N-CSRS 1 income_ncsrs.txt RIVERSOURCE 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 ------------ RIVERSOURCE INCOME SERIES, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) 50606 Ameriprise Financial Center, Minneapolis, Minnesota 55474 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Scott R. Plummer - 5228 Ameriprise Financial Center, Minneapolis, MN 55474 -------------------------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (612) 671-1947 ----------------- Date of fiscal year end: 5/31 -------------- Date of reporting period: 11/30 -------------- Semiannual Report RIVERSOURCE [LOGO](SM) INVESTMENTS RIVERSOURCE(SM) INCOME BUILDER SERIES SEMIANNUAL REPORT FOR THE PERIOD ENDED NOV. 30, 2006 > THIS SEMIANNUAL REPORT DESCRIBES THREE FUNDS, EACH OF WHICH INVESTS IN OTHER RIVERSOURCE FUNDS. THE OBJECTIVE OF EACH FUND IS A HIGH LEVEL OF CURRENT INCOME AND GROWTH OF CAPITAL. RiverSource(SM) Income Builder Basic Income Fund RiverSource(SM) Income Builder Moderate Income Fund RiverSource(SM) Income Builder Enhanced Income Fund TABLE OF CONTENTS Fund Snapshots .......................................................... 2 Portfolio Allocation .................................................... 3 Investment Changes RiverSource Income Builder Basic Income Fund ......................... 4 RiverSource Income Builder Moderate Income Fund ...................... 5 RiverSource Income Builder Enhanced Income Fund ...................... 6 Performance Summaries ................................................... 7 Questions & Answers with Portfolio Management ........................... 11 Investments in Affiliated Funds ......................................... 13 Financial Statements .................................................... 16 Notes to Financial Statements ........................................... 20 Fund Expenses Examples .................................................. 32 Proxy Voting ............................................................ 36 RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT - 1 FUND SNAPSHOTS AT NOV. 30, 2006 FUND OVERVIEW The Income Builder funds provide a steady stream of income through a funds-of-funds approach. The Funds offer built-in asset allocation by investing in a combination of underlying RiverSource Funds that are invested in fixed income and equity securities. The Funds leverage insight from the RiverSource Investments Fixed Income and Disciplined Equity and Asset Allocation teams. Within the RiverSource Income Builder Series, the Funds have a higher level of both risk to principal and potential for high current income. FUND FACTS
RIVERSOURCE INCOME BUILDER BASIC INCOME FUND TICKER SYMBOL INCEPTION DATE Class A RBBAX 2/16/06 Class B -- 2/16/06 Class C -- 2/16/06 Class Y -- 2/16/06 Total net assets ......................................$130.8 million Number of holdings ................................................14
RIVERSOURCE INCOME BUILDER MODERATE INCOME FUND TICKER SYMBOL INCEPTION DATE Class A RSMAX 2/16/06 Class B RSMBX 2/16/06 Class C -- 2/16/06 Class Y -- 2/16/06 Total net assets ......................................$293.4 million Number of holdings ................................................14
RIVERSOURCE INCOME BUILDER ENHANCED INCOME FUND TICKER SYMBOL INCEPTION DATE Class A RSBAX 2/16/06 Class B -- 2/16/06 Class C -- 2/16/06 Class Y -- 2/16/06 Total net assets ......................................$188.3 million Number of holdings ................................................14
TOP FIVE HOLDINGS Percentage of portfolio assets at Nov. 30, 2006 RIVERSOURCE INCOME BUILDER BASIC INCOME FUND RiverSource High Yield Bond Fund 13.2% RiverSource Cash Management Fund 12.6% RiverSource Floating Rate Fund 11.5% RiverSource Disciplined Equity Fund 11.2% RiverSource Dividend Opportunity Fund 11.2% For further detail about these holdings, please refer to the section entitled "Investments in Affiliated Funds."
RIVERSOURCE INCOME BUILDER MODERATE INCOME FUND RiverSource High Yield Bond Fund 17.7% RiverSource Floating Rate Fund 17.3% RiverSource Dividend Opportunity Fund 16.3% RiverSource Disciplined Equity Fund 10.8% RiverSource Emerging Markets Bond Fund 7.9% For further detail about these holdings, please refer to the section entitled "Investments in Affiliated Funds."
RIVERSOURCE INCOME BUILDER ENHANCED INCOME FUND RiverSource High Yield Bond Fund 25.0% RiverSource Floating Rate Fund 18.0% RiverSource Dividend Opportunity Fund 17.3% RiverSource Disciplined International Equity Fund 9.0% RiverSource Emerging Markets Bond Fund 9.0% For further detail about these holdings, please refer to the section entitled "Investments in Affiliated Funds."
PORTFOLIO MANAGERS
YEARS IN INDUSTRY Dimitris Bertsimas, Ph.D. 13 Colin Lundgren, CFA 17 Erol Sonderegger, CFA 11
Fund holdings are as of the date given, are subject to change at any time, and are not recommendations to buy or sell any security. The Income Builder funds are "funds of funds" comprised of holdings in several different RiverSource Funds, which may include small-cap, mid-cap, large-cap, money market, international, bond and/or sector funds. Each of the underlying funds in which the portfolio invests has its own investment risks, and those risks can affect the value of each portfolio's shares and investments. There are risks associated with fixed income investments, including credit risk, interest rate risk, and prepayment and extension risk. Non-investment grade securities generally have more volatile prices and carry more risk to principal and income than investment grade securities. International investing involves increased risk and volatility due to potential political and economic instability, currency fluctuations and differences in financial reporting and accounting standards and oversight. Risks are particularly significant in emerging markets. Investments in small- and mid-capitalization companies often involve greater risks and potential volatility than investments in larger, more established companies. See the Funds' prospectus for more information on these and other risks that may be associated with the underlying funds. 2 - RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT PORTFOLIO ALLOCATION RIVERSOURCE INCOME BUILDER BASIC INCOME FUND Percentage of portfolio assets at Nov. 30, 2006 Fixed Income Funds(1) 56.0% Equity Funds(2) 29.9% [PIE CHART] Cash Equivalents(3) 12.6% Alternative Investments(4) 1.5% (1) Includes Investment Grade 15.2%, High Yield 13.2%, Floating Rate 11.5%, Global Bond 7.3%, International 4.5% and Inflation Protected Securities 4.3%. (2) Includes Dividend Income 11.2%, U.S. Large Cap 11.2%, International 5.3%, Real Estate 1.2% and U.S. Small Cap 1.0%. (3) Includes Money Market 12.6%. (4) Comprised of an investment in the RiverSource Absolute Return Currency and Income Fund.
RIVERSOURCE INCOME BUILDER MODERATE INCOME FUND Percentage of portfolio assets at Nov. 30, 2006 Fixed Income Funds(1) 58.2% Equity Funds(2) 34.9% [PIE CHART] Cash Equivalents(3) 4.4% Alternative Investments(4) 2.5% (1) Includes High Yield 17.7%, Floating Rate 17.3%, Investment Grade 9.3%, International 7.9%, Inflation Protected Securities 3.5% and Global Bond 2.5%. (2) Includes Dividend Income 16.3%, U.S. Large Cap 10.8%, International 5.4%, Real Estate 1.4% and U.S. Small Cap 1.0%. (3) Includes Money Market 4.4%. (4) Comprised of an investment in the RiverSource Absolute Return Currency and Income Fund.
RIVERSOURCE INCOME BUILDER ENHANCED INCOME FUND Percentage of portfolio assets at Nov. 30, 2006 Fixed Income Funds(1) 59.8% Equity Funds(2) 36.3% [PIE CHART] Cash Equivalents(3) 0.5% Alternative Investments(4) 3.4% (1) Includes High Yield 25.0%, Floating Rate 18.0%, International 9.0%, Investment Grade 4.0%, Global Bond 2.2% and Inflation Protected Securities 1.6%. (2) Includes Dividend Income 17.3%, International 9.0%, U.S. Large Cap 7.4%, Real Estate 1.6% and U.S. Small Cap 1.0%. (3) Includes Money Market 0.5%. (4) Comprised of an investment in the RiverSource Absolute Return Currency and Income Fund.
RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT - 3 INVESTMENT CHANGES RIVERSOURCE INCOME BUILDER BASIC INCOME FUND
Fund holdings at Nov. 30, 2006 % OF FUND'S % OF FUND'S PORTFOLIO ASSETS PORTFOLIO ASSETS 6 MONTHS AGO ----------------------------------------------------- FLOATING RATE FUNDS RiverSource Floating Rate Fund 11.5% 9.9% ----------------------------------------------------- GLOBAL BOND FUNDS RiverSource Global Bond Fund 7.3% 8.2% ----------------------------------------------------- HIGH YIELD FIXED-INCOME FUNDS RiverSource High Yield Bond Fund 13.2% 10.9% ----------------------------------------------------- INFLATION PROTECTED SECURITIES FUNDS RiverSource Inflation Protected Securities Fund 4.3% 9.1% ----------------------------------------------------- INTERNATIONAL BOND FUNDS RiverSource Emerging Markets Bond Fund 4.5% 8.0% ----------------------------------------------------- INVESTMENT GRADE FIXED-INCOME FUNDS Includes government, corporate, mortgage and agency securities RiverSource Diversified Bond Fund 6.6% 0.9% RiverSource U.S. Government Mortgage Fund 8.6% 11.3% ----------------------------------------------------- 15.2% 12.2% ----------------------------------------------------- SECTOR FUNDS RiverSource Dividend Opportunity Fund 11.2% 23.5% ----------------------------------------------------- INTERNATIONAL EQUITY FUNDS RiverSource Disciplined International Equity Fund 5.3% 1.1% ----------------------------------------------------- DOMESTIC EQUITY FUNDS RiverSource Real Estate Fund 1.2% 1.8% RiverSource Disciplined Equity Fund 11.2% --% RiverSource Disciplined Small Cap Value Fund 1.0% 0.9% ----------------------------------------------------- 13.4% 2.7% ----------------------------------------------------- MONEY MARKET FUNDS RiverSource Cash Management Fund 12.6% 14.4% ----------------------------------------------------- ALTERNATIVE INVESTMENTS RiverSource Absolute Return Currency and Income Fund 1.5% --% ----------------------------------------------------- 100% 100.0% -----------------------------------------------------
4 - RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT INVESTMENT CHANGES RIVERSOURCE INCOME BUILDER MODERATE INCOME FUND
Fund holdings at Nov. 30, 2006 % OF FUND'S % OF FUND'S PORTFOLIO ASSETS PORTFOLIO ASSETS 6 MONTHS AGO ----------------------------------------------------- FLOATING RATE FUNDS RiverSource Floating Rate Fund 17.3% 16.0% ----------------------------------------------------- GLOBAL BOND FUNDS RiverSource Global Bond Fund 2.5% 3.0% ----------------------------------------------------- HIGH YIELD FIXED-INCOME FUNDS RiverSource High Yield Bond Fund 17.7% 13.5% ----------------------------------------------------- INFLATION PROTECTED SECURITIES FUND RiverSource Inflation Protected Securities Fund 3.5% 5.2% ----------------------------------------------------- INTERNATIONAL BOND FUNDS RiverSource Emerging Markets Bond Fund 7.9% 15.7% ----------------------------------------------------- INVESTMENT GRADE FIXED-INCOME FUNDS Includes government, corporate, mortgage and agency securities RiverSource Diversified Bond Fund 5.7% 1.4% RiverSource U.S. Government Mortgage Fund 3.6% 2.8% ----------------------------------------------------- 9.3% 4.2% ----------------------------------------------------- SECTOR FUNDS RiverSource Dividend Opportunity Fund 16.3% 26.5% ----------------------------------------------------- INTERNATIONAL EQUITY FUNDS RiverSource Disciplined International Equity Fund 5.4% 3.2% ----------------------------------------------------- DOMESTIC EQUITY FUNDS RiverSource Real Estate Fund 1.4% 4.3% RiverSource Disciplined Equity Fund 10.8% --% RiverSource Disciplined Small Cap Value Fund 1.0% 1.3% ----------------------------------------------------- 13.2% 5.6% ----------------------------------------------------- MONEY MARKET FUND RiverSource Cash Management Fund 4.4% 7.1% ----------------------------------------------------- ALTERNATIVE INVESTMENTS RiverSource Absolute Return Currency and Income Fund 2.5% --% ----------------------------------------------------- 100% 100.0% -----------------------------------------------------
RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT - 5 INVESTMENT CHANGES RIVERSOURCE INCOME BUILDER ENHANCED INCOME FUND
Fund holdings at Nov. 30, 2006 % OF FUND'S % OF FUND'S PORTFOLIO ASSETS PORTFOLIO ASSETS 6 MONTHS AGO ----------------------------------------------------- FLOATING RATE FUNDS RiverSource Floating Rate Fund 18.0% 19.7% ----------------------------------------------------- GLOBAL BOND FUNDS RiverSource Global Bond Fund 2.2% 4.2% ----------------------------------------------------- HIGH YIELD FIXED-INCOME FUNDS RiverSource High Yield Bond Fund 25.0% 20.1% ----------------------------------------------------- INFLATION PROTECTED SECURITIES FUNDS RiverSource Inflation Protected Securities Fund 1.6% 3.1% ----------------------------------------------------- INTERNATIONAL BOND FUNDS RiverSource Emerging Markets Bond Fund 9.0% 17.2% ----------------------------------------------------- INVESTMENT GRADE FIXED-INCOME FUNDS Includes government, corporate, mortgage and agency securities RiverSource Diversified Bond Fund 2.7% 2.0% RiverSource U.S. Government Mortgage Fund 1.3% 2.4% ----------------------------------------------------- 4.0% 4.4% ----------------------------------------------------- SECTOR FUNDS RiverSource Dividend Opportunity Fund 17.3% 17.8% ----------------------------------------------------- INTERNATIONAL EQUITY FUND RiverSource Disciplined International Equity Fund 9.0% 2.6% ----------------------------------------------------- DOMESTIC EQUITY FUNDS RiverSource Real Estate Fund 1.6% 4.4% RiverSource Disciplined Equity Fund 7.4% --% RiverSource Disciplined Small Cap Value Fund 1.0% 1.2% ----------------------------------------------------- 10.0% 5.6% ----------------------------------------------------- ALTERNATIVE INVESTMENTS RiverSource Absolute Return Currency and Income Fund 3.4% --% ----------------------------------------------------- MONEY MARKET FUNDS RiverSource Cash Management Fund 0.5% 5.3% ----------------------------------------------------- 100% 100.0% -----------------------------------------------------
6 - RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT PERFORMANCE SUMMARIES RIVERSOURCE INCOME BUILDER BASIC INCOME FUND PERFORMANCE COMPARISON For the six-month period ended Nov. 30, 2006 [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] RiverSource Income Builder Basic Income Fund Class A (excluding sales charge) +7.30% Lehman Brothers Aggregate Bond Index(1) (unmanaged) +5.93% Russell 3000(R) Value Index(2) (unmanaged) +12.85% Citigroup 3-Month U.S. Treasury Bill Index(3) (unmanaged) +2.48% Blended Index(4) +7.27%
RIVERSOURCE INCOME BUILDER MODERATE INCOME FUND PERFORMANCE COMPARISON For the six-month period ended Nov. 30, 2006 [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] RiverSource Income Builder Moderate Income Fund Class A (excluding sales charge) +8.40% Lehman Brothers Aggregate Bond Index(1) (unmanaged) +5.93% Russell 3000(R) Value Index(2) (unmanaged) +12.85% Citigroup 3-Month U.S. Treasury Bill Index(3) (unmanaged) +2.48% Blended Index(4) +7.45%
RIVERSOURCE INCOME BUILDER ENHANCED INCOME FUND PERFORMANCE COMPARISON For the six-month period ended Nov. 30, 2006 [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.] RiverSource Income Builder Enhanced Income Fund Class A (excluding sales charge) +8.49% Lehman Brothers Aggregate Bond Index(1) (unmanaged) +5.93% Russell 3000(R) Value Index(2) (unmanaged) +12.85% Citigroup 3-Month U.S. Treasury Bill Index(3) (unmanaged) +2.48% Blended Index(4) +7.54%
The performance information shown represents past performance and is not a guarantee of future results. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by contacting your financial institution or visiting riversource.com/funds. The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart. If reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The indices do not reflect the effects of sales charges, expenses and taxes. It is not possible to invest directly in an index. 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 Russell 3000(R) Value Index, an unmanaged index, measures the performance of those Russell 3000(R) Index companies with lower price-to-book ratios and lower forecasted growth values. The Citigroup 3-Month U.S. Treasury Bill Index, an unmanaged index, is representative of the performance of three-month Treasury bills. The indexes reflect reinvestment of all distributions and changes in market prices. The Income Builder Basic Income Fund's Blended Index consists of 65% Lehman Brothers Aggregate Bond Index, 25% Russell 3000 Value Index and 10% Citigroup 3-Month U.S. Treasury Bill Index. The Income Builder Moderate Income Fund's Blended Index consists of 70% Lehman Brothers Aggregate Bond Index, 25% Russell 3000 Value Index and 5% Citigroup 3-Month U.S. Treasury Bill Index. The Income Builder Enhanced Income Fund's Blended Index consists of 72.5% Lehman Brothers Aggregate Bond Index, 25% Russell 3000 Value Index and 2.5% Citigroup 3-Month U.S. Treasury Bill Index. The indexes reflect reinvestment of all distributions and changes in market prices. RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT - 7 PERFORMANCE SUMMARIES RiverSource Income Builder Basic Income Fund TOTAL RETURNS AT NOV. 30, 2006
SINCE Without sales charge 6 MONTHS* INCEPTION* Class A (inception 2/16/06) +7.30% +7.63% Class B (inception 2/16/06) +6.93% +7.00% Class C (inception 2/16/06) +6.82% +7.06% Class Y (inception 2/16/06) +7.36% +7.83% With sales charge Class A (inception 2/16/06) +2.20% +2.52% Class B (inception 2/16/06) +1.93% +2.00% Class C (inception 2/16/06) +5.82% +6.06%
AT DEC. 31, 2006
SINCE Without sales charge 6 MONTHS* INCEPTION* Class A (inception 2/16/06) +8.00% +8.63% Class B (inception 2/16/06) +7.54% +7.85% Class C (inception 2/16/06) +7.55% +7.91% Class Y (inception 2/16/06) +8.18% +8.84% With sales charge Class A (inception 2/16/06) +2.87% +3.47% Class B (inception 2/16/06) +2.54% +2.85% Class C (inception 2/16/06) +6.55% +6.91%
Class A share performance reflects the maximum sales charge of 4.75%. Class B share performance reflects a contingent deferred sales charge (CDSC) applied as follows: first year 5%; second and third years 4%; fourth year 3%; fifth year 2%; sixth year 1%; no sales charge thereafter. Class C shares may be subject to a 1% CDSC if shares are sold within one year after purchase. Sales charges do not apply to Class Y shares. This share class is available to institutional investors only. * Not annualized 8 - RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT PERFORMANCE SUMMARIES RiverSource Income Builder Moderate Income Fund TOTAL RETURNS AT NOV. 30, 2006
SINCE Without sales charge 6 MONTHS* INCEPTION* Class A (inception 2/16/06) +8.40% +8.58% Class B (inception 2/16/06) +8.04% +7.98% Class C (inception 2/16/06) +8.03% +8.08% Class Y (inception 2/16/06) +8.52% +8.72% With sales charge Class A (inception 2/16/06) +3.25% +3.43% Class B (inception 2/16/06) +3.04% +2.98% Class C (inception 2/16/06) +7.03% +7.08%
AT DEC. 31, 2006
SINCE Without sales charge 6 MONTHS* INCEPTION* Class A (inception 2/16/06) +9.23% +9.84% Class B (inception 2/16/06) +8.88% +9.18% Class C (inception 2/16/06) +8.77% +9.29% Class Y (inception 2/16/06) +9.26% +9.99% With sales charge Class A (inception 2/16/06) +4.05% +4.62% Class B (inception 2/16/06) +3.88% +4.18% Class C (inception 2/16/06) +7.77% +8.29%
Class A share performance reflects the maximum sales charge of 4.75%. Class B share performance reflects a contingent deferred sales charge (CDSC) applied as follows: first year 5%; second and third years 4%; fourth year 3%; fifth year 2%; sixth year 1%; no sales charge thereafter. Class C shares may be subject to a 1% CDSC if shares are sold within one year after purchase. Sales charges do not apply to Class Y shares. This share class is available to institutional investors only. * Not annualized RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT - 9 PERFORMANCE SUMMARIES RiverSource Income Builder Enhanced Income Fund TOTAL RETURNS AT NOV. 30, 2006
SINCE Without sales charge 6 MONTHS* INCEPTION* Class A (inception 2/16/06) +8.49% +8.65% Class B (inception 2/16/06) +8.00% +8.02% Class C (inception 2/16/06) +8.11% +8.14% Class Y (inception 2/16/06) +8.57% +8.85% With sales charge Class A (inception 2/16/06) +3.34% +3.49% Class B (inception 2/16/06) +3.00% +3.02% Class C (inception 2/16/06) +7.11% +7.14%
AT DEC. 31, 2006
SINCE Without sales charge 6 MONTHS* INCEPTION* Class A (inception 2/16/06) +9.79% +10.30% Class B (inception 2/16/06) +9.42% +9.60% Class C (inception 2/16/06) +9.32% +9.62% Class Y (inception 2/16/06) +9.87% +10.41% With sales charge Class A (inception 2/16/06) +4.58% +5.06% Class B (inception 2/16/06) +4.42% +4.60% Class C (inception 2/16/06) +8.32% +8.62%
Class A share performance reflects the maximum sales charge of 4.75%. Class B share performance reflects a contingent deferred sales charge (CDSC) applied as follows: first year 5%; second and third years 4%; fourth year 3%; fifth year 2%; sixth year 1%; no sales charge thereafter. Class C shares may be subject to a 1% CDSC if shares are sold within one year after purchase. Sales charges do not apply to Class Y shares. This share class is available to institutional investors only. * Not annualized 10 - RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT QUESTIONS & ANSWERS WITH PORTFOLIO MANAGEMENT Below, Portfolio Managers Dimitris Bertsimas, Colin Lundgren and Erol Sonderegger discuss the positioning and results for each RiverSource Income Builder Series fund for the six months ended Nov. 30, 2006. The specific securities mentioned are for illustrative purposes only and are not a complete list of securities that have increased or decreased in value. The views expressed in this statement reflect those of the portfolio manager only through the end of the period of the report as stated on the cover and do not necessarily represent the views of RiverSource Investments, LLC (RiverSource) or any subadviser to the Fund or any other person in the RiverSource or subadviser organization. Any such views are subject to change at any time based upon market or other conditions and RiverSource disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a RiverSource Fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any RiverSource Fund. Q: How did each RiverSource Income Builder Series fund perform for the first half of the fiscal year? A: All three funds of the RiverSource Income Builder Series outperformed their respective blended benchmarks during the reporting period. All Fund returns listed below are for Class A shares (excluding sales charge) for the six-month period ended Nov. 30, 2006. RiverSource Income Builder Basic Income Fund advanced 7.30%. The Fund's blended benchmark, composed 65% Lehman Brothers Aggregate Bond Index, 25% Russell 3000 Value Index and 10% Citigroup 3-Month U.S. Treasury Bill Index, returned 7.27% for the period. RiverSource Income Builder Moderate Income Fund gained 8.40%. The Fund's blended benchmark, composed 70% Lehman Brothers Aggregate Bond Index, 25% Russell 3000 Value Index and 5% Citigroup 3-Month U.S. Treasury Bill Index, returned 7.45% for the period. RiverSource Income Builder Enhanced Income Fund rose 8.49%. The Fund's blended benchmark, composed 72.5% Lehman Brothers Aggregate Bond Index, 25% Russell 3000 Value Index and 2.5% Citigroup 3-Month U.S. Treasury Bill Index, returned 7.54% for the period. The Funds' bond benchmark, the Lehman Brothers Aggregate Bond Index, rose 5.93%. The Funds' domestic equity benchmark, the Russell 3000 Value Index, increased 12.85%, while the cash benchmark, the Citigroup 3-Month U.S. Treasury Bill Index, advanced 2.48%. Index returns are for the six-month period ended Nov. 30, 2006. FOR ALL THREE FUNDS OF THE RIVERSOURCE INCOME BUILDER SERIES, A SIGNIFICANT ALLOCATION TO EQUITIES AND A MODEST EXPOSURE TO FIXED INCOME HELPED RELATIVE PERFORMANCE, AS STOCKS OUTPERFORMED BONDS DURING THE PERIOD. Q: What factors most significantly affected each Fund's performance during the semiannual period? A: For all three funds of the RiverSource Income Builder Series, a significant allocation to equities and a modest exposure to fixed income helped relative performance, as stocks outperformed bonds during the period. RiverSource Income Builder Basic Income Fund held an average allocation in equities of approximately 30%, or about 5% more than the long-term target of 25%, while RiverSource Income Builder Moderate Income Fund and RiverSource Income Builder Enhanced Income Fund each held an average allocation in equities of approximately 35%, or about 10% more than the long-term targets of 25%. Within equities, maintaining a significant allocation to real estate investment trusts (REITs), through RiverSource Real Estate Fund, helped performance, as the REIT sector posted robust results during the period. A sizable exposure to larger-cap value stocks, through RiverSource Dividend Opportunity Fund, also contributed positively to the Funds' performance, as larger-cap value stocks were among the best-performing asset classes during the period. Within fixed income, an emphasis on high yield corporate bonds and emerging markets bonds, through RiverSource High Yield Bond Fund and RiverSource Emerging Markets Bond Fund, respectively, supported relative results, as these two sectors notably outpaced the Lehman Aggregate Bond Index for the period. RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT - 11 QUESTIONS & ANSWERS Conversely, a slightly higher allocation to cash than the Funds' respective long-term targets, i.e., approximately 3% to 4% more than the respective blended benchmarks, detracted from the three funds of the Income Builder Series' results, as cash underperformed bonds during the period. Within equities, allocations to international stocks, U.S. large-cap core stocks, and U.S. small-cap stocks via the underlying funds focusing on these market segments hurt the Funds' relative performance somewhat, as each of these equity sub-classes modestly lagged the Russell 3000 Value Index. Also, within fixed income, allocations to floating rate bank loans, mortgages, Treasury inflation-protected securities (TIPS) and global bonds via the underlying funds focusing on these market segments all detracted modestly from the Funds' performance, as each of these fixed income sectors lagged the broad Lehman Aggregate Bond Index on a relative basis, despite posting positive absolute returns. Q: What changes did you make to the Funds' portfolios and how are they currently positioned? A: During the six months, we modestly reduced overall exposure to lower-quality bonds in RiverSource Income Builder Moderate Income Fund and RiverSource Income Builder Enhanced Income Fund. Within the lower-quality category of fixed income securities, we decreased allocations to emerging market debt, via RiverSource Emerging Markets Bond Fund, and increased exposure to floating rate bank loans and high-yield corporate bonds, via RiverSource Floating Rate Fund and RiverSource High Yield Bond Fund, respectively, in all three funds of the RiverSource Income Builder Series. Within the higher-quality category of fixed income securities, we increased all three Funds' allocations to investment-grade corporate bonds, through RiverSource Diversified Bond Fund, and to mortgages, through RiverSource U.S. Government Mortgage Fund. Within equities, we modestly shifted away from value stocks, via RiverSource Dividend Opportunity Fund, and moved toward core stocks, through RiverSource Disciplined Equity Fund, in all three funds of the RiverSource Income Builder Series. We also gradually reduced the Funds' exposure to REITs, through RiverSource Real Estate Fund, over the period. At the end of the period, the Funds maintained their tilt away from bonds in favor of equities relative to their respective blended benchmarks. Within equities, we had an emphasis on large-cap stocks over small-cap stocks and favored international stocks over U.S. stocks. Having begun to upgrade to higher-quality bonds within the fixed income allocation, the Funds had the lowest exposure to emerging market debt at the end of November that they had had since their inception in February 2006. We favored high yield corporate bonds and floating rate bank loans instead. THE THREE FUNDS OF THE RIVERSOURCE INCOME BUILDER SERIES WILL CONTINUE TO FOLLOW A QUANTITATIVE DISCIPLINE THAT SEEKS TO GENERATE A HIGH LEVEL OF INCOME, CAPITAL GROWTH AND MANAGE DOWNSIDE RISK. Q: What is the Funds' tactical view and strategy for the months ahead? A: The three funds of the RiverSource Income Builder Series will continue to follow a quantitative discipline that seeks to generate a high level of income, capital growth and manage downside risk. Sector allocation changes are implemented monthly and may be due to changes in yields, valuations, price momentum and/or correlations to other asset classes. Each of the underlying funds are managed to generate competitive performance vs. a benchmark and peer group as well. 12 - RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT INVESTMENTS IN AFFILIATED FUNDS RiverSource Income Builder Basic Income Fund NOV. 30, 2006 (UNAUDITED) (Percentages represent value of investments compared to net assets) FIXED INCOME FUNDS (56.1%)(c)
SHARES VALUE(a) FLOATING RATE (11.5%) RiverSource Floating Rate Fund 1,493,903 $ 15,013,723 ------------------------------------------------------------------------------------ GLOBAL BOND (7.3%) RiverSource Global Bond Fund 1,416,425 9,546,705 ------------------------------------------------------------------------------------ HIGH YIELD (13.2%) RiverSource High Yield Bond Fund 5,852,105 17,205,189 ------------------------------------------------------------------------------------ INFLATION PROTECTED SECURITIES (4.3%) RiverSource Inflation Protected Securities Fund 579,497 5,673,273 ------------------------------------------------------------------------------------ INTERNATIONAL (4.5%) RiverSource Emerging Markets Bond Fund 578,365 5,928,245 ------------------------------------------------------------------------------------ INVESTMENT GRADE (15.3%) RiverSource Diversified Bond Fund 1,795,981 8,692,550 RiverSource U.S. Government Mortgage Fund 2,237,863 11,278,830 ------------ Total 19,971,380 ------------------------------------------------------------------------------------ TOTAL FIXED INCOME FUNDS (Cost: $72,176,540) $ 73,338,515 ------------------------------------------------------------------------------------
EQUITY FUNDS (30.0%)(c)
SHARES VALUE(a) DIVIDEND INCOME (11.2%) RiverSource Dividend Opportunity Fund 1,670,890 $ 14,720,537 ------------------------------------------------------------------------------------ INTERNATIONAL (5.3%) RiverSource Disciplined International Equity Fund 681,957(b) 6,921,868 ------------------------------------------------------------------------------------
EQUITY FUNDS (CONTINUED)
SHARES VALUE(a) REAL ESTATE (1.2%) RiverSource Real Estate Fund 88,082 $ 1,613,657 ------------------------------------------------------------------------------------ U.S. LARGE CAP (11.3%) RiverSource Disciplined Equity Fund 1,961,798 14,713,489 ------------------------------------------------------------------------------------ U.S. SMALL CAP (1.0%) RiverSource Disciplined Small Cap Value Fund 120,335(b) 1,310,444 ------------------------------------------------------------------------------------ TOTAL EQUITY FUNDS (Cost: $35,994,441) $ 39,279,995 ------------------------------------------------------------------------------------
CASH EQUIVALENTS (12.7%)(c)
SHARES VALUE(a) MONEY MARKET RiverSource Cash Management Fund 16,573,256 $ 16,573,256 ------------------------------------------------------------------------------------ TOTAL CASH EQUIVALENTS (Cost: $16,573,256) $ 16,573,256 ------------------------------------------------------------------------------------
ALTERNATIVE INVESTMENTS (1.5%)(c)
SHARES VALUE(a) RiverSource Absolute Return Currency and Income Fund 192,925 $ 1,956,257 ------------------------------------------------------------------------------------ TOTAL ALTERNATIVE INVESTMENTS (Cost: $1,933,285) $ 1,956,257 ------------------------------------------------------------------------------------ TOTAL INVESTMENTS IN AFFILIATED FUNDS (Cost: $126,677,522)(d) $131,148,023 ====================================================================================
NOTES TO INVESTMENTS IN AFFILIATED FUNDS (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Non-income producing. (c) Investments in Underlying Affiliated Funds -- See Note 6 to the financial statements. (d) At Nov. 30, 2006, the cost of securities for federal income tax purposes was approximately $126,678,000 and the approximate aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 4,477,000 Unrealized depreciation (7,000) -------------------------------------------------------------- Net unrealized appreciation $ 4,470,000 --------------------------------------------------------------
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 riversource.com/funds. RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT - 13 INVESTMENTS IN AFFILIATED FUNDS RiverSource Income Builder Moderate Income Fund NOV. 30, 2006 (UNAUDITED) (Percentages represent value of investments compared to net assets) FIXED INCOME FUNDS (58.4%)(c)
SHARES VALUE(a) FLOATING RATE (17.4%) RiverSource Floating Rate Fund 5,077,401 $ 51,027,879 ------------------------------------------------------------------------------------ GLOBAL BOND (2.5%) RiverSource Global Bond Fund 1,108,835 7,473,549 ------------------------------------------------------------------------------------ HIGH YIELD (17.8%) RiverSource High Yield Bond Fund 17,698,707 52,034,196 ------------------------------------------------------------------------------------ INFLATION PROTECTED SECURITIES (3.5%) RiverSource Inflation Protected Securities Fund 1,049,730 10,276,860 ------------------------------------------------------------------------------------ INTERNATIONAL (7.9%) RiverSource Emerging Markets Bond Fund 2,261,125 23,176,530 ------------------------------------------------------------------------------------ INVESTMENT GRADE (9.3%) RiverSource Diversified Bond Fund 3,430,171 16,602,030 RiverSource U.S. Government Mortgage Fund 2,112,005 10,644,506 ------------ Total 27,246,536 ------------------------------------------------------------------------------------ TOTAL FIXED INCOME FUNDS (Cost: $168,693,180) $171,235,550 ------------------------------------------------------------------------------------
EQUITY FUNDS (35.0%)(c)
SHARES VALUE(a) DIVIDEND INCOME (16.3%) RiverSource Dividend Opportunity Fund 5,445,741 $ 47,976,979 ------------------------------------------------------------------------------------ INTERNATIONAL (5.5%) RiverSource Disciplined International Equity Fund 1,576,994(b) 16,006,488 ------------------------------------------------------------------------------------
EQUITY FUNDS (CONTINUED)
SHARES VALUE(a) REAL ESTATE (1.4%) RiverSource Real Estate Fund 228,806 $ 4,191,733 ------------------------------------------------------------------------------------ U.S. LARGE CAP (10.8%) RiverSource Disciplined Equity Fund 4,237,198 31,778,988 ------------------------------------------------------------------------------------ U.S. SMALL CAP (1.0%) RiverSource Disciplined Small Cap Value Fund 264,759(b) 2,883,225 ------------------------------------------------------------------------------------ TOTAL EQUITY FUNDS (Cost: $94,172,619) $102,837,413 ------------------------------------------------------------------------------------
CASH EQUIVALENTS (4.4%)(c)
SHARES VALUE(a) MONEY MARKET RiverSource Cash Management Fund 12,906,647 $ 12,906,647 ------------------------------------------------------------------------------------ TOTAL CASH EQUIVALENTS (Cost: $12,906,647) $ 12,906,647 ------------------------------------------------------------------------------------
ALTERNATIVE INVESTMENTS (2.5%)(c)
SHARES VALUE(a) RiverSource Absolute Return Currency and Income Fund 722,585 $ 7,327,014 ------------------------------------------------------------------------------------ TOTAL ALTERNATIVE INVESTMENTS (Cost: $7,235,680) $ 7,327,014 ------------------------------------------------------------------------------------ TOTAL INVESTMENTS IN AFFILIATED FUNDS (Cost: $283,008,126)(d) $294,306,624 ====================================================================================
NOTES TO INVESTMENTS IN AFFILIATED FUNDS (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Non-income producing. (c) Investments in Underlying Affiliated Funds -- See Note 6 to the financial statements. (d) At Nov. 30, 2006, the cost of securities for federal income tax purposes was approximately $283,008,000 and the approximate aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 11,343,000 Unrealized depreciation (44,000) --------------------------------------------------------------- Net unrealized appreciation $ 11,299,000 ---------------------------------------------------------------
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 riversource.com/funds. 14 - RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT INVESTMENTS IN AFFILIATED FUNDS RiverSource Income Builder Enhanced Income Fund NOV. 30, 2006 (UNAUDITED) (Percentages represent value of investments compared to net assets) FIXED INCOME FUNDS (59.8%)(c)
SHARES VALUE(a) FLOATING RATE (18.0%) RiverSource Floating Rate Fund 3,368,622 $ 33,854,655 ------------------------------------------------------------------------------------- GLOBAL BOND (2.2%) RiverSource Global Bond Fund 616,168 4,152,972 ------------------------------------------------------------------------------------- HIGH YIELD (25.0%) RiverSource High Yield Bond Fund 15,994,183 47,022,900 ------------------------------------------------------------------------------------- INFLATION PROTECTED SECURITIES (1.6%) RiverSource Inflation Protected Securities Fund 298,247 2,919,841 ------------------------------------------------------------------------------------- INTERNATIONAL (9.0%) RiverSource Emerging Markets Bond Fund 1,659,844 17,013,401 ------------------------------------------------------------------------------------- INVESTMENT GRADE (4.0%) RiverSource Diversified Bond Fund 1,056,750 5,114,672 RiverSource U.S. Government Mortgage Fund 489,873 2,468,961 ------------- Total 7,583,633 ------------------------------------------------------------------------------------- TOTAL FIXED INCOME FUNDS (Cost: $110,704,168) $ 112,547,402 -------------------------------------------------------------------------------------
EQUITY FUNDS (36.3%)(c)
SHARES VALUE(a) DIVIDEND INCOME (17.3%) RiverSource Dividend Opportunity Fund 3,698,672 $ 32,585,301 ------------------------------------------------------------------------------------- INTERNATIONAL (9.0%) RiverSource Disciplined International Equity Fund 1,678,491(b) 17,036,682 -------------------------------------------------------------------------------------
EQUITY FUNDS (CONTINUED)
SHARES VALUE(a) REAL ESTATE (1.6%) RiverSource Real Estate Fund 164,829 $ 3,019,674 ------------------------------------------------------------------------------------- U.S. LARGE CAP (7.4%) RiverSource Disciplined Equity Fund 1,861,901 13,964,259 ------------------------------------------------------------------------------------- U.S. SMALL CAP (1.0%) RiverSource Disciplined Small Cap Value Fund 167,769(b) 1,827,003 ------------------------------------------------------------------------------------- TOTAL EQUITY FUNDS (Cost: $62,593,243) $ 68,432,919 -------------------------------------------------------------------------------------
ALTERNATIVE INVESTMENTS (3.4%)(c)
SHARES VALUE(a) RiverSource Absolute Return Currency and Income Fund 624,325 $ 6,330,651 ------------------------------------------------------------------------------------- TOTAL ALTERNATIVE INVESTMENTS (Cost: $6,245,488) $ 6,330,651 -------------------------------------------------------------------------------------
CASH EQUIVALENTS (0.5%)(c)
SHARES VALUE(a) MONEY MARKET RiverSource Cash Management Fund 967,118 $ 967,118 ------------------------------------------------------------------------------------- TOTAL CASH EQUIVALENTS (Cost: $967,118) $ 967,118 ------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN AFFILIATED FUNDS (Cost: $180,510,017)(d) $ 188,278,090 =====================================================================================
NOTES TO INVESTMENTS IN AFFILIATED FUNDS (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Non-income producing. (c) Investments in Underlying Affiliated Funds -- See Note 6 to the financial statements. (d) At Nov. 30, 2006, the cost of securities for federal income tax purposes was approximately $180,510,000 and the approximate aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 7,810,000 Unrealized depreciation (42,000) -------------------------------------------------------------- Net unrealized appreciation $ 7,768,000 --------------------------------------------------------------
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 riversource.com/funds. RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT - 15 FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES
RIVERSOURCE RIVERSOURCE RIVERSOURCE INCOME BUILDER INCOME BUILDER INCOME BUILDER BASIC INCOME MODERATE INCOME ENHANCED INCOME NOV. 30, 2006 (UNAUDITED) FUND FUND FUND ASSETS Investments in affiliated funds, at value (Note 1) (identified cost $126,677,522, $283,008,126 and $180,510,017, respectively) $ 131,148,023 $ 294,306,624 $ 188,278,090 Cash in bank on demand deposit -- 6,354 -- Capital shares receivable 785,223 976,253 777,639 Dividends receivable 60,475 152,670 112,258 -------------------------------------------------------------------------------------------------------------------------------- Total assets 131,993,721 295,441,901 189,167,987 -------------------------------------------------------------------------------------------------------------------------------- LIABILITIES Capital shares payable 3,500 33,500 32,126 Payable for investments purchased 1,140,011 1,864,882 713,591 Accrued distribution fee 25,955 58,810 37,740 Accrued transfer agency fee 237 616 392 Accrued administrative services fee 71 160 102 Other accrued expenses 42,690 40,664 40,952 -------------------------------------------------------------------------------------------------------------------------------- Total liabilities 1,212,464 1,998,632 824,903 -------------------------------------------------------------------------------------------------------------------------------- Net assets applicable to outstanding capital stock $ 130,781,257 $ 293,443,269 $ 188,343,084 ================================================================================================================================ REPRESENTED BY Capital stock -- $.01 par value (Note 1) $ 124,526 $ 276,981 $ 177,986 Additional paid-in capital 126,299,188 282,136,060 180,402,822 Excess of distributions over net investment income (175,342) (350,964) (169,303) Accumulated net realized gain (loss) (Note 7) 62,384 82,694 163,506 Unrealized appreciation (depreciation) on investments 4,470,501 11,298,498 7,768,073 -------------------------------------------------------------------------------------------------------------------------------- Total -- representing net assets applicable to outstanding capital stock $ 130,781,257 $ 293,443,269 $ 188,343,084 ================================================================================================================================ Net assets applicable to outstanding shares: Class A $ 108,305,559 $ 249,924,470 $ 157,083,977 Class B $ 18,605,540 $ 36,626,125 $ 25,039,813 Class C $ 3,690,477 $ 6,882,067 $ 6,184,495 Class Y $ 179,681 $ 10,607 $ 34,799 Outstanding shares of capital stock: Class A shares 10,310,364 23,584,130 14,842,344 Class B shares 1,773,699 3,462,970 2,368,252 Class C shares 351,437 649,970 584,757 Class Y shares 17,095 1,000 3,287 Net asset value per share Class A $ 10.50 $ 10.60 $ 10.58 Class B $ 10.49 $ 10.58 $ 10.57 Class C $ 10.50 $ 10.59 $ 10.58 Class Y $ 10.51 $ 10.61 $ 10.59 --------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. 16 - RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT STATEMENTS OF OPERATIONS
RIVERSOURCE RIVERSOURCE RIVERSOURCE INCOME BUILDER INCOME BUILDER INCOME BUILDER BASIC INCOME MODERATE INCOME ENHANCED INCOME SIX MONTHS ENDED NOV. 30, 2006 (UNAUDITED) FUND FUND FUND INVESTMENT INCOME Income: Income distributions from underlying affiliated funds $ 1,643,458 $ 3,947,274 $ 2,895,753 ------------------------------------------------------------------------------------------------------------------------------- Expenses (Note 2): Distribution fee Class A 78,578 184,541 127,888 Class B 54,779 114,395 84,169 Class C 10,033 19,520 20,376 Transfer agency fee 22,602 59,944 42,148 Incremental transfer agency fee Class A 1,805 5,114 3,535 Class B 800 1,648 1,144 Class C 107 294 282 Service fee - Class Y 56 11 17 Administrative services fees and expenses 7,594 17,444 12,325 Custodian fees 381 468 588 Printing and postage 3,405 9,705 2,295 Registration fees 82,383 100,166 83,624 Audit fees 8,250 8,250 8,250 Other 4,879 4,105 3,355 ------------------------------------------------------------------------------------------------------------------------------- Total expenses 275,652 525,605 389,996 Expenses waived/reimbursed by the Investment Manager and its affiliates (Note 2) (55,627) (31,395) (33,251) ------------------------------------------------------------------------------------------------------------------------------- Total net expenses 220,025 494,210 356,745 ------------------------------------------------------------------------------------------------------------------------------- Investment income (loss) -- net 1,423,433 3,453,064 2,539,008 ------------------------------------------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) -- NET Net realized gain (loss) on sales of underlying affiliated funds (Note 3) 63,582 82,711 163,512 Net change in unrealized appreciation (depreciation) on investments 4,611,696 11,878,059 8,350,141 ------------------------------------------------------------------------------------------------------------------------------- Net gain (loss) on investments 4,675,278 11,960,770 8,513,653 ------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $ 6,098,711 $15,413,834 $11,052,661 ===============================================================================================================================
See accompanying notes to financial statements. RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT - 17 STATEMENTS OF CHANGES IN NET ASSETS
RIVERSOURCE INCOME BUILDER BASIC INCOME FUND NOV. 30, 2006 FOR THE PERIOD FROM SIX MONTHS ENDED FEB. 16, 2006(a) TO (UNAUDITED) MAY 31, 2006 OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ 1,423,433 $ 94,859 Net realized gain (loss) on sales of underlying affiliated funds 63,582 (1,181) Net change in unrealized appreciation (depreciation) on investments 4,611,696 (141,672) ------------------------------------------------------------------------------------------------------------ Net increase (decrease) in net assets resulting from operations 6,098,711 (47,994) ------------------------------------------------------------------------------------------------------------ Distributions to shareholders from: Net investment income Class A (1,371,725) (76,415) Class B (194,372) (16,399) Class C (36,304) (2,469) Class Y (2,636) (266) ------------------------------------------------------------------------------------------------------------ Total distributions (1,605,037) (95,549) ------------------------------------------------------------------------------------------------------------ CAPITAL SHARE TRANSACTIONS (NOTE 4) Proceeds from sales Class A shares (Note 2) 89,249,508 19,465,304 Class B shares 14,950,417 4,864,449 Class C shares 2,971,398 689,934 Class Y shares 161,269 35,000 Reinvestment of distributions at net asset value Class A shares 1,217,924 65,275 Class B shares 180,385 14,755 Class C shares 30,314 2,176 Class Y shares 2,428 163 Payments for redemptions Class A shares (5,137,546) (247,683) Class B shares (Note 2) (1,914,034) (106,089) Class C shares (Note 2) (129,123) (19) Class Y shares (35,561) -- ------------------------------------------------------------------------------------------------------------ Increase (decrease) in net assets from capital share transactions 101,547,379 24,783,265 ------------------------------------------------------------------------------------------------------------ Total increase (decrease) in net assets 106,041,053 24,639,722 Net assets at beginning of period (Note 1) 24,740,204 100,482(b) ------------------------------------------------------------------------------------------------------------ Net assets at end of period $ 130,781,257 $ 24,740,204 ============================================================================================================ Undistributed (excess of distributions over) net investment income $ (175,342) $ 6,262 ------------------------------------------------------------------------------------------------------------ RIVERSOURCE INCOME BUILDER MODERATE INCOME FUND NOV. 30, 2006 FOR THE PERIOD FROM SIX MONTHS ENDED FEB. 16, 2006(a) TO (UNAUDITED) MAY 31, 2006 OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ 3,453,064 $ 241,817 Net realized gain (loss) on sales of underlying affiliated funds 82,711 -- Net change in unrealized appreciation (depreciation) on investments 11,878,059 (580,209) ------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 15,413,834 (338,392) ------------------------------------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income Class A (3,320,478) (206,945) Class B (420,619) (31,620) Class C (73,272) (4,851) Class Y (392) (207) ------------------------------------------------------------------------------------------------------------- Total distributions (3,814,761) (243,623) ------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (NOTE 4) Proceeds from sales Class A shares (Note 2) 189,413,364 57,688,458 Class B shares 28,234,877 10,479,846 Class C shares 4,814,461 1,921,240 Class Y shares 50,037 50,025 Reinvestment of distributions at net asset value Class A shares 2,970,359 182,337 Class B shares 386,814 29,187 Class C shares 58,866 3,935 Class Y shares 181 98 Payments for redemptions Class A shares (9,052,209) (720,800) Class B shares (Note 2) (3,724,123) (192,367) Class C shares (Note 2) (162,164) (5,211) Class Y shares (81,653) (20,000) ------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions 212,908,810 69,416,748 ------------------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets 224,507,883 68,834,733 Net assets at beginning of period (Note 1) 68,935,386 100,653(c) ------------------------------------------------------------------------------------------------------------- Net assets at end of period $ 293,443,269 $ 68,935,386 ============================================================================================================= Undistributed (excess of distributions over) net investment income $ (350,964) $ 10,733 ------------------------------------------------------------------------------------------------------------- (a) When shares became publicly available. (b) Initial capital of $100,000 was contributed on Feb. 9, 2006. The Fund had an increase in net assets resulting from operations of $482 during the period from Feb. 9, 2006 to Feb. 16, 2006 (when shares became publicly available). (c) Initial capital of $100,000 was contributed on Feb. 9, 2006. The Fund had an increase in net assets resulting from operations of $653 during the period from Feb. 9, 2006 to Feb. 16, 2006 (when shares became publicly available).
See accompanying notes to financial statements. 18 - RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT STATEMENTS OF CHANGES IN NET ASSETS
RIVERSOURCE INCOME BUILDER ENHANCED INCOME FUND NOV. 30, 2006 FOR THE PERIOD FROM SIX MONTHS ENDED FEB. 16, 2006(a) TO (UNAUDITED) MAY 31, 2006 OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ 2,539,008 $ 233,928 Net realized gain (loss) on investments 163,512 (582,671) Net change in unrealized appreciation (depreciation) on investments 8,350,141 -- ------------------------------------------------------------------------------------------------------------ Net increase (decrease) in net assets resulting from operations 11,052,661 (348,743) ------------------------------------------------------------------------------------------------------------ Distributions to shareholders from: Net investment income Class A (2,326,612) (194,160) Class B (313,893) (34,517) Class C (77,150) (6,772) Class Y (729) (191) ------------------------------------------------------------------------------------------------------------ Total distributions (2,718,384) (235,640) ------------------------------------------------------------------------------------------------------------ CAPITAL SHARE TRANSACTIONS (NOTE 4) Proceeds from sales Class A shares (Note 2) 105,636,050 50,658,429 Class B shares 16,569,185 9,771,252 Class C shares 3,953,540 2,089,812 Class Y shares -- 22,500 Reinvestment of distributions at net asset value Class A shares 2,001,818 165,641 Class B shares 272,503 29,969 Class C shares 61,941 5,240 Class Y shares 506 74 Payments for redemptions Class A shares (7,141,158) (788,395) Class B shares (Note 2) (2,492,519) (134,406) Class C shares (Note 2) (188,001) (1,411) ------------------------------------------------------------------------------------------------------------ Increase (decrease) in net assets from capital share transactions 118,673,865 61,818,705 ------------------------------------------------------------------------------------------------------------ Total increase (decrease) in net assets 127,008,142 61,234,322 Net assets at beginning of period (Note 1) 61,334,942 100,620(b) ------------------------------------------------------------------------------------------------------------ Net assets at end of period $ 188,343,084 $ 61,334,942 ============================================================================================================ Undistributed (excess of distributions over) net investment income $ (169,303) $ 10,073 ------------------------------------------------------------------------------------------------------------ (a) When shares became publicly available. (b) Initial capital of $100,000 was contributed on Feb. 9, 2006. The Fund had an increase in net assets resulting from operations of $620 during the period from Feb. 9, 2006 to Feb. 16, 2006 (when shares became publicly available).
See accompanying notes to financial statements. RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT - 19 NOTES TO FINANCIAL STATEMENTS (Unaudited as to Nov. 30, 2006) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Each Fund is a series of RiverSource Income Series, Inc. and is registered under the Investment Company Act of 1940 (as amended) as a non-diversified, open-end management investment company. RiverSource Income Series, Inc. has 10 billion authorized shares of capital stock that can be allocated among the separate series as designated by the Board. Each Fund is a "fund of funds" and seeks to achieve its objective by investing in a combination of underlying affiliated funds* for which RiverSource Investments, LLC or an affiliate acts as investment manager or principal underwriter. For each Fund, on Feb. 9, 2006, Ameriprise Financial, Inc. (Ameriprise Financial) invested $100,000 (7,000 shares for Class A; 1,000 shares for Class B, Class C and Class Y, respectively), which represented the initial capital for each class at $10 per share. Shares of each Fund were first offered to the public on Feb. 16, 2006. The primary objective of each Fund is as follows: RiverSource Income Builder Basic Income Fund is designed for investors seeking a high level of current income and growth of capital, with a more conservative level of both risk to principal and potential for high current income, relative to RiverSource Income Builder Moderate Income Fund and RiverSource Income Builder Enhanced Income Fund. RiverSource Income Builder Moderate Income Fund is designed for investors seeking a high level of current income and growth of capital, with a higher level of both risk to principal and potential for high current income, relative to RiverSource Income Builder Basic Income Fund, and a more moderate level of risk to principal and potential for high current income relative to RiverSource Income Builder Enhanced Income Fund. RiverSource Income Builder Enhanced Income Fund is designed for investors seeking a high level of current income and growth of capital, with a higher level of both risk to principal and potential for high current income relative to RiverSource Income Builder Basic Income Fund and RiverSource Income Builder Moderate Income Fund. Each Fund offers Class A, Class B, Class C and Class Y shares. o Class A shares are sold with a front-end sales charge. o Class B shares may be subject to a contingent deferred sales charge (CDSC) and automatically convert to Class A shares during the ninth year of ownership. o Class C shares may be subject to a CDSC. o Class Y shares have no sales charge and are offered only to qualifying institutional investors. In September 2006, the Board approved renaming Class Y as Class R4, terminating the shareholder servicing agreement, revising the fee structure under the transfer agent agreement from account-based to asset-based, and adopting a plan administration services agreement. These changes are effective Dec. 11, 2006. 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. * For information on the goals, investment strategies and risks of the underlying funds please refer to Appendix A and B in the Funds' most recent prospectus. Each Fund's significant accounting policies are summarized below: USE OF ESTIMATES Preparing financial statements that conform to U.S. generally accepted accounting principles requires management to make estimates (e.g., on assets, liabilities and contingent assets and liabilities) that could differ from actual results. VALUATION OF INVESTMENTS Investments in the underlying funds are valued at their net asset value at the close of each business day. 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. GUARANTEES AND INDEMNIFICATIONS Under each Fund's organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to each Fund. In addition, certain of each Fund's contracts with its service providers contain general indemnification clauses. Each Fund's maximum exposure under these arrangements is unknown since the amount of any future claims that may be made against each Fund cannot be determined and each Fund has no historical basis for predicting the likelihood of any such claims. 20 - RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT FEDERAL TAXES Each Fund's policy is to comply with Subchapter M of the Internal Revenue Code that applies to regulated investment companies and to distribute substantially all of its taxable income to shareholders. No provision for income or excise taxes is thus required. Each Fund is treated as a separate entity for federal income tax purposes. Net investment income and net realized gain distributions are determined in accordance with income tax regulations, which may differ from generally accepted accounting principals. Capital accounts within the financial statements are adjusted for permanent book/tax differences. These differences are primarily due to capital loss carryforwards and losses due to wash sales and excise tax regulations. 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 were recorded by the Funds. RECENT ACCOUNTING PRONOUNCEMENTS On Sept. 20, 2006, the Financial Accounting Standards Board ("FASB") released Statement of Financial Accounting Standards No. 157 "Fair Value Measurements" ("SFAS 157"). SFAS 157 establishes an authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair-value measurements. The application of SFAS 157 is required for fiscal years beginning after Nov. 15, 2007 and interim periods within those fiscal years. The impact of SFAS 157 on the Fund's financial statements is being evaluated. In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation 48 (FIN 48), "Accounting for Uncertainty in Income Taxes." FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with FASB Statement 109, "Accounting for Income Taxes." FIN 48 prescribes a two-step process to recognize and measure a tax position taken or expected to be taken in a tax return. The first step is to determine whether a tax position has met the more-likely-than-not recognition threshold and the second step is to measure a tax position that meets the threshold to determine the amount of benefit to recognize. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after Dec. 15, 2006. Tax positions of each Fund are being evaluated to determine the impact, if any, to the Funds. The adoption of FIN 48 is not anticipated to have a material impact on the Funds. DIVIDENDS TO SHAREHOLDERS Dividends from net investment income, declared daily and payable monthly, are reinvested in additional shares of each Fund at net asset value or payable in cash. Capital gains, when available, are distributed along with the last income dividend of the calendar year. OTHER Security transactions, normally shares of the underlying funds, are accounted for as of trade date. Income and capital gain distributions from the underlying funds, if any, are recorded on the ex-dividend date. Interest income, including amortization of premium, market discount and original issue discount using the effective interest method, is accrued daily. 2. EXPENSES AND SALES CHARGES Under an Administrative Services Agreement, each Fund pays Ameriprise Financial a fee for administration and accounting services at an annual rate of 0.02% of each Fund's average daily net assets. Compensation to board members and certain other core expenses are paid by the affiliated underlying funds in which each Fund invests. Under a Transfer Agency Agreement, RiverSource Service Corporation (the Transfer Agent) maintains shareholder accounts and records. Each Fund pays the Transfer Agent an annual fee per shareholder account for this service as follows: o Class A $20.50 o Class B $21.50 o Class C $21.00 o Class Y $18.50 The incremental transfer agency fee is the amount charged to the specific classes for the additional expense above the fee for Class Y. Effective Dec. 11, 2006, as part of the Board's approval to rename Class Y as Class R4, the fee structure under the Transfer Agency Agreement was revised from an account-based fee for Class Y to an asset-based fee for Class R4. Each Fund will pay the Transfer Agent an annual asset-based fee at a rate of 0.05% of each Fund's average daily net assets for this service attributable to Class R4 shares. The Transfer Agent charges an annual closed account fee of $5 per inactive account, charged on a pro rata basis for 12 months from the date the account becomes inactive. These fees are included in the transfer agency fees on the statements of operations. RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT - 21 Each 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, each Fund pays a fee at an annual rate up to 0.25% of each Fund's average daily net assets attributable to Class A shares and up to 1.00% for Class B and Class C shares. Beginning Dec. 11, 2006, a new Plan Administration Services Agreement was adopted for the restructured Class R4. The fee is calculated at a rate of 0.25% of each Fund's average daily net assets attributable to Class R4 shares. Under the current Shareholder Service Agreement, each Fund pays the Distributor a fee for service provided to shareholders by the Distributor and other servicing agents with respect to those shares. The fee is calculated at a rate of 0.10% of each Fund's average daily net assets attributable to Class Y shares. Effective Dec. 11, 2006, this agreement was terminated. For the six months ended Nov 30, 2006, the Investment Manager and its affiliates waived certain fees and expenses as follows:
FUND CLASS A CLASS B CLASS C CLASS Y ------------------------------------------------------------------------------------------- RiverSource Income Builder Basic Income Fund 0.45% 1.21% 1.21% 0.29% RiverSource Income Builder Moderate Income Fund 0.45 1.21 1.21 0.29 RiverSource Income Builder Enhanced Income Fund 0.45 1.21 1.21 0.29
Of these waived fees and expenses, the transfer agency fees waived are as follows:
FUND AMOUNT -------------------------------------------------------------------------------------------- RIVERSOURCE INCOME BUILDER BASIC INCOME FUND Class A ...................................................................... $17,368 Class B ...................................................................... 2,970 Class C ...................................................................... 504 Class Y ...................................................................... 33 The Administrative services fees and other Fund level expenses were $34,752 RIVERSOURCE INCOME BUILDER MODERATE INCOME FUND Class A ...................................................................... 26,915 Class B ...................................................................... 3,752 Class C ...................................................................... 725 Class Y ...................................................................... 3 RIVERSOURCE INCOME BUILDER ENHANCED INCOME FUND Class A ...................................................................... 27,783 Class B ...................................................................... 4,413 Class C ...................................................................... 1,044 Class Y ...................................................................... 11
In addition, the Investment Manager and its affiliates have agreed to waive certain fees and expenses until May 31, 2007, unless sooner terminated at the discretion of the Board, such that net direct expenses will not exceed 0.45% for Class A, 1.21% for Class B, 1.21% for Class C and 0.29% for Class Y of each Fund's average daily net assets. Sales charges received by the Distributor for distributing the Funds' shares for the six months ended Nov. 30, 2006, are as follows:
FUND CLASS A CLASS B CLASS C -------------------------------------------------------------------------------------------- RiverSource Income Builder Basic Income Fund $ 607,236 $ 3,853 $ 1,073 RiverSource Income Builder Moderate Income Fund 1,402,720 6,115 356 RiverSource Income Builder Enhanced Income Fund 768,376 4,127 760
Each Fund also pays custodian fees to Ameriprise Trust Company, an affiliate of Ameriprise Financial. In addition to the fees and expenses which each Fund bears directly, each Fund indirectly bears a pro rata share of the fees and expenses of the underlying funds in which a Fund invests. Each Fund also indirectly receives a pro rata share of earnings credits from overnight cash balances which reduced the underlying funds transfer agency fee. Because the underlying funds have varied expense and fee levels and each Fund may own different proportions of underlying funds at different times, the amount of fees and expenses incurred indirectly by each Fund will vary. 3. TRANSACTIONS OF UNDERLYING AFFILIATED FUNDS For the six months ended Nov. 30, 2006, cost of purchases and proceeds from sales (other than short-term obligations) aggregated for each Fund are as follows:
FUND PURCHASES PROCEEDS ------------------------------------------------------------------------------------------- RiverSource Income Builder Basic Income Fund $107,966,875 $ 6,375,000 RiverSource Income Builder Moderate Income Fund 229,028,309 16,600,000 RiverSource Income Builder Enhanced Income Fund 126,565,919 8,150,000
Realized gains and losses are determined on an identified cost basis. 22 - RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT 4. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the periods indicated are as follows:
RIVERSOURCE INCOME BUILDER BASIC INCOME FUND SIX MONTHS ENDED NOV. 30, 2006 CLASS A CLASS B CLASS C CLASS Y --------------------------------------------------------------------------------------------------- Sold 8,765,018 1,467,968 291,347 15,880 Issued for reinvested distributions 118,536 17,587 2,948 237 Redeemed (500,584) (188,326) (12,808) (3,517) --------------------------------------------------------------------------------------------------- Net increase (decrease) 8,382,970 1,297,229 281,487 12,600 ---------------------------------------------------------------------------------------------------
RIVERSOURCE INCOME BUILDER BASIC INCOME FUND FEB. 16, 2006* TO MAY 31, 2006 CLASS A CLASS B CLASS C CLASS Y --------------------------------------------------------------------------------------------------- Sold 1,938,512 484,572 68,735 3,479 Issued for reinvested distributions 6,517 1,474 217 16 Redeemed (24,635) (10,576) (2) -- --------------------------------------------------------------------------------------------------- Net increase (decrease) 1,920,394 475,470 68,950 3,495 --------------------------------------------------------------------------------------------------- * When shares became publicly available
RIVERSOURCE INCOME BUILDER MODERATE INCOME FUND SIX MONTHS ENDED NOV. 30, 2006 CLASS A CLASS B CLASS C CLASS Y --------------------------------------------------------------------------------------------------- Sold 18,487,715 2,766,017 468,205 5,081 Issued for reinvested distributions 287,473 37,549 5,697 18 Redeemed (877,234) (368,890) (15,804) (8,066) --------------------------------------------------------------------------------------------------- Net increase (decrease) 17,897,954 2,434,676 458,098 (2,967) ---------------------------------------------------------------------------------------------------
RIVERSOURCE INCOME BUILDER MODERATE INCOME FUND FEB. 16, 2006* TO MAY 31, 2006 CLASS A CLASS B CLASS C CLASS Y --------------------------------------------------------------------------------------------------- Sold 5,732,529 1,043,675 190,992 4,965 Issued for reinvested distributions 18,198 2,915 393 10 Redeemed (71,551) (19,296) (513) (2,008) --------------------------------------------------------------------------------------------------- Net increase (decrease) 5,679,176 1,027,294 190,872 2,967 --------------------------------------------------------------------------------------------------- * When shares became publicly available
RIVERSOURCE INCOME BUILDER ENHANCED INCOME FUND SIX MONTHS ENDED NOV. 30, 2006 CLASS A CLASS B CLASS C CLASS Y --------------------------------------------------------------------------------------------------- Sold 10,361,895 1,625,682 387,936 -- Issued for reinvested distributions 194,728 26,549 6,027 49 Redeemed (696,078) (246,337) (18,320) -- --------------------------------------------------------------------------------------------------- Net increase (decrease) 9,860,545 1,405,894 375,643 49 ---------------------------------------------------------------------------------------------------
RIVERSOURCE INCOME BUILDER ENHANCED INCOME FUND FEB. 16, 2006* TO MAY 31, 2006 CLASS A CLASS B CLASS C CLASS Y --------------------------------------------------------------------------------------------------- Sold 5,036,375 971,755 207,731 2,231 Issued for reinvested distributions 16,546 2,994 523 7 Redeemed (78,122) (13,391) (140) -- --------------------------------------------------------------------------------------------------- Net increase (decrease) 4,974,799 961,358 208,114 2,238 --------------------------------------------------------------------------------------------------- * When shares became publicly available.
RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT - 23 5. BANK BORROWINGS Each Fund has a revolving credit agreement with a syndicate of banks headed by JPMorgan Chase Bank, N.A. (JPMCB), whereby each Fund may borrow for the temporary funding of shareholder redemptions or for other temporary or emergency purposes. The agreement went into effect Sept. 19, 2006. Each Fund must maintain asset coverage for borrowings of at least 300%. The agreement, which enables each 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. Each Fund also pays a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.06% per annum. Prior to this agreement, each Fund paid a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.07% per annum. Each Fund had no borrowings outstanding during the six months ended Nov. 30, 2006. 6. INVESTMENTS IN UNDERLYING AFFILIATED FUNDS The Funds do not invest in the underlying funds for the purpose of exercising management or control. At Nov. 30, 2006, each Fund held the following positions, which exceed 5% of the underlying fund's shares outstanding:
RIVERSOURCE INCOME BUILDER BASIC INCOME FUND UNDERLYING FUND PERCENT OF SHARES HELD --------------------------------------------------------------------------------- RiverSource Disciplined Small Cap Value Fund 6.44% RiverSource Disciplined International Equity Fund 8.59% RiverSource Emerging Markets Bond Fund 9.93%
RIVERSOURCE INCOME BUILDER MODERATE INCOME FUND UNDERLYING FUND PERCENT OF SHARES HELD --------------------------------------------------------------------------------- RiverSource Absolute Return Currency and Income Fund 8.93% RiverSource Floating Rate Fund 10.53% RiverSource Disciplined Small Cap Value Fund 14.26% RiverSource Disciplined International Equity Fund 19.68% RiverSource Emerging Markets Bond Fund 38.81%
RIVERSOURCE INCOME BUILDER ENHANCED INCOME FUND UNDERLYING FUND PERCENT OF SHARES HELD --------------------------------------------------------------------------------- RiverSource Floating Rate Fund 7.02% RiverSource Absolute Return Currency and Income Fund 7.74% RiverSource Disciplined Small Cap Value Fund 9.07% RiverSource Disciplined International Equity Fund 21.01% RiverSource Emerging Markets Bond Fund 28.49%
7. CAPITAL LOSS CARRY-OVER For federal income tax purposes, capital loss carry-overs at May 31, 2006 are as follows:
FUND CARRY-OVER EXPIRATION DATE ------------------------------------------------------------------------------ RiverSource Income Builder Basic Income Fund $ 48 2014 RiverSource Income Builder Moderate Income Fund 17 2014 RiverSource Income Builder Enhanced Income Fund 6 2014
It is unlikely the Board will authorize a distribution of any net realized gains until the available capital loss carry-overs have been offset or expire. 24 - RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT 8. INFORMATION REGARDING PENDING AND SETTLED LEGAL PROCEEDINGS In June 2004, an action captioned John E. Gallus et al. v. American Express Financial Corp. and American Express Financial Advisors Inc., was filed in the United States District Court for the District of Arizona. The plaintiffs allege that they are investors in several American Express Company mutual funds and they purport to bring the action derivatively on behalf of those funds under the Investment Company Act of 1940. The plaintiffs allege that fees allegedly paid to the defendants by the funds for investment advisory and administrative services are excessive. The plaintiffs seek remedies including restitution and rescission of investment advisory and distribution agreements. The plaintiffs voluntarily agreed to transfer this case to the United States District Court for the District of Minnesota. In response to our motion to dismiss the complaint, the Court dismissed one of plaintiffs' four claims and granted plaintiffs limited discovery. Discovery is currently set to end in March 2007. In December 2005, without admitting or denying the allegations, American Express Financial Corporation (AEFC, which is now known as Ameriprise Financial, Inc. (Ameriprise Financial)), the parent company of RiverSource Investments, LLC (RiverSource Investments), entered into settlement agreements with the Securities and Exchange Commission (SEC) and Minnesota Department of Commerce (MDOC) related to market timing activities. In connection with these matters, the SEC and MDOC issued orders (the Orders) alleging that AEFC violated certain provisions of the federal and Minnesota securities laws by failing to adequately disclose market timing activities by allowing certain identified market timers to continue to market time contrary to disclosures in mutual fund and variable annuity product prospectuses. The Orders also alleged that AEFC failed to implement procedures to detect and prevent market timing in 401(k) plans for employees of AEFC and related companies and failed to adequately disclose that there were no such procedures. Pursuant to the MDOC Order, the MDOC also alleged that AEFC allowed inappropriate market timing to occur by failing to have written policies and procedures and failing to properly supervise its employees. As a result of the Orders, AEFC was censured and ordered to cease and desist from committing or causing any violations of certain provisions of the Investment Advisers Act of 1940, the Investment Company Act of 1940, and various Minnesota laws. Pursuant to the terms of the Orders, AEFC agreed to pay disgorgement of $10 million and civil money penalties of $7 million. AEFC also agreed to make presentations at least annually to its board of directors and the relevant mutual funds' board that include an overview of policies and procedures to prevent market timing, material changes to these policies and procedures and whether disclosures related to market timing are consistent with the SEC order and federal securities laws. AEFC also agreed to retain an independent distribution consultant to assist in developing a plan for distribution of all disgorgement and civil penalties ordered by the SEC in accordance with various undertakings detailed at http://www.sec.gov/litigation/admin/ia-2451.pdf. In addition, AEFC agreed to complete and submit to the MDOC a compliance review of its procedures regarding market timing within one year of the MDOC Order, including a summary of actions taken to ensure compliance with applicable laws and regulations and certification by a senior officer regarding compliance and supervisory procedures. Ameriprise Financial and its affiliates have cooperated with the SEC and the MDOC in these legal proceedings, and have made regular reports to the RiverSource Funds' Boards of Directors/Trustees. Ameriprise Financial and certain of its affiliates have historically been involved in a number of legal, arbitration and regulatory proceedings, including routine litigation, class actions, and governmental actions, concerning matters arising in connection with the conduct of their business activities. Ameriprise Financial believes that the Funds are not currently the subject of, and that neither Ameriprise Financial nor any of its affiliates are the subject of, any pending legal, arbitration or regulatory proceedings that are likely to have a material adverse effect on the Funds or the ability of Ameriprise Financial or its affiliates to perform under their contracts with the Funds. Ameriprise Financial is required to make 10-Q, 10-K and, as necessary, 8-K filings with the Securities and Exchange Commission on legal and regulatory matters that relate to Ameriprise Financial and its affiliates. Copies of these filings may be obtained by accessing the SEC website at www.sec.gov. There can be no assurance that these matters, or the adverse publicity associated with them, will not result in increased fund redemptions, reduced sale of fund shares or other adverse consequences to the Funds. Further, although we believe proceedings are not likely to have a material adverse effect on the Funds or the ability of Ameriprise Financial or its affiliates to perform under their contracts with the Funds, these proceedings are subject to uncertainties and, as such, we are unable to estimate the possible loss or range of loss that may result. An adverse outcome in one or more of these proceedings could result in adverse judgments, settlements, fines, penalties or other relief that could have a material adverse effect on the consolidated financial condition or results of operations of Ameriprise Financial. RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT - 25 9. FINANCIAL HIGHLIGHTS The tables below show certain important financial information for evaluating each Fund's results. RIVERSOURCE INCOME BUILDER BASIC INCOME FUND CLASS A PER SHARE INCOME AND CAPITAL CHANGES(a)
Fiscal period ended May 31, 2006(h) 2006(b) Net asset value, beginning of period $ 9.98 $ 10.05 --------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .18 .10 Net gains (losses) (both realized and unrealized) .54 (.07) --------------------------------------------------------------------------------------- Total from investment operations .72 .03 --------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.20) (.10) --------------------------------------------------------------------------------------- Net asset value, end of period $ 10.50 $ 9.98 --------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 108 $ 19 --------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) .45%( e) .45%(e) --------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.88%( e) 3.44%(e) --------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 8% 1% --------------------------------------------------------------------------------------- Total return(f) 7.30%( g) .31%(g) --------------------------------------------------------------------------------------- (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Feb. 16, 2006 (when shares became publicly available) to May 31, 2006. (c) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the underlying funds in which the Fund invests. Such indirect expenses are not included in the above reported expense ratios. (d) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class A would have been 0.59% for the six months ended Nov. 30, 2006 and 3.62% for the period ended May 31, 2006. (e) Adjusted to an annual basis. (f) Total return does not reflect payment of a sales charge. (g) Not annualized. (h) Six months ended Nov. 30, 2006 (Unaudited).
CLASS B PER SHARE INCOME AND CAPITAL CHANGES(a)
Fiscal period ended May 31, 2006(h) 2006(b) Net asset value, beginning of period $ 9.97 $ 10.05 -------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .15 .08 Net gains (losses) (both realized and unrealized) .53 (.07) -------------------------------------------------------------------------------------- Total from investment operations .68 .01 -------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.16) (.09) -------------------------------------------------------------------------------------- Net asset value, end of period $ 10.49 $ 9.97 -------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 19 $ 5 -------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) 1.21%(e) 1.21%(e) -------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.13%(e) 2.70%(e) -------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 8% 1% -------------------------------------------------------------------------------------- Total return(f) 6.93%(g) .07%(g) -------------------------------------------------------------------------------------- (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Feb. 16, 2006 (when shares became publicly available) to May 31, 2006. (c) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the underlying funds in which the Fund invests. Such indirect expenses are not included in the above reported expense ratios. (d) 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 1.37% for the six months ended Nov. 30, 2006 and 4.20% for the period ended May 31, 2006. (e) Adjusted to an annual basis. (f) Total return does not reflect payment of a sales charge. (g) Not annualized. (h) Six months ended Nov. 30, 2006 (Unaudited).
26 - RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT RIVERSOURCE INCOME BUILDER BASIC INCOME FUND (CONTINUED) CLASS C PER SHARE INCOME AND CAPITAL CHANGES(a)
Fiscal period ended May 31, 2006(h) 2006(b) Net asset value, beginning of period $ 9.99 $ 10.05 --------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .15 .09 Net gains (losses) (both realized and unrealized) .53 (.07) --------------------------------------------------------------------------------------- Total from investment operations .68 .02 --------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.17) (.08) --------------------------------------------------------------------------------------- Net asset value, end of period $ 10.50 $ 9.99 --------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 4 $ 1 --------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) 1.21%(e) 1.21%(e) --------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.11%(e) 2.74%(e) --------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 8% 1% --------------------------------------------------------------------------------------- Total return(f) 6.82%(g) .23%(g) --------------------------------------------------------------------------------------- (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Feb. 16, 2006 (when shares became publicly available) to May 31, 2006. (c) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the underlying funds in which the Fund invests. Such indirect expenses are not included in the above reported expense ratios. (d) 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 1.34% for the six months ended Nov. 30, 2006 and 4.30% for the period ended May 31, 2006. (e) Adjusted to an annual basis. (f) Total return does not reflect payment of a sales charge. (g) Not annualized. (h) Six months ended Nov. 30, 2006 (Unaudited).
CLASS Y* PER SHARE INCOME AND CAPITAL CHANGES(a)
Fiscal period ended May 31, 2006(h) 2006(b) Net asset value, beginning of period $ 9.99 $ 10.05 -------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .19 .11 Net gains (losses) (both realized and unrealized) .54 (.07) -------------------------------------------------------------------------------------- Total from investment operations .73 .04 -------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.21) (.10) -------------------------------------------------------------------------------------- Net asset value, end of period $ 10.51 $ 9.99 -------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ -- $ -- -------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) .29%(e) .29%(e) -------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.04%(e) 3.25%(e) -------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 8% 1% -------------------------------------------------------------------------------------- Total return(f) 7.36%(g) .43%(g) -------------------------------------------------------------------------------------- * Effective Dec. 11, 2006, Class Y was renamed Class R4. (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Feb. 16, 2006 (when shares became publicly available) to May 31, 2006. (c) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the underlying funds in which the Fund invests. Such indirect expenses are not included in the above reported expense ratios. (d) 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 0.47% for the six months ended Nov. 30, 2006 and 6.84% for the period ended May 31, 2006. (e) Adjusted to an annual basis. (f) Total return does not reflect payment of a sales charge. (g) Not annualized. (h) Six months ended Nov. 30, 2006 (Unaudited).
RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT - 27 RIVERSOURCE INCOME BUILDER MODERATE INCOME FUND CLASS A PER SHARE INCOME AND CAPITAL CHANGES(a)
Fiscal period ended May 31, 2006(h) 2006(b) Net asset value, beginning of period $ 9.98 $ 10.07 -------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .20 .10 Net gains (losses) (both realized and unrealized) .63 (.08) -------------------------------------------------------------------------------------- Total from investment operations .83 .02 -------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.21) (.11) -------------------------------------------------------------------------------------- Net asset value, end of period $ 10.60 $ 9.98 -------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 250 $ 57 -------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) .45%(e) .45%(e) -------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.07%(e) 3.59%(e) -------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 9% --% -------------------------------------------------------------------------------------- Total return(f) 8.40%(g) .17%(g) -------------------------------------------------------------------------------------- (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Feb. 16, 2006 (when shares became publicly available) to May 31, 2006. (c) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the underlying funds in which the Fund invests. Such indirect expenses are not included in the above reported expense ratios. (d) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class A would have been 0.49% for the six months ended Nov. 30, 2006 and 1.77% for the period ended May 31, 2006. (e) Adjusted to an annual basis. (f) Total return does not reflect payment of a sales charge. (g) Not annualized. (h) Six months ended Nov. 30, 2006 (Unaudited).
CLASS B PER SHARE INCOME AND CAPITAL CHANGES(a)
Fiscal period ended May 31, 2006(h) 2006(b) Net asset value, beginning of period $ 9.96 $ 10.06 --------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .16 .08 Net gains (losses) (both realized and unrealized) .63 (.08) --------------------------------------------------------------------------------------- Total from investment operations .79 -- --------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.17) (.10) --------------------------------------------------------------------------------------- Net asset value, end of period $ 10.58 $ 9.96 --------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 37 $ 10 --------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) 1.21%(e) 1.21%(e) --------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.32%(e) 2.88%(e) --------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 9% --% --------------------------------------------------------------------------------------- Total return(f) 8.04%(g) (.05%)(g) --------------------------------------------------------------------------------------- (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Feb. 16, 2006 (when shares became publicly available) to May 31, 2006. (c) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the underlying funds in which the Fund invests. Such indirect expenses are not included in the above reported expense ratios. (d) 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 1.24% for the six months ended Nov. 30, 2006 and 2.41% for the period ended May 31, 2006. (e) Adjusted to an annual basis. (f) Total return does not reflect payment of a sales charge. (g) Not annualized. (h) Six months ended Nov. 30, 2006 (Unaudited).
28 - RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT RIVERSOURCE INCOME BUILDER MODERATE INCOME FUND (CONTINUED) CLASS C PER SHARE INCOME AND CAPITAL CHANGES(a)
Fiscal period ended May 31, 2006(h) 2006(b) Net asset value, beginning of period $ 9.97 $ 10.06 -------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .16 .09 Net gains (losses) (both realized and unrealized) .63 (.08) -------------------------------------------------------------------------------------- Total from investment operations .79 .01 -------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.17) (.10) -------------------------------------------------------------------------------------- Net asset value, end of period $ 10.59 $ 9.97 -------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 7 $ 2 -------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) 1.21%(e) 1.21%(e) -------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.34%(e) 2.83%(e) -------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 9% --% -------------------------------------------------------------------------------------- Total return(f) 8.03%(g) .05%(g) -------------------------------------------------------------------------------------- (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Feb. 16, 2006 (when shares became publicly available) to May 31, 2006. (c) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the underlying funds in which the Fund invests. Such indirect expenses are not included in the above reported expense ratios. (d) 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 1.25% for the six months ended Nov. 30, 2006 and 2.35% for the period ended May 31, 2006. (e) Adjusted to an annual basis. (f) Total return does not reflect payment of a sales charge. (g) Not annualized. (h) Six months ended Nov. 30, 2006 (Unaudited).
CLASS Y* PER SHARE INCOME AND CAPITAL CHANGES(a)
Fiscal period ended May 31, 2006(h) 2006(b) Net asset value, beginning of period $ 9.98 $ 10.07 -------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .20 .10 Net gains (losses) (both realized and unrealized) .64 (.08) -------------------------------------------------------------------------------------- Total from investment operations .84 .02 -------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.21) (.11) -------------------------------------------------------------------------------------- Net asset value, end of period $ 10.61 $ 9.98 -------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ -- $ -- -------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) .29%(e) .20%(e) -------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.57%(e) 3.88%(e) -------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 9% --% -------------------------------------------------------------------------------------- Total return(f) 8.52%(g) .18%(g) -------------------------------------------------------------------------------------- * Effective Dec. 11, 2006, Class Y was renamed Class R4. (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Feb. 16, 2006 (when shares became publicly available) to May 31, 2006. (c) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the underlying funds in which the Fund invests. Such indirect expenses are not included in the above reported expense ratios. (d) 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 0.31% for the six months ended Nov. 30, 2006 and 5.51% for the period ended May 31, 2006. (e) Adjusted to an annual basis. (f) Total return does not reflect payment of a sales charge. (g) Not annualized. (h) Six months ended Nov. 30, 2006 (Unaudited).
RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT - 29 RIVERSOURCE INCOME BUILDER ENHANCED INCOME FUND CLASS A PER SHARE INCOME AND CAPITAL CHANGES(a)
Fiscal period ended May 31, 2006(h) 2006(b) Net asset value, beginning of period $ 9.96 $ 10.06 -------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .21 .11 Net gains (losses) (both realized and unrealized) .63 (.09) -------------------------------------------------------------------------------------- Total from investment operations .84 .02 -------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.22) (.12) -------------------------------------------------------------------------------------- Net asset value, end of period $ 10.58 $ 9.96 -------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 157 $ 50 -------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) .45%(e) .45%(e) -------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.25%(e) 3.96%(e) -------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 7% --% -------------------------------------------------------------------------------------- Total return(f) 8.49%(g) .15%(g) -------------------------------------------------------------------------------------- (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Feb. 16, 2006 (when shares became publicly available) to May 31, 2006. (c) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the underlying funds in which the Fund invests. Such indirect expenses are not included in the above reported expense ratios. (d) The Investment Manager and its affiliates waived/reimbursed the Fund for certain expenses. Had they not done so, the annual ratios of expenses for Class A would have been 0.50% for the six months ended Nov. 30, 2006 and 2.04% for the period ended May 31, 2006. (e) Adjusted to an annual basis. (f) Total return does not reflect payment of a sales charge. (g) Not annualized. (h) Six months ended Nov. 30, 2006 (Unaudited).
CLASS B PER SHARE INCOME AND CAPITAL CHANGES(a)
Fiscal period ended May 31, 2006(h) 2006(b) Net asset value, beginning of period $ 9.96 $ 10.06 --------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .17 .09 Net gains (losses) (both realized and unrealized) .62 (.09) --------------------------------------------------------------------------------------- Total from investment operations .79 -- --------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.18) (.10) --------------------------------------------------------------------------------------- Net asset value, end of period $ 10.57 $ 9.96 --------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 25 $ 10 --------------------------------------------------------------------------------------- Ratio of expenses to average daily net asset(c),(d) 1.21% (e) 1.21%(e) --------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.50% (e) 3.24%(e) --------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 7% --% --------------------------------------------------------------------------------------- Total return(f) 8.00% (g) .02%(g) --------------------------------------------------------------------------------------- (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Feb. 16, 2006 (when shares became publicly available) to May 31, 2006. (c) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the underlying funds in which the Fund invests. Such indirect expenses are not included in the above reported expense ratios. (d) 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 1.26% for the six months ended Nov. 30, 2006 and 2.79% for the period ended May 31, 2006. (e) Adjusted to an annual basis. (f) Total return does not reflect payment of a sales charge. (g) Not annualized. (h) Six months ended Nov. 30, 2006 (Unaudited).
30 - RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT RIVERSOURCE INCOME BUILDER ENHANCED INCOME FUND (CONTINUED) CLASS C PER SHARE INCOME AND CAPITAL CHANGES(a)
Fiscal period ended May 31, 2006(h) 2006(b) Net asset value, beginning of period $ 9.96 $ 10.06 -------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .17 .09 Net gains (losses) (both realized and unrealized) .63 (.09) -------------------------------------------------------------------------------------- Total from investment operations .80 -- -------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.18) (.10) -------------------------------------------------------------------------------------- Net asset value, end of period $ 10.58 $ 9.96 -------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 6 $ 2 -------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) 1.21%(e) 1.21%(e) -------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.48%(e) 3.22%(e) -------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 7% --% -------------------------------------------------------------------------------------- Total return(f) 8.11%(g) .02%(g) -------------------------------------------------------------------------------------- (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Feb. 16, 2006 (when shares became publicly available) to May 31, 2006. (c) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the underlying funds in which the Fund invests. Such indirect expenses are not included in the above reported expense ratios. (d) 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 1.26% for the six months ended Nov. 30, 2006 and 2.63% for the period ended May 31, 2006. (e) Adjusted to an annual basis. (f) Total return does not reflect payment of a sales charge. (g) Not annualized. (h) Six months ended Nov. 30, 2006 (Unaudited).
CLASS Y* PER SHARE INCOME AND CAPITAL CHANGES(a)
Fiscal period ended May 31, 2006(h) 2006(b) Net asset value, beginning of period $ 9.97 $ 10.06 -------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .21 .12 Net gains (losses) (both realized and unrealized) .63 (.09) -------------------------------------------------------------------------------------- Total from investment operations .84 .03 -------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.22) (.12) -------------------------------------------------------------------------------------- Net asset value, end of period $ 10.59 $ 9.97 -------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ -- $ -- -------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) .29%(e) .29%(e) -------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.39%(e) 3.66%(e) -------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 7% --% -------------------------------------------------------------------------------------- Total return(f) 8.57%(g) .27%(g) -------------------------------------------------------------------------------------- * Effective Dec. 11, 2006, Class Y was renamed Class R4. (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Feb. 16, 2006 (when shares became publicly available) to May 31, 2006. (c) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the underlying funds in which the Fund invests. Such indirect expenses are not included in the above reported expense ratios. (d) 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 0.35% for the six months ended Nov. 30, 2006 and 5.75% for the period ended May 31, 2006. (e) Adjusted to an annual basis. (f) Total return does not reflect payment of a sales charge. (g) Not annualized. (h) Six months ended Nov. 30, 2006 (Unaudited).
RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT - 31 FUND EXPENSES EXAMPLES (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 distribution and service (12b-1) fees; and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. In addition to the ongoing expenses, which each Fund bears directly, the Fund's shareholders indirectly bear the expenses of the underlying funds in which each Fund invests. Each Fund's estimated indirect expense from investing in the underlying funds is based on the Fund's pro rata portion of the cumulative expenses charged by the underlying funds using the underlying funds expense ratio as of the most recent shareholder report. These examples are based on an investment of $1,000 invested at the beginning of the period and held for the six months ended Nov. 30, 2006. ACTUAL EXPENSES The first line of each 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 "Direct Expenses paid during the period" to estimate the expenses you paid on your account during this period. You can also estimate the direct and indirect expenses you paid over the period by using the number in the first line under the heading "Direct and indirect expenses paid during the period." HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of each table provides information about hypothetical account values and hypothetical expenses based on each 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 with the cost of investing in other funds. To do so, compare each 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 each 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 each 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. 32 - RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT RiverSource Income Builder Basic Income Fund
BEGINNING ENDING DIRECT EXPENSES DIRECT AND INDIRECT ACCOUNT VALUE ACCOUNT VALUE PAID DURING EXPENSES PAID JUNE 1, 2006 NOV. 30, 2006 THE PERIOD(a) DURING THE PERIOD(b),(c) Class A Actual(d) $1,000 $1,073.00 $2.34 $6.08 Hypothetical (5% return before expenses) $1,000 $1,022.81 $2.28 $5.93 Class B Actual(d) $1,000 $1,069.30 $6.28 $10.01 Hypothetical (5% return before expenses) $1,000 $1,019.00 $6.12 $9.77 Class C Actual(d) $1,000 $1,068.20 $6.27 $10.01 Hypothetical (5% return before expenses) $1,000 $1,019.00 $6.12 $9.77 Class Y Actual(d) $1,000 $1,073.60 $1.51(e) $5.25 Hypothetical (5% return before expenses) $1,000 $1,023.61 $1.47(e) $5.12
FUND'S ACQUIRED FUND ANNUALIZED (UNDERLYING FUND) FEES NET FUND ANNUALIZED EXPENSE RATIOS EXPENSE RATIO AND EXPENSES(c) EXPENSES Class A .45% .72% 1.17% Class B 1.21% .72% 1.93% Class C 1.21% .72% 1.93% Class Y .29% .72% 1.01% (a) Expenses are equal to the Fund's annualized expense ratio for each class, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). (b) Expenses are equal to the Fund's annualized expense ratio for each class plus the "Acquired fund (underlying fund) fees and expenses," multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). (c) The investment manager and its affiliates have contractually agreed to waive fees and expenses for Class I shares on a number of underlying funds until the end of the underlying funds' next fiscal year. Before taking the fee waivers into account, the Acquired fund (underlying fund) fees and expenses would have been 0.90% for all classes. Had these commitments not been in place for the entire six-month period ended Nov. 30, 2006, the actual expenses paid would have been $7.02 for Class A, $10.95 for Class B, $10.94 for Class C and $6.19 for Class Y and the hypothetical expenses paid would have been $6.85 for Class A, $10.68 for Class B, $10.68 for Class C and $6.04 for Class Y. (d) Based on the actual return for the six months ended Nov. 30, 2006: +7.30% for Class A, +6.93% for Class B, +6.82% for Class C and +7.36% for Class Y. (e) In September 2006, the Board approved renaming Class Y as Class R4, terminating the shareholder servicing agreement, revising the fee structure under the transfer agent agreement from account-based to asset-based, and adopting a plan administration services agreement. In addition, the investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until May 31, 2007, unless sooner terminated at the discretion of the Fund's Board, such that net expenses will not exceed 0.29% for Class R4. Any amounts waived will not be reimbursed by the Fund. These changes are effective Dec. 11, 2006. If these changes had been in place for the six-month period ended Nov. 30, 2006, the actual and hypothetical expenses paid for Class Y would have been the same as those presented in the table above.
RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT - 33 RiverSource Income Builder Moderate Income Fund
BEGINNING ENDING DIRECT EXPENSES DIRECT AND INDIRECT ACCOUNT VALUE ACCOUNT VALUE PAID DURING EXPENSES PAID JUNE 1, 2006 NOV. 30, 2006 THE PERIOD(a) DURING THE PERIOD(b),(c) Class A Actual(d) $1,000 $1,084.00 $2.35 $6.48 Hypothetical (5% return before expenses) $1,000 $1,022.81 $2.28 $6.29 Class B Actual(d) $1,000 $1,080.40 $6.31 $10.43 Hypothetical (5% return before expenses) $1,000 $1,019.00 $6.12 $10.12 Class C Actual(d) $1,000 $1,080.30 $6.31 $10.43 Hypothetical (5% return before expenses) $1,000 $1,019.00 $6.12 $10.12 Class Y Actual(d) $1,000 $1,085.20 $1.52(e) $5.65 Hypothetical (5% return before expenses) $1,000 $1,023.61 $1.47(e) $5.48
FUND'S ACQUIRED FUND ANNUALIZED (UNDERLYING FUND) FEES NET FUND ANNUALIZED EXPENSE RATIOS EXPENSE RATIO AND EXPENSES(c) EXPENSES Class A .45% .79% 1.24% Class B 1.21% .79% 2.00% Class C 1.21% .79% 2.00% Class Y .29% .79% 1.08% (a) Expenses are equal to the Fund's annualized expense ratio for each class, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). (b) Expenses are equal to the Fund's annualized expense ratio for each class plus the "Acquired fund (underlying fund) fees and expenses," multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). (c) The investment manager and its affiliates have contractually agreed to waive fees and expenses for Class I shares on a number of underlying funds until the end of the underlying funds' next fiscal year. Before taking the fee waivers into account, the Acquired fund (underlying fund) fees and expenses would have been 1.04% for all classes. Had these commitments not been in place for the entire six-month period ended Nov. 30, 2006, the actual expenses paid would have been $7.78 for Class A, $11.73 for Class B, $11.73 for Class C and $6.95 for Class Y and the hypothetical expenses paid would have been $7.56 for Class A, $11.39 for Class B, $11.39 for Class C and $6.75 for Class Y. (d) Based on the actual return for the six months ended Nov. 30, 2006: +8.40% for Class A, +8.04% for Class B, +8.03% for Class C and +8.52% for Class Y. (e) In September 2006, the Board approved renaming Class Y as Class R4, terminating the shareholder servicing agreement, revising the fee structure under the transfer agent agreement from account-based to asset-based, and adopting a plan administration services agreement. In addition, the investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until May 31, 2007, unless sooner terminated at the discretion of the Fund's Board, such that net expenses will not exceed 0.29% for Class R4. Any amounts waived will not be reimbursed by the Fund. These changes are effective Dec. 11, 2006. If these changes had been in place for the six-month period ended Nov. 30, 2006, the actual and hypothetical expenses paid for Class Y would have been the same as those presented in the table above.
34 - RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT RiverSource Income Builder Enhanced Income Fund
BEGINNING ENDING DIRECT EXPENSES DIRECT AND INDIRECT ACCOUNT VALUE ACCOUNT VALUE PAID DURING EXPENSES PAID JUNE 1, 2006 NOV. 30, 2006 THE PERIOD(a) DURING THE PERIOD(b),(c) Class A Actual(d) $1,000 $1,084.90 $2.35 $6.74 Hypothetical (5% return before expenses) $1,000 $1,022.81 $2.28 $6.54 Class B Actual(d) $1,000 $1,080.00 $6.31 $10.69 Hypothetical (5% return before expenses) $1,000 $1,019.00 $6.12 $10.38 Class C Actual(d) $1,000 $1,081.10 $6.31 $10.69 Hypothetical (5% return before expenses) $1,000 $1,019.00 $6.12 $10.38 Class Y Actual(d) $1,000 $1,085.70 $1.52(e) $5.91 Hypothetical (5% return before expenses) $1,000 $1,023.61 $1.47(e) $5.73
FUND'S ACQUIRED FUND ANNUALIZED (UNDERLYING FUND) FEES NET FUND ANNUALIZED EXPENSE RATIOS EXPENSE RATIO AND EXPENSES(c) EXPENSES Class A .45% .84% 1.29% Class B 1.21% .84% 2.05% Class C 1.21% .84% 2.05% Class Y .29% .84% 1.13% (a) Expenses are equal to the Fund's annualized expense ratio for each class, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). (b) Expenses are equal to the Fund's annualized expense ratio for each class plus the "Acquired fund (underlying fund) fees and expenses," multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). (c) The investment manager and its affiliates have contractually agreed to waive fees and expenses for Class I shares on a number of underlying funds until the end of the underlying funds' next fiscal year. Before taking the fee waivers into account, the Acquired fund (underlying fund) fees and expenses would have been 1.13% for all classes. Had these commitments not been in place for the entire six-month period ended Nov. 30, 2006, the actual expenses paid would have been $8.26 for Class A, $12.20 for Class B, $12.21 for Class C and $7.42 for Class Y and the hypothetical expenses paid would have been $8.01 for Class A, $11.84 for Class B, $11.84 for Class C and $7.20 for Class Y. (d) Based on the actual return for the six months ended Nov. 30, 2006: +8.49% for Class A, +8.00% for Class B, +8.11% for Class C and +8.57% for Class Y. (e) In September 2006, the Board approved renaming Class Y as Class R4, terminating the shareholder servicing agreement, revising the fee structure under the transfer agent agreement from account-based to asset-based, and adopting a plan administration services agreement. In addition, the investment manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until May 31, 2007, unless sooner terminated at the discretion of the Fund's Board, such that net expenses will not exceed 0.29% for Class R4. Any amounts waived will not be reimbursed by the Fund. These changes are effective Dec. 11, 2006. If these changes had been in place for the six-month period ended Nov. 30, 2006, the actual and hypothetical expenses paid for Class Y would have been the same as those presented in the table above.
RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT - 35 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 RiverSource Funds at (888) 791-3380; contacting your financial institution; visiting riversource.com/funds; or searching the website of the Securities and Exchange Commission (SEC) at http://www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the 12-month period ended June 30, 2006 is available without charge by visiting riversource.com/funds; or searching the website of the SEC at www.sec.gov. 36 - RIVERSOURCE INCOME BUILDER SERIES - 2006 SEMIANNUAL REPORT RIVERSOURCE [LOGO](SM) INVESTMENTS RIVERSOURCE INVESTMENTS 734 AMERIPRISE FINANCIAL CENTER MINNEAPOLIS, MN 55474 RIVERSOURCE.COM/FUNDS RiverSource(SM) funds are distributed by RiverSource Distributors, Inc. and Ameriprise Financial Services, Inc., Members NASD, and managed by RiverSource Investments, LLC. These companies are part of Ameriprise Financial, Inc. S-6513 A (1/07) 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) RiverSource Income Series, Inc. By /s/ Patrick T. Bannigan ----------------------- Patrick T. Bannigan President and Principal Executive Officer Date February 2, 2007 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By /s/ Patrick T. Bannigan ----------------------- Patrick T. Bannigan President and Principal Executive Officer Date February 2, 2007 By /s/ Jeffrey P. Fox ----------------------- Jeffrey P. Fox Treasurer and Principal Financial Officer Date February 2, 2007