.080 - ------------------------------------------------------------------------------------------------------------ Emerging Markets 406,991 351,359 271,857 0.080 - ------------------------------------------------------------------------------------------------------------ Emerging Markets Bond 21,248(j) N/A N/A 0.080 - ------------------------------------------------------------------------------------------------------------ European Equity 89,350 75,504 78,835 0.080 - ------------------------------------------------------------------------------------------------------------ Global Bond 412,783 342,324 314,640 0.080 - ------------------------------------------------------------------------------------------------------------ Global Equity 532,772 305,907 284,795 0.078 - ------------------------------------------------------------------------------------------------------------ Global Technology 101,197 112,326 131,702 0.060 - ------------------------------------------------------------------------------------------------------------ International Aggressive Growth 347,819 240,889 149,750 0.080 - ------------------------------------------------------------------------------------------------------------ International Equity 146,048 127,687 88,536 0.080 - ------------------------------------------------------------------------------------------------------------ International Opportunity 470,847 331,818 255,871 0.079 - ------------------------------------------------------------------------------------------------------------ International Select Value 1,306,775 861,655 549,050 0.074 - ------------------------------------------------------------------------------------------------------------ International Small Cap 83,383 74,264 46,103 0.080 - ------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 140
- ------------------------------------------------------------------------------------------------------------- Administrative services fees paid in: Daily rate --------------------------------------- applied to FUND 2006 2005 2004 fund assets - ------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING NOVEMBER 30 - ------------------------------------------------------------------------------------------------------------ Intermediate Tax-Exempt 74,912 64,053 69,058 0.070 - ------------------------------------------------------------------------------------------------------------ Mid Cap Growth 946,943 1,023,124 1,056,445 0.056 - ------------------------------------------------------------------------------------------------------------ Tax-Exempt Bond 544,894 321,037 323,368 0.068 - ------------------------------------------------------------------------------------------------------------ Tax-Exempt High Income 2,064,819 1,505,060 1,447,459 0.062 - ------------------------------------------------------------------------------------------------------------ FOR FUNDS WITH FISCAL PERIOD ENDING DECEMBER 31 - ------------------------------------------------------------------------------------------------------------ Tax-Exempt Money Market 69,922 42,768 45,528 0.060 - ------------------------------------------------------------------------------------------------------------
(a) For the period from March 4, 2004 (when shares became publicly available) to Jan. 31, 2005. (b) For the period from May 18, 2006 (when shares became publicly available) to April 30, 2007. (c) For the period from Feb. 16, 2006 (when shares became publicly available) to May 31, 2006. (d) For the period from May 18, 2006 (when shares became publicly available) to July 31, 2006. (e) For the period from Feb. 16, 2006 (when shares became publicly available) to July 31, 2006. (f) The fund changed its fiscal year end in 2006 from June 30 to Aug. 31. For 2006, the information shown is for the period from July 1, 2005 through Aug. 31, 2006. For years prior to 2006, the fiscal period ended on June 30. (g) For the period from May 17, 2007 (when shares became publicly available) to Sept. 30, 2007. (h) For the period from June 15, 2006 (when the Fund became available) to Oct. 31, 2006. (i) For the period from May 18, 2006 (when shares became publicly available) to Oct. 31, 2006. (j) For the period from Feb. 16, 2006 (when shares became publicly available) to Oct. 31, 2006. Third parties with which Ameriprise Financial contracts to provide services for the fund or its shareholders may pay a fee to Ameriprise Financial to help defray the cost of providing administrative and accounting services. The amount of any such fee is negotiated separately with each service provider and does not constitute compensation for investment advisory, distribution, or other services. Payment of any such fee neither increases nor reduces fees or expenses paid by shareholders of the fund. TRANSFER AGENCY SERVICES Each fund has a Transfer Agency Agreement with RiverSource Service Corporation (the "transfer agent") located at 734 Ameriprise Financial Center, Minneapolis, MN 55474. This agreement governs RiverSource Service Corporation's responsibility for administering and/or performing transfer agent functions, for acting as service agent in connection with dividend and distribution functions and for performing shareholder account administration agent functions in connection with the issuance, exchange and redemption or repurchase of the fund's shares. CLASS A, CLASS B, CLASS C AND CLASS D. For Class A, Class B, Class C and Class D, RiverSource Service Corporation will earn a fee from the fund determined by multiplying the number of shareholder accounts at the end of the day by a rate determined for each class per year and dividing by the number of days in the year. The fund will pay on the basis of the relative percentage of net assets of each class of shares, first allocating the base fee (equal to Class A shares) across share classes, and then allocating the incremental per share class fee, based on the number of shareholder accounts. The fee varies depending on the investment category of the fund. You can find your fund's investment category in Table 1. BALANCED, EQUITY, FUNDS-OF-FUNDS - EQUITY FUNDS The annual per account fee accrued daily and payable monthly, for the applicable classes is as follows:
Class A Class B Class C Class D - ------- ------- ------- ------- $19.50 $20.50 $20.00 $19.50
FUNDS-OF-FUNDS - FIXED INCOME, STATE TAX-EXEMPT FIXED INCOME, TAXABLE FIXED INCOME, TAX-EXEMPT FIXED INCOME FUNDS The annual per account fee accrued daily and payable monthly, for the applicable classes is as follows:
Class A Class B Class C - ------- ------- ------- $20.50 $21.50 $21.00
Statement of Additional Information - Nov. 29, 2007 Page 141 MONEY MARKET FUNDS For Cash Management Fund and Tax-Exempt Money Market Fund, the annual per account fee accrued daily and payable monthly, for the applicable classes is as follows. The fee for Tax-Exempt Money Market Fund, which does not have separate classes of shares, is the same as that applicable to Class A:
Class A Class B Class C - ------- ------- ------- $22.00 $23.00 $22.50
CLASS E, CLASS R2, CLASS R3, CLASS R4, CLASS R5, CLASS W AND CLASS Y. For Class E, Class R2, Class R3, Class R4, Class R5, Class W and Class Y, RiverSource Service Corporation will earn a fee from the fund, accrued daily and payable monthly, determined by multiplying the average daily net assets of the applicable class by the annual rate shown below:
Class E Class R2 Class R3 Class R4 Class R5 Class W Class Y - ------- -------- -------- -------- -------- ------- ------- 0.05% 0.05% 0.05% 0.05% 0.05% 0.20% 0.05%
In addition, an annual closed-account fee of $5.00 per inactive account is charged on a pro rata basis for 12 months from the date the account becomes inactive. The fees paid to RiverSource Service Corporation may be changed by the Board without shareholder approval. PLAN ADMINISTRATION SERVICES The funds* have a Plan Administration Services Agreement with the transfer agent. Under the agreement the fund pays for plan administration services, including services such as implementation and conversion services, account set- up and maintenance, reconciliation and account recordkeeping, education services and administration to various plan types, including 529 plans, retirement plans and Health Savings Accounts (HSAs). The fee for services is equal on an annual basis to the following percentage of the average daily net assets of the fund attributable to the applicable class:
Class E Class R2 Class R3 Class R4 Class Y - ------- -------- -------- -------- ------- 0.15% 0.25% 0.25% 0.25% 0.15%
The fees paid to the transfer agent may be changed by the Board without shareholder approval. DISTRIBUTION SERVICES RiverSource Distributors, Inc. and Ameriprise Financial Services, Inc. (collectively, the distributor), 70100 Ameriprise Financial Center, Minneapolis, MN 55474, both wholly owned subsidiaries of Ameriprise Financial, Inc., serve as the fund's principal underwriter. As of Oct. 1, 2007, RiverSource Distributors serves as the sole principal underwriter and distributor to the funds. The fund's shares are offered on a continuous basis. Under a Distribution Agreement, sales charges deducted for distributing fund shares are paid to the distributor daily. The following table shows the sales charges paid to the distributor and the amount retained by the distributor after paying commissions and other expenses for each of the last three fiscal periods. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1. TABLE 22. SALES CHARGES PAID TO DISTRIBUTOR
- ---------------------------------------------------------------------------------------------------------------------------- AMOUNT RETAINED AFTER PAYING SALES CHARGES PAID TO DISTRIBUTOR COMMISSIONS AND OTHER EXPENSES - ---------------------------------------------------------------------------------------------------------------------------- FUND 2007 2006 2005 2007 2006 2005 - ---------------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JANUARY 31 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Portfolio Builder Aggressive $3,260,693 $3,095,956 $2,689,735(a) $1,029,231 $1,116,369 $1,129,812(a) - ---------------------------------------------------------------------------------------------------------------------------- Portfolio Builder Conservative 455,765 577,821 722,689(a) 94,296 105,590 178,650(a) - ---------------------------------------------------------------------------------------------------------------------------- Portfolio Builder Moderate 4,127,743 4,118,788 3,810,185(a) 1,084,978 1,075,302 1,309,727(a) - ---------------------------------------------------------------------------------------------------------------------------- Portfolio Builder Moderate 6,845,238 7,078,581 6,114,118(a) 2,326,266 2,691,706 2,610,071(a) Aggressive - ---------------------------------------------------------------------------------------------------------------------------- Portfolio Builder Moderate 1,084,727 1,286,540 1,603,913(a) 252,979 274,017 530,042(a) Conservative - ---------------------------------------------------------------------------------------------------------------------------- Portfolio Builder Total Equity 2,414,356 1,845,156 1,393,255(a) 594,766 518,093 509,719(a) - ---------------------------------------------------------------------------------------------------------------------------- S&P 500 Index N/A - No N/A N/A N/A N/A N/A sales charge - ---------------------------------------------------------------------------------------------------------------------------- Small Company Index 973,579 1,228,665 1,511,932 220,620 337,031 554,278 - ----------------------------------------------------------------------------------------------------------------------------
- ---------- * Currently, tax-exempt and state tax-exempt funds do not have classes of shares that are subject to this fee. Statement of Additional Information - Nov. 29, 2007 Page 142
- ---------------------------------------------------------------------------------------------------------------------------- AMOUNT RETAINED AFTER PAYING SALES CHARGES PAID TO DISTRIBUTOR COMMISSIONS AND OTHER EXPENSES - ---------------------------------------------------------------------------------------------------------------------------- FUND 2007 2006 2005 2007 2006 2005 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING MARCH 31 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Equity Value 928,630 645,442 740,741 86,064 116,536 258,954 - ---------------------------------------------------------------------------------------------------------------------------- Precious Metals and Mining 178,460 104,779 141,256 33,944 21,277 58,658 - ---------------------------------------------------------------------------------------------------------------------------- Small Cap Advantage 569,430 986,996 1,972,996 100,405 276,857 774,287 - ---------------------------------------------------------------------------------------------------------------------------- Small Cap Growth 265,315 401,382 636,221 52,127 127,479 251,743 - ---------------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING APRIL 30 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Retirement Plus 2010 2,283(b) N/A N/A (6,048)(b) N/A N/A - ---------------------------------------------------------------------------------------------------------------------------- Retirement Plus 2015 35,493(b) N/A N/A 27,942(b) N/A N/A - ---------------------------------------------------------------------------------------------------------------------------- Retirement Plus 2020 35,121(b) N/A N/A 23,828(b) N/A N/A - ---------------------------------------------------------------------------------------------------------------------------- Retirement Plus 2025 38,880(b) N/A N/A 25,335(b) N/A N/A - ---------------------------------------------------------------------------------------------------------------------------- Retirement Plus 2030 29,205(b) N/A N/A 15,221(b) N/A N/A - ---------------------------------------------------------------------------------------------------------------------------- Retirement Plus 2035 21,303(b) N/A N/A 13,718(b) N/A N/A - ---------------------------------------------------------------------------------------------------------------------------- Retirement Plus 2040 14,822(b) N/A N/A 7,670(b) N/A N/A - ---------------------------------------------------------------------------------------------------------------------------- Retirement Plus 2045 10,606(b) N/A N/A 5,832(b) N/A N/A - ---------------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING MAY 31 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Aggressive Growth 359,329 217,559 166,200 63,452 44,653 72,464 - ---------------------------------------------------------------------------------------------------------------------------- Fundamental Growth 53,206 69,062 109,110 11,221 15,922 43,395 - ---------------------------------------------------------------------------------------------------------------------------- Fundamental Value 1,266,023 1,915,417 2,827,644 158,689 406,545 1,038,987 - ---------------------------------------------------------------------------------------------------------------------------- High Yield Bond 1,787,813 2,479,319 3,295,433 139,630 682,596 1,011,136 - ---------------------------------------------------------------------------------------------------------------------------- Income Builder Basic Income 1,155,448 128,246(c) N/A 6,089 25,697(c) N/A - ---------------------------------------------------------------------------------------------------------------------------- Income Builder Enhanced Income 1,678,918 326,707(c) N/A 287,006 73,038(c) N/A - ---------------------------------------------------------------------------------------------------------------------------- Income Builder Moderate Income 2,955,938 437,903(c) N/A 435,561 109,389(c) N/A - ---------------------------------------------------------------------------------------------------------------------------- Select Value 518,110 945,839 1,633,975 61,797 213,839 582,671 - ---------------------------------------------------------------------------------------------------------------------------- Short Duration U.S. Government 962,025 1,908,960 3,842,195 (85,482) 482,228 1,629,476 - ---------------------------------------------------------------------------------------------------------------------------- Small Cap Equity 309,112 604,021 523,687 95,646 190,699 187,706 - ---------------------------------------------------------------------------------------------------------------------------- Small Cap Value 1,147,620 1,616,642 2,787,117 249,915 478,093 1,053,640 - ---------------------------------------------------------------------------------------------------------------------------- U.S. Government Mortgage 252,402 442,638 631,090 (67,241) 61,137 197,759 - ---------------------------------------------------------------------------------------------------------------------------- Value 267,672 474,692 836,914 (2,163) 83,140 248,868 - ---------------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JUNE 30 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Dividend Opportunity 2,653,148 1,665,096 1,604,180 266,495 207,486 523,080 - ---------------------------------------------------------------------------------------------------------------------------- Real Estate 813,437 598,431 556,465 218,298 180,632 223,572 - ---------------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JULY 31 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Cash Management 437,392 718,247 994,923 423,832 714,638 993,250 - ---------------------------------------------------------------------------------------------------------------------------- Core Bond 117,004 180,034 207,266 31,663 62,588 90,811 - ---------------------------------------------------------------------------------------------------------------------------- Disciplined Equity 661,751 322,731 126,376 140,529 67,609 47,059 - ---------------------------------------------------------------------------------------------------------------------------- Disciplined Small and Mid Cap 55,865 1,760(d) N/A 9,445 852(d) N/A Equity - ---------------------------------------------------------------------------------------------------------------------------- Disciplined Small Cap Value 15,644 6,304(e) N/A 1,960 1,708(e) N/A - ---------------------------------------------------------------------------------------------------------------------------- Floating Rate 1,282,342 364,914(e) N/A (554,729) (118,354)(e) N/A - ---------------------------------------------------------------------------------------------------------------------------- Growth 3,028,179 4,553,722 3,540,317 548,978 955,528 1,430,279 - ---------------------------------------------------------------------------------------------------------------------------- Income Opportunities 320,351 486,593 891,368 (6,952) 108,764 201,999 - ---------------------------------------------------------------------------------------------------------------------------- Inflation Protected Securities 105,703 326,780 429,879 18,732 47,098 84,033 - ---------------------------------------------------------------------------------------------------------------------------- Large Cap Equity 4,596,427 3,400,059 1,812,939 641,330 629,348 723,158 - ---------------------------------------------------------------------------------------------------------------------------- Large Cap Value 102,472 123,212 196,360 26,452 37,908 71,406 - ---------------------------------------------------------------------------------------------------------------------------- Limited Duration Bond 136,687 220,446 393,925 28,890 28,711 115,701 - ----------------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 143
- ---------------------------------------------------------------------------------------------------------------------------- AMOUNT RETAINED AFTER PAYING SALES CHARGES PAID TO DISTRIBUTOR COMMISSIONS AND OTHER EXPENSES - ---------------------------------------------------------------------------------------------------------------------------- FUND 2007 2006 2005 2007 2006 2005 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING AUGUST 31 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- California Tax-Exempt(f) 150,760 212,157 218,698 46,117 77,373 111,053 - ---------------------------------------------------------------------------------------------------------------------------- Diversified Bond 2,340,251 2,757,988 3,072,387 419,415 788,192 1,203,503 - ---------------------------------------------------------------------------------------------------------------------------- Massachusetts Tax-Exempt(f) 53,880 107,050 98,324 18,208 45,035 44,188 - ---------------------------------------------------------------------------------------------------------------------------- Michigan Tax-Exempt(f) 21,458 54,648 68,367 (9,718) (3,556) 20,700 - ---------------------------------------------------------------------------------------------------------------------------- Minnesota Tax-Exempt(f) 338,160 480,402 463,661 12,594 102,088 141,616 - ---------------------------------------------------------------------------------------------------------------------------- New York Tax-Exempt(f) 43,518 89,560 134,248 6,984 19,641 63,799 - ---------------------------------------------------------------------------------------------------------------------------- Ohio Tax-Exempt(f) 39,647 68,092 55,404 3,003 19,353 9,152 - ---------------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING SEPTEMBER 30 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Balanced 474,702 400,884 501,366 32,524 59,347 168,698 - ---------------------------------------------------------------------------------------------------------------------------- Disciplined Large Cap Growth 20,834(g) N/A N/A 5,197(g) N/A N/A - ---------------------------------------------------------------------------------------------------------------------------- Diversified Equity Income 9,553,810 12,904,884 9,791,165 1,407,616 2,114,315 2,664,788 - ---------------------------------------------------------------------------------------------------------------------------- Mid Cap Value 3,538,910 4,477,119 3,098,747 862,120 1,010,224 986,793 - ---------------------------------------------------------------------------------------------------------------------------- Strategic Allocation 8,570,846 3,667,041 1,083,154 1,738,063 739,852 244,136 - ---------------------------------------------------------------------------------------------------------------------------- Strategic Income Allocation 267,319(g) N/A N/A 26,129(g) N/A N/A - ---------------------------------------------------------------------------------------------------------------------------- 2006 2005 2004 2006 2005 2004 - ---------------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING OCTOBER 31 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Absolute Return Currency and 0(h) N/A N/A 0(h) N/A N/A Income - ---------------------------------------------------------------------------------------------------------------------------- Disciplined International Equity 4,700(i) N/A N/A 434(i) N/A N/A - ---------------------------------------------------------------------------------------------------------------------------- Emerging Markets 1,075,586 798,990 556,829 (9,848,080) (6,658,875) (6,660,972) - ---------------------------------------------------------------------------------------------------------------------------- Emerging Markets Bond 11,348(j) N/A N/A 2,036(j) N/A N/A - ---------------------------------------------------------------------------------------------------------------------------- European Equity 107,816 N/A N/A 29,463 N/A N/A - ---------------------------------------------------------------------------------------------------------------------------- Global Bond 447,007 765,438 956,580 320,724 390,806 536,364 - ---------------------------------------------------------------------------------------------------------------------------- Global Equity 1,272,084 778,062 467,198 218,974 211,977 203,564 - ---------------------------------------------------------------------------------------------------------------------------- Global Technology 242,177 328,770 591,744 29,861 67,485 208,704 - ---------------------------------------------------------------------------------------------------------------------------- International Aggressive Growth 810,514 816,345 796,060 234,619 282,465 360,944 - ---------------------------------------------------------------------------------------------------------------------------- International Equity 243,753 299,410 456,321 64,053 96,946 175,987 - ---------------------------------------------------------------------------------------------------------------------------- International Opportunity 563,174 873,855 997,517 107,305 244,843 371,845 - ---------------------------------------------------------------------------------------------------------------------------- International Select Value 3,895,267 3,425,153 3,105,887 815,331 1,020,350 1,220,539 - ---------------------------------------------------------------------------------------------------------------------------- International Small Cap 173,659 203,543 324,756 37,954 60,817 115,235 - ---------------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING NOVEMBER 30 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Intermediate Tax-Exempt 115,280 176,349 306,545 29,590 40,451 86,091 - ---------------------------------------------------------------------------------------------------------------------------- Mid Cap Growth 1,388,577 1,821,533 3,566,760 346,497 635,918 1,373,111 - ---------------------------------------------------------------------------------------------------------------------------- Tax-Exempt Bond 346,932 371,626 495,541 79,024 107,815 197,028 - ---------------------------------------------------------------------------------------------------------------------------- Tax-Exempt High Income 1,485,792 2,115,452 3,131,234 389,650 2,736,405 1,256,629 - ---------------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING DECEMBER 31 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Tax-Exempt Money Market N/A - No N/A N/A N/A N/A N/A sales charge - ----------------------------------------------------------------------------------------------------------------------------
(a) For the period from March 4, 2004 (when shares became publicly available) to Jan. 31, 2005. (b) For the period from May 18, 2006 (when shares became publicly available) to April 30, 2007. (c) For the period from Feb. 16, 2006 (when shares became publicly available) to May 31, 2006. (d) For the period from May 18, 2006 (when shares became publicly available) to July 31, 2006. (e) For the period from Feb. 16, 2006 (when shares became publicly available) to July 31, 2006. (f) The fund changed its fiscal year end in 2006 from June 30 to Aug. 31. For 2006, the information shown is for the period from July 1, 2005 through Aug. 31, 2006. For years prior to 2006, the fiscal period ended on June 30. (g) For the period from May 17, 2007 (when shares became publicly available) to Sept. 30, 2007. (h) For the period from June 15, 2006 (when the Fund became available) to Oct. 31, 2006. Statement of Additional Information - Nov. 29, 2007 Page 144 (i) For the period from May 18, 2006 (when shares became publicly available) to Oct. 31, 2006. (j) For the period from Feb. 16, 2006 (when shares became publicly available) to Oct. 31, 2006. Part of the sales charge may be paid to selling dealers who have agreements with the distributor. The distributor will retain the balance of the sales charge. At times the entire sales charge may be paid to selling dealers. PLAN AND AGREEMENT OF DISTRIBUTION To help defray the cost of distribution and servicing not covered by the sales charges received under the Distribution Agreement, each fund listed in Table 24. 12b-1 Fees, approved a Plan of Distribution (Plan) and entered into an agreement under the Plan pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, of the type known as a reimbursement plan, the fund pays the distributor a fee up to actual expenses incurred at an annual rate as follows: FOR FUNDS OTHER THAN MONEY MARKET FUNDS: The fee is equal on an annual basis to the following percentage of the average daily net assets of the fund attributable to the applicable class:
Class A Class B Class C Class D Class R2 Class R3 Class W - ------- ------- ------- ------- -------- -------- ------- 0.25% 1.00% 1.00% 0.25% 0.50% 0.25% 0.25%
For Class B and Class C, up to 0.75% of the fee is reimbursed for distribution expenses. Up to an additional 0.25% is paid to the distributor to reimburse certain expenses incurred in connection with providing services to fund shareholders. For Class R2, up to 0.50% and for Class R3, up to 0.25% shall be reimbursed for distribution expenses. Of that amount, for Class R2, up to 0.25% may be reimbursed for shareholder servicing expenses. FOR MONEY MARKET FUNDS: The fee for services is equal on an annual basis to the following percentage of the average daily net assets of the fund attributable to the applicable class. The fee for Tax-Exempt Money Market, which does not have separate classes of shares, is the same as that applicable to Class A:
Class A Class B Class C Class W - ------- ------- ------- ------- 0.10% 0.85% 0.75% 0.10%
For Class B, up to 0.75% of the fee is reimbursed for distribution expenses. Up to an additional 0.10% is paid to the distributor to reimburse certain expenses incurred in connection with providing services to fund shareholders. The distributor has currently agreed not to be reimbursed by the Fund for distribution (12b-1) fees equal to 0.10% of the stated amount for Class B. FOR ALL FUNDS: Distribution and shareholder servicing expenses include payment of distribution and shareholder servicing fees to financial institutions that sell shares of the fund. Financial institutions may compensate their financial advisors with the distribution and shareholder servicing fees paid to them by the distributor. Payments under the Plan are intended to result in an increase in fund assets and thus potentially result in economies of scale and lower costs for all shareholders. Each class has exclusive voting rights on the Plan as it applies to that class. In addition, because Class B shares convert to Class A shares, Class B shareholders have the right to vote on any material increase to expenses charged under the Class A plan. Distribution expenses covered under this Plan include commissions to financial intermediaries, printing prospectuses and reports used for sales purposes, the preparation, printing and distribution of advertising and sales literature, personnel, travel, office expense and equipment, and other distribution-related expenses. Shareholder service expenses include costs of establishing and maintaining shareholder accounts and records, assisting with purchase, redemption and exchange requests, arranging for bank wires, monitoring dividend payments from the funds on behalf of shareholders, forwarding certain shareholder communications from funds to shareholders, receiving and responding to inquiries and answering questions regarding the funds, aiding in maintaining the investment of shareholders in the funds and other service-related expenses. A substantial portion of the expenses are not specifically identified to any one of the RiverSource funds. The fee is not allocated to any one service (such as advertising, compensation to financial intermediaries, or other uses). However, a significant portion of the fee is generally used for sales and promotional expenses. Statement of Additional Information - Nov. 29, 2007 Page 145 The Plan must be approved annually by the Board, including a majority of the disinterested Board members, if it is to continue for more than a year. At least quarterly, the Board reviews written reports concerning the amounts expended under the Plan and the purposes for which such expenditures were made. The Plan and any agreement related to it may be terminated at any time by vote of a majority of Board members who are not interested persons of the fund and have no direct or indirect financial interest in the operation of the Plan or in any agreement related to the Plan, or by vote of a majority of the outstanding voting securities of the relevant class of shares or by the distributor. Any agreement related to the Plan will terminate in the event of its assignment, as that term is defined in the 1940 Act. The Plan may not be amended to increase the amount to be spent for distribution without shareholder approval, and all material amendments to the Plan must be approved by a majority of the Board members, including a majority of the Board members who are not interested persons of the fund and who do not have a financial interest in the operation of the Plan or any agreement related to it. The selection and nomination of disinterested Board members is the responsibility of the other disinterested Board members. No Board member who is not an interested person has any direct or indirect financial interest in the operation of the Plan or any related agreement. For its most recent fiscal period, each fund paid 12b-1 fees as shown in the following table. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1. TABLE 23. 12B-1 FEES
FUND CLASS A CLASS B CLASS C CLASS D CLASS R2 CLASS R3 CLASS W - ------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JANUARY 31 - ------------------------------------------------------------------------------------------------------ Portfolio Builder $837,585 $871,878 $92,112 N/A N/A N/A N/A Aggressive - ------------------------------------------------------------------------------------------------------ Portfolio Builder 195,700 362,205 57,303 N/A N/A N/A N/A Conservative - ------------------------------------------------------------------------------------------------------ Portfolio Builder Moderate 1,248,370 1,685,146 222,324 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ Portfolio Builder Moderate 1,668,911 1,749,200 202,249 N/A N/A N/A N/A Aggressive - ------------------------------------------------------------------------------------------------------ Portfolio Builder Moderate 434,923 681,066 117,115 N/A N/A N/A N/A Conservative - ------------------------------------------------------------------------------------------------------ Portfolio Builder Total 733,984 793,853 83,860 N/A N/A N/A N/A Equity - ------------------------------------------------------------------------------------------------------ S&P 500 Index N/A N/A N/A $143,473 N/A N/A N/A - ------------------------------------------------------------------------------------------------------ Small Company Index 2,109,546 2,771,834 N/A N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ FOR FUNDS WITH FISCAL PERIOD ENDING MARCH 31 - ------------------------------------------------------------------------------------------------------ Equity Value 2,462,327 1,951,663 50,362 N/A 7 3 4 - ------------------------------------------------------------------------------------------------------ Precious Metals and Mining 229,568 182,836 18,005 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ Small Cap Advantage 1,274,129 1,546,551 103,108 N/A 6 3 N/A - ------------------------------------------------------------------------------------------------------ Small Cap Growth 312,614 496,176 50,257 N/A 7 3 N/A - ------------------------------------------------------------------------------------------------------ FOR FUNDS WITH FISCAL PERIOD ENDING APRIL 30 - ------------------------------------------------------------------------------------------------------ Retirement Plus 2010(a) 749 N/A N/A N/A 10 4 N/A - ------------------------------------------------------------------------------------------------------ Retirement Plus 2015(a) 1,762 N/A N/A N/A 10 4 N/A - ------------------------------------------------------------------------------------------------------ Retirement Plus 2020(a) 1,718 N/A N/A N/A 10 5 N/A - ------------------------------------------------------------------------------------------------------ Retirement Plus 2025(a) 1,481 N/A N/A N/A 10 4 N/A - ------------------------------------------------------------------------------------------------------ Retirement Plus 2030(a) 1,216 N/A N/A N/A 10 4 N/A - ------------------------------------------------------------------------------------------------------ Retirement Plus 2035(a) 876 N/A N/A N/A 10 5 N/A - ------------------------------------------------------------------------------------------------------ Retirement Plus 2040(a) 321 N/A N/A N/A 10 5 N/A - ------------------------------------------------------------------------------------------------------ Retirement Plus 2045(a) 464 N/A N/A N/A 10 5 N/A - ------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 146
FUND CLASS A CLASS B CLASS C CLASS D CLASS R2 CLASS R3 CLASS W - ------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING MAY 31 - ------------------------------------------------------------------------------------------------------ Aggressive Growth 968,992 964,778 17,993 N/A 12 6 N/A - ------------------------------------------------------------------------------------------------------ Fundamental Growth 49,742 62,405 6,619 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ Fundamental Value 1,949,704 2,565,192 186,220 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ High Yield Bond 3,770,904 3,490,903 260,374 N/A 12 6 7,834 - ------------------------------------------------------------------------------------------------------ Income Builder Basic Income 266,605 179,793 36,091 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ Income Builder Enhanced 388,750 241,288 61,000 N/A N/A N/A N/A Income - ------------------------------------------------------------------------------------------------------ Income Builder Moderate 620,930 371,546 72,544 N/A N/A N/A N/A Income - ------------------------------------------------------------------------------------------------------ Select Value 1,116,653 1,282,538 88,805 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ Short Duration U.S. 1,466,190 2,610,675 119,778 N/A N/A N/A 6 Government - ------------------------------------------------------------------------------------------------------ Small Cap Equity 695,371 474,779 35,431 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ Small Cap Value 1,670,091 2,630,734 181,325 N/A 10 5 N/A - ------------------------------------------------------------------------------------------------------ U.S. Government Mortgage 299,282 529,573 56,655 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ Value 543,221 939,804 68,182 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ FOR FUNDS WITH FISCAL PERIOD ENDING JUNE 30 - ------------------------------------------------------------------------------------------------------ Dividend Opportunity 2,921,042 2,684,130 189,487 N/A N/A N/A 8 - ------------------------------------------------------------------------------------------------------ Real Estate 362,012 303,076 22,109 N/A N/A N/A 7 - ------------------------------------------------------------------------------------------------------ FOR FUNDS WITH FISCAL PERIOD ENDING JULY 31 - ------------------------------------------------------------------------------------------------------ Cash Management 4,173,165 726,794 20,932 N/A N/A N/A 20,714 - ------------------------------------------------------------------------------------------------------ Core Bond 93,444 114,825 5,557 N/A 16 7 8 - ------------------------------------------------------------------------------------------------------ Disciplined Equity 3,592,175 774,204 30,535 N/A 15 7 360,341 - ------------------------------------------------------------------------------------------------------ Disciplined Small and Mid 36,017 7,170 845 N/A N/A N/A 13,719 Cap Equity - ------------------------------------------------------------------------------------------------------ Disciplined Small Cap Value 34,465 4,763 349 N/A 16 7 N/A - ------------------------------------------------------------------------------------------------------ Floating Rate 850,476 411,313 148,157 N/A N/A N/A 8 - ------------------------------------------------------------------------------------------------------ Growth 6,060,271 4,642,489 201,604 N/A 16 8 9 - ------------------------------------------------------------------------------------------------------ Income Opportunities 473,678 539,206 53,830 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ Inflation Protected 197,429 254,136 22,157 N/A N/A N/A 8 Securities - ------------------------------------------------------------------------------------------------------ Large Cap Equity 13,273,226 11,344,113 344,990 N/A 16 8 N/A - ------------------------------------------------------------------------------------------------------ Large Cap Value 160,778 188,820 11,437 N/A 14 7 N/A - ------------------------------------------------------------------------------------------------------ Limited Duration Bond 166,025 127,161 17,304 N/A N/A N/A 8 - ------------------------------------------------------------------------------------------------------ FOR FUNDS WITH FISCAL PERIOD ENDING AUGUST 31 - ------------------------------------------------------------------------------------------------------ California Tax-Exempt 412,060 82,230 20,739 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ Diversified Bond 4,860,209 3,704,597 168,420 N/A 18 8 128,130 - ------------------------------------------------------------------------------------------------------ Massachusetts Tax-Exempt 113,078 78,218 6,386 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ Michigan Tax-Exempt 105,247 21,951 12,458 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ Minnesota Tax-Exempt 751,419 265,289 76,915 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ New York Tax-Exempt 153,046 59,859 9,503 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ Ohio Tax-Exempt 100,075 44,993 12,438 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ FOR FUNDS WITH FISCAL PERIOD ENDING SEPTEMBER 30 - ------------------------------------------------------------------------------------------------------ Balanced 2,372,601 664,087 47,138 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ Disciplined Large Cap 1,799 596 94 N/A 18 9 N/A Growth(b) - ------------------------------------------------------------------------------------------------------ Diversified Equity Income 15,091,455 12,454,200 1,006,4- N/A 37 25,993 10 85 - ------------------------------------------------------------------------------------------------------ Mid Cap Value 4,403,769 3,263,100 328,848 N/A 195 272 10 - ------------------------------------------------------------------------------------------------------ Strategic Allocation 3,858,078 2,055,354 433,308 N/A 21 10 N/A - ------------------------------------------------------------------------------------------------------ Strategic Income 72,743 12,441 3,633 N/A N/A N/A N/A Allocation(b) - ------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 147
FUND CLASS A CLASS B CLASS C CLASS D CLASS R2 CLASS R3 CLASS W - ------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING OCTOBER 31 - ------------------------------------------------------------------------------------------------------ Absolute Return Currency 9,416 38 38 N/A N/A N/A N/A and Income(c) - ------------------------------------------------------------------------------------------------------ Disciplined International 10,920 278 104 N/A N/A N/A N/A Equity(d) - ------------------------------------------------------------------------------------------------------ Emerging Markets 962,664 874,959 40,971 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ Emerging Markets Bond(e) 18,917 2,217 212 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ European Equity 199,348 305,006 14,257 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ Global Bond 762,624 850,871 35,610 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ Global Equity 1,369,019 1,166,873 41,196 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ Global Technology 300,030 449,937 32,281 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ International Aggressive 650,601 659,823 40,332 N/A N/A N/A N/A Growth - ------------------------------------------------------------------------------------------------------ International Equity 242,885 263,442 16,516 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ International Opportunity 1,104,799 844,548 31,174 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ International Select Value 3,237,723 3,631,768 217,884 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ International Small Cap 177,484 183,656 9,465 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ FOR FUNDS WITH FISCAL PERIOD ENDING NOVEMBER 30 - ------------------------------------------------------------------------------------------------------ Intermediate Tax-Exempt 222,998 129,780 48,379 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ Mid Cap Growth 3,114,493 2,748,569 109,599 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ Tax-Exempt Bond 1,878,827 432,834 62,203 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ Tax-Exempt High Income 8,005,917 1,573,435 199,250 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------ FOR FUNDS WITH FISCAL PERIOD ENDING DECEMBER 31 - ------------------------------------------------------------------------------------------------------ Tax-Exempt Money Market 116,536 N/A N/A N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------
(a) For the period from May 16, 2006 (when shares became publicly available) to April 30, 2007. (b) For the period from May 17, 2007 (when shares became publicly available) to Sept. 30, 2007. (c) For the period from June 15, 2006 (when shares became publicly available) to Oct. 31, 2006. (d) For the period from May 18, 2006 (when shares became publicly available) to Oct. 31, 2006. (e) For the period from Feb. 16, 2006 (when shares became publicly available) to Oct. 31, 2006. PAYMENTS TO FINANCIAL INSTITUTIONS The distributor and its affiliates make or support additional cash payments out of their own resources (including profits earned from providing services to the funds) to financial institutions, including inter-company allocation of resources or payment to affiliated broker-dealers, in connection with agreements between the distributor and financial institutions pursuant to which these financial institutions sell fund shares and provide services to their clients who are shareholders of the funds. These payments and intercompany allocations (collectively, "payments") do not change the price paid by investors and fund shareholders for the purchase or ownership of shares of the funds, and these payments are not reflected in the fees and expenses of the funds, as they are not paid by the funds. These payments are in addition to fees paid by the funds to the distributor under 12b-1 plans, which fees may be used to compensate financial institutions for the distribution of fund shares and the servicing of fund shareholders, or paid by the funds to the transfer agent under the transfer agent agreement or plan administration agreement, which fees may be used to support networking or servicing fees to compensate financial institutions for supporting shareholder account maintenance, sub-accounting, plan recordkeeping or other services provided directly by the financial institution to shareholders or plans and plan participants, including retirement plans, 529 plans, Health Savings Account plans, or other plans, where participants beneficially own shares of the funds. These payments are typically made pursuant to an agreement between the distributor and the financial institution, and are typically made in support of marketing and sales support efforts or program and shareholder servicing, as further described below. These payments are usually calculated based on a percentage of fund assets owned through the financial institution and/or as a percentage of fund sales attributable to the financial institution. Certain financial institutions require flat fees instead of or in addition to these asset-based fees as compensation for including or maintaining funds on their platforms, and, in certain situations, may require the reimbursement of ticket or operational charges -- fees that a financial institution charges its representatives for effecting transactions in the funds. The amount of payment varies by financial institution, and Statement of Additional Information - Nov. 29, 2007 Page 148 often is significant. In addition, the amount of payments may differ based upon the type of fund sold or maintained; for instance, the amount of payments for an equity fund may differ from payments for a money-market or fixed income fund. Asset-based payments generally will be made in a range of up to 0.25% of assets or 0.25% of sales or some combination thereof. Exceptions to these general ranges will be considered on a case-by-case basis. Flat fees or annual minimum fees required by a financial institution in addition to such asset-based fees, are considered on a case-by-case basis. MARKETING AND SALES SUPPORT Payments may be paid in support of retail, institutional, plan or other fee- based advisory program distribution efforts. These payments are typically made by the distributor in its efforts to advertise to and/or educate the financial institution's personnel, including its registered representatives, about the fund. As a result of these payments, the distributor may obtain a higher profile and greater visibility for the fund within the financial institution's organization, including placement of the fund on the financial institution's preferred or recommended list. The distributor may also obtain greater access to sales meetings, sales representatives, and management representatives of the financial institution, including potentially having increased opportunity for fund representatives to participate in and/or present at conferences or seminars, sales or training programs for invited registered representatives and their clients and other events sponsored by the financial institution. PROGRAM AND SHAREHOLDER SERVICING Payments may be made in support of recordkeeping, reporting, transaction processing, and other plan administration services provided by a financial institution to or through retirement plans, 529 plans, Health Savings Account plans, or other plans or fee-based advisory programs but may also be made in support of certain retail advisory programs, including wrap programs. A financial institution may perform program services itself or may arrange with a third party to perform program services. These payments may also include services rendered in connection with fund selection and monitoring, employee enrollment and education, plan balance rollover or separation, or other similar services. OTHER PAYMENTS The distributor and its affiliates may separately pay financial institutions in order to participate in and/or present at conferences or seminars, sales or training programs for invited registered representatives and other financial institution employees, client and investor events and other financial institution-sponsored events, and for travel expenses, including lodging incurred by registered representatives and other employees in connection with prospecting, asset retention and due diligence trips. The amount of these payments varies depending upon the nature of the event. The distributor and its affiliates make payments for such events as they deem appropriate, subject to internal guidelines and applicable law. From time to time, to the extent permitted by SEC and NASD rules and by other applicable laws and regulations, the distributor and its affiliates may make other reimbursements or payment to financial institutions or their registered representatives, including non-cash compensation, in the form of gifts of nominal value, occasional meals, tickets, or other entertainment, support for due diligence trips, training and educational meetings or conference sponsorships, support for recognition programs, and other forms of non-cash compensation permissible under regulations to which these financial institutions and their representatives are subject. To the extent these are made as payments instead of reimbursement, they may provide profit to the financial institution to the extent the cost of such services was less than the actual expense of the service. FINANCIAL INSTITUTION ARRANGEMENTS The financial institution through which you are purchasing or own shares of funds has been authorized directly or indirectly by the distributor to sell funds and/or to provide services to you as a shareholder of funds. Investors and current shareholders may wish to take such payment arrangements into account when considering and evaluating any recommendations they receive relating to fund shares. If you have questions regarding the specific details regarding the payments your financial institution may receive from the distributor or its affiliates related to your purchase or ownership of funds, please contact your financial institution. CUSTODIAN SERVICES Custody information varies depending on the fund's investment category. You can find your fund's investment category in Table 1. FOR BALANCED, EQUITY, FUNDS-OF-FUNDS, TAXABLE MONEY MARKET AND TAXABLE FIXED INCOME FUNDS OTHER THAN DIVERSIFIED BOND AND HIGH YIELD BOND: The fund's securities and cash are held by Ameriprise Trust Company, 200 Ameriprise Financial Center, Minneapolis, MN 55474, through a custodian agreement. The custodian is permitted to deposit some or all of its securities in central depository systems as allowed by federal law. For its services, the fund pays the Statement of Additional Information - Nov. 29, 2007 Page 149 custodian a maintenance charge and a charge per transaction in addition to reimbursing the custodian's out-of-pocket expenses. FOR STATE TAX-EXEMPT FIXED INCOME, TAX-EXEMPT FIXED INCOME AND TAX-EXEMPT MONEY MARKET FUNDS, AS WELL AS DIVERSIFIED BOND AND HIGH YIELD BOND: The fund's securities and cash are held by U.S. Bank National Association, 180 E. Fifth St., St. Paul, MN 55101-1631, through a custodian agreement. The custodian is permitted to deposit some or all of its securities in central depository systems as allowed by federal law. For its services, the fund pays the custodian a maintenance charge and a charge per transaction in addition to reimbursing the custodian's out-of-pocket expenses. FOR ALL FUNDS: The custodian may enter into a subcustodian agreement with The Bank of New York, 90 Washington Street, New York, NY 10286. As part of this arrangement, securities purchased outside the United States are maintained in the custody of various foreign branches of The Bank of New York or in other financial institutions as permitted by law and by the fund's subcustodian agreement. BOARD SERVICES CORPORATION The funds have an agreement with Board Services Corporation (Board Services) located at 901 Marquette Avenue South, Suite 2810, Minneapolis, MN 55402. This agreement sets forth the terms of Board Services' responsibility to serve as an agent of the funds for purposes of administering the payment of compensation to each independent Board member, to provide office space for use by the funds and their boards, and to provide any other services to the boards or the independent members, as may be reasonably requested. ORGANIZATIONAL INFORMATION Each fund is an open-end management investment company. The fund's headquarters are at 901 S. Marquette Ave., Suite 2810, Minneapolis, MN 55402-3268. SHARES The shares of a fund represent an interest in that fund's assets only (and profits or losses), and, in the event of liquidation, each share of a fund would have the same rights to dividends and assets as every other share of that fund. VOTING RIGHTS As a shareholder in a fund, you have voting rights over the fund's management and fundamental policies. You are entitled to vote based on your total dollar interest in the fund. Each class, if applicable, has exclusive voting rights with respect to matters for which separate class voting is appropriate under applicable law. All shares have cumulative voting rights with respect to the election of Board members. This means that you have as many votes as the dollar amount you own, including the fractional amount, multiplied by the number of members to be elected. DIVIDEND RIGHTS Dividends paid by a fund, if any, with respect to each applicable class of shares will be calculated in the same manner, at the same time, on the same day, and will be in the same amount, except for differences resulting from differences in fee structures. SHAREHOLDER LIABILITY For funds organized as Massachusetts business trusts, under Massachusetts law, shareholders of a Massachusetts business trust may, under certain circumstances, be held personally liable as partners for its obligation. However, the Declaration of Trust that establishes a trust, a copy of which, together with all amendments thereto (the "Declaration of Trust"), is on file with the office of the Secretary of the Commonwealth of Massachusetts for each applicable fund, contains an express disclaimer of shareholder liability for acts or obligations of the Trust, or of any fund in the Trust. The Declaration of Trust provides that, if any shareholder (or former shareholder) of a fund in the Trust is charged or held to be personally liable for any obligation or liability of the Trust, or of any fund in the Trust, solely by reason of being or having been a shareholder and not because of such shareholder's acts or omissions or for some other reason, the Trust (upon request of the shareholder) shall assume the defense against such charge and satisfy any judgment thereon, and the shareholder or former shareholder (or the heirs, executors, administrators or other legal representatives thereof, or in the case of a corporation or other entity, its Statement of Additional Information - Nov. 29, 2007 Page 150 corporate or other general successor) shall be entitled (but solely out of the assets of the fund of which such shareholder or former shareholder is or was the holder of shares) to be held harmless from and indemnified against all loss and expense arising from such liability. The Declaration of Trust also provides that the Trust may maintain appropriate insurance (for example, fidelity bond and errors and omissions insurance) for the protection of the Trust, its shareholders, Trustees, officers, employees and agents covering possible tort and other liabilities. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which both inadequate insurance existed and the Trust itself was unable to meet its obligations. The Declaration of Trust further provides that obligations of the Trust are not binding upon the Trustees individually, but only upon the assets and property of the Trust, and that the Trustees will not be liable for any action or failure to act, errors of judgment, or mistakes of fact or law, but nothing in the Declaration of Trust or other agreement with a Trustee protects a Trustee against any liability to which he or she would otherwise be subject by reason of his or her willful bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his or her office. By becoming a shareholder of the fund, each shareholder shall be expressly held to have assented to and agreed to be bound by the provisions of the Declaration of Trust. TABLE 24. FUND HISTORY TABLE FOR RIVERSOURCE FUNDS*
FISCAL DATE OF DATE BEGAN FORM OF STATE OF YEAR FUND** ORGANIZATION OPERATIONS ORGANIZATION ORGANIZATION END DIVERSIFIED*** - ------------------------------------------------------------------------------------------------------------------------- BOND SERIES, INC.(3) 4/29/81, 6/13/86(1) Corporation NV/MN 7/31 - ------------------------------------------------------------------------------------------------------------------------- Core Bond Fund 6/19/03 Yes - ------------------------------------------------------------------------------------------------------------------------- Floating Rate Fund 2/16/06 Yes - ------------------------------------------------------------------------------------------------------------------------- Income Opportunities Fund 6/19/03 Yes - ------------------------------------------------------------------------------------------------------------------------- Inflation Protected 3/4/04 No Securities Fund - ------------------------------------------------------------------------------------------------------------------------- Limited Duration Bond Fund 6/19/03 Yes - ------------------------------------------------------------------------------------------------------------------------- CALIFORNIA TAX-EXEMPT TRUST 4/7/86 Business Trust(2) MA 8/31 - ------------------------------------------------------------------------------------------------------------------------- California Tax-Exempt Fund 8/18/86 No - ------------------------------------------------------------------------------------------------------------------------- DIMENSIONS SERIES, INC. 2/20/68, 6/13/86(1) Corporation NV/MN 7/31 - ------------------------------------------------------------------------------------------------------------------------- Disciplined Small and Mid Cap 5/18/06 Yes Equity Fund - ------------------------------------------------------------------------------------------------------------------------- Disciplined Small Cap Value 2/16/06 Yes Fund - ------------------------------------------------------------------------------------------------------------------------- DIVERSIFIED INCOME SERIES, 6/27/74, 6/31/86(1) Corporation NV/MN 8/31 INC.(3) - ------------------------------------------------------------------------------------------------------------------------- Diversified Bond Fund(4) 10/3/74 Yes - ------------------------------------------------------------------------------------------------------------------------- EQUITY SERIES, INC. 3/18/57, 6/13/86(1) Corporation NV/MN 11/30 - ------------------------------------------------------------------------------------------------------------------------- Mid Cap Growth Fund(5) 6/4/57 Yes - ------------------------------------------------------------------------------------------------------------------------- GLOBAL SERIES, INC. 10/28/88 Corporation MN 10/31 - ------------------------------------------------------------------------------------------------------------------------- Absolute Return Currency and 6/15/06 No Income Fund - ------------------------------------------------------------------------------------------------------------------------- Emerging Markets Bond Fund 2/16/06 No - ------------------------------------------------------------------------------------------------------------------------- Emerging Markets Fund(6) 11/13/96 Yes - ------------------------------------------------------------------------------------------------------------------------- Global Bond Fund 3/20/89 No - ------------------------------------------------------------------------------------------------------------------------- Global Equity Fund(7),(6) 5/29/90 Yes - ------------------------------------------------------------------------------------------------------------------------- Global Technology Fund 11/13/96 Yes - ------------------------------------------------------------------------------------------------------------------------- GOVERNMENT INCOME SERIES, 3/12/85 Corporation MN 5/31 INC. - ------------------------------------------------------------------------------------------------------------------------- Short Duration U.S. 8/19/85 Yes Government Fund(4) - ------------------------------------------------------------------------------------------------------------------------- U.S. Government Mortgage Fund 2/14/02 Yes - ------------------------------------------------------------------------------------------------------------------------- HIGH YIELD INCOME SERIES, 8/17/83 Corporation MN 5/31 INC. - ------------------------------------------------------------------------------------------------------------------------- High Yield Bond Fund(4) 12/8/83 Yes - -------------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 151
FISCAL DATE OF DATE BEGAN FORM OF STATE OF YEAR FUND** ORGANIZATION OPERATIONS ORGANIZATION ORGANIZATION END DIVERSIFIED*** - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- INCOME SERIES, INC. 2/10/45; 6/13/86(1) Corporation NV/MN 5/31 - ------------------------------------------------------------------------------------------------------------------------- Income Builder Basic Income 2/16/06 No Fund - ------------------------------------------------------------------------------------------------------------------------- Income Builder Enhanced 2/16/06 No Income Fund - ------------------------------------------------------------------------------------------------------------------------- Income Builder Moderate 2/16/06 No Income Fund - ------------------------------------------------------------------------------------------------------------------------- INTERNATIONAL MANAGERS SERIES, 5/9/01 Corporation MN 10/31 INC.(3) - ------------------------------------------------------------------------------------------------------------------------- International Aggressive 9/28/01 Yes Growth Fund - ------------------------------------------------------------------------------------------------------------------------- International Equity Fund(5) 10/3/02 Yes - ------------------------------------------------------------------------------------------------------------------------- International Select Value 9/28/01 Yes Fund - ------------------------------------------------------------------------------------------------------------------------- International Small Cap Fund 10/3/02 Yes - ------------------------------------------------------------------------------------------------------------------------- INTERNATIONAL SERIES, INC. 7/18/84 Corporation MN 10/31 - ------------------------------------------------------------------------------------------------------------------------- Disciplined International 5/18/06 Yes Equity Fund - ------------------------------------------------------------------------------------------------------------------------- European Equity Fund(6) 6/26/00 Yes - ------------------------------------------------------------------------------------------------------------------------- International Opportunity 11/15/84 Yes Fund(6),(5) - ------------------------------------------------------------------------------------------------------------------------- INVESTMENT SERIES, INC. 1/18/40; 6/13/86(1) Corporation NV/MN 9/30 - ------------------------------------------------------------------------------------------------------------------------- Balanced Fund(5) 4/16/40 Yes - ------------------------------------------------------------------------------------------------------------------------- Disciplined Large Cap Growth 5/17/07 Yes Fund - ------------------------------------------------------------------------------------------------------------------------- Diversified Equity Income 10/15/90 Yes Fund - ------------------------------------------------------------------------------------------------------------------------- Mid Cap Value Fund 2/14/02 Yes - ------------------------------------------------------------------------------------------------------------------------- LARGE CAP SERIES, INC.(3) 5/21/70, 6/13/86(1) Corporation NV/MN 7/31 - ------------------------------------------------------------------------------------------------------------------------- Disciplined Equity Fund(5) 4/24/03 Yes - ------------------------------------------------------------------------------------------------------------------------- Growth Fund 3/1/72 Yes - ------------------------------------------------------------------------------------------------------------------------- Large Cap Equity Fund 3/28/02 Yes - ------------------------------------------------------------------------------------------------------------------------- Large Cap Value Fund 6/27/02 Yes - ------------------------------------------------------------------------------------------------------------------------- MANAGERS SERIES, INC.(3) 3/20/01 Corporation MN 5/31 - ------------------------------------------------------------------------------------------------------------------------- Aggressive Growth Fund 4/24/03 Yes - ------------------------------------------------------------------------------------------------------------------------- Fundamental Growth Fund(5) 4/24/03 Yes - ------------------------------------------------------------------------------------------------------------------------- Fundamental Value Fund 6/18/01 Yes - ------------------------------------------------------------------------------------------------------------------------- Select Value Fund 3/8/02 Yes - ------------------------------------------------------------------------------------------------------------------------- Small Cap Equity Fund(5) 3/8/02 Yes - ------------------------------------------------------------------------------------------------------------------------- Small Cap Value Fund 6/18/01 Yes - ------------------------------------------------------------------------------------------------------------------------- Value Fund 6/18/01 Yes - ------------------------------------------------------------------------------------------------------------------------- MARKET ADVANTAGE SERIES, INC. 8/25/89 Corporation MN 1/31 - ------------------------------------------------------------------------------------------------------------------------- Portfolio Builder 3/4/04 No Conservative Fund - ------------------------------------------------------------------------------------------------------------------------- Portfolio Builder Moderate 3/4/04 No Conservative Fund - ------------------------------------------------------------------------------------------------------------------------- Portfolio Builder Moderate 3/4/04 No Fund - ------------------------------------------------------------------------------------------------------------------------- Portfolio Builder Moderate 3/4/04 No Aggressive Fund - ------------------------------------------------------------------------------------------------------------------------- Portfolio Builder Aggressive 3/4/04 No Fund - ------------------------------------------------------------------------------------------------------------------------- Portfolio Builder Total 3/4/04 No Equity Fund - ------------------------------------------------------------------------------------------------------------------------- S&P 500 Index Fund 10/25/99 Yes - ------------------------------------------------------------------------------------------------------------------------- Small Company Index Fund 8/19/96 Yes - -------------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 152
FISCAL DATE OF DATE BEGAN FORM OF STATE OF YEAR FUND** ORGANIZATION OPERATIONS ORGANIZATION ORGANIZATION END DIVERSIFIED*** - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- MONEY MARKET SERIES, INC. 8/22/75; 6/13/86(1) Corporation NV/MN 7/31 - ------------------------------------------------------------------------------------------------------------------------- Cash Management Fund 10/6/75 Yes - ------------------------------------------------------------------------------------------------------------------------- SECTOR SERIES, INC. 3/25/88 Corporation MN 6/30 - ------------------------------------------------------------------------------------------------------------------------- Dividend Opportunity Fund(8) 8/1/88 Yes - ------------------------------------------------------------------------------------------------------------------------- Real Estate Fund 3/4/04 Yes - ------------------------------------------------------------------------------------------------------------------------- SELECTED SERIES, INC. 10/5/84 Corporation MN 3/31 - ------------------------------------------------------------------------------------------------------------------------- Precious Metals and Mining 4/22/86 No Fund(9) - ------------------------------------------------------------------------------------------------------------------------- SERIES TRUST 1/27/06 Business Trust(2) MA 4/30 - ------------------------------------------------------------------------------------------------------------------------- 120/20 Contrarian Equity Fund 10/18/07 Yes - ------------------------------------------------------------------------------------------------------------------------- 130/30 U.S. Equity Fund 10/18/07 Yes - ------------------------------------------------------------------------------------------------------------------------- Retirement Plus 2010 Fund 5/18/06 No - ------------------------------------------------------------------------------------------------------------------------- Retirement Plus 2015 Fund 5/18/06 No - ------------------------------------------------------------------------------------------------------------------------- Retirement Plus 2020 Fund 5/18/06 No - ------------------------------------------------------------------------------------------------------------------------- Retirement Plus 2025 Fund 5/18/06 No - ------------------------------------------------------------------------------------------------------------------------- Retirement Plus 2030 Fund 5/18/06 No - ------------------------------------------------------------------------------------------------------------------------- Retirement Plus 2035 Fund 5/18/06 No - ------------------------------------------------------------------------------------------------------------------------- Retirement Plus 2040 Fund 5/18/06 No - ------------------------------------------------------------------------------------------------------------------------- Retirement Plus 2045 Fund 5/18/06 No - ------------------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS SERIES, 4/23/68, 6/13/86(1) Corporation NV/MN 7/31 INC. - ------------------------------------------------------------------------------------------------------------------------- Short-Term Cash Fund 9/26/06 Yes - ------------------------------------------------------------------------------------------------------------------------- SPECIAL TAX-EXEMPT SERIES 4/7/86 Business Trust(2) MA 8/31 TRUST(10) - ------------------------------------------------------------------------------------------------------------------------- Massachusetts Tax-Exempt Fund 7/2/87 No - ------------------------------------------------------------------------------------------------------------------------- Michigan Tax-Exempt Fund 7/2/87 No - ------------------------------------------------------------------------------------------------------------------------- Minnesota Tax-Exempt Fund 8/18/86 Yes(11) - ------------------------------------------------------------------------------------------------------------------------- New York Tax-Exempt Fund 8/18/86 No - ------------------------------------------------------------------------------------------------------------------------- Ohio Tax-Exempt Fund 7/2/87 No - ------------------------------------------------------------------------------------------------------------------------- STRATEGIC ALLOCATION SERIES, 10/9/84 Corporation MN 9/30 INC.(3) - ------------------------------------------------------------------------------------------------------------------------- Strategic Allocation Fund(5) 1/23/85 Yes - ------------------------------------------------------------------------------------------------------------------------- Strategic Income Allocation 5/17/07 Yes Fund - ------------------------------------------------------------------------------------------------------------------------- STRATEGY SERIES, INC. 1/24/84 Corporation MN 3/31 - ------------------------------------------------------------------------------------------------------------------------- Equity Value Fund 5/14/84 Yes - ------------------------------------------------------------------------------------------------------------------------- Small Cap Growth Fund 1/24/01 Yes - ------------------------------------------------------------------------------------------------------------------------- Small Cap Advantage Fund 5/4/99 Yes - ------------------------------------------------------------------------------------------------------------------------- TAX-EXEMPT INCOME SERIES, 12/21/78; 6/13/86(1) Corporation NV/MN 11/30 INC.(3) - ------------------------------------------------------------------------------------------------------------------------- Tax-Exempt High Income 5/7/79 Yes Fund(5) - ------------------------------------------------------------------------------------------------------------------------- TAX-EXEMPT MONEY MARKET 2/29/80, 6/13/86(1) Corporation NV/MN 12/31 SERIES, INC.(3) - ------------------------------------------------------------------------------------------------------------------------- Tax-Exempt Money Market 8/5/80 Yes Fund(5) - ------------------------------------------------------------------------------------------------------------------------- TAX-EXEMPT SERIES, INC. 9/30/76, 6/13/86(1) Corporation NV/MN 11/30 - ------------------------------------------------------------------------------------------------------------------------- Intermediate Tax-Exempt Fund 11/13/96 Yes - ------------------------------------------------------------------------------------------------------------------------- Tax-Exempt Bond Fund 11/24/76 Yes - -------------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 153 * The RiverSource Variable Portfolio funds are not included in this table. Please see the Variable Portfolio funds' SAI for fund history. ** Effective Oct. 1, 2005 American Express Funds changed its name to RiverSource funds and the names Threadneedle and Partners were removed from fund names. *** If a non-diversified fund is managed as if it were a diversified fund for a period of three years, its status under the 1940 Act will convert automatically from non-diversified to diversified. A diversified fund may convert to non-diversified status only with shareholder approval. (1) Date merged into a Minnesota corporation incorporated on April 7, 1986. (2) Under Massachusetts law, shareholders of a business trust may, under certain circumstances, be held personally liable as partners for its obligations. However, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the trust itself is unable to meet its obligations. (3) Effective April 21, 2006, AXP Discovery Series, Inc. changed its name to RiverSource Bond Series, Inc.; AXP Fixed Income Series, Inc. changed its name to RiverSource Diversified Income Series, Inc.; AXP Growth Series, Inc. changed its name to RiverSource Large Cap Series, Inc.; AXP High Yield Tax-Exempt Series, Inc. changed its name to RiverSource Tax-Exempt Income Series, Inc.; AXP Managed Series, Inc. changed its name to RiverSource Strategic Allocation Series, Inc.; AXP Partners International Series, Inc. changed its name to RiverSource International Managers Series, Inc.; AXP Partners Series, Inc. changed its name to RiverSource Managers Series, Inc.; AXP Tax-Free Money Series, Inc. changed its name to RiverSource Tax-Exempt Money Market Series, Inc.; and for all other corporations and business trusts, AXP was replaced with RiverSource in the registrant name. (4) Effective June 27, 2003, Bond Fund changed its name to Diversified Bond Fund, Federal Income Fund changed its name to Short Duration U.S. Government Fund and Extra Income Fund changed its name to High Yield Bond Fund. (5) Effective Oct. 1, 2005, Equity Select Fund changed its name to Mid Cap Growth Fund, High Yield Tax-Exempt Fund changed its name to Tax-Exempt High Income Fund, Managed Allocation Fund changed its name to Strategic Allocation Fund, Mutual changed its name to Balanced Fund, Partners Growth Fund changed its name to Fundamental Growth Fund, Partners International Core Fund changed its name to International Equity Fund, Partners Small Cap Core Fund changed its name to Small Cap Equity Fund, Quantitative Large Cap Equity Fund changed its name to Disciplined Equity Fund, Tax-Free Money Fund changed its name to Tax-Exempt Money Market Fund, and Threadneedle International Fund changed its name to International Opportunity Fund. (6) Effective July 9, 2004, Emerging Markets Fund changed its name to Threadneedle Emerging Markets Fund, European Equity Fund changed its name to Threadneedle European Equity Fund, Global Equity Fund changed its name to Threadneedle Global Equity Fund, and International Fund changed its name to Threadneedle International Fund. (7) Effective Oct. 20, 2003, Global Growth Fund changed its name to Global Equity Fund. (8) Effective Feb. 18, 2004, Utilities Fund changed its name to Dividend Opportunity Fund. (9) Effective Nov. 1, 2006, Precious Metals Fund changed its name to Precious Metals and Mining Fund. (10) Effective April 13, 2006, the fiscal year end was changed from June 30 to Aug. 31. (11) Minnesota Tax-Exempt Fund is currently classified as a diversified fund under the 1940 Act. This means that the fund may not, with respect to 75% of its total assets, invest more than 5% of its total assets in any one issuer or purchase more than 10% of the outstanding voting securities of any one issuer. With respect to the remaining 25% of the fund's total assets, there is no limitation on the amount of assets the fund may invest in any one issuer. These are "fundamental" policies of the fund. Section 13(a)(1) of the 1940 Act and Rule 13a-1 thereunder generally provide that if a non-diversified fund actually operates as if it were a diversified fund for a period of three years, its classification under the 1940 Act will convert automatically from non- diversified to diversified. The fund has been classified as a diversified fund since Spring 2006, a result of its operation as a diversified fund for more than three years based on the measurement of diversification that existed at the time, which is not consistent with how diversification is currently measured. Specifically, the fund has historically participated in inverse floater programs, where the fund transfers to trusts fixed rate municipal bonds (municipal bonds) in exchange for cash and residual interest in the trusts' assets and cash flows, which are in the form of inverse floating rate securities (residual bonds). The trusts fund the purchase of the municipal bonds by issuing short-term floating rate notes to third parties. The municipal bonds transferred to the trusts remain in the fund's investments in securities and the related short-term floating rate notes are reflected as fund liabilities. Prior to January 2007, the fund measured diversification based upon the value of the residual bonds only. Since January 2007, the fund has also measured diversification based on the full value of the municipal bonds held in trusts; had this measurement of diversification (considering the full value of municipal bonds held in trusts) been employed historically, the fund would not have converted its classification to a diversified fund in Spring 2006. The Board of Trustees of the fund has recommended that the fund be managed as a non-diversified fund, consistent with its original structure. It is expected that shareholders will vote on this matter in the first quarter of 2008. Statement of Additional Information - Nov. 29, 2007 Page 154 BOARD MEMBERS AND OFFICERS Shareholders elect a Board that oversees a fund's operations. The Board appoints officers who are responsible for day-to-day business decisions based on policies set by the Board. The following is a list of each fund's Board members. Each member oversees 104 RiverSource funds. Board members serve until the next regular shareholders' meeting or until he or she reaches the mandatory retirement age established by the Board. Under the current Board policy, members may serve until the end of the meeting following their 75th birthday, or the fifteenth anniversary of the first Board meeting they attended as members of the Board, whichever occurs first. This policy does not apply to Ms. Jones who may retire after her 75th birthday. TABLE 25. BOARD MEMBERS INDEPENDENT BOARD MEMBERS
POSITION HELD WITH FUNDS AND NAME, ADDRESS, LENGTH OF PRINCIPAL OCCUPATION OTHER COMMITTEE AGE SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS MEMBERSHIPS - ------------------------------------------------------------------------------------------- Kathleen Blatz Board Chief Justice, Minnesota None Compliance, 901 S. member Supreme Court, 1998-2005 Investment Marquette Ave. since 2006 Review, Joint Minneapolis, MN Audit 55402 Age 53 - ------------------------------------------------------------------------------------------- Arne H. Carlson Board Chair, RiverSource Funds, 1999- None Board 901 S. member 2006; former Governor of Governance, Marquette Ave. since 1999 Minnesota Contracts, Minneapolis, MN Executive, 55402 Investment Age 73 Review - ------------------------------------------------------------------------------------------- Pamela G. Board President, Springboard-Partners None Investment Carlton member in Cross Cultural Leadership Review, Joint 901 S. since 2007 (consulting company) Audit Marquette Ave. Minneapolis, MN 55402 Age 52 - ------------------------------------------------------------------------------------------- Patricia M. Board Trustee Professor of Economics None Board Flynn member and Management, Bentley Governance, 901 S. since 2004 College; former Dean, McCallum Compliance, Marquette Ave. Graduate School of Business, Contracts, Minneapolis, MN Bentley College Investment 55402 Review Age 56 - ------------------------------------------------------------------------------------------- Anne P. Jones Board Attorney and Consultant None Board 901 S. member Governance, Marquette Ave. since 1985 Executive, Minneapolis, MN Investment 55402 Review, Joint Age 72 Audit - ------------------------------------------------------------------------------------------- Jeffrey Board Former Managing Director, American Board Laikind, CFA member Shikiar Asset Management Progressive Governance, 901 S. since 2005 Insurance Investment Marquette Ave. Review, Joint Minneapolis, MN Audit 55402 Age 72 - ------------------------------------------------------------------------------------------- Stephen R. Board President Emeritus and Valmont Board Lewis, Jr. member Professor of Economics, Industries, Governance, 901 S. since 2002 Carleton College Inc. Compliance, Marquette Ave. and Chair (manufactures Contracts, Minneapolis, MN of the irrigation Executive, 55402 Board systems) Investment Age 68 since 2007 Review - ------------------------------------------------------------------------------------------- Catherine James Board Director, Enterprise Asset Strategic Compliance, Paglia member Management, Inc. (private real Distribution, Contracts, 901 S. since 2004 estate and asset management Inc. Executive, Marquette Ave. company) (transporta- Investment Minneapolis, MN tion, Review 55402 distribution Age 55 and logistics consultants) - ------------------------------------------------------------------------------------------- Alison Taunton- Board Chief Executive Officer, Hybridon, Inc. Contracts, Rigby member RiboNovix, Inc. since 2003 (biotechnol- Executive, 901 S. since 2002 (biotechnology); former ogy); American Investment Marquette Ave. President, Forester Biotech Healthways, Review Minneapolis, MN Inc. (health 55402 management Age 63 programs) - -------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 155 BOARD MEMBER AFFILIATED WITH RIVERSOURCE INVESTMENTS*
POSITION HELD WITH FUNDS AND NAME, ADDRESS, LENGTH OF PRINCIPAL OCCUPATION OTHER COMMITTEE AGE SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS MEMBERSHIPS - ------------------------------------------------------------------------------------------- William F. Board President - U.S. Asset None Investment Truscott member Management and Chief Investment Review 53600 since Officer, Ameriprise Financial, Ameriprise 2001, Vice Inc. and President, Chairman of Financial President the Board and Chief Investment Center since 2002 Officer, RiverSource Minneapolis, MN Investments, LLC since 2005; 55474 President, Ameriprise Age 47 Certificate Company since 2006; Senior Vice President - Chief Investment Officer, Ameriprise Financial, Inc. and Chairman of the Board and Chief Investment Officer, RiverSource Investments, LLC, 2001-2005 - -------------------------------------------------------------------------------------------
* Interested person by reason of being an officer, director, security holder and/or employee of RiverSource Investments. The Board has appointed officers who are responsible for day-to-day business decisions based on policies it has established. The officers serve at the pleasure of the Board. In addition to Mr. Truscott, who is Vice President, the fund's other officers are: TABLE 26. FUND OFFICERS
POSITION HELD WITH FUNDS AND LENGTH OF PRINCIPAL OCCUPATION NAME, ADDRESS, AGE SERVICE DURING PAST FIVE YEARS - ---------------------------------------------------------------------------------------- Patrick T. Bannigan President since Senior Vice President - Asset Management, 172 Ameriprise 2006 RiverSource Investments, LLC since 2006; Financial Center Managing Director and Global Head of Product, Minneapolis, MN 55474 Morgan Stanley Investment Management, 2004- Age 42 2006; President, Touchstone Investments, 2002- 2004; Director of Strategic Planning, Evergreen Investments, 1995-2002 - --------------------------------------------------------------------------------------- Michelle M. Keeley Vice President Executive Vice President - Equity and Fixed 172 Ameriprise since 2004 Income, Ameriprise Financial, Inc. and Financial Center RiverSource Investments, LLC since 2006; Vice Minneapolis, MN 55474 President - Investments, Ameriprise Age 43 Certificate Company since 2003; Senior Vice President - Fixed Income, Ameriprise Financial, Inc., 2002-2006 and RiverSource Investments, LLC, 2004-2006; Managing Director, Zurich Global Assets, 2001-2002 - --------------------------------------------------------------------------------------- Amy K. Johnson Vice President Vice President - Asset Management and Trust 5228 Ameriprise since 2006 Company Services, RiverSource Investments, LLC Financial Center since 2006; Vice President - Operations and Minneapolis, MN 55474 Compliance, RiverSource Investments, LLC, Age 42 2004-2006; Director of Product Development - Mutual Funds, Ameriprise Financial, Inc., 2001-2004 - --------------------------------------------------------------------------------------- Jeffrey P. Fox Treasurer since Vice President - Investment Accounting, 105 Ameriprise 2002 Ameriprise Financial, Inc. since 2002; Vice Financial Center President - Finance, American Express Company, Minneapolis, MN 55474 2000-2002 Age 52 - --------------------------------------------------------------------------------------- Scott R. Plummer Vice President, Vice President and Chief Counsel - Asset 5228 Ameriprise General Counsel Management, Ameriprise Financial, Inc. since Financial Center and Secretary 2005; Vice President, General Counsel and Minneapolis, MN 55474 since 2006 Secretary, Ameriprise Certificate Company Age 48 since 2005; Vice President - Asset Management Compliance, Ameriprise Financial, Inc., 2004- 2005; Senior Vice President and Chief Compliance Officer, U.S. Bancorp Asset Management, 2002-2004; Second Vice President and Assistant General Counsel, Hartford Life, 2001-2002 - ---------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 156
POSITION HELD WITH FUNDS AND LENGTH OF PRINCIPAL OCCUPATION NAME, ADDRESS, AGE SERVICE DURING PAST FIVE YEARS - ---------------------------------------------------------------------------------------- Jennifer D. Lammers Chief Compliance U.S. Asset Management Chief Compliance 172 Ameriprise Officer since Officer, RiverSource Investments, LLC since Financial Center 2006 2006; Director - Mutual Funds, Voyageur Asset Minneapolis, MN 55474 Management, 2003-2006; Director of Finance, Age 46 Voyageur Asset Management, 2000-2003 - --------------------------------------------------------------------------------------- Neysa M. Alecu Money Laundering Compliance Director and Anti-Money Laundering 2934 Ameriprise Prevention Officer, Ameriprise Financial, Inc. since Financial Center Officer since 2004; Manager Anti-Money Laundering, Minneapolis, MN 55474 2004 Ameriprise Financial, Inc., 2003-2004; Age 43 Compliance Director and Bank Secrecy Act Officer, American Express Centurion Bank, 2000-2003 - ---------------------------------------------------------------------------------------
RESPONSIBILITIES OF BOARD WITH RESPECT TO FUND MANAGEMENT The Board initially approves an Investment Management Services Agreement and other contracts with the investment manager and its affiliates, and other service providers. Once the contracts are approved, the Board monitors the level and quality of services including commitments of service providers to achieve expected levels of investment performance and shareholder services. In addition, the Board oversees that processes are in place to assure compliance with applicable rules, regulations and investment policies and addresses possible conflicts of interest. Annually, the Board evaluates the services received under the contracts by receiving reports covering investment performance, shareholder services, marketing, and the investment manager's profitability in order to determine whether to continue existing contracts or negotiate new contracts. SEVERAL COMMITTEES FACILITATE ITS WORK BOARD GOVERNANCE COMMITTEE -- Recommends to the Board the size, structure and composition of the Board and its committees; the compensation to be paid to members of the Board; and a process for evaluating the Board's performance. The committee also reviews candidates for Board membership including candidates recommended by shareholders. To be considered, recommendations must include a curriculum vitae and be mailed to the Chairman of the Board, RiverSource Funds, 901 Marquette Avenue South, Suite 2810, Minneapolis, MN 55402-3268. The committee also makes recommendations to the Board regarding responsibilities and duties of the Board, oversees proxy voting and supports the work of the Board Chair in relation to furthering the interests of the Funds and their shareholders on external matters. COMPLIANCE COMMITTEE -- Supports the Funds' maintenance of a strong compliance program by providing a forum for independent Board members to consider compliance matters impacting the Funds or their key service providers; developing and implementing, in coordination with the Funds' Chief Compliance Officer (CCO), a process for the review and consideration of compliance reports that are provided to the Boards; and providing a designated forum for the Funds' CCO to meet with independent Board members on a regular basis to discuss compliance matters. CONTRACTS COMMITTEE -- Reviews and oversees the contractual relationships with service providers. Receives and analyzes reports covering the level and quality of services provided under contracts with the fund and advises the Board regarding actions taken on these contracts during the annual review process. EXECUTIVE COMMITTEE -- Acts for the Board between meetings of the Board. INVESTMENT REVIEW COMMITTEE -- Reviews and oversees the management of the Funds' assets. Considers investment management policies and strategies; investment performance; risk management techniques; and securities trading practices and reports areas of concern to the Board. JOINT AUDIT COMMITTEE -- Oversees the accounting and financial reporting processes of the Funds and internal controls over financial reporting. Oversees the quality and integrity of the Funds' financial statements and independent audits as well as the Funds' compliance with legal and regulatory requirements relating to the Funds' accounting and financial reporting, internal controls over financial reporting and independent audits. The committee also makes recommendations regarding the selection of the Funds' independent auditor and reviews and evaluates the qualifications, independence and performance of the auditor. Statement of Additional Information - Nov. 29, 2007 Page 157 This table shows the number of times the committees met during each fund's most recent fiscal period. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1. TABLE 27. COMMITTEE MEETINGS
BOARD INVEST- GOVER- COMPLI- CON- EXECU- MENT JOINT NANCE ANCE TRACTS TIVE REVIEW AUDIT COMMIT- COMMIT- COMMIT- COMMIT- COMMIT- COMMIT- FISCAL PERIOD TEE TEE* TEE TEE TEE TEE - ------------------------------------------------------------------------------------------------ For funds with fiscal period ending 5 1 6 1 5 6 January 31 - ------------------------------------------------------------------------------------------------ For funds with fiscal period ending 5 1 6 2 5 6 March 31 - ------------------------------------------------------------------------------------------------ For funds with fiscal period ending 5 2 6 1 5 6 April 30 - ------------------------------------------------------------------------------------------------ For funds with fiscal period ending 5 2 6 1 5 7 May 31 - ------------------------------------------------------------------------------------------------ For funds with fiscal period ending 5 2 6 1 5 8 June 30 - ------------------------------------------------------------------------------------------------ For funds with fiscal period ending 5 3 6 1 5 8 July 31 - ------------------------------------------------------------------------------------------------ For funds with fiscal period ending 5 3 6 1 5 8 August 31 - ------------------------------------------------------------------------------------------------ For funds with fiscal period ending 6 5 6 1 5 8 September 30 - ------------------------------------------------------------------------------------------------ For funds with fiscal period ending 2 N/A 6 0 4 5 October 31 - ------------------------------------------------------------------------------------------------ For funds with fiscal period ending 5 N/A 6 0 5 6 November 30 - ------------------------------------------------------------------------------------------------ For funds with fiscal period ending 5 N/A 6 1 5 6 December 31 - ------------------------------------------------------------------------------------------------
* Committee established December 2006. BOARD MEMBER HOLDINGS The following table shows the Board members' dollar range of equity securities beneficially owned on Dec. 31, 2006 of each individual fund owned by a Board member, and the aggregate dollar range of equity securities of all RiverSource funds overseen by the Board members. TABLE 28. BOARD MEMBER HOLDINGS Based on net asset values as of Dec. 31, 2006
AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES DOLLAR RANGE OF ALL OF EQUITY RIVERSOURCE FUNDS SECURITIES IN OVERSEEN BOARD MEMBER* FUND THE FUND BY BOARD MEMBER - -------------------------------------------------------------------------------------- Kathleen Blatz Equity Value $10,001- Over $100,000 $50,000 ---------------------------------------------- Global Equity $10,001- $50,000 ---------------------------------------------- Strategic Allocation Over $100,000 - -------------------------------------------------------------------------------------- Arne H. Carlson Cash Management $1-$10,000 Over $100,000 ---------------------------------------------- Disciplined Equity $10,001- $50,000 ---------------------------------------------- Diversified Equity Income $10,001- $50,000 ---------------------------------------------- Dividend Opportunity $10,001- $50,000 ---------------------------------------------- Fundamental Value $10,001- $50,000 ---------------------------------------------- Global Equity $10,001- $50,000 ---------------------------------------------- Global Technology $10,001- $50,000 ---------------------------------------------- International Equity $10,001- $50,000 ---------------------------------------------- International Select Value $10,001- $50,000 ---------------------------------------------- Strategic Allocation $10,001- $50,000 - -------------------------------------------------------------------------------------- Patricia M. Flynn Growth** -- Over $100,000** - ------------------------------------------------------------------- Strategic Allocation** $10,001- $50,000 - --------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 158
AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES DOLLAR RANGE OF ALL OF EQUITY RIVERSOURCE FUNDS SECURITIES IN OVERSEEN BOARD MEMBER* FUND THE FUND BY BOARD MEMBER - -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------- Anne P. Jones Disciplined Equity $50,001- Over $100,000 $100,000 ---------------------------------------------- Diversified Bond $10,001- $50,000 ---------------------------------------------- Diversified Equity Income $10,001- $50,000 ---------------------------------------------- Global Bond Over $100,000 ---------------------------------------------- Global Equity $50,001- $100,000 ---------------------------------------------- Growth $50,001- $100,000 ---------------------------------------------- High Yield Bond Over $100,000 ---------------------------------------------- Short Duration U.S. Government Over $100,000 ---------------------------------------------- Small Company Index Over $100,000 - ------------------------------------------------------------------- Strategic Allocation $10,001- $50,000 - -------------------------------------------------------------------------------------- Jeffrey Laikind Disciplined Equity $10,001- $50,001-$100,000 $50,000 ---------------------------------------------- Growth $50,001- $100,000 ---------------------------------------------- Stephen R. Lewis, Cash Management** -- Over $100,000** Jr. ---------------------------------------------- Diversified Equity Income** $10,001- $50,000 ---------------------------------------------- Emerging Markets** -- ---------------------------------------------- International Opportunity** -- ---------------------------------------------- Mid Cap Growth $10,001- $50,000 ---------------------------------------------- Portfolio Builder Total -- Equity** ---------------------------------------------- Strategic Allocation $10,001- $50,000 - -------------------------------------------------------------------------------------- Catherine James Disciplined Equity** -- Over $100,000** Paglia - ------------------------------------------------------------------- Diversified Equity Income $10,001- $50,000 ---------------------------------------------- Growth $10,001- $50,000 ---------------------------------------------- Small Cap Advantage** -- ---------------------------------------------- Strategic Allocation $50,001- $100,000 - -------------------------------------------------------------------------------------- Alison Taunton Diversified Equity Income $10,001- Over $100,000 Rigby $50,000 ---------------------------------------------- Emerging Markets $10,001- $50,000 ---------------------------------------------- Equity Value $10,001- $50,000 ---------------------------------------------- Global Equity $10,001- $50,000 ---------------------------------------------- Growth $10,001- $50,000 ---------------------------------------------- Income Builder Enhanced Income Over $100,000 ---------------------------------------------- International Aggressive Growth $10,001- $50,000 ---------------------------------------------- International Select Value $10,001- $50,000 ---------------------------------------------- Mid Cap Value $10,001- $50,000 ---------------------------------------------- Strategic Allocation $10,001- $50,000 - --------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 159
AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES DOLLAR RANGE OF ALL OF EQUITY RIVERSOURCE FUNDS SECURITIES IN OVERSEEN BOARD MEMBER* FUND THE FUND BY BOARD MEMBER - -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------- William F. Balanced $50,001- Over $100,000 Truscott $100,000 ---------------------------------------------- Cash Management Over $100,000 ---------------------------------------------- Disciplined Equity $50,001- $100,000 ---------------------------------------------- Disciplined International $50,001- Equity $100,000 ---------------------------------------------- Dividend Opportunity Over $100,000 ---------------------------------------------- Emerging Markets $50,001- $100,000 ---------------------------------------------- Floating Rate Over $100,000 ---------------------------------------------- Global Equity Over $100,000 ---------------------------------------------- Global Technology $10,001- $50,000 ---------------------------------------------- Growth $50,001- $100,000 ---------------------------------------------- High Yield Bond $50,001- $100,000 ---------------------------------------------- Income Builder Enhanced Income Over $100,000 ---------------------------------------------- Income Opportunities $10,001- $50,000 ---------------------------------------------- Intermediate Tax-Exempt $50,001- $100,000 ---------------------------------------------- International Opportunity Over $100,000 ---------------------------------------------- Large Cap Equity Over $100,000 ---------------------------------------------- Large Cap Value $50,001- $100,000 ---------------------------------------------- Massachusetts Tax-Exempt Over $100,000 ---------------------------------------------- Mid Cap Growth $50,001- $100,000 ---------------------------------------------- Mid Cap Value $10,001- $50,000 ---------------------------------------------- Portfolio Builder Moderate Over $100,000 Aggressive ---------------------------------------------- Real Estate $50,001- $100,000 ---------------------------------------------- Retirement Plus 2035 $50,001- $100,000 ---------------------------------------------- Small Cap Advantage $10,001- $50,000 ---------------------------------------------- Small Cap Equity Over $100,000 ---------------------------------------------- Small Cap Value $10,001- $50,000 ---------------------------------------------- Strategic Allocation Over $100,000 ---------------------------------------------- Tax-Exempt High Income $50,001- $100,000 - --------------------------------------------------------------------------------------
* Ms. Carlton was not a Board member as of Dec. 31, 2006 and therefore is not included in the table. ** Deferred compensation invested in share equivalents: A. Flynn Growth............. $50,001-$100,000 Strategic $50,001-$100,000 Allocation......... B. Lewis Cash Management.... $50,001-$100,000 Diversified Equity Over $100,000 Income............. Emerging Markets... $10,001-$50,000 International $10,001-$50,000 Opportunity........ Portfolio Builder $10,001-$50,000 Total Equity....... C. Paglia Disciplined $50,001-$100,000 Equity............. Small Cap $50,001-$100,000 Advantage..........
As of 30 days prior to the date of this SAI, the Board members and officers as a group owned less than 1% of the outstanding shares of any class of any fund. Statement of Additional Information - Nov. 29, 2007 Page 160 This table shows the dollar range of equity securities beneficially owned on June 30, 2007 of each fund. TABLE 29. BOARD MEMBER HOLDINGS -- INDIVIDUAL FUNDS AS OF QUARTER END
AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES DOLLAR RANGE OF ALL OF EQUITY RIVERSOURCE FUNDS SECURITIES IN OVERSEEN BOARD MEMBER* FUND THE FUND BY BOARD MEMBER - -------------------------------------------------------------------------------------- Kathleen Blatz Emerging Markets $10,001- Over $100,000 $50,000 ---------------------------------------------- Equity Value $50,001- $100,000 ---------------------------------------------- Global Equity $50,001- $100,000 ---------------------------------------------- Real Estate $10,001- $50,000 ---------------------------------------------- Strategic Allocation Over $100,000 - -------------------------------------------------------------------------------------- Arne H. Carlson Cash Management Over $00,000 Over $100,000 ---------------------------------------------- Disciplined Equity $10,001- $50,000 ---------------------------------------------- Dividend Opportunity $10,001- $50,000 ---------------------------------------------- Global Technology $10,001- $50,000 ---------------------------------------------- International Equity $10,001- $50,000 ---------------------------------------------- International Select Value $10,001- $50,000 ---------------------------------------------- Strategic Allocation $50,001- $100,000 - -------------------------------------------------------------------------------------- Patricia M. Flynn Growth $50,001- Over $100,000** $100,000** ---------------------------------------------- Portfolio Builder Aggressive $10,001- $50,000** ---------------------------------------------- Strategic Allocation Over $100,000** - -------------------------------------------------------------------------------------- Anne P. Jones Disciplined Equity $50,001- Over $100,000 $100,000 ---------------------------------------------- Diversified Bond $10,001- $50,000 ---------------------------------------------- Diversified Equity Income $50,001- $100,000 ---------------------------------------------- Global Bond Over $100,000 ---------------------------------------------- Global Equity $50,001- $100,000 ---------------------------------------------- Growth $50,001- $100,000 ---------------------------------------------- High Yield Bond Over $100,000 ---------------------------------------------- Short Duration U.S. Government Over $100,000 ---------------------------------------------- Small Company Index $50,000- $100,000 ---------------------------------------------- Strategic Allocation $50,001- $100,000 - -------------------------------------------------------------------------------------- Jeffrey Laikind Disciplined Equity $10,001- Over $100,000 $50,000 ---------------------------------------------- Growth $50,001- $100,000 - -------------------------------------------------------------------------------------- Stephen R. Lewis, Cash Management $50,001- Over $100,000** Jr. $100,000** ---------------------------------------------- Disciplined International $50,001- Equity $100,000** ---------------------------------------------- Diversified Equity Income Over $100,000** ---------------------------------------------- Emerging Markets $50,001- $100,000** ---------------------------------------------- Mid Cap Growth $10,001- $50,000 ---------------------------------------------- Portfolio Builder Total Equity $10,001- $50,000** ---------------------------------------------- Strategic Allocation $10,001- $50,000 - -------------------------------------------------------------------------------------- Catherine James Disciplined Equity $50,001- Over $100,000** Paglia $100,000** ---------------------------------------------- Global Equity $50,001- $100,000** ---------------------------------------------- Growth $10,001- $50,000 ---------------------------------------------- Small Cap Advantage $50,001- $100,000** ---------------------------------------------- Strategic Allocation $50,001- $100,000 - --------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 161
AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES DOLLAR RANGE OF ALL OF EQUITY RIVERSOURCE FUNDS SECURITIES IN OVERSEEN BOARD MEMBER* FUND THE FUND BY BOARD MEMBER - -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------- Alison Taunton- Cash Management $10,001- Over $100,000 Rigby $50,000 ---------------------------------------------- Diversified Equity Income $50,001- $100,000 ---------------------------------------------- Emerging Markets $50,001- $100,000 ---------------------------------------------- Growth Over $100,000 ---------------------------------------------- Income Builder Enhanced Income Over $100,000 ---------------------------------------------- International Aggressive Growth Over $100,000 ---------------------------------------------- International Select Value Over $100,000 ---------------------------------------------- Mid Cap Value $50,001- $100,000 ---------------------------------------------- Small Cap Value $50,001- $100,000 ---------------------------------------------- Strategic Allocation Over $100,000 - -------------------------------------------------------------------------------------- William F. Balanced Over $100,000 Over $100,000 Truscott ---------------------------------------------- Cash Management Over $100,000 ---------------------------------------------- Disciplined Equity Over $100,000 ---------------------------------------------- Disciplined International Over $100,000 Equity ---------------------------------------------- Disciplined Small & Mid Cap $10,001- $50,000 ---------------------------------------------- Disciplined Small Cap Value Over $100,000 ---------------------------------------------- Diversified Bond $10,001- $50,000 ---------------------------------------------- Emerging Markets Over $100,000 ---------------------------------------------- Floating Rate Over $100,000 ---------------------------------------------- Global Equity Over $100,000 ---------------------------------------------- Global Technology $50,001- $100,000 ---------------------------------------------- Growth Over $100,000 ---------------------------------------------- High Yield Bond $50,001- $100,000 ---------------------------------------------- Income Builder Enhanced Income Over $100,000 ---------------------------------------------- Income Opportunities $10,001- $50,000 ---------------------------------------------- Intermediate Tax-Exempt $50,001- $100,000 ---------------------------------------------- International Equity $10,001- $50,000 ---------------------------------------------- International Opportunity Over $100,000 ---------------------------------------------- International Select Value $10,001- $50,000 ---------------------------------------------- International Small Cap Over $100,000 ---------------------------------------------- Large Cap Equity Over $100,000 ---------------------------------------------- Large Cap Value $50,001- $100,000 ---------------------------------------------- Massachusetts Tax-Exempt Over $100,000 ---------------------------------------------- Mid Cap Growth $50,001- $100,000 ---------------------------------------------- Mid Cap Value $10,001- $50,000 ---------------------------------------------- Portfolio Builder Over $100,000 Moderate Aggressive ---------------------------------------------- Real Estate $50,001- $100,000 ---------------------------------------------- Retirement Plus 2035 Over $100,000 ---------------------------------------------- Small Cap Advantage $10,001- $50,000 ---------------------------------------------- Small Cap Equity Over $100,000 ---------------------------------------------- Small Cap Value $10,001- $50,000 ---------------------------------------------- Strategic Allocation Over $100,000 ---------------------------------------------- Tax-Exempt High Income $50,001- $100,000 - --------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 162 * Pamela Carlton was not a member of the Board as of June 30, 2007. ** Deferred compensation invested in share equivalents: A. Flynn Growth............. $50,001-$100,000 Portfolio Builder $10,001-$50,000 Aggressive......... Strategic Over $100,000 Allocation......... B. Lewis Cash Management.... $50,001-$100,000 Disciplined Int'l $50,001-$100,000 Equity............. Diversified Equity Over $100,000 Income............. Emerging Markets... $50,001-$100,000 Portfolio Builder $10,001-$50,000 Total Equity....... C. Paglia Disciplined $50,001-$100,000 Equity............. Small Cap $50,001-$100,000 Advantage.......... Global Equity...... $50,001-$100,000
COMPENSATION OF BOARD MEMBERS TOTAL COMPENSATION. The following table shows the total compensation paid to independent Board members from all the RiverSource funds in the last fiscal period. TABLE 30. BOARD MEMBER COMPENSATION - ALL FUNDS
TOTAL CASH COMPENSATION FROM PENSION OR RETIREMENT RIVERSOURCE BOARD MEMBER(A) BENEFITS PAID TO BOARD MEMBER FUNDS PAID TO BOARD MEMBER - ------------------------------------------------------------------------------------------------------- Kathleen Blatz N/A $150,750 - ------------------------------------------------------------------------------------------------------- Arne H. Carlson(b) 8,250(b) 197,000 - ------------------------------------------------------------------------------------------------------- Pamela Carlton N/A 40,000 - ------------------------------------------------------------------------------------------------------- Patricia M. Flynn N/A 144,300(c) - ------------------------------------------------------------------------------------------------------- Anne P. Jones N/A 151,150 - ------------------------------------------------------------------------------------------------------- Jeffrey Laikind N/A 151,150 - ------------------------------------------------------------------------------------------------------- Stephen R. Lewis, Jr. N/A 325,950(c) - ------------------------------------------------------------------------------------------------------- Catherine James Paglia N/A 144,300(c) - ------------------------------------------------------------------------------------------------------- Vikki L. Pryor(d) N/A 49,917 - ------------------------------------------------------------------------------------------------------- Alan K. Simpson(e) N/A 0 - ------------------------------------------------------------------------------------------------------- Alison Taunton-Rigby N/A 136,800 - -------------------------------------------------------------------------------------------------------
(a) Board member compensation is a combination of a base fee and meeting fees, with the exception of the Chair of the Boards, who receives a base annual compensation. Payment of compensation is facilitated by a company providing limited administrative services to the funds and to the Boards. (b) Mr. Carlson served as Chair of the Boards through Dec. 31, 2006. The amount for Mr. Carlson includes base annual compensation for serving as Chair of the Boards through Dec. 31, 2006. Additionally, during the time he served as Chair of the Boards, from March 1, 1999 to Dec. 31, 2006, Mr. Carlson was provided health and certain other benefits, including participation in a Qualified Retirement Plan (QRP) and a Supplemental Retirement Plan (SRP). Under the QRP, subject to limits imposed by applicable law (the Dollar Limits), Mr. Carlson earned annually 15% of the non-deferred portion of his base annual compensation. The QRP payments were fully funded by the funds in the year that they were earned by Mr. Carlson. The above table reflects $11,000 paid pursuant to the QRP during the fiscal period. To the extent the 15% amount exceeded the Dollar Limits in any year, the excess was recorded for the benefit of Mr. Carlson under the SRP. These SRP amounts were accrued as liabilities of the funds. Table 31B shows the amount of the SRP accrual in each year for the benefit of Mr. Carlson. Total base annual compensation from the RiverSource funds paid to Mr. Carlson for the most recent fiscal period (not including retirement benefits) was $188,750. (c) Ms. Flynn, Mr. Lewis and Ms. Paglia elected to defer a portion of the total cash compensation payable during the period in the amount of $60,650, $95,925 and $144,300, respectively. Amount deferred by fund is set forth in Table 32. Additional information regarding the deferred compensation plan is described below. (d) Ms. Pryor ceased service as a member of the Boards, effective Jan. 11, 2007. (She had commenced serving on the Boards on Feb. 15, 2006.) (e) Mr. Simpson retired as a member of the Boards, effective Sept. 14, 2006. Statement of Additional Information - Nov. 29, 2007 Page 163 TABLE 31. SUPPLEMENTAL BOARD MEMBER RETIREMENT BENEFITS -- ALL FUNDS
1999 2000 2001 2002 2003 2004 2005 2006 - --------------------------------------------------------------------------------------------------------------------------- Arne H. Carlson* $13,200 -- $3,750 -- $4,950 $18,000 $17,250 $15,750 - ---------------------------------------------------------------------------------------------------------------------------
* Retirement benefit amounts in excess of the Dollar Limits were accrued annually for the benefit of Mr. Carlson in a SRP. This table shows the amount of such accruals. Because of his retirement as Chair, the SRP amounts are now payable to Mr. Carlson. In this regard, it is expected that the total accrued retirement benefits under the SRP, equal to approximately $82,000 (which includes earnings and interest on the contributed amounts set forth in the table), will be paid to Mr. Carlson in January 2008. SRP payments are funded by the funds. As of January 2007, neither the Chair nor any Board member earns retirement benefits. The independent Board members determine the amount of compensation that they receive, including the amount paid to the Chair of the Board. In determining compensation for the independent Board members, the independent Board members take into account a variety of factors including, among other things, their collective significant work experience (e.g., in business and finance, government or academia). The independent Board members also recognize that these individuals' advice and counsel are in demand by other organizations, that these individuals may reject other opportunities because the time demands of their duties as independent Board members, and that they undertake significant legal responsibilities. The independent Board members also consider the compensation paid to independent board members of other mutual fund complexes of comparable size. In determining the compensation paid to the Chair, the independent Board members take into account, among other things, the Chair's significant additional responsibilities (e.g., setting the agenda for Board meetings, communicating or meeting regularly with the Funds' Chief Compliance Officer, Counsel to the independent Board members, and the Funds' service providers) which result in a significantly greater time commitment required of the Board Chair. The Chair's compensation, therefore, has generally been set at a level between 2.5 and 3 times the level of compensation paid to other independent Board members. Effective Jan. 1, 2007, independent Board members will be paid an annual retainer of $80,000. Committee and sub-committee Chairs will each receive an additional annual retainer of $5,000. In addition, independent Board members will be paid the following fees for attending Board and committee meetings: $5,000 per day of in-person Board meetings and $2,500 per day of in-person committee or sub-committee meetings (if such meetings are not held on the same day as a Board meeting). Independent Board members are not paid for special telephonic meetings. In 2007, the Board's Chair will receive total annual cash compensation of $385,000, approximately 2.7 times the anticipated average annual compensation expected to be earned by an independent Board member in 2007. The independent Board members may elect to defer payment of up to 100% of the compensation they receive in accordance with a Deferred Compensation Plan (the Deferred Plan). Under the Deferred Plan, a Board member may elect to have his or her deferred compensation treated as if they had been invested in shares of one or more RiverSource funds and the amount paid to the Board member under the Deferred Plan will be determined based on the performance of such investments. Distributions may be taken in a lump sum or over a period of years. The Deferred Plan will remain unfunded for federal income tax purposes under the Internal Revenue Code of 1986, as amended. It is anticipated that deferral of Board member compensation in accordance with the Deferred Plan will have, at most, a negligible impact on Fund assets and liabilities. COMPENSATION FROM EACH FUND. The following table shows the compensation paid to independent Board members from each fund during its last fiscal period. TABLE 32. BOARD MEMBER COMPENSATION -- INDIVIDUAL FUNDS
AGGREGATE COMPENSATION FROM FUND ------------------------------------------------------------------------------------------------ TAUNTON- FUND BLATZ CARLSON* CARLTON FLYNN JONES LAIKIND LEWIS PAGLIA PRYOR** SIMPSON** RIGBY - ---------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JANUARY 31 - ---------------------------------------------------------------------------------------------------------------------- Portfolio Builder *** *** *** *** *** *** *** *** *** *** *** Aggressive - ---------------------------------------------------------------------------------------------------------------------- Portfolio Builder *** *** *** *** *** *** *** *** *** *** *** Conservative - ---------------------------------------------------------------------------------------------------------------------- Portfolio Builder *** *** *** *** *** *** *** *** *** *** *** Moderate - ---------------------------------------------------------------------------------------------------------------------- Portfolio Builder *** *** *** *** *** *** *** *** *** *** *** Moderate Aggressive - ----------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 164
AGGREGATE COMPENSATION FROM FUND ------------------------------------------------------------------------------------------------ TAUNTON- FUND BLATZ CARLSON* CARLTON FLYNN JONES LAIKIND LEWIS PAGLIA PRYOR** SIMPSON** RIGBY - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- Portfolio Builder *** *** *** *** *** *** *** *** *** *** *** Moderate Conservative - ---------------------------------------------------------------------------------------------------------------------- Portfolio Builder *** *** *** *** *** *** *** *** *** *** *** Total Equity - ---------------------------------------------------------------------------------------------------------------------- S&P 500 415 1,159 N/A 420 474 458 527 436 391 294 412 Index -- total Amount deferred 0 0 204 0 0 137 436 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Small Company Index -- total 1,880 5,223 N/A 1,894 2,156 2,078 2,374 1,972 1,777 1,348 1,861 Amount deferred 0 0 922 0 0 615 1,972 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING MARCH 31 - ---------------------------------------------------------------------------------------------------------------------- Equity 1,982 4,553 N/A 1,960 2,252 2,176 3,202 2,036 1,741 1,169 1,921 Value -- total Amount deferred 0 0 926 0 0 874 2,036 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Precious Metals and 188 432 N/A 186 215 207 304 195 166 114 183 Mining -- total Amount deferred 0 0 88 0 0 83 195 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Small Cap Advantage -- total 1,216 2,903 N/A 1,198 1,397 1,345 1,849 1,249 1,100 800 1,178 Amount deferred 0 0 573 0 0 498 1,249 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Small Cap 371 865 N/A 366 423 408 586 381 329 229 359 Growth -- total Amount deferred 0 0 174 0 0 159 381 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING APRIL 30 - ---------------------------------------------------------------------------------------------------------------------- Retirement Plus 2010 *** *** *** *** *** *** *** *** *** *** *** - ---------------------------------------------------------------------------------------------------------------------- Retirement Plus 2015 *** *** *** *** *** *** *** *** *** *** *** - ---------------------------------------------------------------------------------------------------------------------- Retirement Plus 2020 *** *** *** *** *** *** *** *** *** *** *** - ---------------------------------------------------------------------------------------------------------------------- Retirement Plus 2025 *** *** *** *** *** *** *** *** *** *** *** - ---------------------------------------------------------------------------------------------------------------------- Retirement Plus 2030 *** *** *** *** *** *** *** *** *** *** *** - ---------------------------------------------------------------------------------------------------------------------- Retirement Plus 2035 *** *** *** *** *** *** *** *** *** *** *** - ---------------------------------------------------------------------------------------------------------------------- Retirement Plus 2040 *** *** *** *** *** *** *** *** *** *** *** - ---------------------------------------------------------------------------------------------------------------------- Retirement Plus 2045 *** *** *** *** *** *** *** *** *** *** *** - ---------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING MAY 31 - ---------------------------------------------------------------------------------------------------------------------- Aggressive 1,025 2,018 N/A 997 1,120 1,078 1,805 1,039 725 448 963 Growth -- total Amount deferred 0 0 457 0 0 506 1,039 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Fundamental Growth -- total 360 642 N/A 352 383 372 696 363 232 116 337 Amount deferred 0 0 158 0 0 199 363 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Fundamental 1,991 3,846 N/A 1,933 2,165 2,092 3,558 2,007 1,381 786 1,863 Value -- total Amount deferred 0 0 882 0 0 1,001 2,007 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- High Yield 3,467 6,785 N/A 3,366 3,784 3,654 6,136 3,496 2,443 1,395 3,247 Bond -- total Amount deferred 0 0 1,540 0 0 1,723 3,496 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Income Builder Basic *** *** *** *** *** *** *** *** *** *** *** Income - ---------------------------------------------------------------------------------------------------------------------- Income Builder *** *** *** *** *** *** *** *** *** *** *** Enhanced Income - ---------------------------------------------------------------------------------------------------------------------- Income Builder *** *** *** *** *** *** *** *** *** *** *** Moderate Income - ----------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 165
AGGREGATE COMPENSATION FROM FUND ------------------------------------------------------------------------------------------------ TAUNTON- FUND BLATZ CARLSON* CARLTON FLYNN JONES LAIKIND LEWIS PAGLIA PRYOR** SIMPSON** RIGBY - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- Select 1,074 2,123 N/A 1,042 1,176 1,134 1,883 1,084 762 451 1,007 Value -- total Amount deferred 0 0 478 0 0 528 1,084 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Short Duration U.S. Government -- total 1,703 3,495 N/A 1,651 1,884 1,813 2,881 1,722 1,268 760 1,600 Amount deferred 0 0 764 0 0 801 1,722 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Small Cap 616 1,236 N/A 598 678 652 1,064 624 448 277 579 Equity -- total Amount deferred 0 0 276 0 0 297 624 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Small Cap 1,740 3,416 N/A 1,690 1,901 1,833 3,072 1,758 1,229 726 1,632 Value -- total Amount deferred 0 0 774 0 0 862 1,758 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- U.S. Government Mortgage -- total 483 866 N/A 470 515 500 937 485 292 162 451 Amount deferred 0 0 211 0 0 267 485 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Value -- total 709 1,412 N/A 689 778 750 1,236 717 512 300 666 Amount deferred 0 0 316 0 0 346 717 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JUNE 30 - ---------------------------------------------------------------------------------------------------------------------- Dividend Opportunity -- total 2,682 4,351 N/A 2,552 2,855 2,775 5,583 2,632 1,496 722 2,447 Amount deferred 0 0 1,130 0 0 1,606 2,632 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Real Estate -- total 401 641 N/A 384 425 414 849 395 218 99 367 Amount deferred 0 0 169 0 0 245 395 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JULY 31 - ---------------------------------------------------------------------------------------------------------------------- Cash 7,831 11,960 969 7,491 7,827 7,827 15,148 7,491 3,536 914 7,077 Management -- total Amount deferred 0 0 0 3,240 0 0 4,402 7,491 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Core Bond -- total 429 664 61 410 429 429 805 410 193 53 388 Amount deferred 0 0 0 178 0 0 233 410 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Disciplined 4,147 6,259 552 3,964 4,124 4,124 8,033 3,964 1,802 522 3,743 Equity -- total Amount deferred 0 0 0 1,711 0 0 2,337 3,964 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Disciplined Small and Mid Cap Equity -- total 75 67 23 72 70 70 170 72 6 0 67 Amount deferred 0 0 0 29 0 0 51 72 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Disciplined Small Cap Value -- total 36 32 8 34 33 33 84 34 4 0 32 Amount deferred 0 0 0 14 0 0 25 34 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Floating 873 1,059 136 835 845 845 1,895 835 255 33 780 Rate -- total Amount deferred 0 0 0 348 0 0 560 835 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Growth -- total 6,225 10,084 633 5,955 6,267 6,267 11,761 5,955 3,117 928 5,648 Amount deferred 0 0 0 2,604 0 0 3,400 5,955 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Income Opportunities -- to- tal 626 1,026 61 599 632 632 1,183 599 318 94 569 Amount deferred 0 0 0 262 0 0 342 599 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Inflation Protected Securities -- total 553 862 77 531 553 553 1,038 531 254 71 502 Amount deferred 0 0 0 230 0 0 301 531 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Large Cap 13,514 23,263 1,243 12,902 13,751 13,751 24,507 12,902 7,411 2,342 12,290 Equity -- total Amount deferred 0 0 0 5,710 0 0 7,035 12,902 0 0 0 - ----------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 166
AGGREGATE COMPENSATION FROM FUND ------------------------------------------------------------------------------------------------ TAUNTON- FUND BLATZ CARLSON* CARLTON FLYNN JONES LAIKIND LEWIS PAGLIA PRYOR** SIMPSON** RIGBY - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- Large Cap 187 307 19 179 188 188 350 179 95 30 170 Value -- total Amount deferred 0 0 0 78 0 0 101 179 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Limited Duration Bond -- total 287 480 30 275 289 289 528 275 148 51 261 Amount deferred 0 0 0 121 0 0 152 275 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING AUGUST 31 - ---------------------------------------------------------------------------------------------------------------------- California Tax- Exempt -- total 325 473 47 311 329 329 655 311 154 38 295 Amount deferred 0 0 0 135 0 0 190 311 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Diversified Bond -- total 5,229 7,563 793 5,000 5,279 5,279 10,572 5,000 2,424 588 4,748 Amount deferred 0 0 0 2,171 0 0 3,071 5,000 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Massachusetts Tax- Exempt -- total 101 151 13 97 103 103 199 97 51 12 92 Amount deferred 0 0 0 42 0 0 58 97 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Michigan Tax- Exempt -- total 87 131 11 83 89 88 170 83 44 11 79 Amount deferred 0 0 0 36 0 0 49 83 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Minnesota Tax- Exempt -- total 620 903 87 593 626 626 1,247 593 294 71 563 Amount deferred 0 0 0 258 0 0 362 593 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- New York Tax- Exempt -- total 128 189 18 122 130 130 255 122 61 14 116 Amount deferred 0 0 0 53 0 0 74 122 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Ohio Tax- Exempt -- total 88 132 12 84 89 89 173 84 44 11 80 Amount deferred 0 0 0 37 0 0 50 84 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING SEPTEMBER 30 - ---------------------------------------------------------------------------------------------------------------------- Balanced -- total 2,015 2,758 484 1,923 2,039 2,039 4,261 1,923 747 0 1,825 Amount deferred 0 0 0 815 0 0 1,249 1,923 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Disciplined Large Cap Growth -- total 44 42 35 44 42 42 94 44 0 0 42 Amount deferred 0 0 0 18 0 0 28 44 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Diversified Equity Income -- total 13,740 17,680 3,684 13,164 13,732 13,732 29,971 13,164 4,412 0 12,473 Amount deferred 0 0 0 5,519 0 0 8,830 13,164 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Mid Cap 3,987 4,948 1,144 3,827 3,958 3,958 8,837 3,827 1,151 0 3,623 Value -- total Amount deferred 0 0 0 1,595 0 0 2,610 3,827 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Strategic 3,251 3,980 976 3,122 3,219 3,219 7,227 3,123 895 0 2,956 Allocation -- total Amount deferred 0 0 0 1,299 0 0 2,137 3,123 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Strategic Income Allocation -- total 68 63 48 65 65 65 163 65 0 0 63 Amount deferred 0 0 0 26 0 0 49 65 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING OCTOBER 31 - ---------------------------------------------------------------------------------------------------------------------- Absolute Return Currency and Income(a) -- total 58 15 N/A 8 58 58 8 8 58 0 8 Amount deferred 0 0 4 0 0 2 8 0 0 0 - ----------------------------------------------------------------------------------------------------------------------
Statement of Additional Information - Nov. 29, 2007 Page 167
AGGREGATE COMPENSATION FROM FUND ------------------------------------------------------------------------------------------------ TAUNTON- FUND BLATZ CARLSON* CARLTON FLYNN JONES LAIKIND LEWIS PAGLIA PRYOR** SIMPSON** RIGBY - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- Disciplined International Equity(b) -- total 58 12 N/A 8 58 58 8 8 58 0 8 Amount deferred 0 0 4 0 0 2 8 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Emerging 1,000 1,972 N/A 1,217 1,282 1,367 1,432 1,282 800 1,257 1,217 Markets -- total Amount deferred 0 0 608 0 0 358 1,066 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Emerging Markets Bond(c) -- total 383 45 N/A 333 499 433 449 399 383 441 333 Amount deferred 0 0 167 0 0 112 399 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- European 783 436 N/A 1,000 1,066 1,150 1,216 1,066 617 1,057 1,000 Equity -- total Amount deferred 0 0 500 0 0 304 849 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Global Bond -- total 975 2,023 N/A 1,192 1,257 1,342 1,407 1,257 758 1,232 1,192 Amount deferred 0 0 596 0 0 352 1,041 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Global 1,067 2,551 N/A 1,283 1,349 1,433 1,499 1,349 850 1,307 1,283 Equity -- total Amount deferred 0 0 642 0 0 375 1,132 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Global 758 674 N/A 958 1,024 1,108 1,174 1,024 608 1,016 958 Technology -- total Amount deferred 0 0 479 0 0 294 824 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- International Aggressive Growth -- total 950 1,638 N/A 1,200 1,266 1,350 1,416 1,266 750 1,241 1,200 Amount deferred 0 0 600 0 0 354 1,016 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- International 783 704 N/A 1,000 1,066 1,150 1,216 1,066 617 1,057 1,000 Equity -- total Amount deferred 0 0 500 0 0 304 849 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- International Opportunity -- total 1,033 2,279 N/A 1,283 1,349 1,433 1,499 1,349 817 1,316 1,283 Amount deferred 0 0 642 0 0 375 1,099 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- International Select Value -- total 1,483 6,528 N/A 1,700 1,766 1,850 1,916 1,766 1,300 1,657 1,700 Amount deferred 0 0 850 0 0 479 1,549 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- International Small Cap -- total 783 415 N/A 1,000 1,066 1,150 1,216 1,066 617 1,057 1,000 Amount deferred 0 0 500 0 0 304 849 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING NOVEMBER 30 - ---------------------------------------------------------------------------------------------------------------------- Intermediate Tax- Exempt -- total 942 489 N/A 1,000 1,266 1,200 1,266 1,066 775 949 1,000 Amount deferred 0 0 500 0 0 316 1,007 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Mid Cap 2,033 7,936 N/A 2,200 2,466 2,400 2,466 2,266 1,650 1,982 2,200 Growth -- total Amount deferred 0 0 1,100 0 0 616 2,099 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Tax-Exempt 1,375 3,535 N/A 1,467 1,732 1,667 1,732 1,532 1,142 1,332 1,467 Bond -- total Amount deferred 0 0 733 0 0 433 1,441 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- Tax-Exempt High Income -- total 3,058 14,836 N/A 3,192 3,457 3,392 3,458 3,257 2,475 2,774 3,192 Amount deferred 0 0 1,596 0 0 864 3,124 0 0 0 - ---------------------------------------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING DECEMBER 31 - ---------------------------------------------------------------------------------------------------------------------- Tax-Exempt Money Market -- total 1,000 519 N/A 1,000 1,316 1,250 1,316 1,066 833 891 1,000 Amount deferred 0 0 500 0 0 329 1,066 0 0 0 - ----------------------------------------------------------------------------------------------------------------------
* Mr. Carlson served as Chair of the Boards through Dec. 31, 2006. For Mr. Carlson, aggregate compensation for fiscal periods through Dec. 31, 2006 was based initially on the total annual cash compensation, including payments under the Qualified Retirement Plan, but for Statement of Additional Information - Nov. 29, 2007 Page 168 purposes of this Table 32 was (1) estimated for each fund based on the relative net assets of all funds for fiscal periods ending on or before Dec. 31, 2006, and was (2) limited for each fund to compensation paid by the fund subsequent to Jan. 1, 2006, accrued through the fund's fiscal period end. ** Ms. Pryor ceased service as a member of the Boards, effective Jan. 11, 2007. Mr. Simpson retired as a member of the Boards, effective Sept. 14, 2006. *** Funds-of-Funds do not pay additional compensation to the Board members for attending meetings. Compensation is paid directly from the underlying funds in which each Fund-of-Funds invests. (a) For the period from June 15, 2006 (when the Fund became available) to Oct. 31, 2006. (b) For the period from May 18, 2006 (when shares became publicly available) to Oct. 31, 2006. (c) For the period from Feb. 16, 2006 (when shares became publicly available) to Oct. 31, 2006. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES The following table identifies those investors who, as of 30 days after the end of the fund's fiscal period, owned 5% or more of any class of a fund's shares and those investors who owned 25% or more of a fund's shares (all share classes taken together). Investors who own more than 25% of a fund's shares are presumed to control the fund and would be able to determine the outcome of most issues that are submitted to shareholders for vote. The table is organized by fiscal year end. You can find your fund's fiscal year end in Table 1. TABLE 33. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES As of 30 days after the end of the fund's fiscal period:
PERCENT FUND SHARES OF FUND -------------------- (if SHARE PERCENT- greater FUND SHAREHOLDER NAME, CITY AND STATE CLASS(A) AGE than 25%) - ----------------------------------------------------------------------------------------- FUNDS WITH FISCAL PERIOD ENDING JANUARY 31 - ----------------------------------------------------------------------------------------- Portfolio Builder Ameriprise Financial, Inc. Class R4 15.94% -- Aggressive (Ameriprise Financial), Minneapolis, MN ---------------------------------------------------------------------- Charles Schwab & Co., Inc. Class R4 84.06% -- (Charles Schwab), a brokerage firm in San Francisco, CA - ----------------------------------------------------------------------------------------- Portfolio Builder Ameriprise Financial Class R4 43.56% -- ---------------------------------------------------------------------- Conservative Charles Schwab Class R4 56.44% -- - ----------------------------------------------------------------------------------------- Portfolio Builder Ameriprise Financial Class R4 16.17% -- ---------------------------------------------------------------------- Moderate Charles Schwab Class R4 83.83% -- - ----------------------------------------------------------------------------------------- Portfolio Builder Charles Schwab Class R4 98.26% -- Moderate Aggressive - ----------------------------------------------------------------------------------------- Portfolio Builder Ameriprise Financial Class R4 38.24% -- ---------------------------------------------------------------------- Moderate Conservative Charles Schwab Class R4 61.76% -- - ----------------------------------------------------------------------------------------- Portfolio Builder Ameriprise Financial Class R4 6.45% -- ---------------------------------------------------------------------- Total Equity Charles Schwab Class R4 93.55% -- - ----------------------------------------------------------------------------------------- S&P 500 Index Ameriprise Trust Company, Class E 83.30% -- Minneapolis, MN ---------------------------------------------------------------------- Charles Schwab Class D 100.00% -- -------------------------------- Class E 16.48% - ----------------------------------------------------------------------------------------- Small Company Ameriprise Trust Company Class R4 84.96% -- Index ---------------------------------------------------------------------- Charles Schwab Class A 9.37% -- ---------------------------------------------------------------------- GWFS Equities Inc. (GWFS Equities), Class R4 10.44% -- Greenwood Village, CO
Statement of Additional Information - Nov. 29, 2007 Page 169
PERCENT FUND SHARES OF FUND -------------------- (if SHARE PERCENTA- greater FUND SHAREHOLDER NAME, CITY AND STATE CLASS(A) GE than 25%) - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- FUNDS WITH FISCAL PERIOD ENDING MARCH 31 - ----------------------------------------------------------------------------------------- Equity Value Ameriprise Financial Class I 100.00% -- -------------------------------- Class R2 100.00% -------------------------------- Class R3 100.00% -------------------------------- Class R5 100.00% -------------------------------- Class W 100.00% ---------------------------------------------------------------------- Charles Schwab Class A 7.79% -- ---------------------------------------------------------------------- John C. Mullarkey, Willowbrook, IL Class C 6.84% -- ---------------------------------------------------------------------- Wachovia Bank NA (Wachovia Bank), Class R4 98.72% -- Charlotte, NC - ----------------------------------------------------------------------------------------- Precious Metals Ameriprise Financial Class I 100.00% -- and Mining ---------------------------------------------------------------------- Charles Schwab Class A 14.66% -- Class R4 97.96% -- ---------------------------------------------------------------------- John E. Bridgman, Minneapolis, MN Class C 7.77% -- ---------------------------------------------------------------------- Richard L. Venable and Susan Angela Class C 9.25% -- Venable, Argyle, TX - ----------------------------------------------------------------------------------------- Small Cap Ameriprise Financial Class I 100.00% -- Advantage -------------------------------- Class R2 100.00% -------------------------------- Class R3 100.00% -------------------------------- Class R5 100.00% ---------------------------------------------------------------------- Charles Schwab Class A 13.39% -- -------------------------------- Class R4 99.11% - ----------------------------------------------------------------------------------------- Small Cap Growth Ameriprise Financial Class R2 100.00% -- -------------------------------- Class R3 100.00% -------------------------------- Class R5 100.00% ---------------------------------------------------------------------- Charles Schwab Class A 13.12% -- -------------------------------- Class R4 35.72% ---------------------------------------------------------------------- Portfolio Builder Aggressive Fund Class I 19.55% -- ---------------------------------------------------------------------- Portfolio Builder Conservative Fund Class I 5.20% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 32.22% -- Aggressive Fund ---------------------------------------------------------------------- Portfolio Builder Moderate Fund Class I 20.25% -- ---------------------------------------------------------------------- Portfolio Builder Total Equity Fund Class I 21.36% -- ---------------------------------------------------------------------- Wachovia Bank Class R4 63.59% --
Statement of Additional Information - Nov. 29, 2007 Page 170
PERCENT FUND SHARES OF FUND -------------------- (if SHARE PERCENTA- greater FUND SHAREHOLDER NAME, CITY AND STATE CLASS(A) GE than 25%) - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- FUNDS WITH FISCAL PERIOD ENDING APRIL 30 - ----------------------------------------------------------------------------------------- Retirement Plus Ameriprise Financial Class R2 100.00% -- 2010 -------------------------------- Class R3 100.00% -------------------------------- Class R4 100.00% -------------------------------- Class R5 100.00% ---------------------------------------------------------------------- Charles Schwab Class A 36.67% -- ---------------------------------------------------------------------- Wachovia Bank Class Y 98.80% -- ---------------------------------------------------------------------- Delbert K and Helen R Havercroft, Class A 14.84% -- Hutchinson, KS ---------------------------------------------------------------------- Charles B. Mark, Kihei, HI Class A 6.16% -- ---------------------------------------------------------------------- Nathaniel and Jonnie Jackson, Class A 6.13% -- Toledo, OH - ----------------------------------------------------------------------------------------- Retirement Plus Ameriprise Financial Class R2 100.00% -- 2015 -------------------------------- Class R3 100.00% -------------------------------- Class R4 100.00% -------------------------------- Class R5 100.00% ---------------------------------------------------------------------- Charles Schwab Class A 7.79% -- ---------------------------------------------------------------------- Wachovia Bank Class Y 99.14% -- ---------------------------------------------------------------------- Jack R. and Virginia L. Nelson, Class A 11.27% -- Rapid City, SD ---------------------------------------------------------------------- Stephen W. and Denise R. Hatt, Class A 8.26% -- Fredericksburg, VA ---------------------------------------------------------------------- Robert and Pamela R. D'Agostino, Class A 7.81% -- Canton, MA ---------------------------------------------------------------------- Sherellee F. Medlock, Desoto, TX Class A 7.80% -- - ----------------------------------------------------------------------------------------- Retirement Plus Ameriprise Financial Class R2 100.00% -- 2020 -------------------------------- Class R3 100.00% -------------------------------- Class R4 100.00% -------------------------------- Class R5 100.00% ---------------------------------------------------------------------- Wachovia Bank Class Y 99.43% -- ---------------------------------------------------------------------- John C. Burowski, Suffern, NY Class A 8.42% -- ---------------------------------------------------------------------- William R. and Tina L. Oliver, Las Class A 7.06% -- Vegas, NV ---------------------------------------------------------------------- Lisa J. and Cecil B. Mc Adams, Class A 6.97% -- Tallahassee, FL ---------------------------------------------------------------------- Keith J. Newmark, Coral Springs, FL Class A 5.83% -- - ----------------------------------------------------------------------------------------- Retirement Plus Ameriprise Financial Class R2 100.00% -- 2025 -------------------------------- Class R3 100.00% -------------------------------- Class R4 100.00% -------------------------------- Class R5 100.00% ---------------------------------------------------------------------- Wachovia Bank Class Y 99.42% -- ---------------------------------------------------------------------- Darryl Roberts, Toledo, OH Class A 9.08% -- ---------------------------------------------------------------------- Kevin S. Vincent, Hillsboro, OR Class A 7.93% -- ---------------------------------------------------------------------- Denise A. Spring, Peoria, IL Class A 7.17% -- ---------------------------------------------------------------------- William D. Pullins, Hot Springs, SD Class A 5.24% --
Statement of Additional Information - Nov. 29, 2007 Page 171
PERCENT FUND SHARES OF FUND -------------------- (if SHARE PERCENTA- greater FUND SHAREHOLDER NAME, CITY AND STATE CLASS(A) GE than 25%) - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- Retirement Plus Ameriprise Financial Class R2 100.00% -- 2030 -------------------------------- Class R3 100.00% -------------------------------- Class R4 100.00% -------------------------------- Class R5 100.00% ---------------------------------------------------------------------- Wachovia Bank Class Y 99.39% -- ---------------------------------------------------------------------- Stephen T. and Teresa T. Bockian, Class A 10.04% -- Orlando, FL ---------------------------------------------------------------------- Troy and Sandy Farrington, Riverton, Class A 9.70% -- UT - ----------------------------------------------------------------------------------------- Retirement Plus Ameriprise Financial Class R2 100.00% -- 2035 -------------------------------- Class R3 100.00% -------------------------------- Class R4 100.00% -------------------------------- Class R5 100.00% ---------------------------------------------------------------------- Wachovia Bank Class Y 98.39% -- ---------------------------------------------------------------------- Richard and Stefanie A. Nelson, Hot Class A 14.50% -- Springs, SD ---------------------------------------------------------------------- William F. and Kathleen Truscott, Class A 11.81% -- Marblehead, MA ---------------------------------------------------------------------- Paul S. Mumma, St. Louis Park, MN Class A 6.05% -- ---------------------------------------------------------------------- Eric J. and Christine X. Dawson, Class A 5.67% -- Spring Lake, MI - ----------------------------------------------------------------------------------------- Retirement Plus Ameriprise Financial Class R2 100.00% -- 2040 -------------------------------- Class R3 100.00% -------------------------------- Class R4 100.00% -------------------------------- Class R5 100.00% ---------------------------------------------------------------------- Wachovia Bank Class Y 99.20% -- ---------------------------------------------------------------------- Larry R. Shum, Shanandoah, IA Class A 7.11% -- ---------------------------------------------------------------------- Richard and Stefanie A. Nelson, Hot Class A 5.85% -- Springs, SD ---------------------------------------------------------------------- Yi Chen, Glen Allen, VA Class A 5.11% -- - ----------------------------------------------------------------------------------------- Retirement Plus Ameriprise Financial Class R2 100.00% -- 2045 -------------------------------- Class R3 100.00% -------------------------------- Class R4 100.00% -------------------------------- Class R5 100.00% ---------------------------------------------------------------------- Wachovia Bank Class Y 95.71% -- ---------------------------------------------------------------------- Troy M. Brueggemeier, Class A 9.00% -- St. Louis Park, MN ---------------------------------------------------------------------- Anthony D. And Rebecca-Heizer Class A 6.26% -- Marken, Lexington, MA ---------------------------------------------------------------------- Colby L. Morrow, Fresno, CA Class A 5.84% -- ---------------------------------------------------------------------- Anna Marcus, New York, NY Class A 5.60% --
Statement of Additional Information - Nov. 29, 2007 Page 172
PERCENT FUND SHARES OF FUND -------------------- (if SHARE PERCENTA- greater FUND SHAREHOLDER NAME, CITY AND STATE CLASS(A) GE than 25%) - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- FUNDS WITH FISCAL PERIOD ENDING MAY 31 - ----------------------------------------------------------------------------------------- Aggressive Growth Ameriprise Financial Class R2 100.00% -- -------------------------------- Class R3 100.00% -------------------------------- Class R4 24.74% -------------------------------- Class R5 100.00% ---------------------------------------------------------------------- Charles Schwab Class R4 75.26% -- ---------------------------------------------------------------------- Portfolio Builder Aggressive Fund Class I 19.55% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Fund Class I 20.31% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 32.23% -- Aggressive Fund ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 5.24% -- Conservative Fund ---------------------------------------------------------------------- Portfolio Builder Total Equity Fund Class I 21.23% -- - ----------------------------------------------------------------------------------------- Fundamental Growth Ameriprise Financial Class R4 29.26% 89.30%(b) ---------------------------------------------------------------------- Charles Schwab Class A 5.31% -- -------------------------------- Class R4 70.74% ---------------------------------------------------------------------- Portfolio Builder Aggressive Fund Class I 19.72% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Fund Class I 19.95% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 32.44% -- Aggressive Fund ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 5.11% -- Conservative Fund ---------------------------------------------------------------------- Portfolio Builder Total Equity Fund Class I 21.47% -- ---------------------------------------------------------------------- Taylor Ambe-Crain Partnership, Class C 25.77% -- Westlake Vlg, CA - ----------------------------------------------------------------------------------------- Fundamental Value Charles Schwab Class A 15.19% -- -------------------------------- Class R4 98.51% ---------------------------------------------------------------------- Portfolio Builder Aggressive Fund Class I 19.56% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Fund Class I 20.36% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 32.21% -- Aggressive Fund ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 5.26% -- Conservative Fund ---------------------------------------------------------------------- Portfolio Builder Total Equity Fund Class I 21.20% -- - ----------------------------------------------------------------------------------------- High Yield Bond Ameriprise Financial Class R2 100.00% -- -------------------------------- Class R3 100.00% -------------------------------- Class R5 100.00% ---------------------------------------------------------------------- American Enterprise Investment Class W 99.99% -- Services Inc. Minneapolis, MN ---------------------------------------------------------------------- Charles Schwab Class A 10.83% -- -------------------------------- Class R4 47.70% ---------------------------------------------------------------------- GWFS Equities Class R4 52.04% -- ---------------------------------------------------------------------- Income Builder Basic Income Class I 7.38% -- ---------------------------------------------------------------------- Income Builder Enhanced Income Class I 58.35% -- ---------------------------------------------------------------------- Income Builder Moderate Income Class I 31.36% --
Statement of Additional Information - Nov. 29, 2007 Page 173
PERCENT FUND SHARES OF FUND -------------------- (if SHARE PERCENTA- greater FUND SHAREHOLDER NAME, CITY AND STATE CLASS(A) GE than 25%) - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- Income Builder Ameriprise Financial Class R2 10.10% -- Basic Income ---------------------------------------------------------------------- Charles Schwab Class A 39.43% -- -------------------------------- Class R4 89.90% - ----------------------------------------------------------------------------------------- Income Builder Ameriprise Financial Class R4 18.32% -- Enhanced Income ---------------------------------------------------------------------- Charles Schwab Class A 43.43% -- -------------------------------- Class R4 81.68% - ----------------------------------------------------------------------------------------- Income Builder Ameriprise Financial Class R4 48.68% -- Moderate Income ---------------------------------------------------------------------- Charles Schwab Class A 43.69% -- -------------------------------- Class R4 51.32% -- - ----------------------------------------------------------------------------------------- Select Value Ameriprise Financial Class R4 14.82% -- ---------------------------------------------------------------------- Charles Schwab Class A 8.60% -- -------------------------------- Class R4 85.18% ---------------------------------------------------------------------- Portfolio Builder Aggressive Fund Class I 19.66% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Fund Class I 20.54% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 31.91% -- Aggressive Fund ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 5.28% -- Conservative Fund ---------------------------------------------------------------------- Portfolio Builder Total Equity Fund Class I 21.20% -- - ----------------------------------------------------------------------------------------- Short Duration Ameriprise Financial Class W 100.00% -- U.S. Govt. ---------------------------------------------------------------------- Charles Schwab Class A 8.70% -- ---------------------------------------------------------------------- GWFS Equities Inc. Class R4 15.27% -- Greenwood Village, CO ---------------------------------------------------------------------- Portfolio Builder Conservative Fund Class I 31.30% -- ---------------------------------------------------------------------- Portfolio Builder Aggressive Fund Class I 36.58% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 32.10% -- Conservative Fund ---------------------------------------------------------------------- Wachovia Bank Class R4 81.70% -- - ----------------------------------------------------------------------------------------- Small Cap Equity Ameriprise Financial Class I 100.00% -- ---------------------------------------------------------------------- Charles Schwab Class A 9.07% -- -------------------------------- Class R4 12.33% ---------------------------------------------------------------------- Wachovia Bank Class R4 87.34% -- - ----------------------------------------------------------------------------------------- Small Cap Value Ameriprise Financial Class R2 100.00% -- -------------------------------- Class R3 100.00% -------------------------------- Class R5 100.00% ---------------------------------------------------------------------- Charles Schwab Class A 19.14% -- -------------------------------- Class R4 96.23% ---------------------------------------------------------------------- Portfolio Builder Aggressive Fund Class I 19.56% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Fund Class I 20.15% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 32.35% -- Aggressive Fund ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 5.29% -- Conservative Fund ---------------------------------------------------------------------- Portfolio Builder Total Equity Fund Class I 21.20% --
Statement of Additional Information - Nov. 29, 2007 Page 174
PERCENT FUND SHARES OF FUND -------------------- (if SHARE PERCENTA- greater FUND SHAREHOLDER NAME, CITY AND STATE CLASS(A) GE than 25%) - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- U.S. Government Charles Schwab Class A 18.36% -- Mortgage ---------------------------------------------------------------------- Income Builder Basic Income Class I 36.82% 52.41%(b) ---------------------------------------------------------------------- Income Builder Enhanced Income Class I 8.18% -- ---------------------------------------------------------------------- Income Builder Moderate Income Class I 55.00% -- ---------------------------------------------------------------------- Wells Fargo Bank, Minneapolis, MN Class R4 99.89% -- - ----------------------------------------------------------------------------------------- Value Ameriprise Financial Class R4 8.78% -- ---------------------------------------------------------------------- Charles Schwab Class A 11.58% -- -------------------------------- Class R4 91.22% ---------------------------------------------------------------------- Portfolio Builder Aggressive Fund Class I 19.57% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Fund Class I 20.39% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 32.19% -- Aggressive Fund ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 5.28% -- Conservative Fund ---------------------------------------------------------------------- Portfolio Builder Total Equity Fund Class I 21.17% -- - ----------------------------------------------------------------------------------------- FUNDS WITH FISCAL PERIOD ENDING JUNE 30 - ----------------------------------------------------------------------------------------- Dividend Ameriprise Financial Class W 100.00% -- Opportunity ---------------------------------------------------------------------- Charles Schwab Class A 23.55% -------------------------------- Class R4 100.00% -- ---------------------------------------------------------------------- Income Builder Basic Income Class I 10.47% -- ---------------------------------------------------------------------- Income Builder Enhanced Income Class I 21.32% -- ---------------------------------------------------------------------- Income Builder Moderate Income Class I 36.57% -- ---------------------------------------------------------------------- Portfolio Builder Aggressive Fund Class I 6.24% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Fund Class I 6.30% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 10.10% -- Aggressive Fund ---------------------------------------------------------------------- Portfolio Builder Total Equity Fund Class I 7.04% -- - ----------------------------------------------------------------------------------------- Real Estate Ameriprise Financial Class R4 8.28% 38.09%(b) -------------------------------- Class W 100.00% ---------------------------------------------------------------------- Charles Schwab Class A 16.35% -- -------------------------------- Class R4 91.72% ---------------------------------------------------------------------- Income Builder Basic Income Class I 6.22% -- ---------------------------------------------------------------------- Income Builder Enhanced Income Class I 13.76% -- ---------------------------------------------------------------------- Income Builder Moderate Income Class I 17.20% -- ---------------------------------------------------------------------- Portfolio Builder Aggressive Fund Class I 10.56% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Fund Class I 17.24% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 21.14% -- Aggressive Fund ---------------------------------------------------------------------- Portfolio Builder Total Equity Fund Class I 9.77% --
Statement of Additional Information - Nov. 29, 2007 Page 175
PERCENT FUND SHARES OF FUND -------------------- (if SHARE PERCENTA- greater FUND SHAREHOLDER NAME, CITY AND STATE CLASS(A) GE than 25%) - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- FOR FUNDS WITH FISCAL PERIOD ENDING JULY 31 - ----------------------------------------------------------------------------------------- Cash Management Ameriprise Financial Class R5 100.00% -- ---------------------------------------------------------------------- American Enterprise Investment Class W 99.99% -- Services Inc. ---------------------------------------------------------------------- Income Builder Basic Income Class I 41.56% -- ---------------------------------------------------------------------- Income Builder Moderate Income Class I 13.61% -- ---------------------------------------------------------------------- Portfolio Builder Conservative Fund Class I 14.03% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 15.48% -- Conservative Fund ---------------------------------------------------------------------- Stanson Nimiroski, Branford, CT Class C 7.31% -- ---------------------------------------------------------------------- Wachovia Bank Class Y 95.15% -- - ----------------------------------------------------------------------------------------- Core Bond Ameriprise Financial Class R2 100.00% 83.63%(b) -------------------------------- Class R3 100.00% -------------------------------- Class R5 100.00% -------------------------------- Class W 100.00% ---------------------------------------------------------------------- RiverSource Life Insurance Company Class R4 99.96% -- ---------------------------------------------------------------------- Charles Schwab Class A 12.77% -- ---------------------------------------------------------------------- Frank S. Gregory, Derry, NH Class C 6.27% -- ---------------------------------------------------------------------- Portfolio Builder Aggressive Fund Class I 9.25% -- ---------------------------------------------------------------------- Portfolio Builder Conservative Fund Class I 10.53% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Fund Class I 39.61% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 26.12% -- Aggressive Fund ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 14.49% -- Conservative Fund - ----------------------------------------------------------------------------------------- Disciplined Equity Ameriprise Financial Class R2 100.00% -- -------------------------------- Class R3 100.00% -------------------------------- Class R5 100.00% ---------------------------------------------------------------------- American Enterprise Investment Class W 99.99% -- Services Inc. ---------------------------------------------------------------------- Income Builder Basic Income Class I 6.17% -- ---------------------------------------------------------------------- Income Builder Moderate Income Class I 13.86% -- ---------------------------------------------------------------------- Portfolio Builder Aggressive Fund Class I 9.05% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Fund Class I 9.16% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 14.57% -- Aggressive Fund ---------------------------------------------------------------------- Portfolio Builder Total Equity Fund Class I 10.17% -- ---------------------------------------------------------------------- Retirement Plus Fund 2020 Class I 5.29% -- ---------------------------------------------------------------------- Retirement Plus Fund 2025 Class I 5.24% -- ---------------------------------------------------------------------- Retirement Plus Fund 2030 Class I 5.12% -- ---------------------------------------------------------------------- Wachovia Bank Class R4 99.69% --
Statement of Additional Information - Nov. 29, 2007 Page 176
PERCENT FUND SHARES OF FUND -------------------- (if SHARE PERCENTA- greater FUND SHAREHOLDER NAME, CITY AND STATE CLASS(A) GE than 25%) - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- Disciplined Small Ameriprise Financial Class A 50.89% 52.21%(b) and Mid Cap Equity -------------------------------- Class C 5.54% -------------------------------- Class R4 67.87% ---------------------------------------------------------------------- American Enterprise Investment Class W 99.99% -- Services Inc. ---------------------------------------------------------------------- Charles Schwab Class A 11.08% -- -------------------------------- Class R4 32.13% ---------------------------------------------------------------------- Portfolio Builder Aggressive Fund Class I 10.94% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Fund Class I 11.16% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 17.54% -- Aggressive Fund ---------------------------------------------------------------------- Portfolio Builder Total Equity Fund Class I 12.27% -- ---------------------------------------------------------------------- Retirement Plus Fund 2020 Class I 7.86% -- ---------------------------------------------------------------------- Retirement Plus Fund 2025 Class I 8.56% -- ---------------------------------------------------------------------- Retirement Plus Fund 2030 Class I 8.40% -- ---------------------------------------------------------------------- Retirement Plus Fund 2040 Class I 6.22% -- ---------------------------------------------------------------------- Deanna L. Rose, Punta Gorda, FL Class C 9.54% -- ---------------------------------------------------------------------- William E. and MaryLou K. Carroll, Class C 8.20% -- Punta Gorda, FL ---------------------------------------------------------------------- Contemporary Gardens, Honolulu, HI Class C 6.43% -- ---------------------------------------------------------------------- Mary Ruth Neal, Sacramento, CA Class C 6.05% -- ---------------------------------------------------------------------- Don M. and Barbara A. Warner, Class C 5.68% -- Fair Oaks, CA ---------------------------------------------------------------------- Claude V. and Julianna K. Neighbors, Class C 5.48% -- Lynchburg, VA ---------------------------------------------------------------------- Kenneth E. and Elaine M. Jacobsen, Class C 5.45% -- Madison, SD ---------------------------------------------------------------------- Heidi and Norbert Schuchbauer, Class C 5.00% -- Fair Oaks, CA
Statement of Additional Information - Nov. 29, 2007 Page 177
PERCENT FUND SHARES OF FUND -------------------- (if SHARE PERCENTA- greater FUND SHAREHOLDER NAME, CITY AND STATE CLASS(A) GE than 25%) - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- Disciplined Small Ameriprise Financial Class A 73.83% 89.88%(b) Cap Value -------------------------------- Class C 14.89% -------------------------------- Class R2 100.00% -------------------------------- Class R3 100.00% -------------------------------- Class R4 100.00% -------------------------------- Class R5 100.00% ---------------------------------------------------------------------- David G. and Sharon M. Michaud, Class B 7.49% -- Gorham, ME ---------------------------------------------------------------------- Joanne and David J. Thorpe, Class B 7.05% -- Lakeville, MA ---------------------------------------------------------------------- David J. Heck, Clermont, FL Class B 6.72% -- ---------------------------------------------------------------------- Keith and Sandra Crowell, Class C 30.65% -- Huntersville, NC ---------------------------------------------------------------------- Dale T. and Jennie I. Metzgar, Class C 15.84% -- Shavertown, PA ---------------------------------------------------------------------- Ronald E. and Linda F. Dearing, Class C 11.35% -- Fort Wayne, IN ---------------------------------------------------------------------- Douglas E. and Cynthia A. Thompson, Class C 10.91% -- Churubusco, IN ---------------------------------------------------------------------- Robert and Lynn M. Schuster, Class C 6.88% -- Richardson, TX ---------------------------------------------------------------------- Robert W. and Wanda J. Jordan, Class C 6.71% -- Beverly Hills, MI ---------------------------------------------------------------------- Income Builder Basic Income Class I 29.69% -- ---------------------------------------------------------------------- Income Builder Enhanced Income Class I 31.02% -- ---------------------------------------------------------------------- Income Builder Moderate Income Class I 39.25% -- - ----------------------------------------------------------------------------------------- Floating Rate Ameriprise Financial Class W 100.00% 28.27%(b) ---------------------------------------------------------------------- Charles Schwab Class A 55.60% -- -------------------------------- Class R4 96.93% ---------------------------------------------------------------------- Income Builder Basic Income Class I 8.06% -- ---------------------------------------------------------------------- Income Builder Enhanced Income Class I 37.18% -- ---------------------------------------------------------------------- Income Builder Moderate Income Class I 52.66% -- - ----------------------------------------------------------------------------------------- Growth Ameriprise Financial Class R2 100.00% -- -------------------------------- Class R3 100.00% -------------------------------- Class R5 100.00% -------------------------------- Class W 100.00% ---------------------------------------------------------------------- Charles Schwab Class A 9.00% -- ---------------------------------------------------------------------- Portfolio Builder Aggressive Fund Class I 19.72% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Fund Class I 19.97% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 31.81% -- Aggressive Fund ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 5.09% -- Conservative Fund ---------------------------------------------------------------------- Portfolio Builder Total Equity Fund Class I 22.16% -- ---------------------------------------------------------------------- Wachovia Bank Class R4 47.89% -- ---------------------------------------------------------------------- Ameriprise Trust Company Class R4 43.02% -- ---------------------------------------------------------------------- New York Life Trust Company Class R4 5.67% --
Statement of Additional Information - Nov. 29, 2007 Page 178
PERCENT FUND SHARES OF FUND -------------------- (if SHARE PERCENTA- greater FUND SHAREHOLDER NAME, CITY AND STATE CLASS(A) GE than 25%) - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- Income Charles Schwab Class A 17.46% -- Opportunities -------------------------------- Class R4 93.49% ---------------------------------------------------------------------- Portfolio Builder Aggressive Fund Class I 11.18% 28.33%(b) ---------------------------------------------------------------------- Portfolio Builder Moderate Fund Class I 59.65% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 24.81% -- Aggressive Fund ---------------------------------------------------------------------- RiverSource Life Insurance Company Class R4 6.51% -- - ----------------------------------------------------------------------------------------- Inflation Ameriprise Financial Class W 100.00% 78.59%(b) Protected Securities ---------------------------------------------------------------------- RiverSource Life Insurance Company Class R4 65.66% -- ---------------------------------------------------------------------- Charles Schwab Class A 19.90% -- -------------------------------- Class R4 34.34% ---------------------------------------------------------------------- Mary and George Forsman, Class C 5.23% -- Minneapolis, MN ---------------------------------------------------------------------- Income Builder Moderate Income Class I 6.36% -- ---------------------------------------------------------------------- Portfolio Builder Aggressive Fund Class I 9.90% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Fund Class I 30.84% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 36.64% -- Aggressive Fund ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 8.38% -- Conservative Fund - ----------------------------------------------------------------------------------------- Large Cap Equity Ameriprise Financial Class R2 100.00% -- -------------------------------- Class R3 100.00% ---------------------------------------------------------------------- The Bank of New York Class R5 99.98% -- ---------------------------------------------------------------------- Portfolio Builder Aggressive Fund Class I 19.71% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Fund Class I 20.04% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 31.71% -- Aggressive Fund ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 5.09% -- Conservative Fund ---------------------------------------------------------------------- Portfolio Builder Total Equity Fund Class I 22.19% -- ---------------------------------------------------------------------- Wachovia Bank Class R4 99.89% -- - ----------------------------------------------------------------------------------------- Large Cap Value Ameriprise Financial Class R2 100.00% -- -------------------------------- Class R3 100.00% -------------------------------- Class R4 30.36% -------------------------------- Class R5 100.00% ---------------------------------------------------------------------- Charles Schwab Class A 12.75% -- -------------------------------- Class R4 69.64% ---------------------------------------------------------------------- Portfolio Builder Aggressive Fund Class I 19.56% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Fund Class I 19.96% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 31.92% -- Aggressive Fund ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 5.16% -- Conservative Fund ---------------------------------------------------------------------- Portfolio Builder Total Equity Fund Class I 22.11% --
Statement of Additional Information - Nov. 29, 2007 Page 179
PERCENT FUND SHARES OF FUND -------------------- (if SHARE PERCENTA- greater FUND SHAREHOLDER NAME, CITY AND STATE CLASS(A) GE than 25%) - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- Limited Duration Ameriprise Financial Class W 12.19% 52.48%(b) Bond ---------------------------------------------------------------------- American Enterprise Investment Class W 87.81% -- Services Inc. ---------------------------------------------------------------------- RiverSource Life Insurance Company Class R4 100.00% -- ---------------------------------------------------------------------- Charles Schwab Class A 18.56% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Fund Class I 60.09% -- ---------------------------------------------------------------------- Portfolio Builder Conservative Fund Class I 39.90% -- ---------------------------------------------------------------------- John W. and Cecelia E. Kramar, Class C 17.08% -- Hacienda Heights, CA ---------------------------------------------------------------------- Mary Loretta Jacobsmeyer, Riverside, Class C 8.07% -- CA ---------------------------------------------------------------------- Michael N. Stanley, Palm Springs, CA Class C 7.88% -- ---------------------------------------------------------------------- Rita R. and Lawrence E. Dale, Class C 6.52% -- Barstow, CA ---------------------------------------------------------------------- John B. Mudd, Riverside, CA Class C 5.00% -- - ----------------------------------------------------------------------------------------- FUNDS WITH FISCAL PERIOD ENDING AUGUST 31 - ----------------------------------------------------------------------------------------- California Tax- Linda A. Wochnik, Sierra Madre, CA Class B 10.88% -- Exempt ---------------------------------------------------------------------- Wells Fargo Bank Class C 7.91% -- ---------------------------------------------------------------------- Robert P. and Diane E. Minger, Class C 6.03% -- Huntley, IL ---------------------------------------------------------------------- Yu Chuan Chen, Tyan Yue Hwu and Class C 5.88% -- Vanessa Hwu, Walnut, CA - ----------------------------------------------------------------------------------------- Diversified Bond Ameriprise Financial Class R2 100.00% -- -------------------- Class R3 100.00% -------------------- Class R5 100.00% ---------------------------------------------------------------------- American Enterprise Investment Class W 99.99% -- Services Inc. ---------------------------------------------------------------------- Charles Schwab Class A 6.99% -- ---------------------------------------------------------------------- GWFS Equities Class R4 5.01% -- ---------------------------------------------------------------------- Income Builder Moderate Income Fund Class I 7.35% -- ---------------------------------------------------------------------- Portfolio Builder Aggressive Fund Class I 8.27% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Fund Class I 38.13% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 28.74% -- Aggressive Fund ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 10.16% -- Conservative Fund ---------------------------------------------------------------------- Wacovia Bank Class R4 93.57% -- - ----------------------------------------------------------------------------------------- Massachusetts Tax- Charles Schwab Class A 5.76% -- Exempt ---------------------------------------------------------------------- June P. Venette and Norman E. Class C 21.79% -- Venette, Orange, MA ---------------------------------------------------------------------- Kevin H. and Nancy A. Aiken, Athol, Class C 9.74% -- MA ---------------------------------------------------------------------- Charles M. and Carol A. Breau, Class C 9.13% -- Clinton, MA ---------------------------------------------------------------------- Alphonse A. Di Nardo and Linda Di Class C 6.64% -- Nardo, Leominster, MA
Statement of Additional Information - Nov. 29, 2007 Page 180
PERCENT FUND SHARES OF FUND -------------------- (if SHARE PERCENTA- greater FUND SHAREHOLDER NAME, CITY AND STATE CLASS(A) GE than 25%) - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- Michigan Tax- Ann Marie and Harley R. Arnold, Class B 8.09% -- Exempt Barton City, MI ---------------------------------------------------------------------- Nancy J. Anderson, Iron River, MI Class B 6.85% -- ---------------------------------------------------------------------- Elizabeth L. and Dennis P. Sexton, Class B 5.41% -- Benton Harbor, MI ---------------------------------------------------------------------- Orva Lee and Jean E. Ice, Sterling Class B 5.31% -- Hts., MI ---------------------------------------------------------------------- Chester V. and Rose M. Mysliwiec, Class B 5.27% -- Grand Rapids, MI ---------------------------------------------------------------------- Francis D. and Isabel S. Kinser, Class C 8.00% -- Waterford, MI ---------------------------------------------------------------------- Carl L. and Marian A. Beaver, Riga, Class C 7.68% -- MI ---------------------------------------------------------------------- Lorne R. and Vivian T. Trainor, Class C 7.35% -- Erie, MI ---------------------------------------------------------------------- Barry J. Fishman and Teresa A. Class C 6.22% -- McMahon, Cambridge, MA - ----------------------------------------------------------------------------------------- Minnesota Tax- None None N/A -- Exempt - ----------------------------------------------------------------------------------------- New York Tax- Charles Schwab Class A 7.81% -- Exempt ---------------------------------------------------------------------- Joan Sabbatini, E. Northport, NY Class B 6.27% -- ---------------------------------------------------------------------- Ena S. Ryan, Brooklyn, NY Class C 7.69% -- ---------------------------------------------------------------------- Ottoviano Asarese, Buffalo, NY Class C 5.34% -- ---------------------------------------------------------------------- Arthur and Sandra Ezersky, Woodbury, Class C 5.29% -- NY - ----------------------------------------------------------------------------------------- Ohio Tax-Exempt Clarence J. and Nancy J. Varhol, Class B 6.00% -- Euclid, OH ---------------------------------------------------------------------- Richard L. Sears, Parma, OH Class C 12.76% -- ---------------------------------------------------------------------- George and Ophelia M. Hill, Class C 8.39% -- Cincinnati, OH ---------------------------------------------------------------------- Randall J. Hohman, Tiffin, OH Class C 6.48% -- - ----------------------------------------------------------------------------------------- FUNDS WITH FISCAL PERIOD ENDING SEPTEMBER 30 - ----------------------------------------------------------------------------------------- Balanced Wacovia Bank Class R4 99.81% --
Statement of Additional Information - Nov. 29, 2007 Page 181
PERCENT FUND SHARES OF FUND -------------------- (if SHARE PERCENTA- greater FUND SHAREHOLDER NAME, CITY AND STATE CLASS(A) GE than 25%) - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- Disciplined Large Charles Schwab Class A 36.15% -- Cap Growth ---------------------------------------------------------------------- Joyce S. Tsuji and Laurence Lance, Class B 8.39% -- Renton, WA ---------------------------------------------------------------------- Fred A. and Christine F. Fox, Class B 6.71% -- Clarkston, MI ---------------------------------------------------------------------- Neocles G. and Karen S. Class B 5.47% -- Athanasiades, East Setauket, NY ---------------------------------------------------------------------- Michael L. and Melissa M. Gunderson, Class C 28.22% -- Marschall, MN ---------------------------------------------------------------------- Robert M. and Patricia A. Smith, Class C 19.30% -- Camarillo, CA ---------------------------------------------------------------------- Paul L. and Denise B. Powell, North Class C 13.14% -- Hampton, NH ---------------------------------------------------------------------- Marilyn S. and Thomas S. Araki, Class C 7.17% -- Wailuku, HI ---------------------------------------------------------------------- Robert L. Veeneman, Sarasota, FL Class C 5.13% -- ---------------------------------------------------------------------- Portfolio Builder Aggressive Fund Class I 19.35% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Fund Class I 19.96% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 31.39% -- Aggressive Fund ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 5.10% -- Conservative Fund ---------------------------------------------------------------------- Portfolio Builder Total Equity Fund Class I 21.89% -- ---------------------------------------------------------------------- Ameriprise Financial Class C 27.04% 95.01% -------------------- Class R2 100.00% Class R3 100.00% Class R4 100.00% Class R5 100.00% - ----------------------------------------------------------------------------------------- Diversified Equity Charles Schwab Class A 26.75% -- Income ---------------------------------------------------------------------- Portfolio Builder Aggressive Fund Class I 19.61% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Fund Class I 20.13% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 31.66% -- Aggressive Fund ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 5.15% -- Conservative Fund ---------------------------------------------------------------------- Portfolio Builder Total Equity Fund Class I 22.18% -- ---------------------------------------------------------------------- Hartford Life Insurance Company Class R2 89.67% -- (Hartford Life), Weatogue, CT ---------------------------------------------------------------------- GWFS Equities Class R2 7.71% -- Class R3 97.47% Class R5 16.22% ---------------------------------------------------------------------- Wacovia Bank Class R4 47.97% -- ---------------------------------------------------------------------- Wells Fargo Bank Class R4 31.13% -- ---------------------------------------------------------------------- American Century Investments, Kansas Class R4 5.28% -- City, MO ---------------------------------------------------------------------- Ameriprise Trust Company Class R5 84.09% -- ---------------------------------------------------------------------- Ameriprise Financial Class W 100.00% --
Statement of Additional Information - Nov. 29, 2007 Page 182
PERCENT FUND SHARES OF FUND -------------------- (if SHARE PERCENTA- greater FUND SHAREHOLDER NAME, CITY AND STATE CLASS(A) GE than 25%) - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- Mid Cap Value Charles Schwab Class A 39.47% -- ---------------------------------------------------------------------- First Clearing L.L.C., Glen Allen, Class C 7.09% -- VA ---------------------------------------------------------------------- Portfolio Builder Aggressive Fund Class I 19.51% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Fund Class I 20.11% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 31.78% -- Aggressive Fund ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 5.20% -- Conservative Fund ---------------------------------------------------------------------- Portfolio Builder Total Equity Fund Class I 22.12% -- ---------------------------------------------------------------------- Hartford Life Class R2 98.90% -- ---------------------------------------------------------------------- JP Morgan Chase Bank, Kansas City, Class R3 37.46% -- MO ---------------------------------------------------------------------- Hartford Securities, Hartford, CT Class R3 29.81% -- ---------------------------------------------------------------------- GWFS Equities Class R3 27.61% -- ---------------------------------------------------------------------- Wacovia Bank Class R4 39.95% -- ---------------------------------------------------------------------- John Hancock Life Insurance Company, Class R4 31.22% -- Buffalo, NY ---------------------------------------------------------------------- ING Life Insurance and Annuity, Class R4 13.53% -- Hartford, CT ---------------------------------------------------------------------- National Financial Services Corp., Class R4 6.03% -- New York, NY ---------------------------------------------------------------------- Matrix Capital Bank, Denver, CO Class R5 90.25% -- ---------------------------------------------------------------------- Securian Financial Services, St. Class R5 9.41% -- Paul, MN - ----------------------------------------------------------------------------------------- Strategic Charles Schwab Class A 14.68% -- Allocation ---------------------------------------------------------------------- Ameriprise Financial Class I 100.00% -- -------------------------------- Class R2 100.00% -------------------------------- Class R3 100.00% -------------------------------- Class R5 100.00% ---------------------------------------------------------------------- Wacovia Bank Class R4 78.72% -- ---------------------------------------------------------------------- Charles Schwab Class R4 21.28% -- -------------------------------- - ----------------------------------------------------------------------------------------- Strategic Income Ameriprise Financial Class A 39.42% 36.02% Allocation ---------------------------------------------------------------------- Charles Schwab Class A 22.87% -- - ----------------------------------------------------------------------------------------- FUNDS WITH FISCAL PERIOD ENDING OCTOBER 31 - ----------------------------------------------------------------------------------------- Absolute Return Ameriprise Financial Class A 100.00% 100.00%- Currency (b) and Income -------------------------------- Class B 100.00% -------------------------------- Class C 100.00% -------------------------------- Class R4 100.00% ---------------------------------------------------------------------- Income Builder Enhanced Income Fund Class I 8.84% -- ---------------------------------------------------------------------- Income Builder Moderate Income Fund Class I 10.20% -- ---------------------------------------------------------------------- Portfolio Builder Aggressive Fund Class I 13.09% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 26.60% -- Aggressive Fund ---------------------------------------------------------------------- Portfolio Builder Moderate Fund Class I 21.28% -- ---------------------------------------------------------------------- Portfolio Builder Total Equity Fund Class I 11.73% --
Statement of Additional Information - Nov. 29, 2007 Page 183
PERCENT FUND SHARES OF FUND -------------------- (if SHARE PERCENTA- greater FUND SHAREHOLDER NAME, CITY AND STATE CLASS(A) GE than 25%) - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- Disciplined Ameriprise Financial Class A 85.29% 97.48%(b) International Equity -------------------------------- Class C 25.45% -------------------------------- Class R4 49.24% ---------------------------------------------------------------------- Charles Schwab Class R4 50.76% -- ---------------------------------------------------------------------- Income Builder Basic Income Fund Class I 10.12% -- ---------------------------------------------------------------------- Income Builder Enhanced Income Fund Class I 24.75% -- ---------------------------------------------------------------------- Income Builder Moderate Income Fund Class I 23.18% -- ---------------------------------------------------------------------- Retirement Plus 2020 Fund Class I 7.61% -- ---------------------------------------------------------------------- Retirement Plus 2025 Fund Class I 5.98% -- ---------------------------------------------------------------------- Retirement Plus 2030 Fund Class I 6.99% -- ---------------------------------------------------------------------- Retirement Plus 2040 Fund Class I 7.94% -- ---------------------------------------------------------------------- Corine and Cornelius Armstrong, Class C 7.17% -- Chicago, IL ---------------------------------------------------------------------- Michelle, Aaron and Joshua Flanery, Class C 23.66% -- Roseville, CA ---------------------------------------------------------------------- Jon L. and Patricia M. Worthing, Class C 35.34% -- Santa Clarita, CA ---------------------------------------------------------------------- Diana T. and Murray R. Johnson, Class B 8.26% -- La Grange, IL ---------------------------------------------------------------------- Betty C. Russell, Orlando, FL Class B 7.93% -- ---------------------------------------------------------------------- Timothy and Gayle a. Callahan, Class B 6.70% -- Liberty Township, OH ---------------------------------------------------------------------- Lois and Harvey Retzloff, Chicago, Class B 5.86% -- IL ---------------------------------------------------------------------- Drew R. and Madelyn H. Miller, Class B 5.68% -- Bloomsburg, PA ---------------------------------------------------------------------- Audree J. Schmidt, Stockton, CA Class B 5.37% -- ---------------------------------------------------------------------- Byron G. Lee and Audrey Y. Williams- Class B 5.15% -- Lee, Oak Park, IL - ----------------------------------------------------------------------------------------- Emerging Markets Ameriprise Trust Company Class R4 78.55% -- ---------------------------------------------------------------------- Charles Schwab Class A 14.93% -- -------------------------------- Class R4 21.45% ---------------------------------------------------------------------- Portfolio Builder Aggressive Fund Class I 19.94% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Fund Class I 20.32% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 33.06% -- Aggressive Fund ---------------------------------------------------------------------- Portfolio Builder Conservative Fund Class I 5.51% -- ---------------------------------------------------------------------- Portfolio Builder Total Equity Fund Class I 21.13% --
Statement of Additional Information - Nov. 29, 2007 Page 184
PERCENT FUND SHARES OF FUND -------------------- (if SHARE PERCENTA- greater FUND SHAREHOLDER NAME, CITY AND STATE CLASS(A) GE than 25%) - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- Emerging Markets Ameriprise Financial Class A 84.83% 95.94%(b) Bond -------------------------------- Class C 19.61% -------------------------------- Class R4 70.59% ---------------------------------------------------------------------- Richard J. and Rita A Barse, Class B 9.41% -- New Haven, CT ---------------------------------------------------------------------- Paul F. and Maureen M. Bultinck, Class B 5.38% -- Mishawaka, IN ---------------------------------------------------------------------- Kimberly S. and Scott E. Duerr, Class C 14.41% -- Sulphur Springs, TX ---------------------------------------------------------------------- Wesley W. Smith, Houston, TX Class C 13.49% -- ---------------------------------------------------------------------- Jane A. O'Rourke and Frank K. Class C 11.94% -- O'Hara, Hallowell, ME ---------------------------------------------------------------------- Terry I. and Valerie G. Hansen, Class C 11.90% -- Midvale, UT ---------------------------------------------------------------------- Carl J. and Ruth E. Allrich, Class C 11.47% -- St. Charles, MO ---------------------------------------------------------------------- Michael and Lisa Fischer, Class C 10.21% -- Fremont, CA ---------------------------------------------------------------------- Income Builder Basic Income Fund Class I 12.60% -- ---------------------------------------------------------------------- Income Builder Enhanced Income Fund Class I 36.16% -- ---------------------------------------------------------------------- Income Builder Moderate Income Fund Class I 49.26% -- - ----------------------------------------------------------------------------------------- European Equity Ameriprise Financial Class I 100.00% -- -------------------------------- Class R4 50.90% ---------------------------------------------------------------------- Charles Schwab Class A 12.95% -- -------------------------------- Class R4 49.10% ---------------------------------------------------------------------- Marilyn O. Matthews Trust, Class C 7.79% -- Pasadena, CA - ----------------------------------------------------------------------------------------- Global Bond Charles Schwab Class A 14.40% -- -------------------------------- Class R4 100.00% ---------------------------------------------------------------------- Income Builder Basic Income Fund Class I 6.37% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Fund Class I 32.49% 30.38%(b) ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 38.68% -- Aggressive Fund ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 10.79% -- Conservative Fund - ----------------------------------------------------------------------------------------- Global Equity Ameriprise Trust Company Class R4 85.55% -- ---------------------------------------------------------------------- Charles Schwab Class A 14.01% -- ---------------------------------------------------------------------- Met Life Class R4 9.33% -- - ----------------------------------------------------------------------------------------- Global Technology Ameriprise Financial Class I 100.00% -- ---------------------------------------------------------------------- Ameriprise Trust Company Class R4 73.88% -- ---------------------------------------------------------------------- Charles Schwab Class A 13.94% -- -------------------------------- Class R4 26.03%
Statement of Additional Information - Nov. 29, 2007 Page 185
PERCENT FUND SHARES OF FUND -------------------- (if SHARE PERCENTA- greater FUND SHAREHOLDER NAME, CITY AND STATE CLASS(A) GE than 25%) - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- International Charles Schwab Class A 13.83% -- Aggressive Growth -------------------------------- Class R4 97.78% ---------------------------------------------------------------------- Portfolio Builder Aggressive Fund Class I 19.61% 25.69% ---------------------------------------------------------------------- Portfolio Builder Moderate Fund Class I 20.04% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 32.44% -- Aggressive Fund ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 5.44% -- Conservative Fund ---------------------------------------------------------------------- Portfolio Builder Total Equity Fund Class I 20.78% -- - ----------------------------------------------------------------------------------------- International Ameriprise Financial Class R4 7.78% 35.19%(b) Equity ---------------------------------------------------------------------- Charles Schwab Class A 11.64% -- -------------------------------- Class R4 92.22% ---------------------------------------------------------------------- Daniel and Linda L. Miklovic, Class C 5.60% -- St. Louis, MO ---------------------------------------------------------------------- Portfolio Builder Aggressive Fund Class I 19.58% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Fund Class I 20.07% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 32.43% -- Aggressive Fund ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 5.43% -- Conservative Fund ---------------------------------------------------------------------- Portfolio Builder Total Equity Fund Class I 20.78% -- - ----------------------------------------------------------------------------------------- International Charles Schwab Class A 13.36 -- Opportunity -------------------------------- Class R4 77.43% ---------------------------------------------------------------------- Portfolio Builder Aggressive Fund Class I 19.60% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 32.46% -- Aggressive Fund ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 5.43% -- Conservative Fund ---------------------------------------------------------------------- Portfolio Builder Moderate Fund Class I 20.03% -- ---------------------------------------------------------------------- Portfolio Builder Total Equity Fund Class I 20.79% -- ---------------------------------------------------------------------- Met Life Class R4 22.57% -- - ----------------------------------------------------------------------------------------- International Charles Schwab Class A 21.33% -- Select Value -------------------------------- Class R4 98.79% ---------------------------------------------------------------------- Portfolio Builder Aggressive Fund Class I 19.56% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 32.45% -- Aggressive Fund ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 5.44% -- Conservative Fund ---------------------------------------------------------------------- Portfolio Builder Moderate Fund Class I 20.07% -- ---------------------------------------------------------------------- Portfolio Builder Total Equity Fund Class I 20.78% -- - ----------------------------------------------------------------------------------------- International Ameriprise Financial Class R4 18.27% -- Small Cap ---------------------------------------------------------------------- Charles Schwab Class A 16.46% -- -------------------------------- Class R4 81.73% ---------------------------------------------------------------------- Portfolio Builder Aggressive Fund Class I 19.45% -- ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 32.61% -- Aggressive Fund ---------------------------------------------------------------------- Portfolio Builder Moderate Class I 5.34% -- Conservative Fund ---------------------------------------------------------------------- Portfolio Builder Moderate Fund Class I 20.07% -- ---------------------------------------------------------------------- Portfolio Builder Total Equity Fund Class I 20.74% --
Statement of Additional Information - Nov. 29, 2007 Page 186
PERCENT FUND SHARES OF FUND -------------------- (if SHARE PERCENTA- greater FUND SHAREHOLDER NAME, CITY AND STATE CLASS(A) GE than 25%) - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- FUNDS WITH FISCAL PERIOD ENDING NOVEMBER 30 - ----------------------------------------------------------------------------------------- Intermediate Tax- Charles Schwab Class A 9.90% -- Exempt - ----------------------------------------------------------------------------------------- Mid Cap Growth Ameriprise Financial Class I 100.00% -- ---------------------------------------------------------------------- Ameriprise Trust Company Class R4 56.81% -- ---------------------------------------------------------------------- Charles Schwab Class A 5.29% -- ---------------------------------------------------------------------- Charles Schwab Trust Company, Class R4 16.91% -- San Francisco, CA ---------------------------------------------------------------------- GWFS Equities, Class R4 24.73% -- - ----------------------------------------------------------------------------------------- Tax-Exempt Bond J. Hayley Stephens, Calhoun, GA Class C 6.73% -- - ----------------------------------------------------------------------------------------- Tax-Exempt High None -- -- -- Income - ----------------------------------------------------------------------------------------- FUNDS WITH FISCAL PERIOD ENDING DECEMBER 31 - ----------------------------------------------------------------------------------------- Tax-Exempt Money None -- -- -- Market - -----------------------------------------------------------------------------------------
* As of the date of this SAI, the fund has not passed its first fiscal year end, and therefore has no reporting information. (a) Effective Dec. 11, 2006 Class Y was renamed Class R4. (b) Combination of Ameriprise Financial initial capital and affiliated funds-of-funds' investments in Class I shares. A fund may serve as an underlying investment of funds-of-funds that principally invest in shares of other RiverSource funds (the underlying funds). The underlying funds and the funds-of-funds share the same officers, Board members, and investment manager, RiverSource Investments. The funds-of-funds do not invest in an underlying fund for the purpose of exercising management or control; however, from time to time, investments by the funds-of-funds in a fund may represent a significant portion of a fund. Because the funds-of-funds may own a substantial portion of the shares of a fund, procedures have been put into place to assure that public shareholders will determine the outcome of all actions taken at underlying fund shareholder meetings. In proxy voting, the funds-of-funds will vote on each proposal in the same proportion that other shareholders vote on the proposal. In addition, Ameriprise Financial or an affiliate may own shares of a fund as a result of an initial capital investment at the inception of the fund or class. To the extent RiverSource Investments, as manager of the funds-of-funds, may be deemed a beneficial owner of the shares of an underlying fund held by the funds- of-funds, and such shares, together with any initial capital investment by Ameriprise Financial or an affiliate represent more than 25% of a fund, RiverSource Investments and its affiliated companies may be deemed to control the fund. 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 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 defendant's 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 Aug. 8, 2007. In December 2005, without admitting or denying the allegations, American Express Financial Corporation (AEFC, which is now known as Ameriprise Financial, Inc. (Ameriprise Financial)), the parent company of RiverSource Investments, LLC (RiverSource Investments), entered into settlement agreements with the Securities and Exchange Commission (SEC) and Minnesota Department of Commerce (MDOC) related to market timing activities. In connection with these matters, the SEC and MDOC issued orders (the Orders) alleging that AEFC violated certain provisions of the federal and Minnesota securities Statement of Additional Information - Nov. 29, 2007 Page 187 laws by failing to adequately disclose market timing activities by allowing certain identified market timers to continue to market time contrary to disclosures in mutual fund and variable annuity product prospectuses. The Orders also alleged that AEFC failed to implement procedures to detect and prevent market timing in 401(k) plans for employees of AEFC and related companies and failed to adequately disclose that there were no such procedures. Pursuant to the MDOC Order, the MDOC also alleged that AEFC allowed inappropriate market timing to occur by failing to have written policies and procedures and failing to properly supervise its employees. As a result of the Orders, AEFC was censured and ordered to cease and desist from committing or causing any violations of certain provisions of the Investment Advisers Act of 1940, the Investment Company Act of 1940, and various Minnesota laws. Pursuant to the terms of the Orders, AEFC agreed to pay disgorgement of $10 million and civil money penalties of $7 million. AEFC also agreed to make presentations at least annually to its board of directors and the relevant mutual funds' board that include an overview of policies and procedures to prevent market timing, material changes to these policies and procedures and whether disclosures related to market timing are consistent with the SEC order and federal securities laws. AEFC also agreed to retain an independent distribution consultant to assist in developing a plan for distribution of all disgorgement and civil penalties ordered by the SEC in accordance with various undertakings detailed at http://www.sec.gov/litigation/admin/ia-2451.pdf. In addition, AEFC agreed to complete and submit to the MDOC a compliance review of its procedures regarding market timing within one year of the MDOC Order, including a summary of actions taken to ensure compliance with applicable laws and regulations and certification by a senior officer regarding compliance and supervisory procedures. Ameriprise Financial and its affiliates have cooperated with the SEC and the MDOC in these legal proceedings, and have made regular reports to the RiverSource Funds' Boards of Directors/Trustees. 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. INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The financial statements for the fiscal year ended July 31, 2007 or later contained in a fund's Annual Report were audited by the independent registered public accounting firm, Ernst & Young LLP, 220 South 6th Street, Suite 1400, Minneapolis, MN 55402. The information for periods ended on or before June 30, 2007 was audited by KPMG LLP. The independent registered public accounting firm also provides other accounting and tax-related services as requested by the fund. Statement of Additional Information - Nov. 29, 2007 Page 188 APPENDIX A DESCRIPTION OF RATINGS STANDARD & POOR'S LONG-TERM DEBT RATINGS. A Standard & Poor's corporate or municipal debt rating is a current assessment of the creditworthiness of an obligor with respect to a specific obligation. This assessment may take into consideration obligors such as guarantors, insurers, or lessees. The debt rating is not a recommendation to purchase, sell, or hold a security, inasmuch as it does not comment as to market price or suitability for a particular investor. The ratings are based on current information furnished by the issuer or obtained by S&P from other sources it considers reliable. S&P does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of such information or based on other circumstances. The ratings are based, in varying degrees, on the following considerations: - Likelihood of default capacity and willingness of the obligor as to the timely payment of interest and repayment of principal in accordance with the terms of the obligation. - Nature of and provisions of the obligation. - Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights. INVESTMENT GRADE Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the highest rated issues only in a small degree. Debt rated A has a strong capacity to pay interest and repay principal, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories. Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher-rated categories. SPECULATIVE GRADE Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major exposures to adverse conditions. Debt rated BB has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to inadequate capacity to meet timely interest and principal payments. The BB rating category also is used for debt subordinated to senior debt that is assigned an actual or implied BBB- rating. Debt rated B has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The B rating category also is used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating. Debt rated CCC has a currently identifiable vulnerability to default and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The CCC rating category also is used for debt subordinated to senior debt that is assigned an actual or implied B or B- rating. Debt rated CC typically is applied to debt subordinated to senior debt that is assigned an actual or implied CCC rating. Debt rated C typically is applied to debt subordinated to senior debt that is assigned an actual or implied CCC rating. The C rating may be used to cover a situation where a bankruptcy petition has been filed, but debt service payments are continued. The rating CI is reserved for income bonds on which no interest is being paid. Statement of Additional Information - Nov. 29, 2007 A-1 Debt rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due, even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition if debt service payments are jeopardized. MOODY'S LONG-TERM DEBT RATINGS Aaa - Bonds that are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk. Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa - Bonds that are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present that make the long-term risk appear somewhat larger than in Aaa securities. A - Bonds that are rated A possess many favorable investment attributes and are to be considered as upper-medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present that suggest a susceptibility to impairment some time in the future. Baa - Bonds that are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba - Bonds that are rated Ba are judged to have speculative elements - their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B - Bonds that are rated B generally lack characteristics of a desirable investment. Assurance of interest and principal payments or maintenance of other terms of the contract over any long period of time may be small. Caa - Bonds that are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca - Bonds that are rated Ca represent obligations that are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C - Bonds that are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. FITCH'S LONG-TERM DEBT RATINGS Fitch's bond ratings provide a guide to investors in determining the credit risk associated with a particular security. The ratings represent Fitch's assessment of the issuer's ability to meet the obligations of a specific debt issue in a timely manner. The rating takes into consideration special features of the issue, its relationship to other obligations of the issuer, the current and prospective financial condition and operating performance of the issuer and any guarantor, as well as the economic and political environment that might affect the issuer's future financial strength and credit quality. Fitch ratings do not reflect any credit enhancement that may be provided by insurance policies or financial guaranties unless otherwise indicated. Fitch ratings are not recommendations to buy, sell or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature of taxability of payments made in respect of any security. Fitch ratings are based on information obtained from issuers, other obligors, underwriters, their experts, and other sources Fitch believes to be reliable. Fitch does not audit or verify the truth or accuracy of such information. Ratings may be changed, suspended, or withdrawn as a result of changes in, or the unavailability of, information or for other reasons. INVESTMENT GRADE AAA: Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. Statement of Additional Information - Nov. 29, 2007 A-2 AA: Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated F-1+. A: Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. BBB: Bonds considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds and, therefore, impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. SPECULATIVE GRADE BB: Bonds are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified, which could assist the obligor in satisfying its debt service requirements. B: Bonds are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue. CCC: Bonds have certain identifiable characteristics that, if not remedied, may lead to default. The ability to meet obligations requires an advantageous business and economic environment. CC: Bonds are minimally protected. Default in payment of interest and/or principal seems probable over time. C: Bonds are in imminent default in payment of interest or principal. DDD, DD, and D: Bonds are in default on interest and/or principal payments. Such bonds are extremely speculative and should be valued on the basis of their ultimate recovery value in liquidation or reorganization of the obligor. DDD represents the highest potential for recovery on these bonds, and D represents the lowest potential for recovery. SHORT-TERM RATINGS STANDARD & POOR'S COMMERCIAL PAPER RATINGS A Standard & Poor's commercial paper rating is a current assessment of the likelihood of timely payment of debt considered short-term in the relevant market. Ratings are graded into several categories, ranging from A-1 for the highest quality obligations to D for the lowest. These categories are as follows: A-1 This highest category indicates that the degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted with a plus sign (+) designation. A-2 Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree of safety is not as high as for issues designated A-1. A-3 Issues carrying this designation have adequate capacity for timely payment. They are, however, more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations. B Issues are regarded as having only speculative capacity for timely payment. C This rating is assigned to short-term debt obligations with doubtful capacity for payment. D Debt rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due, even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. STANDARD & POOR'S MUNI BOND AND NOTE RATINGS An S&P municipal bond or note rating reflects the liquidity factors and market- access risks unique to these instruments. Notes maturing in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. Statement of Additional Information - Nov. 29, 2007 A-3 Note rating symbols and definitions are as follows: SP-1 Strong capacity to pay principal and interest. Issues determined to possess very strong characteristics are given a plus (+) designation. SP-2 Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes. SP-3 Speculative capacity to pay principal and interest. Municipal bond rating symbols and definitions are as follows: Standard & Poor's rating SP-1 indicates very strong or strong capacity to pay principal and interest. Those issues determined to possess overwhelming safety characteristics will be given a plus (+) designation. Standard & Poor's rating SP-2 indicates satisfactory capacity to pay principal and interest. Standard & Poor's rating SP-3 indicates speculative capacity to pay principal and interest. MOODY'S SHORT-TERM RATINGS Moody's short-term debt ratings are opinions of the ability of issuers to repay punctually senior debt obligations. These obligations have an original maturity not exceeding one year, unless explicitly noted. Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment ability of rated issuers: Issuers rated Prime-1 (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations. Prime-1 repayment ability will often be evidenced by many of the following characteristics: (i) leading market positions in well-established industries, (ii) high rates of return on funds employed, (iii) conservative capitalization structure with moderate reliance on debt and ample asset protection, (iv) broad margins in earnings coverage of fixed financial charges and high internal cash generation, and (v) well established access to a range of financial markets and assured sources of alternate liquidity. Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above, but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. Issuers rated Prime-3 (or supporting institutions) have an acceptable ability for repayment of senior short-term obligations. The effect of industry characteristics and market compositions may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and may require relatively high financial leverage. Adequate alternate liquidity is maintained. Issuers rated Not Prime do not fall within any of the Prime rating categories. MOODY'S SHORT-TERM MUNI BONDS AND NOTES Short-term municipal bonds and notes are rated by Moody's. The ratings reflect the liquidity concerns and market access risks unique to notes. Moody's MIG 1/VMIG 1 indicates the best quality. There is present strong protection by established cash flows, superior liquidity support or demonstrated broad-based access to the market for refinancing. Moody's MIG 2/VMIG 2 indicates high quality. Margins of protection are ample although not so large as in the preceding group. Moody's MIG 3/VMIG 3 indicates favorable quality. All security elements are accounted for but there is lacking the undeniable strength of the preceding grades. Liquidity and cash flow protection may be narrow and market access for refinancing is likely to be less well established. Moody's MIG 4/VMIG 4 indicates adequate quality. Protection commonly regarded as required of an investment security is present and although not distinctly or predominantly speculative, there is specific risk. FITCH'S SHORT-TERM RATINGS Fitch's short-term ratings apply to debt obligations that are payable on demand or have original maturities of generally up to three years, including commercial paper, certificates of deposit, medium-term notes, and municipal and investment notes. The Statement of Additional Information - Nov. 29, 2007 A-4 short-term rating places greater emphasis than a long-term rating on the existence of liquidity necessary to meet the issuer's obligations in a timely manner. Fitch short-term ratings are as follows: F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment. F-1: Very Strong Credit Quality. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated F-1+. F-2: Good Credit Quality. Issues assigned this rating have a satisfactory degree of assurance for timely payment, but the margin of safety is not as great as for issues assigned F-1+ and F-1 ratings. F-3: Fair Credit Quality. Issues assigned this rating have characteristics suggesting that the degree of assurance for timely payment is adequate, however, near-term adverse changes could cause these securities to be rated below investment grade. F-S: Weak Credit Quality. Issues assigned this rating have characteristics suggesting a minimal degree of assurance for timely payment and are vulnerable to near-term adverse changes in financial and economic conditions. D: Default. Issues assigned this rating are in actual or imminent payment default. Statement of Additional Information - Nov. 29, 2007 A-5 APPENDIX B STATE TAX-EXEMPT FUNDS STATE RISK FACTORS California Tax-Exempt Fund, Massachusetts Tax-Exempt Fund, Michigan Tax-Exempt Fund, Minnesota Tax-Exempt Fund, New York Tax-Exempt Fund and Ohio Tax-Exempt Fund invest primarily in the municipal securities issued by a single state and political sub-divisions that state. Each Fund will be particularly affected by political and economic conditions and developments in the state in which it invests. This vulnerability to factors affecting the state's tax-exempt investments will be significantly greater than that of more geographically diversified funds, which may result in greater losses and volatility. Because of the relatively small number of issuers of tax-exempt securities, the Fund may invest a higher percentage of assets in a single issuer and, therefore, be more exposed to the risk of loss by investing in a few issuers than a fund that invests more broadly. At times, the Fund and other accounts managed by the investment manager may own all or most of the debt of a particular issuer. This concentration of ownership may make it more difficult to sell, or to determine the fair value of, these investments. In addition, a Fund may concentrate in a segment of the tax-exempt debt market, such as revenue bonds for health care facilities, housing or airports. These investments may cause the value of a fund's shares to change more than the values of funds' shares that invest in more diversified investments. The yields on the securities in which the Fund invests generally are dependent on a variety of factors, including the financial condition of the issuer or other obligor, the revenue source from which the debt service is payable, general economic and monetary conditions, conditions in the relevant market, the size of a particular issue, the maturity of the obligation, and the rating of the issue. In addition to such factors, geographically concentrated securities will experience particular sensitivity to local conditions, including political and economic changes, adverse conditions to an industry significant to the area, and other developments within a particular locality. Because many tax-exempt bonds may be revenue or general obligations of local governments or authorities, ratings on tax-exempt bonds may be different from the ratings given to the general obligation bonds of a particular state. Certain events may adversely affect all investments within a particular market segment of the market. Examples include litigation, legislation or court decisions, concerns about pending or contemplated litigation, legislation or court decisions, or lower demand for the services or products provided by a particular market segment. Investing mostly in state-specific tax-exempt investments makes the Fund more vulnerable to that state's economy and to factors affecting tax-exempt issuers in that state than would be true for more geographically diversified funds. These risks include, among others: - the inability or perceived inability of a government authority to collect sufficient tax or other revenues to meet its payment obligations; - natural disasters and ecological or environmental concerns; - the introduction of constitutional or statutory limits on a tax-exempt issuer's ability to raise revenues or increase taxes; - the inability of an issuer to pay interest on or repay principal or securities in which the funds invest during recessionary periods; and - economic or demographic factors that may cause a decrease in tax or other revenues for a government authority or for private operators of publicly financed facilities. More information about state specific risks may be available from official state resources. The 1995 Minnesota Legislature enacted a statement of intent (codified at Minn. Stat. sec. 289A.50, subdivision 10) that interest on obligations of Minnesota governmental units and Indian tribes be included in net income of individuals, estates and trusts for Minnesota income tax purposes if a court determines that Minnesota's exemption of such interest unlawfully discriminates against interstate commerce because interest on obligations of governmental issuers located in other states is so included. This provision applies to taxable years that begin during or after the calendar year in which any such court decision becomes final, irrespective of the date on which the obligations were issued. Only two states have addressed whether a state's exemption of interest on its own bonds or those of its political subdivisions, but not of interest on the bonds of other states or their political subdivisions, unlawfully discriminates against interstate commerce or otherwise contravenes the United States Constitution. A court in Ohio decided in 1994 that the Ohio law was not unconstitutional. However, the Kentucky Court of Appeals held early in 2006 that the Kentucky law violated the Commerce Clause. The Kentucky Supreme Court declined to review this decision, however, the U.S. Supreme Court accepted certiorari in May 2007, and is expected to review the case in the fall of 2007. The Funds cannot predict the likelihood that interest on the Minnesota bonds held by the Funds would become taxable for Minnesota income tax purposes under Section 289A.50, subdivision 10. Similarly, the other State Tax-Exempt Funds cannot predict the likelihood that interest on state and municipal bonds held in such funds would become taxable under such applicable state law. See "Taxes" for more information. Statement of Additional Information - Nov. 29, 2007 B-1 APPENDIX C S&P 500 INDEX FUND ADDITIONAL INFORMATION ABOUT THE S&P 500 INDEX The Fund is not sponsored, endorsed, sold or promoted by S&P. S&P makes no representation or warranty, express or implied, to the shareholders of the Fund or any member of the public regarding the advisability of investing in securities generally or in the Fund particularly or the ability of the S&P 500 Index to track general stock market performance. S&P's only relationship to the Fund is the licensing of certain trademarks and trade names of S&P and of the S&P 500 Index, which are determined, composed and calculated by S&P without regard to the Fund. S&P has no obligation to take the needs of the Fund or its shareholders into consideration in determining, composing or calculating the S&P 500 Index. S&P is not responsible for and has not participated in the determination of the prices and amount of the Fund or the timing of the issuance or sale of the Fund or in the determination or calculation of the equation by which the Fund's shares are to be converted into cash. S&P has no obligation or liability in connection with the administration, marketing or trading of Fund shares. S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN (THE S&P INDEX) AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE FUND, ITS SHAREHOLDERS OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. S-6500 AD (11/07) Statement of Additional Information - Nov. 29, 2007 C-1 EX-99.(17)(F) 7 c18637b1exv99wx17yxfy.txt ANNUAL REPORT Annual Report and Prospectus (RIVERSOURCE INVESTMENTS LOGO) RIVERSOURCE(R) DIVERSIFIED BOND FUND ANNUAL REPORT FOR THE PERIOD ENDED AUGUST 31, 2007 (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. LETTER TO SHAREHOLDERS Dear Fellow RiverSource Funds Shareholder: At RiverSource Funds, we are focused on delivering consistent and competitive investment results. Yet our commitment to shareholders extends beyond investment performance to include providing Insightful Solutions for Today's Investor(R). What this means is that we remain dedicated to offering innovative products such as our Advice-Built Solutions(SM) that are designed to help you achieve your financial goals. Our Advice-Built Solutions embed investment advice such as asset allocation and rebalancing into the investment management process. Advice-embedded solutions are among the fastest growing investment products in the financial industry in part because investors find them easy to understand and use in a portfolio. At RiverSource Funds, we have been at the forefront of this movement with innovative products such as our Income Builder, Portfolio Builder and Retirement Plus(SM) Series of funds in addition to RiverSource(R) Strategic Allocation Fund. Your financial professional provides a wide range of investment and planning services in addition to helping you select mutual funds for your portfolio. We encourage you to talk with your financial professional about our Advice-Built Solutions and how they may help you reach your specific goals whether you are saving for retirement or paying for future college expenses or health care expenses. Thank you for investing with RiverSource Funds and for your continued support. Sincerely, /s/ STEPHEN R. LEWIS, JR. /s/ PATRICK T. BANNIGAN Stephen R. Lewis, Jr. Patrick T. Bannigan Chairman of the Boards President, RiverSource Funds
YOU SHOULD CONSIDER THE INVESTMENT OBJECTIVES, RISKS, CHARGES AND EXPENSES OF A MUTUAL FUND CAREFULLY BEFORE INVESTING. FOR A FREE PROSPECTUS, WHICH CONTAINS THIS AND OTHER IMPORTANT INFORMATION ABOUT THE FUNDS, CALL (888) 791-3380. READ THE PROSPECTUS CAREFULLY BEFORE INVESTING. 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. - -------------------------------------------------------------------------------- THIS PAGE IS NOT PART OF THE ANNUAL REPORT TABLE OF CONTENTS Fund Snapshot....................... 3 Performance Summary................. 5 Questions & Answers with Portfolio Management........ 8 The Fund's Long-term Performance ... 12 Fund Expenses Example............... 14 Investments in Securities........... 17 Financial Statements................ 36 Notes to Financial Statements....... 42 Report of Independent Registered Public Accounting Firm........... 69 Federal Income Tax Information...... 70 Board Members and Officers.......... 75 Approval of Investment Management Services Agreement............... 79 Proxy Voting........................ 81 Change in Independent Registered Public Accounting Firm........... 82
(DALBAR LOGO) The RiverSource mutual fund shareholder reports have been awarded the Communications Seal from Dalbar Inc., an independent financial services research firm. The Seal recognizes communications demonstrating a level of excellence in the industry. - -------------------------------------------------------------------------------- 2 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT FUND SNAPSHOT AT AUG. 31, 2007 FUND OBJECTIVE 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. SECTOR BREAKDOWN Percentage of portfolio assets (PIE CHART) Mortgage-Backed 45.0% Corporate Bonds(1) 22.8% U.S. Government Obligations & Agencies 16.7% Commercial Mortgage-Backed 11.8% Asset-Backed 2.3% Cash & Cash Equivalents(2) 1.4%
(1) Includes Telecommunications 5.6%, Financials 4.9%, Utilities 3.4%, Consumer Discretionary 2.9%, Consumer Staples 2.4%, Health Care 1.3%, Energy 0.9%, Materials 0.9% and Industrials 0.5%. (2) Due to security lending activity. QUALITY BREAKDOWN Percentage of bond portfolio assets (PIE CHART) AAA Bonds 75.8% BBB Bonds 12.3% Non-Investment Grade Bonds 6.1% A Bonds 4.2% AA Bonds 1.6% Non-Rated Bonds 0.0%
Bond ratings apply to 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 Fund's investment manager, rates a security using an internal rating system when Moody's doesn't provide a rating. Ratings for 0.2% of the bond portfolio assets were determined through internal analysis. 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 usually more pronounced for longer-term securities. Non-investment grade securities, commonly called "high-yield" or "junk" bonds, generally have more volatile prices and carry more risk to principal and income than investment grade securities. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 3 FUND SNAPSHOT AT AUG. 31, 2007 STYLE MATRIX
DURATION SHORT INT. LONG X HIGH X MEDIUM QUALITY LOW
Shading within the style matrix indicates areas in which the Fund generally invests. 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 serves 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 MANAGERS
YEARS IN INDUSTRY Jamie Jackson, CFA 19 Scott Kirby 28 Tom Murphy, CFA 21 Nicholas Pifer, CFA 17 Jennifer Ponce de Leon 18
FUND FACTS
TICKER SYMBOL INCEPTION DATE Class A INBNX 10/03/74 Class B ININX 03/20/95 Class C AXBCX 06/26/00 Class I RDBIX 03/04/04 Class R2 -- 12/11/06 Class R3 RSDBX 12/11/06 Class R4(1) IDBYX 03/20/95 Class R5 RSVBX 12/11/06 Class W RVBWX 12/01/06 (1) Effective Dec. 11, 2006, Class Y was renamed Class R4. Total net assets $2.944 billion Number of holdings 492 Weighted average life(2) 7.72 years Effective duration(3) 4.43 years Weighted average bond rating(4) AA
(2) 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. (3) 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. (4) WEIGHTED AVERAGE BOND RATING represents the average credit quality of the underlying bonds in the portfolio. - -------------------------------------------------------------------------------- 4 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT PERFORMANCE SUMMARY PERFORMANCE COMPARISON For the year ended Aug. 31, 2007 (BAR CHART) RiverSource Diversified Bond fund Class A (excluding sales charges) +5.54 Lehman Brothers Aggregate Bond Index (unmanaged) +5.26 Lipper Intermediate Investment Grade Index +4.44
(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 institution or visiting riversource.com/funds. The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart. If reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The indices do not reflect the effects of sales charges, expenses (excluding Lipper) and taxes. It is not possible to invest directly in an index. ANNUAL OPERATING EXPENSE RATIO (AS OF THE CURRENT PROSPECTUS)
TOTAL NET EXPENSES(A) Class A 0.97% 0.89% Class B 1.73% 1.65% Class C 1.73% 1.65% Class I 0.56% 0.53% Class R2(b) 1.36% 1.33% Class R3(b) 1.11% 1.08% Class R4(c) 0.86% 0.77% Class R5(b) 0.61% 0.58% Class W(d) 1.01% 0.98%
(a) The investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until Aug. 31, 2008, unless sooner terminated at the discretion of the Fund's Board. Any amounts waived will not be reimbursed by the Fund. Under this agreement, net fund expenses will not exceed 0.89% for Class A, 1.65% for Class B, 1.65% for Class C, 0.53% for Class I, 1.33% for Class R2, 1.08% for Class R3, 0.77% for Class R4, 0.58% for Class R5 and 0.98% for Class W. (b) Inception date for Class R2, Class R3 and Class R5 was Dec. 11, 2006. (c) Effective Dec. 11, 2006, Class Y was renamed Class R4. (d) Inception date for Class W is Dec. 1, 2006. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 5 PERFORMANCE SUMMARY AVERAGE ANNUAL TOTAL RETURNS
AT AUG. 31, 2007 SINCE WITHOUT SALES CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION Class A (inception 10/3/74) +5.54% +3.84% +4.39% +4.81% +9.07% Class B (inception 3/20/95) +4.74% +2.99% +3.61% +4.02% +5.26% Class C (inception 6/26/00) +4.73% +2.98% +3.60% N/A +4.49% Class I (inception 3/4/04) +5.90% +4.20% N/A N/A +4.02% Class R2 (inception 12/11/06) N/A N/A N/A N/A +2.70%* Class R3 (inception 12/11/06) N/A N/A N/A N/A +2.90%* Class R4** (inception 3/20/95) +5.49% +3.87% +4.52% +4.94% +6.20% Class R5 (inception 12/11/06) N/A N/A N/A N/A +3.25%* Class W (inception 12/01/06) N/A N/A N/A N/A +2.71%* WITH SALES CHARGE Class A (inception 10/3/74) +0.52% +2.17% +3.38% +4.30% +8.91% Class B (inception 3/20/95) -0.26% +1.74% +3.26% +4.02% +5.26% Class C (inception 6/26/00) +3.73% +2.98% +3.60% N/A +4.49%
- -------------------------------------------------------------------------------- 6 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT PERFORMANCE SUMMARY
AT SEPT. 30, 2007 SINCE WITHOUT SALES CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION Class A (inception 10/3/74) +5.73% +4.00% +4.42% +4.74% +9.08% Class B (inception 3/20/95) +4.94% +3.22% +3.63% +3.95% +5.30% Class C (inception 6/26/00) +4.93% +3.14% +3.62% N/A +4.57% Class I (inception 3/4/04) +6.10% +4.43% N/A N/A +4.21% Class R2 (inception 12/11/06) N/A N/A N/A N/A +3.67%* Class R3 (inception 12/11/06) N/A N/A N/A N/A +3.90%* Class R4** (inception 3/20/95) +5.69% +4.10% +4.54% +4.87% +6.24% Class R5 (inception 12/11/06) N/A N/A N/A N/A +4.29%* Class W (inception 12/01/06) N/A N/A N/A N/A +3.71%* WITH SALES CHARGE Class A (inception 10/3/74) +0.71% +2.33% +3.40% +4.23% +8.92% Class B (inception 3/20/95) -0.06% +1.97% +3.28% +3.95% +5.30% Class C (inception 6/26/00) +3.93% +3.14% +3.62% N/A +4.57%
Class A share performance reflects the maximum sales charge of 4.75%. Class B share performance reflects a contingent deferred sales charge (CDSC) applied as follows: first year 5%; second and third years 4%; fourth year 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 institutional investors only. Class W shares are offered through qualifying discretionary accounts. * Not annualized. ** Effective Dec. 11, 2006, Class Y was renamed Class R4. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 7 QUESTIONS & ANSWERS WITH PORTFOLIO MANAGEMENT Below, the portfolio management team for RiverSource Diversified Bond Fund discusses the Fund's results and positioning for the 12 months ended Aug. 31, 2007. Q: How did RiverSource Diversified Bond Fund perform for the annual period? A: RiverSource Diversified Bond Fund's Class A shares (excluding sales charge) returned 5.54% for the 12 months ended Aug. 31, 2007. The Fund outperformed its benchmark, the unmanaged Lehman Brothers Aggregate Bond Index (Lehman Index), which gained 5.26%. The Fund also outperformed its peer group, as represented by the Lipper Intermediate Investment Grade Index, which returned 4.44% during the same period. Q: What factors most significantly affected the Fund's performance? A: The Fund outperformed its benchmark and peer group due primarily to effective issue selection within mortgage-backed securities, investment grade corporate bonds and U.S. agency securities. Strategic duration positioning also contributed positively to the Fund's results, especially in early 2007 when its shorter duration than the Lehman Index enabled the Fund to take advantage of rising interest rates. Duration is a measure of the Fund's sensitivity to interest rate changes. Fixed income market returns, in general, were bolstered by a decline in interest rates across the yield curve, or range of maturities, during the last three months of the period. The boost to the fixed income market was partially offset by the lagging performance of non-Treasury securities, as investors became increasingly risk averse given their concerns about subprime mortgage loan losses and signs of a less favorable economic environment for businesses. All told, the yield on the 10-year U.S. Treasury declined approximately 19 points (0.19%) over the 12 months. Shorter maturity Treasuries fell even more; longer maturity Treasuries fell slightly less. THE FUND OUTPERFORMED ITS BENCHMARK AND PEER GROUP DUE PRIMARILY TO EFFECTIVE ISSUE SELECTION WITHIN MORTGAGE-BACKED SECURITIES, INVESTMENT GRADE CORPORATE BONDS AND U.S. AGENCY SECURITIES. - -------------------------------------------------------------------------------- 8 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT QUESTIONS & ANSWERS Given investors' reduced appetite for risk as the period progressed, the Fund's significant allocations to mortgage-backed securities and commercial mortgage-backed securities (CMBS) hurt its performance, as these sectors -- regardless of the quality of the individual securities' underlying mortgage loans -- suffered from subprime mortgage fears and underperformed the broader fixed income market. Similarly, an exposure to high yield corporate bonds, including bank loans, detracted from the Fund's results. Having posted positive returns earlier in the fiscal year, this sector slipped significantly during the last three months of the period. Q: What changes did you make to the Fund's portfolio during the period? A: As indicated above, we strategically adjusted the Fund's duration positioning during the period, shifting between a neutral-to-the-Lehman Index and a shorter-than-the-Lehman Index stance as interest rates moved within a wide range during the 12 months. The Fund ended the period with a shorter duration than the Lehman Index. We increased the Fund's allocations to mortgage-backed securities, CMBS and agency securities during the fiscal year. We also added to the Fund's exposure to high yield corporate bonds, particularly bank loans. Although this exposure detracted from the Fund's results during the period, we expect such positioning to ultimately prove prudent as the markets calm and the strong underlying economic and credit fundamentals prevail over near-term uncertainties. The Fund's portfolio turnover rate for the annual period was 295%.* * A significant portion of the turnover was the result of "roll" transactions in the liquid derivatives and Treasury securities. In derivative transactions, positions in expiring contracts are liquidated and simultaneously replaced with positions in new contracts with equivalent characteristics. In Treasury transactions, existing holdings are sold to purchase newly issued securities with slightly longer maturity dates. Although these transactions affect the turnover rate of the portfolio, they do not change the risk exposure or result in material transaction costs. The remaining turnover resulted from strategic reallocations and relative value trading. We expect this activity to enhance the returns of the Fund. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 9 QUESTIONS & ANSWERS WE ALSO BELIEVE INTEREST RATES ARE LIKELY TO RISE SOMEWHAT OVER THE NEXT SEVERAL QUARTERS, INCREASING TO LEVELS SEEN EARLIER IN 2007. Q: What is the Fund's tactical view and strategy for the months ahead? A: The lagging performance by non-Treasury sectors toward the end of the period has led, in our view, to compelling potential value in a number of these sectors, especially given our belief that recent concerns over liquidity and financial market stability may subside over the near term. We also believe interest rates are likely to rise somewhat over the next several quarters, increasing to levels seen earlier in 2007. Following this move, we expect that interest rates may re-settle during 2008, with the yield on the 10-year U.S. Treasury ranging between 4.75% and 5.25%. Given this view, we intend to maintain the Fund's comparatively shorter duration stance for the near term. We also intend to increase the Fund's exposure to non-Treasury sectors, as their spreads -- or the difference in yields between these sectors and equivalent-duration U.S. Treasuries -- have widened to offer more attractive yield compensation than U.S. Treasuries. We expect to increase the Fund's allocations to CMBS, mortgage-backed securities, agency securities, high yield corporate bonds and bank loans. As always, we will maintain a disciplined focus on individual security selection. Of course, given the volatility of the current fixed income market, 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 stance if necessary. 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 RiverSource Fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any RiverSource Fund. - -------------------------------------------------------------------------------- 10 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 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 9/1/97 to 8/31/07) as compared to the performance of two widely cited performance indices, the Lehman Brothers Aggregate Bond Index and the Lipper Intermediate Investment Grade Index. In comparing the Fund's Class A shares to these indices, you should take into account the fact that the Fund's performance reflects the maximum sales charge of 4.75%, while such charges are not reflected in the performance of the indices. Returns for the Fund include the reinvestment of any distribution paid during each period. The performance information shown represents past performance and is not a guarantee of future results. The 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 institution or visiting riversource.com/funds. Also see "Past Performance" in the Fund's current prospectus. COMPARATIVE RESULTS
SINCE Results at Aug. 31, 2007 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION(3) RIVERSOURCE DIVERSIFIED BOND FUND (INCLUDES SALES CHARGE) Class A Cumulative value of $10,000 $10,052 $10,665 $11,808 $15,233 $165,915 Average annual total return +0.52% +2.17% +3.38% +4.30% +8.91% LEHMAN BROTHERS AGGREGATE BOND INDEX(1) Cumulative value of $10,000 $10,526 $11,152 $12,349 $17,982 N/A Average annual total return +5.26% +3.70% +4.31% +6.04% N/A LIPPER INTERMEDIATE INVESTMENT GRADE INDEX(2) Cumulative value of $10,000 $10,444 $11,078 $12,390 $17,267 N/A Average annual total return +4.44% +3.47% +4.38% +5.61% N/A
Results for other share classes can be found on page 6. - -------------------------------------------------------------------------------- 12 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT (VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN RIVERSOURCE DIVERSIFIED BOND FUND LINE GRAPH)
RIVERSOURCE DIVERSIFIED BOND FUND CLASS A LEHMAN BROTHERS AGGREGATE LIPPER INTERMEDIATE (INCLUDES SALES CHARGE) BOND INDEX(1) INVESTMENT GRADE INDEX(2) ----------------------- ------------------------- ------------------------- '97 $ 9,525 $10,000 $10,000 '98 10,135 11,057 10,950 '99 10,303 11,145 10,998 '00 10,784 11,988 11,722 '01 11,914 13,469 13,165 '02 12,287 14,561 13,935 '03 12,890 15,196 14,685 '04 13,604 16,127 15,586 '05 14,200 16,797 16,269 '06 14,433 17,084 16,533 '07 15,233 17,982 17,267
(1) The Lehman Brothers Aggregate Bond Index, an unmanaged index, is made up of a representative list of government, corporate, asset-backed and mortgage-backed securities. The index is frequently used as a general measure of bond market performance. The index reflects reinvestment of all distributions and changes in market prices. (2) The Lipper Intermediate Investment Grade Index includes the 30 largest investment grade funds tracked by Lipper Inc. The index's returns include net reinvested dividends. (3) Fund data is from Oct. 3, 1974. The Fund began operating before the inception of the Lehman Brothers Aggregate Bond Index and Lipper peer group. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 13 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 acquired funds expense ratio as of the 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 Aug. 31, 2007. 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. - -------------------------------------------------------------------------------- 14 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT
BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED MARCH 1, 2007 AUG. 31, 2007 THE PERIOD(A) EXPENSE RATIO Class A Actual(b) $1,000 $1,007.80 $4.50(c) .89% Hypothetical $1,000 $1,020.72 $4.53(c) .89% (5% return before expenses) Class B Actual(b) $1,000 $1,003.90 $8.33(c) 1.65% Hypothetical $1,000 $1,016.89 $8.39(c) 1.65% (5% return before expenses) Class C Actual(b) $1,000 $1,003.90 $8.28(c) 1.64% Hypothetical $1,000 $1,016.94 $8.34(c) 1.64% (5% return before expenses) Class I Actual(b) $1,000 $1,011.60 $2.74(c) .54% Hypothetical $1,000 $1,022.48 $2.75(c) .54% (5% return before expenses) Class R2 Actual(b) $1,000 $1,005.40 $6.67(c) 1.32% Hypothetical $1,000 $1,018.55 $6.72(c) 1.32% (5% return before expenses) Class R3 Actual(b) $1,000 $1,006.90 $5.36(c) 1.06% Hypothetical $1,000 $1,019.86 $5.40(c) 1.06% (5% return before expenses) Class R4* Actual(b) $1,000 $1,008.50 $3.70(c) .73% Hypothetical $1,000 $1,021.53 $3.72(c) .73% (5% return before expenses) Class R5 Actual(b) $1,000 $1,009.30 $2.89(c) .57% Hypothetical $1,000 $1,022.33 $2.91(c) .57% (5% return before expenses)
- -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 15
BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED MARCH 1, 2007 AUG. 31, 2007 THE PERIOD(A) EXPENSE RATIO Class W Actual(b) $1,000 $1,007.00 $4.91(c) .97% Hypothetical $1,000 $1,020.32 $4.94(c) .97% (5% return before expenses)
* Effective Dec. 11, 2006, Class Y was renamed Class R4. (a) Expenses are equal to the Fund's annualized expense ratio as indicated above, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). (b) Based on the actual return for the six months ended Aug. 31, 2007: +0.78% for Class A, +0.39% for Class B, +0.39% for Class C, +1.16% for Class I, +0.54% for Class R2, +0.69% for Class R3, +0.85% for Class R4, +0.93% for Class R5 and +0.70% for Class W. (c) The investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until Aug. 31, 2008, 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 0.89% for Class A, 1.65% for Class B, 1.65% for Class C, 0.53% for Class I, 1.33% for Class R2, 1.08% for Class R3, 0.77% for Class R4, 0.58% for Class R5 and 0.98% for Class W. Any amounts waived will not be reimbursed by the Fund. This change was effective Sept. 1, 2007. If this change had been in place for the entire six month period ended Aug. 31, 2007, the actual expenses paid would have been $8.33 for Class C, $2.69 for Class I, $3.90 for Class R4, $2.94 for Class R5 and $4.96 for Class W; the hypothetical expenses paid would have been $8.39 for Class C, $2.70 for Class I, $3.92 for Class R4, $2.96 for Class R5 and $4.99 for Class W. The actual and hypothetical expenses paid for Class A, Class B, Class R2 and Class R3 would have been the same as those expenses presented in the table above. - -------------------------------------------------------------------------------- 16 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT INVESTMENTS IN SECURITIES AUG. 31, 2007 (Percentages represent value of investments compared to net assets)
BONDS (105.1%) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) U.S. GOVERNMENT OBLIGATIONS & AGENCIES (18.3%) Federal Farm Credit Bank 10-10-08 4.25% $13,285,000 $13,190,743 Federal Home Loan Bank 06-18-08 5.13 14,675,000 14,678,405 12-29-08 5.13 11,285,000 11,321,010 Federal Home Loan Mtge Corp 03-15-09 5.75 4,385,000 4,441,273 07-15-09 4.25 10,000,000 9,908,120 03-15-31 6.75 16,550,000 19,605,196 04-16-37 6.00 43,260,000 43,250,180 Federal Natl Mtge Assn 08-15-08 3.25 86,170,000 85,001,536 02-16-12 5.00 30,185,000 30,454,039 05-18-12 4.88 20,165,000 20,281,755 11-15-30 6.63 72,815,000 84,954,134 07-15-37 5.63 14,730,000 15,280,018 Overseas Private Investment U.S. Govt Guaranty Series 1996A 09-15-08 6.99 1,666,667 1,695,183 U.S. Treasury 06-30-09 4.88 57,550,000(q) 58,228,917 07-31-09 4.63 6,565,000(q) 6,618,853 05-15-10 4.50 1,185,000 1,195,184 07-31-12 4.63 14,715,000 14,950,675 08-15-17 4.75 24,035,000 24,429,318 02-15-26 6.00 19,083,000 21,672,620 U.S. Treasury Inflation-Indexed Bond 01-15-14 2.00 57,785,913(s) 56,416,999 --------------- Total 537,574,158 - ---------------------------------------------------------------------------------- ASSET-BACKED (2.5%) Capital Auto Receivables Asset Trust Series 2004-1 Cl CTFS 09-15-10 2.84 4,200,000 4,194,593 Capital Auto Receivables Asset Trust Series 2006-SN1A Cl D 04-20-11 6.15 2,500,000(d) 2,498,572
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) ASSET-BACKED (CONT.) College Loan Trust Collateralized Mtge Obligation Interest Only Series 2006-1 Cl AIO 07-25-08 5.62% $14,700,000(g) $1,259,262 Countrywide Asset-backed Ctfs Series 2005-10 Cl AF6 02-25-36 4.92 1,865,000 1,744,449 Countrywide Asset-Backed Ctfs Series 2006-15 Cl A3 10-25-46 5.69 5,175,000 5,057,717 Countrywide Asset-backed Ctfs Series 2006-4 Cl 1A1M 07-25-36 5.77 2,268,423(i) 2,200,055 Countrywide Asset-backed Ctfs Series 2007-7 Cl 2A2 10-25-37 5.67 8,500,000(i) 8,371,174 Dunkin Securitization Series 2006-1 Cl A2 (AMBAC) 06-20-31 5.78 8,900,000(d,e) 8,957,591 Hertz Vehicle Financing LLC Series 2004-1A Cl A3 (MBIA) 05-25-09 2.85 2,600,000(d,e) 2,572,811 Keycorp Student Loan Trust Series 2003-A Cl 2A2 (MBIA) 10-25-25 5.67 967,830(e,i) 970,249 Master Asset Backed Securities Trust Series 2006-HE1 Cl A2 01-25-36 5.65 8,400,000(i) 8,352,750 Natl Collegiate Student Loan Trust Collateralized Mtge Obligation Interest Only Series 2006-2 Cl AIO 08-25-11 5.89 8,875,000(g) 1,803,941 Natl Collegiate Student Loan Trust Collateralized Mtge Obligation Interest Only Series 2006-3 Cl AIO 01-25-12 5.88 13,900,000(g) 3,616,224
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 17
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) ASSET-BACKED (CONT.) Natl Collegiate Student Loan Trust Collateralized Mtge Obligation Interest Only Series 2006-4 Cl AIO 02-27-12 5.88% $11,700,000(g) $2,881,359 Natl Collegiate Student Loan Trust Collateralized Mtge Obligation Interest Only Series 2007-2 Cl AIO 07-25-12 5.90 6,250,000(g) 1,759,000 Popular ABS Mtge Pass-Through Trust Series 2005-A Cl AF2 06-25-35 4.49 117,301 116,823 Renaissance Home Equity Loan Trust Series 2005-4 Cl A3 02-25-36 5.57 4,670,000 4,613,540 Renaissance Home Equity Loan Trust Series 2007-2 Cl M4 06-25-37 6.31 1,380,000 1,026,902 Renaissance Home Equity Loan Trust Series 2007-2 Cl M5 06-25-37 6.66 900,000 674,645 Renaissance Home Equity Loan Trust Series 2007-2 Cl M6 06-25-37 7.01 1,320,000 967,365 Residential Asset Securities Series 2006-KS1 Cl A2 02-25-36 5.65 7,225,000(i) 7,148,234 SBA CMBS Trust Series 2006-1A Cl B 11-15-36 5.45 4,075,000(d) 4,094,103 WFS Financial Owner Trust Series 2004-1 Cl D 08-22-11 3.17 19,940 19,912 --------------- Total 74,901,271 - ---------------------------------------------------------------------------------- COMMERCIAL MORTGAGE-BACKED (13.0%)(f) Banc of America Commercial Mtge Series 2005-1 Cl A4 11-10-42 5.02 4,850,000 4,789,819 Banc of America Commercial Mtge Series 2007-1 Cl A3 01-15-49 5.45 5,825,000 5,694,820
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) COMMERCIAL MORTGAGE-BACKED (CONT.) Bear Stearns Commercial Mtge Securities Series 2003-T10 Cl A1 03-13-40 4.00% $1,983,533 $1,921,310 Bear Stearns Commercial Mtge Securities Series 2007-T26 Cl A4 01-12-45 5.47 5,950,000 5,794,765 CDC Commercial Mtge Trust Series 2002-FX1 Cl A2 11-15-30 5.68 11,775,000 11,863,109 Citigroup Commercial Mtge Trust Series 2005-EMG Cl A1 09-20-51 4.15 3,487,857(d) 3,443,896 Citigroup Commercial Mtge Trust Series 2006-C5 Cl A4 10-15-49 5.43 2,850,000 2,783,126 Citigroup Commercial Mtge Trust Series 2007-C6 Cl A4 12-10-49 5.89 11,550,000 11,549,555 Citigroup/Deutsche Bank Commercial Mtge Trust Series 2005-CD1 Cl ASB 07-15-44 5.40 3,050,000 3,011,088 Commercial Mtge Acceptance Series 1999-C1 Cl A2 06-15-31 7.03 8,567,660 8,723,709 Commercial Mtge Pass-Through Ctfs Series 2006-CN2A Cl BFL 02-05-19 5.64 2,550,000(d,i) 2,557,051 Commercial Mtge Pass-Through Ctfs Series 2007-C9 Cl A4 12-10-49 6.01 12,600,000 12,738,881 Commercial Mtge Pass-Through Ctfs Series 2007-FL14 Cl MKL1 06-15-22 6.30 9,850,000(d,i) 9,800,750 Credit Suisse Mtge Capital Ctfs Series 2006-C2 Cl A3 03-15-39 5.85 5,025,000 5,045,327 Credit Suisse Mtge Capital Ctfs Series 2007-C3 Cl A4 06-15-39 5.91 5,750,000 5,767,253 CS First Boston Mtge Securities Series 2001-CP4 Cl A4 12-15-35 6.18 7,400,000 7,541,743 CS First Boston Mtge Securities Series 2003-CPN1 Cl A2 03-15-35 4.60 3,525,000 3,371,172
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 18 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) COMMERCIAL MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #385683 02-01-13 4.83% $6,116,277 $6,022,463 Federal Natl Mtge Assn #385815 01-01-13 4.77 7,011,956 6,856,249 Federal Natl Mtge Assn #555806 10-01-13 5.26 471,690 465,686 General Electric Capital Assurance Series 2003-1 Cl A3 05-12-35 4.77 10,350,000(d) 10,225,021 GMAC Commercial Mtge Securities Series 1999-C1 Cl B 05-15-33 6.30 8,000,000 8,067,490 Greenwich Capital Commercial Funding Series 2004-GG1 Cl A5 06-10-36 4.88 3,400,000 3,348,659 Greenwich Capital Commercial Funding Series 2007-GG9 Cl A4 03-10-39 5.44 16,350,000 16,027,140 GS Mtge Securities II Series 2004-GG2 Cl A4 08-10-38 4.96 5,900,000 5,828,205 GS Mtge Securities II Series 2007-EOP Cl J 03-06-20 6.18 8,400,000(d,i) 8,232,281 GS Mtge Securities II Series 2007-GG10 Cl A4 08-10-45 5.99 11,900,000 11,989,255 GS Mtge Securities II Series 2007-GG10 Cl F 08-10-45 5.99 4,425,000 4,377,653 JPMorgan Chase Commercial Mtge Securities Series 2003-LN1 Cl A1 10-15-37 4.13 3,751,021 3,635,332 JPMorgan Chase Commercial Mtge Securities Series 2003-ML1A Cl A1 03-12-39 3.97 3,562,855 3,475,363 JPMorgan Chase Commercial Mtge Securities Series 2003-ML1A Cl A2 03-12-39 4.77 6,894,000 6,639,747 JPMorgan Chase Commercial Mtge Securities Series 2004-CBX Cl A3 01-12-37 4.18 4,000,000 3,903,640 JPMorgan Chase Commercial Mtge Securities Series 2004-LN2 Cl A1 07-15-41 4.48 8,570,883 8,348,315
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) COMMERCIAL MORTGAGE-BACKED (CONT.) JPMorgan Chase Commercial Mtge Securities Series 2005-LDP5 Cl A4 12-15-44 5.34% $5,200,000 $5,056,740 JPMorgan Chase Commercial Mtge Securities Series 2006-LDP6 Cl A4 04-15-43 5.48 4,275,000 4,222,294 JPMorgan Chase Commercial Mtge Securities Series 2006-LDP6 Cl ASB 04-15-43 5.49 6,475,000 6,431,032 JPMorgan Chase Commercial Mtge Securities Series 2007-LDPX Cl A3 01-15-49 5.42 16,000,000 15,580,181 LB-UBS Commercial Mtge Trust Series 2002-C4 Cl A4 09-15-26 4.56 7,000,000 6,836,054 LB-UBS Commercial Mtge Trust Series 2002-C4 Cl A5 09-15-31 4.85 6,000,000 5,809,769 LB-UBS Commercial Mtge Trust Series 2004-C2 Cl A3 03-15-29 3.97 4,475,000 4,259,663 LB-UBS Commercial Mtge Trust Series 2005-C5 Cl AAB 09-15-30 4.93 7,325,000 7,193,077 LB-UBS Commercial Mtge Trust Series 2006-C4 Cl AAB 06-15-32 6.06 4,125,000 4,194,353 LB-UBS Commercial Mtge Trust Series 2006-C6 Cl A4 09-15-39 5.37 4,900,000 4,773,782 LB-UBS Commercial Mtge Trust Series 2007-C1 Cl A4 02-15-40 5.42 4,875,000 4,756,949 LB-UBS Commercial Mtge Trust Series 2007-C6 Cl A4 07-15-40 5.86 6,350,000 6,381,746 Morgan Stanley Capital I Series 2003-T11 Cl A2 06-13-41 4.34 4,575,000 4,509,425 Morgan Stanley Capital I Series 2004-HQ4 Cl A5 04-14-40 4.59 4,950,000 4,821,053 Morgan Stanley Capital I Series 2006-T23 Cl AAB 08-12-41 5.97 3,425,000 3,472,257
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 19
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) COMMERCIAL MORTGAGE-BACKED (CONT.) Morgan Stanley Capital I Series 2007-IQ15 Cl A4 06-11-49 6.08% $5,600,000 $5,663,840 TIAA Retail Commercial Trust Series 2007-C4 Cl A3 08-15-39 6.10 8,500,000(c) 8,535,241 Wachovia Bank Commercial Mtge Trust Series 2003-C7 Cl A2 10-15-35 5.08 14,550,000(d) 14,160,801 Wachovia Bank Commercial Mtge Trust Series 2005-C18 Cl A4 04-15-42 4.94 4,815,000 4,624,074 Wachovia Bank Commercial Mtge Trust Series 2005-C20 Cl A5 07-15-42 5.09 4,667,000 4,574,808 Wachovia Bank Commercial Mtge Trust Series 2006-C27 Cl A3 07-15-45 5.77 11,950,372 11,953,069 Wachovia Bank Commercial Mtge Trust Series 2006-C27 Cl APB 07-15-45 5.73 5,075,000 5,034,875 Wachovia Bank Commercial Mtge Trust Series 2006-C29 Cl A4 11-15-48 5.31 8,900,000 8,648,747 Wachovia Bank Commercial Mtge Trust Series 2007-C31 Cl A4 04-15-47 5.51 17,350,000 16,998,308 --------------- Total 382,332,011 - ---------------------------------------------------------------------------------- MORTGAGE-BACKED (49.5%)(f,n) Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2005-12 Cl 2A1 03-25-36 5.69 7,580,646(k) 7,581,474 Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2006-1 Cl 2A1 03-25-36 5.94 8,634,712(k) 8,623,832 Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2007-1 Cl 3A21 03-25-37 6.19 6,766,652(k) 6,840,918
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Banc of America Alternative Loan Trust Collateralized Mtge Obligation Series 2003-11 Cl 1A1 01-25-34 6.00% $6,816,612 $6,691,868 Banc of America Alternative Loan Trust Collateralized Mtge Obligation Series 2003-11 Cl 4A1 01-25-19 4.75 3,729,443 3,583,764 Banc of America Alternative Loan Trust Collateralized Mtge Obligation Series 2004-3 Cl 1A1 04-25-34 6.00 8,654,252 8,589,345 Banc of America Alternative Loan Trust Collateralized Mtge Obligation Series 2006-9 Cl 1CB1 01-25-37 6.00 16,660,970 16,401,807 Banc of America Funding Collateralized Mtge Obligation Series 2006-2 Cl N1 11-25-46 7.25 632,069(d) 595,725 Banc of America Funding Collateralized Mtge Obligation Series 2006-A Cl 3A2 02-20-36 5.89 6,140,551(k) 6,139,507 Banc of America Mtge Securities Collateralized Mtge Obligation Series 2005-9 Cl 3A3 10-25-20 5.00 27,132,255 26,300,240 Bear Stearns Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2005-8 Cl A4 08-25-35 5.10 6,025,000(d,k) 5,756,163 Bear Stearns Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2007-5 Cl 3A1 08-25-47 6.00 13,600,000(k) 13,319,500 ChaseFlex Trust Collateralized Mtge Obligation Series 2005-2 Cl 2A2 06-25-35 6.50 2,001,690 2,023,585 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Interest Only Series 2007-8CB Cl A13 05-25-37 7.73 6,218,487(g) 1,050,738
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 20 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2003-11T1 Cl A1 07-25-18 4.75% $3,818,061 $3,668,920 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2003-20CB Cl 1A1 10-25-33 5.50 14,928,280 14,371,375 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-54CB Cl 2A3 11-25-35 5.50 5,813,231 5,842,996 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-54CB Cl 3A7 11-25-35 5.50 5,890,080 5,920,217 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-64CB Cl 1A1 12-25-35 5.50 10,013,264 10,004,880 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-6CB Cl 1A1 04-25-35 7.50 5,308,276 5,502,702 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-85CB Cl 2A2 02-25-36 5.50 2,708,330 2,699,051 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-22R Cl 1A2 05-25-36 6.00 7,988,368 8,029,342 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-2CB Cl A11 03-25-36 6.00 8,310,985 8,132,753 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-31CB Cl A16 11-25-36 6.00 10,000,000 10,095,600 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-43CB Cl 1A4 02-25-37 6.00 12,356,857 12,389,479
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2007-25 Cl 1A1 10-25-37 6.50% $20,000,000(j) $19,646,875 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2007-OH3 Cl A3 09-25-47 6.01 15,967,790(i) 14,637,770 Countrywide Home Loans Collateralized Mtge Obligation Series 2005-27 Cl 2A1 12-25-35 5.50 13,361,552 12,862,689 Countrywide Home Loans Collateralized Mtge Obligation Series 2005-R2 Cl 2A1 06-25-35 7.00 6,574,642(d) 6,909,833 Countrywide Home Loans Collateralized Mtge Obligation Series 2006-HYB1 Cl 1A1 03-20-36 5.36 3,756,789(k) 3,753,784 Countrywide Home Loans Collateralized Mtge Obligation Series 2007-17 Cl 2A1 10-25-37 6.50 18,000,000 17,907,188 Countrywide Home Loans Collateralized Mtge Obligation Series 2007-HY3 Cl 4A1 06-25-47 6.00 10,335,386(k) 10,121,814 CS First Boston Mtge Securities Collateralized Mtge Obligation Series 2003-29 Cl 8A1 11-25-18 6.00 2,027,217 2,029,162 Downey Savings & Loan Assn Mtge Loan Trust Collateralized Mtge Obligation Interest Only Series 2005-AR5 Cl X1 08-19-45 9.55 42,924,289(g) 382,294 Federal Home Loan Mtge Corp 09-01-37 6.50 61,000,000(j) 61,914,999 Federal Home Loan Mtge Corp #170216 03-01-17 8.50 7,682 8,171 Federal Home Loan Mtge Corp #1J1445 01-01-37 5.90 13,124,315(k) 13,200,534 Federal Home Loan Mtge Corp #284190 01-01-17 8.00 341 358
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 21
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Home Loan Mtge Corp #290970 04-01-17 8.00% $9,885 $10,344 Federal Home Loan Mtge Corp #295114 06-01-17 8.50 3,693 3,929 Federal Home Loan Mtge Corp #540861 09-01-19 8.50 33,499 35,747 Federal Home Loan Mtge Corp #A00304 04-01-21 9.00 46,970 50,357 Federal Home Loan Mtge Corp #A62544 06-01-37 6.00 8,106,420 8,100,509 Federal Home Loan Mtge Corp #B11835 01-01-19 5.50 502,437 500,613 Federal Home Loan Mtge Corp #C00103 03-01-22 8.50 122,079 130,795 Federal Home Loan Mtge Corp #C00144 08-01-22 8.50 111,358 119,412 Federal Home Loan Mtge Corp #C00356 08-01-24 8.00 390,728 413,838 Federal Home Loan Mtge Corp #C00666 10-01-28 7.00 46,602 48,203 Federal Home Loan Mtge Corp #C02951 07-01-37 6.50 24,963,125 25,340,171 Federal Home Loan Mtge Corp #C53878 12-01-30 5.50 1,617,997 1,588,691 Federal Home Loan Mtge Corp #C62993 01-01-32 6.50 1,135,757 1,161,398 Federal Home Loan Mtge Corp #C63552 01-01-32 6.50 1,735,467 1,780,106 Federal Home Loan Mtge Corp #C64703 03-01-32 6.50 991,391 1,014,556 Federal Home Loan Mtge Corp #C67723 06-01-32 7.00 797,346 826,555 Federal Home Loan Mtge Corp #C78031 04-01-33 5.50 8,896,394 8,721,585 Federal Home Loan Mtge Corp #C79930 06-01-33 5.50 7,723,071 7,565,174 Federal Home Loan Mtge Corp #C90767 12-01-23 6.00 7,307,024 7,375,724 Federal Home Loan Mtge Corp #D96300 10-01-23 5.50 5,004,713 4,945,549 Federal Home Loan Mtge Corp #E01127 02-01-17 6.50 1,138,468 1,163,268 Federal Home Loan Mtge Corp #E01419 05-01-18 5.50 4,247,554 4,235,794
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Home Loan Mtge Corp #E79810 11-01-14 7.50% $952,062 $990,711 Federal Home Loan Mtge Corp #E90216 05-01-17 6.00 1,320,121 1,336,218 Federal Home Loan Mtge Corp #E98725 08-01-18 5.00 9,615,590 9,429,100 Federal Home Loan Mtge Corp #E99684 10-01-18 5.00 9,634,698 9,446,483 Federal Home Loan Mtge Corp #G00286 02-01-25 8.00 153,612 162,698 Federal Home Loan Mtge Corp #G01108 04-01-30 7.00 2,957,443 3,059,353 Federal Home Loan Mtge Corp #G01441 07-01-32 7.00 2,685,445 2,769,253 Federal Home Loan Mtge Corp #G01535 04-01-33 6.00 10,192,550 10,259,085 Federal Home Loan Mtge Corp #G02757 06-01-36 5.00 26,392,109 25,135,440 Federal Home Loan Mtge Corp #G11302 07-01-17 7.00 3,189,876 3,296,532 Federal Home Loan Mtge Corp #G30225 02-01-23 6.00 10,088,513 10,195,293 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 237 Cl IO 05-15-36 8.64 4,230,664(g) 1,131,703 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2590 Cl BI 02-15-14 10.67 1,504,506(g) 39,767 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2718 Cl IA 10-15-22 20.00 3,332,378(g) 73,048 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2817 Cl SA 06-15-32 9.13 6,831,038(g) 381,443
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 22 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Home Loan Mtge Corp Collateralized Mtge Obligation Series 1241 Cl K 03-15-22 7.00% $570,583 $568,998 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Series 2576 Cl KJ 02-15-33 5.50 10,213,966 10,268,501 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Series 2641 Cl KC 01-15-18 6.50 3,584,188 3,690,279 Federal Natl Mtge Assn 09-01-37 5.50 34,500,000(j) 33,691,388 09-01-37 6.00 41,500,000(j) 41,448,124 09-01-37 7.00 56,000,000(j) 57,557,471 10-01-37 6.00 48,000,000(j) 47,925,023 Federal Natl Mtge Assn #125479 04-01-27 7.50 236,065 247,416 Federal Natl Mtge Assn #190899 04-01-23 8.50 371,661 392,144 Federal Natl Mtge Assn #190944 05-01-24 6.00 5,759,455 5,786,298 Federal Natl Mtge Assn #190988 06-01-24 9.00 332,477 354,447 Federal Natl Mtge Assn #231309 09-01-23 6.50 151,085 154,501 Federal Natl Mtge Assn #231310 09-01-23 6.50 379,461 388,039 Federal Natl Mtge Assn #250330 09-01-25 8.00 246,521 260,661 Federal Natl Mtge Assn #250495 03-01-26 7.00 596,810 619,041 Federal Natl Mtge Assn #250765 12-01-26 8.00 230,929 244,296 Federal Natl Mtge Assn #251116 08-01-27 8.00 251,494 266,167 Federal Natl Mtge Assn #252498 06-01-29 7.00 5,772 5,990 Federal Natl Mtge Assn #253883 08-01-16 6.00 2,772,025 2,807,905 Federal Natl Mtge Assn #254236 03-01-17 6.50 1,649,152 1,683,180 Federal Natl Mtge Assn #254383 06-01-32 7.50 354,545 369,739
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #254802 07-01-18 4.50% $2,844,873 $2,737,441 Federal Natl Mtge Assn #254916 09-01-23 5.50 9,754,235 9,638,128 Federal Natl Mtge Assn #255788 06-01-15 5.50 2,870,981 2,900,432 Federal Natl Mtge Assn #268071 01-01-24 6.50 103,967 106,317 Federal Natl Mtge Assn #303226 02-01-25 8.00 114,443 120,939 Federal Natl Mtge Assn #313049 08-01-11 8.50 696,950 727,849 Federal Natl Mtge Assn #323933 09-01-29 7.00 3,824,956 3,969,786 Federal Natl Mtge Assn #408207 01-01-28 6.50 145,213 149,108 Federal Natl Mtge Assn #455791 01-01-29 6.50 532,019 544,838 Federal Natl Mtge Assn #489888 05-01-29 6.50 2,018,616 2,065,600 Federal Natl Mtge Assn #496029 01-01-29 6.50 2,369,919 2,431,209 Federal Natl Mtge Assn #50700 03-01-08 7.00 198,293 199,693 Federal Natl Mtge Assn #545008 06-01-31 7.00 2,408,108 2,504,103 Federal Natl Mtge Assn #545342 04-01-13 7.00 1,073,319 1,080,895 Federal Natl Mtge Assn #545684 05-01-32 7.50 303,366 317,198 Federal Natl Mtge Assn #545869 07-01-32 6.50 2,136,329 2,186,657 Federal Natl Mtge Assn #545885 08-01-32 6.50 3,774,242 3,916,909 Federal Natl Mtge Assn #545910 08-01-17 6.00 4,768,777 4,836,062 Federal Natl Mtge Assn #555343 08-01-17 6.00 4,632,714 4,690,762 Federal Natl Mtge Assn #555375 04-01-33 6.00 22,600,396 22,734,627 Federal Natl Mtge Assn #555458 05-01-33 5.50 20,422,396 20,014,152 Federal Natl Mtge Assn #555528 04-01-33 6.00 14,854,511 14,913,146
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 23
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #555734 07-01-23 5.00% $7,982,726 $7,720,003 Federal Natl Mtge Assn #555740 08-01-18 4.50 9,704,041 9,357,955 Federal Natl Mtge Assn #555794 09-01-28 7.50 776,184 813,807 Federal Natl Mtge Assn #567840 10-01-30 7.00 1,235,140 1,281,908 Federal Natl Mtge Assn #587859 12-01-16 5.50 4,352,732 4,344,096 Federal Natl Mtge Assn #597374 09-01-31 7.00 671,534 698,920 Federal Natl Mtge Assn #606882 10-01-31 7.00 931,403 966,140 Federal Natl Mtge Assn #634650 04-01-32 7.50 161,171 168,077 Federal Natl Mtge Assn #638969 03-01-32 5.50 1,461,588 1,436,014 Federal Natl Mtge Assn #643362 04-01-17 6.50 695,230 709,575 Federal Natl Mtge Assn #646147 06-01-32 7.00 2,326,228 2,419,678 Federal Natl Mtge Assn #646446 06-01-17 6.50 1,061,298 1,083,197 Federal Natl Mtge Assn #649068 06-01-17 6.50 1,808,865 1,851,210 Federal Natl Mtge Assn #649263 08-01-17 6.50 1,840,466 1,880,523 Federal Natl Mtge Assn #654208 10-01-32 6.50 1,911,644 1,952,926 Federal Natl Mtge Assn #654682 10-01-32 6.00 1,274,448 1,279,679 Federal Natl Mtge Assn #654689 11-01-32 6.00 1,355,865 1,360,673 Federal Natl Mtge Assn #656908 09-01-32 6.50 1,783,790 1,829,712 Federal Natl Mtge Assn #662061 09-01-32 6.50 1,609,997 1,644,765 Federal Natl Mtge Assn #667787 02-01-18 5.50 1,694,185 1,688,069 Federal Natl Mtge Assn #670382 09-01-32 6.00 10,674,149 10,716,283 Federal Natl Mtge Assn #670387 08-01-32 7.00 1,368,542 1,420,550
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #678028 09-01-17 6.00% $5,336,031 $5,402,891 Federal Natl Mtge Assn #678065 02-01-33 6.50 377,284 386,835 Federal Natl Mtge Assn #678937 01-01-18 5.50 2,673,148 2,667,448 Federal Natl Mtge Assn #678941 02-01-18 5.50 3,304,914 3,297,821 Federal Natl Mtge Assn #679095 04-01-18 5.00 5,180,011 5,074,530 Federal Natl Mtge Assn #680961 01-01-33 6.00 552,356 555,642 Federal Natl Mtge Assn #681400 03-01-18 5.50 4,852,612 4,840,650 Federal Natl Mtge Assn #682825 01-01-33 6.00 1,769,545 1,776,530 Federal Natl Mtge Assn #683274 02-01-18 5.50 2,210,392 2,204,700 Federal Natl Mtge Assn #684586 03-01-33 6.00 3,160,173 3,175,854 Federal Natl Mtge Assn #686172 02-01-33 6.00 2,763,574 2,774,482 Federal Natl Mtge Assn #686528 02-01-33 6.00 3,509,276 3,531,370 Federal Natl Mtge Assn #687051 01-01-33 6.00 10,563,262 10,543,456 Federal Natl Mtge Assn #689093 07-01-28 5.50 3,299,941 3,242,200 Federal Natl Mtge Assn #694628 04-01-33 5.50 6,514,264 6,388,136 Federal Natl Mtge Assn #694795 04-01-33 5.50 7,911,592 7,757,919 Federal Natl Mtge Assn #694988 03-01-33 5.50 11,017,160 10,799,582 Federal Natl Mtge Assn #695202 03-01-33 6.50 4,144,718 4,228,328 Federal Natl Mtge Assn #695909 05-01-18 5.50 2,185,816 2,179,956 Federal Natl Mtge Assn #699424 04-01-33 5.50 4,447,211 4,360,288 Federal Natl Mtge Assn #702427 04-01-33 5.50 4,235,697 4,153,614 Federal Natl Mtge Assn #704049 05-01-18 5.50 2,633,722 2,626,737
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 24 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #710823 05-01-33 5.50% $642,725 $630,299 Federal Natl Mtge Assn #720070 07-01-23 5.50 2,571,009 2,540,406 Federal Natl Mtge Assn #720378 06-01-18 4.50 5,987,721 5,761,605 Federal Natl Mtge Assn #723687 08-01-28 5.50 4,027,298 3,956,829 Federal Natl Mtge Assn #725232 03-01-34 5.00 17,912,257 17,086,761 Federal Natl Mtge Assn #725424 04-01-34 5.50 18,710,807 18,326,764 Federal Natl Mtge Assn #725425 04-01-34 5.50 24,235,824 23,742,274 Federal Natl Mtge Assn #725684 05-01-18 6.00 9,712,655 9,842,789 Federal Natl Mtge Assn #725719 07-01-33 4.85 6,851,569(k) 6,670,893 Federal Natl Mtge Assn #725813 12-01-33 6.50 10,195,718 10,401,393 Federal Natl Mtge Assn #730153 08-01-33 5.50 1,157,023 1,133,274 Federal Natl Mtge Assn #735212 12-01-34 5.00 19,847,099 18,913,399 Federal Natl Mtge Assn #735224 02-01-35 5.50 34,296,906 33,592,952 Federal Natl Mtge Assn #738921 11-01-32 6.50 788,277 807,330 Federal Natl Mtge Assn #743262 10-01-18 5.00 3,429,389 3,362,716 Federal Natl Mtge Assn #745355 03-01-36 5.00 14,145,539 13,467,154 Federal Natl Mtge Assn #747642 11-01-28 5.50 2,607,614 2,561,987 Federal Natl Mtge Assn #753074 12-01-28 5.50 7,004,277 6,881,718 Federal Natl Mtge Assn #753091 12-01-33 5.50 4,402,938 4,312,566 Federal Natl Mtge Assn #753919 12-01-33 4.95 5,758,451(k) 5,645,203 Federal Natl Mtge Assn #759342 01-01-34 6.50 1,629,744 1,663,809 Federal Natl Mtge Assn #765183 01-01-19 5.50 595,602 593,721
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #765759 12-01-18 5.00% $3,517,988 $3,446,351 Federal Natl Mtge Assn #766641 03-01-34 5.00 6,667,469 6,353,800 Federal Natl Mtge Assn #776962 04-01-29 5.00 16,977,928 16,227,156 Federal Natl Mtge Assn #804442 12-01-34 6.50 1,255,828 1,279,151 Federal Natl Mtge Assn #837258 09-01-35 4.93 2,710,141(k) 2,698,108 Federal Natl Mtge Assn #882063 06-01-36 6.50 3,842,858 3,913,141 Federal Natl Mtge Assn #886291 07-01-36 7.00 6,945,957 7,160,276 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-24 Cl PI 12-25-12 20.00 482,725(g) 2,965 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-63 Cl IP 07-25-33 12.86 14,982,101(g) 3,477,449 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-71 Cl IM 12-25-31 10.85 2,878,962(g) 522,216 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2004-84 Cl GI 12-25-22 9.48 773,245(g) 111,624 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2005-92 CL SC 10-25-35 15.94 25,263,829(g) 964,573 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 367 Cl 2 01-01-36 8.59 14,407,307(g) 3,853,955
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 25
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn Collateralized Mtge Obligation Principal Only Series 43 Cl 1 09-01-18 5.77% $19,379(h) $15,804 Federal Natl Mtge Assn Collateralized Mtge Obligation Series 2003-133 Cl GB 12-25-26 8.00 3,411,789 3,619,474 Govt Natl Mtge Assn #345538 02-15-24 8.00 135,245 143,452 Govt Natl Mtge Assn #398831 08-15-26 8.00 129,921 137,949 Govt Natl Mtge Assn #423782 05-15-26 7.50 437,532 459,056 Govt Natl Mtge Assn #425004 10-15-33 5.50 3,678,115 3,620,417 Govt Natl Mtge Assn #426170 06-15-26 8.00 107,855 114,520 Govt Natl Mtge Assn #595256 12-15-32 6.00 6,182,445 6,227,680 Govt Natl Mtge Assn #604580 08-15-33 5.00 3,742,717 3,612,110 Govt Natl Mtge Assn #604708 10-15-33 5.50 9,923,822 9,768,150 Govt Natl Mtge Assn #606844 09-15-33 5.00 9,063,479 8,747,197 Govt Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2002-70 Cl IC 08-20-32 11.73 7,891,946(g) 1,556,411 Govt Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2002-80 Cl CI 01-20-32 12.47 1,364,184(g) 142,851 Harborview Nim Collateralized Mtge Obligation Series 2006-10 Cl N1 11-19-36 6.41 530,358(d) 527,707
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) IndyMac Index Mtge Loan Trust Collateralized Mtge Obligation Interest Only Series 2005-AR8 Cl AX1 04-25-35 4.50% $102,422,089(g) $640,138 IndyMac Index Mtge Loan Trust Collateralized Mtge Obligation Series 2005-AR25 Cl 1A21 12-25-35 5.85 6,148,290(k) 5,999,746 IndyMac Index Mtge Loan Trust Collateralized Mtge Obligation Series 2007-AR5 Cl 1A1 05-25-37 6.36 11,899,514(k) 12,049,091 IndyMac Index Nim Collateralized Mtge Obligation Series 2006-AR6 Cl N1 06-25-46 6.65 594,989(d) 591,270 Lehman XS Net Interest Margin Nts Collateralized Mtge Obligation Series 2006-2N Cl A1 02-27-46 7.00 571,927(d) 571,838 Lehman XS Net Interest Margin Nts Collateralized Mtge Obligation Series 2006-GPM6 Cl A1 10-28-46 6.25 1,185,241(d) 1,166,722 Lehman XS Net Interest Margin Nts Series 2006-AR8 Cl A1 10-28-46 6.25 360,757(d) 359,711 Lehman XS Trust Collateralized Mtge Obligation Series 2007-5H Cl 1A1 05-25-37 6.50 19,549,641 19,761,004 Master Alternative Loans Trust Collateralized Mtge Obligation Series 2004-2 Cl 4A1 02-25-19 5.00 5,827,888 5,653,069 Master Alternative Loans Trust Collateralized Mtge Obligation Series 2004-4 Cl 2A1 05-25-34 6.00 3,341,527 3,303,567 Master Alternative Loans Trust Collateralized Mtge Obligation Series 2004-7 Cl 8A1 08-25-19 5.00 4,678,416 4,601,784
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 26 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Master Alternative Loans Trust Collateralized Mtge Obligation Series 2004-8 Cl 7A1 09-25-19 5.00% $6,513,119 $6,268,551 Morgan Stanley Mtge Loan Trust Collateralized Mtge Obligation Series 2007-12 Cl 3A22 08-25-37 6.00 16,988,485 16,611,510 Rali NIM Collateralized Mtge Obligation Series 2006-QO4 Cl N1 04-25-46 6.05 553,910(d) 548,371 Residential Accredit Loans Collateralized Mtge Obligation Series 2006-QS3 Cl 1A10 03-25-36 6.00 6,008,788 6,100,265 Residential Funding Mtge Securities I Collateralized Mtge Obligation Series 2005-S6 Cl A8 08-25-35 5.25 19,499,904 18,524,852 Structured Asset Securities Collateralized Mtge Obligation Series 2003-33H Cl 1A1 10-25-33 5.50 13,088,921 12,600,309 Washington Mutual Alternative Mtge Loan Trust Pass-Through Ctfs Collateralized Mtge Obligation Interest Only Series 2005-AR1 Cl X2 12-25-35 7.10 38,521,818(g) 264,838 Washington Mutual Mtge Pass-Through Ctfs Collateralized Mtge Obligation Series 2004-CB2 Cl 6A 07-25-19 4.50 4,495,809 4,260,049 Washington Mutual Mtge Pass-Through Ctfs Collateralized Mtge Obligation Series 2005-AR14 Cl 2A1 12-25-35 5.29 5,256,421(k) 5,191,576 Washington Mutual Mtge Pass-Through Ctfs Collateralized Mtge Obligation Series 2006-AR10 Cl 1A1 09-25-36 5.95 5,026,762(k) 5,012,621
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Washington Mutual Mtge Pass-Through Ctfs Collateralized Mtge Obligation Series 2006-AR3 Cl A1A 02-25-46 6.02% $7,800,707(k) $7,561,849 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2005-10 Cl A1 10-25-35 5.00 17,397,295 16,470,715 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2005-5 Cl 2A1 05-25-35 5.50 11,715,569 11,369,596 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2006-16 Cl 1A1 12-25-18 4.75 15,965,609 15,339,242 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2006-AR12 Cl 1A1 09-25-36 6.03 4,800,062(k) 4,782,671 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2006-AR6 Cl 5A1 03-25-36 5.11 11,035,958(k) 10,798,084 --------------- Total 1,453,480,309 - ---------------------------------------------------------------------------------- AEROSPACE & DEFENSE (0.2%) Communications & Power Inds 02-01-12 8.00 185,000 185,925 DRS Technologies 11-01-13 6.88 1,535,000 1,504,300 02-01-18 7.63 1,925,000 1,886,499 L-3 Communications 01-15-15 5.88 1,565,000 1,482,838 L-3 Communications Series B 10-15-15 6.38 1,675,000 1,620,563 TransDigm 07-15-14 7.75 195,000 195,975 --------------- Total 6,876,100 - ---------------------------------------------------------------------------------- BANKING (3.2%) Bank of America Sub Nts 03-15-17 5.30 20,295,000 19,552,162
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 27
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) BANKING (CONT.) Citigroup Sub Nts 02-15-17 5.50% $13,810,000 $13,476,047 JPMorgan Chase & Co Sub Nts 10-01-15 5.15 2,760,000 2,631,889 06-27-17 6.13 7,535,000 7,648,884 Manufacturers & Traders Trust Sub Nts 12-01-21 5.63 17,095,000 16,450,624 Popular North America Sr Nts 10-01-08 3.88 28,122,000 27,537,260 Regions Bank Sub Nts 06-26-37 6.45 7,245,000 7,325,057 --------------- Total 94,621,923 - ---------------------------------------------------------------------------------- BROKERAGE (1.3%) Discover Financial Services 06-12-17 6.45 3,985,000(d,o) 3,959,217 Lehman Brothers Holdings Sr Nts 07-19-12 6.00 22,700,000 22,673,032 Morgan Stanley Sr Unsecured 08-31-12 5.75 10,675,000 10,666,759 --------------- Total 37,299,008 - ---------------------------------------------------------------------------------- CHEMICALS (0.2%) NALCO Sr Unsecured 11-15-11 7.75 4,605,000 4,685,588 NewMarket 12-15-16 7.13 1,815,000 1,724,250 --------------- Total 6,409,838 - ---------------------------------------------------------------------------------- CONSUMER PRODUCTS (--%) Jarden 05-01-17 7.50 635,000 593,725 Visant 10-01-12 7.63 285,000 285,713 --------------- Total 879,438 - ----------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) DIVERSIFIED MANUFACTURING (0.1%) Baldor Electric 02-15-17 8.63% $2,985,000 $3,082,013 - ---------------------------------------------------------------------------------- ELECTRIC (2.5%) Consumers Energy 1st Mtge Series F 05-15-10 4.00 1,040,000 1,004,968 Consumers Energy 1st Mtge Series H 02-17-09 4.80 13,520,000 13,413,463 Edison Mission Energy Sr Nts 05-15-17 7.00 2,855,000(d) 2,712,250 Entergy Gulf States 1st Mtge 06-01-08 3.60 5,500,000 5,391,304 Exelon 06-15-10 4.45 13,085,000 12,732,228 Indiana Michigan Power Sr Nts 03-15-37 6.05 3,825,000 3,629,405 IPALCO Enterprises Secured 11-14-08 8.38 400,000 405,000 11-14-11 8.63 3,680,000 3,781,200 Metropolitan Edison Sr Nts 03-15-10 4.45 1,810,000(o) 1,777,485 Midwest Generation LLC Pass-Through Ctfs Series B 01-02-16 8.56 163,621 174,052 Northern States Power Sr Nts 08-01-09 6.88 5,730,000 5,909,641 NRG Energy 02-01-14 7.25 695,000 688,050 01-15-17 7.38 800,000 786,000 Oncor Electric Delivery Sr Unsecured 01-15-15 6.38 830,000 846,095 Portland General Electric 03-15-10 7.88 2,935,000(o) 3,121,889 Potomac Electric Power Secured 06-01-35 5.40 3,040,000(o) 2,687,102
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 28 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) ELECTRIC (CONT.) Public Service Company of Colorado Sr Nts Series A 07-15-09 6.88% $2,005,000 $2,066,415 Sierra Pacific Power Series M 05-15-16 6.00 8,280,000 8,145,690 Sierra Pacific Power Series P 07-01-37 6.75 915,000 893,552 Xcel Energy Sr Nts 07-01-08 3.40 3,315,000 3,257,385 --------------- Total 73,423,174 - ---------------------------------------------------------------------------------- ENTERTAINMENT (0.2%) United Artists Theatre Circuit Pass-Through Ctfs 07-01-15 9.30 5,706,707(p) 5,934,975 - ---------------------------------------------------------------------------------- ENVIRONMENTAL (--%) Allied Waste North America 06-01-17 6.88 1,320,000 1,280,400 - ---------------------------------------------------------------------------------- FOOD AND BEVERAGE (1.7%) Cadbury Schweppes US Finance LLC 10-01-08 3.88 31,950,000(d) 31,465,703 Cott Beverages USA 12-15-11 8.00 1,740,000 1,722,600 Del Monte 02-15-15 6.75 220,000 209,000 HJ Heinz 12-01-08 6.43 5,920,000(d) 5,982,515 Molson Coors Capital Finance 09-22-10 4.85 12,180,000(c) 11,937,849 --------------- Total 51,317,667 - ---------------------------------------------------------------------------------- GAMING (--%) Mohegan Tribal Gaming Authority Sr Sub Nts 04-01-12 8.00 750,000 760,313 Wynn Las Vegas LLC/Capital 1st Mtge 12-01-14 6.63 690,000 667,575 --------------- Total 1,427,888 - ----------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) GAS DISTRIBUTORS (0.1%) Atmos Energy Sr Unsub 10-15-09 4.00% $4,005,000 $3,920,074 - ---------------------------------------------------------------------------------- GAS PIPELINES (1.1%) CenterPoint Energy Resources 02-15-11 7.75 3,685,000 3,910,920 Colorado Interstate Gas Sr Nts 11-15-15 6.80 10,510,000 10,845,720 Northern Natural Gas Sr Unsecured 02-15-37 5.80 1,535,000(d) 1,448,553 Northwest Pipeline Sr Unsecured 04-15-17 5.95 1,615,000 1,566,550 Southern Natural Gas 04-01-17 5.90 5,925,000(d) 5,759,171 Southern Star Central Sr Nts 03-01-16 6.75 1,460,000 1,401,600 Transcontinental Gas Pipe Line Series B 08-15-11 7.00 1,915,000 1,996,388 Transcontinental Gas Pipe Line Sr Unsecured 04-15-16 6.40 2,221,000 2,237,658 Williams Companies Sr Nts 07-15-19 7.63 2,079,000 2,208,938 --------------- Total 31,375,498 - ---------------------------------------------------------------------------------- HEALTH CARE (0.2%) Coventry Health Care Sr Unsecured 08-15-14 6.30 3,040,000 3,035,540 Omnicare 12-15-13 6.75 2,370,000 2,204,100 12-15-15 6.88 355,000 331,038 --------------- Total 5,570,678 - ---------------------------------------------------------------------------------- HEALTH CARE INSURANCE (0.5%) UnitedHealth Group 06-15-37 6.50 5,700,000(d) 5,924,522
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 29
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) HEALTH CARE INSURANCE (CONT.) WellPoint Sr Unsub 01-15-36 5.85% $5,920,000 $5,381,440 06-15-37 6.38 2,910,000 2,848,483 --------------- Total 14,154,445 - ---------------------------------------------------------------------------------- HOME CONSTRUCTION (0.2%) DR Horton Sr Unsub 04-15-16 6.50 6,875,000 6,035,205 - ---------------------------------------------------------------------------------- INDEPENDENT ENERGY (0.8%) Anadarko Petroleum Sr Unsecured 09-15-16 5.95 4,015,000 3,992,809 Canadian Natural Resources 03-15-38 6.25 6,845,000(c) 6,567,332 Chesapeake Energy 01-15-16 6.63 4,892,000 4,733,010 01-15-18 6.25 925,000 866,031 Denbury Resources 04-01-13 7.50 250,000 249,375 Denbury Resources Sr Sub Nts 12-15-15 7.50 180,000 179,100 EnCana Sr Unsecured 08-15-37 6.63 3,035,000(c) 3,085,008 Forest Oil Sr Nts 06-15-19 7.25 265,000(d) 255,063 Range Resources 03-15-15 6.38 425,000 408,000 05-15-16 7.50 180,000 181,800 XTO Energy Sr Unsecured 08-01-37 6.75 3,245,000 3,325,995 --------------- Total 23,843,523 - ---------------------------------------------------------------------------------- MEDIA CABLE (1.1%) Comcast 03-15-37 6.45 17,105,000 16,517,066 Comcast MO of Delaware LLC 09-01-08 9.00 9,500,000 9,799,060
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MEDIA CABLE (CONT.) CSC Holdings Sr Nts Series B 07-15-09 8.13% $3,200,000 $3,224,000 EchoStar DBS 10-01-13 7.00 225,000 222,188 10-01-14 6.63 363,000 351,203 02-01-16 7.13 940,000 918,850 Videotron Ltee 01-15-14 6.88 1,310,000(c) 1,247,775 --------------- Total 32,280,142 - ---------------------------------------------------------------------------------- MEDIA NON CABLE (1.4%) British Sky Broadcasting Group 02-23-09 6.88 6,270,000(c) 6,430,155 Dex Media West LLC/Finance Sr Unsecured Series B 08-15-10 8.50 560,000 567,000 Idearc 11-15-16 8.00 1,530,000 1,510,875 News America 12-15-35 6.40 13,160,000(o) 12,580,328 Rainbow Natl Services LLC Sr Nts 09-01-12 8.75 1,565,000(d) 1,602,169 RH Donnelley Sr Disc Nts Series A-1 01-15-13 6.88 680,000 640,900 RH Donnelley Sr Disc Nts Series A-2 01-15-13 6.88 1,800,000 1,696,500 RR Donnelley & Sons Sr Unsecured 01-15-17 6.13 15,800,000 15,704,252 Sinclair Broadcast Group 03-15-12 8.00 338,000 341,380 --------------- Total 41,073,559 - ---------------------------------------------------------------------------------- METALS (0.2%) Freeport-McMoRan Copper & Gold Sr Unsecured 04-01-15 8.25 3,600,000 3,816,000 04-01-17 8.38 535,000 569,775 Peabody Energy 11-01-16 7.38 1,885,000 1,899,138
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 30 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) METALS (CONT.) Peabody Energy Series B 03-15-13 6.88% $560,000 $558,600 --------------- Total 6,843,513 - ---------------------------------------------------------------------------------- NON CAPTIVE CONSUMER (0.1%) SLM 01-15-13 5.38 2,125,000(o) 1,881,853 10-01-13 5.00 2,460,000 2,148,564 --------------- Total 4,030,417 - ---------------------------------------------------------------------------------- OIL FIELD SERVICES (0.1%) OPTI Canada Secured 12-15-14 7.88 2,585,000(c,d) 2,597,925 - ---------------------------------------------------------------------------------- PACKAGING (0.2%) Ball 03-15-18 6.63 240,000 229,800 Crown Americas LLC/Capital 11-15-13 7.63 680,000 683,400 11-15-15 7.75 1,685,000(o) 1,701,850 Owens-Brockway Glass Container 05-15-13 8.25 3,345,000 3,428,625 --------------- Total 6,043,675 - ---------------------------------------------------------------------------------- PAPER (0.2%) Cascades Sr Nts 02-15-13 7.25 905,000(c) 864,275 NewPage 05-01-12 10.00 2,090,000 2,163,150 Smurfit-Stone Container Enterprises Sr Unsecured 03-15-17 8.00 1,900,000 1,812,125 --------------- Total 4,839,550 - ---------------------------------------------------------------------------------- PROPERTY & CASUALTY (0.2%) Travelers Companies Sr Unsecured 06-15-37 6.25 5,810,000 5,629,309 - ---------------------------------------------------------------------------------- RAILROADS (0.2%) Burlington Northern Santa Fe 05-01-37 6.15 6,205,000 6,015,232 - ----------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) REITS (0.4%) Brandywine Operating Partnership LP 05-01-17 5.70% $4,635,000 $4,407,143 ERP Operating LP 06-15-17 5.75 6,955,000 6,801,921 --------------- Total 11,209,064 - ---------------------------------------------------------------------------------- RETAILERS (1.0%) Home Depot Sr Unsecured 12-16-36 5.88 15,650,000 13,485,621 Macys Retail Holdings 07-15-09 4.80 16,219,000 15,992,501 Neiman Marcus Group 10-15-15 10.38 600,000 645,000 --------------- Total 30,123,122 - ---------------------------------------------------------------------------------- TRANSPORTATION SERVICES (0.1%) Hertz 01-01-14 8.88 1,925,000 1,992,375 - ---------------------------------------------------------------------------------- WIRELESS (--%) American Tower Sr Nts 10-15-12 7.13 220,000 220,000 - ---------------------------------------------------------------------------------- WIRELINES (4.3%) AT&T 03-15-11 6.25 11,786,000(o) 12,088,653 AT&T Sr Unsub 09-15-09 4.13 1,090,000 1,066,289 Citizens Communications Sr Unsecured 03-15-19 7.13 425,000 404,813 Telecom Italia Capital 11-15-13 5.25 11,405,000(c) 10,988,056 11-15-33 6.38 7,175,000(c) 6,846,385 Telefonica Europe 09-15-10 7.75 17,311,000(c) 18,452,885 TELUS 06-01-11 8.00 35,878,500(c) 38,917,624 Verizon New York Series A 04-01-12 6.88 22,863,000 24,089,463
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 31
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) WIRELINES (CONT.) Verizon Pennsylvania Series A 11-15-11 5.65% $8,000,000 $8,083,040 Windstream 08-01-16 8.63 4,915,000 5,136,175 03-15-19 7.00 420,000 395,850 --------------- Total 126,469,233 - ---------------------------------------------------------------------------------- TOTAL BONDS (Cost: $3,109,869,469) $3,095,106,712 - ----------------------------------------------------------------------------------
MUNICIPAL BONDS (0.4%) NAME OF ISSUER AND TITLE OF COUPON PRINCIPAL ISSUE RATE AMOUNT VALUE(A) TOBACCO Tobacco Settlement Financing Corporation Revenue Bonds Series 2007A-1 06-01-46 6.71% $13,850,000 $12,539,236 - ---------------------------------------------------------------------------------- TOTAL MUNICIPAL BONDS (Cost: $13,848,615) $12,539,236 - ----------------------------------------------------------------------------------
SENIOR LOANS (2.5%)(l) COUPON PRINCIPAL BORROWER RATE AMOUNT VALUE(A) CHEMICALS (0.1%) Celanese Tranche B Term Loan 04-06-14 5.32-7.11% $2,939,125(c) $2,838,695 - ---------------------------------------------------------------------------------- CONSUMER PRODUCTS (0.2%) Jarden Tranche B3 Term Loan 01-24-12 2.50 5,940,000(j) 5,836,050 - ---------------------------------------------------------------------------------- FOOD AND BEVERAGE (0.2%) Aramark Letter of Credit 01-26-14 7.36 226,462 217,888 Aramark Tranche B Term Loan 01-20-14 7.36 3,218,915 3,097,047
SENIOR LOANS (CONTINUED) COUPON PRINCIPAL BORROWER RATE AMOUNT VALUE(A) FOOD AND BEVERAGE (CONT.) Pinnacle Foods Finance Term Loan 04-02-14 8.11% $2,560,000 $2,438,400 --------------- Total 5,753,335 - ---------------------------------------------------------------------------------- GAMING (0.1%) Fontainebleau Las Vegas Delayed Draw Term Loan 06-05-14 0.00 959,355(j,m) 889,802 Fontainebleau Las Vegas Term Loan 06-05-14 8.61 1,918,711 1,779,604 --------------- Total 2,669,406 - ---------------------------------------------------------------------------------- HEALTH CARE (0.7%) Community Health Delayed Draw Term Loan 06-28-14 0.00 447,641(j,m) 429,176 Community Health Term Loan 06-28-14 7.76 6,787,359 6,507,380 HCA Tranche B Term Loan 01-21-13 7.61 12,984,750 12,479,513 Vanguard Health Holding II Term Loan 09-23-11 7.61 2,970,000(j) 2,840,063 --------------- Total 22,256,132 - ---------------------------------------------------------------------------------- LIFE INSURANCE (0.1%) Asurion Term Loan 07-03-14 8.36 4,090,000(j) 3,844,600 - ---------------------------------------------------------------------------------- MEDIA CABLE (0.4%) Charter Communications Term Loan 03-06-14 7.36 6,130,000 5,792,850 Univision Communications Delayed Draw Term Loan 09-23-14 0.00 351,242(j,m) 324,681 Univision Communications Tranche B Term Loan 09-23-14 7.61 5,463,758 5,050,589 --------------- Total 11,168,120 - ----------------------------------------------------------------------------------
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 32 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT
SENIOR LOANS (CONTINUED) COUPON PRINCIPAL BORROWER RATE AMOUNT VALUE(A) MEDIA NON CABLE (0.2%) Idearc Tranche B Term Loan 11-17-14 2.00% $1,485,000(j) $1,434,881 VNU Tranche B Term Loan 08-09-13 7.36 5,442,569(c) 5,184,047 --------------- Total 6,618,928 - ---------------------------------------------------------------------------------- OIL FIELD SERVICES (0.1%) Dresser 1st Lien Term Loan 05-04-14 8.01-8.04 2,059,000 1,973,201 - ---------------------------------------------------------------------------------- PAPER (0.1%) Domtar Tranche B Term Loan 03-07-14 6.93 1,539,000(c) 1,473,593 - ---------------------------------------------------------------------------------- RETAILERS (0.1%) Michaels Stores Term Loan 10-31-13 7.63-7.69 1,201,206 1,130,131 Neiman Marcus Group Tranche B Term Loan 04-27-13 7.09-7.11 1,677,574 1,624,444 --------------- Total 2,754,575 - ---------------------------------------------------------------------------------- TECHNOLOGY (0.1%) West Corp Tranche B Term Loan 10-24-13 7.74-7.88 2,687,952 2,585,138 - ----------------------------------------------------------------------------------
SENIOR LOANS (CONTINUED) COUPON PRINCIPAL BORROWER RATE AMOUNT VALUE(A) WIRELINES (0.1%) Level 3 Communications Tranche B Term Loan 03-13-14 7.61% $3,340,000 $3,178,578 - ---------------------------------------------------------------------------------- TOTAL SENIOR LOANS (Cost: $76,112,324) $72,950,351 - ----------------------------------------------------------------------------------
COMMON STOCKS (--%) ISSUER SHARES VALUE(A) PAPER & FOREST PRODUCTS (--%) Crown Paper Escrow 6,950,000(b) $7 - ---------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost: $--) $7 - ----------------------------------------------------------------------------------
MONEY MARKET FUND (1.6%)(r) SHARES VALUE(A) RiverSource Short-Term Cash Fund 45,885,729(t) $45,885,729 - ------------------------------------------------------------------------------------------------------ TOTAL MONEY MARKET FUND (Cost: $45,885,729) $45,885,729 - ------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS IN SECURITIES (Cost: $3,245,716,137)(u) $3,226,482,035 ======================================================================================================
NOTES TO INVESTMENTS IN SECURITIES (a) Securities are valued by using procedures described in Note 1 to the financial statements. (b) Non-income producing. For long-term debt securities, item identified is in default as to payment of interest and/or principal. (c) Foreign security values are stated in U.S. dollars. For debt securities, principal amounts are denominated in U.S. dollar currency unless otherwise noted. At Aug. 31, 2007, the value of foreign securities represented 4.3% of net assets. (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the Fund's Board of Directors. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At Aug. 31, 2007, the value of these securities amounted to $145,277,305 or 4.9% of net assets. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 33 NOTES TO INVESTMENTS IN SECURITIES (CONTINUED) (e) The following abbreviations are used in the portfolio security descriptions to identify the insurer of the issue: AMBAC -- Ambac Assurance Corporation MBIA -- MBIA Insurance Corporation
(f) Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property, and include single- and multi-class pass-through securities and collateralized mortgage obligations. These securities may be issued or guaranteed by U.S. government agencies or instrumentalities, or by private issuers, generally originators and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers and special purpose entities. The maturity dates shown represent the original maturity of the underlying obligation. Actual maturity may vary based upon prepayment activity on these obligations. Unless otherwise noted, the coupon rates presented are fixed rates. (g) Interest only represents securities that entitle holders to receive only interest payments on the underlying mortgages. The yield to maturity of an interest only is extremely sensitive to the rate of principal payments on the underlying mortgage assets. A rapid (slow) rate of principal repayments may have an adverse (positive) effect on yield to maturity. The principal amount shown is the notional amount of the underlying mortgages. Interest rate disclosed represents yield based upon the estimated timing and amount of future cash flows at Aug, 31, 2007. (h) Principal only represents securities that entitle holders to receive only principal payments on the underlying mortgages. The yield to maturity of a principal only is sensitive to the rate of principal payments on the underlying mortgage assets. A slow (rapid) rate of principal repayments may have an adverse (positive) effect on yield to maturity. Interest rate disclosed represents yield based upon the estimated timing of future cash flows at Aug. 31, 2007. (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, 2007. (j) At Aug. 31, 2007, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $277,561,571. (k) Adjustable rate mortgage; interest rate varies to reflect current market conditions; rate shown is the effective rate on Aug 31, 2007. (l) 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. (m) At Aug. 31, 2007, the Fund had unfunded senior loan commitments pursuant to the term of the loan agreement. The Fund receives a stated coupon rate until the borrower draws on the loan commitment, at which time the rate will become the stated rate in the loan agreement.
UNFUNDED BORROWER COMMITMENT - ----------------------------------------------------------------------------- Community Health $447,641 Fontainebleau Las Vegas 956,957 Univision Communications 351,242 - ----------------------------------------------------------------------------- Total $1,775,840 - -----------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 34 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT NOTES TO INVESTMENTS IN SECURITIES (CONTINUED) (n) Comparable securities are held to satisfy future delivery requirements of the following open forward sale commitments at Aug. 31, 2007:
PRINCIPAL SETTLEMENT PROCEEDS SECURITY AMOUNT DATE RECEIVABLE VALUE - ------------------------------------------------------------------------------------- Federal Natl Mtge Assn 09-01-22 5.50% $10,000,000 09-18-07 $9,884,375 $9,940,620
(o) Partially pledged as initial margin deposit on the following open interest rate futures contracts (see Note 6 to the financial statements):
TYPE OF SECURITY NOTIONAL AMOUNT - ------------------------------------------------------------------------------- SALE CONTRACTS U.S. Long Bond, Dec. 2007, 20-year $27,500,000 U.S. Treasury Note, Dec. 2007, 2-year 22,400,000 U.S. Treasury Note, Dec. 2007, 5-year 81,100,000 U.S. Treasury Note, Dec. 2007, 10-year 47,100,000
(p) Identifies issues considered to be illiquid as to their marketability (see Note 1 to the financial statements). These securities may be valued at fair value according to procedures approved, in good faith, by the Fund's Board of Directors. Information concerning such security holdings at Aug. 31, 2007, is as follows:
ACQUISITION SECURITY DATES COST - ---------------------------------------------------------------------------------- United Artists Theatre Circuit 9.30% Pass-Through Ctfs 2015 02-23-96 thru 08-12-96 $5,520,575
(q) At Aug. 31, 2007, security was partially or fully on loan. See Note 5 to the financial statements. (r) Cash collateral received from security lending activity is invested in an affiliated money market fund. See Note 5 to the financial statements. (s) Inflation-indexed bonds are securities in which the principal amount is adjusted for inflation and the semiannual interest payments equal a fixed percentage of the inflation-adjusted principal amount. (t) Affiliated Money Market Fund -- See Note 8 to the financial statements. (u) At Aug. 31, 2007, the cost of securities for federal income tax purposes was $3,254,248,273 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $18,710,761 Unrealized depreciation (46,476,999) - ------------------------------------------------------------------------------ Net unrealized depreciation $(27,766,238) - ------------------------------------------------------------------------------
HOW TO FIND INFORMATION ABOUT THE FUND'S PORTFOLIO HOLDINGS (i) The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (Commission) for the first and third quarters of each fiscal year on Form N-Q; (ii) The Fund's Forms N-Q are available on the Commission's website at http://www.sec.gov; (iii)The Fund's Forms N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC (information on the operations of the Public Reference Room may be obtained by calling 1-800-SEC-0330); and (iv) The Fund's complete schedule of portfolio holdings, as disclosed in its annual and semiannual shareholder reports and in its filings on Form N-Q, can be found at riversource.com/funds. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 35 FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES AUG. 31, 2007 ASSETS Investments in securities, at value (Note 1) Unaffiliated issuers* (identified cost $3,199,830,408) $3,180,596,306 Affiliated money market fund (identified cost $45,885,729) (Note 8) 45,885,729 - ------------------------------------------------------------------------------ Total investments in securities (identified cost $3,245,716,137) 3,226,482,035 Cash in bank on demand deposit 27,052 Foreign currency holdings (identified cost $1,022) (Note 1) 1,035 Capital shares receivable 11,081,420 Accrued interest receivable 25,647,494 Receivable for investment securities sold 163,119,499 Unrealized appreciation on swap transactions, at value (Note 7) 526,101 Variation margin receivable 712,678 - ------------------------------------------------------------------------------ Total assets 3,427,597,314 - ------------------------------------------------------------------------------ LIABILITIES Dividends payable to shareholders 2,614,030 Capital shares payable 2,846,093 Payable for investment securities purchased 132,764,420 Payable for securities purchased on a forward-commitment basis (Note 1) 277,561,571 Payable upon return of securities loaned (Note 5) 54,427,500 Unrealized depreciation on swap transactions, at value (Note 7) 2,248,872 Accrued investment management services fee 36,751 Accrued distribution fee 542,794 Accrued transfer agency fee 8,066 Accrued administrative services fee 5,047 Accrued plan administration services fee 16,925 Other accrued expenses 283,602 Forward sale commitments, at value (proceeds receivable $9,884,375) (Note 1) 9,940,620 - ------------------------------------------------------------------------------ Total liabilities 483,296,291 - ------------------------------------------------------------------------------ Net assets applicable to outstanding capital stock $2,944,301,023 ==============================================================================
- -------------------------------------------------------------------------------- 36 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT STATEMENT OF ASSETS AND LIABILITIES (CONTINUED) AUG. 31, 2007 REPRESENTED BY Capital stock -- $.01 par value (Note 1) $ 6,119,286 Additional paid-in capital 3,125,529,521 Excess of distributions over net investment income (1,432,632) Accumulated net realized gain (loss) (Note 11) (164,897,645) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (Notes 6 and 7) (21,017,507) - ------------------------------------------------------------------------------ Total -- representing net assets applicable to outstanding capital stock $2,944,301,023 ==============================================================================
Net assets applicable to outstanding shares: Class A $1,936,988,090 Class B $ 303,507,236 Class C $ 16,840,412 Class I $ 386,010,354 Class R2 $ 4,993 Class R3 $ 4,993 Class R4 $ 77,835,688 Class R5 $ 4,993 Class W $ 223,104,264 Net asset value per share of outstanding Class A capital stock: shares(1) 402,638,195 $ 4.81 Class B shares 63,093,643 $ 4.81 Class C shares 3,499,861 $ 4.81 Class I shares 80,134,097 $ 4.82 Class R2 shares 1,040 $ 4.80 Class R3 shares 1,040 $ 4.80 Class R4 shares 16,200,659 $ 4.80 Class R5 shares 1,040 $ 4.80 Class W shares 46,359,028 $ 4.81 - ------------------------------------------------------------------------------------------- * Including securities on loan, at value (Note 5) $ 53,596,150 - -------------------------------------------------------------------------------------------
(1) The maximum offering price per share for Class A is $5.05. The offering price is calculated by dividing the net asset value by 1.0 minus the maximum sales charge of 4.75%. See accompanying notes to financial statements. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 37 STATEMENT OF OPERATIONS YEAR ENDED AUG. 31, 2007 INVESTMENT INCOME Income: Interest $142,326,750 Income distributions from affiliated money market fund (Note 8) 5,748,763 Fee income from securities lending (Note 5) 395,879 - ---------------------------------------------------------------------------- Total income 148,471,392 - ---------------------------------------------------------------------------- Expenses (Note 2): Investment management services fee 12,770,016 Distribution fee Class A 4,860,209 Class B 3,704,597 Class C 168,420 Class R2 18 Class R3 8 Class W 128,130 Transfer agency fee Class A 3,090,229 Class B 631,378 Class C 28,318 Class R2 2 Class R3 2 Class R4 79,526 Class R5 2 Class W 102,504 Service fee -- Class R4 36,188 Administrative services fee 1,752,212 Plan administration services fee Class R2 8 Class R3 8 Class R4 148,364 Compensation of board members 52,475 Custodian fees 249,190 Printing and postage 483,505 Registration fees 166,240 Professional fees 65,771 Other 87,435 - ---------------------------------------------------------------------------- Total expenses 28,604,755 Expenses waived/reimbursed by the Investment Manager and its affiliates (Note 2) (2,004,697) - ---------------------------------------------------------------------------- 26,600,058 Earnings and bank fee credits on cash balances (Note 2) (229,404) - ---------------------------------------------------------------------------- Total net expenses 26,370,654 - ---------------------------------------------------------------------------- Investment income (loss) -- net 122,100,738 - ----------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 38 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT STATEMENT OF OPERATIONS (CONTINUED) YEAR ENDED AUG. 31, 2007 REALIZED AND UNREALIZED GAIN (LOSS) -- NET Net realized gain (loss) on: Security transactions (Note 3) 26,879,708 Foreign currency transactions 145,184 Futures contracts (2,400,100) Swap transactions (3,756,544) - ---------------------------------------------------------------------------- Net realized gain (loss) on investments 20,868,248 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 6,273,301 - ---------------------------------------------------------------------------- Net gain (loss) on investments and foreign currencies 27,141,549 - ---------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $149,242,287 ============================================================================
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 39 STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED AUG. 31, 2007 2006 OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ 122,100,738 $ 103,147,373 Net realized gain (loss) on investments 20,868,248 (39,151,119) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 6,273,301 (17,503,759) - --------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 149,242,287 46,492,495 - --------------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income Class A (86,827,158) (76,604,597) Class B (13,755,846) (15,585,869) Class C (626,596) (591,217) Class I (15,257,999) (4,560,444) Class R2 (141) N/A Class R3 (151) N/A Class R4 (4,383,933) (6,737,531) Class R5 (167) N/A Class W (2,150,062) N/A Tax return of capital Class A (1,969,457) -- Class B (312,017) -- Class C (14,213) -- Class I (346,089) -- Class R2 (3) N/A Class R3 (3) N/A Class R4 (99,439) -- Class R5 (4) N/A Class W (48,769) N/A - --------------------------------------------------------------------------------------- Total distributions (125,792,047) (104,079,658) - ---------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 40 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
YEAR ENDED AUG. 31, 2007 2006 CAPITAL SHARE TRANSACTIONS (NOTE 4) Proceeds from sales Class A shares (Note 2) 341,978,156 316,729,749 Class B shares 73,778,423 79,990,744 Class C shares 4,309,754 3,579,299 Class I shares 162,095,736 109,101,564 Class R2 shares 5,000 N/A Class R3 shares 5,000 N/A Class R4 shares 29,755,649 19,247,047 Class R5 shares 5,000 N/A Class W shares 267,590,689 N/A Fund Merger (Note 10) Class A shares N/A 482,178,674 Class B shares N/A 84,180,791 Class C shares N/A 3,014,375 Class I shares N/A 161,023,234 Class R4 shares N/A 43,644,789 Reinvestment of distributions at net asset value Class A shares 71,340,780 60,868,805 Class B shares 12,481,391 13,634,050 Class C shares 558,059 518,063 Class I shares 15,346,042 4,443,417 Class R4 shares 4,481,258 6,613,878 Class W shares 2,006,618 N/A Payments for redemptions Class A shares (507,058,109) (578,402,371) Class B shares (Note 2) (187,649,959) (247,147,060) Class C shares (Note 2) (5,462,345) (7,432,273) Class I shares (69,529,553) (1,248,255) Class R4 shares (129,682,278) (95,308,639) Class W shares (46,272,210) N/A - --------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions 40,083,101 459,229,881 - --------------------------------------------------------------------------------------- Total increase (decrease) in net assets 63,533,341 401,642,718 Net assets at beginning of year 2,880,767,682 2,479,124,964 - --------------------------------------------------------------------------------------- Net assets at end of year $2,944,301,023 $2,880,767,682 ======================================================================================= Undistributed (excess of distributions over) net investment income $ (1,432,632) $ 4,503,837 - ---------------------------------------------------------------------------------------
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 41 NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Fund is a series of RiverSource Diversified Income Series, Inc. and is registered under the Investment Company Act of 1940 (as amended) 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 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 and Class R4 shares. - - Class A shares are sold with a front-end sales charge. - - Class B shares may be subject to a contingent deferred sales charge (CDSC) and automatically convert to Class A shares during the ninth year of ownership. - - Class C shares may be subject to a CDSC. - - Class I and Class R4 shares have no sales charge and are offered only to qualifying institutional investors. Effective Dec. 11, 2006, the Board approved renaming Class Y as Class R4, terminating the shareholder servicing agreement, revising the fee structure under the transfer agent agreement from account-based to asset-based, and adopting a plan administration services agreement. At Aug. 31, 2007, Ameriprise Financial, Inc. (Ameriprise Financial), the parent company of RiverSource Investments, LLC (the Investment Manager) and the affiliated funds-of-funds owned 100% of Class I shares. Effective Dec. 11, 2006, the Fund offers additional classes of shares, Class R2, Class R3 and Class R5, to certain institutional investors. These shares are sold without a front-end sales charge or CDSC. At Aug. 31, 2007, Ameriprise Financial owned 100% of Class R2, Class R3 and Class R5 shares. Effective Dec. 1, 2006, the Fund offers an additional class of shares, Class W, through qualifying discretionary accounts. Class W shares are sold without a front-end sales charge or CDSC. At Aug. 31, 2007, Ameriprise Financial owned 100% of Class W 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 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. - -------------------------------------------------------------------------------- 42 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT The Fund's significant accounting policies are summarized below: USE OF ESTIMATES Preparing financial statements that conform to U.S. generally accepted accounting principles requires management to make estimates (e.g., on assets, liabilities and contingent assets and liabilities) that could differ from actual results. VALUATION OF SECURITIES All securities are valued at the close of each business day. Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price. Debt securities are generally traded in the over-the-counter market and are valued at a price that reflects fair value as quoted by dealers in these securities or by an independent pricing service. Foreign securities are valued based on quotations from the principal market in which such securities are normally traded. The procedures adopted by the Board of Directors of the funds 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 equities) 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 New York Stock Exchange 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 New York Stock Exchange, including significant movements in the U.S. market after foreign exchanges have closed. Accordingly, in those situations, Ameriprise Financial will fair value foreign equity securities pursuant to procedures adopted by the Board of Directors of the funds, 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 New York Stock Exchange. 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 rates; those maturing in 60 days or less are valued at amortized cost. ILLIQUID SECURITIES At Aug. 31, 2007, 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. Prior to July 12, 2007, the Fund limited the percent held in securities and other instruments that were illiquid to 10% of the Fund's net assets. The aggregate value of such securities at Aug. 31, 2007 was $5,934,975 representing 0.20% of net assets. These securities may be valued at fair value according to procedures approved, in good faith, by the Board. According to board guidelines, - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 43 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 AND UNFUNDED LOAN COMMITMENTS 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, 2007, the Fund has entered into outstanding when-issued securities of $277,561,571. The fund may enter into certain credit agreements, all or a portion of which may be unfunded. The Fund is obligated to fund these loan commitments at the borrower's discretion. These commitments are disclosed in the accompanying "Investments in securities." At Aug. 31, 2007, the Fund has entered into unfunded loan commitments of $1,755,840. The Fund also enters into transactions to sell purchase commitments to third parties at current market values and concurrently acquires other purchase commitments for similar securities at later dates. As an inducement for the Fund to "roll over" its purchase commitments, the Fund receives negotiated amounts in the form of reductions of the purchase price of the commitment. The amounts received, in the form of reductions of the purchase price, are recorded as an adjustment to interest income on the Statement of Operations. Losses may arise due to changes in the value of the securities or if the counterparty does not perform under the terms of the agreement. If the counterparty files for bankruptcy or becomes insolvent, a fund's right to repurchase or sell securities may be limited. OPTION TRANSACTIONS To produce incremental earnings, protect gains, and facilitate buying and selling of securities for investments, the Fund may buy and write options traded on any U.S. or foreign exchange or in the over-the-counter market where completing the obligation depends upon the credit standing of the other party. Cash collateral may be collected by the Fund to secure certain over-the-counter options trades. Cash collateral held by the Fund for such option trades must be returned to the counterparty upon closure, exercise or expiration of the contract. The Fund also may buy and sell put and call options and write covered call options on portfolio securities as well as write cash-secured put options. The risk in writing a call option is that the Fund gives up the opportunity for profit if the market price of the security increases. The risk in writing a put option is that the Fund may incur a loss if the market price of the security decreases and the option is exercised. The - -------------------------------------------------------------------------------- 44 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT risk in buying an option is that the Fund pays a premium whether or not the option is exercised. The Fund also has the additional risk of being unable to enter into a closing transaction if a liquid secondary market does not exist. Option contracts are valued daily at the closing prices on their primary exchanges and unrealized appreciation or depreciation is recorded. The Fund will realize a gain or loss when the option transaction expires or closes. When options on debt securities or futures are exercised, the Fund will realize a gain or loss. When other options are exercised, the proceeds on sales for a written call option, the purchase cost for a written put option or the cost of a security for a purchased put or call option is adjusted by the amount of premium received or paid. At Aug. 31, 2007, the fund had no outstanding option contracts. FUTURES TRANSACTIONS To gain exposure to or protect itself from market changes, the Fund may buy and sell financial futures contracts traded on any U.S. or foreign exchange. The Fund also may buy and write put and call options on these futures contracts. Risks of entering into futures contracts and related options include the possibility of an illiquid market and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. Futures are valued daily based upon the last sale price at the close of 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. FOREIGN CURRENCY TRANSLATIONS AND FORWARD FOREIGN CURRENCY CONTRACTS Securities and other assets and liabilities denominated in foreign currencies are translated daily into U.S. dollars. Foreign currency amounts related to the purchase or sale of securities and income and expenses are translated at the exchange rate on the transaction date. The effect of changes in foreign exchange rates on realized and unrealized security gains or losses is reflected as a component of such gains or losses. In the statement of operations, net realized gains or losses from foreign currency transactions, if any, may arise from sales of foreign currency, closed forward contracts, exchange gains or losses realized between the trade date and settlement date on securities transactions, and other translation gains or losses on dividends, interest income and foreign withholding taxes. At Aug. 31, 2007, foreign currency holdings consisted of European monetary units and British pounds. The Fund may enter into forward foreign currency exchange contracts for operational purposes and to protect against adverse exchange rate fluctuation. The net U.S. dollar value of foreign currency underlying all contractual commitments - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 45 held by the Fund and the resulting unrealized appreciation or depreciation are determined using foreign currency exchange rates from an independent pricing service. The Fund is subject to the credit risk that the other party will not complete its contract obligations. At Aug. 31, 2007 the Fund had no outstanding forward foreign currency contracts. FORWARD SALE COMMITMENTS The Fund may enter into forward sale commitments to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. Proceeds of forward sale commitments are not received until the contractual settlement date. During the time a forward sale commitment is outstanding, equivalent deliverable securities, or an offsetting forward purchase commitment deliverable on or before the sale commitment date, are used to satisfy the commitment. Unsettled forward sale commitments are valued at the current market value of the underlying securities, generally according to the procedures described under "Valuation of securities" above. The forward sale commitment is "marked-to- market" daily and the change in market value is recorded by the Fund as an unrealized gain or loss. If the forward sale commitment is closed through the acquisition of an offsetting purchase commitment, the Fund realizes a gain or loss. If the Fund delivers securities under the commitment, the Fund realizes a gain or a loss from the sale of the securities based upon the market price established at the date the commitment was entered into. Forward sale commitments outstanding at period end are listed in the "Notes to investments in securities." CREDIT DEFAULT SWAP TRANSACTIONS The Fund may enter into credit default swap contracts to increase or decrease its credit exposure to an issuer, obligation, portfolio, or index of issuers or obligations, to hedge its exposure on an obligation that it owns or in lieu of selling such obligations. 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 gain (loss) upon payment. If the credit event specified in the contract occurs, the Fund will be required to deliver either the referenced 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 (loss) upon receipt of the payment. If the credit event specified in the contract occurs, the Fund will receive the referenced 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 - -------------------------------------------------------------------------------- 46 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT obligation received and the notional amount paid will be recorded as a realized gain (loss). As a protection seller, the maximum amount of the payment made by the Fund may equal the notional amount, at par, of the underlying index or security as a result of the related credit event. The notional amounts of credit default swap contracts are not recorded in the financial statements; however any up front payment paid or received by the Fund is recorded as an asset or liability and amortized daily as a component of realized gain (loss) on the statement of operations. At Aug. 31, 2007, there were no credit default swap contracts outstanding which had up front payments 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. CMBS TOTAL RETURN SWAP TRANSACTIONS The Fund may enter into swap agreements to earn the total return on a specified security or index of fixed income securities. CMBS total return swaps are bilateral financial contracts designed to replicate synthetically the total returns of collateralized mortgage-backed securities. Under the terms of the swaps, the Fund either receives or pays the total return on a reference security or index applied to a notional principal amount. In return, the Fund agrees to pay or receive from the counterparty a floating rate, which is reset periodically based on short-term interest rates, applied to the same notional amount. The notional amounts of swap contracts are not recorded in the financial statements. Swaps are valued daily, and the change in value is recorded as unrealized appreciation (depreciation) until the termination of the swap, at which time realized gain (loss) is recorded. Payments received or made are recorded as realized gains (losses). Swap agreements may be subject to liquidity risk, which exists when a particular swap is difficult to purchase or sell. It may not be possible for the Fund to initiate a transaction or liquidate a position at an advantageous time or price, which may result in significant losses. Total return swaps are subject to the risk that the counterparty will default on its obligation to pay net amounts due to the Funds. 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 - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 47 to the Fund. In addition, certain of the Fund's contracts with its service providers contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown since the amount of any future claims that may be made against the Fund cannot be determined and the Fund has no historical basis for predicting the likelihood of any such claims. FEDERAL TAXES The Fund's policy is to comply with Subchapter M of the Internal Revenue Code that applies to regulated investment companies and to distribute substantially all of its taxable income to shareholders. No provision for income or excise taxes is thus required. Net investment income (loss) and net realized gains (losses) may differ for financial statement and tax purposes primarily because of the deferred losses on certain futures contracts, the recognition of certain foreign currency gains (losses) as ordinary income (loss) for tax purposes and losses deferred due to "wash sale" transactions. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. Also, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains (losses) were recorded by the Fund. On the statement of assets and liabilities, as a result of permanent book-to-tax differences, undistributed net investment income has been decreased by $5,035,154 and accumulated net realized loss has been decreased by $5,035,964 resulting in a net reclassification adjustment to decrease paid-in capital by $810. The tax character of distributions paid for the years indicated is as follows:
YEAR ENDED AUG. 31, 2007 2006 - ---------------------------------------------------------------------------- CLASS A Distributions paid from: Ordinary income......................... $86,827,158 $76,604,597 Long-term capital gain.................. -- -- Tax return of capital................... 1,969,457 -- CLASS B Distributions paid from: Ordinary income......................... 13,755,846 15,585,869 Long-term capital gain.................. -- -- Tax return of capital................... 312,017 -- CLASS C Distributions paid from: Ordinary income......................... 626,596 591,217 Long-term capital gain.................. -- -- Tax return of capital................... 14,213 --
- -------------------------------------------------------------------------------- 48 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT
YEAR ENDED AUG. 31, 2007 2006 - ---------------------------------------------------------------------------- CLASS I Distributions paid from: Ordinary income......................... 15,257,999 4,560,444 Long-term capital gain.................. -- -- Tax return of capital................... 346,089 -- CLASS R2(A) Distributions paid from: Ordinary income......................... 141 N/A Long-term capital gain.................. -- N/A Tax return of capital................... 3 N/A CLASS R3(A) Distributions paid from: Ordinary income......................... 151 N/A Long-term capital gain.................. -- N/A Tax return of capital................... 3 N/A CLASS R4(B) Distributions paid from: Ordinary income......................... 4,383,933 6,737,531 Long-term capital gain.................. -- -- Tax return of capital................... 99,439 -- CLASS R5(A) Distributions paid from: Ordinary income......................... 167 N/A Long-term capital gain.................. -- N/A Tax return of capital................... 4 N/A CLASS W(C) Distributions paid from: Ordinary income......................... 2,150,062 N/A Long-term capital gain.................. -- N/A Tax return of capital................... 48,769 N/A
(a) For the period from Dec. 11, 2006 (inception date) to Aug. 31, 2007. (b) Effective Dec. 11, 2006, Class Y was renamed R4. (c) For the period from Dec. 1, 2006 (inception date) to Aug. 31, 2007. At Aug. 31, 2007, the components of distributable earnings on a tax basis are as follows: Undistributed ordinary income............................ $ -- Undistributed accumulated long-term gain................. $ -- Accumulated realized loss................................ $(154,484,363) Unrealized appreciation (depreciation)................... $ (30,249,391)
RECENT ACCOUNTING PRONOUNCEMENTS On Sept. 20, 2006, the Financial Accounting Standards Board (FASB) released Statement of Financial Accounting Standards No. 157 "Fair Value Measurements" - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 49 (SFAS 157). SFAS 157 establishes an authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair-value measurements. The application of SFAS 157 is required for fiscal years beginning after Nov. 15, 2007 and interim periods within those fiscal years. The impact of SFAS 157 on the Fund's financial statements is being evaluated. In June 2006, the FASB issued FASB Interpretation 48 (FIN 48), "Accounting for Uncertainty in Income Taxes." FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with FASB Statement 109, "Accounting for Income Taxes." FIN 48 prescribes a two-step process to recognize and measure a tax position taken or expected to be taken in a tax return. The first step is to determine whether a tax position has met the more-likely-than-not recognition threshold and the second step is to measure a tax position that meets the threshold to determine the amount of benefit to recognize. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after Dec. 15, 2006. As a result, the Fund will incorporate FIN 48 in their semiannual report on Feb 29, 2008. Tax positions of the Fund are being evaluated to determine the impact, if any, to the Fund. The adoption of FIN 48 is not anticipated to have a material impact on the Fund. DIVIDENDS TO SHAREHOLDERS Dividends from net investment income, declared daily and payable monthly, when available, are reinvested in additional shares of the Fund at net asset value or payable in cash. Capital gains, when available, are distributed along with the last income dividend of the calendar year. 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. 2. EXPENSES AND SALES CHARGES Under an Investment Management Services Agreement, the Investment Manager determines which securities will be purchased, held or sold. The management fee is a percentage of the Fund's average daily net assets that declines from 0.48% to 0.29% annually as the Fund's assets increase. The management fee for the year ended Aug. 31, 2007, was 0.46% of the Fund's average daily net assets. Under an Administrative Services Agreement, the Fund pays Ameriprise Financial a fee for administration and accounting services at a percentage of the Fund's average daily net assets that declines from 0.07% to 0.04% annually as the Fund's - -------------------------------------------------------------------------------- 50 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT assets increase. The fee for the year ended Aug. 30, 2007, was 0.06% of the Fund's average daily net assets. Other expenses in the amount of $22,780 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. Compensation of Board members includes, for a former Board Chair, compensation as well as retirement benefits. Certain other aspects of a former Board Chair's compensation, including health benefits and payment of certain other expenses, are included under other expenses. Under a Deferred Compensation Plan (the Plan), non-interested board members may defer receipt of their compensation. Deferred amounts are treated as though equivalent dollar amounts had been invested in shares of the Fund or other RiverSource funds. The Fund's liability for these amounts is adjusted for market value changes and remains in the Fund until distributed in accordance with the Plan. Professional fees include fees paid by the Fund for legal services and independent registered public accounting firm services. Under a Transfer Agency Agreement, RiverSource Service Corporation (the Transfer Agent) maintains shareholder accounts and records. The Fund pays the Transfer Agent an annual fee per shareholder account for this service as follows: - - Class A $20.50 - - Class B $21.50 - - Class C $21.00 Effective Dec. 11, 2006, as part of the Board's approval to rename Class Y as Class R4, the fee structure under the Transfer Agency Agreement was revised from an account-based fee for Class Y to an asset-based fee for Class R4. The Fund 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 R4 shares. Prior to Dec. 11, 2006, the Fund paid the Transfer Agent an annual account-based fee of $18.50 per shareholder account. In addition, the Fund 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 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. Prior to Dec. 11, 2006, Class I paid a transfer agency fee at an annual rate per shareholder account of $1. Effective Dec. 11, 2006, this fee was eliminated. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 51 The Transfer Agent charges an annual fee of $5 per inactive account, charged on a pro rata basis for 12 months from the date the account becomes inactive. These fees are included in the transfer agency fees on the statement of operations. The Fund has agreements with Ameriprise Financial Services, Inc. and RiverSource Distributors, Inc. (collectively, the Distributor) for distribution and shareholder services. As of Oct. 1, 2007, RiverSource Distributors serves as the sole principal and distributor to the Funds. 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. Effective Dec. 11, 2006, a Plan Administration Services Agreement, a fee for the provision of various administrative, recordkeeping, communication and educational services, was adopted for the restructured Class R4 and the introduction of Class R2 and Class R3. The fee is calculated at a rate of 0.25% of the Fund's average daily net assets attributable to Class R2, Class R3 and Class R4 shares. Prior to Dec. 11, 2006, under a Shareholder Service Agreement, the Fund paid the Distributor a fee for service provided to shareholders by the Distributor and other servicing agents with respect to Class Y shares. The fee was calculated at a rate of 0.10% of the Fund's average daily net assets attributable to Class Y shares. Effective Dec. 11, 2006, this agreement was terminated. Sales charges received by the Distributor for distributing Fund shares were $2,007,768 for Class A, $329,350 for Class B and $3,133 for Class C for the year ended Aug. 31, 2007. 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"), 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. For the year ended Aug. 31, 2007, the Investment Manager and its affiliates waived certain fees and expenses such that net expenses (excluding fees and expenses of acquired funds) were 0.89% for Class A, 1.65% for Class B, 1.65% for Class C, 0.54% for Class I, 1.32% for Class R2, 1.06% for Class R3, 0.73% for Class R4, 0.57% for Class R5 and 0.97% for Class W. Of these waived fees and expenses, the transfer agency fees waived for Class A, Class B, Class C and Class W were $1,146,146, $223,872, $9,929 and $6,612, respectively, and the - -------------------------------------------------------------------------------- 52 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT transfer agency and plan administration service fees waived for Class R4 were $82,565 and the management fees waived at the Fund level were $535,573. Under an agreement, which was effective until Aug. 31, 2007, 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 0.89% for Class A, 1.65% for Class B, 1.66% for Class C, 0.54% for Class I, 1.32% for Class R2, 1.07% for Class R3, 0.73% for Class R4, 0.57% for Class R5 and 0.97% for Class W of the Fund's average daily net assets. Effective Sept. 1, 2007, the Investment Manager and its affiliates have contractually agreed to waive certain fees and expenses such that net expenses (excluding fees and expenses of acquired funds) will not exceed 0.89% for Class A, 1.65% for Class B, 1.65% for Class C, 0.53% for Class I, 1.33% for Class R2, 1.08% for Class R3, 0.77% for Class R4, 0.58% for Class R5 and 0.98% for Class W of the Fund's average daily net assets, until Aug. 31, 2008, unless sooner terminated at the discretion of the Board. During the year ended Aug. 31, 2007, the Fund's custodian and transfer agency fees were reduced by $229,404 as a result of earnings and bank fee credits from overnight cash balances. 3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $8,543,779,920 and $8,345,887,467, respectively, for the year ended Aug. 31, 2007. Realized gains and losses are determined on an identified cost basis. 4. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the years indicated are as follows:
YEAR ENDED AUG. 31, 2007 ISSUED FOR REINVESTED NET SOLD DISTRIBUTIONS REDEEMED INCREASE (DECREASE) - ------------------------------------------------------------------------------------------- Class A 71,107,119 14,806,791 (105,297,428) (19,383,518) Class B 15,312,266 2,590,288 (39,059,052) (21,156,498) Class C 893,514 115,836 (1,134,124) (124,774) Class I 33,643,276 3,181,732 (14,430,925) 22,394,083 Class R2(a) 1,040 -- -- 1,040 Class R3(a) 1,040 -- -- 1,040 Class R4(b) 6,169,567 931,416 (27,102,344) (20,001,361) Class R5(a) 1,040 -- -- 1,040 Class W(c) 55,562,189 417,986 (9,621,147) 46,359,028 - -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 53
YEAR ENDED AUG. 31, 2006 ISSUED FOR FUND REINVESTED NET SOLD MERGER DISTRIBUTIONS REDEEMED INCREASE (DECREASE) - ---------------------------------------------------------------------------------------------------------- Class A 66,603,100 101,470,543 12,810,045 (121,661,365) 59,222,323 Class B 16,761,356 17,711,859 2,867,046 (52,093,450) (14,753,189) Class C 749,835 633,369 108,893 (1,561,227) (69,130) Class I 23,207,815 33,851,639 941,851 (263,328) 57,737,977 Class R4(b) 4,039,333 9,182,696 1,392,410 (19,763,678) (5,149,239) - ----------------------------------------------------------------------------------------------------------
(a) For the period from Dec. 11, 2006 (inception date) to Aug. 31, 2007. (b) Effective Dec. 11, 2006, Class Y was renamed Class R4. (c) For the period from Dec. 1, 2006 (inception date) to Aug. 31, 2007. 5. LENDING OF PORTFOLIO SECURITIES In order to generate additional income, the Fund may lend securities representing up to one-third of the value of its total assets (which includes collateral for securities on loan) to broker-dealers, banks, or other institutional borrowers of securities. The Fund receives collateral in the form of cash and U.S. government securities, equal to at least 100% of the value of securities loaned, which is marked to the market value of the loaned securities daily until the securities are returned, e.g., if the value of the securities on loan increases, additional cash collateral is provided by the borrower. The Investment Manager serves as securities lending agent for the Fund under the Investment Management Services Agreement pursuant to which the Fund has agreed to reimburse the Investment Manager for expenses incurred by it in connection with the lending program, and pursuant to guidelines adopted by and under the oversight of the Board. At Aug. 31, 2007, securities valued at $53,596,150 were on loan to brokers. For collateral, the Fund received $54,427,500 in cash. Cash collateral received is invested in an affiliated money market fund and short-term securities, including U.S. government securities or other high-grade debt obligations, which are included in the "Investments in securities." From Aug. 31, 2007 to Sept. 4, 2007, the Fund temporarily held less cash in short term investments than the amount of collateral received from securities on loan. Income from securities lending amounted to $395,879 for the year ended Aug. 31, 2007. Expenses paid to the Investment Manager were $12,365 for the year ended Aug. 31, 2007, which are included in other expenses on the statement of operations. The risks to the Fund of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. 6. INTEREST RATE FUTURES CONTRACTS At Aug. 31, 2007, investments in securities included securities valued at $1,893,987 that were pledged as collateral to cover initial margin deposits on 1,669 open sale contracts. The notional market value of the open sale contracts at Aug. 31, 2007 was $191,666,506 with a net unrealized loss of $4,402. See "Summary of significant accounting policies" and "Notes to investments in securities." - -------------------------------------------------------------------------------- 54 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 7. SWAP CONTRACTS At Aug. 31, 2007, the Fund had the following open CBMS total return swap contracts:
TERMINATION NOTIONAL UNREALIZED UNREALIZED DATE AMOUNT APPRECIATION DEPRECIATION - --------------------------------------------------------------------------------------- Receive total return on Lehman Brothers Aaa 8.5+ Commercial Mortgage-Backed Securities Index and pay a floating rate based on 1-month LIBOR plus 0.25%. Counterparty: Wachovia Oct. 1, 2007 $37,500,000 $508,013 $ -- Receive total return on Lehman Brothers Baa 8.5+ Commercial Mortgage-Backed Securities Index and pay a floating rate based on 1-month LIBOR plus 1.20%. Counterparty: Citibank NA Nov. 1, 2007 7,500,000 -- 501,510 Receive total return on Lehman Brothers Baa 8.5+ Commercial Mortgage-Backed Securities Index and pay a floating rate based on 1-month LIBOR plus 1.05%. Counterparty: Wachovia Dec. 1, 2007 6,725,000 -- 449,758 Receive total return on Lehman Brothers Baa 8.5+ Commercial Mortgage-Backed Securities Index and pay a floating rate based on 1-month LIBOR plus 1.10%. Counterparty: Citibank NA Dec. 1, 2007 7,525,000 -- 503,830 Receive total return on Lehman Brothers Baa 8.5+ Commercial Mortgage-Backed Securities Index and pay a floating rate based on 1-month LIBOR plus 1.10%. Counterparty: Wachovia Jan. 1, 2008 7,500,000 -- 501,277 Receive total return on Lehman Brothers Baa 8.5+ Commercial Mortgage-Backed Securities Index and pay a floating rate based on 1-month LIBOR plus 1.00%. Counterparty: Citibank NA Jan. 1, 2008 2,400,000 -- 223,243 - --------------------------------------------------------------------------------------- Total $508,013 $2,179,618 - ---------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 55 At Aug. 31, 2007, the Fund had the following open credit default swap contracts:
REFERENCED BUY/SELL NOTIONAL FIXED TERMINATION UNREALIZED UNREALIZED COUNTERPARTY ENTITY PROTECTION AMOUNT RATE DATE APPRECIATION DEPRECIATION - ------------------------------------------------------------------------------------------------------------------------ Goldman Lehman Brothers Sell $10,675,000 1.22% Sept. 20, 2012 $ -- $69,254 Sachs Holdings Inc. Goldman Morgan Stanley Buy 10,675,000 0.72% Sept. 20, 2012 18,088 -- Sachs - ------------------------------------------------------------------------------------------------------------------------ Total $18,088 $69,254 - ------------------------------------------------------------------------------------------------------------------------
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 RiverSource funds and other institutional clients of RiverSource Investments. Cost of purchases and proceeds from sales of securities aggregated $1,655,721,359 and $1,609,835,630, respectively, for the year ended Aug. 31, 2007. 9. BANK BORROWINGS The Fund has a revolving credit agreement with a syndicate of banks headed by JPMorgan Chase Bank, N.A. (JPMCB), whereby the Fund may borrow for the temporary funding of shareholder redemptions or for other temporary or emergency purposes. The agreement went into effect Sept. 19, 2006. The Fund must maintain asset coverage for borrowings of at least 300%. The agreement, which enables the Fund to participate with other RiverSource funds, permits borrowings up to $500 million, collectively. Interest is charged to each Fund based on its borrowings at a rate equal to either the higher of the Federal Funds Effective Rate plus 0.40% or the JPMCB Prime Commercial Lending Rate. Borrowings are payable within 60 days after such loan is executed. The Fund also pays a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.06% per annum. Prior to this agreement, the Fund paid a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.07% per annum. The Fund had no borrowings under the facility during the year ended Aug. 31, 2007. 10. FUND MERGER At the close of business on March 10, 2006, RiverSource Diversified Bond Fund acquired the assets and assumed the identified liabilities of RiverSource Selective Fund. The reorganization was completed after shareholders approved the plan on Feb. 15, 2006. The aggregate net assets of RiverSource Diversified Bond Fund immediately before the acquisition were $2,230,540,317 and the combined net assets immediately after the acquisition were $3,004,582,180. - -------------------------------------------------------------------------------- 56 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT The merger was accomplished by a tax-free exchange of 91,783,512 shares of RiverSource Selective Fund valued at $774,041,863. In exchange for the RiverSource Selective Fund shares and net assets, RiverSource Diversified Bond Fund issued the following number of shares:
SHARES - -------------------------------------------------------------------------- Class A.................................................... 101,470,543 Class B.................................................... 17,711,859 Class C.................................................... 633,369 Class I.................................................... 33,851,639 Class Y.................................................... 9,182,696 - --------------------------------------------------------------------------
RiverSource Selective Fund's net assets after adjustments for any permanent book-to-tax differences at the merger date were as follows, which include the following amounts of capital stock, unrealized depreciation, accumulated net realized loss and temporary book-to-tax differences.
TEMPORARY TOTAL CAPITAL UNREALIZED ACCUMULATED BOOK-TO-TAX NET ASSETS STOCK DEPRECIATION NET REALIZED LOSS DIFFERENCES - ----------------------------------------------------------------------------------------------------- RiverSource Selective Fund $774,041,863 $826,804,340 $(18,618,938) $(34,129,421) $(14,118) - -----------------------------------------------------------------------------------------------------
11. CAPITAL LOSS CARRY-OVER AND POST-OCTOBER LOSS For federal income tax purposes, the Fund had a capital loss carry-over of $143,554,285 at Aug. 31, 2007, that if not offset by capital gains will expire as follows:
2009 2010 2012 2014 $75,831,798 $49,658,521 $5,227,159 $12,836,807
The Fund also had a post-October loss of $10,930,078 at Aug. 31, 2007. 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 Funds are permitted to treat net capital losses realized between November 1 and its fiscal year end ("post-October loss") as occurring on the first day of the following tax year. At Aug. 31, 2007, the Fund had a post-October loss of $10,930,078 that is treated as occurring on Sept. 1, 2007. RiverSource Diversified Bond Fund acquired $31,763,053 of capital loss carry-overs in connection with the RiverSource Selective Fund merger (Note 10). In addition to the acquired capital loss carry-overs, the Fund also acquired unrealized capital gains as a result of the mergers. The yearly utilization of the acquired capital losses as well as the utilization of the acquired unrealized losses is limited by the Internal Revenue Code. 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. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 57 12. 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 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. In December 2005, without admitting or denying the allegations, American Express Financial Corporation (AEFC, which is now known as Ameriprise Financial, Inc. (Ameriprise Financial)), the parent company of RiverSource Investments, LLC (RiverSource Investments), entered into settlement agreements with the Securities and Exchange Commission (SEC) and Minnesota Department of Commerce (MDOC) related to market timing activities. In connection with these matters, the SEC and MDOC issued orders (the Orders) alleging that AEFC violated certain provisions of the federal and Minnesota securities laws by failing to adequately disclose market timing activities by allowing certain identified market timers to continue to market time contrary to disclosures in mutual fund and variable annuity product prospectuses. The Orders also alleged that AEFC failed to implement procedures to detect and prevent market timing in 401(k) plans for employees of AEFC and related companies and failed to adequately disclose that there were no such procedures. Pursuant to the MDOC Order, the MDOC also alleged that AEFC allowed inappropriate market timing to occur by failing to have written policies and procedures and failing to properly supervise its employees. As a result of the Orders, AEFC was censured and ordered to cease and desist from committing or causing any violations of certain provisions of the Investment Advisers Act of 1940, the Investment Company Act of 1940, and various Minnesota laws. Pursuant to the terms of the Orders, AEFC agreed to pay disgorgement of $10 million and civil money penalties of $7 million. AEFC also agreed to make presentations at least annually to its board of directors and the relevant mutual funds' board that include an overview of policies and procedures to prevent market timing, material changes to these policies and procedures and whether disclosures related to market timing are consistent with the SEC order and - -------------------------------------------------------------------------------- 58 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT federal securities laws. AEFC also agreed to retain an independent distribution consultant to assist in developing a plan for distribution of all disgorgement and civil penalties ordered by the SEC in accordance with various undertakings detailed at http://www.sec.gov/litigation/admin/ia-2451.pdf. In addition, AEFC agreed to complete and submit to the MDOC a compliance review of its procedures regarding market timing within one year of the MDOC Order, including a summary of actions taken to ensure compliance with applicable laws and regulations and certification by a senior officer regarding compliance and supervisory procedures. Ameriprise Financial and its affiliates have cooperated with the SEC and the MDOC in these legal proceedings, and have made regular reports to the RiverSource Funds' Boards of Directors/Trustees. 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. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 59 13. FINANCIAL HIGHLIGHTS The tables below show certain important financial information for evaluating the Fund's results. CLASS A
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007 2006 2005 2004 2003 Net asset value, beginning of period $4.77 $4.89 $4.87 $4.78 $4.75 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .21(b) .19 .18 .18 .20 Net gains (losses) (both realized and unrealized) .05 (.11) .03 .08 .03 - ----------------------------------------------------------------------------------------------------------- Total from investment operations .26 .08 .21 .26 .23 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.21) (.20) (.19) (.17) (.20) Tax return of capital (.01) -- -- -- -- - ----------------------------------------------------------------------------------------------------------- Total distributions (.22) (.20) (.19) (.17) (.20) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.81 $4.77 $4.89 $4.87 $4.78 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $1,937 $2,013 $1,774 $1,933 $2,280 - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) .89%(e) .89%(e) .94%(e) .98%(e) .97% - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.43% 4.09% 3.67% 3.55% 4.16% - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% 281% 300% 279% 256% - ----------------------------------------------------------------------------------------------------------- Total return(f) 5.54% 1.64% 4.38% 5.54% 4.91% - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amount has been calculated using average shares outstanding method. (c) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. (d) 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. (e) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class A would have been 0.97%, 0.99%, 1.02% and 1.00% for the years ended Aug. 31, 2007, 2006, 2005 and 2004, respectively. (f) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 60 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT CLASS B
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007 2006 2005 2004 2003 Net asset value, beginning of period $4.77 $4.89 $4.88 $4.78 $4.75 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .18(b) .16 .15 .14 .16 Net gains (losses) (both realized and unrealized) .04 (.12) .01 .09 .03 - ----------------------------------------------------------------------------------------------------------- Total from investment operations .22 .04 .16 .23 .19 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.18) (.16) (.15) (.13) (.16) Tax return of capital (.00) -- -- -- -- - ----------------------------------------------------------------------------------------------------------- Total distributions (.18) (.16) (.15) (.13) (.16) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.81 $4.77 $4.89 $4.88 $4.78 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $304 $402 $484 $628 $902 - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) 1.65%(e) 1.65%(e) 1.70%(e) 1.73%(e) 1.73% - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.66% 3.31% 2.92% 2.78% 3.40% - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% 281% 300% 279% 256% - ----------------------------------------------------------------------------------------------------------- Total return(f) 4.74% .88% 3.39% 4.95% 4.12% - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amount has been calculated using average shares outstanding method. (c) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. (d) 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. (e) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class B would have been 1.73%, 1.76%, 1.78% and 1.75% for the years ended Aug. 31, 2007, 2006, 2005 and 2004, respectively. (f) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 61 CLASS C
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007 2006 2005 2004 2003 Net asset value, beginning of period $4.77 $4.90 $4.88 $4.78 $4.75 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .18(b) .16 .15 .14 .16 Net gains (losses) (both realized and unrealized) .04 (.13) .02 .09 .03 - ----------------------------------------------------------------------------------------------------------- Total from investment operations .22 .03 .17 .23 .19 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.18) (.16) (.15) (.13) (.16) Tax return of capital (.00) -- -- -- -- - ----------------------------------------------------------------------------------------------------------- Total distributions (.18) (.16) (.15) (.13) (.16) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.81 $4.77 $4.90 $4.88 $4.78 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $17 $17 $18 $21 $27 - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) 1.65%(e) 1.66%(e) 1.70%(e) 1.73%(e) 1.74% - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.67% 3.31% 2.93% 2.79% 3.34% - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% 281% 300% 279% 256% - ----------------------------------------------------------------------------------------------------------- Total return(f) 4.73% .66% 3.60% 4.95% 4.11% - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amount has been calculated using average shares outstanding method. (c) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. (d) 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. (e) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class C would have been 1.73%, 1.76%, 1.79% and 1.75% for the years ended Aug. 31, 2007, 2006, 2005 and 2004, respectively. (f) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 62 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT CLASS I
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007 2006 2005 2004(B) Net asset value, beginning of period $4.78 $4.89 $4.88 $4.91 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .23(c) .21 .20 .11 Net gains (losses) (both realized and unrealized) .04 (.11) .02 (.04) - ----------------------------------------------------------------------------------------------------------- Total from investment operations .27 .10 .22 .07 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.22) (.21) (.21) (.10) Tax return of capital (.01) -- -- -- - ----------------------------------------------------------------------------------------------------------- Total distributions (.23) (.21) (.21) (.10) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.82 $4.78 $4.89 $4.88 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $386 $276 $-- $-- - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e) .54%(f) .54%(f) .60% .59%(g) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.80% 4.59% 4.01% 3.13%(g) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% 281% 300% 279% - ----------------------------------------------------------------------------------------------------------- Total return(h) 5.90% 2.19% 4.53% 1.43%(i) - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from March 4, 2004 (inception date) to Aug. 31, 2004. (c) Per share amount has been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. (e) 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. (f) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class I would have been 0.56% and 0.55% for the years ended Aug. 31, 2007 and 2006, respectively. (g) Adjusted to an annual basis. (h) Total return does not reflect payment of a sales charge. (i) Not annualized. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 63 CLASS R2
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007(B) Net asset value, beginning of period $4.81 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .14(c) Net gains (losses) (both realized and unrealized) (.02) - ----------------------------------------------------------------------------------------------------------- Total from investment operations .12 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.13) Tax return of capital (.00) - ----------------------------------------------------------------------------------------------------------- Total distributions (.13) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.80 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e) 1.32%(f) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.06%(f) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% - ----------------------------------------------------------------------------------------------------------- Total return(g) 2.70%(h) - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Dec. 11, 2006 (inception date) to Aug. 31, 2007. (c) Per share amount has been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. (e) 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. (f) Adjusted to an annual basis. (g) Total return does not reflect payment of a sales charge. (h) Not annualized. - -------------------------------------------------------------------------------- 64 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT CLASS R3
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007(B) Net asset value, beginning of period $4.81 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .15(c) Net gains (losses) (both realized and unrealized) (.02) - ----------------------------------------------------------------------------------------------------------- Total from investment operations .13 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.14) Tax return of capital (.00) - ----------------------------------------------------------------------------------------------------------- Total distributions (.14) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.80 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e) 1.06%(f) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.33%(f) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% - ----------------------------------------------------------------------------------------------------------- Total return(g) 2.90%(h) - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Dec. 11, 2006 (inception date) to Aug. 31, 2007. (c) Per share amount has been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund before reduction of earnings and bank fee credits on cash balances. (e) 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. (f) Adjusted to an annual basis. (g) Total return does not reflect payment of a sales charge. (h) Not annualized. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 65 CLASS R4*
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007 2006 2005 2004 2003 Net asset value, beginning of period $4.77 $4.89 $4.88 $4.78 $4.75 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .22(b) .20 .19 .18 .21 Net gains (losses) (both realized and unrealized) .04 (.12) .02 .10 .03 - ----------------------------------------------------------------------------------------------------------- Total from investment operations .26 .08 .21 .28 .24 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.22) (.20) (.20) (.18) (.21) Tax return of capital (.01) -- -- -- -- - ----------------------------------------------------------------------------------------------------------- Total distributions (.23) (.20) (.20) (.18) (.21) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.80 $4.77 $4.89 $4.88 $4.78 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $78 $173 $202 $203 $268 - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) .73%(e) .73%(e) .78%(e) .81%(e) .81% - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.53% 4.24% 3.85% 3.70% 4.34% - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% 281% 300% 279% 256% - ----------------------------------------------------------------------------------------------------------- Total return(f) 5.49% 1.81% 4.34% 5.92% 5.08% - -----------------------------------------------------------------------------------------------------------
* Effective Dec. 11, 2006, Class Y was renamed Class R4. (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amount has been calculated using average shares outstanding method. (c) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. (d) 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. (e) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class R4 would have been 0.83%, 0.82%, 0.86% and 0.83% for the years ended Aug. 31, 2007, 2006, 2005 and 2004, respectively. (f) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 66 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT CLASS R5
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007(B) Net asset value, beginning of period $4.81 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .17(c) Net gains (losses) (both realized and unrealized) (.02) - ----------------------------------------------------------------------------------------------------------- Total from investment operations .15 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.16) Tax return of capital (.00) - ----------------------------------------------------------------------------------------------------------- Total distributions (.16) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.80 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e),(f) .57%(g) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.81%(g) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% - ----------------------------------------------------------------------------------------------------------- Total return(h) 3.25%(i) - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Dec. 11, 2006 (inception date) to Aug. 31, 2007. (c) Per share amount has been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. (e) 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. (f) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratio of expenses for Class R5 would have been 0.59% for the period ended Aug. 31, 2007. (g) Adjusted to an annual basis. (h) Total return does not reflect payment of a sales charge. (i) Not annualized. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 67 CLASS W
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED AUG. 31, 2007(B) Net asset value, beginning of period $4.82 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .15(c) - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.16) Tax return of capital (.00) - ----------------------------------------------------------------------------------------------------------- Total distributions (.16) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.81 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $223 - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e),(f) .97%(g) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.32%(g) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 295% - ----------------------------------------------------------------------------------------------------------- Total return(h) 2.71%(i) - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Dec. 1, 2006 (inception date) to Aug. 31, 2007. (c) Per share amount has been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund after Investment Manager waiver/reimbursement and before reduction of earnings and bank fee credits on cash balances. (e) 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. (f) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratio of expenses for Class W would have been 0.98% for the period ended Aug. 31, 2007. (g) Adjusted to an annual basis. (h) Total return does not reflect payment of a sales charge. (i) Not annualized. - -------------------------------------------------------------------------------- 68 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 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 schedule of investments in securities, of RiverSource Diversified Bond Fund (the Fund), one of the portfolios constituting the RiverSource Diversified Income Series, Inc, as of August 31, 2007, and the related statements of operations, changes in net assets, and financial highlights for the year 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 audit. The financial statements and 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 statements and financial highlights. We conducted our audit 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 audit 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, 2007, by correspondence with the custodian and brokers, or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2007 financial statements and financial highlights 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, 2007, the results of its operations, changes in its net assets and the financial highlights for the year then ended, in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLP Minneapolis, Minnesota October 18, 2007 - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 69 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, 2007 CLASS A
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE Sept. 25, 2006.............................................. $0.01750 Oct. 26, 2006............................................... 0.01750 Nov. 27, 2006............................................... 0.01800 Dec. 18, 2006............................................... 0.02100 Jan. 23, 2007............................................... 0.02100 Feb. 23, 2007............................................... 0.01700 March 26, 2007.............................................. 0.01700 April 25, 2007.............................................. 0.01700 May 25, 2007................................................ 0.01700 June 25, 2007............................................... 0.01700 July 25, 2007............................................... 0.01870 Aug. 24, 2007............................................... 0.01870 Total distributions(a)...................................... $0.21740
- -------------------------------------------------------------------------------- 70 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT CLASS B
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE Sept. 25, 2006.............................................. $0.01472 Oct. 26, 2006............................................... 0.01441 Nov. 27, 2006............................................... 0.01480 Dec. 18, 2006............................................... 0.01889 Jan. 23, 2007............................................... 0.01737 Feb. 23, 2007............................................... 0.01388 March 26, 2007.............................................. 0.01385 April 25, 2007.............................................. 0.01396 May 25, 2007................................................ 0.01397 June 25, 2007............................................... 0.01390 July 25, 2007............................................... 0.01563 Aug. 24, 2007............................................... 0.01571 Total distributions(b)...................................... $0.18109
CLASS C
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE Sept. 25, 2006.............................................. $0.01468 Oct. 26, 2006............................................... 0.01438 Nov. 27, 2006............................................... 0.01476 Dec. 18, 2006............................................... 0.01886 Jan. 23, 2007............................................... 0.01730 Feb. 23, 2007............................................... 0.01393 March 26, 2007.............................................. 0.01387 April 25, 2007.............................................. 0.01393 May 25, 2007................................................ 0.01399 June 25, 2007............................................... 0.01396 July 25, 2007............................................... 0.01573 Aug. 24, 2007............................................... 0.01573 Total distributions(b)...................................... $0.18112
- -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 71 CLASS I
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE Sept. 25, 2006.............................................. $0.01881 Oct. 26, 2006............................................... 0.01895 Nov. 27, 2006............................................... 0.01950 Dec. 18, 2006............................................... 0.02200 Jan. 23, 2007............................................... 0.02270 Feb. 23, 2007............................................... 0.01846 March 26, 2007.............................................. 0.01847 April 25, 2007.............................................. 0.01842 May 25, 2007................................................ 0.01842 June 25, 2007............................................... 0.01845 July 25, 2007............................................... 0.02010 Aug. 24, 2007............................................... 0.02010 Total distributions(a)...................................... $0.23438
CLASS R2
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE Dec. 18, 2006............................................... $0.00587 Jan. 23, 2007............................................... 0.01889 Feb. 23, 2007............................................... 0.01516 March 26, 2007.............................................. 0.01523 April 25, 2007.............................................. 0.01521 May 25, 2007................................................ 0.01523 June 25, 2007............................................... 0.01522 July 25, 2007............................................... 0.01685 Aug. 24, 2007............................................... 0.01684 Total distributions(c)...................................... $0.13450
- -------------------------------------------------------------------------------- 72 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT CLASS R3
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE Dec. 18, 2006............................................... $0.00608 Jan. 23, 2007............................................... 0.02018 Feb. 23, 2007............................................... 0.01631 March 26, 2007.............................................. 0.01631 April 25, 2007.............................................. 0.01635 May 25, 2007................................................ 0.01637 June 25, 2007............................................... 0.01629 July 25, 2007............................................... 0.01789 Aug. 24, 2007............................................... 0.01789 Total distributions(c)...................................... $0.14367
CLASS R4*
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE Sept. 25, 2006.............................................. $0.01808 Oct. 26, 2006............................................... 0.01807 Nov. 27, 2006............................................... 0.01866 Dec. 18, 2006............................................... 0.02167 Jan. 23, 2007............................................... 0.02185 Feb. 23, 2007............................................... 0.01763 March 26, 2007.............................................. 0.01764 April 25, 2007.............................................. 0.01762 May 25, 2007................................................ 0.01762 June 25, 2007............................................... 0.01763 July 25, 2007............................................... 0.01928 Aug. 24, 2007............................................... 0.01932 Total distributions(a)...................................... $0.22507
* Effective Dec. 11, 2006, Class Y was reamed Class R4. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 73 CLASS R5
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE Dec. 18, 2006............................................... $0.00627 Jan. 23, 2007............................................... 0.02240 Feb. 23, 2007............................................... 0.01826 March 26, 2007.............................................. 0.01846 April 25, 2007.............................................. 0.01820 May 25, 2007................................................ 0.01818 June 25, 2007............................................... 0.01821 July 25, 2007............................................... 0.01980 Aug. 24, 2007............................................... 0.01979 Total distributions(b)...................................... $0.15957
CLASS W
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE Dec. 18, 2006............................................... $0.01734 Jan. 23, 2007............................................... 0.01952 Feb. 23, 2007............................................... 0.01663 March 26, 2007.............................................. 0.01543 April 25, 2007.............................................. 0.01637 May 25, 2007................................................ 0.01649 June 25, 2007............................................... 0.01654 July 25, 2007............................................... 0.01835 Aug. 24, 2007............................................... 0.01835 Total distributions(c)...................................... $0.15502
(a) $0.005 per share represents a tax return of capital. (b) $0.004 per share represents a tax return of capital. (c) $0.003 per share represents a tax return of capital. - -------------------------------------------------------------------------------- 74 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT BOARD MEMBERS AND OFFICERS Shareholders elect a Board that oversees the Fund's operations. The Board appoints officers who are responsible for day-to-day business decisions based on policies set by the Board. The following is a list of the Fund's Board members. Each member oversees 104 RiverSource funds. Board members serve until the next regular shareholders' meeting or until he or she reaches the mandatory retirement age established by the Board. Under the current Board policy, members may serve until the end of the meeting following their 75th birthday, or the fifteenth anniversary of the first Board meeting they attended as members of the Board, whichever occurs first. This policy does not apply to Ms. Jones who may retire after her 75th birthday. 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 Chief Justice, Minnesota Supreme 901 S. Marquette Ave. since 2006 Court, 1998-2005 Minneapolis, MN 55402 Age 53 - ----------------------------------------------------------------------------------------------------- Arne H. Carlson Board member Chair, RiverSource Funds, 901 S. Marquette Ave. since 1999 1999-2006; former Governor of Minneapolis, MN 55402 Minnesota Age 73 - ----------------------------------------------------------------------------------------------------- Pamela G. Carlton Board member President, Springboard -- Partners 901 S. Marquette Ave. since 2007 in Cross Cultural Leadership Minneapolis, MN 55402 (consulting company) Age 52 - ----------------------------------------------------------------------------------------------------- Patricia M. Flynn Board member Trustee Professor of Economics and 901 S. Marquette Ave. since 2004 Management, Bentley College; former Minneapolis, MN 55402 Dean, McCallum Graduate School of Age 56 Business, Bentley College - ----------------------------------------------------------------------------------------------------- Anne P. Jones Board member Attorney and Consultant 901 S. Marquette Ave. since 1985 Minneapolis, MN 55402 Age 72 - ----------------------------------------------------------------------------------------------------- Jeffrey Laikind, CFA Board member Former Managing Director, Shikiar American Progressive 901 S. Marquette Ave. since 2005 Asset Management Insurance Minneapolis, MN 55402 Age 72 - ----------------------------------------------------------------------------------------------------- Stephen R. Lewis, Jr. Board member President Emeritus and Professor of Valmont Industries, 901 S. Marquette Ave. since 2002 and Economics, Carleton College Inc. (manufactures Minneapolis, MN 55402 Chair of the irrigation systems) Age 68 Board since 2007 - -----------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 75 INDEPENDENT BOARD MEMBERS (CONTINUED)
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION OTHER AGE LENGTH OF SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS - ----------------------------------------------------------------------------------------------------- Catherine James Paglia Board member Director, Enterprise Asset Strategic 901 S. Marquette Ave. since 2004 Management, Inc. (private real Distribution, Inc. Minneapolis, MN 55402 estate and asset management (transportation, Age 55 company) distribution and logistics consultants) - ----------------------------------------------------------------------------------------------------- Alison Taunton-Rigby Board member Chief Executive Officer, RiboNovix, Hybridon, Inc. 901 S. Marquette Ave. since 2002 Inc. since 2003 (biotechnology); (biotechnology); Minneapolis, MN 55402 former President, Forester Biotech American Healthways, Age 63 Inc. (health management programs) - -----------------------------------------------------------------------------------------------------
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 President -- U.S. Asset Management 53600 Ameriprise since 2001, and Chief Investment Officer, Financial Center Vice President Ameriprise Financial, Inc. and Minneapolis, MN 55474 since 2002 President, Chairman of the Board Age 47 and Chief Investment Officer, RiverSource Investments, LLC since 2005; President, Ameriprise Certificate Company since 2006; Senior Vice President -- Chief Investment Officer, Ameriprise Financial, Inc. and Chairman of the Board and Chief Investment Officer, RiverSource Investments, LLC, 2001-2005 - -----------------------------------------------------------------------------------------------------
* Interested person by reason of being an officer, director, security holder and/or employee of RiverSource Investments. The SAI has additional information about the Fund's Board members and is available, without charge, upon request by calling RiverSource Funds at (888) 791-3380; contacting your financial institution; or visiting riversource.com/funds. - -------------------------------------------------------------------------------- 76 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT The Board has appointed officers who are responsible for day-to-day business decisions based on policies it has established. The officers serve at the pleasure of the Board. In addition to Mr. Truscott, who is Vice President, the Fund's other officers are: FUND OFFICERS
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION AGE LENGTH OF SERVICE DURING PAST FIVE YEARS - ------------------------------------------------------------------------------------------ Patrick T. Bannigan President since Senior Vice President -- Asset Management, 172 Ameriprise 2006 RiverSource Investments, LLC since 2006; Financial Center Managing Director and Global Head of Product, Minneapolis, MN 55474 Morgan Stanley Investment Management, Age 41 2004-2006; President, Touchstone Investments, 2002-2004; Director of Strategic Planning, Evergreen Investments, 1995-2002 - ------------------------------------------------------------------------------------------ Michelle M. Keeley Vice President Executive Vice President -- Equity and Fixed 172 Ameriprise since 2004 Income, Ameriprise Financial, Inc. and Financial Center RiverSource Investments, LLC since 2006; Vice Minneapolis, MN 55474 President -- Investments, Ameriprise Age 43 Certificate Company since 2003; Senior Vice President -- Fixed Income, Ameriprise Financial, Inc., 2002-2006 and RiverSource Investments, LLC, 2004-2006; Managing Director, Zurich Global Assets, 2001-2002 - ------------------------------------------------------------------------------------------ Amy K. Johnson Vice President Vice President -- Asset Management and Trust 5228 Ameriprise since 2006 Company Services, RiverSource Investments, LLC Financial Center since 2006; Vice President -- Operations and Minneapolis, MN 55474 Compliance, RiverSource Investments, LLC, Age 42 2004-2006; Director of Product Development -- Mutual Funds, Ameriprise Financial, Inc., 2001-2004 - ------------------------------------------------------------------------------------------ Jeffrey P. Fox Treasurer since Vice President -- Investment Accounting, 105 Ameriprise 2002 Ameriprise Financial, Inc. since 2002; Vice Financial Center President -- Finance, American Express Minneapolis, MN 55474 Company, 2000-2002 Age 52 - ------------------------------------------------------------------------------------------ Scott R. Plummer Vice President, Vice President and Chief Counsel -- Asset 5228 Ameriprise General Counsel Management, Ameriprise Financial, Inc. since Financial Center and Secretary 2005; Vice President, General Counsel and Minneapolis, MN 55474 since 2006 Secretary, Ameriprise Certificate Company Age 48 since 2005; Vice President -- Asset Management Compliance, Ameriprise Financial, Inc., 2004-2005; Senior Vice President and Chief Compliance Officer, U.S. Bancorp Asset Management, 2002-2004; Second Vice President and Assistant General Counsel, Hartford Life, 2001-2002 - ------------------------------------------------------------------------------------------ Jennifer D. Lammers Chief Compliance U.S. Asset Management Chief Compliance 172 Ameriprise Officer since Officer, RiverSource Investments, LLC since Financial Center 2006 2006; Director -- Mutual Funds, Voyageur Asset Minneapolis, MN 55474 Management, 2003-2006; Director of Finance, Age 46 Voyageur Asset Management, 2000-2003 - ------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 77 FUND OFFICERS (CONTINUED)
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION AGE LENGTH OF SERVICE DURING PAST FIVE YEARS - ------------------------------------------------------------------------------------------ Neysa M. Alecu Money Laundering Compliance Director and Anti-Money Laundering 2934 Ameriprise Prevention Officer, Ameriprise Financial, Inc. since Financial Center Officer since 2004; Manager Anti-Money Laundering, Minneapolis, MN 55474 2004 Ameriprise Financial, Inc., 2003-2004; Age 43 Compliance Director and Bank Secrecy Act Officer, American Express Centurion Bank, 2000-2003 - ------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 78 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT APPROVAL OF INVESTMENT MANAGEMENT SERVICES AGREEMENT RiverSource Investments, LLC ("RiverSource"), 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 provides investment advice and other services to the Fund and all RiverSource funds (collectively, the "Funds"). The Fund's Board of Directors (the "Board") and the Board's Investment Review and Contracts Committees monitor these services throughout the year. On an annual basis, the Board, including the independent Board members (the "Independent Directors"), considers renewal of the IMS Agreement. RiverSource prepares detailed reports for the Board and its Contracts Committee in March and April, 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 addressing the services RiverSource provides and Fund performance. The Board accords particular weight to the work, deliberations and conclusions of the Contracts and Investment Review Committees in determining whether to continue the IMS Agreement. At the April 11-12, 2007 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: The Board analyzed various reports and presentations it had received detailing the services performed by RiverSource, as well as its expertise, resources and capabilities. The Board specifically considered many developments during the past year concerning the services provided by RiverSource, including, in particular, the growing strength and capabilities of many RiverSource offices and the increased investment and resources dedicated to the Fund's operations, particularly in the areas of trading systems, legal and compliance. Further, in connection with the Board's evaluation of the overall package of services provided by RiverSource, the Board considered the quality of the administrative, custody and transfer agency services provided by RiverSource affiliates to the Fund. The Board also reviewed the financial condition of RiverSource and the entity's ability to carry out its responsibilities under the IMS Agreement. 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). The Board concluded that the services being performed under the IMS Agreement were of a reasonably high quality. - -------------------------------------------------------------------------------- RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 79 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 determined that RiverSource was 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 (including since inception), recent Fund inflows (and outflows) and a comparison of the Fund's net assets from December 2006 to December 2005. The Board observed that the Fund's investment performance met expectations. Comparative Fees, Costs of Services Provided and the Profits Realized By RiverSource 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's profitability. 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, 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) was below the peer group's median expense ratio shown in the reports. Based on its review, the Board concluded that the Fund's management fee was fair and reasonable in light of the extent and quality of services that the Fund receives. The Board also considered the expected profitability of RiverSource and its affiliates in connection with RiverSource providing investment management services to the Fund. In this regard, the Board referred to a detailed profitability report, discussing the profitability to RiverSource and Ameriprise Financial from managing and operating the Fund, including data showing comparative profitability. 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 - -------------------------------------------------------------------------------- 80 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT 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 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 12, 2007, the Board, including all of the Independent Directors, approved the renewal of the IMS Agreement. 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 RiverSource Funds at (888) 791-3380; contacting your financial institution; 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 -- 2007 ANNUAL REPORT 81 CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM On April 12, 2007, Ernst & Young LLP was selected as the Fund's independent registered public accounting firm for the 2007 fiscal year. A majority of the Fund's Board of Directors, including a majority of the Independent Directors, approved the appointment of Ernst & Young LLP. The predecessor independent registered public accounting firm's reports on the Fund's financial statements for the year ended Aug. 31, 2006 and the year ended Aug. 31, 2005 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. During such fiscal periods and through April 12, 2007 there were no disagreements between the Fund and the predecessor independent registered public accounting firm on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which such disagreements, if not resolved to the satisfaction of the predecessor independent registered public accounting firm, would have caused them to make reference to the subject matter of the disagreement in connection with their reports on the financial statements for such fiscal periods. - -------------------------------------------------------------------------------- 82 RIVERSOURCE DIVERSIFIED BOND FUND -- 2007 ANNUAL REPORT EX-99.(17)(G) 8 c18637b1exv99wx17yxgy.txt ANNUAL REPORT Annual Report and Prospectus (RIVERSOURCE INVESTMENTS LOGO) RIVERSOURCE(R) CORE BOND FUND ANNUAL REPORT FOR THE PERIOD ENDED JULY 31, 2007 (Prospectus also enclosed) RIVERSOURCE CORE BOND FUND SEEKS TO PROVIDE SHAREHOLDERS WITH A HIGH TOTAL RETURN THROUGH CURRENT INCOME AND CAPITAL APPRECIATION. 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. LETTER TO SHAREHOLDERS Dear Fellow RiverSource Funds Shareholder: At RiverSource Funds, we are focused on delivering consistent and competitive investment results. Yet our commitment to shareholders extends beyond investment performance to include providing Insightful Solutions for Today's Investor(R). What this means is that we remain dedicated to offering innovative products such as our Advice-Built Solutions(SM) that are designed to help you achieve your financial goals. Our Advice-Built Solutions embed investment advice such as asset allocation and rebalancing into the investment management process. Advice-embedded solutions are among the fastest growing investment products in the financial industry in part because investors find them easy to understand and use in a portfolio. At RiverSource Funds, we have been at the forefront of this movement with innovative products such as our Income Builder, Portfolio Builder and Retirement Plus(SM) Series of funds in addition to RiverSource(R) Strategic Allocation Fund. Your financial professional provides a wide range of investment and planning services in addition to helping you select mutual funds for your portfolio. We encourage you to talk with your financial professional about our Advice-Built Solutions and how they may help you reach your specific goals whether you are saving for retirement or paying for future college expenses or health care expenses. Thank you for investing with RiverSource Funds and for your continued support. Sincerely, /s/ STEPHEN R. LEWIS, JR. /s/ PATRICK T. BANNIGAN Stephen R. Lewis, Jr. Patrick T. Bannigan Chairman of the Boards President, RiverSource Funds
YOU SHOULD CONSIDER THE INVESTMENT OBJECTIVES, RISKS, CHARGES AND EXPENSES OF A MUTUAL FUND CAREFULLY BEFORE INVESTING. FOR A FREE PROSPECTUS, WHICH CONTAINS THIS AND OTHER IMPORTANT INFORMATION ABOUT THE FUNDS, CALL (888) 791-3380. READ THE PROSPECTUS CAREFULLY BEFORE INVESTING. 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. - -------------------------------------------------------------------------------- THIS PAGE IS NOT PART OF THE ANNUAL REPORT TABLE OF CONTENTS Fund Snapshot....................... 3 Performance Summary................. 5 Questions & Answers with Portfolio Management........ 8 The Fund's Long-term Performance ... 12 Fund Expenses Example............... 14 Investments in Securities........... 17 Financial Statements................ 30 Notes to Financial Statements....... 36 Report of Independent Registered Public Accounting Firm........... 60 Federal Income Tax Information...... 61 Board Members and Officers.......... 66 Approval of Investment Management Services Agreement............... 70 Proxy Voting........................ 72 Change in Independent Registered Public Accounting Firm........... 72
(DALBAR LOGO) The RiverSource mutual fund shareholder reports have been awarded the Communications Seal from Dalbar Inc., an independent financial services research firm. The Seal recognizes communications demonstrating a level of excellence in the industry. - -------------------------------------------------------------------------------- 2 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT FUND SNAPSHOT AT JULY 31, 2007 FUND OBJECTIVE RiverSource Core Bond Fund seeks to provide shareholders with a high total return through current income and capital appreciation. SECTOR BREAKDOWN Percentage of portfolio assets (PIE CHART) Mortgage-Backed 38.9% U.S. Government Obligations & Agencies 18.3% Cash & Cash Equivalents 17.0% Corporate Bonds (1) 16.6% Commercial Mortgage-Backed 7.3% Asset-Backed 1.9%
(1) Includes Financials 7.1%, Telecommunication 3.7%, Utilities 2.0%, Consumer Discretionary 1.4%, Consumer Staples 1.4%, Energy 0.4%, Health Care 0.4% and Industrials 0.2%. QUALITY BREAKDOWN Percentage of bond portfolio assets (PIE CHART) AAA bonds 79.0% AA bonds 3.1% A bonds 5.3% BBB bonds 12.0% Non-investment grade bonds 0.6%
Bond ratings apply to 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 Fund's investment manager, rates a security using an internal rating system when Moody's doesn't provide a rating. There are risks associated with an investment in a bond fund, including the impact of interest rates and credit. These and other risk considerations are discussed in the fund's prospectus. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer-term securities. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 3 FUND SNAPSHOT AT JULY 31, 2007 STYLE MATRIX
DURATION SHORT INT. LONG X HIGH MEDIUM QUALITY LOW
Shading within the style matrix indicates areas in which the Fund generally invests. 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 serves 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 MANAGERS
YEARS IN INDUSTRY Jamie Jackson, CFA 19 Scott Kirby 28 Tom Murphy, CFA 21
FUND FACTS
TICKER SYMBOL INCEPTION DATE Class A ACBAX 06/19/03 Class B ABOBX 06/19/03 Class C -- 06/19/03 Class I ABDIX 03/04/04 Class R2 -- 12/11/06 Class R3 -- 12/11/06 Class R4(1) RSCFX 06/19/03 Class R5 -- 12/11/06 Class W RCBWX 12/01/06 (1) Effective Dec. 11, 2006, Class Y was renamed Class R4. Total net assets $309.8 million Number of holdings 320 Weighted average life(2) 7.5 years Effective duration(3) 4.7 years Weighted average bond rating(4) AA+
(2) 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. (3) 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. (4) WEIGHTED AVERAGE BOND RATING represents the average credit quality of the underlying bonds in the portfolio. - -------------------------------------------------------------------------------- 4 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT PERFORMANCE SUMMARY PERFORMANCE COMPARISON For the year ended July 31, 2007 (BAR CHART) RiverSource Core Bond Fund Class A (excluding sales charge) +4.75 Lehman Brothers Aggregate Bond Index (unmanaged) +5.58 Lipper Intermediate Investment Grade Debt Funds Index +5.07
(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 institution or visiting riversource.com/funds. The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart. If reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The indices do not reflect the effects of sales charges, expenses (excluding Lipper) and taxes. It is not possible to invest directly in an index. ANNUAL OPERATING EXPENSE RATIO (AS OF THE CURRENT PROSPECTUS)
TOTAL NET EXPENSES(A) Class A 1.09% 0.89% Class B 1.85% 1.65% Class C 1.85% 1.65% Class I 0.66% 0.50% Class R2(b) 1.45% 1.30% Class R3(b) 1.19% 1.05% Class R4(c) 0.95% 0.77% Class R5(b) 0.71% 0.55% Class W(d) 1.08% 0.95%
(a) The investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until July 31, 2008, unless sooner terminated at the discretion of the Fund's Board. Any amounts waived will not be reimbursed by the Fund. Under this agreement, net fund expenses (excluding fees and expenses of acquired funds), will not exceed 0.89% for Class A, 1.65% for Class B, 1.65% for Class C, 0.50% for Class I, 1.30% for Class R2, 1.05% for Class R3, 0.77% for Class R4, 0.55% for Class R5 and 0.95% for Class W. (b) Inception date for Class R2, Class R3 and Class R5 was Dec. 11, 2006. (c) Effective Dec. 11, 2006, Class Y was renamed Class R4. (d) Inception date for Class W was Dec. 1, 2006. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 5 PERFORMANCE SUMMARY AVERAGE ANNUAL TOTAL RETURNS
AT JULY 31, 2007 SINCE WITHOUT SALES CHARGE 1 YEAR 3 YEARS INCEPTION Class A (inception 6/19/03) +4.75% +3.39% +2.35% Class B (inception 6/19/03) +3.85% +2.60% +1.58% Class C (inception 6/19/03) +3.85% +2.59% +1.57% Class I (inception 3/4/04) +5.01% +3.68% +3.01% Class R2 (inception 12/11/06) N/A N/A +0.67%* Class R3 (inception 12/11/06) N/A N/A +0.83%* Class R4** (inception 6/19/03) +4.81% +3.52% +2.49% Class R5 (inception 12/11/06) N/A N/A +1.14%* Class W (inception 12/1/06) N/A N/A +0.58%* WITH SALES CHARGE Class A (inception 6/19/03) -0.22% +1.73% +1.15% Class B (inception 6/19/03) -1.15% +1.34% +1.14% Class C (inception 6/19/03) +2.85% +2.59% +1.57%
- -------------------------------------------------------------------------------- 6 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT PERFORMANCE SUMMARY
AT JUNE 30, 2007 SINCE WITHOUT SALES CHARGE 1 YEAR 3 YEARS INCEPTION Class A (inception 6/19/03) +5.40% +3.50% +2.25% Class B (inception 6/19/03) +4.60% +2.67% +1.48% Class C (inception 6/19/03) +4.60% +2.67% +1.47% Class I (inception 3/4/04) +5.88% +3.78% +2.92% Class R2 (inception 12/11/06) N/A N/A +0.08%* Class R3 (inception 12/11/06) N/A N/A +0.22%* Class R4** (inception 6/19/03) +5.57% +3.59% +2.38% Class R5 (inception 12/11/06) N/A N/A +0.49%* Class W (inception 12/1/06) N/A N/A +0.07%* WITH SALES CHARGE Class A (inception 6/19/03) +0.39% +1.83% +1.02% Class B (inception 6/19/03) -0.40% +1.40% +1.02% Class C (inception 6/19/03) +3.60% +2.67% +1.47%
Class A share performance reflects the maximum sales charge of 4.75%. Class B share performance reflects a contingent deferred sales charge (CDSC) applied as follows: first year 5%; second and third years 4%; fourth year 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 institutional investors only. Class W shares are offered through qualifying discretionary accounts. * Not annualized. ** Effective Dec. 11, 2006, Class Y was renamed Class R4. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 7 QUESTIONS & ANSWERS WITH PORTFOLIO MANAGEMENT Below, the portfolio management team for RiverSource Core Bond Fund discusses the Fund's results and positioning for the 12 months ended July 31, 2007. At July 31, 2007, approximately 84% of the Fund's shares were owned in the aggregate by affiliated funds-of-funds managed by RiverSource Investments, LLC (RiverSource). As a result of asset allocation decisions by RiverSource, it is possible RiverSource Core Bond Fund may experience relatively large purchases or redemptions from affiliated funds-of-funds (see page 46, Class I capital share transactions for related activity during the most recent fiscal period). RiverSource seeks to minimize the impact of these transactions by structuring them over a reasonable period of time. RiverSource Core Bond Fund may experience increased expenses as it buys and sells securities as a result of purchases or redemptions by affiliated funds-of-funds. For more information on the Fund's expenses, see the discussions beginning on pages 14 and 43. Q: How did RiverSource Core Bond Fund perform for the 12-month period? A: RiverSource Core Bond Fund's Class A shares (excluding sales charge) returned 4.75% for the 12 months ended July 31, 2007. The Fund underperformed its benchmark, the unmanaged Lehman Brothers Aggregate Bond Index (Lehman Index), which gained 5.58%. The Fund's peer group, as represented by the Lipper Intermediate Investment Grade Debt Funds Index, returned 5.07% during the same period. MODESTLY DECLINING INTEREST RATES, GENERALLY SOLID RETURNS FROM U.S. BONDS AND INCREASED VOLATILITY AMONG THE SPREAD SECTORS, OR NON-TREASURY SECTORS OF THE FIXED INCOME MARKET, HAD THE GREATEST IMPACT ON THE FUND. Q: What factors most significantly affected the Fund's performance? A: Modestly declining interest rates, generally solid returns from U.S. bonds and increased volatility among the spread sectors, or non-Treasury sectors of the fixed income market, had the greatest impact on the Fund. For much of the annual period, interest rates actually rose across the yield curve as the fixed income market dropped its expectations of Federal Reserve Board (Fed) easing later this year. However, in July 2007, the U.S. Treasury market rallied strongly. Investors flocked to the relative safety of Treasuries as other fixed income asset classes experienced notable volatility based on heightened concerns over subprime mortgage turmoil, hedge fund losses and the fear that - -------------------------------------------------------------------------------- 8 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT QUESTIONS & ANSWERS the turmoil in the credit markets would affect the broader economy. Bonds in credit-sensitive sectors were impacted most. Such increasingly risk-averse investor sentiment pushed U.S. Treasury yields lower across the yield curve. The Fed maintained its targeted federal funds rate at 5.25% throughout the period despite the fact that inflation remained at or above the Fed's stated comfort level. The Fed also anticipated greater economic growth over the second half of 2007. The Fund's tactical duration positioning relative to the Lehman Index contributed positively to its performance for the annual period overall. The Fund was well positioned with a shorter-than-Lehman Index duration when interest rates rose from November through January, and again in April through May. In response to these materially higher interest rates, we subsequently lengthened the Fund's duration from shorter than the Lehman Index to neutral to the Lehman Index in June. This proved prudent, as interest rates declined toward the end of the period. Duration is a measure of the Fund's sensitivity to changes in interest rates. Effective issue selection within mortgage-backed securities also helped Fund performance for the annual period, as adjustable-rate mortgages (ARMs) and higher-coupon mortgage-backed securities, where the Fund had an emphasis, outperformed the sector as a whole. Conversely, a significant allocation to commercial mortgage-backed securities detracted from performance, as this sector lagged the Lehman Index for the 12 months. Shifts in the Fund's exposure to investment grade corporate bonds also hurt its annual results, as this sector swung from outperformance to underperformance of the Lehman Index during the fiscal year. We increased the Fund's allocation to investment grade corporate bonds during the period, seeking to take advantage of what we believed to be temporary weakness in the sector. However, the move proved premature, as investment grade corporate bonds continued to perform poorly in the last two months of the period. Q: What changes did you make to the Fund's portfolio during the period? A: We tactically shifted the Fund's duration over the period between shorter than the Lehman Index and neutral to the Lehman Index in response to changes in the direction of interest rates. At the end of the period, the Fund had a duration relatively neutral to the Lehman Index. Also, we increased the Fund's exposure - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 9 QUESTIONS & ANSWERS to investment grade corporate bonds during the period. We also increased the Fund's already sizable allocations to high quality mortgage-backed securities, U.S. agency securities and commercial mortgage-backed securities, as we continue to believe that the weakness in these sectors seen toward the end of the period will be temporary. The Fund's portfolio turnover rate for the annual period was 347%.* DESPITE THE TURMOIL IN THE FIXED INCOME MARKET AT THE END OF JULY, THE FUNDAMENTAL ECONOMIC PICTURE REMAINED FAIRLY STRONG. Q: What is the Fund's tactical view and strategy for the months ahead? A: Despite the turmoil in the fixed income market at the end of July, the fundamental economic picture remained fairly strong. Recent reports on the labor market indicate continued strength and low unemployment, as well as solid gains in real wages. In addition, broad measures of both consumer and wholesale prices indicated that inflation rates exceed the Fed's stated 1% to 2% comfort zone. We believe interest rates may resume their migration higher over the coming months, supported by the Fed staying on hold. Given this view, we intend to maintain the Fund's neutral duration positioning relative to the Lehman Index for the near term. We further intend to maintain a disciplined focus on individual security selection, as we believe there remain pockets of opportunities to add value through investment grade corporate bonds, commercial mortgage-backed securities and agency securities. We continue to favor investment in these non-Treasury sectors over U.S. Treasuries. Within mortgage-backed securities, we intend to maintain the Fund's emphasis on AAA-rated agency pass-through mortgages with premium coupons as a defensive strategy with respect to higher interest rates and widening credit spreads. * A significant portion of the turnover was the result of "roll" transactions in the liquid derivatives and Treasury securities. In the derivative transactions, positions in expiring contracts are liquidated and simultaneously replaced with positions in new contracts with equivalent characteristics. In the Treasury transactions, existing holdings are sold to purchase newly issued securities with slightly longer maturity dates. Although these transactions affect the turnover rate of the portfolio, they do not change the risk exposure or result in material transaction costs. The remaining turnover resulted from strategic reallocations and relative value trading. After transaction costs, we expect this activity to enhance the returns on the overall Fund. - -------------------------------------------------------------------------------- 10 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT QUESTIONS & ANSWERS Given the volatility of the fixed income market of late, we will continue to closely monitor Fed policy shifts, economic data releases, supply/demand factors and interest rate movements, and adjust the Fund's holdings and duration stance if necessary. 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 RiverSource Fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any RiverSource Fund. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 11 THE FUND'S LONG-TERM PERFORMANCE The chart on the facing page illustrates the total value of an assumed $10,000 investment in RiverSource Core Bond Fund Class A shares (from 7/1/03 to 7/31/07)* as compared to the performance of two widely cited performance indices, the Lehman Brothers Aggregate Bond Index and the Lipper Intermediate Investment Grade Debt Funds Index. In comparing the Fund's Class A shares to these indices, you should take into account the fact that the Fund's performance reflects the maximum sales charge of 4.75%, while such charges are not reflected in the performance of the indices. Returns for the Fund include the reinvestment of any distribution paid during each period. The performance information shown represents past performance and is not a guarantee of future results. The 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 institution or visiting riversource.com/funds. Also see "Past Performance" in the Fund's current prospectus. * Fund data is from June 19, 2003. Lehman Brothers Aggregate Bond Index and Lipper peer group data is from July 1, 2003. COMPARATIVE RESULTS
SINCE Results at July 31, 2007 1 YEAR 3 YEARS INCEPTION(3) RIVERSOURCE CORE BOND FUND (INCLUDES SALES CHARGE) Class A Cumulative value of $10,000 $9,978 $10,528 $10,481 Average annual total return -0.22% +1.73% +1.15% LEHMAN BROTHERS AGGREGATE BOND INDEX(1) Cumulative value of $10,000 $10,558 $11,226 $11,373 Average annual total return +5.58% +3.93% +3.20% LIPPER INTERMEDIATE INVESTMENT GRADE DEBT FUNDS INDEX(2) Cumulative value of $10,000 $10,507 $11,177 $11,347 Average annual total return +5.07% +3.78% +3.14%
- -------------------------------------------------------------------------------- 12 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT (VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN RIVERSOURCE CORE BOND FUND LINE GRAPH)
RIVERSOURCE CORE BOND FUND LIPPER INTERMEDIATE INVESTMENT CLASS A (INCLUDES SALES CHARGE) LEHMAN BROTHERS AGGREGATE GRADE DEBT FUNDS INDEX(2) ($10,481) BOND INDEX(1) ($11,373) ($11,347) ------------------------------- ------------------------- ------------------------------ 7/1/03 9,525 10,000 10,000 7/03 9,114 9,664 9,663 7/04 9,484 10,132 10,151 7/05 9,894 10,617 10,653 7/06 10,006 10,772 10,799 7/07 10,481 11,373 11,347
(1) The Lehman Brothers Aggregate Bond Index, an unmanaged index, is made up of a representative list of government, corporate, asset-backed and mortgage-backed securities. The index is frequently used as a general measure of bond market performance. The index reflects reinvestment of all distributions and changes in market prices. (2) The Lipper Intermediate Investment Grade Debt Funds Index includes the 30 largest investment grade funds tracked by Lipper Inc. The index's returns include net reinvested dividends. (3) Fund data is from June 19, 2003. Lehman Brothers Aggregate Bond Index and Lipper peer group data is from July 1, 2003. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 13 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 acquired funds expense ratio as of the 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 July 31, 2007. 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. - -------------------------------------------------------------------------------- 14 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT
BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED FEB. 1, 2007 JULY 31, 2007 THE PERIOD(A) EXPENSE RATIO Class A Actual(b) $1,000 $1,015.90 $4.45(c) .89% Hypothetical (5% return before expenses) $1,000 $1,020.38 $4.46(c) .89% Class B Actual(b) $1,000 $1,011.00 $8.23(c) 1.65% Hypothetical (5% return before expenses) $1,000 $1,016.61 $8.25(c) 1.65% Class C Actual(b) $1,000 $1,011.00 $8.18(c) 1.64% Hypothetical (5% return before expenses) $1,000 $1,016.66 $8.20(c) 1.64% Class I Actual(b) $1,000 $1,016.60 $2.70(c) .54% Hypothetical (5% return before expenses) $1,000 $1,022.12 $2.71(c) .54% Class R2 Actual(b) $1,000 $1,012.80 $6.49(c) 1.30% Hypothetical (5% return before expenses) $1,000 $1,018.35 $6.51(c) 1.30% Class R3 Actual(b) $1,000 $1,014.00 $5.24(c) 1.05% Hypothetical (5% return before expenses) $1,000 $1,019.59 $5.26(c) 1.05% Class R4* Actual(b) $1,000 $1,015.60 $3.65(c) .73% Hypothetical (5% return before expenses) $1,000 $1,021.17 $3.66(c) .73% Class R5 Actual(b) $1,000 $1,016.60 $2.75(c) .55% Hypothetical (5% return before expenses) $1,000 $1,022.07 $2.76(c) .55%
- -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 15
BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED FEB. 1, 2007 JULY 31, 2007 THE PERIOD(A) EXPENSE RATIO Class W Actual(b) $1,000 $1,014.60 $4.75(c) .95% Hypothetical (5% return before expenses) $1,000 $1,020.08 $4.76(c) .95%
* Effective Dec. 11, 2006, Class Y was renamed Class R4. (a) Expenses are equal to the Fund's annualized expense ratio as indicated above, multiplied by the average account value over the period, multiplied by 181/365 (to reflect the one-half year period). (b) Based on the actual return for the six months ended July 31, 2007: +1.59% for Class A, +1.10% for Class B, +1.10% for Class C, +1.66% for Class I, +1.28% for Class R2, +1.40% for Class R3, +1.56% for Class R4, +1.66%. for Class R5 and +1.46% for Class W. (c) The investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until July 31, 2008, 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 0.89% for Class A, 1.65% for Class B, 1.65% for Class C, 0.50% for Class I, 1.30% for Class R2, 1.05% for Class R3, 0.77% for Class R4, 0.55% for Class R5 and 0.95% for Class W. Any amounts waived will not be reimbursed by the Fund. This change was effective Aug. 1, 2007. If this change had been in place for the entire six month period ended July 31, 2007, the actual expenses paid would have been $8.23 for Class C, $2.50 for Class I and $3.85 for Class R4; the hypothetical expenses paid would have been $8.25 for Class C, $2.51 for Class I and $3.86 for Class R4; the actual and hypothetical expenses paid for Class A, Class B, Class R2, Class R3, Class R5 and Class W would have been the same as those expenses presented in the table above. - -------------------------------------------------------------------------------- 16 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT INVESTMENTS IN SECURITIES JULY 31, 2007 (Percentages represent value of investments compared to net assets)
BONDS (96.6%) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) U.S. GOVERNMENT OBLIGATIONS & AGENCIES (21.4%) Federal Farm Credit Bank 10-10-08 4.25% $660,000 $654,488 Federal Home Loan Bank 02-08-08 4.63 2,100,000 2,092,726 09-12-08 4.25 2,215,000 2,196,310 Federal Home Loan Mtge Corp 06-15-08 3.88 3,890,000 3,847,871 03-15-09 5.75 470,000 475,890 07-12-10 4.13 2,371,000 2,314,366 03-15-31 6.75 1,430,000 1,648,787 04-16-37 6.00 3,615,000 3,522,362 Federal Natl Mtge Assn 01-15-08 3.25 1,750,000 1,734,548 06-15-08 5.25 1,750,000 1,751,295 02-16-12 5.00 3,215,000 3,199,922 05-18-12 4.88 4,865,000 4,811,728 11-15-30 6.63 6,900,000 7,832,777 07-15-37 5.63 1,595,000 1,613,630 U.S. Treasury 11-30-07 4.25 5,000 4,988 06-30-09 4.88 10,705,000 10,762,711 07-31-09 4.63 1,060,000 1,061,242 06-30-12 4.88 3,905,000 3,950,150 05-15-17 4.50 1,295,000 1,267,380 02-15-26 6.00 6,065,000 6,776,691 U.S. Treasury Inflation-Indexed Bond 01-15-14 2.00 4,997,491(e) 4,849,297 --------------- Total 66,369,159 - ----------------------------------------------------------------------------------- ASSET-BACKED (2.2%) Capital Auto Receivables Asset Trust Series 2004-1 Cl CTFS 09-15-10 2.84 200,000 199,772 Capital Auto Receivables Asset Trust Series 2006-SN1A Cl D 04-20-11 6.15 200,000(d) 202,053
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) ASSET-BACKED (CONT.) College Loan Trust Collateralized Mtge Obligation Interest Only Series 2006-1 Cl AIO 07-25-08 5.62% $1,025,000(h) $96,854 Countrywide Asset-backed Ctfs Series 2005-10 Cl AF6 02-25-36 4.92 95,000 90,862 Countrywide Asset-backed Ctfs Series 2006-4 Cl 1A1M 07-25-36 5.58 153,711(i) 153,189 Countrywide Asset-backed Ctfs Series 2007-7 Cl 2A2 10-25-37 5.48 750,000(i) 745,430 Dunkin Securitization Series 2006-1 Cl A2 (AMBAC) 06-20-31 5.78 700,000(d,j) 706,760 Franklin Auto Trust Series 2004-1 Cl A3 (MBIA) 03-15-12 4.15 83,871(j) 83,335 Hertz Vehicle Financing LLC Series 2004-1A Cl A3 (MBIA) 05-25-09 2.85 200,000(d,j) 197,607 Keycorp Student Loan Trust Series 2003-A Cl 2A2 (MBIA) 10-25-25 5.67 1,209,787(i,j) 1,215,268 Natl Collegiate Student Loan Trust Collateralized Mtge Obligation Interest Only Series 2006-2 Cl AIO 08-25-11 5.88 650,000(h) 137,137 Natl Collegiate Student Loan Trust Collateralized Mtge Obligation Interest Only Series 2006-3 Cl AIO 01-25-12 5.88 1,100,000(h) 292,655
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 17
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) ASSET-BACKED (CONT.) Natl Collegiate Student Loan Trust Collateralized Mtge Obligation Interest Only Series 2007-2 Cl AIO 07-25-12 5.90% $550,000(h) $156,112 Popular ABS Mtge Pass-Through Trust Series 2005-A Cl AF2 06-25-35 4.49 23,585 23,485 Renaissance Home Equity Loan Trust Series 2005-4 Cl A3 02-25-36 5.57 275,000 274,126 Renaissance Home Equity Loan Trust Series 2007-2 Cl M4 06-25-37 6.31 120,000 113,220 Renaissance Home Equity Loan Trust Series 2007-2 Cl M5 06-25-37 6.66 80,000 75,363 Renaissance Home Equity Loan Trust Series 2007-2 Cl M6 06-25-37 7.01 115,000 112,107 Residential Asset Securities Series 2006-KS1 Cl A2 02-25-36 5.46 605,000(i) 602,731 Residential Asset Securities Series 2007-KS3 Cl AI2 04-25-37 5.50 1,050,000(i) 1,049,212 SBA CMBS Trust Series 2006-1A Cl B 11-15-36 5.45 300,000(d) 296,580 WFS Financial Owner Trust Series 2004-1 Cl D 08-22-11 3.17 14,953 14,928 --------------- Total 6,838,786 - ----------------------------------------------------------------------------------- COMMERCIAL MORTGAGE-BACKED (8.5%)(f) Banc of America Commercial Mtge Series 2005-1 Cl A4 11-10-42 5.02 225,000 221,009 Banc of America Commercial Mtge Series 2007-1 Cl A3 01-15-49 5.45 450,000 439,449 Bear Stearns Commercial Mtge Securities Series 2003-T10 Cl A1 03-13-40 4.00 294,433 285,268
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) COMMERCIAL MORTGAGE-BACKED (CONT.) Bear Stearns Commercial Mtge Securities Series 2004-PWR5 Cl A3 07-11-42 4.57% $325,000 $314,147 Bear Stearns Commercial Mtge Securities Series 2007-T26 Cl A4 01-12-45 5.47 475,000 466,835 CDC Commercial Mtge Trust Series 2002-FX1 Cl A2 11-15-30 5.68 750,000 755,467 Citigroup Commercial Mtge Trust Series 2005-EMG Cl A1 09-20-51 4.15 219,138(d) 216,042 Citigroup/Deutsche Bank Commercial Mtge Trust Series 2005-CD1 Cl ASB 07-15-44 5.23 175,000 171,454 Commercial Mtge Pass-Through Ctfs Series 2006-CN2A Cl BFL 02-05-19 5.63 150,000(d,i) 150,533 Commercial Mtge Pass-Through Ctfs Series 2007-FL14 Cl MKL1 06-15-22 6.12 875,000(d,i) 873,906 Credit Suisse Mtge Capital Ctfs Series 2006-C2 Cl A3 03-15-39 5.66 375,000 370,162 CS First Boston Mtge Securities Series 2003-CPN1 Cl A2 03-15-35 4.60 275,000 261,282 Federal Natl Mtge Assn #386558 10-01-10 4.85 475,039 471,151 Federal Natl Mtge Assn #725217 02-01-14 4.72 1,172,889 1,141,259 Federal Natl Mtge Assn #735029 09-01-13 5.28 479,218 479,454 GE Capital Commercial Mtge Series 2005-C1 Cl A5 06-10-48 4.77 400,000 375,076 General Electric Capital Assurance Series 2003-1 Cl A3 05-12-35 4.77 525,000(d) 517,888 Greenwich Capital Commercial Funding Series 2004-GG1 Cl A5 06-10-36 4.88 150,000 147,145 Greenwich Capital Commercial Funding Series 2007-GG9 Cl A4 03-10-39 5.44 700,000 673,456
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 18 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) COMMERCIAL MORTGAGE-BACKED (CONT.) GS Mtge Securities II Series 2004-GG2 Cl A4 08-10-38 4.96% $250,000 $245,898 GS Mtge Securities II Series 2006-GG6 Cl A4 04-10-38 5.55 375,000 366,712 GS Mtge Securities II Series 2007-EOP Cl J 03-06-20 6.17 500,000(d,i) 495,000 GS Mtge Securities II Series 2007-GG10 Cl A4 08-10-45 5.99 1,250,000 1,235,486 GS Mtge Securities II Series 2007-GG10 Cl F 08-10-45 5.99 375,000 368,393 JPMorgan Chase Commercial Mtge Securities Series 2003-LN1 Cl A1 10-15-37 4.13 178,895 172,920 JPMorgan Chase Commercial Mtge Securities Series 2003-ML1A Cl A1 03-12-39 3.97 159,027 154,861 JPMorgan Chase Commercial Mtge Securities Series 2003-ML1A Cl A2 03-12-39 4.77 525,000 502,110 JPMorgan Chase Commercial Mtge Securities Series 2004-C2 Cl A2 05-15-41 5.26 325,000 320,533 JPMorgan Chase Commercial Mtge Securities Series 2004-CBX Cl A3 01-12-37 4.18 150,000 146,068 JPMorgan Chase Commercial Mtge Securities Series 2004-LN2 Cl A1 07-15-41 4.48 677,766 657,733 JPMorgan Chase Commercial Mtge Securities Series 2006-LDP6 Cl A4 04-15-43 5.48 750,000 727,919 JPMorgan Chase Commercial Mtge Securities Series 2006-LDP6 Cl ASB 04-15-43 5.49 750,000 739,767 JPMorgan Chase Commercial Mtge Securities Series 2007-LDPX Cl A3 01-15-49 5.42 700,000 671,371 LB-UBS Commercial Mtge Trust Series 2002-C4 Cl A4 09-15-26 4.56 200,000 195,204
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) COMMERCIAL MORTGAGE-BACKED (CONT.) LB-UBS Commercial Mtge Trust Series 2002-C4 Cl A5 09-15-31 4.85% $500,000 $483,143 LB-UBS Commercial Mtge Trust Series 2004-C2 Cl A3 03-15-29 3.97 225,000 213,530 LB-UBS Commercial Mtge Trust Series 2005-C5 Cl AAB 09-15-30 4.93 1,200,000 1,170,372 LB-UBS Commercial Mtge Trust Series 2006-C4 Cl AAB 06-15-32 5.86 975,000 983,278 LB-UBS Commercial Mtge Trust Series 2007-C1 Cl A4 02-15-40 5.42 375,000 359,452 Merrill Lynch Mtge Trust Series 2005-CKI1 Cl A1 11-12-37 5.08 1,246,354 1,241,879 Morgan Stanley Capital I Series 2003-T11 Cl A2 06-13-41 4.34 1,325,000 1,301,762 Morgan Stanley Capital I Series 2004-HQ4 Cl A5 04-14-40 4.59 250,000 242,030 Morgan Stanley Capital I Series 2006-T23 Cl AAB 08-12-41 5.97 250,000 251,451 Wachovia Bank Commercial Mtge Trust Series 2003-C7 Cl A2 10-15-35 5.08 1,100,000(d) 1,061,234 Wachovia Bank Commercial Mtge Trust Series 2005-C18 Cl A4 04-15-42 4.94 300,000 283,307 Wachovia Bank Commercial Mtge Trust Series 2005-C20 Cl A5 07-15-42 5.09 300,000 293,772 Wachovia Bank Commercial Mtge Trust Series 2006-C27 Cl A3 07-15-45 5.77 225,000 221,289 Wachovia Bank Commercial Mtge Trust Series 2006-C27 Cl APB 07-15-45 5.73 400,000 396,462 Wachovia Bank Commercial Mtge Trust Series 2006-C29 Cl A4 11-15-48 5.31 900,000 858,340
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 19
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) COMMERCIAL MORTGAGE-BACKED (CONT.) Wachovia Bank Commercial Mtge Trust Series 2007-C31 Cl A4 04-15-47 5.51% $1,775,000 $1,708,081 --------------- Total 26,400,340 - ----------------------------------------------------------------------------------- MORTGAGE-BACKED (45.5%)(f) Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2005-12 Cl 2A1 03-25-36 5.69 458,521(g) 460,115 Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2006-1 Cl 2A1 03-25-36 5.94 553,191(g) 553,673 Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2007-1 Cl 3A21 03-25-37 6.19 555,000(g) 558,200 American Home Mtge Assets Collateralized Mtge Obligation Series 2007-2 Cl A2A 03-25-47 5.49 898,898(g) 896,060 Banc of America Alternative Loan Trust Collateralized Mtge Obligation Series 2003-11 Cl 1A1 01-25-34 6.00 103,365 103,209 Banc of America Alternative Loan Trust Collateralized Mtge Obligation Series 2003-11 Cl 4A1 01-25-19 4.75 180,502 172,125 Banc of America Alternative Loan Trust Collateralized Mtge Obligation Series 2006-9 Cl 1CB1 01-25-37 6.00 1,401,354 1,374,360 Banc of America Funding Collateralized Mtge Obligation Series 2006-2 Cl N1 11-25-46 7.25 66,397(d) 64,903 Banc of America Funding Collateralized Mtge Obligation Series 2006-A Cl 3A2 02-20-36 5.90 447,540(g) 448,914
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Bear Stearns Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2005-8 Cl A4 08-25-35 5.09% $450,000(d,g) $432,111 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Interest Only Series 2007-8CB Cl A13 05-25-37 7.73 478,657(h) 81,783 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2003-11T1 Cl A1 07-25-18 4.75 144,443 137,740 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2003-20CB Cl 1A1 10-25-33 5.50 2,219,404 2,122,031 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-54CB Cl 2A3 11-25-35 5.50 308,494 307,902 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-54CB Cl 3A7 11-25-35 5.50 311,614 311,020 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-64CB Cl 1A1 12-25-35 5.50 644,935 644,788 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-6CB Cl 1A1 04-25-35 7.50 262,748 272,488 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-85CB Cl 2A2 02-25-36 5.50 235,648 234,952 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-22R Cl 1A2 05-25-36 6.00 773,865 780,002 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-2CB Cl A11 03-25-36 6.00 627,495 625,776
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 20 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-31CB Cl A16 11-25-36 6.00% $1,200,000 $1,215,684 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-43CB Cl 1A4 02-25-37 6.00 965,397 972,705 Countrywide Home Loans Collateralized Mtge Obligation Series 2005-R2 Cl 2A1 06-25-35 7.00 323,819(d) 337,901 Countrywide Home Loans Collateralized Mtge Obligation Series 2006-HYB1 Cl 1A1 03-20-36 5.36 638,521(g) 638,725 Deutsche Bank Alternate Mtge Loan Trust Collateralized Mtge Obligation Series 2007-AR3 Cl 2A1 05-25-37 5.43 460,509(g) 460,750 Downey Savings & Loan Assn Mtge Loan Trust Collateralized Mtge Obligation Interest Only Series 2005-AR5 Cl X1 08-19-45 0.12 2,360,026(h) 23,600 Federal Home Loan Mtge Corp 08-01-37 6.00 3,785,000(b) 3,754,248 08-01-37 6.50 6,000,000(b) 6,067,501 Federal Home Loan Mtge Corp #1J0283 02-01-37 5.83 810,210(g) 810,783 Federal Home Loan Mtge Corp #1J1445 01-01-37 5.90 1,224,630(g) 1,229,749 Federal Home Loan Mtge Corp #A12692 10-01-32 6.00 127,526 127,904 Federal Home Loan Mtge Corp #A13854 09-01-33 6.00 141,467 141,420 Federal Home Loan Mtge Corp #A62695 06-01-37 6.00 1,997,915 1,983,139 Federal Home Loan Mtge Corp #B10254 10-01-18 5.50 437,147 433,482 Federal Home Loan Mtge Corp #B12280 02-01-19 5.50 230,387 228,456 Federal Home Loan Mtge Corp #C02951 07-01-37 6.50 3,000,000(b) 3,034,148
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Home Loan Mtge Corp #C59161 10-01-31 6.00% $133,738 $133,518 Federal Home Loan Mtge Corp #C77372 03-01-33 6.00 260,479 260,353 Federal Home Loan Mtge Corp #C90613 01-01-23 5.00 148,000 141,785 Federal Home Loan Mtge Corp #C90683 06-01-23 5.00 152,018 145,634 Federal Home Loan Mtge Corp #C90767 12-01-23 6.00 129,528 130,212 Federal Home Loan Mtge Corp #E74288 12-01-13 6.00 180,073 181,837 Federal Home Loan Mtge Corp #E98725 08-01-18 5.00 160,399 156,347 Federal Home Loan Mtge Corp #G01410 04-01-32 7.00 294,846 304,073 Federal Home Loan Mtge Corp #G02757 06-01-36 5.00 2,157,631 2,029,800 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 237 Cl IO 05-15-36 9.81 317,668(h) 86,253 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2718 Cl IA 10-15-22 20.00 92,246(h) 2,414 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2795 Cl IY 07-15-17 12.98 416,814(h) 41,893 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2817 Cl SA 06-15-32 18.97 603,103(h) 32,028 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Series 2576 Cl KJ 02-15-33 5.50 169,683 170,119
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 21
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Home Loan Mtge Corp Collateralized Mtge Obligation Series 2641 Cl KC 01-15-18 6.50% $170,981 $175,451 Federal Natl Mtge Assn 08-01-22 5.00 2,500,000(b) 2,423,438 08-01-22 5.50 3,000,000(b) 2,962,500 08-01-22 6.00 2,275,000(b) 2,288,509 08-01-37 5.00 2,000,000(b) 1,875,624 08-01-37 5.50 7,000,000(b) 6,759,376 08-01-37 6.00 7,000,000(b) 6,934,376 08-01-37 7.00 7,500,000(b) 7,703,911 09-01-37 6.00 3,300,000(b) 3,267,000 Federal Natl Mtge Assn #252440 05-01-29 7.00 214,485 222,536 Federal Natl Mtge Assn #254587 12-01-22 5.50 588,529 576,572 Federal Natl Mtge Assn #254916 09-01-23 5.50 446,382 437,257 Federal Natl Mtge Assn #255788 06-01-15 5.50 634,598 636,808 Federal Natl Mtge Assn #256135 02-01-36 5.50 3,858,265 3,703,771 Federal Natl Mtge Assn #323715 05-01-29 6.00 452,792 452,272 Federal Natl Mtge Assn #493945 04-01-29 6.50 93,115 94,792 Federal Natl Mtge Assn #518159 09-01-14 7.00 406,922 419,544 Federal Natl Mtge Assn #545216 03-01-09 5.89 103,281 103,425 Federal Natl Mtge Assn #545868 08-01-32 7.00 102,114 106,143 Federal Natl Mtge Assn #555340 04-01-33 5.50 283,517 275,473 Federal Natl Mtge Assn #555528 04-01-33 6.00 1,579,930 1,574,781 Federal Natl Mtge Assn #555734 07-01-23 5.00 95,777 91,579 Federal Natl Mtge Assn #555740 08-01-18 4.50 167,512 160,334 Federal Natl Mtge Assn #555794 09-01-28 7.50 86,521 90,639 Federal Natl Mtge Assn #582154 05-01-31 6.50 123,851 126,310
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #597374 09-01-31 7.00% $110,023 $114,910 Federal Natl Mtge Assn #611831 02-01-31 7.50 43,871 45,932 Federal Natl Mtge Assn #615135 11-01-16 6.00 281,100 283,286 Federal Natl Mtge Assn #646147 06-01-32 7.00 699,755 731,998 Federal Natl Mtge Assn #650009 09-01-31 7.50 98,374 102,996 Federal Natl Mtge Assn #654208 10-01-32 6.50 239,376 243,667 Federal Natl Mtge Assn #661815 10-01-32 6.00 148,874 148,655 Federal Natl Mtge Assn #662061 09-01-32 6.50 1,009,647 1,027,745 Federal Natl Mtge Assn #667604 10-01-32 5.50 278,518 270,382 Federal Natl Mtge Assn #677089 01-01-33 5.50 641,586 622,845 Federal Natl Mtge Assn #678028 09-01-17 6.00 146,121 147,226 Federal Natl Mtge Assn #681080 02-01-18 5.00 1,084,250 1,056,667 Federal Natl Mtge Assn #681166 04-01-32 6.50 423,861 432,278 Federal Natl Mtge Assn #683100 02-01-18 5.50 191,231 189,846 Federal Natl Mtge Assn #683116 02-01-33 6.00 269,261 268,384 Federal Natl Mtge Assn #689026 05-01-33 5.50 1,151,540 1,118,204 Federal Natl Mtge Assn #689093 07-01-28 5.50 123,838 120,328 Federal Natl Mtge Assn #704005 05-01-33 5.50 1,103,657 1,071,249 Federal Natl Mtge Assn #705655 05-01-33 5.00 490,478 462,677 Federal Natl Mtge Assn #709093 06-01-33 6.00 180,882 180,163 Federal Natl Mtge Assn #709901 06-01-18 5.00 531,414 518,243 Federal Natl Mtge Assn #711503 06-01-33 5.50 136,137 132,651
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 22 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #712057 07-01-18 4.50% $81,255 $77,777 Federal Natl Mtge Assn #720378 06-01-18 4.50 169,706 162,443 Federal Natl Mtge Assn #725232 03-01-34 5.00 1,141,124 1,076,444 Federal Natl Mtge Assn #725424 04-01-34 5.50 1,850,536 1,796,196 Federal Natl Mtge Assn #725425 04-01-34 5.50 1,791,982(b) 1,739,475 04-01-34 5.50 1,346,244 1,306,798 Federal Natl Mtge Assn #725431 08-01-15 5.50 152,894 152,124 Federal Natl Mtge Assn #725684 05-01-18 6.00 336,534 339,334 Federal Natl Mtge Assn #725719 07-01-33 4.85 252,618(g) 248,252 Federal Natl Mtge Assn #725773 09-01-34 5.50 1,774,975 1,720,506 Federal Natl Mtge Assn #726940 08-01-23 5.50 79,516 77,695 Federal Natl Mtge Assn #735212 12-01-34 5.00 1,842,194 1,736,408 Federal Natl Mtge Assn #735841 11-01-19 4.50 1,864,933 1,782,531 Federal Natl Mtge Assn #743347 10-01-33 6.00 101,901 101,828 Federal Natl Mtge Assn #743579 11-01-33 5.50 305,607 296,633 Federal Natl Mtge Assn #745392 12-01-20 4.50 1,019,643 974,590 Federal Natl Mtge Assn #745563 08-01-34 5.50 1,525,070 1,480,287 Federal Natl Mtge Assn #753074 12-01-28 5.50 199,606 193,948 Federal Natl Mtge Assn #757581 01-01-19 5.50 999,070 990,760 Federal Natl Mtge Assn #765760 02-01-19 5.00 246,260 239,995 Federal Natl Mtge Assn #779676 06-01-34 5.00 2,361,390 2,225,789 Federal Natl Mtge Assn #815264 05-01-35 5.23 710,962(g) 703,052 Federal Natl Mtge Assn #829227 08-01-35 6.00 1,436,499 1,425,995
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #831870 11-01-36 6.50% $1,975,210 $1,995,379 Federal Natl Mtge Assn #848482 12-01-35 6.00 3,029,646(b) 3,004,557 Federal Natl Mtge Assn #878661 02-01-36 5.50 1,856,296 1,784,030 Federal Natl Mtge Assn #881629 02-01-36 5.50 1,217,201 1,169,816 Federal Natl Mtge Assn #883201 07-01-36 6.50 874,862 888,313 Federal Natl Mtge Assn #886291 07-01-36 7.00 877,572 907,607 Federal Natl Mtge Assn #886464 08-01-36 6.50 2,030,876 2,051,613 Federal Natl Mtge Assn #915770 03-01-37 6.50 3,190,188(b) 3,222,513 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-63 Cl IP 07-25-33 12.58 1,316,452(h) 322,537 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-71 Cl IM 12-25-31 12.80 233,683(h) 42,737 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2004-84 Cl GI 12-25-22 11.02 135,743(h) 19,735 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2005-92 CL SC 10-25-35 17.41 2,212,292(h) 111,986 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 367 Cl 2 01-01-36 9.52 1,440,669(h) 389,438 Federal Natl Mtge Assn Collateralized Mtge Obligation Series 2003-133 Cl GB 12-25-26 8.00 143,822 152,373
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 23
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Govt Natl Mtge Assn #567717 06-15-32 7.50% $15,588 $16,305 Govt Natl Mtge Assn #604708 10-15-33 5.50 105,669 103,183 Harborview Mtge Loan Trust Collateralized Mtge Obligation Series 2005-16 Cl 3A1B 01-19-36 5.66 346,830(g) 346,828 Harborview Mtge Loan Trust Collateralized Mtge Obligation Series 2006-8 Cl 2A1B 08-21-36 5.57 1,116,511(g) 1,116,123 Harborview Nim Collateralized Mtge Obligation Series 2006-10 Cl N1 11-19-36 6.41 87,037(d) 86,956 Harborview Nim Collateralized Mtge Obligation Series 2006-8A Cl N1 07-21-36 6.41 10,554(d) 10,462 IndyMac Index Mtge Loan Trust Collateralized Mtge Obligation Interest Only Series 2005-AR8 Cl AX1 04-25-35 4.50 5,188,201(h) 37,290 IndyMac Index Mtge Loan Trust Collateralized Mtge Obligation Series 2005-AR25 Cl 1A21 12-25-35 5.85 372,140(g) 369,189 IndyMac Index Mtge Loan Trust Collateralized Mtge Obligation Series 2007-AR5 Cl 1A1 05-25-37 6.37 1,052,968(g) 1,069,352 IndyMac Index Nim Collateralized Mtge Obligation Series 2006-AR6 Cl N1 06-25-46 6.65 59,511(d) 59,288 Lehman XS Net Interest Margin Nts Collateralized Mtge Obligation Series 2006-GPM6 Cl A1 10-28-46 6.25 140,047(d) 139,612 Lehman XS Trust Collateralized Mtge Obligation Series 2007-5H Cl 1A1 05-25-37 6.50 2,361,748 2,386,468
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Master Alternative Loans Trust Collateralized Mtge Obligation Series 2004-2 Cl 4A1 02-25-19 5.00% $405,539 $390,396 Master Alternative Loans Trust Collateralized Mtge Obligation Series 2004-4 Cl 2A1 05-25-34 6.00 144,313 144,407 Master Alternative Loans Trust Collateralized Mtge Obligation Series 2004-7 Cl 8A1 08-25-19 5.00 164,555 160,091 Master Alternative Loans Trust Collateralized Mtge Obligation Series 2004-8 Cl 7A1 09-25-19 5.00 239,651 232,718 Master Alternative Loans Trust Collateralized Mtge Obligation Series 2005-3 Cl 1A2 04-25-35 5.50 950,000 901,778 Merrill Lynch Alternative Note Asset Collateralized Mtge Obligation Series 2007-OAR2 Cl A1 04-25-37 5.50 1,059,897(i) 1,060,247 Residential Accredit Loans Collateralized Mtge Obligation Series 2006-QS3 Cl 1A10 03-25-36 6.00 463,335 467,386 Structured Adjustable Rate Mtge Loan Trust Collateralized Mtge Obligation Series 2006-5 Cl 4A1 06-25-36 5.94 709,416(g) 703,791 Structured Asset Securities Collateralized Mtge Obligation Series 2003-33H Cl 1A1 10-25-33 5.50 1,073,053 1,025,994 Washington Mutual Mtge Pass-Through Ctfs Collateralized Mtge Obligation Series 2004-CB2 Cl 6A 07-25-19 4.50 118,551 113,339 Washington Mutual Mtge Pass-Through Ctfs Collateralized Mtge Obligation Series 2005-AR14 Cl 2A1 12-25-35 5.29 401,363(g) 397,857
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 24 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) MORTGAGE-BACKED (CONT.) Washington Mutual Mtge Pass-Through Ctfs Collateralized Mtge Obligation Series 2005-AR8 Cl 2AB1 07-25-45 5.57% $119,856(g) $119,842 Washington Mutual Mtge Pass-Through Ctfs Collateralized Mtge Obligation Series 2006-AR10 Cl 1A1 09-25-36 5.95 392,190(g) 392,610 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2005-10 Cl A1 10-25-35 5.00 1,699,583 1,630,835 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2005-5 Cl 2A1 05-25-35 5.50 677,041 649,853 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2006-AR12 Cl 1A1 09-25-36 6.03 373,157(g) 373,621 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2006-AR6 Cl 5A1 03-25-36 5.11 894,098(g) 879,502 --------------- Total 140,908,183 - ----------------------------------------------------------------------------------- BANKING (4.2%) Bank of America Sub Nts 03-15-17 5.30 3,435,000 3,264,029 Citigroup Sub Nts 02-15-17 5.50 2,365,000 2,280,910 JPMorgan Chase & Co Sub Nts 06-27-17 6.13 2,025,000 2,055,760 Manufacturers & Traders Trust Sub Nts 12-01-21 5.63 1,720,000 1,644,545 Popular North America Sr Nts 10-01-08 3.88 2,180,000 2,133,302 Regions Bank Sub Nts 06-26-37 6.45 875,000 892,798
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) BANKING (CONT.) Wachovia Bank Sub Nts 02-01-37 5.85% $645,000 $603,870 --------------- Total 12,875,214 - ----------------------------------------------------------------------------------- BROKERAGE (2.9%) Discover Financial Services 06-12-17 6.45 580,000(d,k) 562,472 Goldman Sachs Group Sub Nts 01-15-17 5.63 1,290,000 1,222,356 Lehman Brothers Holdings Sr Nts 07-19-12 6.00 1,520,000 1,519,883 Lehman Brothers Holdings Sub Nts 07-19-17 6.50 1,185,000 1,163,826 Merrill Lynch & Co Sub Nts 05-02-17 5.70 1,910,000 1,810,546 Morgan Stanley 04-27-17 5.55 2,755,000 2,631,963 --------------- Total 8,911,046 - ----------------------------------------------------------------------------------- ELECTRIC (1.6%) Consumers Energy 1st Mtge Series F 05-15-10 4.00 105,000 101,120 Consumers Energy 1st Mtge Series H 02-17-09 4.80 1,165,000 1,153,720 Entergy Gulf States 1st Mtge 06-01-08 3.60 425,000 418,388 Exelon 06-15-10 4.45 1,585,000 1,539,443 Indiana Michigan Power Sr Nts 03-15-37 6.05 330,000 313,629 Metropolitan Edison Sr Nts 03-15-10 4.45 140,000 136,767 Northern States Power Sr Nts 08-01-09 6.88 515,000 528,661
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 25
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) ELECTRIC (CONT.) Oncor Electric Delivery Secured 01-15-15 6.38% $75,000 $75,886 Portland General Electric 03-15-10 7.88 230,000(k) 244,896 Potomac Electric Power Secured 06-01-35 5.40 240,000 211,055 Public Service Company of Colorado Sr Nts Series A 07-15-09 6.88 160,000 164,268 Xcel Energy Sr Nts 07-01-08 3.40 145,000 142,294 --------------- Total 5,030,127 - ----------------------------------------------------------------------------------- FOOD AND BEVERAGE (1.2%) Cadbury Schweppes US Finance LLC 10-01-08 3.88 2,155,000(d) 2,111,575 HJ Heinz 12-01-08 6.43 470,000(d) 475,494 Molson Coors Capital Finance 09-22-10 4.85 1,055,000(c) 1,037,205 --------------- Total 3,624,274 - ----------------------------------------------------------------------------------- GAS DISTRIBUTORS (0.1%) Atmos Energy Sr Unsub 10-15-09 4.00 310,000 301,009 - ----------------------------------------------------------------------------------- GAS PIPELINES (0.7%) CenterPoint Energy Resources 02-15-11 7.75 285,000 303,152 Colorado Interstate Gas Sr Nts 11-15-15 6.80 970,000(k) 996,150 Southern Natural Gas 04-01-17 5.90 805,000(d) 777,706 --------------- Total 2,077,008 - ----------------------------------------------------------------------------------- HEALTH CARE INSURANCE (0.4%) UnitedHealth Group 06-15-37 6.50 490,000(d) 504,587
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) HEALTH CARE INSURANCE (CONT.) WellPoint Sr Unsub 01-15-36 5.85% $665,000 $602,890 06-15-37 6.38 255,000 251,864 --------------- Total 1,359,341 - ----------------------------------------------------------------------------------- HOME CONSTRUCTION (0.2%) Centex Sr Unsecured 05-01-16 6.50 140,000 127,604 DR Horton Sr Unsub 04-15-16 6.50 695,000 631,653 --------------- Total 759,257 - ----------------------------------------------------------------------------------- INDEPENDENT ENERGY (0.4%) Anadarko Petroleum Sr Unsecured 09-15-16 5.95 425,000 417,650 Canadian Natural Resources 03-15-38 6.25 870,000(c) 831,640 XTO Energy Sr Nts 08-01-37 6.75 60,000 60,869 --------------- Total 1,310,159 - ----------------------------------------------------------------------------------- MEDIA CABLE (0.4%) Comcast 03-15-37 6.45 930,000 884,569 Comcast MO of Delaware LLC 09-01-08 9.00 400,000 414,371 --------------- Total 1,298,940 - ----------------------------------------------------------------------------------- MEDIA NON CABLE (1.2%) British Sky Broadcasting Group 02-23-09 6.88 850,000(c) 868,011 News America 12-15-35 6.40 1,215,000 1,141,112 RR Donnelley & Sons Sr Unsecured 01-15-17 6.13 1,780,000 1,728,456 --------------- Total 3,737,579 - -----------------------------------------------------------------------------------
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 26 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) NON CAPTIVE CONSUMER (0.1%) SLM 01-15-13 5.38% $195,000 $172,938 10-01-13 5.00 200,000 172,958 --------------- Total 345,896 - ----------------------------------------------------------------------------------- OTHER FINANCIAL INSTITUTIONS (0.6%) Residential Capital LLC 06-30-10 6.38 2,055,000 1,934,515 - ----------------------------------------------------------------------------------- PROPERTY & CASUALTY (0.2%) Travelers Companies Sr Unsecured 06-15-37 6.25 605,000 567,907 - ----------------------------------------------------------------------------------- RAILROADS (0.3%) Burlington Northern Santa Fe 05-01-37 6.15 660,000 625,508 REITS (0.3%) Brandywine Operating Partnership LP 05-01-17 5.70 490,000 472,380 ERP Operating LP 06-15-17 5.75 605,000 588,689 --------------- Total 1,061,069 - ----------------------------------------------------------------------------------- RETAILERS (1.0%) CVS Caremark Sr Unsecured 06-01-17 5.75 145,000 138,796 Home Depot Sr Unsecured 12-16-36 5.88 1,605,000 1,393,546 Macys Retail Holdings 07-15-09 4.80 1,575,000 1,548,541 --------------- Total 3,080,883 - ----------------------------------------------------------------------------------- WIRELINES (3.1%) AT&T Sr Nts 05-15-36 6.80 520,000 538,325 Sprint Capital 03-15-32 8.75 55,000 60,440 Telecom Italia Capital 11-15-33 6.38 885,000(c) 816,233
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(A) WIRELINES (CONT.) Telefonica Europe 09-15-10 7.75% $1,560,000(c) $1,650,180 TELUS 06-01-11 8.00 3,727,500(c) 3,991,489 Verizon New York Series A 04-01-12 6.88 1,900,000 1,982,023 Verizon Pennsylvania Series A 11-15-11 5.65 665,000 668,305 --------------- Total 9,706,995 - ----------------------------------------------------------------------------------- TOTAL BONDS (Cost: $300,949,859) $299,123,195 - -----------------------------------------------------------------------------------
MUNICIPAL BONDS (0.5%) NAME OF ISSUER AND TITLE COUPON PRINCIPAL OF ISSUE RATE AMOUNT VALUE(A) TOBACCO Tobacco Settlement Financing Corporation Revenue Bonds Series 2007A-1 06-01-46 6.71% $1,480,000 $1,412,527 - ----------------------------------------------------------------------------------- TOTAL MUNICIPAL BONDS (Cost: $1,467,425) $1,412,527 - -----------------------------------------------------------------------------------
MONEY MARKET FUND (19.8%) SHARES VALUE(A) RiverSource Short-Term Cash Fund 61,324,135(l) $61,324,135 - ----------------------------------------------------------------------------------- TOTAL MONEY MARKET FUND (Cost: $61,324,135) $61,324,135 - ----------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $363,741,419)(m) $361,859,857 ===================================================================================
See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 27 NOTES TO INVESTMENTS IN SECURITIES (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) At July 31, 2007, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $54,995,296. (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 July 31, 2007, the value of foreign securities represented 3.0% of net assets. (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the Fund's Board of Directors. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At July 31, 2007, the value of these securities amounted to $10,280,670 or 3.3% of net assets. (e) Inflation-indexed bonds are securities in which the principal amount is adjusted for inflation and the semiannual interest payments equal a fixed percentage of the inflation-adjusted principal amount. (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) Adjustable rate mortgage; interest rate varies to reflect current market conditions; rate shown is the effective rate on July 31, 2007. (h) Interest only represents securities that entitle holders to receive only interest payments on the underlying mortgages. The yield to maturity of an interest only is extremely sensitive to the rate of principal payments on the underlying mortgage assets. A rapid (slow) rate of principal repayments may have an adverse (positive) effect on yield to maturity. The principal amount shown is the notional amount of the underlying mortgages. Interest rate disclosed represents yield based upon the estimated timing and amount of future cash flows at July 31, 2007. (i) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on July 31, 2007. (j) The following abbreviations are used in the portfolio security descriptions to identify the insurer of the issue: AMBAC -- Ambac Assurance Corporation MBIA -- MBIA Insurance Corporation
(k) Partially pledged as initial deposit on the following open interest rate futures contracts (see Note 5 to the financial statements):
TYPE OF SECURITY NOTIONAL AMOUNT - ------------------------------------------------------------------------------- PURCHASE CONTRACTS U.S. Treasury Note, Sept. 2007, 2-year $10,400,000 U.S. Treasury Note, Sept. 2007, 10-year 3,700,000 SALE CONTRACTS U.S. Long Bond, Sept. 2007, 20-year 1,200,000 U.S. Treasury Note, Sept. 2007, 5-year 200,000
(l) Affiliated Money Market Fund -- See Note 7 to the financial statements. - -------------------------------------------------------------------------------- 28 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT NOTES TO INVESTMENTS IN SECURITIES (CONTINUED) (m) At July 31, 2007, the cost of securities for federal income tax purposes was $364,166,578 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $1,044,685 Unrealized depreciation (3,351,406) - ------------------------------------------------------------------------------ Net unrealized depreciation $(2,306,721) - ------------------------------------------------------------------------------
HOW TO FIND INFORMATION ABOUT THE FUND'S PORTFOLIO HOLDINGS (i) The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (Commission) for the first and third quarters of each fiscal year on Form N-Q; (ii) The Fund's Forms N-Q are available on the Commission's website at http://www.sec.gov; (iii)The Fund's Forms N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC (information on the operations of the Public Reference Room may be obtained by calling 1-800-SEC-0330); and (iv) The Fund's complete schedule of portfolio holdings, as disclosed in its annual and semiannual shareholder reports and in its filings on Form N-Q, can be found at riversource.com/funds. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 29 FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES JULY 31, 2007 ASSETS Investments in securities, at value (Note 1) Unaffiliated issuers (identified cost $302,417,284) $300,535,722 Affiliated money market fund (identified cost $61,324,135) (Note 7) 61,324,135 - ---------------------------------------------------------------------------- Total investments in securities (identified cost $363,741,419) 361,859,857 Capital shares receivable 1,732,203 Accrued interest receivable 2,289,498 Receivable for investment securities sold 17,604,605 Variation margin receivable 3,391 - ---------------------------------------------------------------------------- Total assets 383,489,554 - ---------------------------------------------------------------------------- LIABILITIES Disbursements in excess of cash on demand deposit 10,572 Dividends payable to shareholders 246,535 Capital shares payable 104,292 Payable for investment securities purchased 18,107,229 Payable for securities purchased on a forward-commitment basis (Note 1) 54,995,296 Unrealized depreciation on swap transactions, at value (Note 6) 170,408 Accrued investment management services fee 4,026 Accrued distribution fee 567 Accrued transfer agency fee 31 Accrued administrative services fee 587 Other accrued expenses 60,009 - ---------------------------------------------------------------------------- Total liabilities 73,699,552 - ---------------------------------------------------------------------------- Net assets applicable to outstanding capital stock $309,790,002 ============================================================================
- -------------------------------------------------------------------------------- 30 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT STATEMENT OF ASSETS AND LIABILITIES (CONTINUED) JULY 31, 2007 REPRESENTED BY Capital stock -- $.01 par value (Note 1) $ 327,248 Additional paid-in capital 314,870,028 Undistributed net investment income (78,744) Accumulated net realized gain (loss) (Note 9) (3,410,267) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (Notes 5 and 6) (1,918,263) - ---------------------------------------------------------------------------- Total -- representing net assets applicable to outstanding capital stock $309,790,002 ============================================================================
Net assets applicable to outstanding shares: Class A $ 39,913,930 Class B $ 10,154,475 Class C $ 587,688 Class I $259,104,810 Class R2 $ 4,912 Class R3 $ 4,912 Class R4 $ 9,474 Class R5 $ 4,912 Class W $ 4,889 Net asset value per share of outstanding Class A capital stock: shares(1) 4,212,416 $ 9.48 Class B shares 1,070,928 $ 9.48 Class C shares 61,965 $ 9.48 Class I shares 27,376,402 $ 9.46 Class R2 shares 518 $ 9.48 Class R3 shares 518 $ 9.48 Class R4 shares 1,000 $ 9.47 Class R5 shares 518 $ 9.48 Class W shares 516 $ 9.47 - ------------------------------------------------------------------------------------------
(1) The maximum offering price per share for Class A is $9.95. The offering price is calculated by dividing the net asset value by 1.0 minus the maximum sales charge of 4.75%. See accompanying notes to financial statements. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 31 STATEMENT OF OPERATIONS YEAR ENDED JULY 31, 2007 INVESTMENT INCOME Income: Interest 11,030,002 Income distributions from affiliated money market fund (Note 7) 1,055,036 - --------------------------------------------------------------------------- Total income 12,085,038 - --------------------------------------------------------------------------- Expenses (Note 2): Investment management services fee 1,096,973 Distribution fee Class A 93,444 Class B 114,825 Class C 5,557 Class R2 16 Class R3 7 Class W 8 Transfer agency fee Class A 68,221 Class B 22,251 Class C 1,062 Class R2 2 Class R3 2 Class R4 90 Class R5 2 Class W 7 Service fee -- Class R4 44 Administrative services fees and expenses 159,975 Plan administration services fee Class R2 7 Class R3 7 Class R4 111 Compensation of board members 4,271 Custodian fees 90,758 Printing and postage 30,055 Registration fees 79,995 Professional fees 35,350 Other 9,650 - --------------------------------------------------------------------------- Total expenses 1,812,690 Expenses waived/reimbursed by the Investment Manager and its affiliates (Note 2) (313,935) - --------------------------------------------------------------------------- 1,498,755 Earnings and bank fee credits on cash balances (Note 2) (3,105) - --------------------------------------------------------------------------- Total net expenses 1,495,650 - --------------------------------------------------------------------------- Investment income (loss) -- net 10,589,388 - ---------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 32 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT STATEMENT OF OPERATIONS (CONTINUED) YEAR ENDED JULY 31, 2007 REALIZED AND UNREALIZED GAIN (LOSS) -- NET Net realized gain (loss) on: Security transactions (Note 3) $ (9,600) Foreign currency transactions 9,539 Futures contracts 205,518 Swap transactions (106,013) - --------------------------------------------------------------------------- Net realized gain (loss) on investments 99,444 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 227,306 - --------------------------------------------------------------------------- Net gain (loss) on investments and foreign currencies 326,750 - --------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $10,916,138 ===========================================================================
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 33 STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED JULY 31, 2007 2006 OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ 10,589,388 $ 7,875,418 Net realized gain (loss) on investments 99,444 (3,334,965) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 227,306 (1,626,948) - -------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 10,916,138 2,913,505 - -------------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income Class A (1,661,080) (1,346,770) Class B (422,424) (363,823) Class C (20,374) (16,869) Class I (8,585,459) (6,020,734) Class R2 (121) N/A Class R3 (129) N/A Class R4 (4,185) (3,966) Class R5 (144) N/A Class W (142) N/A Net realized gain Class A -- (10,474) Class B -- (3,920) Class C -- (158) Class I -- (42,743) Class R4 -- (30) - -------------------------------------------------------------------------------------- Total distributions (10,694,058) (7,809,487) - --------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 34 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
YEAR ENDED JULY 31, 2007 2006 CAPITAL SHARE TRANSACTIONS (NOTE 4) Proceeds from sales Class A shares (Note 2) $ 15,225,958 $ 18,529,854 Class B shares 5,099,082 6,000,039 Class C shares 287,282 266,911 Class I shares 120,023,256 95,959,205 Class R2 shares 5,000 N/A Class R3 shares 5,000 N/A Class R4 shares 91,190 -- Class R5 shares 5,000 N/A Class W shares 5,000 N/A Reinvestment of distributions at net asset value Class A shares 1,481,215 1,165,583 Class B shares 389,581 333,536 Class C shares 18,738 15,565 Class I shares 8,481,913 5,968,439 Class R4 shares 3,799 3,571 Payments for redemptions Class A shares (13,285,763) (22,260,950) Class B shares (Note 2) (6,200,217) (7,088,319) Class C shares (Note 2) (290,569) (290,859) Class I shares (44,053,924) (36,878,152) Class R4 shares (188,059) (10) - -------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions 87,103,482 61,724,413 - -------------------------------------------------------------------------------------- Total increase (decrease) in net assets 87,325,562 56,828,431 Net assets at beginning of year 222,464,440 165,636,009 - -------------------------------------------------------------------------------------- Net assets at end of year $309,790,002 $222,464,440 ====================================================================================== Undistributed net investment income $ (78,744) $ 122,400 - --------------------------------------------------------------------------------------
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 35 NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Fund is a series of RiverSource Bond Series, Inc. and is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. RiverSource Bond Series, Inc. has 10 billion authorized shares of capital stock that can be allocated among the separate series as designated by the Board. Although the Fund is not an index fund, it invests primarily in securities like those included in the Lehman Brothers Aggregate Bond Index (the Index), which are investment grade and denominated in U.S. dollars. The Index includes securities issued by the U.S. government, corporate bonds and mortgage- and asset-backed securities. The Fund offers Class A, Class B, Class C, Class I and Class R4 shares. - - Class A shares are sold with a front-end sales charge. - - Class B shares may be subject to a contingent deferred sales charge (CDSC) and automatically convert to Class A shares during the ninth year of ownership. - - Class C shares may be subject to a CDSC. - - Class I and Class R4 shares have no sales charge and are offered only to qualifying institutional investors. Effective Dec. 11, 2006, the Board approved renaming Class Y as Class R4, terminating the shareholder servicing agreement, revising the fee structure under the transfer agent agreement from account-based to asset-based, and adopting a plan administration services agreement. At July 31, 2007, Ameriprise Financial, Inc. (Ameriprise Financial), the parent company of RiverSource Investments, LLC (the Investment Manager) and the affiliated funds-of-funds owned 100% of Class I shares. Effective Dec. 11, 2006, the Fund offers additional classes of shares, Class R2, Class R3, and Class R5, to certain institutional investors. These shares are sold without a front-end sales charge or CDSC. At July 31, 2007, Ameriprise Financial owned 100% of Class R2, Class R3 and Class R5 shares. Effective Dec. 1, 2006, the Fund offers an additional class of shares, Class W, through qualifying discretionary accounts. Class W shares are sold without a front-end sales charge or CDSC. At July 31, 2007, Ameriprise Financial owned 100% of Class W shares. At July 31, 2007, Ameriprise Financial, RiverSource Life Insurance Company, a wholly-owned subsidiary of Ameriprise Financial and the affiliated funds-of-funds owned approximately 84% of the total outstanding Fund shares. - -------------------------------------------------------------------------------- 36 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 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 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. The Fund's significant accounting policies are summarized below: USE OF ESTIMATES Preparing financial statements that conform to U.S. generally accepted accounting principles requires management to make estimates (e.g., on assets, liabilities and contingent assets and liabilities) that could differ from actual results. VALUATION OF SECURITIES All securities are valued at the close of each business day. Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price. Debt securities are generally traded in the over-the-counter market and are valued at a price that reflects fair value as quoted by dealers in these securities or by an independent pricing service. Foreign securities are valued based on quotations from the principal market in which such securities are normally traded. The procedures adopted by the Board of Directors of the funds 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 equities) 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 New York Stock Exchange 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 New York Stock Exchange, including significant movements in the U.S. market after foreign exchanges have closed. Accordingly, in those situations, Ameriprise Financial will fair value foreign equity securities pursuant to procedures adopted by the Board of Directors of the funds, 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 New York Stock Exchange. 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 rates; those maturing in 60 days or less are valued at amortized cost. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 37 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 July 31, 2007, the Fund has entered into outstanding when-issued securities of $43,991,346 and other forward-commitments of $11,003,950. The Fund also enters into transactions to sell purchase commitments to third parties at current market values and concurrently acquires other purchase commitments for similar securities at later dates. As an inducement for the Fund to "roll over" its purchase commitments, the Fund receives negotiated amounts in the form of reductions of the purchase price of the commitment. OPTION TRANSACTIONS To produce incremental earnings, protect gains and facilitate buying and selling of securities for investments, the Fund may buy and write options traded on any U.S. or foreign exchange or in the over-the-counter market where completing the obligation depends upon the credit standing of the other party. Cash collateral may be collected by the Fund to secure certain over-the-counter options trades. Cash collateral held by the Fund for such option trades must be returned to the counterparty upon closure, exercise or expiration of the contract. The Fund also may buy and sell put and call options and write covered call options on portfolio securities as well as write cash-secured put options. The risk in writing a call option is that the Fund gives up the opportunity for profit if the market price of the security increases. The risk in writing a put option is that the Fund may incur a loss if the market price of the security decreases and the option is exercised. The risk in buying an option is that the Fund pays a premium whether or not the option is exercised. The Fund also has the additional risk of being unable to enter into a closing transaction if a liquid secondary market does not exist. Option contracts are valued daily at the closing prices on their primary exchanges and unrealized appreciation or depreciation is recorded. The Fund will realize a gain or loss when the option transaction expires or closes. When options on debt securities or futures are exercised, the Fund will realize a gain or loss. When other options are exercised, the proceeds on sales for a written call option, the purchase cost for a written put option or the cost of a security for a purchased put or call option is adjusted by the amount of premium received or paid. At July 31, 2007, the Fund had no outstanding option contracts. FUTURES TRANSACTIONS To gain exposure to or protect itself from market changes, the Fund may buy and sell financial futures contracts traded on any U.S. or foreign exchange. The Fund - -------------------------------------------------------------------------------- 38 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT also may buy and write put and call options on these futures contracts. Risks of entering into futures contracts and related options include the possibility of an illiquid market and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. Futures are valued daily based upon the last sale price at the close of 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. FOREIGN CURRENCY TRANSLATIONS AND FORWARD FOREIGN CURRENCY CONTRACTS Securities and other assets and liabilities denominated in foreign currencies are translated daily into U.S. dollars. Foreign currency amounts related to the purchase or sale of securities and income and expenses are translated at the exchange rate on the transaction date. The effect of changes in foreign exchange rates on realized and unrealized security gains or losses is reflected as a component of such gains or losses. In the statement of operations, net realized gains or losses from foreign currency transactions, if any, may arise from sales of foreign currency, closed forward contracts, exchange gains or losses realized between the trade date and settlement date on securities transactions, and other translation gains or losses on dividends, interest income and foreign withholding taxes. The Fund may enter into forward foreign currency exchange contracts for operational purposes and to protect against adverse exchange rate fluctuation. The net U.S. dollar value of foreign currency underlying all contractual commitments held by the Fund and the resulting unrealized appreciation or depreciation are determined using foreign currency exchange rates from an independent pricing service. The Fund is subject to the credit risk that the other party will not complete its contract obligations. At July 31, 2007, the Fund had no outstanding forward foreign currency contracts. 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 - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 39 "Valuation of securities" above. The forward sale commitment is "marked-to- market" daily and the change in market value is recorded by the Fund as an unrealized gain or loss. If the forward sale commitment is closed through the acquisition of an offsetting purchase commitment, the Fund realizes a gain or loss. If the Fund delivers securities under the commitment, the Fund realizes a gain or a loss from the sale of the securities based upon the market price established at the date the commitment was entered into. Forward sale commitments outstanding at period end are listed in the "Notes to investments in securities." At July 31, 2007, the Fund had no outstanding forward sale commitments. CMBS TOTAL RETURN SWAP TRANSACTIONS The Fund may enter into swap agreements to earn the total return on a specified security or index of fixed income securities. CMBS total return swaps are bilateral financial contracts designed to replicate synthetically the total returns of collateralized mortgage-backed securities. Under the terms of the swaps, the Fund either receives or pays the total return on a reference security or index applied to a notional principal amount. In return, the Fund agrees to pay or receive from the counterparty a floating rate, which is reset periodically based on short-term interest rates, applied to the same notional amount. The notional amounts of swap contracts are not recorded in the financial statements. Swaps are valued daily, and the change in value is recorded as unrealized appreciation (depreciation) until the termination of the swap, at which time realized gain (loss) is recorded. Payments received or made are recorded as realized gains (losses). Swap agreements may be subject to liquidity risk, which exists when a particular swap is difficult to purchase or sell. It may not be possible for the Fund to initiate a transaction or liquidate a position at an advantageous time or price, which may result in significant losses. Total return swaps are subject to the risk that the counterparty will default on its obligation to pay net amounts due to the Fund. GUARANTEES AND INDEMNIFICATIONS Under the Fund's organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, certain of the Fund's contracts with its service providers contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown since the amount of any future claims that may be made against the Fund cannot be determined and the Fund has no historical basis for predicting the likelihood of any such claims. FEDERAL TAXES The Fund's policy is to comply with Subchapter M of the Internal Revenue Code that applies to regulated investment companies and to distribute substantially all of its taxable income to shareholders. No provision for income or excise taxes is thus required. - -------------------------------------------------------------------------------- 40 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT Net investment income (loss) and net realized gains (losses) may differ for financial statement and tax purposes primarily because of deferred losses on certain futures contracts, the recognition of certain foreign currency gains (losses) as ordinary income (loss) for tax purposes and losses deferred due to "wash sale" transactions. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. Also, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains (losses) were recorded by the Fund. On the statement of assets and liabilities, as a result of permanent book-to-tax differences, undistributed net investment income has been decreased by $96,474 and accumulated net realized loss has been decreased by $96,474. The tax character of distributions paid for the years indicated is as follows:
YEAR ENDED JULY 31, 2007 2006 - ---------------------------------------------------------------------------- CLASS A Distributions paid from: Ordinary income........................... $1,661,080 $1,357,244 Long-term capital gain.................... -- -- CLASS B Distributions paid from: Ordinary income........................... 422,424 367,743 Long-term capital gain.................... -- -- CLASS C Distributions paid from: Ordinary income........................... 20,374 17,027 Long-term capital gain.................... -- -- CLASS I Distributions paid from: Ordinary income........................... 8,585,459 6,063,477 Long-term capital gain.................... -- -- CLASS R2(A) Distributions paid from: Ordinary income........................... 121 N/A Long-term capital gain.................... -- N/A CLASS R3(A) Distributions paid from: Ordinary income........................... 129 N/A Long-term capital gain.................... -- N/A CLASS R4(B) Distributions paid from: Ordinary income........................... 4,185 3,966 Long-term capital gain.................... -- --
- -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 41
YEAR ENDED JULY 31, 2007 2006 - ---------------------------------------------------------------------------- CLASS R5(A) Distributions paid from: Ordinary income........................... 144 N/A Long-term capital gain.................... -- N/A CLASS W(C) Distributions paid from: Ordinary income........................... 142 N/A Long-term capital gain.................... -- N/A
(a) For the period from Dec. 11, 2006 (inception date) to July 31, 2007. (b) Effective Dec. 11, 2006, Class Y was renamed Class R4. (c) For the period from Dec. 1, 2006 (inception date) to July 31, 2007. At July 31, 2007, the components of distributable earnings on a tax basis are as follows: Undistributed ordinary income.............................. $ 378,829 Undistributed accumulated long-term gain................... $ -- Accumulated realized loss.................................. $(2,830,266) Unrealized appreciation (depreciation)..................... $(2,709,302)
RECENT ACCOUNTING PRONOUNCEMENTS On Sept. 20, 2006, the Financial Accounting Standards Board (FASB) released Statement of Financial Accounting Standards No. 157 "Fair Value Measurements" (SFAS 157). SFAS 157 establishes an authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair-value measurements. The application of SFAS 157 is required for fiscal years beginning after Nov. 15, 2007 and interim periods within those fiscal years. The impact of SFAS 157 on the Fund's financial statements is being evaluated. In June 2006, the FASB issued FASB Interpretation 48 (FIN 48), "Accounting for Uncertainty in Income Taxes." FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with FASB Statement 109, "Accounting for Income Taxes." FIN 48 prescribes a two-step process to recognize and measure a tax position taken or expected to be taken in a tax return. The first step is to determine whether a tax position has met the more-likely-than-not recognition threshold and the second step is to measure a tax position that meets the threshold to determine the amount of benefit to recognize. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after Dec. 15, 2006. Tax positions of the Fund are being evaluated to determine the impact, if any, to the Fund. The adoption of FIN 48 is not anticipated to have a material impact on the Fund. - -------------------------------------------------------------------------------- 42 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT DIVIDENDS TO SHAREHOLDERS Dividends from net investment income, declared daily and payable monthly, when available, are reinvested in additional shares of the Fund at net asset value or payable in cash. Capital gains, when available, are distributed along with the last income dividend of the calendar year. OTHER Security transactions are accounted for on the date securities are purchased or sold. Interest income, including amortization of premium, market discount and original issue discount using the effective interest method, is accrued daily. 2. EXPENSES AND SALES CHARGES Under an Investment Management Services Agreement, the Investment Manager determines which securities will be purchased, held or sold. The management fee is a percentage of the Fund's average daily net assets that declines from 0.48% to 0.29% annually as the Fund's assets increase. The management fee for the year ended July 31, 2007, was 0.48% of the Fund's average daily net assets. Under an Administrative Services Agreement, the Fund pays Ameriprise Financial a fee for administration and accounting services at a percentage of the Fund's average daily net assets that declines from 0.07% to 0.04% annually as the Fund's assets increase. Other expenses in the amount of $3,868 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. Compensation of Board members includes, for a former Board Chair, compensation as well as retirement benefits. Certain other aspects of a former Board Chair's compensation, including health benefits and payment of certain other expenses, are included under other expenses. Under a Deferred Compensation Plan (the Plan), non-interested Board members may defer receipt of their compensation. Deferred amounts are treated as though equivalent dollar amounts had been invested in shares of the Fund or other RiverSource funds. The Fund's liability for these amounts is adjusted for market value changes and remains in the Fund until distributed in accordance with the Plan. Professional fees include fees paid by the Fund for legal services and independent registered public accounting firm services. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 43 Under a Transfer Agency Agreement, RiverSource Service Corporation (the Transfer Agent) maintains shareholder accounts and records. The Fund pays the Transfer Agent an annual fee per shareholder account for this service as follows: - - Class A $20.50 - - Class B $21.50 - - Class C $21.00 Effective Dec. 11, 2006, as part of the Board's approval to rename Class Y as Class R4, the fee structure under the Transfer Agency Agreement was revised from an account-based fee for Class Y to an asset-based fee for Class R4. The Fund 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 R4 shares. Prior to Dec. 11, 2006, the Fund paid the Transfer Agent an annual account-based fee of $18.50 per shareholder account. In addition, the Fund pays the Transfer Agent an annual asset-based fee at a rate of 0.05% of the Funds average daily net assets attributable to Class R2, Class R3 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. Prior to Dec. 11, 2006, Class I paid a transfer agency fee at an annual rate per shareholder account of $1. Effective Dec. 11, 2006, this fee was eliminated. The Transfer Agent charges an annual fee of $5 per inactive account, charged on a pro rata basis for 12 months from the date the account becomes inactive. These fees are included in the transfer agency fees on the statement of operations. The Fund has agreements with Ameriprise Financial Services, Inc. and RiverSource Distributors, Inc. (collectively, 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. Effective Dec. 11, 2006, a Plan Administration Services Agreement was adopted for the restructured Class R4 and the introduction of Class R2 and Class R3. The fee is calculated at a rate of 0.25% of the Fund's average daily net assets attributable to Class R2, Class R3 and Class R4 shares. Prior to Dec. 11, 2006, under a Shareholder Service Agreement, the Fund paid the Distributor a fee for service provided to shareholders by the Distributor and other servicing agents with respect to Class Y shares. The fee was calculated at a rate of 0.10% of the Fund's average daily net assets attributable to Class Y shares. Effective Dec. 11, 2006, this agreement was terminated. - -------------------------------------------------------------------------------- 44 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT Sales charges received by the Distributor for distributing Fund shares were $101,452 for Class A, $15,438 for Class B and $114 for Class C for the year ended July 31, 2007. 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"), 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. For the year ended July 31, 2007, the Investment Manager and its affiliates waived certain fees and expenses such that net expenses (excluding fees and expenses of acquired funds) were 0.89% for Class A, 1.65% for Class B, 1.65% for Class C, 0.54% for Class I, 1.30% for Class R2, 1.05% for Class R3, 0.73% for Class R4, 0.55% for Class R5 and 0.95% for Class W. Of these waived fees and expenses, the transfer agency fees waived for Class A, Class B, Class C, Class R2, Class R3, Class R4, Class R5, and Class W were $30,843, $9,621, $458, $1, $1, $77, $2 and $1, respectively, and the management fees waived at the Fund level were $272,931. Under an agreement, which was effective until July 31, 2007, 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 0.89% for Class A, 1.65% for Class B, 1.66% for Class C, 0.54% for Class I, 1.30% for Class R2, 1.05% for Class R3, 0.73% for Class R4, 0.55% for Class R5 and 0.95% for Class W of the Fund's average daily net assets. Effective August 1, 2007, the Investment Manager and its affiliates have contractually agreed to wave certain fees and expenses (excluding fees and expenses of acquired funds) such that net expenses will not exceed 0.89% for Class A, 1.65% for Class B, 1.65% for Class C, 0.50% for Class I, 1.30% for Class R2, 1.05% for Class R3, 0.77% for Class R4, 0.55% for Class R5 and 0.95% for Class W of the Fund's average daily net assets, until July 31, 2008, unless sooner terminated at the discretion of the Board. During the year ended July 31, 2007, the Fund's custodian and transfer agency fees were reduced by $3,105 as a result of earnings and bank fee credits from overnight cash balances. The Fund also pays custodian fees to Ameriprise Trust Company, an affiliate of Ameriprise Financial. 3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $863,227,222 and $791,864,523, respectively, for the year ended July 31, 2007. Realized gains and losses are determined on an identified cost basis. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 45 4. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the years indicated are as follows:
YEAR ENDED JULY 31, 2007 ISSUED FOR REINVESTED NET SOLD DISTRIBUTIONS REDEEMED INCREASE (DECREASE) - --------------------------------------------------------------------------------------------- Class A 1,595,525 154,847 (1,389,995) 360,377 Class B 532,271 40,687 (650,636) (77,678) Class C 30,029 1,958 (30,399) 1,588 Class I 12,642,580 888,099 (4,616,870) 8,913,809 Class R2(a) 518 -- -- 518 Class R3(a) 518 -- -- 518 Class R4(b) 9,495 396 (19,605) (9,714) Class R5(a) 518 -- -- 518 Class W(c) 516 -- -- 516 - ---------------------------------------------------------------------------------------------
YEAR ENDED JULY 31, 2006 ISSUED FOR REINVESTED NET SOLD DISTRIBUTIONS REDEEMED INCREASE (DECREASE) - --------------------------------------------------------------------------------------------- Class A 1,936,566 122,246 (2,314,283) (255,471) Class B 625,431 34,948 (741,998) (81,619) Class C 27,931 1,630 (30,424) (863) Class I 10,067,076 627,362 (3,874,552) 6,819,886 Class R4(b) -- 374 (1) 373 - ---------------------------------------------------------------------------------------------
(a) For the period from Dec. 11, 2006 (inception date) to July 31, 2007. (b) Effective Dec. 11, 2006, Class Y was renamed Class R4. (c) For the period from Dec. 1, 2006 (inception date) to July 31, 2007. 5. INTEREST RATE FUTURES CONTRACTS At July 31, 2007, investments in securities included securities valued at $118,597 that were pledged as collateral to cover initial margin deposits on 89 open purchase contracts and 14 open sale contracts. The notional market value of the open purchase contracts at July 31, 2007 was $14,631,360 with a net unrealized gain of $154,843. The notional market value of the open sale contracts at July 31, 2007 was $4,695,750 with a net unrealized loss of $21,136. See "Summary of significant accounting policies" and "Notes to investments in securities." - -------------------------------------------------------------------------------- 46 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 6. SWAP CONTRACTS At July 31, 2007, the Fund had the following open CMBS total return swap contracts:
UNREALIZED TERMINATION NOTIONAL APPRECIATION DATE AMOUNT (DEPRECIATION) - ---------------------------------------------------------------------------------- Receive total return on Lehman Brothers Aaa 8.5+ Commercial Mortgage-Backed Securities Index and pay a floating rate based on 1-month LIBOR less 0.25%. Counterparty: Wachovia Oct. 1, 2007 $2,725,000 $ (16,781) Receive total return on Lehman Brothers Baa 8.5+ Commercial Mortgage-Backed Securities Index and pay a floating rate based on 1-month LIBOR less 1.20%. Counterparty: Citigroup Nov. 1, 2007 650,000 (35,512) Receive total return on Lehman Brothers Baa 8.5+ Commercial Mortgage-Backed Securities Index and pay a floating rate based on 1-month LIBOR less 1.10%. Counterparty: Citigroup Dec. 1, 2007 650,000 (35,568) Receive total return on Lehman Brothers Baa 8.5+ Commercial Mortgage-Backed Securities Index and pay a floating rate based on 1-month LIBOR less 1.05%. Counterparty: Wachovia Dec. 1, 2007 600,000 (32,787) Receive spread on Lehman Brothers Baa 8.5+ Commercial Mortgage-Backed Securities Index plus 1.00% times notional amount plus spread return amount, if such amount is positive, and pay the absolute value of the spread return amount, if such amount is negative. Counterparty: Citigroup Jan. 1, 2008 200,000 (14,268) Receive total return on Lehman Brothers Baa 8.5+ Commercial Mortgage-Backed Securities Index and pay a floating rate based on 1-month LIBOR plus 1.10%. Counterparty: Wachovia Jan. 1, 2008 650,000 (35,492) - ---------------------------------------------------------------------------------- Total $(170,408) - ----------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 47 7. 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 RiverSource funds and other institutional clients of RiverSource Investments. Cost of purchases and proceeds from sales aggregated $196,644,362 and $135,320,227, respectively, for the year ended July 31, 2007. 8. BANK BORROWINGS The Fund has a revolving credit agreement with a syndicate of banks headed by JPMorgan Chase Bank, N.A. (JPMCB), whereby the Fund may borrow for the temporary funding of shareholder redemptions or for other temporary or emergency purposes. The agreement went into effect Sept. 19, 2006. The Fund must maintain asset coverage for borrowings of at least 300%. The agreement, which enables the Fund to participate with other RiverSource funds, permits borrowings up to $500 million, collectively. Interest is charged to each Fund based on its borrowings at a rate equal to either the higher of the Federal Funds Effective Rate plus 0.40% or the JPMCB Prime Commercial Lending Rate. Borrowings are payable within 60 days after such loan is executed. The Fund also pays a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.06% per annum. Prior to this agreement, the Fund paid a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.07% per annum. The Fund had no borrowings under the facility outstanding during the year ended July 31, 2007. 9. CAPITAL LOSS CARRY-OVER AND POST-OCTOBER LOSS For federal income tax purposes, the Fund had a capital loss carry-over of $2,158,756 at July 31, 2007, that if not offset by capital gains will expire as follows:
2014 2015 $526,700 $1,632,056
The Fund also had a post-October loss of $671,510 at July 31, 2007. It is unlikely the Board will authorize a distribution of any net realized capital gains until the available capital loss carry-over has been offset or expires. 10. INFORMATION REGARDING PENDING AND SETTLED LEGAL PROCEEDINGS In 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 mutual funds and they - -------------------------------------------------------------------------------- 48 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 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 may file a notice of appeal with the Eighth Circuit Court of Appeals within 30 days from the date of judgment. In December 2005, without admitting or denying the allegations, American Express Financial Corporation (AEFC, which is now known as Ameriprise Financial, Inc. (Ameriprise Financial)), the parent company of RiverSource Investments, LLC (RiverSource Investments), entered into settlement agreements with the Securities and Exchange Commission (SEC) and Minnesota Department of Commerce (MDOC) related to market timing activities. In connection with these matters, the SEC and MDOC issued orders (the Orders) alleging that AEFC violated certain provisions of the federal and Minnesota securities laws by failing to adequately disclose market timing activities by allowing certain identified market timers to continue to market time contrary to disclosures in mutual fund and variable annuity product prospectuses. The Orders also alleged that AEFC failed to implement procedures to detect and prevent market timing in 401(k) plans for employees of AEFC and related companies and failed to adequately disclose that there were no such procedures. Pursuant to the MDOC Order, the MDOC also alleged that AEFC allowed inappropriate market timing to occur by failing to have written policies and procedures and failing to properly supervise its employees. As a result of the Orders, AEFC was censured and ordered to cease and desist from committing or causing any violations of certain provisions of the Investment Advisers Act of 1940, the Investment Company Act of 1940, and various Minnesota laws. Pursuant to the terms of the Orders, AEFC agreed to pay disgorgement of $10 million and civil money penalties of $7 million. AEFC also agreed to make presentations at least annually to its board of directors and the relevant mutual funds' board that include an overview of policies and procedures to prevent market timing, material changes to these policies and procedures and whether disclosures related to market timing are consistent with the SEC order and federal securities laws. AEFC also agreed to retain an independent distribution consultant to assist in developing a plan for distribution of all disgorgement and civil penalties ordered by the SEC in accordance with various undertakings detailed at http://www.sec.gov/litigation/admin/ia-2451.pdf. In addition, AEFC agreed to complete and submit to the MDOC a compliance review of its - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 49 procedures regarding market timing within one year of the MDOC Order, including a summary of actions taken to ensure compliance with applicable laws and regulations and certification by a senior officer regarding compliance and supervisory procedures. Ameriprise Financial and its affiliates have cooperated with the SEC and the MDOC in these legal proceedings, and have made regular reports to the RiverSource Funds' Boards of Directors/Trustees. 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. - -------------------------------------------------------------------------------- 50 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 11. FINANCIAL HIGHLIGHTS The tables below show certain important financial information for evaluating the Fund's results. CLASS A
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED JULY 31, 2007 2006 2005 2004 2003(B) Net asset value, beginning of period $9.46 $9.72 $9.62 $9.49 $9.94 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .42(c) .36 .31 .26 .02 Net gains (losses) (both realized and unrealized) .02 (.26) .11 .13 (.45) - ----------------------------------------------------------------------------------------------------------- Total from investment operations .44 .10 .42 .39 (.43) - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.42) (.36) (.32) (.26) (.02) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $9.48 $9.46 $9.72 $9.62 $9.49 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $40 $36 $40 $65 $51 - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e),(f) .89% .90% .94% .97% .96%(g) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.39% 3.84% 3.09% 2.61% 1.80%(g) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 347% 301% 313% 310% 46% - ----------------------------------------------------------------------------------------------------------- Total return(h) 4.75% 1.13% 4.32% 4.06% (4.31%)(i) - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from June 19, 2003 (when shares became publicly available) to July 31, 2003. (c) Per share amounts have been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (e) 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. (f) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class A would have been 1.09%, 1.12%, 1.04%, 1.06% and 2.56% for the periods ended July 31, 2007, 2006, 2005, 2004 and 2003, respectively. (g) Adjusted to an annual basis. (h) Total return does not reflect payment of a sales charge. (i) Not annualized. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 51 CLASS B
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED JULY 31, 2007 2006 2005 2004 2003(B) Net asset value, beginning of period $9.47 $9.72 $9.62 $9.50 $9.94 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .35(c) .29 .23 .18 .01 Net gains (losses) (both realized and unrealized) .01 (.25) .11 .12 (.44) - ----------------------------------------------------------------------------------------------------------- Total from investment operations .36 .04 .34 .30 (.43) - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.35) (.29) (.24) (.18) (.01) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $9.48 $9.47 $9.72 $9.62 $9.50 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $10 $11 $12 $8 $2 - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e),(f) 1.65% 1.66% 1.69% 1.74% 1.73%(g) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.62% 3.09% 2.39% 1.87% 1.37%(g) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 347% 301% 313% 310% 46% - ----------------------------------------------------------------------------------------------------------- Total return(h) 3.85% .42% 3.56% 3.18% (4.28%)(i) - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from June 19, 2003 (when shares became publicly available) to July 31, 2003. (c) Per share amounts have been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (e) 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. (f) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class B would have been 1.85%, 1.89%, 1.83%, 1.83% and 3.32% for the periods ended July 31, 2007, 2006, 2005, 2004 and 2003, respectively. (g) Adjusted to an annual basis. (h) Total return does not reflect payment of a sales charge. (i) Not annualized. - -------------------------------------------------------------------------------- 52 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT CLASS C
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED JULY 31, 2007 2006 2005 2004 2003(B) Net asset value, beginning of period $9.47 $9.72 $9.62 $9.50 $9.94 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .35(c) .29 .23 .18 .01 Net gains (losses) (both realized and unrealized) .01 (.26) .11 .12 (.44) - ----------------------------------------------------------------------------------------------------------- Total from investment operations .36 .03 .34 .30 (.43) - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.35) (.28) (.24) (.18) (.01) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $9.48 $9.47 $9.72 $9.62 $9.50 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $1 $1 $1 $-- $-- - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e),(f) 1.65% 1.67% 1.69% 1.72% 1.64%(g) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.63% 3.07% 2.40% 1.88% 1.51%(g) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 347% 301% 313% 310% 46% - ----------------------------------------------------------------------------------------------------------- Total return(h) 3.85% .42% 3.55% 3.17% (4.28%)(i) - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from June 19, 2003 (when shares became publicly available) to July 31, 2003. (c) Per share amounts have been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (e) 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. (f) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class C would have been 1.85%, 1.89%, 1.84%, 1.81% and 3.32% for the periods ended July 31, 2007, 2006, 2005, 2004 and 2003, respectively. (g) Adjusted to an annual basis. (h) Total return does not reflect payment of a sales charge. (i) Not annualized. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 53 CLASS I
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED JULY 31, 2007 2006 2005 2004(B) Net asset value, beginning of period $9.45 $9.71 $9.61 $9.79 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .45(c) .39 .33 .12 Net gains (losses) (both realized and unrealized) .02 (.26) .11 (.18) - ----------------------------------------------------------------------------------------------------------- Total from investment operations .47 .13 .44 (.06) - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.46) (.39) (.34) (.12) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $9.46 $9.45 $9.71 $9.61 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $259 $174 $113 $63 - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e),(f) .54% .58% .70% .70%(g) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.75% 4.22% 3.42% 3.03%(g) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 347% 301% 313% 310% - ----------------------------------------------------------------------------------------------------------- Total return(h) 5.01% 1.47% 4.58% (.72%)(i) - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from March 4, 2004 (inception date) to July 31, 2004. (c) Per share amounts have been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (e) 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. (f) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class I would have been 0.66%, 0.69%, 0.72% and 0.73% for the periods ended July 31, 2007, 2006, 2005 and 2004, respectively. (g) Adjusted to an annual basis. (h) Total return does not reflect payment of a sales charge. (i) Not annualized. - -------------------------------------------------------------------------------- 54 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT CLASS R2
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED JULY 31, 2007(B) Net asset value, beginning of period $9.65 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .24(c) Net gains (losses) (both realized and unrealized) (.18) - ----------------------------------------------------------------------------------------------------------- Total from investment operations .06 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.23) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $9.48 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e),(f) 1.30%(g) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.04%(g) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 347% - ----------------------------------------------------------------------------------------------------------- Total return(h) .67%(i) - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Dec. 11, 2006 (inception date) to July 31, 2007. (c) Per share amounts have been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (e) 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. (f) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratio of expenses for Class R2 would have been 1.45% for the period ended July 31, 2007. (g) Adjusted to an annual basis. (h) Total return does not reflect payment of a sales charge. (i) Not annualized. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 55 CLASS R3
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED JULY 31, 2007(B) Net asset value, beginning of period $9.65 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .26(c) Net gains (losses) (both realized and unrealized) (.19) - ----------------------------------------------------------------------------------------------------------- Total from investment operations .07 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.24) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $9.48 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e),(f) 1.05%(g) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.29%(g) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 347% - ----------------------------------------------------------------------------------------------------------- Total return(h) .83%(i) - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Dec. 11, 2006 (inception date) to July 31, 2007. (c) Per share amounts have been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (e) 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. (f) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratio of expenses for Class R3 would have been 1.18% for the period ended July 31, 2007. (g) Adjusted to an annual basis. (h) Total return does not reflect payment of a sales charge. (i) Not annualized. - -------------------------------------------------------------------------------- 56 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT CLASS R4*
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED JULY 31, 2007 2006 2005 2004 2003(B) Net asset value, beginning of period $9.46 $9.72 $9.62 $9.49 $9.94 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .43(c) .38 .32 .27 .02 Net gains (losses) (both realized and unrealized) .02 (.26) .11 .13 (.45) - ----------------------------------------------------------------------------------------------------------- Total from investment operations .45 .12 .43 .40 (.43) - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.44) (.38) (.33) (.27) (.02) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $9.47 $9.46 $9.72 $9.62 $9.49 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- $-- $-- $-- $-- - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e),(f) .73% .74% .78% .80% .82%(g) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.43% 4.01% 3.36% 2.78% 2.01%(g) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 347% 301% 313% 310% 46% - ----------------------------------------------------------------------------------------------------------- Total return(h) 4.81% 1.28% 4.49% 4.23% (4.30%)(i) - -----------------------------------------------------------------------------------------------------------
* Effective Dec. 11, 2006, Class Y was renamed Class R4. (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from June 19, 2003 (when shares became publicly available) to July 31, 2003. (c) Per share amounts have been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (e) 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. (f) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class R4 would have been 0.93%, 0.94%, 0.92%, 0.89% and 2.40% for the periods ended July 31, 2007, 2006, 2005, 2004 and 2003, respectively. (g) Adjusted to an annual basis. (h) Total return does not reflect payment of a sales charge. (i) Not annualized. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 57 CLASS R5
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED JULY 31, 2007(B) Net asset value, beginning of period $9.65 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .29(c) Net gains (losses) (both realized and unrealized) (.19) - ----------------------------------------------------------------------------------------------------------- Total from investment operations .10 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.27) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $9.48 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e),(f) .55%(g) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.78%(g) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 347% - ----------------------------------------------------------------------------------------------------------- Total return(h) 1.14%(i) - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Dec. 11, 2006 (inception date) to July 31, 2007. (c) Per share amounts have been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (e) 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. (f) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratio of expenses for Class R5 would have been 0.71% for the period ended July 31, 2007. (g) Adjusted to an annual basis. (h) Total return does not reflect payment of a sales charge. (i) Not annualized. - -------------------------------------------------------------------------------- 58 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT CLASS W
PER SHARE INCOME AND CAPITAL CHANGES(a) FISCAL PERIOD ENDED JULY 31, 2007(B) Net asset value, beginning of period $9.69 - ----------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .28(c) Net gains (losses) (both realized and unrealized) (.23) - ----------------------------------------------------------------------------------------------------------- Total from investment operations .05 - ----------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.27) - ----------------------------------------------------------------------------------------------------------- Net asset value, end of period $9.47 - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- - ----------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(d),(e),(f) .95%(g) - ----------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.41%(g) - ----------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 347% - ----------------------------------------------------------------------------------------------------------- Total return(h) .58%(i) - -----------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Dec. 1, 2006 (inception date) to July 31, 2007. (c) Per share amounts have been calculated using average shares outstanding method. (d) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (e) 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. (f) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratio of expenses for Class W would have been 1.08% for the period ended July 31, 2007. (g) Adjusted to an annual basis. (h) Total return does not reflect payment of a sales charge. (i) Not annualized. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 59 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF RIVERSOURCE CORE BOND FUND: We have audited the accompanying statement of assets and liabilities, including the schedule of investments in securities, of RiverSource Core Bond Fund (the Fund), one of the portfolios constituting the RiverSource Bond Series, Inc. as of July 31, 2007, and the related statements of operations, changes in net assets and financial highlights for the year 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 audit. The financial statements and financial highlights of the Fund for the periods presented through July 31, 2006, were audited by other auditors whose report dated September 20, 2006, expressed an unqualified opinion on those financial statements and financial highlights. We conducted our audit 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 audit 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 July 31, 2007, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2007 financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of RiverSource Core Bond Fund of the RiverSource Bond Series, Inc. at July 31, 2007, the results of its operations, changes in its net assets, and the financial highlights for the year then ended, in conformity with U.S. generally accepted accounting principles. ERNST & YOUNG LLP Minneapolis, Minnesota September 20, 2007 - -------------------------------------------------------------------------------- 60 RIVERSOURCE CORE BOND FUND -- 2007 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 July 31, 2007 CLASS A
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE Aug. 28, 2006............................................... $0.03500 Sept. 25, 2006.............................................. 0.03600 Oct. 26, 2006............................................... 0.03750 Nov. 27, 2006............................................... 0.03750 Dec. 18, 2006............................................... 0.03751 Jan. 23, 2007............................................... 0.03751 Feb. 23, 2007............................................... 0.03300 March 26, 2007.............................................. 0.03300 April 25, 2007.............................................. 0.03300 May 25, 2007................................................ 0.03300 June 25, 2007............................................... 0.03400 July 25, 2007............................................... 0.03600 Total distributions......................................... $0.42302
- -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 61 CLASS B
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE Aug. 28, 2006............................................... $0.02850 Sept. 25, 2006.............................................. 0.03046 Oct. 26, 2006............................................... 0.03136 Nov. 27, 2006............................................... 0.03113 Dec. 18, 2006............................................... 0.03330 Jan. 23, 2007............................................... 0.03036 Feb. 23, 2007............................................... 0.02686 March 26, 2007.............................................. 0.02680 April 25, 2007.............................................. 0.02703 May 25, 2007................................................ 0.02702 June 25, 2007............................................... 0.02790 July 25, 2007............................................... 0.02999 Total distributions......................................... $0.35071
CLASS C
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE Aug. 28, 2006............................................... $0.02844 Sept. 25, 2006.............................................. 0.03040 Oct. 26, 2006............................................... 0.03126 Nov. 27, 2006............................................... 0.03105 Dec. 18, 2006............................................... 0.03326 Jan. 23, 2007............................................... 0.03025 Feb. 23, 2007............................................... 0.02663 March 26, 2007.............................................. 0.02679 April 25, 2007.............................................. 0.02743 May 25, 2007................................................ 0.02680 June 25, 2007............................................... 0.02818 July 25, 2007............................................... 0.03016 Total distributions......................................... $0.35065
- -------------------------------------------------------------------------------- 62 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT CLASS I
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE Aug. 28, 2006............................................... $0.03796 Sept. 25, 2006.............................................. 0.03852 Oct. 26, 2006............................................... 0.04030 Nov. 27, 2006............................................... 0.04040 Dec. 18, 2006............................................... 0.03938 Jan. 23, 2007............................................... 0.04078 Feb. 23, 2007............................................... 0.03580 March 26, 2007.............................................. 0.03582 April 25, 2007.............................................. 0.03572 May 25, 2007................................................ 0.03572 June 25, 2007............................................... 0.03677 July 25, 2007............................................... 0.03866 Total distributions......................................... $0.45583
CLASS R2
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE Dec. 18, 2006............................................... $0.01048 Jan. 23, 2007............................................... 0.03401 Feb. 23, 2007............................................... 0.02974 March 26, 2007.............................................. 0.02966 April 25, 2007.............................................. 0.02982 May 25, 2007................................................ 0.02982 June 25, 2007............................................... 0.03088 July 25, 2007............................................... 0.03287 Total distributions......................................... $0.22728
- -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 63 CLASS R3
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE Dec. 18, 2006............................................... $0.01086 Jan. 23, 2007............................................... 0.03632 Feb. 23, 2007............................................... 0.03177 March 26, 2007.............................................. 0.03171 April 25, 2007.............................................. 0.03180 May 25, 2007................................................ 0.03179 June 25, 2007............................................... 0.03289 July 25, 2007............................................... 0.03482 Total distributions......................................... $0.24196
CLASS R4*
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE Aug. 28, 2006............................................... $0.03637 Sept. 25, 2006.............................................. 0.03717 Oct. 26, 2006............................................... 0.03880 Nov. 27, 2006............................................... 0.03885 Dec. 18, 2006............................................... 0.03888 Jan. 23, 2007............................................... 0.03922 Feb. 23, 2007............................................... 0.03430 March 26, 2007.............................................. 0.03425 April 25, 2007.............................................. 0.03425 May 25, 2007................................................ 0.03425 June 25, 2007............................................... 0.03509 July 25, 2007............................................... 0.03720 Total distributions......................................... $0.43863
- -------------------------------------------------------------------------------- 64 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT CLASS R5
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE Dec. 18, 2006............................................... $0.01129 Jan. 23, 2007............................................... 0.04088 Feb. 23, 2007............................................... 0.03582 March 26, 2007.............................................. 0.03582 April 25, 2007.............................................. 0.03574 May 25, 2007................................................ 0.03574 June 25, 2007............................................... 0.03689 July 25, 2007............................................... 0.03870 Total distributions......................................... $0.27088
CLASS W
INCOME DISTRIBUTIONS - taxable as dividend income: Qualified Dividend Income for individuals............. 0.00% Dividends Received Deduction for corporations......... 0.00%
PAYABLE DATE PER SHARE Dec. 18, 2006............................................... $0.03114 Jan. 23, 2007............................................... 0.03711 Feb. 23, 2007............................................... 0.03264 March 26, 2007.............................................. 0.03260 April 25, 2007.............................................. 0.03267 May 25, 2007................................................ 0.03254 June 25, 2007............................................... 0.03347 July 25, 2007............................................... 0.03566 Total distributions......................................... $0.26783
* Effective Dec. 11, 2006, Class Y was renamed Class R4. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 65 BOARD MEMBERS AND OFFICERS Shareholders elect a Board that oversees the Fund's operations. The Board appoints officers who are responsible for day-to-day business decisions based on policies set by the Board. The following is a list of the Fund's Board members. Each member oversees 102 RiverSource funds. Board members serve until the next regular shareholders' meeting or until he or she reaches the mandatory retirement age established by the Board. Under the current Board policy, members may serve until the end of the meeting following their 75th birthday, or the fifteenth anniversary of the first Board meeting they attended as members of the Board, whichever occurs first. This policy does not apply to Ms. Jones who may retire after her 75th birthday. 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 Chief Justice, Minnesota Supreme 901 S. Marquette Ave. since 2006 Court, 1998-2005 Minneapolis, MN 55402 Age 53 - ----------------------------------------------------------------------------------------------------- Arne H. Carlson Board member Chair, RiverSource Funds, 901 S. Marquette Ave. since 1999 1999-2006; former Governor of Minneapolis, MN 55402 Minnesota Age 73 - ----------------------------------------------------------------------------------------------------- Pamela G. Carlton Board member President, Springboard -- Partners 901 S. Marquette Ave. since 2007 in Cross Cultural Leadership Minneapolis, MN 55402 (consulting company) Age 52 - ----------------------------------------------------------------------------------------------------- Patricia M. Flynn Board member Trustee Professor of Economics and 901 S. Marquette Ave. since 2004 Management, Bentley College; former Minneapolis, MN 55402 Dean, McCallum Graduate School of Age 56 Business, Bentley College - ----------------------------------------------------------------------------------------------------- Anne P. Jones Board member Attorney and Consultant 901 S. Marquette Ave. since 1985 Minneapolis, MN 55402 Age 72 - ----------------------------------------------------------------------------------------------------- Jeffrey Laikind, CFA Board member Former Managing Director, Shikiar American Progressive 901 S. Marquette Ave. since 2005 Asset Management Insurance Minneapolis, MN 55402 Age 71 - ----------------------------------------------------------------------------------------------------- Stephen R. Lewis, Jr. Board member President Emeritus and Professor of Valmont Industries, 901 S. Marquette Ave. since 2002 and Economics, Carleton College Inc. (manufactures Minneapolis, MN 55402 Chair of the irrigation systems) Age 68 Board since 2007 - -----------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 66 RIVERSOURCE CORE BOND FUND -- 2007 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 - ----------------------------------------------------------------------------------------------------- Catherine James Paglia Board member Director, Enterprise Asset Strategic 901 S. Marquette Ave. since 2004 Management, Inc. (private real Distribution, Inc. Minneapolis, MN 55402 estate and asset management (transportation, Age 55 company) distribution and logistics consultants) - ----------------------------------------------------------------------------------------------------- Alison Taunton-Rigby Board member Chief Executive Officer, RiboNovix, Hybridon, Inc. 901 S. Marquette Ave. since 2002 Inc. since 2003 (biotechnology); (biotechnology); Minneapolis, MN 55402 former President, Forester Biotech American Healthways, Age 63 Inc. (health management programs) - -----------------------------------------------------------------------------------------------------
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 President -- U.S. Asset Management 53600 Ameriprise since 2001, and Chief Investment Officer, Financial Center Vice President Ameriprise Financial, Inc. and Minneapolis, MN 55474 since 2002 President, Chairman of the Board Age 47 and Chief Investment Officer, RiverSource Investments, LLC since 2005; President, Ameriprise Certificate Company since 2006; Senior Vice President -- Chief Investment Officer, Ameriprise Financial, Inc. and Chairman of the Board and Chief Investment Officer, RiverSource Investments, LLC, 2001-2005 - -----------------------------------------------------------------------------------------------------
* Interested person by reason of being an officer, director, security holder and/or employee of RiverSource Investments. The SAI has additional information about the Fund's Board members and is available, without charge, upon request by calling RiverSource Funds at (888) 791-3380; contacting your financial institution; or visiting riversource.com/funds. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 67 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 Senior Vice President -- Asset Management, 172 Ameriprise 2006 RiverSource Investments, LLC since 2006; Financial Center Managing Director and Global Head of Product, Minneapolis, MN 55474 Morgan Stanley Investment Management, Age 41 2004-2006; President, Touchstone Investments, 2002-2004; Director of Strategic Planning, Evergreen Investments, 1995-2002 - ------------------------------------------------------------------------------------------ Michelle M. Keeley Vice President Executive Vice President -- Equity and Fixed 172 Ameriprise since 2004 Income, Ameriprise Financial, Inc. and Financial Center RiverSource Investments, LLC since 2006; Vice Minneapolis, MN 55474 President -- Investments, Ameriprise Age 43 Certificate Company since 2003; Senior Vice President -- Fixed Income, Ameriprise Financial, Inc., 2002-2006 and RiverSource Investments, LLC, 2004-2006; Managing Director, Zurich Global Assets, 2001-2002 - ------------------------------------------------------------------------------------------ Amy K. Johnson Vice President Vice President -- Asset Management and Trust 5228 Ameriprise since 2006 Company Services, RiverSource Investments, LLC Financial Center since 2006; Vice President -- Operations and Minneapolis, MN 55474 Compliance, RiverSource Investments, LLC, Age 41 2004-2006; Director of Product Development -- Mutual Funds, Ameriprise Financial, Inc., 2001-2004 - ------------------------------------------------------------------------------------------ Jeffrey P. Fox Treasurer since Vice President -- Investment Accounting, 105 Ameriprise 2002 Ameriprise Financial, Inc. since 2002; Vice Financial Center President -- Finance, American Express Minneapolis, MN 55474 Company, 2000-2002 Age 52 - ------------------------------------------------------------------------------------------ Scott R. Plummer Vice President, Vice President and Chief Counsel -- Asset 5228 Ameriprise General Counsel Management, Ameriprise Financial, Inc. since Financial Center and Secretary 2005; Vice President, General Counsel and Minneapolis, MN 55474 since 2006 Secretary, Ameriprise Certificate Company Age 47 since 2005; Vice President -- Asset Management Compliance, Ameriprise Financial, Inc., 2004-2005; Senior Vice President and Chief Compliance Officer, U.S. Bancorp Asset Management, 2002-2004; Second Vice President and Assistant General Counsel, Hartford Life, 2001-2002 - ------------------------------------------------------------------------------------------ Jennifer D. Lammers Chief Compliance U.S. Asset Management Chief Compliance 172 Ameriprise Officer since Officer, RiverSource Investments, LLC since Financial Center 2006 2006; Director -- Mutual Funds, Voyageur Asset Minneapolis, MN 55474 Management, 2003-2006; Director of Finance, Age 46 Voyageur Asset Management, 2000-2003 - ------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 68 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT FUND OFFICERS (CONTINUED)
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION AGE LENGTH OF SERVICE DURING PAST FIVE YEARS - ------------------------------------------------------------------------------------------ Neysa M. Alecu Money Laundering Compliance Director and Anti-Money Laundering 2934 Ameriprise Prevention Officer, Ameriprise Financial, Inc. since Financial Center Officer since 2004; Manager Anti-Money Laundering, Minneapolis, MN 55474 2004 Ameriprise Financial, Inc., 2003-2004; Age 43 Compliance Director and Bank Secrecy Act Officer, American Express Centurion Bank, 2000-2003 - ------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 69 APPROVAL OF INVESTMENT MANAGEMENT SERVICES AGREEMENT RiverSource Investments, LLC ("RiverSource"), 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 provides investment advice and other services to the Fund and all RiverSource funds (collectively, the "Funds"). The Fund's Board of Directors (the "Board") and the Board's Investment Review and Contracts Committees monitor these services throughout the year. On an annual basis, the Board, including the independent Board members (the "Independent Directors"), considers renewal of the IMS Agreement. RiverSource prepares detailed reports for the Board and its Contracts Committee in March and April, 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 addressing the services RiverSource provides and Fund performance. The Board accords particular weight to the work, deliberations and conclusions of the Contracts and Investment Review Committees in determining whether to continue the IMS Agreement. At the April 11-12, 2007 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: The Board analyzed various reports and presentations it had received detailing the services performed by RiverSource, as well as its expertise, resources and capabilities. The Board specifically considered many developments during the past year concerning the services provided by RiverSource, including, in particular, the growing strength and capabilities of many RiverSource offices and the increased investment and resources dedicated to the Fund's operations, particularly in the areas of trading systems, legal and compliance. Further, in connection with the Board's evaluation of the overall package of services provided by RiverSource, the Board considered the quality of the administrative, custody and transfer agency services provided by RiverSource affiliates to the Fund. The Board also reviewed the financial condition of RiverSource and the entity's ability to carry out its responsibilities under the IMS Agreement. 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). The Board concluded that the services being performed under the IMS Agreement were of a reasonably high quality. - -------------------------------------------------------------------------------- 70 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 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 determined that RiverSource was 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 (including since inception), recent Fund inflows (and outflows) and a comparison of the Fund's net assets from December 2006 to December 2005. The Board observed that the Fund's investment performance was appropriate in light of the particular management style and market conditions involved. Comparative Fees, Costs of Services Provided and the Profits Realized By RiverSource 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's profitability. 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, 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) was below the peer group's median expense ratio shown in the reports. Based on its review, the Board concluded that the Fund's management fee was fair and reasonable in light of the extent and quality of services that the Fund receives. The Board also considered the expected profitability of RiverSource and its affiliates in connection with RiverSource providing investment management services to the Fund. In this regard, the Board referred to a detailed profitability report, discussing the profitability to RiverSource and Ameriprise Financial from managing and operating the Fund, including data showing comparative profitability. 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 - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 71 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 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 12, 2007, the Board, including all of the Independent Directors, approved the renewal of the IMS Agreement. 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 RiverSource Funds at (888) 791-3380; contacting your financial institution; 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. CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM On April 12, 2007, Ernst & Young LLP was selected as the Fund's independent registered public accounting firm for the 2007 fiscal year. A majority of the Fund's Board of Directors, including a majority of the Independent Directors, approved the appointment of Ernst & Young LLP. The predecessor independent registered public accounting firm's reports on the Fund's financial statements for the year ended July 31, 2006 and the year ended July 31, 2005 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. During such fiscal periods and through April 12, 2007 there were no disagreements between the Fund and the predecessor independent registered public accounting firm on any matter of - -------------------------------------------------------------------------------- 72 RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which such disagreements, if not resolved to the satisfaction of the predecessor independent registered public accounting firm, would have caused them to make reference to the subject matter of the disagreement in connection with their reports on the financial statements for such fiscal periods. - -------------------------------------------------------------------------------- RIVERSOURCE CORE BOND FUND -- 2007 ANNUAL REPORT 73 THIS PAGE LEFT BLANK INTENTIONALLY THIS PAGE LEFT BLANK INTENTIONALLY THROUGH THE RIVERSOURCE INVESTMENTS FAMILY OF FUNDS, YOU CAN BUILD A DIVERSIFIED PORTFOLIO THAT IS DESIGNED TO HELP YOU REACH YOUR GOALS. GROWTH FUNDS RiverSource Growth Fund RiverSource Fundamental Growth Fund RiverSource Disciplined Large Cap Growth Fund RiverSource Mid Cap Growth Fund RiverSource Aggressive Growth Fund RiverSource Small Cap Growth Fund Sector: RiverSource Global Technology Fund BLEND FUNDS RiverSource Disciplined Equity Fund RiverSource Large Cap Equity Fund RiverSource S&P 500 Index Fund* RiverSource Disciplined Small and Mid Cap Equity Fund RiverSource Small Cap Advantage Fund RiverSource Small Company Index Fund RiverSource Small Cap Equity Fund Sector: RiverSource Precious Metals and Mining Fund VALUE FUNDS RiverSource Dividend Opportunity Fund RiverSource Value Fund RiverSource Fundamental Value Fund RiverSource Equity Value Fund RiverSource Large Cap Value Fund RiverSource Diversified Equity Income Fund RiverSource Select Value Fund RiverSource Mid Cap Value Fund RiverSource Disciplined Small Cap Value Fund RiverSource Small Cap Value Fund Sector: RiverSource Real Estate Fund ASSET ALLOCATION FUNDS RiverSource Portfolio Builder Conservative Fund RiverSource Income Builder Basic Income Fund RiverSource Income Builder Moderate Income Fund RiverSource Income Builder Enhanced Income Fund RiverSource Portfolio Builder Moderate Conservative Fund RiverSource Portfolio Builder Moderate Fund RiverSource Retirement Plus(SM) 2010 Fund RiverSource Balanced Fund RiverSource Portfolio Builder Moderate Aggressive Fund RiverSource Retirement Plus(SM) 2015 Fund RiverSource Strategic Allocation Fund RiverSource Retirement Plus(SM) 2020 Fund RiverSource Portfolio Builder Aggressive Fund RiverSource Retirement Plus(SM) 2025 Fund RiverSource Retirement Plus(SM) 2030 Fund RiverSource Retirement Plus(SM) 2035 Fund RiverSource Retirement Plus(SM) 2040 Fund RiverSource Retirement Plus(SM) 2045 Fund RiverSource Portfolio Builder Total Equity Fund
- -------------------------------------------------------------------------------- THIS PAGE IS NOT PART OF THE ANNUAL REPORT TAXABLE INCOME FUNDS RiverSource Cash Management Fund** RiverSource Short Duration U.S. Government Fund RiverSource U.S. Government Mortgage Fund RiverSource Inflation Protected Securities Fund RiverSource Floating Rate Fund RiverSource Limited Duration Bond Fund RiverSource Core Bond Fund RiverSource Diversified Bond Fund RiverSource Strategic Income Allocation Fund RiverSource Income Opportunities Fund RiverSource High Yield Bond Fund RiverSource Global Bond Fund RiverSource Emerging Markets Bond Fund TAX-EXEMPT FUNDS RiverSource Tax-Exempt Money Market Fund** RiverSource Intermediate Tax-Exempt Fund RiverSource Tax-Exempt Bond Fund RiverSource State Tax-Exempt Funds RiverSource Tax-Exempt High Income Fund GLOBAL/INTERNATIONAL FUNDS RiverSource Global Equity Fund RiverSource International Select Value Fund RiverSource International Equity Fund RiverSource Disciplined International Equity Fund RiverSource International Opportunity Fund RiverSource International Small Cap Fund RiverSource International Aggressive Growth Fund RiverSource European Equity Fund RiverSource Emerging Markets Fund
You should consider the investment objectives, risks, charges and expenses of a mutual fund carefully before investing. For a free prospectus of any of the funds listed above, which contains this and other important information about the funds, contact your financial institution or visit riversource.com/funds. Read the prospectus carefully before investing. Investment products, including shares of mutual funds, involve risks including possible loss of principal and fluctuation in value. Investing in certain funds involves special risks, such as those related to investments in foreign securities, small- and mid-capitalization stocks, fixed income securities (especially high-yield securities), and funds which focus their investments in a particular sector, such as real estate, technology and precious metals. See each fund's prospectus for specific risks associated with the fund. * "Standard & Poor's(R)," "S&P," "S&P 500(R)," and "Standard & Poor's 500(R)" are trademarks of the McGraw-Hill Companies, Inc. These trademarks have been licensed for use by Ameriprise Financial, Inc. The fund is not sponsored, endorsed, sold or promoted by Standard & Poor's or any of their subsidiaries or affiliates (the "Licensors") and the Licensors make no representation regarding the advisability of investing in the fund. ** AN INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH A MONEY MARKET FUND SEEKS TO MAINTAIN THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN A MONEY MARKET FUND. - -------------------------------------------------------------------------------- THIS PAGE IS NOT PART OF THE ANNUAL REPORT RIVERSOURCE(R) CORE 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 Distributors, Inc. and Ameriprise Financial Services, Inc., Members FINRA, and managed by (RIVERSOURCE INVESTMENTS RiverSource Investments, LLC. These companies are part of LOGO) Ameriprise Financial, Inc. S-6267 G (9/07)
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