N-CSRS 1 income-nscrs.txt AXP INCOME SERIES, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-499 ------------ AXP INCOME SERIES, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) 50606 AXP Financial Center, Minneapolis, Minnesota 55474 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Leslie L. Ogg - 901 S. Marquette Avenue, Suite 2810, Minneapolis, MN 55402-3268 -------------------------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (612) 330-9283 ----------------- Date of fiscal year end: 5/31 -------------- Date of reporting period: 11/30 -------------- SEMIANNUAL REPORT [RIVERSOURCE INVESTMENTS(SM) LOGO] RIVERSOURCE(SM) SELECTIVE FUND SEMIANNUAL REPORT FOR THE PERIOD ENDED NOV. 30, 2005 - RIVERSOURCE SELECTIVE FUND (FORMERLY AXP(R) SELECTIVE FUND) SEEKS TO PROVIDE SHAREHOLDERS WITH CURRENT INCOME AND PRESERVATION OF CAPITAL. TABLE OF CONTENTS Fund Snapshot 3 Performance Summary 4 Questions & Answers with Portfolio Management 6 Investments in Securities 10 Financial Statements (Portfolio) 21 Notes to Financial Statements (Portfolio) 24 Financial Statements (Fund) 29 Notes to Financial Statements (Fund) 32 Fund Expenses Example 41 Approval of Investment Management Services Agreement 43 Proxy Voting 47 [DALBAR RATED FOR COMMUNICATION 2005 LOGO] American Express(R) Funds'* reports to shareholders have been awarded the Communications Seal from Dalbar Inc., an independent financial services research firm. The Seal recognizes communications demonstrating a level of excellence in the industry. * As of Oct. 1, 2005, the RiverSource brand replaced "American Express" as the name of the American Express Funds. -------------------------------------------------------------------------------- 2 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT FUND SNAPSHOT AT NOV. 30, 2005 PORTFOLIO MANAGERS
PORTFOLIO MANAGERS SINCE YEARS IN INDUSTRY Jamie Jackson, CFA 6/03 17 Scott Kirby 6/03 19 Tom Murphy, CFA 2/03 19
FUND OBJECTIVE For investors seeking current income and preservation of capital. Inception dates by class A: 4/6/45 B: 3/20/95 C: 6/26/00 I: 7/15/04 Y: 3/20/95 Ticker symbols by class A: INSEX B: ISEBX C: ASLCX I: ASTIX Y: IDEYX Total net assets $846.7 million Number of holdings 283 Weighted average life(1) 6.4 years Effective duration(2) 4.3 years Weighted average bond rating(3) AA+
(1) WEIGHTED AVERAGE LIFE measures a bond's maturity, which takes into consideration the possibility that the issuer may call the bond before its maturity date. (2) EFFECTIVE DURATION measures the sensitivity of a security's price to parallel shifts in the yield curve (the graphical depiction of the levels of interest rates from two years out to 30 years). Positive duration means that as rates rise, the price decreases, and negative duration means that as rates rise, the price increases. (3) WEIGHTED AVERAGE BOND RATING represents the average credit quality of the underlying bonds in the portfolio. SECTOR COMPOSITION PERCENTAGE OF PORTFOLIO ASSETS [CHART] Mortgage-Backed 40.9% U.S. Government Obligations & Agencies 25.7% Corporate Bonds* 16.5% Commercial Mortgage-Backed 12.7% Asset-Backed 2.5% Foreign Government Bonds 1.6% Short-Term Securities 0.1%
* Includes 5.3% Telecommunication, 4.5% Financials, 2.2% Utilities, 1.8% Consumer Discretionary, 1.1% Health Care, 0.8% Consumer Staples and 0.8% Industrials. CREDIT QUALITY SUMMARY PERCENTAGE OF BOND PORTFOLIO ASSETS AAA bonds 82.3% AA bonds 1.8 A bonds 6.5 BBB bonds 9.4
Individual security ratings are based on information from Standard & Poor's Corp. and Moody's Investors Service. If a rating is unavailable, the rating is determined through an internal analysis, if appropriate. Investment products, including shares of mutual funds, involve investment risks including possible loss of principal and fluctuation in value. There are risks associated with an investment in a bond fund, including the impact of interest rates, credit and inflation. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer-term securities. Fund holdings are subject to change. -------------------------------------------------------------------------------- 3 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT PERFORMANCE SUMMARY [CHART] PERFORMANCE COMPARISON FOR THE SIX-MONTH PERIOD ENDED NOV. 30, 2005 RiverSource Selective Fund Class A (excluding sales charge) -0.54% Lehman Brothers Aggregate Bond Index(1) (unmanaged) -0.48% Lipper Corporate Debt - A rated Funds Index(2) -0.61%
THE PERFORMANCE INFORMATION SHOWN REPRESENTS PAST PERFORMANCE AND IS NOT A GUARANTEE OF FUTURE RESULTS. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF YOUR INVESTMENT WILL FLUCTUATE SO THAT YOUR SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE INFORMATION SHOWN. YOU MAY OBTAIN PERFORMANCE INFORMATION CURRENT TO THE MOST RECENT MONTH-END BY CALLING (800) 862-7919 OR VISITING www.riversource.com/funds. (1) The Lehman Brothers Aggregate Bond Index, an unmanaged index, is made up of a representative list of government, corporate, asset-backed and mortgage-backed securities. The index is frequently used as a general measure of bond market performance. The index reflects reinvestment of all distributions and changes in market prices, but excludes brokerage commissions or other fees. (2) The Lipper Corporate Debt - A rated Funds Index includes the 30 largest corporate debt A rated funds tracked by Lipper Inc. The index's returns include net reinvested dividends. The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart. If reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The indices do not reflect the effects of sales charges, expenses (excluding Lipper) and taxes. SEC YIELDS At Nov. 30, 2005 by class A: 4.04% B: 3.49% C: 3.48% I: 4.54% Y: 4.41% At Dec. 30, 2005* by class A: 3.88% B: 3.33% C: 3.33% I: 4.39% Y: 4.26% The Securities and Exchange Commission (SEC) yield is calculated by dividing anticipated net investment income during a 31-day period by the public offering price (POP) per share on the last day of the period, and converting the results to yearly figures. See Average Annual Total Returns on page 5 for additional performance information. * The last business day of the period. STYLE MATRIX DURATION SHORT INT. LONG QUALITY HIGH X MEDIUM LOW
SHADING WITHIN THE STYLE MATRIX INDICATES AREAS IN WHICH THE FUND GENERALLY INVESTS. -------------------------------------------------------------------------------- 4 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT PERFORMANCE SUMMARY AVERAGE ANNUAL TOTAL RETURNS
CLASS A CLASS B CLASS C CLASS I CLASS Y (INCEPTION DATES) (4/6/45) (3/20/95) (6/26/00) (7/15/04) (3/20/95) AFTER AFTER NAV(1) POP(2) NAV(1) CDSC(3) NAV(1) CDSC(4) NAV(5) NAV(6) AT NOV. 30, 2005 6 months* -0.54% -5.27% -0.92% -5.80% -0.92% -1.90% -0.39% -0.34% 1 year +1.83% -3.01% +1.06% -3.85% +1.06% +0.08% +2.15% +2.12% 3 years +3.32% +1.66% +2.54% +1.27% +2.55% +2.55% N/A +3.49% 5 years +3.85% +2.85% +3.07% +2.72% +3.07% +3.07% N/A +4.02% 10 years +4.66% +4.15% +3.87% +3.87% N/A N/A N/A +4.81% Since inception +6.64% +6.56% +4.83% +4.83% +3.80% +3.80% +3.49% +5.78% AT DEC. 31, 2005 6 months* -0.06% -4.80% -0.43% -5.34% -0.43% -1.41% +0.09% -0.09% 1 year +1.91% -2.93% +1.14% -3.76% +1.15% +0.16% +2.23% +1.96% 3 years +2.97% +1.32% +2.20% +0.92% +2.20% +2.20% N/A +3.10% 5 years +3.63% +2.63% +2.85% +2.50% +2.85% +2.85% N/A +3.78% 10 years +4.57% +4.06% +3.78% +3.78% N/A N/A N/A +4.71% Since inception +6.65% +6.56% +4.87% +4.87% +3.89% +3.89% +3.92% +5.81%
(1) EXCLUDING SALES CHARGE. (2) RETURNS AT PUBLIC OFFERING PRICE (POP) REFLECT A SALES CHARGE OF 4.75%. (3) RETURNS AT MAXIMUM CONTINGENT DEFERRED SALES CHARGE (CDSC). CDSC APPLIES AS FOLLOWS: FIRST YEAR 5%; SECOND AND THIRD YEAR 4%; FOURTH YEAR 3%; FIFTH YEAR 2%; SIXTH YEAR 1%; NO SALES CHARGE THEREAFTER. (4) 1% CDSC APPLIES TO REDEMPTIONS MADE WITHIN THE FIRST YEAR OF PURCHASE. (5) SALES CHARGE IS NOT APPLICABLE TO THESE SHARES. SHARES AVAILABLE TO ELIGIBLE INVESTORS ONLY, CURRENTLY LIMITED TO RIVERSOURCE PORTFOLIO BUILDER FUNDS, SIX AFFILIATED FUNDS-OF-FUNDS. (6) SALES CHARGE IS NOT APPLICABLE TO THESE SHARES. SHARES AVAILABLE TO INSTITUTIONAL INVESTORS ONLY. * NOT ANNUALIZED. -------------------------------------------------------------------------------- 5 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT QUESTIONS & ANSWERS WITH PORTFOLIO MANAGEMENT BELOW, THE FUND'S PORTFOLIO MANAGEMENT TEAM DISCUSSES THE FUND'S POSITIONING AND RESULTS FOR THE SEMIANNUAL PERIOD ENDED NOV. 30, 2005. SHAREHOLDERS WILL BE ASKED TO APPROVE A MERGER OF THE FUND INTO RIVERSOURCE DIVERSIFIED BOND FUND AT A SHAREHOLDER MEETING ON FEB. 15, 2006. THIS APPROVAL IS NOT GUARANTEED. Q: HOW DID RIVERSOURCE SELECTIVE FUND PERFORM FOR THE SIX-MONTH PERIOD ENDED NOV. 30, 2005? A: RiverSource Selective Fund's Class A shares (excluding sales charge) declined 0.54% for the six months ended Nov. 30, 2005. The Fund underperformed the Lehman Brothers Aggregate Bond Index (Lehman Index), which fell 0.48%. However, the Fund outperformed the Lipper Corporate Debt - A rated Funds Index, representing the Fund's peer group, which declined 0.61%. Q: WHAT FACTORS MOST SIGNIFICANTLY AFFECTED PERFORMANCE DURING THE SEMIANNUAL PERIOD? A: Overall, the fixed income market struggled during the six months, as U.S. Treasury rates followed a volatile path in a generally upward direction. The major exception to the trend toward higher rates was the short-lived rally in the immediate aftermath of Hurricane Katrina. However, despite the wrenching personal catastrophe, fears of a dramatic economic slowdown in response to the damage did not materialize. The Federal Reserve Board (the Fed) raised interest rates a total of four times during the semiannual period, bringing the targeted federal funds rate to 4.00% by the end of November. The market began to price in continued hikes by the Fed. Thus, returns on the Fund and its benchmarks were negative. The Fund benefited during the period from its comparatively short duration positioning, as rates rose materially, particularly on 10-year and shorter maturity bonds, and the yield curve flattened somewhat, meaning short-term interest rates rose more than long-term rates. Duration is a measure of the Fund's sensitivity to changes in interest rates. From a sector perspective, we maintained the Fund's defensive position in mortgages, favoring higher coupon bonds. The Fund's positioning in mortgages contributed to results, as higher coupon bonds outperformed lower coupon bonds. A modest exposure to mortgages also helped, as mortgage-backed securities overall underperformed U.S. Treasuries due to higher interest rates, slightly higher volatility and a general lack of demand on the part of investors. Most affected were 30-year, lower coupon mortgage-backed securities. -------------------------------------------------------------------------------- 6 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT QUESTIONS & ANSWERS - THE FUND'S POSITIONING IN MORTGAGES CONTRIBUTED TO RESULTS, AS HIGHER COUPON BONDS OUTPERFORMED LOWER COUPON BONDS. Individual issue selection in the corporate bond sector helped the Fund's performance for the period as well. Further supporting the Fund's returns was its positioning within the agency sector, wherein we favored shorter-term maturities, as shorter-term agencies outperformed longer-term agencies during the period. Conversely, detracting from the Fund's results was its positioning in non-U.S. dollar bonds, or bonds denominated in foreign currencies. The U.S. dollar was stubbornly strong vs. foreign currencies during the six months, eroding the value of the portfolio's non-U.S. dollar bond holdings in U.S. dollar terms. Remember, a strengthening dollar decreases the value of the Fund's foreign currency denominated securities when expressed in U.S. dollar terms. Q: WHAT CHANGES DID YOU MAKE TO THE FUND AND HOW IS IT CURRENTLY POSITIONED? A: While we kept duration shorter than the Lehman Index throughout the semiannual period, we extended duration a bit as rates rose to what we consider our target level. Toward the end of the period, we added two-year U.S. Treasuries to the Fund's exposure, based upon our view that short-term maturities had become a slightly better value than longer-term maturities. Also, as the yield curve flattened dramatically, we removed some of the Fund's yield curve flattening bias and reduced the portfolio's sensitivity to changes in interest rates. We maintained the Fund's significant exposure to commercial mortgage-backed securities (CMBS) and asset-backed securities throughout the six months, as we believe these sectors offer attractive yield as well as the kind of defensive characteristics we want in the current -------------------------------------------------------------------------------- 7 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT QUESTIONS & ANSWERS - WE INTEND TO POSITION THE FUND FOR ONGOING U.S. ECONOMIC RECOVERY AND STILL HIGHER INTEREST RATES, AS THESE THEMES ARE LIKELY TO CONTINUE TO WEIGH ON THE FIXED INCOME MARKETS INTO THE NEW YEAR. market environment. In reaction to the underperformance of mortgage-backed securities, we started to increase the Fund's allocation to this sector. While we maintain a moderate exposure to mortgages, we had started to see better value in these securities and added to the Fund's position accordingly. Throughout the period, we constantly re-evaluated all of the Fund's positions as we sought to have the best risk/reward opportunities in the Fund across sectors, with an eye toward holding greater positions in securities that may offer the highest likelihood of outperforming the Lehman Index. Overall, the opportunistic changes we made in response to valuations or market developments resulted in a semiannual portfolio turnover rate of 147%. At the end of the semiannual period, the Fund had a modest exposure to investment grade credit and mortgage securities in favor of CMBS and asset-backed securities and a small position in global bonds. Q: HOW DO YOU INTEND TO MANAGE THE FUND IN THE COMING MONTHS? A: We intend to position the Fund for ongoing U.S. economic recovery and still higher interest rates, as these themes are likely to continue to weigh on the fixed income markets into the new year. We believe the Fed will likely continue its gradualist approach, raising the targeted federal funds rate to a 4.50% or 4.75% rate. Based on this view, we intend to maintain the Fund's duration shorter than that of the Lehman Index for the near term. We believe fixed income yields will move materially higher in the months ahead. As for yield curve positioning, or the way a Fund is positioned to respond to changes in short-term vs. long-term interest rates, we are currently maintaining only a modest flattening bias. We believe the yield curve has already flattened to near fair value and the move to higher yields across short-term and long-term maturities -------------------------------------------------------------------------------- 8 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT QUESTIONS & ANSWERS going forward may be more parallel in nature. From a sector perspective, we intend to maintain the Fund's sizable position in CMBS and asset-backed securities, as high quality yield enhancers. In mortgages, we plan to remain defensively positioned, emphasizing premium coupons, 15-year mortgages and attractive structural attributes. We continue to be very selective in adding investment grade corporate holdings to the portfolio. Finally, we intend to maintain the Fund's moderate exposure to non-U.S. dollar bonds. The U.S. dollar's pressured path may experience fits and starts with short-lived periods of currency strength. However, we believe the U.S. dollar will likely remain at relatively weak levels going forward, as we expect the currency's structural problems to continue. We will continue to monitor job creation and inflation numbers, as they remain key indicators for the economy in the coming months. As always, we maintain a disciplined focus on individual security selection. -------------------------------------------------------------------------------- 9 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT INVESTMENTS IN SECURITIES QUALITY INCOME PORTFOLIO NOV. 30, 2005 (UNAUDITED) (PERCENTAGES REPRESENT VALUE OF INVESTMENTS COMPARED TO NET ASSETS) BONDS (100.7%)
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) SOVEREIGN (1.7%) Bundesrepublik Deutschland (European Monetary Unit) 01-04-07 6.00% 6,747,000(c) $ 8,231,993 United Kingdom Treasury (British Pound) 12-07-06 7.50 3,223,000(c) 5,749,097 ------------ Total 13,981,090 -------------------------------------------------------------------------------------------------------- U.S. GOVERNMENT OBLIGATIONS & AGENCIES (26.0%) Federal Farm Credit Bank 10-10-08 4.25 3,485,000 3,444,504 Federal Home Loan Bank 04-18-08 4.13 2,585,000 2,551,475 Federal Home Loan Mtge Corp 06-15-08 3.88 18,350,000 17,987,588 10-15-08 5.13 13,885,000 14,029,904 03-18-09 3.76 2,810,000 2,724,115 07-15-09 4.25 10,000,000 9,838,200 07-12-10 4.13 18,052,000 17,564,434 Federal Natl Mtge Assn 10-15-08 4.50 7,450,000 7,404,093 12-19-08 4.63 5,000,000 4,985,550 Overseas Private Investment U.S. Govt Guaranty Series 1996A 09-15-08 6.99 3,333,333 3,442,900 U.S. Treasury 06-30-07 3.63 7,785,000 7,691,642 11-30-07 4.25 35,330,000 35,216,837 11-15-10 4.50 130,000 130,421 11-15-15 4.50 10,370,000 10,371,618 08-15-23 6.25 19,435,000 22,741,224 02-15-26 6.00 44,014,000(l) 50,734,717 U.S. Treasury Inflation-Indexed Bond 01-15-15 1.63 9,460,145(m) 9,069,136 ------------ Total 219,928,358 -------------------------------------------------------------------------------------------------------- ASSET-BACKED (2.5%) Aesop Funding II LLC Series 2004-2A Cl A1 (FGIC) 04-20-08 2.76% $ 825,000(d,e) $ 804,877 AmeriCredit Automobile Receivables Trust Series 2005-BM Cl A3 (MBIA) 02-06-10 4.05 3,000,000(e) 2,962,033 AmeriCredit Automobile Receivables Trust Series 2005-DA Cl A3 12-06-10 4.87 800,000 800,594 ARG Funding Series 2005-1A Cl A3 (MBIA) 04-20-11 4.29 2,250,000(d,e) 2,189,522 Capital Auto Receivables Asset Trust Series 2004-1 09-15-10 2.84 1,200,000 1,161,636 Capital Auto Receivables Asset Trust Series 2005-1 Cl A4 07-15-09 4.05 2,800,000 2,748,368 Capital One Auto Finance Trust Series 2005-BSS Cl A3 11-15-09 4.08 1,600,000 1,575,536 Carmax Auto Owner Trust Series 2005-1 Cl A4 03-15-10 4.35 900,000 889,384 Countrywide Asset-Backed Certificates Series 2005-10 Cl AF6 02-25-36 4.92 490,000 475,373 Long Beach Auto Receivables Trust Series 2004-C Cl A3 (FSA) 09-15-09 3.40 1,400,000(e) 1,383,956 Morgan Stanley Auto Loan Trust Series 2004-HB2 Cl A3 03-16-09 2.94 1,500,000 1,471,145 Popular ABS Mtge Pass-Through Trust Series 2005-A Cl AF2 06-25-35 4.49 955,000 937,740 Residential Asset Securities Series 2002-KS1 Cl AI4 (AMBAC) 11-25-29 5.86 92,924(e) 92,588
See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 10 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) ASSET-BACKED (CONT.) Triad Auto Receivables Owner Trust Series 2005-A Cl A3 (AMBAC) 03-12-10 4.05% $2,700,000(e) $2,667,222 WFS Financial Owner Trust Series 2004-1 Cl D 08-22-11 3.17 941,958 926,781 ------------ Total 21,086,755 -------------------------------------------------------------------------------------------------------- COMMERCIAL MORTGAGE-BACKED (12.8%)(f) Banc of America Commercial Mtge Series 2005-1 Cl A4 11-10-42 5.03 1,250,000 1,241,209 Banc of America Large Loan Series 2005-BOCA Cl A1 12-15-16 4.24 1,073,718(d,i) 1,073,991 Banc of America Large Loan Series 2005-BOCA Cl A2 12-15-16 4.29 1,500,000(d,i) 1,500,845 Bank of America-First Union NB Commercial Mtge Series 2001-3 Cl A1 04-11-37 4.89 1,174,957 1,172,371 Bear Stearns Commercial Mtge Securities Series 2003-T10 Cl A1 03-13-40 4.00 2,924,698 2,828,388 Bear Stearns Commercial Mtge Securities Series 2004-T16 Cl A3 02-13-46 4.03 600,000 578,480 Bear Stearns Commercial Mtge Securities Series 2005-PWR8 Cl A1 06-11-41 4.21 2,370,783 2,330,029 Bear Stearns Commercial Mtge Securities Series 2005-T20 Cl E 10-12-42 5.16 800,000 782,872 California State Teachers' Retirement System Trust Series 2002-C6 Cl A3 11-20-14 4.46 5,311,845(d) 5,210,404 CDC Commercial Mtge Trust Series 2002-FX1 Cl A2 11-15-30 5.68 1,750,000 1,790,841 Citigroup Commercial Mtge Trust Series 2005-EMG Cl A1 09-20-51 4.15 3,332,802(d) 3,271,191 Citigroup/Deutsche Bank Commercial Mtge Trust Series 2005-CD1 Cl A4 07-15-44 5.23 2,800,000 2,802,192 Citigroup/Deutsche Bank Commercial Mtge Trust Series 2005-CD1 Cl ASB 07-15-44 5.23 825,000 827,475 Commercial Mtge Pass-Through Ctfs Series 2004-CNL Cl A1 09-15-14 4.34% $3,280,000(d,i) $3,279,246 CS First Boston Mtge Securities Series 2002-CKS4 Cl A1 11-15-36 4.49 1,857,809 1,824,554 CS First Boston Mtge Securities Series 2004-C1 Cl A2 01-15-37 3.52 1,550,000 1,492,118 CS First Boston Mtge Securities Series 2005-C5 Cl A2 08-15-38 5.10 825,000 824,629 Federal Natl Mtge Assn #385717 11-01-12 4.84 1,818,056 1,806,657 Federal Natl Mtge Assn #386599 11-01-10 4.47 553,861 543,618 GE Capital Commercial Mtge Series 2001-3 Cl A1 06-10-38 5.56 1,290,345 1,303,277 GE Capital Commercial Mtge Series 2004-C2 Cl A2 03-10-40 4.12 3,250,000 3,149,705 GE Capital Commercial Mtge Series 2005-C3 Cl A1 07-10-45 4.59 1,593,165 1,576,279 General Electric Capital Assurance Series 2003-1 Cl A3 05-12-35 4.77 2,700,000(d) 2,647,672 GMAC Commercial Mtge Securities Series 1999-C1 Cl B 05-15-33 6.30 2,200,000 2,278,211 GMAC Commercial Mtge Securities Series 2004-C3 Cl A4 12-10-41 4.55 1,700,000 1,639,836 GMAC Commercial Mtge Securities Series 2005-C1 Cl A1 05-10-43 4.21 1,240,558 1,217,448 Greenwich Capital Commercial Funding Series 2004-GG1 Cl A5 06-10-36 4.88 1,000,000 987,540 Greenwich Capital Commercial Funding Series 2005-GG3 Cl A1 08-10-42 3.92 1,135,684 1,115,718 Greenwich Capital Commercial Funding Series 2005-GG3 Cl A3 08-10-42 4.57 2,650,000 2,566,214
See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 11 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL 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% $1,600,000 $1,583,055 GS Mtge Securities II Series 2005-GG4 Cl A1 07-10-39 4.37 2,054,066 2,021,244 JPMorgan Chase Commercial Mtge Securities Series 2002-CIB5 Cl A1 10-12-37 4.37 1,825,119 1,791,579 JPMorgan Chase Commercial Mtge Securities Series 2003-CB6 Cl A2 07-12-37 5.26 1,500,000 1,500,573 JPMorgan Chase Commercial Mtge Securities Series 2003-LN1 Cl A1 10-15-37 4.13 1,256,010 1,210,168 JPMorgan Chase Commercial Mtge Securities Series 2003-ML1A Cl A1 03-12-39 3.97 1,089,865 1,052,551 JPMorgan Chase Commercial Mtge Securities Series 2004-CBX Cl A3 01-12-37 4.18 1,000,000 967,823 JPMorgan Chase Commercial Mtge Securities Series 2004-CBX Cl A5 01-12-37 4.65 1,500,000 1,453,244 JPMorgan Chase Commercial Mtge Securities Series 2005-LDP2 Cl A1 07-15-42 4.33 1,985,695 1,958,074 LB-UBS Commercial Mtge Trust Series 2002-C2 Cl A3 06-15-26 5.39 2,790,000 2,818,796 LB-UBS Commercial Mtge Trust Series 2002-C4 Cl A4 09-15-26 4.56 1,800,000 1,754,661 LB-UBS Commercial Mtge Trust Series 2003-C8 Cl A2 11-15-27 4.21 5,130,000 5,015,959 LB-UBS Commercial Mtge Trust Series 2003-C8 Cl A3 11-15-27 4.83 1,150,000 1,134,590 LB-UBS Commercial Mtge Trust Series 2004-C2 Cl A3 03-15-29 3.97 1,200,000 1,129,452 LB-UBS Commercial Mtge Trust Series 2004-C4 Cl A3 06-15-29 5.16 1,000,000 1,001,308 LB-UBS Commercial Mtge Trust Series 2004-C6 Cl A2 08-15-29 4.19 1,995,000 1,943,948 LB-UBS Commercial Mtge Trust Series 2004-C6 Cl A4 08-15-29 4.58% $1,550,000 $1,508,499 LB-UBS Commercial Mtge Trust Series 2004-C7 Cl A2 10-15-29 3.99 1,000,000 964,180 LB-UBS Commercial Mtge Trust Series 2004-C8 Cl A2 12-15-29 4.20 2,300,000 2,236,221 LB-UBS Commercial Mtge Trust Series 2005-C3 Cl A1 07-15-30 4.39 1,267,652 1,253,049 LB-UBS Commercial Mtge Trust Series 2005-C5 Cl A2 09-15-30 4.89 1,500,000 1,488,225 Merrill Lynch Mtge Trust Series 2005-MCP1 Cl A1 06-12-43 4.22 1,694,125 1,665,640 Morgan Stanley Capital I Series 2003-IQ4 Cl A1 05-15-40 3.27 4,063,533 3,804,191 Morgan Stanley Capital I Series 2003-T11 Cl A2 06-13-41 4.34 1,225,000 1,194,965 Morgan Stanley Capital I Series 2004-HQ4 Cl A5 04-14-40 4.59 1,350,000 1,311,984 Morgan Stanley Capital I Series 2005-IQ10 Cl A4A 09-15-42 5.23 1,600,000 1,590,775 Morgan Stanley, Dean Witter Capital I Series 2002-TOP7 Cl A2 01-15-39 5.98 4,335,000 4,507,905 Prudential Commercial Mtge Trust Series 2003-PWR1 Cl A1 02-11-36 3.67 1,498,522 1,436,015 Wachovia Bank Commercial Mtge Trust Series 2005-C16 Cl A2 10-15-41 4.38 1,500,000 1,461,304 Wachovia Bank Commercial Mtge Trust Series 2005-C16 Cl A3 10-15-41 4.62 1,962,000 1,903,368 ------------ Total 108,326,356 --------------------------------------------------------------------------------------------------------
See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 12 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT BONDS (CONTINUED)
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) MORTGAGE-BACKED (41.3%)(f,k) Adjustable Rate Mtge Trust Series 2004-2 Cl 6A1 02-25-35 5.26% $1,685,054(j) $1,682,336 Banc of America Mtge Securities Series 2004-F Cl B1 07-25-34 4.13 1,826,752(j) 1,761,884 Bank of America Alternative Loan Trust Series 2003-11 Cl 1A1 01-25-34 6.00 2,190,026 2,188,756 Bank of America Alternative Loan Trust Series 2003-11 Cl 4A1 01-25-19 4.75 1,270,303 1,231,004 Bear Stearns Adjustable Rate Mtge Trust Series 2004-10 Cl 13A1 01-25-35 5.03 2,523,880(j) 2,493,793 Bear Stearns Adjustable Rate Mtge Trust Series 2004-12 Cl 3A1 02-25-35 5.17 1,859,415(j) 1,845,544 Chaseflex Trust Series 2005-2 Cl 2A2 06-25-35 6.50 2,809,211 2,865,395 Countrywide Alternative Loan Trust Series 2003-11T1 Cl A1 07-25-18 4.75 1,413,192 1,369,472 Countrywide Alternative Loan Trust Series 2005-54CB Cl 2A3 11-25-35 5.50 1,992,545 1,996,217 Countrywide Alternative Loan Trust Series 2005-54CB Cl 3A7 11-25-35 5.50 2,027,760 2,034,233 Countrywide Alternative Loan Trust Series 2005-6CB Cl 1A1 04-25-35 7.50 2,017,674 2,086,050 Countrywide Home Loans Series 2004-12 Cl 1M 08-25-34 4.61 1,172,432(j) 1,138,593 Countrywide Home Loans Series 2005-R2 Cl 2A1 06-25-35 7.00 2,796,046(d) 2,877,974 CS First Boston Mtge Securities Series 2004-AR5 Cl CB1 06-25-34 4.40 1,187,347(j) 1,153,531 CS First Boston Mtge Securities Series 2005-12 12-25-35 7.00 3,700,000(b) 3,829,500 CS First Boston Mtge Securities Series 2005-10 4A1 11-25-35 6.50 3,074,235 3,124,191 CS First Boston Mtge Securities Series 2005-8 7A1 09-25-35 7.00% $4,228,564 $4,324,029 Downey Savings & Loan Assn Mtge Loan Trust Collateralized Mtge Obligation Interest Only Series 2005-AR5 Cl X1 08-19-45 6.38 27,826,504(g) 417,398 Federal Home Loan Mtge Corp Collateralized Mtge Obligation 01-15-18 6.50 1,293,207 1,348,215 10-15-27 5.00 7,425,000 7,365,445 06-15-28 5.00 4,625,000 4,589,749 12-15-28 5.50 2,175,000 2,183,950 02-15-33 5.50 3,396,152 3,432,890 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only 02-15-14 17.16 1,211,516(g) 68,499 Federal Home Loan Mtge Corp #170216 03-01-17 8.50 11,894 12,820 Federal Home Loan Mtge Corp #275036 07-01-16 8.00 136 144 Federal Home Loan Mtge Corp #284190 01-01-17 8.00 1,012 1,084 Federal Home Loan Mtge Corp #295114 06-01-17 8.50 4,067 4,384 Federal Home Loan Mtge Corp #540861 09-01-19 8.50 35,977 38,873 Federal Home Loan Mtge Corp #A00304 04-01-21 9.00 84,821 91,910 Federal Home Loan Mtge Corp #B11835 01-01-19 5.50 692,938 696,394 Federal Home Loan Mtge Corp #C00103 03-01-22 8.50 189,667 205,658 Federal Home Loan Mtge Corp #C00144 08-01-22 8.50 157,671 171,022 Federal Home Loan Mtge Corp #C62993 01-01-32 6.50 1,558,575 1,598,097 Federal Home Loan Mtge Corp #C63552 01-01-32 6.50 2,067,220 2,130,856 Federal Home Loan Mtge Corp #C64703 03-01-32 6.50 1,389,970 1,432,427 Federal Home Loan Mtge Corp #C67723 06-01-32 7.00 1,297,201 1,363,395 Federal Home Loan Mtge Corp #C79930 06-01-33 5.50 3,043,748 3,008,965
See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 13 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT BONDS (CONTINUED)
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) MORTGAGE-BACKED (CONT.) Federal Home Loan Mtge Corp #E01419 05-01-18 5.50% $1,718,975 $1,728,188 Federal Home Loan Mtge Corp #E79810 11-01-14 7.50 1,515,528 1,599,597 Federal Home Loan Mtge Corp #E96516 05-01-13 4.50 1,788,232 1,747,568 Federal Home Loan Mtge Corp #E99101 09-01-18 5.00 3,426,016 3,383,764 Federal Home Loan Mtge Corp #E99593 10-01-18 5.00 1,172,089 1,157,306 Federal Home Loan Mtge Corp #E99684 10-01-18 5.00 4,101,222 4,049,846 Federal Home Loan Mtge Corp #G00286 02-01-25 8.00 236,147 252,258 Federal Home Loan Mtge Corp #G01441 07-01-32 7.00 4,138,038 4,311,498 Federal Home Loan Mtge Corp #G01535 04-01-33 6.00 5,354,146 5,424,524 Federal Home Loan Mtge Corp #G11302 07-01-17 7.00 5,021,279 5,214,433 Federal Natl Mtge Assn 12-01-20 5.50 4,500,000(b) 4,518,279 04-01-34 5.50 8,465,270 8,357,914 12-01-35 6.50 5,500,000(b) 5,630,625 Federal Natl Mtge Assn Collateralized Mtge Obligation 12-25-26 8.00 1,327,927 1,410,640 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only 12-25-12 20.00 928,798(g) 40,397 12-25-22 8.27 1,050,946(g) 159,893 12-25-31 10.31 1,230,896(g) 208,051 Federal Natl Mtge Assn Collateralized Mtge Obligation Principal Only 09-01-18 5.50 24,223(h) 20,647 Federal Natl Mtge Assn #125479 04-01-27 7.50 364,664 383,686 Federal Natl Mtge Assn #250765 12-01-26 8.00 340,006 362,358 Federal Natl Mtge Assn #251116 08-01-27 8.00 397,097 423,750 Federal Natl Mtge Assn #252982 01-01-30 8.00 295,445 315,082 Federal Natl Mtge Assn #254236 03-01-17 6.50 2,560,426 2,639,628 Federal Natl Mtge Assn #254383 06-01-32 7.50% $ 587,205 $ 616,530 Federal Natl Mtge Assn #254916 09-01-23 5.50 3,217,851 3,200,473 Federal Natl Mtge Assn #255788 06-01-15 5.50 4,269,694 4,301,854 Federal Natl Mtge Assn #323980 04-01-14 6.00 2,177,148 2,224,248 Federal Natl Mtge Assn #408207 01-01-28 6.50 204,024 210,145 Federal Natl Mtge Assn #545008 06-01-31 7.00 3,398,354 3,572,440 Federal Natl Mtge Assn #545684 05-01-32 7.50 466,814 490,371 Federal Natl Mtge Assn #545869 07-01-32 6.50 847,246 871,876 Federal Natl Mtge Assn #545885 08-01-32 6.50 5,375,154 5,529,690 Federal Natl Mtge Assn #555343 08-01-17 6.00 5,079,695 5,190,294 Federal Natl Mtge Assn #555375 04-01-33 6.00 8,487,314 8,573,596 Federal Natl Mtge Assn #555458 05-01-33 5.50 5,151,782 5,085,788 Federal Natl Mtge Assn #555734 07-01-23 5.00 2,705,607 2,630,673 Federal Natl Mtge Assn #555740 08-01-18 4.50 5,103,081 4,943,211 Federal Natl Mtge Assn #634650 04-01-32 7.50 320,764 336,784 Federal Natl Mtge Assn #643362 04-01-17 6.50 1,068,367 1,101,415 Federal Natl Mtge Assn #662061 09-01-32 6.50 2,177,969 2,233,366 Federal Natl Mtge Assn #670387 08-01-32 7.00 556,481 581,324 Federal Natl Mtge Assn #678028 09-01-17 6.00 5,925,976 6,055,001 Federal Natl Mtge Assn #680961 01-01-33 6.00 840,704 847,342 Federal Natl Mtge Assn #682825 01-01-33 6.00 2,642,324 2,660,087 Federal Natl Mtge Assn #686172 02-01-33 6.00 3,436,211 3,459,310 Federal Natl Mtge Assn #686528 02-01-33 6.00 4,674,779 4,719,292
See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 14 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT BONDS (CONTINUED)
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #689093 07-01-28 5.50% $1,633,727 $1,614,725 Federal Natl Mtge Assn #694628 04-01-33 5.50 2,913,720 2,884,346 Federal Natl Mtge Assn #694795 04-01-33 5.50 2,901,972 2,872,630 Federal Natl Mtge Assn #695220 04-01-33 5.50 1,998,052 1,972,713 Federal Natl Mtge Assn #697843 04-01-18 5.00 2,882,467 2,847,027 Federal Natl Mtge Assn #699424 04-01-33 5.50 5,693,678 5,636,273 Federal Natl Mtge Assn #702427 04-01-33 5.50 5,429,397 5,374,589 Federal Natl Mtge Assn #704049 05-01-18 5.50 3,957,379 3,982,345 Federal Natl Mtge Assn #712109 04-01-18 5.00 2,382,949 2,360,395 Federal Natl Mtge Assn #720006 07-01-33 5.50 2,985,917 2,948,050 Federal Natl Mtge Assn #720070 07-01-23 5.50 3,164,363 3,147,273 Federal Natl Mtge Assn #720378 06-01-18 4.50 1,568,850 1,521,572 Federal Natl Mtge Assn #725232 03-01-34 5.00 7,386,285 7,131,885 Federal Natl Mtge Assn #725684 05-01-18 6.00 3,795,462 3,877,746 Federal Natl Mtge Assn #725719 07-01-33 4.84 2,049,930(j) 2,012,417 Federal Natl Mtge Assn #726362 06-01-18 5.00 1,814,863 1,794,937 Federal Natl Mtge Assn #730153 08-01-33 5.50 683,755 675,083 Federal Natl Mtge Assn #735057 01-01-19 4.50 3,780,721 3,666,789 Federal Natl Mtge Assn #735160 12-01-34 4.36 946,959(j) 937,129 Federal Natl Mtge Assn #738921 11-01-32 6.50 1,211,414 1,247,746 Federal Natl Mtge Assn #747642 11-01-28 5.50 2,977,462 2,942,831 Federal Natl Mtge Assn #747784 10-01-18 4.50 2,848,158 2,762,328 Federal Natl Mtge Assn #759342 01-01-34 6.50 1,307,348 1,345,866 Federal Natl Mtge Assn #765183 01-01-19 5.50 884,927 889,903 Federal Natl Mtge Assn #765761 02-01-19 5.00% $2,354,700 $2,324,226 Federal Natl Mtge Assn #766641 03-01-34 5.00 3,008,573 2,901,225 Federal Natl Mtge Assn #776962 04-01-29 5.00 3,282,555 3,159,010 Federal Natl Mtge Assn #779327 06-01-34 4.56 5,180,607(j) 5,114,809 Federal Natl Mtge Assn #790759 09-01-34 4.82 3,301,426(j) 3,291,100 Federal Natl Mtge Assn #804442 12-01-34 6.50 2,791,224 2,858,507 Federal Natl Mtge Assn #811925 04-01-35 4.92 2,133,929(j) 2,126,785 Federal Natl Mtge Assn #821378 05-01-35 5.04 2,059,180(j) 2,059,833 First Horizon Alternative Mtge Securities Series 2004-AA4 Cl A1 10-25-34 5.41 1,477,125(i) 1,488,794 First Horizon Alternative Mtge Securities Series 2005-AA2 Cl 2A1 04-25-35 5.42 2,268,521(i) 2,280,408 First Horizon Alternative Mtge Securities Series 2005-AA3 Cl 3A1 05-25-35 5.40 2,005,635(i) 2,005,876 First Horizon Alternative Mtge Securities Series 2005-AA4 Cl B1 06-25-35 5.38 724,348 722,537 Govt Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2002-70 Cl IC 08-20-32 11.69 3,367,760(g) 600,095 Govt Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2002-80 Cl CI 01-20-32 20.00 737,873(g) 75,604 Govt Natl Mtge Assn #423782 05-15-26 7.50 608,763 644,366 Govt Natl Mtge Assn #595256 12-15-32 6.00 8,784,137 8,924,503 Govt Natl Mtge Assn #604580 08-15-33 5.00 5,071,267 4,969,372 Govt Natl Mtge Assn #604708 10-15-33 5.50 3,599,620 3,592,024
See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 15 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT BONDS (CONTINUED)
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) MORTGAGE-BACKED (CONT.) Harborview Mtge Loan Trust Series 2005-16 Cl 3A1B 01-19-36 4.55% $ 3,225,000(j) $ 3,225,000 IndyMac Index Mtge Loan Trust Collateralized Mtge Obligation Interest Only Series 2005-AR8 Cl AX1 04-25-35 4.50 61,475,045(g) 730,016 IndyMac Index Mtge Loan Trust Series 2005-AR3 Cl 3A1 04-25-35 5.33 1,157,319(j) 1,154,139 Master Adjustable Rate Mtge Trust Series 2004-5 Cl B1 07-25-34 4.39 1,453,920(j) 1,409,386 Master Alternative Loans Trust Series 2004-2 Cl 4A1 02-25-19 5.00 2,146,654 2,122,504 Master Alternative Loans Trust Series 2004-4 Cl 2A1 05-25-34 6.00 3,351,972 3,375,469 Master Alternative Loans Trust Series 2004-7 Cl 8A1 08-25-19 5.00 1,600,786 1,580,088 Master Alternative Loans Trust Series 2004-8 Cl 7A1 09-25-19 5.00 2,236,775 2,207,406 Structured Adjustable Rate Mtge Loan Trust Series 2004-5 Cl B1 05-25-34 4.60 1,344,652(j) 1,298,046 Structured Asset Securities Series 2003-33H Cl 1A1 10-25-33 5.50 4,602,965 4,504,642 Washington Mutual Series 2003-AR10 Cl A7 10-25-33 4.07 2,375,000(j) 2,295,086 Washington Mutual Series 2004-CB2 Cl 6A 07-25-19 4.50 1,590,039 1,528,854 Washington Mutual Series 2005-AR17 Cl A1C1 12-25-45 4.39 1,735,000(b) 1,735,000 Washington Mutual Alternative Mtge Loan Trust Pass-Through Certificates Interest Only Series 2005-AR1 Cl X2 12-25-35 0.00 21,000,000(g) 239,941 Wells Fargo Mtge Backed Securities Trust Series 2005-10 Cl A1 10-25-35 5.00% $ 6,273,188 $ 6,020,303 Wells Fargo Mtge Backed Securities Trust Series 2005-5 Cl 2A1 05-25-35 5.50 3,798,265 3,716,366 Wells Fargo Mtge Backed Securities Trust Series 2005-AR1 Cl 1A1 02-25-35 4.55 3,303,262(j) 3,251,566 Wells Fargo Mtge Backed Securities Trust Series 2005-AR16 Cl 6A3 10-25-35 5.00 2,318,464(j) 2,301,748 --------------- Total 349,220,951 -------------------------------------------------------------------------------------------------------- AUTOMOTIVE (0.1%) DaimlerChrysler NA Holding 11-15-13 6.50 755,000 784,347 -------------------------------------------------------------------------------------------------------- BANKING (1.9%) Banknorth Group Sr Nts 05-01-08 3.75 3,370,000(l) 3,289,019 HSBC Bank USA Sub Nts 08-15-35 5.63 4,830,000 4,592,653 JPMorgan Chase & Co Sub Nts 10-01-15 5.15 4,120,000 4,036,352 Sovereign Bank Sub Nts 03-15-13 5.13 555,000 541,051 Washington Mutual 09-15-17 5.25 4,065,000 3,889,201 --------------- Total 16,348,276 -------------------------------------------------------------------------------------------------------- BROKERAGE (0.4%) Morgan Stanley 10-15-15 5.38 3,640,000 3,614,109 -------------------------------------------------------------------------------------------------------- DIVERSIFIED MANUFACTURING (0.4%) Tyco Intl Group 02-15-11 6.75 3,180,000(c) 3,334,923 -------------------------------------------------------------------------------------------------------- ELECTRIC (2.2%) Carolina Power & Light 1st Mtge 12-15-15 5.25 1,220,000 1,206,136
See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 16 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT BONDS (CONTINUED)
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) ELECTRIC (CONT.) Consumers Energy 1st Mtge 02-15-17 5.15% $ 710,000 $ 664,006 09-15-35 5.80 870,000 806,044 Dayton Power & Light 1st Mtge 10-01-13 5.13 1,185,000 1,171,919 Detroit Edison 1st Mtge 10-01-37 5.70 980,000 938,106 Dominion Resources Sr Unsecured Series B 06-15-35 5.95 1,500,000 1,439,273 Exelon 06-15-15 4.90 1,765,000 1,672,449 Ohio Power Sr Nts Series H 01-15-14 4.85 1,080,000 1,044,792 Pacific Gas & Electric 03-01-34 6.05 1,470,000 1,485,259 PacifiCorp 1st Mtge 06-15-35 5.25 1,015,000 942,998 Potomac Edison 1st Mtge 11-15-14 5.35 790,000 787,310 PSI Energy 10-15-35 6.12 2,025,000 2,021,502 Southern California Edison 1st Mtge 07-15-35 5.35 1,070,000 1,011,999 Westar Energy 1st Mtge 07-01-14 6.00 3,350,000 3,486,783 ------------ Total 18,678,576 -------------------------------------------------------------------------------------------------------- ENTERTAINMENT (0.2%) Time Warner 05-15-29 6.63 1,500,000 1,525,598 -------------------------------------------------------------------------------------------------------- FOOD AND BEVERAGE (0.9%) Kraft Foods 06-01-12 6.25 4,130,000(l) 4,334,926 Kraft Foods Sr Unsecured 11-01-11 5.63 2,815,000 2,869,977 ------------ Total 7,204,903 -------------------------------------------------------------------------------------------------------- HEALTH CARE (0.7%) Cardinal Health 06-15-15 4.00% $ 7,015,000 $ 6,242,613 -------------------------------------------------------------------------------------------------------- LIFE INSURANCE (0.6%) Pricoa Global Funding I 06-25-12 4.63 5,660,000(d) 5,478,422 -------------------------------------------------------------------------------------------------------- MEDIA CABLE (1.0%) Comcast 03-15-11 5.50 8,407,000 8,427,177 -------------------------------------------------------------------------------------------------------- MEDIA NON CABLE (0.3%) News America 12-15-34 6.20 2,305,000 2,268,487 -------------------------------------------------------------------------------------------------------- OTHER FINANCIAL INSTITUTIONS (1.1%) American Express Credit 12-02-10 5.00 2,630,000(b) 2,627,370 Residential Capital Sr Unsecured 06-30-10 6.38 5,750,000 5,795,960 Willis North America 07-15-15 5.63 1,220,000 1,206,102 ------------ Total 9,629,432 -------------------------------------------------------------------------------------------------------- PHARMACEUTICALS (0.3%) Merck & Co 02-15-13 4.38 1,390,000 1,313,606 03-01-15 4.75 1,585,000 1,511,543 ------------ Total 2,825,149 -------------------------------------------------------------------------------------------------------- PROPERTY & CASUALTY (0.1%) Marsh & McLennan Companies Sr Unsecured 09-15-15 5.75 980,000 976,305 -------------------------------------------------------------------------------------------------------- REITS (0.3%) Simon Property Group LP 12-01-15 5.75 2,245,000(d) 2,258,369 -------------------------------------------------------------------------------------------------------- RETAILERS (0.5%) CVS 09-15-14 4.88 2,435,000 2,341,430 May Department Stores 07-15-34 6.70 2,065,000 2,137,341 ------------ Total 4,478,771 --------------------------------------------------------------------------------------------------------
See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 17 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT BONDS (CONTINUED)
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) TRANSPORTATION SERVICES (0.4%) ERAC USA Finance 05-01-15 5.60% $1,750,000(d) $1,728,452 11-15-15 5.90 1,805,000(d) 1,820,758 ------------ Total 3,549,210 -------------------------------------------------------------------------------------------------------- WIRELESS (1.5%) Nextel Communications Sr Nts Series F 03-15-14 5.95 10,245,000 10,244,959 US Cellular Sr Nts 12-15-33 6.70 2,315,000 2,257,292 ------------ Total 12,502,251 -------------------------------------------------------------------------------------------------------- WIRELINES (3.6%) Telecom Italia Capital 10-01-15 5.25 7,355,000(c) 7,125,237 TELUS 06-01-11 8.00 7,677,500(c) 8,624,082 Verizon Pennsylvania Series A 11-15-11 5.65 15,155,000 15,116,810 ------------ Total 30,866,129 -------------------------------------------------------------------------------------------------------- TOTAL BONDS (Cost: $868,394,946) $853,536,557 -------------------------------------------------------------------------------------------------------- AMOUNT EFFECTIVE PAYABLE AT ISSUER YIELD MATURITY VALUE(a) SHORT-TERM SECURITY (0.1%) COMMERCIAL PAPER Sheffield Receivables 12-01-05 4.04% $ 1,100,000(n) $ 1,099,877 -------------------------------------------------------------------------------------------------------- TOTAL SHORT-TERM SECURITY (Cost: $1,100,000) $ 1,099,877 -------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $869,494,946)(o) $854,636,434 ========================================================================================================
See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 18 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT NOTES TO INVESTMENTS IN SECURITIES (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) At Nov. 30, 2005, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $18,376,818. (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 Nov. 30, 2005, the value of foreign securities represented 3.9% 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 Nov. 30, 2005, the value of these securities amounted to $34,141,723 or 4.0% of net assets. (e) The following abbreviations are used in the portfolio security descriptions to identify the insurer of the issue: AMBAC -- Ambac Assurance Corporation FGIC -- Financial Guaranty Insurance Company FSA -- Financial Security Assurance MBIA -- MBIA Insurance Corporation (f) Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property, and include single- and multi-class pass-through securities and collateralized mortgage obligations. These securities may be issued or guaranteed by U.S. government agencies or instrumentalities, or by private issuers, generally originators and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers and special purpose entities. The maturity dates shown represent the original maturity of the underlying obligation. Actual maturity may vary based upon prepayment activity on these obligations. Unless otherwise noted, the coupon rates presented are fixed rates. (g) Interest only represents securities that entitle holders to receive only interest payments on the underlying mortgages. The yield to maturity of an interest only is extremely sensitive to the rate of principal payments on the underlying mortgage assets. A rapid (slow) rate of principal repayments may have an adverse (positive) effect on yield to maturity. The principal amount shown is the notional amount of the underlying mortgages. Interest rate disclosed represents yield based upon the estimated timing and amount of future cash flows at Nov. 30, 2005. (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 Nov. 30, 2005. (i) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on Nov. 30, 2005. (j) Adjustable rate mortgage; interest rate varies to reflect current market conditions; rate shown is the effective rate on Nov. 30, 2005. (k) Comparable securities are held to satisfy future delivery requirements of the following open forward sale commitments at Nov. 30, 2005:
PRINCIPAL SETTLEMENT PROCEEDS SECURITY AMOUNT DATE RECEIVABLE VALUE ----------------------------------------------------------------------------------- Federal Natl Mtge Assn 12-01-20 4.50% $ 3,425,000 12-15-05 $ 3,290,676 $ 3,310,475 12-01-20 5.00 2,500,000 12-15-05 2,449,219 2,460,950 12-01-35 5.00 8,000,000 12-13-05 7,715,313 7,695,000 12-01-35 5.50 22,000,000 12-13-05 21,567,500 21,663,136 12-01-35 6.00 11,500,000 12-13-05 11,586,250 11,561,065
-------------------------------------------------------------------------------- 19 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT NOTES TO INVESTMENTS IN SECURITIES (CONTINUED) (l) Partially pledged as initial deposit on the following open interest rate futures contracts (see Note 4 to the financial statements):
TYPE OF SECURITY NOTIONAL AMOUNT -------------------------------------------------------------------------------------- PURCHASE CONTRACTS U.S. Treasury Note, March 2006, 2-year $25,600,000 U.S. Long Bond, March 2006, 20-year 8,500,000 SALE CONTRACTS U.S. Treasury Note, Dec. 2005, 5-year 19,900,000 U.S. Treasury Note, Dec. 2005, 10-year 9,500,000 U.S. Treasury Note, March 2006, 5-year 100,000 U.S. Treasury Note, March 2006, 10-year 7,500,000
(m) U.S. Treasury inflation-indexed bonds are securities in which the principal amount is adjusted for inflation and the semiannual interest payments equal a fixed percentage of the inflation-adjusted principal amount. (n) Commercial paper sold within terms of a private placement memorandum, exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and may be sold only to dealers in that program or other "accredited investors." This security has been determined to be liquid under guidelines established by the Fund's Board of Directors. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At Nov. 30, 2005, the value of these securities amounted to $1,099,877 or 0.1% of net assets. (o) At Nov. 30, 2005, the cost of securities for federal income tax purposes was approximately $869,495,000 and the approximate aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 1,449,000 Unrealized depreciation (16,308,000) ---------------------------------------------------------------------------- Net unrealized depreciation $(14,859,000) ----------------------------------------------------------------------------
HOW TO FIND INFORMATION ABOUT THE FUND'S PORTFOLIO HOLDINGS (I) The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (Commission) for the first and third quarters of each fiscal year on Form N-Q; (II) The Fund's Forms N-Q are available on the Commission's website at http://www.sec.gov; (III) The Fund's Forms N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC (information on the operations of the Public Reference Room may be obtained by calling 1-800-SEC-0330); and (IV) The Fund's complete schedule of portfolio holdings, as disclosed in its annual and semiannual shareholder reports and in its filings on Form N-Q, can be found at www.riversource.com/funds. -------------------------------------------------------------------------------- 20 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES QUALITY INCOME PORTFOLIO NOV. 30, 2005 (UNAUDITED) ASSETS Investments in securities, at value (Note 1) (identified cost $869,494,946) $854,636,434 Accrued interest receivable 7,161,007 Receivable for investment securities sold 58,201,795 Unrealized appreciation on swap transactions, at value (Note 5) 78,115 ----------------------------------------------------------------------------------------------- Total assets 920,077,351 ----------------------------------------------------------------------------------------------- LIABILITIES Disbursements in excess of cash on demand deposit 417,102 Payable for investment securities purchased 25,669,061 Accrued investment management services fee 12,094 Other accrued expenses 38,724 Forward sale commitments, at value (proceeds receivable $46,608,958) (Note 1) 46,690,626 ----------------------------------------------------------------------------------------------- Total liabilities 72,827,607 ----------------------------------------------------------------------------------------------- Net assets $847,249,744 ===============================================================================================
See accompanying notes to financial statements. -------------------------------------------------------------------------------- 21 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT STATEMENT OF OPERATIONS QUALITY INCOME PORTFOLIO SIX MONTHS ENDED NOV. 30, 2005 (UNAUDITED) INVESTMENT INCOME Income: Interest $ 20,041,368 Fee income from securities lending (Note 3) 39,922 ------------------------------------------------------------------------------------------ Total income 20,081,290 ------------------------------------------------------------------------------------------ Expenses (Note 2): Investment management services fee 2,285,614 Compensation of board members 6,869 Custodian fees 54,900 Audit fees 16,500 Other 11,596 ------------------------------------------------------------------------------------------ Total expenses 2,375,479 Earnings credits on cash balances (Note 2) (4,480) ------------------------------------------------------------------------------------------ Total net expenses 2,370,999 ------------------------------------------------------------------------------------------ Investment income (loss)-- net 17,710,291 ------------------------------------------------------------------------------------------ REALIZED AND UNREALIZED GAIN (LOSS) -- NET Net realized gain (loss) on: Security transactions (Note 3) 35,876 Foreign currency transactions (4,742) Futures contracts 1,494,233 Swap transactions (187,758) ------------------------------------------------------------------------------------------ Net realized gain (loss) on investments 1,337,609 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (21,726,125) ------------------------------------------------------------------------------------------ Net gain (loss) on investments and foreign currencies (20,388,516) ------------------------------------------------------------------------------------------ Net increase (decrease) in net assets resulting from operations $ (2,678,225) ==========================================================================================
See accompanying notes to financial statements. -------------------------------------------------------------------------------- 22 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT STATEMENTS OF CHANGES IN NET ASSETS QUALITY INCOME PORTFOLIO
NOV. 30, 2005 MAY 31, 2005 SIX MONTHS ENDED YEAR ENDED (UNAUDITED) OPERATIONS Investment income (loss) -- net $ 17,710,291 $ 37,284,467 Net realized gain (loss) on investments 1,337,609 719,913 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (21,726,125) 21,053,971 ----------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations (2,678,225) 59,058,351 ----------------------------------------------------------------------------------------------------------- Proceeds from contributions 7,936,320 50,501,206 Fair value of withdrawals (72,643,257) (184,551,000) ----------------------------------------------------------------------------------------------------------- Net contributions (withdrawals) from partners (64,706,937) (134,049,794) ----------------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets (67,385,162) (74,991,443) Net assets at beginning of period 914,634,906 989,626,349 ----------------------------------------------------------------------------------------------------------- Net assets at end of period $847,249,744 $ 914,634,906 ===========================================================================================================
See accompanying notes to financial statements. -------------------------------------------------------------------------------- 23 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT NOTES TO FINANCIAL STATEMENTS QUALITY INCOME PORTFOLIO (UNAUDITED AS TO NOV. 30, 2005) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Quality Income Portfolio (the Portfolio) is a series of Income Trust (the Trust) and is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. The Portfolio invests primarily in investment-grade bonds. The Declaration of Trust permits the Trustees to issue non-transferable interests in the Portfolio. The Portfolio's significant accounting policies are summarized below: USE OF ESTIMATES Preparing financial statements that conform to U.S. generally accepted accounting principles requires management to make estimates (e.g., on assets, liabilities and contingent assets and liabilities) that could differ from actual results. VALUATION OF SECURITIES All securities are valued at the close of each business day. Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price. Debt securities are generally traded in the over-the-counter market and are valued at a price that reflects fair value as quoted by dealers in these securities or by an independent pricing service. Securities for which market quotations are not readily available are valued at fair value according to methods selected in good faith by the Board. Short-term securities maturing in more than 60 days from the valuation date are valued at the market price or approximate market value based on current interest rates; those maturing in 60 days or less are valued at amortized cost. SECURITIES PURCHASED ON A FORWARD-COMMITMENT BASIS Delivery and payment for securities that have been purchased by the Portfolio on a forward-commitment basis, including when issued securities and other forward-commitments, can take place one month or more after the transaction date. During this period, such securities are subject to market fluctuations, and they may affect the Portfolio's net assets the same as owned securities. The Portfolio designates cash or liquid securities at least equal to the amount of its forward-commitments. At Nov. 30, 2005, the Portfolio has entered into outstanding when-issued securities of $18,376,818. The Portfolio also enters into transactions to sell purchase commitments to third parties at current market values and concurrently acquires other purchase commitments for similar securities at later dates. As an inducement for the Portfolio to "roll over" its purchase commitments, the Portfolio receives negotiated amounts in the form of reductions of the purchase price of the commitment. -------------------------------------------------------------------------------- 24 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT OPTION TRANSACTIONS To produce incremental earnings, protect gains and facilitate buying and selling of securities for investments, the Portfolio may buy and write options traded on any U.S. or foreign exchange or in the over-the-counter market where completing the obligation depends upon the credit standing of the other party. The Portfolio also may buy and sell put and call options and write covered call options on portfolio securities as well as write cash-secured put options. The risk in writing a call option is that the Portfolio gives up the opportunity for profit if the market price of the security increases. The risk in writing a put option is that the Portfolio may incur a loss if the market price of the security decreases and the option is exercised. The risk in buying an option is that the Portfolio pays a premium whether or not the option is exercised. The Portfolio also has the additional risk of being unable to enter into a closing transaction if a liquid secondary market does not exist. Option contracts are valued daily at the closing prices on their primary exchanges and unrealized appreciation or depreciation is recorded. The Portfolio will realize a gain or loss when the option transaction expires or closes. When options on debt securities or futures are exercised, the Portfolio will realize a gain or loss. When other options are exercised, the proceeds on sales for a written call option, the purchase cost for a written put option or the cost of a security for a purchased put or call option is adjusted by the amount of premium received or paid. FUTURES TRANSACTIONS To gain exposure to or protect itself from market changes, the Portfolio may buy and sell financial futures contracts traded on any U.S. or foreign exchange. The Portfolio also may buy and write put and call options on these futures contracts. Risks of entering into futures contracts and related options include the possibility of an illiquid market and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. Upon entering into a futures contract, the Portfolio is required to deposit either cash or securities in an amount (initial margin) equal to a certain percentage of the contract value. Subsequent payments (variation margin) are made or received by the Portfolio each day. The variation margin payments are equal to the daily changes in the contract value and are recorded as unrealized gains and losses. The Portfolio recognizes a realized gain or loss when the contract is closed or expires. FOREIGN CURRENCY TRANSLATIONS AND FOREIGN CURRENCY CONTRACTS Securities and other assets and liabilities denominated in foreign currencies are translated daily into U.S. dollars. Foreign currency amounts related to the purchase or sale of securities and income and expenses are translated at the exchange rate on the transaction date. The effect of changes in foreign exchange rates on realized and unrealized security gains or losses is reflected as a component of such gains or losses. In the statement of operations, net realized gains or losses from foreign currency transactions, if any, may arise from sales of foreign currency, closed forward contracts, exchange gains or losses realized between the trade date and settlement date on securities transactions, and other translation gains or losses on dividends, interest income and foreign withholding taxes. -------------------------------------------------------------------------------- 25 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT The Portfolio may enter into forward foreign currency exchange contracts for operational purposes and to protect against adverse exchange rate fluctuation. The net U.S. dollar value of foreign currency underlying all contractual commitments held by the Portfolio and the resulting unrealized appreciation or depreciation are determined using foreign currency exchange rates from an independent pricing service. The Portfolio is subject to the credit risk that the other party will not complete its contract obligations. TOTAL RETURN SWAP TRANSACTIONS The Portfolio may enter into swap agreements to earn the total return on a specified security or index of fixed income securities. Under the terms of the swaps, the Portfolio either receives or pays the total return on a reference security or index applied to a notional principal amount. In return, the Portfolio agrees to pay or receive from the counterparty a floating rate, which is reset periodically based on short-term interest rates, applied to the same notional amount. The notional amounts of swap contracts are not recorded in the financial statements. Swaps are valued daily, and the change in value is recorded as unrealized appreciation (depreciation) until the termination of the swap, at which time realized gain (loss) is recorded. Payments received or made are recorded as realized gains (losses). Total return swaps are subject to the risk that the counterparty will default on its obligation to pay net amounts due to the Portfolio. FORWARD SALE COMMITMENTS The Portfolio may enter into forward sale commitments to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. Proceeds of forward sale commitments are not received until the contractual settlement date. During the time a forward sale commitment is outstanding, equivalent deliverable securities, or an offsetting forward purchase commitment deliverable on or before the sale commitment date, are used to satisfy the commitment. Unsettled forward sale commitments are valued at the current market value of the underlying securities, generally according to the procedures described under "Valuation of securities" above. The forward sale commitment is "marked-to-market" daily and the change in market value is recorded by the Portfolio as an unrealized gain or loss. If the forward sale commitment is closed through the acquisition of an offsetting purchase commitment, the Portfolio realizes a gain or loss. If the Portfolio delivers securities under the commitment, the Portfolio realizes a gain or a loss from the sale of the securities based upon the market price established at the date the commitment was entered into. Forward sale commitments outstanding at period end are listed in the "Notes to investments in securities." GUARANTEES AND INDEMNIFICATIONS Under the Portfolio's organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Portfolio. In addition, certain of the Portfolio's contracts with its service providers contain general indemnification clauses. The Portfolio's maximum exposure under these arrangements is unknown since the amount of any future claims that may be made against the Portfolio cannot be determined and the Portfolio has no historical basis for predicting the likelihood of any such claims. -------------------------------------------------------------------------------- 26 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT FEDERAL TAXES For federal income tax purposes the Portfolio qualifies as a partnership and each investor in the Portfolio is treated as the owner of its proportionate share of the net assets, income, expenses and realized and unrealized gains and losses of the Portfolio. As a "pass-through" entity, the Portfolio therefore does not pay any income dividends or capital gain distributions. OTHER Security transactions are accounted for on the date securities are purchased or sold. Dividend income is recognized on the ex-dividend date or upon receipt of ex-dividend notification in the case of certain foreign securities. Interest income, including amortization of premium, market discount and original issue discount using the effective interest method, is accrued daily. 2. FEES AND EXPENSES The Trust, on behalf of the Portfolio, has an Investment Management Services Agreement with RiverSource Investments, LLC (the Investment Manager) to manage its portfolio. Prior to Oct. 1, 2005, investment management services were provided by Ameriprise Financial, Inc. (Ameriprise Financial) (formerly American Express Financial Corporation). Under this agreement, the Investment Manager determines which securities will be purchased, held or sold. The management fee is a percentage of the Portfolio's average daily net assets that declines from 0.52% to 0.395% annually as the Portfolio's assets increase. Under the agreement, the Trust also pays taxes, brokerage commissions and nonadvisory expenses, which include custodian fees, audit and certain legal fees, fidelity bond premiums, registration fees for units, office expenses, consultants' fees, compensation of trustees, corporate filing fees, expenses incurred in connection with lending securities of the Portfolio and any other expenses properly payable by the Trust or Portfolio and approved by the Board. Under a Deferred Compensation Plan (the Plan), non-interested trustees may defer receipt of their compensation. Deferred amounts are treated as though equivalent dollar amounts had been invested in shares of the underlying Fund or other RiverSource funds. The Portfolio's liability for these amounts is adjusted for market value changes and remains in the Portfolio until distributed in accordance with the Plan. During the six months ended Nov. 30, 2005, the Portfolio's custodian fees were reduced by $4,480 as a result of earnings credits from overnight cash balances. According to a Placement Agency Agreement, Ameriprise Financial Services, Inc. (formerly American Express Financial Advisors Inc.) acts as placement agent of the Trust's units. 3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $1,214,465,274 and $1,250,756,780, respectively, for the six months ended Nov. 30, 2005. Realized gains and losses are determined on an identified cost basis. Income from securities lending amounted to $39,922 for the six months ended Nov. 30, 2005. The risks to the Portfolio of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. -------------------------------------------------------------------------------- 27 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT 4. INTEREST RATE FUTURES CONTRACTS At Nov. 30, 2005, investments in securities included securities valued at $591,741 that were pledged as collateral to cover initial margin deposits on 213 open purchase contracts and 370 open sale contracts. The notional market value of the open purchase contracts at Nov. 30, 2005 was $35,774,656 with a net unrealized loss of $64,963. The notional market value of the open sale contracts at Nov. 30, 2005 was $39,691,314 with a net unrealized gain of $518,244. See "Summary of significant accounting policies" and "Notes to investments in securities." 5. SWAP CONTRACTS At Nov. 30, 2005, the Portfolio had the following open total return swap contracts:
UNREALIZED TERMINATION NOTIONAL APPRECIATION DATE PRINCIPAL (DEPRECIATION) ------------------------------------------------------------------------------------------------------------------- Receive total return on Lehman Brothers Aaa 8.5+ Commercial Mortgage-Backed Securities Index and pay a floating rate based on 1-month LIBOR less 0.35%. Counterparty: Citigroup 02/01/06 $6,475,000 $46,257 Receive total return on Lehman Brothers Aaa 8.5+ Commercial Mortgage-Backed Securities Index and pay a floating rate based on 1-month LIBOR less 0.25%. Counterparty: Citigroup 05/01/06 4,900,000 31,858 ------------------------------------------------------------------------------------------------------------------- Total $78,115 -------------------------------------------------------------------------------------------------------------------
6. FINANCIAL HIGHLIGHTS The table below shows certain important financial information for evaluating the Portfolio's results. RATIOS/SUPPLEMENTAL DATA
FISCAL PERIOD ENDED MAY 31, 2005(e) 2005 2004 2003 2002 Ratio of expenses to average daily net assets(a) .54%(b) .54% .54% .52% .53% ----------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.03%(b) 3.93% 3.62% 4.33% 4.89% ----------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 147% 297% 292% 263% 389% ----------------------------------------------------------------------------------------------------------------- Total return(c) (.33%)(d) 6.49% (.77%) 6.56% 5.34% -----------------------------------------------------------------------------------------------------------------
(a) Expense ratio is based on total expenses of the Portfolio before reduction of earnings credits on cash balances. The ratio does not include feeder fund expenses. (b) Adjusted to an annual basis. (c) Total return is based on a calculated Portfolio net asset value and does not reflect payment of a sales charge. (d) Not annualized. (e) Six months ended Nov. 30, 2005 (Unaudited). -------------------------------------------------------------------------------- 28 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES RIVERSOURCE SELECTIVE FUND NOV. 30, 2005 (UNAUDITED) ASSETS Investment in Portfolio (Note 1) $847,120,761 Capital shares receivable 20,493 -------------------------------------------------------------------------------------------------------------- Total assets 847,141,254 -------------------------------------------------------------------------------------------------------------- LIABILITIES Dividends payable to shareholders 125,298 Capital shares payable 109,111 Accrued distribution fee 144,639 Accrued service fee 129 Accrued transfer agency fee 1,034 Accrued administrative services fee 1,575 Other accrued expenses 42,355 -------------------------------------------------------------------------------------------------------------- Total liabilities 424,141 -------------------------------------------------------------------------------------------------------------- Net assets applicable to outstanding capital stock $846,717,113 ============================================================================================================== REPRESENTED BY Capital stock -- $.01 par value (Note 1) $ 996,870 Additional paid-in capital 891,235,315 Undistributed net investment income 346,289 Accumulated net realized gain (loss) (Note 5) (31,430,032) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (14,431,329) -------------------------------------------------------------------------------------------------------------- Total -- representing net assets applicable to outstanding capital stock $846,717,113 ============================================================================================================== Net assets applicable to outstanding shares: Class A $523,055,673 Class B $ 96,874,301 Class C $ 3,561,130 Class I $175,975,176 Class Y $ 47,250,833 Net asset value per share of outstanding capital stock: Class A shares 61,577,472 $ 8.49 Class B shares 11,406,817 $ 8.49 Class C shares 419,272 $ 8.49 Class I shares 20,715,943 $ 8.49 Class Y shares 5,567,458 $ 8.49 --------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. -------------------------------------------------------------------------------- 29 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT STATEMENT OF OPERATIONS RIVERSOURCE SELECTIVE FUND SIX MONTHS ENDED NOV. 30, 2005 (UNAUDITED) INVESTMENT INCOME Income: Interest $ 20,038,622 Fee income from securities lending 39,916 ----------------------------------------------------------------------------------------------------- Total income 20,078,538 ----------------------------------------------------------------------------------------------------- Expenses (Note 2): Expenses allocated from Portfolio 2,370,651 Distribution fee Class A 699,893 Class B 552,778 Class C 19,806 Transfer agency fee 531,442 Incremental transfer agency fee Class A 35,539 Class B 15,031 Class C 636 Service fee -- Class Y 23,553 Administrative services fees and expenses 248,644 Compensation of board members 5,694 Printing and postage 53,882 Registration fees 30,920 Audit fees 5,500 Other 23,207 ----------------------------------------------------------------------------------------------------- Total expenses 4,617,176 Expenses waived/reimbursed by the Investment Manager and its affiliates (Note 2) (562,003) ----------------------------------------------------------------------------------------------------- 4,055,173 Earnings credits on cash balances (Note 2) (22,303) ----------------------------------------------------------------------------------------------------- Total net expenses 4,032,870 ----------------------------------------------------------------------------------------------------- Investment income (loss) -- net 16,045,668 ----------------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) -- NET Net realized gain (loss) on: Security transactions 35,712 Foreign currency transactions (4,741) Futures contracts 1,494,233 Swap transactions (187,758) ----------------------------------------------------------------------------------------------------- Net realized gain (loss) on investments 1,337,446 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (21,722,941) ----------------------------------------------------------------------------------------------------- Net gain (loss) on investments and foreign currencies (20,385,495) ----------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $ (4,339,827) =====================================================================================================
See accompanying notes to financial statements. -------------------------------------------------------------------------------- 30 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT STATEMENTS OF CHANGES IN NET ASSETS RIVERSOURCE SELECTIVE FUND
NOV. 30, 2005 MAY 31, 2005 SIX MONTHS ENDED YEAR ENDED (UNAUDITED) OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ 16,045,668 $ 32,644,259 Net realized gain (loss) on investments 1,337,446 719,728 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (21,722,941) 21,051,280 ------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations (4,339,827) 54,415,267 ------------------------------------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income Class A (9,939,022) (23,912,310) Class B (1,540,727) (4,361,239) Class C (55,420) (144,617) Class I (3,013,754) (2,796,739) Class Y (878,788) (2,459,415) ------------------------------------------------------------------------------------------------------------- Total distributions (15,427,711) (33,674,320) ------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (NOTE 3) Proceeds from sales Class A shares (Note 2) 22,050,114 45,644,903 Class B shares 3,757,174 11,147,044 Class C shares 145,508 642,495 Class I shares 52,243,758 153,620,994 Class Y shares 2,906,157 12,950,585 Reinvestment of distributions at net asset value Class A shares 8,067,068 19,053,522 Class B shares 1,392,713 3,923,698 Class C shares 48,529 127,953 Class I shares 3,050,765 2,725,902 Class Y shares 894,977 2,448,606 Payments for redemptions Class A shares (85,569,766) (195,290,057) Class B shares (Note 2) (30,561,671) (83,730,597) Class C shares (Note 2) (786,250) (2,216,368) Class I shares (19,042,746) (13,407,549) Class Y shares (5,974,252) (53,143,328) ------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions (47,377,922) (95,502,197) ------------------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets (67,145,460) (74,761,250) Net assets at beginning of period 913,862,573 988,623,823 ------------------------------------------------------------------------------------------------------------- Net assets at end of period $846,717,113 $ 913,862,573 ============================================================================================================= Undistributed (excess of distributions over) net investment income $ 346,289 $ (271,668) -------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. -------------------------------------------------------------------------------- 31 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT NOTES TO FINANCIAL STATEMENTS RIVERSOURCE SELECTIVE FUND (FORMERLY AXP SELECTIVE FUND) (UNAUDITED AS TO NOV. 30, 2005) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Fund is a series of AXP Income Series, Inc. and is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. AXP Income Series, Inc. has 10 billion authorized shares of capital stock that can be allocated among the separate series as designated by the Board. The Fund offers Class A, Class B, Class C and Class Y shares. - 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 Y shares have no sales charge and are offered only to qualifying institutional investors. The Fund offers an additional class of shares, Class I, exclusively to certain institutional investors. Class I shares have no sales charge and are made available through a separate prospectus supplement provided to investors eligible to purchase the shares. At Nov. 30, 2005, Ameriprise Financial and the RiverSource Portfolio Builder Funds owned 100% of Class I shares, which represents 20.78% of the Fund's net assets. All classes of shares have identical voting, dividend and liquidation rights. The distribution fee, transfer agency fees and service fee (class specific expenses) differ among classes. Income, expenses (other than class specific expenses) and realized and unrealized gains or losses on investments are allocated to each class of shares based upon its relative net assets. INVESTMENT IN QUALITY INCOME PORTFOLIO The Fund currently invests all of its assets in Quality Income Portfolio (the Portfolio), a series of Income Trust (the Trust), an open-end investment company that has the same objectives as the Fund. The Portfolio invests primarily in investment-grade bonds. The Fund records daily its share of the Portfolio's income, expenses and realized and unrealized gains and losses. The financial statements of the Portfolio are included elsewhere in this report and should be read in conjunction with the Fund's financial statements. The Fund records its investment in the Portfolio at the value that is equal to the Fund's proportionate ownership interest in the Portfolio's net assets. The percentage of the Portfolio owned by the Fund at Nov. 30, 2005 was 99.98%. The Fund's Board has approved the withdrawal of the Fund's assets from the Portfolio, which is expected to be completed in early 2006. After that date, the Fund will invest directly in and manage its own portfolio of securities rather than investing in the Portfolio. -------------------------------------------------------------------------------- 32 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT All securities held by the Portfolio are valued at the close of each business day. Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price. Debt securities are generally traded in the over-the-counter market and are valued at a price that reflects fair value as quoted by dealers in these securities or by an independent pricing service. Securities for which market quotations are not readily available are valued at fair value according to methods selected in good faith by the Board. Short-term securities maturing in more than 60 days from the valuation date are valued at the market price or approximate market value based on current interest rates; those maturing in 60 days or less are valued at amortized cost. USE OF ESTIMATES Preparing financial statements that conform to U.S. generally accepted accounting principles requires management to make estimates (e.g., on assets, liabilities and contingent assets and liabilities) that could differ from actual results. GUARANTEES AND INDEMNIFICATIONS Under the Fund's organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, certain of the Fund's contracts with its service providers contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown since the amount of any future claims that may be made against the Fund cannot be determined and the Fund has no historical basis for predicting the likelihood of any such claims. FEDERAL TAXES The Fund's policy is to comply with all sections of the Internal Revenue Code that apply to regulated investment companies and to distribute substantially all of its taxable income to the shareholders. No provision for income or excise taxes is thus required. Net investment income (loss) and net realized gains (losses) may differ for financial statement and tax purposes primarily because of deferred losses on certain futures contracts, the recognition of certain foreign currency gains (losses) as ordinary income (loss) for tax purposes, and losses deferred due to "wash sale" transactions. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. Also, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains (losses) were recorded by the Fund. 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. -------------------------------------------------------------------------------- 33 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT 2. EXPENSES AND SALES CHARGES In addition to the expenses allocated from the Portfolio, the Fund accrues its own expenses as follows: The Fund has an agreement with Ameriprise Financial to provide administrative services. Under the current Administrative Services Agreement, the Fund pays Ameriprise Financial a fee for administration and accounting services at a percentage of the Fund's average daily net assets that declines from 0.07% to 0.04% annually as the Fund's assets increase. Prior to Oct. 1, 2005, the fee percentage of the Fund's average daily net assets declined from 0.05% to 0.025% annually as the Fund's assets increased. A minor portion of additional administrative service expenses paid by the Fund are consultants' fees and fund office expenses. Under this agreement, the Fund also pays taxes, audit and certain legal fees, registration fees for shares, compensation of board members, corporate filing fees and any other expenses properly payable by the Fund and approved by the Board. Under a Deferred Compensation Plan (the Plan), non-interested board members may defer receipt of their compensation. Deferred amounts are treated as though equivalent dollar amounts had been invested in shares of the Fund or other RiverSource funds. The Fund's liability for these amounts is adjusted for market value changes and remains in the Fund until distributed in accordance with the Plan. Under a separate Transfer Agency Agreement, RiverSource Service Corporation (formerly American Express Client Service Corporation) (the Transfer Agent) maintains shareholder accounts and records. The Fund pays the Transfer Agent an annual fee per shareholder account for this service as follows: - Class A $20.50 - Class B $21.50 - Class C $21.00 - Class Y $18.50 The incremental transfer agency fee is the amount charged to the specific classes for the additional expense above the fee for Class Y. Class I pays a transfer agency fee at an annual rate per shareholder account of $1. This amount is included in the transfer agency fee on the statement of operations. Beginning May 20, 2005, the Transfer Agent implemented an annual closed account fee of $5 per inactive account, charged on a pro rata basis for 12 months from the date the account becomes inactive. These fees are included in the transfer agency fees on the statement of operations. The Fund has agreements with Ameriprise Financial Services, Inc. (the Distributor) for distribution and shareholder services. Under a Plan and Agreement of Distribution pursuant to Rule 12b-1, the Fund pays a fee at an annual rate up to 0.25% of the Fund's average daily net assets attributable to Class A shares and up to 1.00% for Class B and Class C shares. Under a Shareholder Service Agreement, the Fund pays the Distributor a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.10% of the Fund's average daily net assets attributable to Class Y shares. -------------------------------------------------------------------------------- 34 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT Sales charges received by the Distributor for distributing Fund shares were $130,081 for Class A, $87,146 for Class B and $179 for Class C for the six months ended Nov. 30, 2005. For the six months ended Nov. 30, 2005, the Investment Manager and its affiliates waived certain fees and expenses to 0.89% for Class A, 1.64% for Class B, 1.64% for Class C, 0.59% for Class I and 0.72% for Class Y. Of these waived fees and expenses, the transfer agency fees waived for Class A, Class B, Class C and Class Y were $309,894, $69,154, $25,348 and $2,577, respectively, and the management fees waived at the Fund level were $155,030. Beginning Oct. 1, 2005, a new agreement to waive certain fees and expenses is effective until May 31, 2006, such that net expenses will not exceed 0.89% for Class A, 1.64% for Class B, 1.64% for Class C, 0.59% for Class I and 0.72% for Class Y of the Fund's average daily net assets. During the six months ended Nov. 30, 2005, the Fund's transfer agency fees were reduced by $22,303 as a result of earnings credits from overnight cash balances. 3. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the periods indicated are as follows:
SIX MONTHS ENDED NOV. 30, 2005 CLASS A CLASS B CLASS C CLASS I CLASS Y ----------------------------------------------------------------------------------------------------------------------- Sold 2,559,542 436,522 16,899 6,070,571 338,028 Issued for reinvested distributions 938,834 162,029 5,647 355,310 104,284 Redeemed (9,949,924) (3,549,579) (91,587) (2,200,160) (690,068) ----------------------------------------------------------------------------------------------------------------------- Net increase (decrease) (6,451,548) (2,951,028) (69,041) 4,225,721 (247,756) ----------------------------------------------------------------------------------------------------------------------- YEAR ENDED MAY 31, 2005 CLASS A CLASS B CLASS C CLASS I* CLASS Y ----------------------------------------------------------------------------------------------------------------------- Sold 5,297,822 1,289,751 74,421 17,736,298 1,500,618 Issued for reinvested distributions 2,202,977 453,875 14,795 314,693 283,580 Redeemed (22,628,707) (9,719,218) (256,820) (1,560,769) (6,147,313) ----------------------------------------------------------------------------------------------------------------------- Net increase (decrease) (15,127,908) (7,975,592) (167,604) 16,490,222 (4,363,115) -----------------------------------------------------------------------------------------------------------------------
* Inception date is July 15, 2004. 4. BANK BORROWINGS The Fund has a revolving credit agreement with a syndicate of banks headed by JPMorgan Chase Bank, N.A. (JPMCB), whereby the Fund may borrow for the temporary funding of shareholder redemptions or for other temporary or emergency purposes. The agreement went into effect Sept. 20, 2005. The Fund must maintain asset coverage for borrowings of at least 300%. The agreement, which enables the Fund to participate with other RiverSource funds, permits borrowings up to $500 million, collectively. Interest is charged to each Fund based on its borrowings at a rate equal to either the higher of the Federal Funds Effective Rate plus 0.40% or the JPMCB Prime Commercial Lending Rate. Borrowings are payable within 60 days after such loan is executed. The Fund also pays a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.07% per annum. Prior to this agreement, the Fund had a revolving credit agreement that permitted borrowings up to $500 million with The Bank of New York. The Fund had no borrowings outstanding during the six months ended Nov. 30, 2005. -------------------------------------------------------------------------------- 35 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT 5. CAPITAL LOSS CARRY-OVER For federal income tax purposes, the Fund had a capital loss carry-over of $29,747,019 at May 31, 2005, that if not offset by capital gains will expire as follows:
2011 2013 2014 $24,224,582 $5,017,493 $504,944
It is unlikely the Board will authorize a distribution of any net realized capital gains until the available capital loss carry-over has been offset or expires. 6. SUBSEQUENT EVENT Shareholders will be asked to approve a merger of RiverSource Selective Fund into RiverSource Diversified Bond Fund at a shareholder meeting on Feb. 15, 2006. This approval is not guaranteed. 7. FINANCIAL HIGHLIGHTS The tables below show certain important financial information for evaluating the Fund's results. CLASS A PER SHARE INCOME AND CAPITAL CHANGES(a)
FISCAL PERIOD ENDED MAY 31, 2005(g) 2005 2004 2003 2002 Net asset value, beginning of period $8.69 $8.50 $8.88 $8.74 $ 8.74 --------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .16 .31 .28 .33 .40 Net gains (losses) (both realized and unrealized) (.20) .20 (.38) .18 .02 --------------------------------------------------------------------------------------------------------------------------- Total from investment operations (.04) .51 (.10) .51 .42 --------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.16) (.32) (.28) (.33) (.40) Distributions from realized gains -- -- -- (.04) (.02) --------------------------------------------------------------------------------------------------------------------------- Total distributions (.16) (.32) (.28) (.37) (.42) --------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $8.49 $8.69 $8.50 $8.88 $ 8.74 --------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 523 $ 591 $707 $955 $1,042 --------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b) .89%(c),(d) .94%(c) 1.00% .98% .98% --------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.69%(d) 3.54% 3.17% 3.89% 4.45% --------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 147% 297% 292% 263% 389% --------------------------------------------------------------------------------------------------------------------------- Total return(e) (.54%)(f) 6.06% (1.17%) 6.05% 4.85% ---------------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class A would have been 1.04% for the six months ended Nov. 30, 2005 and 1.02% for the year ended May 31, 2005. (d) Adjusted to an annual basis. (e) Total return does not reflect payment of a sales charge. (f) Not annualized. (g) Six months ended Nov. 30, 2005 (Unaudited). -------------------------------------------------------------------------------- 36 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT CLASS B PER SHARE INCOME AND CAPITAL CHANGES(a)
FISCAL PERIOD ENDED MAY 31, 2005(g) 2005 2004 2003 2002 Net asset value, beginning of period $8.69 $8.50 $8.88 $8.74 $8.74 --------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .13 .24 .21 .27 .33 Net gains (losses) (both realized and unrealized) (.21) .20 (.38) .18 .02 --------------------------------------------------------------------------------------------------------------------------- Total from investment operations (.08) .44 (.17) .45 .35 --------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.12) (.25) (.21) (.27) (.33) Distributions from realized gains -- -- -- (.04) (.02) --------------------------------------------------------------------------------------------------------------------------- Total distributions (.12) (.25) (.21) (.31) (.35) --------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $8.49 $8.69 $8.50 $8.88 $8.74 --------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 97 $ 125 $ 190 $ 315 $ 342 --------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b) 1.64%(c),(d) 1.69%(c) 1.76% 1.74% 1.73% --------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 2.92%(d) 2.78% 2.40% 3.12% 3.67% --------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 147% 297% 292% 263% 389% --------------------------------------------------------------------------------------------------------------------------- Total return(e) (.92%)(f) 5.26% (1.92%) 5.25% 4.06% ---------------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class B would have been 1.80% for the six months ended Nov. 30, 2005 and 1.78% for the year ended May 31, 2005. (d) Adjusted to an annual basis. (e) Total return does not reflect payment of a sales charge. (f) Not annualized. (g) Six months ended Nov. 30, 2005 (Unaudited). -------------------------------------------------------------------------------- 37 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT CLASS C PER SHARE INCOME AND CAPITAL CHANGES(a)
FISCAL PERIOD ENDED MAY 31, 2005(g) 2005 2004 2003 2002 Net asset value, beginning of period $8.69 $8.50 $8.88 $8.74 $8.74 --------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .13 .24 .21 .27 .33 Net gains (losses) (both realized and unrealized) (.21) .20 (.38) .18 .02 --------------------------------------------------------------------------------------------------------------------------- Total from investment operations (.08) .44 (.17) .45 .35 --------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.12) (.25) (.21) (.27) (.33) Distributions from realized gains -- -- -- (.04) (.02) --------------------------------------------------------------------------------------------------------------------------- Total distributions (.12) (.25) (.21) (.31) (.35) --------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $8.49 $8.69 $8.50 $8.88 $8.74 --------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 4 $ 4 $ 6 $ 10 $ 9 Ratio of expenses to average daily net assets(b) 1.64%(c),(d) 1.69%(c) 1.76% 1.75% 1.74% --------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 2.94%(d) 2.79% 2.40% 3.07% 3.64% --------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 147% 297% 292% 263% 389% --------------------------------------------------------------------------------------------------------------------------- Total return(e) (.92%)(f) 5.26% (1.92%) 5.24% 4.06% ---------------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class C would have been 1.80% for the six months ended Nov. 30, 2005 and 1.79% for the year ended May 31, 2005. (d) Adjusted to an annual basis. (e) Total return does not reflect payment of a sales charge. (f) Not annualized. (g) Six months ended Nov. 30, 2005 (Unaudited). -------------------------------------------------------------------------------- 38 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT CLASS I PER SHARE INCOME AND CAPITAL CHANGES(a)
FISCAL PERIOD ENDED MAY 31, 2005(h) 2005(b) Net asset value, beginning of period $8.69 $8.55 ------------------------------------------------------------------------------------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .18 .29 Net gains (losses) (both realized and unrealized) (.21) .15 ------------------------------------------------------------------------------------------ Total from investment operations (.03) .44 ------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS: Dividends from net investment income (.17) (.30) ------------------------------------------------------------------------------------------ Net asset value, end of period $8.49 $8.69 ------------------------------------------------------------------------------------------ RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 176 $ 143 ------------------------------------------------------------------------------------------ Ratio of expenses to average daily net assets(c) .59%(d),(e) .63%(e) ------------------------------------------------------------------------------------------ Ratio of net investment income (loss) to average daily net assets 4.02%(e) 3.92%(e) ------------------------------------------------------------------------------------------ Portfolio turnover rate (excluding short-term securities) 147% 297% ------------------------------------------------------------------------------------------ Total return(f) (.39%)(g) 5.25%(g) ------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Inception date is July 15, 2004. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratio of expenses for Class I would have been 0.63% for the six months ended Nov. 30, 2005. (e) Adjusted to an annual basis. (f) Total return does not reflect payment of a sales charge. (g) Not annualized. (h) Six months ended Nov. 30, 2005 (Unaudited). -------------------------------------------------------------------------------- 39 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT CLASS Y PER SHARE INCOME AND CAPITAL CHANGES(a)
FISCAL PERIOD ENDED MAY 31, 2005(g) 2005 2004 2003 2002 Net asset value, beginning of period $8.68 $8.49 $8.88 $8.74 $8.74 ------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .17 .32 .29 .35 .42 Net gains (losses) (both realized and unrealized) (.20) .20 (.39) .18 .02 ------------------------------------------------------------------------------------------------------------------------------- Total from investment operations (.03) .52 (.10) .53 .44 ------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.16) (.33) (.29) (.35) (.42) Distributions from realized gains -- -- -- (.04) (.02) ------------------------------------------------------------------------------------------------------------------------------- Total distributions (.16) (.33) (.29) (.39) (.44) ------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $8.49 $8.68 $8.49 $8.88 $8.74 ------------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 47 $ 50 $ 86 $ 177 $ 188 ------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b) .72%(c),(d) .77%(c) .84% .82% .81% ------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.87%(d) 3.70% 3.30% 4.04% 4.61% ------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 147% 297% 292% 263% 389% ------------------------------------------------------------------------------------------------------------------------------- Total return(e) (.34%)(f) 6.24% (1.13%) 6.22% 5.02% -------------------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class Y would have been 0.86% for the six months ended Nov. 30, 2005 and 0.86% for the year ended May 31, 2005. (d) Adjusted to an annual basis. (e) Total return does not reflect payment of a sales charge. (f) Not annualized. (g) Six months ended Nov. 30, 2005 (Unaudited). -------------------------------------------------------------------------------- 40 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT FUND EXPENSES EXAMPLE (UNAUDITED) As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments; and (2) ongoing costs, including management fees; distribution and service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the six months ended Nov. 30, 2005. ACTUAL EXPENSES The first line of the table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading titled "Expenses paid during the period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of the table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads). Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. -------------------------------------------------------------------------------- 41 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT
BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED JUNE 1, 2005 NOV. 30, 2005 THE PERIOD(a) EXPENSE RATIO Class A Actual(b) $1,000 $ 994.60 $4.45(c) .89% Hypothetical (5% return before expenses) $1,000 $1,020.61 $4.51(c) .89% Class B Actual(b) $1,000 $ 990.80 $8.18(c) 1.64% Hypothetical (5% return before expenses) $1,000 $1,016.85 $8.29(c) 1.64% Class C Actual(b) $1,000 $ 990.80 $8.18(c) 1.64% Hypothetical (5% return before expenses) $1,000 $1,016.85 $8.29(c) 1.64% Class I Actual(b) $1,000 $ 996.10 $2.95(c) .59% Hypothetical (5% return before expenses) $1,000 $1,022.11 $2.99(c) .59% Class Y Actual(b) $1,000 $ 996.60 $3.60(c) .72% Hypothetical (5% return before expenses) $1,000 $1,021.46 $3.65(c) .72%
(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 183/365 (to reflect the one-half year period). (b) Based on the actual return for the six months ended Nov. 30, 2005: -0.54% for Class A, -0.92% for Class B, -0.92% for Class C, -0.39% for Class I and -0.34% for Class Y. (c) Effective Oct. 1, 2005, the Fund's Board of Directors approved a change to the fee schedule under the Administrative Services Agreement between Ameriprise Financial and the Fund. The Investment Manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until May 31, 2006, unless sooner terminated at the discretion of the Board. Under this expense cap/fee waiver agreement, net expenses will not exceed 0.89% for Class A, 1.64% for Class B, 1.64% for Class C, 0.59% for Class I and 0.72% for Class Y. If the revised fee schedule under the Administrative Services Agreement and the cap/fee waiver agreement had been in place for the entire six-month period ended Nov. 30, 2005, the actual and hypothetical expenses paid would have been the same as those presented in the table above. -------------------------------------------------------------------------------- 42 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT APPROVAL OF INVESTMENT MANAGEMENT SERVICES AGREEMENT RiverSource Investments, LLC (RiverSource), a wholly-owned subsidiary of Ameriprise Financial, Inc. (Ameriprise Financial, formerly American Express Financial Corporation), serves as the investment manager to the Fund. Under an investment management services agreement (the IMS Agreement), the investment manager provides investment advice and other services to the Fund. Throughout the year, the Fund's Board of Directors (the Board) and the Board's Investment Review and Contracts Committees monitor these services. Ameriprise Financial had served as investment manager to the Fund until Sept. 29, 2005. On that date, and pursuant to the consent of the Board, Ameriprise Financial transferred its rights, title, and interest and its burdens and obligations under the IMS Agreement to RiverSource, its wholly-owned subsidiary. Each year, the Board determines whether to continue the IMS Agreement by evaluating the quality and level of services received and the costs associated with those services. To assist the Board in making this determination, the investment manager prepares detailed reports for the Board and its Contracts Committee in March and April and provides data prepared by independent organizations. The Board gives considerable weight to the work, deliberations and conclusions of the Contracts and Investment Review Committees in determining whether to continue the IMS Agreement. BACKGROUND This past year, prior to the Board's annual review process, on Feb. 1, 2005, American Express Company, the former parent of Ameriprise Financial, announced its intention to pursue a spin-off of Ameriprise Financial by distributing shares of the common stock of Ameriprise Financial to shareholders of American Express Company. Following this announcement, the Board determined to proceed with its annual review process and, after thorough review of the reports and data provided, at a meeting held in person on April 14, 2005, the Board, including all of its independent members, determined that the quality and level of advisory services provided pursuant to the IMS Agreement were satisfactory and that fees were fair and reasonable. However, in light of the announced plans of the spin-off, the Board approved continuation of the IMS Agreement with Ameriprise Financial for only an interim period ending on the later of (i) the effective date of the spin-off; or (ii) the approval of a new IMS Agreement with Ameriprise Financial (or its subsidiary) by the shareholders of the Fund, but in no event for a period longer than one year. During the course of the six-month period following the April 2005 meeting, the Board evaluated whether to approve new investment management services agreements for each of the funds within the Ameriprise Financial fund complex (together, the Funds) with post-spin Ameriprise Financial (or RiverSource). Independent counsel, Schulte Roth & Zabel LLP (Schulte), assisted the Boards in fulfilling their statutory and other responsibilities associated with the spin-off and the resulting consideration of new contracts, including the new IMS Agreement. The Board and its committees were provided with a wealth of written and oral information in this regard. Furthermore, in connection with the Board's considerations as to whether post-spin Ameriprise Financial, as an entity independent from American Express Company, would be capable of continuing to provide a high quality of services to the Funds, the -------------------------------------------------------------------------------- 43 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT Board's independent members retained their own financial adviser, Credit Suisse First Boston LLC (CSFB), to assist them in analyzing the capital adequacy of post-spin Ameriprise Financial. (The costs of independent counsel and CSFB and of additional meetings of the Boards were borne by Ameriprise Financial as part of the commitment of the American Express Company to ensure a complete and thorough review of the proposed spin-off and its effect on the services provided by Ameriprise Financial and its subsidiaries.) At a meeting of the Board held on Sept. 8, 2005, the Board, including all of its independent members, approved, and recommended that shareholders approve, a proposed new IMS Agreement with RiverSource (the New IMS Agreement). A meeting of the Fund's shareholders is expected to be held on Feb. 15, 2006 to consider approval of the New IMS Agreement. If approved, the New IMS Agreement would take effect shortly after the shareholder meeting. The following section, "Board Considerations Related to the New IMS Agreement," provides a detailed discussion of the Board's considerations and determinations respecting the New IMS Agreement. BOARD CONSIDERATIONS RELATED TO THE NEW IMS AGREEMENT In carrying out its legal responsibilities associated with the consideration of the New IMS Agreement, the Board evaluated the following factors: NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY POST-SPIN AMERIPRISE FINANCIAL (AND ITS SUBSIDIARIES) The Board recognized that only a few months had passed since its April 2005 conclusion that the nature, extent and quality of services provided by Ameriprise Financial were satisfactory and consistent with those that would be expected for a fund family of the size of the Funds and its determination to renew the IMS Agreement for the interim period. However, the Board also recognized the need to supplement this assessment with an evaluation of whether the spin-off or other factors would result in changes to the advisory services being provided under the current IMS Agreement. The Board focused its evaluation on the following factors potentially impacting the nature, extent and quality of advisory services to be provided by Ameriprise Financial: (i) Ameriprise Financial's projected capital structure and capital adequacy as a stand-alone entity; (ii) its legal and regulatory risks; (iii) its ability to retain and attract personnel; and (iv) its ability to successfully re-brand its products and services. Based on extensive presentations and reports by Ameriprise Financial, CSFB and Schulte, the Board concluded that the proposed capital structure (which includes certain indemnification commitments made by American Express Company) should enable RiverSource to continue to provide a high quality and level of advisory services to the Fund. In making this determination, the Board took into account representations by management of Ameriprise Financial that projected capital levels would allow Ameriprise Financial and RiverSource to meet legal and compliance responsibilities, build their distribution network, pursue technological upgrades, make capital commitments necessary to retain and attract key personnel devoted to legal and compliance responsibilities, portfolio management and distribution, and pursue smaller asset management acquisitions to help grow the asset management business. The Board accorded significant weight to CSFB's confirmation as to the reasonableness of the proposed capital structure. The Board also considered the fact that there were no expected departures of key personnel involved in the portfolio management, operations and marketing of the Funds as a result of the announcement of the spin-off. -------------------------------------------------------------------------------- 44 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT The Board concluded that, based on all of the materials and information provided, post-spin Ameriprise Financial (including RiverSource) would be in a position to continue to provide a high quality and level of advisory services to the Fund. INVESTMENT PERFORMANCE The Board next focused on investment performance. The Board reviewed reports documenting the Fund's performance over one-, three- and/or five-year periods, as well as the entire period during which its current portfolio manager has managed the Fund, and compared to relevant Lipper and market indices. The Board took into account its determination in April 2005 that investment performance in 2004 approximated the median. The Board also considered that it had been receiving monthly performance reports for the Fund and that there had been no significant deviations from April's overall performance data. COST OF SERVICES PROVIDED The Board evaluated comparative fees and the costs of services under the current IMS Agreement and the New IMS Agreement, including fees charged by Ameriprise Financial (including RiverSource and other subsidiaries) to institutional clients. The Board observed that the proposed advisory fee changes are designed to work in tandem with proposed changes to administrative services fees and that advisory fees under the New IMS Agreement would decrease. The Board studied RiverSource's effort (i.e., its "pricing philosophy") to set substantially all Funds' total expense ratios at or below the median expense ratio of comparable mutual funds (as compiled by Lipper). It also noted that RiverSource has agreed to voluntarily impose expense caps or waivers to achieve this pricing objective whenever the expense ratio exceeded the median expense ratio by more than three basis points. The Board next considered the expected profitability to Ameriprise Financial and RiverSource derived from their relationship with the Fund, recalling the April 2005 determination that the profitability level was appropriate. The Board noted that projected profitability of Ameriprise Financial would allow it to operate effectively and, at the same time, reinvest in RiverSource and its other asset management businesses. The Board also considered that the proposed changes in advisory fees and the mergers of certain other Funds would result in revenue gains to Ameriprise Financial, but that these increases would not materially alter profit margins due to expected increases in costs associated with the spin-off, particularly re-branding and separation. CSFB also reported that Ameriprise Financial's projected level of return on equity was generally reasonable in light of the returns on equity of its industry competitors. In evaluating profitability, the Board also considered the benefits Ameriprise Financial obtains through the use of commission dollars paid on portfolio transactions for the Fund and from other business relationships that result from managing the Fund. The Board also considered the fees charged by Ameriprise Financial (and its subsidiaries) to institutional clients as well as the fees paid to, and charged by, subadvisers, noting the differences in services provided in each case. In light of these considerations, the Board concluded that projected profitability levels were appropriate. -------------------------------------------------------------------------------- 45 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT ECONOMIES OF SCALE The Board also considered the "breakpoints" in fees that would be triggered as Fund net asset levels grew and the extent to which shareholders would benefit from such growth. The Board observed that the revised fee schedules under the proposed New IMS Agreement would continue to provide breakpoints similar to those in place pursuant to the current IMS Agreement. Accordingly, the Board concluded that the proposed New IMS Agreement provides adequate opportunity for shareholders to realize benefits as Fund assets grow. OTHER CONSIDERATIONS In addition, the Board accorded weight to the fact that, under the New IMS Agreement, RiverSource Investments is held to a higher standard of care than under the current IMS Agreement. The Board also noted Ameriprise Financial's commitment to a culture that adheres to ethical business practice, assigns accountability to senior management and seeks to identify conflicts and propose appropriate action to minimize the risks posed by the conflicts. Furthermore, the Board recognized that it was not limited to considering management's proposed New IMS Agreement. In this regard, the Board evaluated the circumstances under which it would consider the retention of an investment adviser different from RiverSource Investments. The Board concluded, based on its consultation with independent counsel, that pursuing the retention of a different adviser was not necessary, primarily because, in its best judgment, Ameriprise Financial continues to be basically the same organization (from a functional and managerial standpoint) as it was prior to the spin-off. The Board reasoned that shareholders purchased shares of the Fund with an expectation that the current investment advisory organization would be servicing the Fund. The Fund's Board has approved a merger of the Fund into RiverSource Diversified Bond Fund. Completion of the merger is subject to final approval by shareholders of the Fund. Proxy materials regarding the merger will be distributed to shareholders in December 2005, and a meeting of shareholders to consider the merger will be scheduled for February 2006. -------------------------------------------------------------------------------- 46 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT PROXY VOTING The policy of the Board is to vote all proxies of the companies in which the Fund holds investments. The procedures are stated in the Statement of Additional Information (SAI). You may obtain a copy of the SAI without charge by calling (800) 862-7919; by looking at the website www.riversource.com/funds; or by searching the website of the Securities and Exchange Commission (SEC) at http://www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available without charge by calling the Fund's administrator, Board Services Corporation, collect at (612) 330-9283; by looking at the website www.riversource.com/funds; or by searching the website of the SEC at www.sec.gov. -------------------------------------------------------------------------------- 47 -- RIVERSOURCE SELECTIVE FUND -- 2005 SEMIANNUAL REPORT [RIVERSOURCE INVESTMENTS(SM) LOGO] RIVERSOURCE INVESTMENTS 200 AMERIPRISE FINANCIAL CENTER MINNEAPOLIS, MN 55474 This report must be accompanied or preceded by the Fund's current prospectus. RiverSource Funds are managed by RiverSource Investments, LLC and distributed by Ameriprise Financial Services, Inc., Member NASD. Both companies are part of Ameriprise Financial, Inc. S-6385 W (1/06) Item 2. Code of Ethics. Not applicable for semi-annual reports. Item 3. Audit Committee Financial Expert. Not applicable for semi-annual reports. Item 4. Principal Accountant Fees and Services. Not applicable for semi-annual reports. Item 5. Audit Committee of Listed Registrants. Not applicable. Item 6. The complete schedule of investments is included in Item 1 of this Form N-CSR. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable. Item 8. Portfolio Managers of Closed-End Management Investment Companies. Not applicable. Item 9. Purchase of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. Not applicable. Item 10. Submission of matters to a vote of security holders. Not applicable. Item 11. Controls and Procedures. (a) Based upon their evaluation of the registrant's disclosure controls and procedures as conducted within 90 days of the filing date of this Form N-CSR, the registrant's Principal Financial Officer and Principal Executive Officer have concluded that those disclosure controls and procedures provide reasonable assurance that the material information required to be disclosed by the registrant on this report is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. (b) There were no changes in the registrant's internal controls over financial reporting that occurred during the registrant's last fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12. Exhibits. (a)(1) Not applicable for semi-annual reports. (a)(2) Separate certification for the Registrant's principal executive officer and principal financial officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company Act of 1940, are attached as EX.99.CERT. (a)(3) Not applicable. (b) A certification by the Registrant's principal executive officer and principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(b) under the Investment Company Act of 1940, is attached as EX.99.906 CERT. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) AXP Income Series, Inc. By /s/ Paula R. Meyer ------------------ Paula R. Meyer President and Principal Executive Officer Date January 31, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/ Paula R. Meyer ------------------ Paula R. Meyer President and Principal Executive Officer Date January 31, 2006 By /s/ Jeffrey P. Fox ------------------ Jeffrey P. Fox Treasurer and Principal Financial Officer Date January 31, 2006