N-CSR 1 c51930nvcsr.txt N-CSR UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act File Number 811-4260 RIVERSOURCE GOVERNMENT 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: 5/31 Annual Report and Prospectus (RIVERSOURCE INVESTMENTS LOGO) RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND ANNUAL REPORT FOR THE PERIOD ENDED MAY 31, 2009 (Prospectus also enclosed) RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND SEEKS TO PROVIDE SHAREHOLDERS WITH A HIGH LEVEL OF CURRENT INCOME AND SAFETY OF PRINCIPAL CONSISTENT WITH INVESTMENT IN U.S. GOVERNMENT AND GOVERNMENT AGENCY SECURITIES. This annual report includes a prospectus that describes in detail the Fund's objective, investment strategy, risks, sales charges, fees and other matters of interest. Please read the prospectus carefully before you invest or send money. (SINGLE STRATEGY FUNDS ICON)
TABLE OF CONTENTS -------------------------------------------------------------- Your Fund at a Glance.............. 2 Manager Commentary................. 6 The Fund's Long-term Performance... 12 Fund Expenses Example.............. 14 Portfolio of Investments........... 16 Statement of Assets and Liabilities...................... 28 Statement of Operations............ 30 Statements of Changes in Net Assets........................... 31 Financial Highlights............... 32 Notes to Financial Statements...... 38 Report of Independent Registered Public Accounting Firm........... 55 Federal Income Tax Information..... 57 Board Members and Officers......... 58 Approval of Investment Management Services Agreement............... 62 Proxy Voting....................... 65
-------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 1 YOUR FUND AT A GLANCE ---------------------------------------------------------- FUND SUMMARY -------------------------------------------------------------------------------- > RiverSource Short Duration U.S. Government Fund (the Fund) Class A shares rose 0.59% (excluding sales charge) for the 12 months ended May 31, 2009. > The Fund underperformed its benchmark, the Barclays Capital U.S. 1-3 Year Government Index, which gained 5.34% during the same period. > The Fund underperformed the Lipper Short U.S. Government Funds Index, representing the Fund's peer group, which advanced 3.96% during the same time frame. ANNUALIZED TOTAL RETURNS (for period ended May 31, 2009) --------------------------------------------------------------------------------
1 year 3 years 5 years 10 years -------------------------------------------------------------------- RiverSource Short Duration U.S. Government Fund Class A (excluding sales charge) +0.59% +3.31% +2.56% +3.30% -------------------------------------------------------------------- Barclays Capital U.S. 1-3 Year Government Index (unmanaged) +5.34% +5.86% +4.24% +4.78% -------------------------------------------------------------------- Lipper Short U.S. Government Funds Index +3.96% +4.63% +3.53% +4.08% --------------------------------------------------------------------
(See "The Fund's Long-term Performance" for Index descriptions) The performance information shown represents past performance and is not a guarantee of future results. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by contacting your financial intermediary or visiting riversource.com/funds. The 3.00% sales charge applicable to Class A shares of the Fund is not reflected in the table above. If reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. See the Average Annual Total Returns table for performance of other share classes of the Fund. The indices do not reflect the effects of sales charges, expenses (excluding Lipper) and taxes. It is not possible to invest directly in an index. -------------------------------------------------------------------------------- 2 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS --------------------------------------------------------------------------------
AT MAY 31, 2009 SINCE Without sales charge 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION* Class A (inception 8/19/95) +0.59% +3.31% +2.56% +3.30% N/A --------------------------------------------------------------------------- Class B (inception 3/20/95) -0.18% +2.53% +1.80% +2.53% N/A --------------------------------------------------------------------------- Class C (inception 6/26/00) -0.17% +2.53% +1.80% N/A +2.79% --------------------------------------------------------------------------- Class I (inception 3/4/04) +1.18% +3.69% +2.93% N/A +2.63% --------------------------------------------------------------------------- Class R4 (inception 3/20/95) +0.93% +3.53% +2.77% +3.49% N/A --------------------------------------------------------------------------- Class W (inception 12/1/06) +0.52% N/A N/A N/A +2.45% --------------------------------------------------------------------------- With sales charge Class A (inception 8/19/95) -2.44% +2.26% +1.94% +2.99% N/A --------------------------------------------------------------------------- Class B (inception 3/20/95) -5.06% +1.26% +1.44% +2.53% N/A --------------------------------------------------------------------------- Class C (inception 6/26/00) -1.15% +2.53% +1.80% N/A +2.79% ---------------------------------------------------------------------------
Class A share performance reflects the maximum sales charge of 3.00%. Class B share performance reflects a contingent deferred sales charge (CDSC) applied as follows: first year 5%; second and third** years 4%; fourth year 3%; fifth year 2%; sixth year 1%; no sales charge thereafter. Class C shares may be subject to a 1% CDSC if shares are sold within one year after purchase. Sales charges do not apply to Class I, Class R4 and Class W shares. Class I and Class R4 are available to institutional investors only. Class W shares are offered through qualifying discretionary accounts. *For classes with less than 10 years performance. **For Class B shares purchased on or after June 13, 2009, the CDSC percentage for the third year will be 3%. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 3 YOUR FUND AT A GLANCE (continued) ---------------------------------------------- STYLE MATRIX --------------------------------------------------------------------------------
DURATION SHORT INT. LONG X HIGH MEDIUM QUALITY LOW
Shading within the style matrix indicates areas in which the Fund is designed to generally invest. The style matrix can be a valuable tool for constructing and monitoring your portfolio. It provides a frame of reference for distinguishing the types of stocks or bonds owned by a mutual fund, and may serve as a guideline for helping you build a portfolio. Investment products, including shares of mutual funds, are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value. PORTFOLIO STATISTICS -------------------------------------------------------------------------------- Weighted average life(1) 3.4 years -------------------------------------- Effective duration(2) 2.2 years -------------------------------------- Weighted average bond rating(3) AAA --------------------------------------
ANNUAL OPERATING EXPENSE RATIO* (as of the current prospectus) --------------------------------------------------------------------------------
Total Net fund fund expenses expenses(a) ---------------------------------------- Class A 1.02% 0.86% ---------------------------------------- Class B 1.78% 1.62% ---------------------------------------- Class C 1.78% 1.62% ---------------------------------------- Class I 0.60% 0.48% ---------------------------------------- Class R2(b) 1.40% 1.28% ---------------------------------------- Class R4 0.90% 0.78% ---------------------------------------- Class W 1.04% 0.93% ----------------------------------------
(a) The Investment Manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until July 31, 2010, unless sooner terminated at the discretion of the Fund's Board. Any amounts waived will not be reimbursed by the Fund. Under this agreement, net fund expenses (excluding fees and expenses of acquired funds) will not exceed 0.86% for Class A, 1.62% for Class B, 1.62% for Class C, 0.48% for Class I, 1.28% for Class R2, 0.78% for Class R4 and 0.93% for Class W. (b) Inception date for Class R5 is Aug. 3, 2009. (1) WEIGHTED AVERAGE LIFE measures a bond's maturity, which takes into consideration the possibility that the issuer may call the bond before its maturity date. (2) EFFECTIVE DURATION measures the sensitivity of a security's price to parallel shifts in the yield curve (the graphical depiction of the levels of interest rates from two years out to 30 years). Positive duration means that as rates rise, the price decreases, and negative duration means that as rates rise, the price increases. (3) WEIGHTED AVERAGE BOND RATING represents the average credit quality of the underlying bonds in the portfolio. * Fund expense ratios are calculated based on the fund's average net assets during the fund's most recently completed fiscal year, and have not been adjusted for current asset levels, including any decrease or increase in assets, which, if adjusted, would result in expense ratios that are higher or lower, respectively, than those that are expressed herein. Any fee waivers/expense caps would limit the impact that any decrease in assets will have on net expense ratios in the current fiscal year. Shares of the RiverSource Short Duration U.S. Government Fund are not insured or guaranteed by the U.S. government. -------------------------------------------------------------------------------- 4 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- There are risks associated with an investment in a bond fund, including the impact of interest rates and credit. These and other risk considerations are discussed in the Fund's prospectus. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer- term securities. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 5 MANAGER COMMENTARY ------------------------------------------------------------- Todd White became a Portfolio Manager of RiverSource Short Duration U.S. Government Fund effective November 17, 2008. John G. McColley joined Mr. White as Portfolio Manager of RiverSource Short Duration U.S. Government Fund effective March 25, 2009. Dear Shareholders, RiverSource Short Duration U.S. Government Fund (the Fund) Class A shares rose 0.59% (excluding sales charge) for the 12 months ended May 31, 2009. The Fund underperformed its benchmark, the Barclays Capital U.S. 1-3 Year Government Index (Barclays Index), which gained 5.34% during the same period. The Fund also underperformed the Lipper Short U.S. Government Funds Index, representing the Fund's peer group, which advanced 3.96% during the same time frame. SIGNIFICANT PERFORMANCE FACTORS The annual period ended May 31, 2009 was a tale of two halves for the fixed income market. During the first half, interest rates across the SECTOR DIVERSIFICATION(1) (at May 31, 2009; % of portfolio assets) ---------------------------------------------------------------------
Asset-Backed 4.3% ------------------------------------------------ Commercial Mortgage-Backed 3.5% ------------------------------------------------ Consumer Discretionary 0.2% ------------------------------------------------ Energy 0.8% ------------------------------------------------ FDIC -- Insured Debt(2) 4.6% ------------------------------------------------ Foreign Government 1.4% ------------------------------------------------ Government Guaranteed(3) 1.0% ------------------------------------------------ Industrials 0.1% ------------------------------------------------ Mortgage-Backed(4) 46.8% ------------------------------------------------ Telecommunication 1.8% ------------------------------------------------ U.S. Government Obligations & Agencies 30.3% ------------------------------------------------ Utilities 1.8% ------------------------------------------------ Other(5) 3.4% ------------------------------------------------
(1) Percentages indicated are based upon total investments (excluding Investments of Cash Collateral Received for Securities on Loan) as of May 31, 2009. The Fund's composition is subject to change. (2) Debt guaranteed under the FDIC's Temporary Liquidity Guarantee Program (TLGP). (3) Debt guaranteed by the HM Treasury, United Kingdom. (4) Of the 46.8%, 4.8% is due to forward commitment mortgage-backed securities activity. Short-term securities are held as collateral for these commitments. (5) Cash & Cash Equivalents. -------------------------------------------------------------------------------- 6 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- Treasury yield curve declined dramatically as the economy weakened and the financial markets seized up. The Treasury yield curve steepened, meaning short- term rates declined more than long-term rates, as the Federal Reserve Board (the Fed) reduced the targeted federal funds rate by 200 basis points (2.00%) by the end of December 2008, bringing it to a range of 0% to 0.25%. For non-Treasury sectors, spreads, or the difference in yields between these securities and Treasuries, widened, as a flight to quality intensified, with investor risk aversion remaining high. Strong government response, led by the Fed, the Treasury Department and the Federal Deposit Insurance Corporation, helped stabilize the financial markets late in 2008. Since that time, interest rates across the Treasury yield curve rose, as the economy was seen as bottoming and financial conditions improved. Still, the Treasury QUALITY BREAKDOWN (at May 31, 2009; % of portfolio assets excluding cash equivalents) --------------------------------------------------------------------------------
AAA bonds 91.4% ------------------------------------------- AA bonds 0.7% ------------------------------------------- A bonds 3.9% ------------------------------------------- BBB bonds 3.4% ------------------------------------------- Non-investment grade bonds 0.6% -------------------------------------------
Bond ratings apply to the underlying holdings of the Fund and not the Fund itself. Whenever possible, the Standard and Poor's rating is used to determine the credit quality of a security. Standard and Poor's rates the creditworthiness of corporate bonds, with 15 categories, ranging from AAA (highest) to D (lowest). Ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories. If Standard and Poor's doesn't rate a security, then Moody's rating is used. RiverSource Investments, LLC, the Fund's investment manager, rates a security using an internal rating system when Moody's doesn't provide a rating. Strong government response, led by the Fed, the Treasury Department and the Federal Deposit Insurance Corporation, helped stabilize the financial markets late in 2008. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 7 MANAGER COMMENTARY (continued) ------------------------------------------------- yield curve remained steep, as the Fed held the targeted federal funds rate near zero in an effort to stimulate economic activity. Spreads on non-Treasury sectors have tightened in 2009 in response to the credit and quantitative easing by the various government arms. Quantitative easing is essentially when the Fed actively purchases bonds in the open market. For the annual period overall, the yield on the five-year U.S. Treasury was still nearly 100 basis points lower at May 31, 2009 than at the start of the fiscal year, despite a push higher in the latter months. Likewise, the Treasury yield curve was steeper at the end of the annual period than at the beginning. As for the non-Treasury sectors, performance of mortgage-backed securities became bifurcated for the annual period. The Fed's credit easing initiatives caused agency-issued mortgage-backed securities to outperform Treasuries for the 12-month period as a whole, while poor fundamentals and a lack of Fed sponsorship caused non-agency-issued mortgage-backed securities to lag. The Fund lagged the Barclays Index due primarily to its exposure to mortgage- backed securities, both agency and non-agency issued, during the first half of the year, as this sector posted positive returns but significantly underperformed Treasuries during these months. Non-agency mortgage-backed securities, in particular, were hurt by a lack of liquidity and experienced more dramatic price depreciation than those mortgage securities backed by the federal government. Similarly, a sizable exposure to commercial mortgage-backed securities (CMBS) detracted from the Fund's results during the first half of the annual period as spreads widened. The Fund's position in Treasury Inflation Protected Securities, or TIPS, also hurt its performance during these months. TIPS underperformed nominal Treasury securities, or non-inflation protected Treasury securities, as deflationary fears emerged. During the second half of the fiscal year, the Fund was positioned with a slight yield curve flattening bias, which detracted as the yield curve remained steep. The primary contributor to the Fund's performance during the first half of the annual period was its exposure to U.S. agency subordinated debt. Subordinated debt is debt that ranks below other securities with regard to claims on assets or earnings, but which typically offers a higher rate of return than senior debt due to the increased inherent risk. Subordinated debt of U.S. agencies is widely considered to be comparatively less risky -------------------------------------------------------------------------------- 8 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- and of greater quality than that of banks or other issuers. U.S. agency subordinated debt prices had become distressed based on the view that the federal government would not include the securities in programs to support the agencies. When the announcement was made that the agencies were being placed under conservatorship, subordinated debt payments were explicitly supported along with senior debt obligations. Several additional factors added value to the Fund's results during the second six months of the fiscal year, in particular an overweight position in agency mortgage-backed securities. Though underperforming during the first half of the annual period, agency mortgage-backed securities outperformed Treasuries in 2009 through the end of May, as the Fed supported this fixed income sector. Significant exposure to CMBS and TIPS, which had also detracted during the first half, further boosted the Fund's performance during the second half of the annual period. CMBS showed improvement, buoyed by new Treasury Department programs designed to support this sector. TIPS also performed well, as concerns regarding deflation gradually began to subside. The Fund's sizable exposure to asset-backed securities also contributed to its results during the second half of the annual period. Asset-backed securities' performance improved following the Fed's announcement of the Term Asset-Backed Securities Loan Facility (TALF), which is designed to improve liquidity in the asset-backed securities market and ultimately increase the availability of consumer lending. Lengthening the Fund's duration, relative to the Barclays Index, helped the Fund's performance during the second half of the fiscal year as well. Duration is a measure of the Fund's sensitivity to changes in interest rates. CHANGES TO THE FUND'S PORTFOLIO Since taking over management of the Fund, we reduced the Fund's positions in non-agency mortgage-backed securities and TIPS. We believe government supported agency mortgage-backed securities will continue to outperform non-agency mortgage-backed securities, and we believe prices on TIPS, which had performed well, began to imply a more reasonable assessment of future inflation. We correspondingly increased the Fund's exposure to asset-backed securities and agency debentures, both through senior and subordinated debt. We also initiated a modest exposure to investment grade corporate bonds, focusing Fund positions on utilities and -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 9 MANAGER COMMENTARY (continued) ------------------------------------------------- less-cyclical industrials, and reduced the Fund's cash position materially. These shifts in allocation helped the Fund's performance. Toward the end of the annual period, we shifted the Fund's duration back to a more neutral position, relative to the Barclays Index, given our view ahead for the economy and for interest rates. The Fund's portfolio turnover rate for the 12-month period was 271%.* OUR FUTURE STRATEGY Over the last few months of the annual period, we saw signs of stabilization in some areas of the economy, as nightmares of a coordinated collapse of the banking system subsided. As asset prices improved from their lows, so, too, did the lending environment, with corporate bond issuance increasing meaningfully. It seemed, at the end of May, that the vicious cycle of declining confidence, spending and market values finally abated as nascent signs of optimism emerged. Looking forward, we expect further signs of stabilization through the end of the second quarter and gradual expansion during the second half of the year. We believe that Gross Domestic Product is likely to grow at a below trend rate of approximately 1% during the second half of 2009, though with a cautionary note that the recovery may stall at some point during those months. We expect labor markets to lag, with the unemployment rate not peaking until the fourth quarter or beyond -- although we believe peak job losses may be behind us. In the fixed income market, we expect that Treasuries will continue to lose appeal as a safe haven and prefer the value offered by other sectors. Indeed, in our view, the level of Treasury yields will remain volatile in the months ahead, given the dynamic of record Treasury issuance versus continued quantitative easing. Supply of U.S. Treasury securities is anticipated to continue at a rate of approximately $150 billion per month over the near term. Also causing volatility in the Treasury market may be the question of the sustainability of an improving economy against a still-challenged housing market. With the Fed likely to keep the targeted federal funds rate near zero for a considerable amount of time and the record Treasury issuance of long-term securities, the Treasury yield curve should remain steep. -------------------------------------------------------------------------------- 10 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- Non-Treasury sectors with government sponsorship should remain firm. Sectors such as agency mortgage-backed securities and agency debentures already saw significant spread tightening in the last months of the fiscal year because of the Fed's support programs. Asset-backed securities could benefit going forward with the commencement of credit initiatives such as TALF and the Public-Private Investment Program, the latter of which has been proposed to further support asset prices of historically securitized products. As always, our strategy is to provide added portfolio value with a moderate amount of risk. Quality issues and security selection remain a priority as we continue to seek attractive buying opportunities. Todd White John McColley Portfolio Manager Portfolio Manager
* A significant portion of the turnover was the result of rolling-maturity mortgage securities, processing of prepayments and opportunistic changes we made at the margin in response to valuations or market developments. Any specific securities mentioned are for illustrative purposes only and are not a complete list of securities that have increased or decreased in value. The views expressed in this statement reflect those of the portfolio manager(s) only through the end of the period of the report as stated on the cover and do not necessarily represent the views of RiverSource Investments, LLC (RiverSource) or any subadviser to the Fund or any other person in the RiverSource or subadviser organizations. Any such views are subject to change at any time based upon market or other conditions and RiverSource disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a RiverSource fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any RiverSource fund. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 11 THE FUND'S LONG-TERM PERFORMANCE ----------------------------------------------- The chart on the facing page illustrates the total value of an assumed $10,000 investment in RiverSource Short Duration U.S. Government Fund Class A shares (from 6/1/99 to 5/31/09) as compared to the performance of two widely cited performance indices, the Barclays Capital U.S. 1-3 Year Government Index and the Lipper Short U.S. Government Funds Index. In comparing the Fund's Class A shares to these indices, you should take into account the fact that the Fund's performance reflects the maximum sales charge of 3.00%, while such charges are not reflected in the performance of the indices. Returns for the Fund include the reinvestment of any distributions paid during each period. The performance information shown represents past performance and is not a guarantee of future results. The table below and the chart on the facing page do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by contacting your financial intermediary or visiting riversource.com/funds. Also see "Past Performance" in the Fund's current prospectus. COMPARATIVE RESULTS --------------------------------------------------------------------------------
Results at May 31, 2009 1 YEAR 3 YEARS 5 YEARS 10 YEARS RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND (INCLUDES SALES CHARGE) Class A Cumulative value of $10,000 $9,756 $10,694 $11,009 $13,424 ------------------------------------------------------------------------------------------ Average annual total return -2.44% +2.26% +1.94% +2.99% ------------------------------------------------------------------------------------------ BARCLAYS CAPITAL U.S. 1-3 YEAR GOVERNMENT INDEX(1) Cumulative value of $10,000 $10,534 $11,862 $12,310 $15,948 ------------------------------------------------------------------------------------------ Average annual total return +5.34% +5.86% +4.24% +4.78% ------------------------------------------------------------------------------------------ LIPPER SHORT U.S. GOVERNMENT FUNDS INDEX(2) Cumulative value of $10,000 $10,396 $11,454 $11,892 $14,913 ------------------------------------------------------------------------------------------ Average annual total return +3.96% +4.63% +3.53% +4.08% ------------------------------------------------------------------------------------------
Results for other share classes can be found on page 3. -------------------------------------------------------------------------------- 12 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- (VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND LINE GRAPH)
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND BARCLAYS CAPITAL CLASS A U.S. 1-3 LIPPER SHORT (INCLUDES SALES YEAR U.S. U.S. GOVERNMENT CHARGE) GOVERNMENT INDEX(1) FUNDS INDEX(2) ----------------- ------------------- --------------- 5/31/99 $ 9,700 $10,000 $10,000 8/99 9,643 10,088 10,050 11/99 9,814 10,201 10,172 2/00 9,724 10,277 10,237 5/00 9,700 10,403 10,369 8/00 10,018 10,664 10,622 11/00 10,278 10,910 10,872 2/01 10,585 11,263 11,214 5/01 10,688 11,449 11,384 8/01 10,912 11,698 11,560 11/01 11,122 11,979 11,783 2/02 11,207 12,075 11,875 5/02 11,306 12,181 11,981 8/02 11,550 12,489 12,222 11/02 11,629 12,585 12,288 2/03 11,798 12,767 12,455 5/03 11,858 12,870 12,531 8/03 11,749 12,812 12,447 11/03 11,813 12,886 12,510 2/04 11,963 13,062 12,645 5/04 11,830 12,956 12,540 8/04 11,954 13,104 12,665 11/04 11,931 13,073 12,664 2/05 11,939 13,072 12,687 5/05 12,057 13,199 12,796 8/05 12,112 13,271 12,861 11/05 12,083 13,277 12,860 2/06 12,194 13,368 12,956 5/06 12,177 13,447 13,020 8/06 12,424 13,673 13,224 11/06 12,617 13,874 13,421 2/07 12,725 14,020 13,559 5/07 12,801 14,117 13,631 8/07 12,972 14,426 13,830 11/07 13,250 14,818 14,115 2/08 13,405 15,260 14,440 5/08 13,346 15,141 14,345 8/08 13,212 15,298 14,421 11/08 13,039 15,688 14,478 2/09 13,158 15,820 14,700 5/09 13,424 15,948 14,913
(1) The Barclays Capital U.S. 1-3 Year Government Index, an unmanaged index, is made up of all publicly issued, non-convertible domestic debt of the U.S. government, or agency thereof, or any quasi-federal corporation. The index also includes corporate debt guaranteed by the U.S. government. Only notes and bonds with a minimum maturity of one year up to a maximum maturity of 2.9 years are included. The index reflects reinvestment of all distributions and changes in market prices. (2) The Lipper Short U.S. Government Funds Index includes the 30 largest short U.S. government funds tracked by Lipper Inc. The index's returns include net reinvested dividends. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 13 FUND EXPENSES EXAMPLE --------------------------------------------------------- (UNAUDITED) As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments; and (2) ongoing costs, which may include management fees; distribution and service (12b-1) fees; and other Fund fees and expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. In addition to the ongoing expenses which the Fund bears directly, the Fund's shareholders indirectly bear the expenses of the funds in which it invests (also referred to as "acquired funds"), including affiliated and non-affiliated pooled investment vehicles (including mutual funds and exchange traded funds). The Fund's indirect expense from investing in the acquired funds is based on the Fund's pro rata portion of the cumulative expenses charged by the acquired funds using the expense ratio of each of the acquired funds as of the acquired fund's most recent shareholder report. The example is based on an investment of $1,000 invested at the beginning of the period and held for the six months ended May 31, 2009. ACTUAL EXPENSES The first line of the table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading titled "Expenses paid during the period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of the table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads). Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. -------------------------------------------------------------------------------- 14 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT --------------------------------------------------------------------------------
BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED DEC. 1, 2008 MAY 31, 2009 THE PERIOD(A) EXPENSE RATIO ------------------------------------------------------------------------------------------ Class A ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,029.60 $4.50(c) .89% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,020.49 $4.48(c) .89% ------------------------------------------------------------------------------------------ Class B ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,025.60 $8.33(c) 1.65% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,016.70 $8.30(c) 1.65% ------------------------------------------------------------------------------------------ Class C ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,025.60 $8.33(c) 1.65% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,016.70 $8.30(c) 1.65% ------------------------------------------------------------------------------------------ Class I ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,033.70 $2.59(c) .51% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,022.39 $2.57(c) .51% ------------------------------------------------------------------------------------------ Class R4 ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,032.40 $3.85(c) .76% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,021.14 $3.83(c) .76% ------------------------------------------------------------------------------------------ Class W ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,031.40 $4.86(c) .96% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,020.14 $4.84(c) .96% ------------------------------------------------------------------------------------------
(a) Expenses are equal to the annualized expense ratio for each class as indicated above, multiplied by the average account value over the period, multiplied by 182/365 (to reflect the one-half year period). (b) Based on the actual return for the six months ended May 31, 2009: +2.96% for Class A, +2.56% for Class B, +2.56% for Class C, +3.37% for Class I, +3.24% for Class R4 and +3.14% for Class W. (c) The Investment Manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until July 31, 2010, unless sooner terminated at the discretion of the Fund's Board, such that net expenses (excluding fees and expenses of acquired funds), will not exceed 0.86% for Class A, 1.62% for Class B, 1.62% for Class C, 0.48% for Class I, 0.78% for Class R4 and 0.93% for Class W. Any amounts waived will not be reimbursed by the Fund. This change was effective June 1, 2009. Had this change been in place for the entire six month period ended May 31, 2009, the actual expenses paid would have been $4.35 for Class A, $8.18 for Class B, $8.18 for Class C, $2.43 for Class I, $3.95 for Class R4 and $4.71 for Class W; the hypothetical expenses paid would have been $4.33 for Class A, $8.15 for Class B, $8.15 for Class C, $2.42 for Class I, $3.93 for Class R4 and $4.68 for Class W. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 15 PORTFOLIO OF INVESTMENTS ------------------------------------------------------ MAY 31, 2009 (Percentages represent value of investments compared to net assets) INVESTMENTS IN SECURITIES
BONDS (98.0%) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) FOREIGN AGENCIES (0.9%)(C) KfW 04-16-12 2.25% $3,795,000 $3,836,662 10-31-14 5.00 2,600,000 2,784,189 --------------- Total 6,620,851 ------------------------------------------------------------------------------------- SUPRANATIONAL (0.5%)(c) Asian Development Bank 09-05-13 3.63 3,726,000 3,836,280 ------------------------------------------------------------------------------------- U.S. GOVERNMENT OBLIGATIONS & AGENCIES (32.6%) Federal Home Loan Mtge Corp 10-20-10 1.38 3,545,000 3,549,718 01-07-11 1.50 9,070,000(p) 9,154,387 03-15-11 5.63 2,612,000(p) 2,821,684 11-18-11 1.75 6,355,000 6,372,947 03-23-12 2.13 7,420,000(p) 7,512,861 06-13-18 4.88 5,405,000(p) 5,782,949 Federal Natl Mtge Assn 03-02-11 2.00 12,270,000 12,365,669 04-28-11 1.38 5,685,000 5,715,953 04-29-11 1.15 3,121,000(l) 3,122,992 05-18-12 1.50 3,200,000(l) 3,193,509 04-09-13 3.25 14,350,000(p) 14,935,437 07-17-13 4.38 5,020,000 5,377,951 01-02-14 5.13 16,915,000 17,310,016 02-05-14 2.75 12,715,000(p) 12,772,216 11-15-30 6.63 1,945,000 2,371,214 U.S. Treasury 06-30-10 2.88 5,730,000(p) 5,875,267 10-31-10 1.50 18,575,000(p) 18,795,577 05-31-11 0.88 13,000,000(b) 12,987,780 01-15-12 1.13 17,000,000(p) 16,957,500 04-15-12 1.38 5,135,000(p) 5,140,618 05-15-12 1.38 15,000,000(p) 14,987,100 02-15-14 4.00 1,375,000 1,482,315 04-30-14 1.88 6,195,000(p) 6,065,277 02-15-15 4.00 17,240,000(p) 18,493,933 02-15-19 2.75 4,140,000(p) 3,890,648 05-15-19 3.13 7,500,000 7,285,575 U.S. Treasury Inflation-Indexed Bond 01-15-14 2.00 4,333,176(e) 4,464,873 --------------- Total 228,785,966 ------------------------------------------------------------------------------------- ASSET-BACKED (4.6%) Ameriquest Mtge Securities Series 2005-R6 Cl A2 08-25-35 0.51 2,159,043(l) 1,859,664 Asset Backed Securities Corp Home Equity Series 2005-HE2 Cl M1 02-25-35 0.76 2,672,462(l) 2,107,001 Bank of America Credit Card Trust Series 2008-A5 Cl A5 12-16-13 1.54 1,825,000(l) 1,821,714 Capital Auto Receivables Asset Trust Series 2006-SN1A Cl A4B 03-20-10 0.43 984,823(d,l) 979,675 Credit-Based Asset Servicing and Securitization LLC Series 2007-CB4 Cl A1A 04-25-37 0.40 3,285,082(l) 2,182,947 Deutsche Mtge Securities Collateralized Mtge Obligation Series 2009-RS2 Cl 4A1 04-26-37 0.44 3,880,000(d,m) 3,336,800 First Franklin Mtge Loan Asset-backed Ctfs Series 2005-FFH3 Cl 2A3 09-25-35 0.72 1,254,695(l) 1,147,357 First Franklin Mtge Loan Asset-backed Ctfs Series 2006-FF18 Cl A2A 12-25-37 0.38 1,641,466(l) 1,539,102 GSAMP Trust Series 2006-HE8 Cl A2A 01-25-37 0.38 3,943,311(l) 3,502,697 JPMorgan Mtge Acquisition Corp Series 2006-HE2 Cl A3 07-25-36 0.53 3,506,268(l) 3,026,046
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 16 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT --------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) ASSET-BACKED (CONT.) NovaStar Home Equity Loan Series 2006-4 Cl A2A (MGIC) 09-25-36 0.35% $1,618,243(i,l) $1,533,626 NovaStar Home Equity Loan Series 2007-2 Cl A2A 09-25-37 0.40 2,467,013(l) 2,042,502 Residential Asset Securities Series 2007-KS3 Cl AI2 12-25-32 0.49 4,050,000(l) 2,177,472 Structured Asset Investment Loan Trust Series 2005-9 Cl A5 11-25-10 0.54 3,749,663(l) 3,192,835 Structured Asset Securities Corp Collateralized Mtge Obligation Series 2006-NC1 Cl A6 05-25-36 0.36 2,205,069(m) 2,045,834 --------------- Total 32,495,272 ------------------------------------------------------------------------------------- COMMERCIAL MORTGAGE-BACKED (3.7%)(f) Crown Castle Towers LLC Series 2005-1A Cl AFX 06-15-35 4.64 3,525,000(d) 3,436,875 Federal Home Loan Mtge Corp Multifamily Structured Pass-Through Ctfs Series K001 Cl A2 04-25-16 5.65 5,402,714 5,884,186 Federal Natl Mtge Assn #381990 10-01-09 7.11 4,023,504 4,021,147 GE Capital Commercial Mtge Series 2001-3 Cl A1 06-10-38 5.56 5,714,888 5,798,287 JPMorgan Chase Commercial Mtge Securities Series 2004-CBX Cl A3 01-12-37 4.18 7,135,074 7,081,672 --------------- Total 26,222,167 ------------------------------------------------------------------------------------- MORTGAGE-BACKED (50.5%)(f,o) Adjustable Rate Mtge Trust Collateralized Mtge Obligation Series 2007-1 Cl 3A21 03-25-37 6.18 1,584,469(m) 928,123 American Home Mtge Assets Collateralized Mtge Obligation Series 2007-2 Cl A2A 03-25-47 0.47 3,162,944(m) 751,675 American Home Mtge Investment Trust Collateralized Mtge Obligation Series 2007-1 Cl GA1C 05-25-47 0.50 4,151,613(m) 1,615,834 Citigroup Mtge Loan Trust Collateralized Mtge Obligation Series 2006-AR9 Cl 1A1 11-25-36 0.38 510,470(l) 426,900 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-6CB Cl 1A1 04-25-35 7.50 1,278,861 828,973 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-OA11 Cl A3B1 09-25-46 0.49 2,693,863(l) 1,835,562 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2007-OA9 Cl A2 06-25-47 0.66 5,396,281(l) 1,327,812 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2007-OH3 Cl A3 01-25-38 0.81 3,616,229(l) 383,359 Countrywide Home Loans Collateralized Mtge Obligation Series 2005-R2 Cl 2A1 06-25-35 7.00 3,924,101(d) 3,127,018 Federal Home Loan Mtge Corp #1G0847 07-01-35 4.71 6,224,439(m) 6,336,940 Federal Home Loan Mtge Corp #1G2264 10-01-37 6.02 5,635,953(m) 5,881,151 Federal Home Loan Mtge Corp #1G2598 01-01-37 6.09 2,029,677(m) 2,125,973 Federal Home Loan Mtge Corp #1J0614 09-01-37 5.68 2,801,415(m) 2,926,778 Federal Home Loan Mtge Corp #A18107 01-01-34 5.50 2,705,069 2,803,382
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 17 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) MORTGAGE-BACKED (CONT.) Federal Home Loan Mtge Corp #A57402 02-01-37 5.00% $2,180,719 $2,233,306 Federal Home Loan Mtge Corp #A74027 03-01-38 5.00 1,290,117 1,321,156 Federal Home Loan Mtge Corp #A74458 03-01-38 5.00 704,887 721,845 Federal Home Loan Mtge Corp #A78592 06-01-38 5.00 494,336 506,229 Federal Home Loan Mtge Corp #A78614 06-01-38 5.00 329,979 337,918 Federal Home Loan Mtge Corp #A82611 10-01-38 5.00 490,670 502,475 Federal Home Loan Mtge Corp #A82694 10-01-38 5.00 172,812 176,970 Federal Home Loan Mtge Corp #A82811 11-01-38 5.00 748,683 766,695 Federal Home Loan Mtge Corp #A83067 11-01-38 5.00 184,005 188,432 Federal Home Loan Mtge Corp #A83590 12-01-38 5.00 218,563 223,821 Federal Home Loan Mtge Corp #A84206 01-01-38 5.00 115,814 118,734 Federal Home Loan Mtge Corp #C00351 07-01-24 8.00 215,238 238,273 Federal Home Loan Mtge Corp #C00385 01-01-25 9.00 358,166 399,712 Federal Home Loan Mtge Corp #C80329 08-01-25 8.00 62,965 69,851 Federal Home Loan Mtge Corp #E00398 10-01-10 7.00 129,553 133,878 Federal Home Loan Mtge Corp #E81240 06-01-15 7.50 2,552,496 2,713,846 Federal Home Loan Mtge Corp #E90650 07-01-12 5.50 85,064 87,423 Federal Home Loan Mtge Corp #E92454 11-01-17 5.00 2,184,774 2,278,899 Federal Home Loan Mtge Corp #G00363 06-01-25 8.00 262,684 291,412 Federal Home Loan Mtge Corp #G00501 05-01-26 9.00 470,374 525,824 Federal Home Loan Mtge Corp #G04699 09-01-38 5.00 678,733 695,062 Federal Home Loan Mtge Corp #G04710 09-01-38 6.00 1,784,488 1,868,482 Federal Home Loan Mtge Corp #G04723 03-01-38 5.00 91,275 93,476 Federal Home Loan Mtge Corp #G05198 12-01-37 5.00 917,497 940,052 Federal Home Loan Mtge Corp #G05290 02-01-39 5.00 1,264,854 1,295,284 Federal Home Loan Mtge Corp #G05306 12-01-38 5.00 31,074 31,821 Federal Home Loan Mtge Corp #G08307 11-01-38 5.00 1,886,530 1,931,916 Federal Home Loan Mtge Corp #G10669 03-01-12 7.50 812,132 859,829 Federal Home Loan Mtge Corp #G11243 04-01-17 6.50 10,078,382 10,673,700 Federal Home Loan Mtge Corp #G12100 11-01-13 5.00 2,237,036 2,295,490 Federal Home Loan Mtge Corp #M30074 09-01-09 6.50 3,132 3,143 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 11 Cl B 01-01-20 7.58 6,376(j) 1,470 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2471 Cl SI 03-15-32 52.06 1,184,043(j) 116,610 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2783 Cl MI 03-15-25 307.69 415,971(j) 108 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Series 2617 Cl HD 06-15-16 7.00 4,484,335 4,732,992 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Series 3346 Cl FA 02-15-19 0.57 7,691,874(l) 7,582,934
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 18 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT --------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn 06-01-24 5.50% $475,000(b) $495,633 06-01-39 4.50 25,225,000(b) 25,414,187 Federal Natl Mtge Assn #125032 11-01-21 8.00 105,728 117,305 Federal Natl Mtge Assn #190129 11-01-23 6.00 804,329 848,133 Federal Natl Mtge Assn #190353 08-01-34 5.00 5,924,836 6,084,128 Federal Natl Mtge Assn #190988 06-01-24 9.00 178,540 195,906 Federal Natl Mtge Assn #254384 06-01-17 7.00 246,334 262,421 Federal Natl Mtge Assn #254454 08-01-17 7.00 459,380 489,379 Federal Natl Mtge Assn #254723 05-01-23 5.50 7,296,383 7,593,505 Federal Natl Mtge Assn #254757 05-01-13 5.00 4,875,017 5,070,969 Federal Natl Mtge Assn #255501 09-01-14 6.00 495,141 517,563 Federal Natl Mtge Assn #303885 05-01-26 7.50 395,348 436,252 Federal Natl Mtge Assn #313007 07-01-11 7.50 84,491 87,814 Federal Natl Mtge Assn #336512 02-01-26 6.00 43,385 45,816 Federal Natl Mtge Assn #357485 02-01-34 5.50 10,804,551 11,218,725 Federal Natl Mtge Assn #407327 01-01-14 5.50 276,608 291,032 Federal Natl Mtge Assn #456374 12-01-13 5.50 501,560 527,714 Federal Natl Mtge Assn #508402 08-01-14 6.50 220,317 233,520 Federal Natl Mtge Assn #545818 07-01-17 6.00 10,126,036 10,690,737 Federal Natl Mtge Assn #545864 08-01-17 5.50 8,611,000 9,056,461 Federal Natl Mtge Assn #545910 08-01-17 6.00 1,575,077 1,661,789 Federal Natl Mtge Assn #555063 11-01-17 5.50 6,325,348 6,655,454 Federal Natl Mtge Assn #555367 03-01-33 6.00 7,889,568 8,337,464 Federal Natl Mtge Assn #579485 04-01-31 6.50 2,021,663(q) 2,186,861 Federal Natl Mtge Assn #593829 12-01-28 7.00 1,349,555 1,478,047 Federal Natl Mtge Assn #601416 11-01-31 6.50 749,741 813,174 Federal Natl Mtge Assn #630993 09-01-31 7.50 2,064,121 2,279,529 Federal Natl Mtge Assn #648040 06-01-32 6.50 2,039,875 2,197,583 Federal Natl Mtge Assn #648349 06-01-17 6.00 5,611,149 5,925,164 Federal Natl Mtge Assn #651284 07-01-17 6.00 1,099,903 1,161,956 Federal Natl Mtge Assn #662866 11-01-17 6.00 1,009,492 1,070,407 Federal Natl Mtge Assn #665752 09-01-32 6.50 1,125,872 1,212,917 Federal Natl Mtge Assn #670782 11-01-12 5.00 193,702 201,367 Federal Natl Mtge Assn #670830 12-01-12 5.00 243,703 250,100 Federal Natl Mtge Assn #671415 01-01-10 5.00 137,036 138,523 Federal Natl Mtge Assn #678940 02-01-18 5.50 1,721,771 1,811,824 Federal Natl Mtge Assn #686227 02-01-18 5.50 2,310,129 2,430,921 Federal Natl Mtge Assn #696837 04-01-18 5.50 2,501,023 2,631,713 Federal Natl Mtge Assn #704610 06-01-33 5.50 9,256,205(q) 9,611,025 Federal Natl Mtge Assn #712602 06-01-13 5.00 585,408 608,939 Federal Natl Mtge Assn #722325 07-01-33 4.96 4,419,062(m) 4,561,965 Federal Natl Mtge Assn #725232 03-01-34 5.00 8,732,366 8,975,325 Federal Natl Mtge Assn #725425 04-01-34 5.50 7,904,430 8,203,004
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 19 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #725431 08-01-15 5.50% $5,408,796 $5,690,834 Federal Natl Mtge Assn #725773 09-01-34 5.50 6,712,159 6,965,263 Federal Natl Mtge Assn #730632 08-01-33 4.01 1,296,527(m) 1,328,664 Federal Natl Mtge Assn #735212 12-01-34 5.00 5,284,101 5,426,166 Federal Natl Mtge Assn #735578 06-01-35 5.00 3,967,190 4,071,370 Federal Natl Mtge Assn #739243 09-01-33 6.00 2,580,615 2,750,639 Federal Natl Mtge Assn #739331 09-01-33 6.00 1,347,318 1,422,123 Federal Natl Mtge Assn #743524 11-01-33 5.00 2,709,728 2,785,120 Federal Natl Mtge Assn #745275 02-01-36 5.00 919,886 944,043 Federal Natl Mtge Assn #753508 11-01-33 5.00 2,769,842 2,846,907 Federal Natl Mtge Assn #791447 10-01-34 6.00 3,978,422 4,191,848 Federal Natl Mtge Assn #797046 07-01-34 5.50 2,669,459 2,770,119 Federal Natl Mtge Assn #799769 11-01-34 5.04 3,066,498(m) 3,174,531 Federal Natl Mtge Assn #801344 10-01-34 5.08 3,149,346(m) 3,239,921 Federal Natl Mtge Assn #815463 02-01-35 5.50 1,737,096 1,802,599 Federal Natl Mtge Assn #832641 09-01-35 6.00 5,866,125 6,158,820 Federal Natl Mtge Assn #849082 01-01-36 5.83 2,545,481(m) 2,680,284 Federal Natl Mtge Assn #849170 01-01-36 5.93 2,801,968(m) 2,950,823 Federal Natl Mtge Assn #878661 02-01-36 5.50 7,000,101 7,194,792 Federal Natl Mtge Assn #883267 07-01-36 6.50 3,980,832 4,297,944 Federal Natl Mtge Assn #887403 07-01-36 7.00 2,455,234 2,676,772 Federal Natl Mtge Assn #888989 06-01-37 5.99 4,964,436(m) 5,246,334 Federal Natl Mtge Assn #902818 11-01-36 5.91 1,982,527(m) 2,065,793 Federal Natl Mtge Assn #919341 05-01-37 6.50 2,921,054 3,116,144 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 163 Cl 2 07-25-22 22.15 440,083(j) 72,282 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2002-18 Cl SE 02-25-32 39.01 2,396,640(j) 285,189 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-26 Cl MI 03-25-23 20.86 1,324,839(j) 131,474 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-63 Cl IP 07-25-33 29.02 3,261,423(j) 339,766 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-71 Cl IM 12-25-31 22.49 1,752,360(j) 148,381 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 36 Cl 2 08-01-18 26.78 3,749(j) 624 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 70 Cl 2 01-15-20 27.28 166,984(j) 33,230
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 20 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT --------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn Collateralized Mtge Obligation Principal Only Series G-15 Cl A 06-25-21 2.49% $22,103(k) $20,297 Federal Natl Mtge Assn Collateralized Mtge Obligation Series 2003-W11 Cl A1 06-25-33 5.40 103,627(m) 103,745 Federal Natl Mtge Assn Collateralized Mtge Obligation Series 2004-60 Cl PA 04-25-34 5.50 2,859,415 2,970,046 Govt Natl Mtge Assn 06-01-39 4.50 5,000,000(b) 5,043,750 06-01-39 5.50 5,000,000(b) 5,179,725 Govt Natl Mtge Assn #608948 06-15-36 6.00 15,146 15,843 Govt Natl Mtge Assn #615740 08-15-13 6.00 536,542 566,532 Govt Natl Mtge Assn #646487 04-15-36 6.00 65,313 68,318 Govt Natl Mtge Assn #651914 04-15-36 6.00 206,234 215,721 Govt Natl Mtge Assn #657503 07-15-36 6.00 297,959 311,666 Govt Natl Mtge Assn #676516 02-15-38 6.00 32,179 33,649 Govt Natl Mtge Assn #677228 08-15-38 6.00 763,321 798,195 Govt Natl Mtge Assn #677322 09-15-38 6.00 4,484,529 4,689,416 Govt Natl Mtge Assn #677589 12-15-37 6.00 391,977 410,253 Govt Natl Mtge Assn #678095 01-15-39 6.00 237,962 248,834 Govt Natl Mtge Assn #678101 01-15-39 6.00 372,126 389,128 Govt Natl Mtge Assn #680678 01-15-38 6.00 59,461 62,177 Govt Natl Mtge Assn #685300 11-15-38 6.00 99,907 104,471 Govt Natl Mtge Assn #689460 07-15-38 6.00 30,571 31,968 Govt Natl Mtge Assn #695654 10-15-38 6.00 23,657 24,738 Govt Natl Mtge Assn #699277 09-15-38 6.00 23,577 24,655 Govt Natl Mtge Assn #700159 01-15-39 6.00 304,398 318,305 Govt Natl Mtge Assn #700743 10-15-38 6.00 213,079 222,814 Govt Natl Mtge Assn #701589 01-15-39 6.00 378,659 395,958 Govt Natl Mtge Assn #781507 09-15-14 6.00 2,531,716 2,640,536 Govt Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-62 Cl IC 03-20-29 8,876.79 395,732(j) 1,191 Harborview Mtge Loan Trust Collateralized Mtge Obligation Series 2004-4 Cl 3A 06-19-34 1.08 317,838(m) 141,797 Lehman XS Trust Series 2006-16N Cl A1B 11-25-46 0.43 1,509,715(l) 1,209,748 Morgan Stanley Mtge Loan Trust Series 2006-13AX Cl A1 10-25-36 0.40 1,720,974(l) 1,136,508 Residential Accredit Loans Collateralized Mtge Obligation Series 2002-QS14 Cl A12 09-25-32 5.50 5,609,926 4,603,673 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2005-14 Cl 2A1 12-25-35 5.50 2,731,470 2,284,832 --------------- Total 353,418,087 -------------------------------------------------------------------------------------
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 21 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) ELECTRIC (0.7%) FirstEnergy Sr Unsecured Series B 11-15-11 6.45% $1,330,000 $1,390,017 NiSource Finance 11-15-10 7.88 3,590,000 3,653,321 --------------- Total 5,043,338 ------------------------------------------------------------------------------------- GAS PIPELINES (1.2%) CenterPoint Energy Resources Sr Unsecured 02-15-11 7.75 2,120,000 2,203,723 Northern Natural Gas Sr Unsecured 06-01-11 7.00 1,275,000(d) 1,378,610 Transcontinental Gas Pipe Line LLC Sr Unsecured Series B 08-15-11 7.00 4,895,000 5,134,244 --------------- Total 8,716,577 ------------------------------------------------------------------------------------- INDEPENDENT ENERGY (0.9%) Anadarko Finance Series B 05-01-11 6.75 3,595,000(c) 3,748,446 Devon Financing 09-30-11 6.88 2,060,000(c) 2,233,085 --------------- Total 5,981,531 ------------------------------------------------------------------------------------- MEDIA CABLE (0.2%) Comcast 03-15-11 5.50 1,440,000 1,510,109 ------------------------------------------------------------------------------------- RAILROADS (0.2%) CSX Sr Unsecured 03-15-11 6.75 1,065,000 1,114,750 ------------------------------------------------------------------------------------- WIRELINES (2.0%) AT&T Sr Unsecured 03-15-11 6.25 3,590,000 3,824,316 Telefonica Emisiones SAU 06-20-11 5.98 1,065,000(c) 1,124,736 Telefonica Europe 09-15-10 7.75 1,065,000(c) 1,129,774 TELUS Sr Unsecured 06-01-11 8.00 3,565,000(c) 3,832,699 Verizon Pennsylvania Sr Unsecured Series A 11-15-11 5.65 3,725,000 3,930,847 --------------- Total 13,842,372 ------------------------------------------------------------------------------------- TOTAL BONDS (Cost: $692,068,548) $687,587,300 ------------------------------------------------------------------------------------- FDIC-INSURED DEBT (5.0%)(g) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) Bank of America FDIC Govt Guaranty 04-30-12 2.10% $6,455,000(p) $6,502,051 General Electric Capital FDIC Govt Guaranty 03-11-11 1.80 9,635,000 9,744,410 Goldman Sachs Group FDIC Govt Guaranty 07-15-11 1.63 7,750,000(p) 7,801,414 JPMorgan Chase & Co FDIC Govt Guaranty 02-23-11 1.65 2,655,000(p) 2,680,716 Morgan Stanley FDIC Govt Guaranty 02-10-12 1.24 8,300,000 8,340,454 ------------------------------------------------------------------------------------- TOTAL FDIC-INSURED DEBT (Cost: $34,778,501) $35,069,045 ------------------------------------------------------------------------------------- GOVERNMENT GUARANTEED (1.1%)(h) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) UK Barclays Bank Govt Guaranty 03-05-12 2.70% $7,440,000(c,d) $7,535,582 ------------------------------------------------------------------------------------- TOTAL GOVERNMENT GUARANTEED (Cost: $7,433,602) $7,535,582 -------------------------------------------------------------------------------------
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 22 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT --------------------------------------------------------------------------------
MONEY MARKET FUND (3.6%) SHARES VALUE(a) RiverSource Short-Term Cash Fund, 0.27% 25,429,221(n) $25,429,221 ------------------------------------------------------------------------------------- TOTAL MONEY MARKET FUND (Cost: $25,429,221) $25,429,221 ------------------------------------------------------------------------------------- INVESTMENTS OF CASH COLLATERAL RECEIVED FOR SECURITIES ON LOAN (14.6%) SHARES VALUE(a) CASH COLLATERAL REINVESTMENT FUND JPMorgan Prime Money Market Fund 102,551,624 $102,551,624 ------------------------------------------------------------------------------------- TOTAL INVESTMENTS OF CASH COLLATERAL RECEIVED FOR SECURITIES ON LOAN (Cost: $102,551,624) $102,551,624 ------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $862,261,496)(r) $858,172,772 =====================================================================================
INVESTMENTS IN DERIVATIVES FUTURES CONTRACTS OUTSTANDING AT MAY 31, 2009
NUMBER OF UNREALIZED CONTRACTS NOTIONAL EXPIRATION APPRECIATION CONTRACT DESCRIPTION LONG (SHORT) MARKET VALUE DATE (DEPRECIATION) ------------------------------------------------------------------------------------ U.S. Long Bond, 20-year 13 $1,529,531 Sept. 2009 $4,855 U.S. Treasury Note, 2- year 646 140,060,875 Oct. 2009 (9,128) U.S. Treasury Note, 3- year (70) (15,788,281) July 2009 (6,686) U.S. Treasury Note, 5- year (669) (77,886,238) July 2009 685,159 U.S. Treasury Note, 10- year (139) (16,488,875) June 2009 326,625 U.S. Treasury Note, 10- year (75) (8,775,000) Sept. 2009 (97,396) ------------------------------------------------------------------------------------ Total $903,429 ------------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS (a) Securities are valued by using policies described in Note 1 to the financial statements. (b) At May 31, 2009, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $48,991,523. See Note 1 to the financial statements. (c) Foreign security values are stated in U.S. dollars. At May 31, 2009, the value of foreign securities represented 4.3% of net assets. (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security may be determined to be liquid under guidelines established by the Fund's Board of Directors. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At May 31, 2009, the value of these securities amounted to $19,794,560 or 2.8% of net assets. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 23 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------ NOTES TO PORTFOLIO OF INVESTMENTS (CONTINUED) (e) Inflation-indexed bonds are securities in which the principal amount is adjusted for inflation and the semiannual interest payments equal a fixed percentage of the inflation-adjusted principal amount. (f) Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property, and include single- and multi-class pass-through securities and collateralized mortgage obligations. These securities may be issued or guaranteed by U.S. government agencies or instrumentalities, or by private issuers, generally originators and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers and special purpose entities. The maturity dates shown represent the original maturity of the underlying obligation. Actual maturity may vary based upon prepayment activity on these obligations. Unless otherwise noted, the coupon rates presented are fixed rates. (g) This debt is guaranteed under the FDIC's Temporary Liquidity Guarantee Program (TLGP) and is backed by the full faith and credit of the United States. (h) This debt is guaranteed by the HM Treasury, United Kingdom. (i) The following abbreviation is used in the portfolio security description to identify the insurer of the issue: MGIC -- Mortgage Guaranty Insurance Corporation
(j) Interest only represents securities that entitle holders to receive only interest payments on the underlying mortgages. The yield to maturity of an interest only is extremely sensitive to the rate of principal payments on the underlying mortgage assets. A rapid (slow) rate of principal repayments may have an adverse (positive) effect on yield to maturity. The principal amount shown is the notional amount of the underlying mortgages. The interest rate disclosed represents yield based upon the estimated timing and amount of future cash flows at May 31, 2009. (k) Principal only represents securities that entitle holders to receive only principal payments on the underlying mortgages. The yield to maturity of a principal only is sensitive to the rate of principal payments on the underlying mortgage assets. A slow (rapid) rate of principal repayments may have an adverse (positive) effect on yield to maturity. Interest rate disclosed represents yield based upon the estimated timing of future cash flows at May 31, 2009. (l) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on May 31, 2009. (m) Adjustable rate mortgage; interest rate varies to reflect current market conditions; rate shown is the effective rate on May 31, 2009. (n) Affiliated Money Market Fund -- See Note 7 to the financial statements. The rate shown is the seven-day current annualized yield at May 31, 2009. -------------------------------------------------------------------------------- 24 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- NOTES TO PORTFOLIO OF INVESTMENTS (CONTINUED) (o) Represents comparable securities held to satisfy future delivery requirements of the following open forward sale commitments at May 31, 2009:
PRINCIPAL SETTLEMENT PROCEEDS SECURITY AMOUNT DATE RECEIVABLE VALUE ----------------------------------------------------------------------------- Federal Natl Mtge Assn 05-01-39 6.00% $4,000,000 06-11-09 $4,175,000 $4,187,500 06-01-39 5.00 10,000,000 06-11-09 10,137,890 10,237,500
(p) At May 31, 2009, security was partially or fully on loan. See Note 6 to the financial statements. (q) At May 31, 2009, investments in securities included securities valued at $774,454 that were partially pledged as collateral to cover initial margin deposits on open interest rate futures contracts. (r) At May 31, 2009, the cost of securities for federal income tax purposes was $871,890,260 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $15,870,846 Unrealized depreciation (29,588,334) ----------------------------------------------------------- Net unrealized depreciation $(13,717,488) -----------------------------------------------------------
-------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 25 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------ FAIR VALUE MEASUREMENTS Statement of Financial Accounting Standards No. 157 (SFAS 157) requires disclosures relating to the fair valuation of securities for financial statement purposes. Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in the three broad levels listed below: - Level 1 -- quoted prices in active markets for identical securities - Level 2 -- other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risks, etc.) - Level 3 -- significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments) Observable inputs are those based on market data obtained from sources independent of the Fund, and unobservable inputs reflect the Fund's own assumptions based on the best information available. The input levels are not necessarily an indication of the risk or liquidity associated with investments at that level. The following table is a summary of the inputs used to value the Fund's investments as of May 31, 2009:
FAIR VALUE AT MAY 31, 2009 ------------------------------------------------------------ LEVEL 1 LEVEL 2 QUOTED PRICES OTHER LEVEL 3 IN ACTIVE SIGNIFICANT SIGNIFICANT MARKETS FOR OBSERVABLE UNOBSERVABLE DESCRIPTION IDENTICAL ASSETS INPUTS INPUTS TOTAL ------------------------------------------------------------------------------------ Investments in securities $239,942,437 $611,921,465 $6,308,870 $858,172,772 Other financial instruments* 903,429 -- -- 903,429 ------------------------------------------------------------------------------------ Total $240,845,866 $611,921,465 $6,308,870 $859,076,201 ------------------------------------------------------------------------------------
* Other financial instruments are derivative instruments, such as futures, which are valued at the unrealized appreciation (depreciation) on the instrument. The following table is a reconciliation of Level 3 assets for which significant unobservable inputs were used to determine fair value.
INVESTMENTS IN SECURITIES --------------------------------------------------------------- Balance as of May 31, 2008 $16,535,423 Accrued discounts/premiums 100,303 Realized gain (loss) (387,893) Change in unrealized appreciation (depreciation)* (363,113) Net purchases (sales) (5,298,292) Transfers in and/or out of Level 3 (4,277,558) --------------------------------------------------------------- Balance as of May 31, 2009 $6,308,870 ---------------------------------------------------------------
* Change in unrealized appreciation (depreciation) relating to securities held at May 31, 2009 was $(824,895). -------------------------------------------------------------------------------- 26 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- HOW TO FIND INFORMATION ABOUT THE FUND'S QUARTERLY PORTFOLIO HOLDINGS (i) The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (Commission) for the first and third quarters of each fiscal year on Form N-Q; (ii) The Fund's Forms N-Q are available on the Commission's website at http://www.sec.gov; (iii)The Fund's Forms N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC (information on the operations of the Public Reference Room may be obtained by calling 1-800-SEC-0330); and (iv) The Fund's complete schedule of portfolio holdings, as filed on Form N-Q, can be obtained without charge, upon request, by calling the RiverSource Family of Funds at 1(800) 221-2450. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 27 STATEMENT OF ASSETS AND LIABILITIES -------------------------------------------- MAY 31, 2009
ASSETS Investments in securities, at value Unaffiliated issuers* (identified cost $734,280,651) $730,191,927 Affiliated money market fund (identified cost $25,429,221) 25,429,221 Investments of cash collateral received for securities on loan (identified cost $102,551,624) 102,551,624 -------------------------------------------------------------------------------------- Total investments in securities (identified cost $862,261,496) 858,172,772 Capital shares receivable 752,784 Dividends and accrued interest receivable 3,781,009 Receivable for investment securities sold 87,645,201 -------------------------------------------------------------------------------------- Total assets 950,351,766 -------------------------------------------------------------------------------------- LIABILITIES Forward sale commitments, at value (proceeds receivable $14,312,890) 14,425,000 Dividends payable to shareholders 175,365 Capital shares payable 927,045 Payable for investment securities purchased 80,449,998 Payable for securities purchased on a forward-commitment basis 48,991,523 Payable upon return of securities loaned 102,551,624 Variation margin payable on futures contracts 467,305 Accrued investment management services fees 9,213 Accrued distribution fees 134,353 Accrued transfer agency fees 3,282 Accrued administrative services fees 1,316 Accrued plan administration services fees 848 Other accrued expenses 575,682 -------------------------------------------------------------------------------------- Total liabilities 248,712,554 -------------------------------------------------------------------------------------- Net assets applicable to outstanding capital stock $701,639,212 -------------------------------------------------------------------------------------- REPRESENTED BY Capital stock -- $.01 par value $ 1,514,025 Additional paid-in capital 802,474,911 Undistributed net investment income 430,828 Accumulated net realized gain (loss) (99,483,147) Unrealized appreciation (depreciation) on investments (3,297,405) -------------------------------------------------------------------------------------- Total -- representing net assets applicable to outstanding capital stock $701,639,212 -------------------------------------------------------------------------------------- *Including securities on loan, at value $132,128,881 --------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 28 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE NET ASSETS SHARES OUTSTANDING NET ASSET VALUE PER SHARE Class A $529,368,837 114,236,678 $4.63(1) Class B $113,216,242 24,431,558 $4.63 Class C $ 12,866,781 2,776,585 $4.63 Class I $ 41,851,347 9,022,598 $4.64 Class R4 $ 4,331,129 934,061 $4.64 Class W $ 4,876 1,053 $4.63 -----------------------------------------------------------------------------------------
(1) The maximum offering price per share for Class A is $4.77. The offering price is calculated by dividing the net asset value by 1.0 minus the maximum sales charge of 3.00%. The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 29 STATEMENT OF OPERATIONS -------------------------------------------------------- YEAR ENDED MAY 31, 2009
INVESTMENT INCOME Income: Interest $ 29,489,899 Income distributions from affiliated money market fund 64,532 Fee income from securities lending 259,895 Less foreign taxes withheld (2,823) -------------------------------------------------------------------------- Total income 29,811,503 -------------------------------------------------------------------------- Expenses: Investment management services fees 3,665,529 Distribution fees Class A 1,393,600 Class B 1,284,921 Class C 111,382 Class W 11 Transfer agency fees Class A 979,619 Class B 240,149 Class C 20,239 Class R4 2,188 Class W 10 Administrative services fees 521,265 Plan administration services fees -- Class R4 10,939 Compensation of board members 22,801 Custodian fees 73,685 Printing and postage 107,869 Registration fees 95,951 Professional fees 53,153 Other 31,755 -------------------------------------------------------------------------- Total expenses 8,615,066 Expenses waived/reimbursed by the Investment Manager and its affiliates (987,699) Earnings and bank fee credits on cash balances (8,100) -------------------------------------------------------------------------- Total net expenses 7,619,267 -------------------------------------------------------------------------- Investment income (loss) -- net 22,192,236 -------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) -- NET Net realized gain (loss) on: Security transactions (16,858,870) Futures contracts (7,152,235) -------------------------------------------------------------------------- Net realized gain (loss) on investments (24,011,105) Net change in unrealized appreciation (depreciation) on investments 4,441,905 -------------------------------------------------------------------------- Net gain (loss) on investments (19,569,200) -------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $ 2,623,036 --------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- 30 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT STATEMENTS OF CHANGES IN NET ASSETS --------------------------------------------
YEAR ENDED MAY 31, 2009 2008 OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ 22,192,236 $ 29,999,961 Net realized gain (loss) on investments (24,011,105) 1,099,985 Net change in unrealized appreciation (depreciation) on investments 4,441,905 (800,569) ------------------------------------------------------------------------------------------ Net increase (decrease) in net assets resulting from operations 2,623,036 30,299,377 ------------------------------------------------------------------------------------------ Distributions to shareholders from: Net investment income Class A (16,331,022) (21,333,414) Class B (2,826,872) (5,699,109) Class C (237,025) (312,941) Class I (2,172,593) (2,868,438) Class R4 (134,786) (183,760) Class W (139) (196) ------------------------------------------------------------------------------------------ Total distributions (21,702,437) (30,397,858) ------------------------------------------------------------------------------------------ CAPITAL SHARE TRANSACTIONS Proceeds from sales Class A shares 246,924,684 206,496,511 Class B shares 33,777,836 42,734,598 Class C shares 7,040,083 2,621,382 Class I shares 13,901,496 69,048,377 Class R4 shares 2,274,007 2,801,130 Reinvestment of distributions at net asset value Class A shares 14,899,763 19,605,781 Class B shares 2,659,409 5,406,615 Class C shares 215,459 299,079 Class I shares 2,176,497 2,844,139 Class R4 shares 134,521 185,296 Payments for redemptions Class A shares (258,638,948) (200,741,788) Class B shares (78,504,697) (105,920,795) Class C shares (3,812,662) (3,568,542) Class I shares (64,443,360) (33,540,963) Class R4 shares (2,725,737) (2,086,457) ------------------------------------------------------------------------------------------ Increase (decrease) in net assets from capital share transactions (84,121,649) 6,184,363 ------------------------------------------------------------------------------------------ Total increase (decrease) in net assets (103,201,050) 6,085,882 Net assets at beginning of year 804,840,262 798,754,380 ------------------------------------------------------------------------------------------ Net assets at end of year $ 701,639,212 $ 804,840,262 ------------------------------------------------------------------------------------------ Undistributed (excess of distributions over) net investment income $ 430,828 $ (195,666) ------------------------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 31 FINANCIAL HIGHLIGHTS ---------------------------------------------------------- CLASS A
PER SHARE INCOME AND CAPITAL CHANGES(a) Fiscal period ended May 31, 2009 2008 2007 2006 2005 Net asset value, beginning of period $4.74 $4.73 $4.68 $4.79 $4.82 -------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .14(b) .19(b) .19 .15 .12 Net gains (losses) (both realized and unrealized) (.11) .01 .05 (.10) (.03) -------------------------------------------------------------------------------------------------------------- Total from investment operations .03 .20 .24 .05 .09 -------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.14) (.19) (.19) (.16) (.12) -------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.63 $4.74 $4.73 $4.68 $4.79 -------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA -------------------------------------------------------------------------------------------------------------- Net assets, end of period (in millions) $529 $539 $514 $641 $894 -------------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/reimbursement(c),(d) 1.02% 1.04% 1.03% 1.06% 1.01% -------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(d),(e),(f) .89% .89% .89% .89% .93% -------------------------------------------------------------------------------------------------------------- Net investment income (loss) 3.00% 3.93% 3.99% 3.27% 2.49% -------------------------------------------------------------------------------------------------------------- Portfolio turnover rate(g) 271% 209% 168% 194% 169% -------------------------------------------------------------------------------------------------------------- Total return(h) .59% 4.27% 5.12% 1.00% 1.92% --------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amounts have been calculated using the average shares outstanding method. (c) Expense ratio is before reduction for earnings and bank fee credits on cash balances. (d) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (e) The Investment Manager and its affiliates have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (f) Expense ratio is before reduction for earnings and bank fee credits on cash balances. Earnings and bank fee credits for the year ended May 31, 2009 were less than 0.01% of average net assets. The ratio of net expenses after expense waiver/reimbursement and after reduction for earnings and bank fee credits was 0.88% for the year ended May 31, 2008. (g) Includes mortgage dollar rolls. If mortgage dollar roll transactions were excluded, the portfolio turnover would have been 199% for the year ended May 31, 2009. (h) Total return does not reflect payment of a sales charge. The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- 32 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- CLASS B
PER SHARE INCOME AND CAPITAL CHANGES(a) Fiscal period ended May 31, 2009 2008 2007 2006 2005 Net asset value, beginning of period $4.74 $4.73 $4.68 $4.79 $4.82 -------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .10(b) .15(b) .15 .12 .08 Net gains (losses) (both realized and unrealized) (.11) .01 .05 (.11) (.03) -------------------------------------------------------------------------------------------------------------- Total from investment operations (.01) .16 .20 .01 .05 -------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.10) (.15) (.15) (.12) (.08) -------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.63 $4.74 $4.73 $4.68 $4.79 -------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA -------------------------------------------------------------------------------------------------------------- Net assets, end of period (in millions) $113 $159 $216 $338 $588 -------------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/reimbursement(c),(d) 1.78% 1.80% 1.79% 1.82% 1.76% -------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(d),(e),(f) 1.65% 1.65% 1.64% 1.64% 1.68% -------------------------------------------------------------------------------------------------------------- Net investment income (loss) 2.26% 3.18% 3.23% 2.50% 1.73% -------------------------------------------------------------------------------------------------------------- Portfolio turnover rate(g) 271% 209% 168% 194% 169% -------------------------------------------------------------------------------------------------------------- Total return(h) (.18%) 3.48% 4.34% .26% 1.16% --------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amounts have been calculated using the average shares outstanding method. (c) Expense ratio is before reduction for earnings and bank fee credits on cash balances. (d) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (e) The Investment Manager and its affiliates have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (f) Expense ratio is before reduction for earnings and bank fee credits on cash balances. Earnings and bank fee credits for the year ended May 31, 2009 were less than 0.01% of average net assets. The ratio of net expenses after expense waiver/reimbursement and after reduction for earnings and bank fee credits was 1.64% for the year ended May 31, 2008. (g) Includes mortgage dollar rolls. If mortgage dollar roll transactions were excluded, the portfolio turnover would have been 199% for the year ended May 31, 2009. (h) Total return does not reflect payment of a sales charge. The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 33 FINANCIAL HIGHLIGHTS (continued) ---------------------------------------------- CLASS C
PER SHARE INCOME AND CAPITAL CHANGES(a) Fiscal period ended May 31, 2009 2008 2007 2006 2005 Net asset value, beginning of period $4.74 $4.73 $4.68 $4.79 $4.82 -------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .10(b) .15(b) .15 .12 .08 Net gains (losses) (both realized and unrealized) (.11) .02 .05 (.11) (.03) -------------------------------------------------------------------------------------------------------------- Total from investment operations (.01) .17 .20 .01 .05 -------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.10) (.16) (.15) (.12) (.08) -------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.63 $4.74 $4.73 $4.68 $4.79 -------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $13 $10 $10 $15 $24 -------------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/reimbursement(c),(d) 1.78% 1.80% 1.80% 1.83% 1.77% -------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(d),(e),(f) 1.65% 1.65% 1.64% 1.64% 1.68% -------------------------------------------------------------------------------------------------------------- Net investment income (loss) 2.21% 3.18% 3.24% 2.51% 1.73% -------------------------------------------------------------------------------------------------------------- Portfolio turnover rate(g) 271% 209% 168% 194% 169% -------------------------------------------------------------------------------------------------------------- Total return(h) (.17%) 3.49% 4.34% .26% 1.16% --------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amounts have been calculated using the average shares outstanding method. (c) Expense ratio is before reduction for earnings and bank fee credits on cash balances. (d) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (e) The Investment Manager and its affiliates have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (f) Expense ratio is before reduction for earnings and bank fee credits on cash balances. Earnings and bank fee credits for the year ended May 31, 2009 were less than 0.01% of average net assets. The ratio of net expenses after expense waiver/reimbursement and after reduction for earnings and bank fee credits was 1.64% for the year ended May 31, 2008. (g) Includes mortgage dollar rolls. If mortgage dollar roll transactions were excluded, the portfolio turnover would have been 199% for the year ended May 31, 2009. (h) Total return does not reflect payment of a sales charge. The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- 34 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- CLASS I
PER SHARE INCOME AND CAPITAL CHANGES(a) Fiscal period ended May 31, 2009 2008 2007 2006 2005 Net asset value, beginning of period $4.74 $4.74 $4.69 $4.79 $4.83 -------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .16(b) .20(b) .20 .17 .14 Net gains (losses) (both realized and unrealized) (.11) .01 .05 (.10) (.04) -------------------------------------------------------------------------------------------------------------- Total from investment operations .05 .21 .25 .07 .10 -------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.15) (.21) (.20) (.17) (.14) -------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.64 $4.74 $4.74 $4.69 $4.79 -------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $42 $93 $55 $62 $31 -------------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/reimbursement(c),(d) .60% .60% .59% .62% .57% -------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(d),(e),(f) .51% .51% .54% .58% .57% -------------------------------------------------------------------------------------------------------------- Net investment income (loss) 3.49% 4.23% 4.37% 3.66% 2.98% -------------------------------------------------------------------------------------------------------------- Portfolio turnover rate(g) 271% 209% 168% 194% 169% -------------------------------------------------------------------------------------------------------------- Total return 1.18% 4.45% 5.50% 1.56% 2.06% --------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amounts have been calculated using the average shares outstanding method. (c) Expense ratio is before reduction for earnings and bank fee credits on cash balances. (d) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (e) The Investment Manager and its affiliates have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (f) Expense ratio is before reduction for earnings and bank fee credits on cash balances. Earnings and bank fee credits for the year ended May 31, 2009 were less than 0.01% of average net assets. The ratio of net expenses after expense waiver/reimbursement and after reduction for earnings and bank fee credits was 0.50% for the year ended May 31, 2008. (g) Includes mortgage dollar rolls. If mortgage dollar roll transactions were excluded, the portfolio turnover would have been 199% for the year ended May 31, 2009. The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 35 FINANCIAL HIGHLIGHTS (continued) ---------------------------------------------- CLASS R4
PER SHARE INCOME AND CAPITAL CHANGES(a) Fiscal period ended May 31, 2009 2008 2007 2006 2005 Net asset value, beginning of period $4.74 $4.73 $4.68 $4.79 $4.82 -------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .15(b) .19(b) .19 .16 .13 Net gains (losses) (both realized and unrealized) (.11) .02 .05 (.11) (.03) -------------------------------------------------------------------------------------------------------------- Total from investment operations .04 .21 .24 .05 .10 -------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.14) (.20) (.19) (.16) (.13) -------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.64 $4.74 $4.73 $4.68 $4.79 -------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $4 $5 $4 $19 $100 -------------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/reimbursement(c),(d) .90% .90% .86% .88% .84% -------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(d),(e),(f) .76% .76% .72% .72% .76% -------------------------------------------------------------------------------------------------------------- Net investment income (loss) 3.15% 4.06% 4.09% 3.27% 2.66% -------------------------------------------------------------------------------------------------------------- Portfolio turnover rate(g) 271% 209% 168% 194% 169% -------------------------------------------------------------------------------------------------------------- Total return .93% 4.41% 5.31% 1.19% 2.10% --------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amounts have been calculated using the average shares outstanding method. (c) Expense ratio is before reduction for earnings and bank fee credits on cash balances. (d) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (e) The Investment Manager and its affiliates have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (f) Expense ratio is before reduction for earnings and bank fee credits on cash balances. Earnings and bank fee credits for the year ended May 31, 2009 were less than 0.01% of average net assets. The ratio of net expenses after expense waiver/reimbursement and after reduction for earnings and bank fee credits was 0.75% for the year ended May 31, 2008. (g) Includes mortgage dollar rolls. If mortgage dollar roll transactions were excluded, the portfolio turnover would have been 199% for the year ended May 31, 2009. The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- 36 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- CLASS W
PER SHARE INCOME AND CAPITAL CHANGES(a) Fiscal period ended May 31, 2009 2008 2007(B) Net asset value, beginning of period $4.74 $4.73 $4.75 -------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .14(c) .18(c) .08 Net gains (losses) (both realized and unrealized) (.12) .02 (.02) -------------------------------------------------------------------------------------------------------------- Total from investment operations .02 .20 .06 -------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.13) (.19) (.08) -------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.63 $4.74 $4.73 -------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- $-- $-- -------------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/reimbursement(d),(e) 1.04% 1.06% 1.00%(f) -------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(e),(g),(h) .96% .95% .95%(f) -------------------------------------------------------------------------------------------------------------- Net investment income (loss) 2.95% 3.87% 4.02%(f) -------------------------------------------------------------------------------------------------------------- Portfolio turnover rate(i) 271% 209% 168% -------------------------------------------------------------------------------------------------------------- Total return .52% 4.21% 1.42%(j) --------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Dec. 1, 2006 (inception date) to May 31, 2007. (c) Per share amounts have been calculated using the average shares outstanding method. (d) Expense ratio is before reduction for earnings and bank fee credits on cash balances. (e) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (f) Adjusted to an annual basis. (g) The Investment Manager and its affiliates have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (h) Expense ratio is before reduction for earnings and bank fee credits on cash balances. Earnings and bank fee credits were less than 0.01% of average net assets for the years ended May 31, 2009 and 2008. (i) Includes mortgage dollar rolls. If mortgage dollar roll transactions were excluded, the portfolio turnover would have been 199% for the year ended May 31, 2009. (j) Not annualized. The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 37 NOTES TO FINANCIAL STATEMENTS -------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES RiverSource Short Duration U.S. Government Fund (the Fund) is a series of RiverSource Government Income Series, Inc. and is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. RiverSource Government Income Series, Inc. has 10 billion authorized shares of capital stock that can be allocated among the separate series as designated by the Board of Directors (the Board). The Fund invests in direct obligations of the U.S. government, such as Treasury bonds, bills and notes, and of its agencies and instrumentalities. The Fund offers Class A, Class B, Class C, Class I, Class R4 and Class W shares. - Class A shares are sold with a front-end sales charge. - Class B shares may be subject to a contingent deferred sales charge (CDSC) and automatically convert to Class A shares during the ninth year of ownership. However, Class B shares are closed to new investors and new purchases. - Class C shares may be subject to a CDSC. - Class I and Class R4 shares are sold without a front-end sales charge or CDSC and are offered to qualifying institutional investors. - Class W shares are sold without a front-end sales charge or CDSC and are offered through qualifying discretionary accounts. At May 31, 2009, RiverSource Investments, LLC (RiverSource Investments or the Investment Manager) and the RiverSource affiliated funds-of-funds owned 100% of Class I shares, and the Investment Manager owned 100% of Class W shares. All classes of shares have identical voting, dividend and liquidation rights. Class specific expenses (e.g., distribution and service fees, transfer agency fees, plan administration services fees) differ among classes. Income, expenses (other than class specific expenses) and realized and unrealized gains or losses on investments are allocated to each class of shares based upon its relative net assets. The Fund's significant accounting policies are summarized below: USE OF ESTIMATES Preparing financial statements that conform to U.S. generally accepted accounting principles requires management to make estimates (e.g., on assets, liabilities and contingent assets and liabilities) that could differ from actual results. -------------------------------------------------------------------------------- 38 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- VALUATION OF SECURITIES Effective June 1, 2008, the Fund adopted Statement of Financial Accounting Standards No. 157 "Fair Value Measurements" (SFAS 157). SFAS 157 establishes an authoritative definition of fair value, sets out a hierarchy for measuring fair value, and requires additional disclosures about the inputs used to develop the measurements of fair value and the effect of certain measurements reported in the Statement of Operations for a fiscal period. There was no impact to the Fund's net assets or results of operations upon adoption. The fair valuation measurements disclosure can be found following the Notes to Portfolio of Investments. All securities are valued at the close of each business day. Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price. Debt securities are generally traded in the over-the-counter market and are valued at a price that reflects fair value as quoted by dealers in these securities or by an independent pricing service. When market quotes are not readily available, the pricing service, in determining fair values of debt securities, takes into consideration such factors as current quotations by broker/dealers, coupon, maturity, quality, type of issue, trading characteristics, and other yield and risk factors it deems relevant in determining valuations. The procedures adopted by the Board generally contemplate the use of fair valuation in the event that price quotations or valuations are not readily available, price quotations or valuations from other sources are not reflective of market value and thus deemed unreliable, or a significant event has occurred in relation to a security or class of securities that is not reflected in price quotations or valuations from other sources. A fair value price is a good faith estimate of the value of a security at a given point in time. 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, which approximates fair value. Investments in money market funds are valued at net asset value. SECURITIES PURCHASED ON A FORWARD-COMMITMENT BASIS Delivery and payment for securities that have been purchased by the Fund on a forward-commitment basis, including when-issued securities and other forward- commitments, can take place one month or more after the transaction date. During this period, such securities are subject to market fluctuations, and they may affect the Fund's net assets the same as owned securities. The Fund designates cash or liquid securities at least equal to the amount of its forward- -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 39 NOTES TO FINANCIAL STATEMENTS (continued) ------------------------------------- commitments. At May 31, 2009, the Fund has outstanding when-issued securities of $48,991,523. The Fund also enters into transactions to sell purchase commitments to third parties at current market values and concurrently acquires other purchase commitments for similar securities at later dates. As an inducement for the Fund to "roll over" its purchase commitments, the Fund receives negotiated amounts in the form of reductions of the purchase price of the commitment. The Fund records the incremental difference between the forward purchase and sale of each forward roll as realized gain or loss. Losses may arise due to changes in the value of the securities or if a counterparty does not perform under the terms of the agreement. If a counterparty files for bankruptcy or becomes insolvent, the Fund's right to repurchase or sell securities may be limited. FORWARD SALE COMMITMENTS The Fund may enter into forward sale commitments to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. Proceeds of forward sale commitments are not received until the contractual settlement date. During the time a forward sale commitment is outstanding, equivalent deliverable securities, or an offsetting forward purchase commitment deliverable on or before the sale commitment date, are used to satisfy the commitment. Unsettled forward sale commitments are valued at the current market value of the underlying securities, generally according to the procedures described under "Valuation of securities" above. The forward sale commitment is "marked-to- market" daily and the change in market value is recorded by the Fund as an unrealized gain or loss. If the forward sale commitment is closed through the acquisition of an offsetting purchase commitment, the Fund realizes a gain or loss. If the Fund delivers securities under the commitment, the Fund realizes a gain or a loss from the sale of the securities based upon the market price established at the date the commitment was entered into. Forward sale commitments outstanding at period end are listed in the Notes to Portfolio of Investments. GUARANTEES AND INDEMNIFICATIONS Under the Fund's organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, certain of the Fund's contracts with its service providers contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown since the amount of any future claims that may be made against the Fund cannot be determined and the Fund has no historical basis for predicting the likelihood of any such claims. -------------------------------------------------------------------------------- 40 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- FEDERAL TAXES The Fund's policy is to comply with Subchapter M of the Internal Revenue Code that applies to regulated investment companies and to distribute substantially all of its taxable income to shareholders. No provision for income or excise taxes is thus required. Management of the Fund has concluded that there are no significant uncertain tax positions that would require recognition in the financial statements. Generally, the tax authorities can examine all the tax returns filed for the last three years. Net investment income (loss) and net realized gains (losses) may differ for financial statement and tax purposes primarily because of futures and options contracts, recognition of unrealized appreciation (depreciation) for certain derivative investments, post-October losses and losses deferred due to wash sales. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. Also, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains (losses) were recorded by the Fund. In the Statement of Assets and Liabilities, as a result of permanent book-to-tax differences, undistributed net investment income has been increased by $136,695 and accumulated net realized loss has been decreased by $117,395,747 resulting in a net reclassification adjustment to decrease paid-in capital by $117,532,442. The tax character of distributions paid for the years indicated is as follows:
YEAR ENDED MAY 31, 2009 2008 -------------------------- -------------------------- ORDINARY LONG-TERM ORDINARY LONG-TERM INCOME CAPITAL GAIN INCOME CAPITAL GAIN -------------------------------------------------------------------------------- Class A $16,331,022 $-- $21,333,414 $-- Class B 2,826,872 -- 5,699,109 -- Class C 237,025 -- 312,941 -- Class I 2,172,593 -- 2,868,438 -- Class R4 134,786 -- 183,760 -- Class W 139 -- 196 --
-------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 41 NOTES TO FINANCIAL STATEMENTS (continued) ------------------------------------- At May 31, 2009, the components of distributable earnings on a tax basis are as follows: Undistributed ordinary income.................. $ 821,385 Undistributed accumulated long-term gain....... $ -- Accumulated realized loss...................... $(88,365,852) Unrealized appreciation (depreciation)......... $(14,629,892)
RECENT ACCOUNTING PRONOUNCEMENTS The Fund has adopted FASB Staff Position No. 133-1 and FIN No. 45-4 (FSP FAS 133-1 and FIN 45-4), "Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45." The amendments to FSP FAS 133-1 and FIN 45-4 require enhanced disclosures about a fund's derivatives and guarantees. Funds are required to provide enhanced disclosures about (a) how and why a fund uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, (c) how derivative instruments and related hedged items affect a fund's financial position, financial performance, and cash flows and (d) the current status of the payment/performance risk of the credit derivative. The amendments to FSP FAS 133-1 and FIN 45-4 also require additional disclosures about the current status of the payment/performance risk of a guarantee. At May 31, 2009, the Fund did not own nor was it a party to any credit derivative contracts within the scope of these amendments. The Fund has adopted Statement of Financial Accounting Standards No. 161, "Disclosures about Derivative Instruments and Hedging Activities -- an amendment of FASB Statement No. 133," which requires enhanced disclosures about a fund's derivative and hedging activities. See Investments in Derivatives below for more information. On April 9, 2009, the FASB issued Staff Position No. 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly" (FSP 157-4). FSP 157-4 provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased. FSP 157-4 also requires additional disaggregation of the current SFAS 157 required disclosures. FSP 157-4 is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Management is currently evaluating the impact that the adoption of FSP 157-4 will have on the amounts and disclosures within the Fund's financial statements. -------------------------------------------------------------------------------- 42 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- DIVIDENDS TO SHAREHOLDERS Dividends from net investment income, declared daily and payable monthly, when available, are reinvested in additional shares of the Fund at net asset value or payable in cash. Capital gains, when available, are distributed along with the last income dividend of the calendar year. OTHER Security transactions are accounted for on the date securities are purchased or sold. Dividend income, if any, is recognized on the ex-dividend date and interest income, including amortization of premium, market discount and original issue discount using the effective interest method, is accrued daily. 2. INVESTMENTS IN DERIVATIVES The Fund may invest in certain derivative instruments which are transactions whose values depend on or are derived from (in whole or in part) the value of one or more other assets, such as securities, currencies, commodities or indices. Such derivative instruments may be used to maintain cash reserves while maintaining exposure to certain other assets, to offset anticipated declines in values of investments, to facilitate trading, to reduce transaction costs, and to pursue higher investment returns. The Fund may also use derivative instruments to mitigate certain investment risks, such as foreign currency exchange rate risk, interest rate risk, and credit risk. FUTURES TRANSACTIONS The Fund may buy and sell financial futures contracts traded on any U.S. or foreign exchange to produce incremental earnings, hedge existing positions or protect against market changes in the value of equities, interest rates or foreign currencies. The Fund may also buy and write put and call options on these futures contracts. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date. Futures and options on futures are valued daily based upon the last sale price at the close of the market on the principal exchange on which they are traded. Upon entering into a futures contract, the Fund is required to deposit either cash or securities in an amount (initial margin) equal to a certain percentage of the contract value. Subsequent payments (variation margin) are made or received by the Fund each day. The variation margin payments are equal to the daily changes in the contract value and are recorded as unrealized gains and losses. The Fund recognizes a realized gain or loss when the contract is closed or expires. Upon entering into futures contracts, the Fund bears the risk of interest rates, exchange rates or securities prices moving unexpectedly, in which case, the Fund -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 43 NOTES TO FINANCIAL STATEMENTS (continued) ------------------------------------- may not achieve the anticipated benefits of the futures contracts and may realize a loss. Additional risks include counterparty credit risk, the possibility of an illiquid market, and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. The gross notional amount of long and short futures contracts were $142 million and $119 million, respectively, at May 31, 2009. The monthly average gross notional amounts for long and short contracts were $162 million and $144 million, respectively, for the year ended May 31, 2009. EFFECTS OF DERIVATIVE TRANSACTIONS ON THE FINANCIAL STATEMENTS The following tables are intended to provide additional information about the effect of derivatives on the financial statements of the Fund, including: 1) the fair value of derivatives by risk category and the location of those fair values in the Statement of Assets and Liabilities and 2) the impact of derivatives transactions on the Fund's operations over the period including realized gains or losses and unrealized gains or losses. The derivative schedules following the Portfolio of Investments present additional information regarding derivative instruments outstanding at the end of the period, if any. FAIR VALUES OF DERIVATIVE INSTRUMENTS AS OF MAY 31, 2009
ASSET DERIVATIVES LIABILITY DERIVATIVES -------------------------------- -------------------------------- STATEMENT OF ASSETS STATEMENT OF ASSETS RISK EXPOSURE AND LIABILITIES AND LIABILITIES CATEGORY LOCATION FAIR VALUE LOCATION FAIR VALUE ---------------------------------------------------------------------------------------- Net Net Interest rate Assets--Unrealized Assets--Unrealized contracts appreciation $1,016,639* depreciation $113,210* ---------------------------------------------------------------------------------------- TOTAL $1,016,639 $113,210 ----------------------------------------------------------------------------------------
* Includes cumulative appreciation (depreciation) of futures contracts as reported in the Futures Contracts Outstanding table following the Portfolio of Investments. Only the current day's variation margin of futures contracts is reported in receivables or payables in the Statement of Assets and Liabilities. EFFECT OF DERIVATIVE INSTRUMENTS ON THE STATEMENT OF OPERATIONS FOR THE YEAR ENDED MAY 31, 2009
AMOUNT OF REALIZED GAIN OR (LOSS) ON DERIVATIVES RECOGNIZED IN INCOME -------------------------------------------- RISK EXPOSURE CATEGORY FUTURES -------------------------------------------- Interest rate contracts $(7,152,235) -------------------------------------------- TOTAL $(7,152,235) --------------------------------------------
-------------------------------------------------------------------------------- 44 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION OR (DEPRECIATION) ON DERIVATIVES RECOGNIZED IN INCOME -------------------------------------------- RISK EXPOSURE CATEGORY FUTURES -------------------------------------------- Interest rate contracts $(1,578,737) -------------------------------------------- TOTAL $(1,578,737) --------------------------------------------
3. EXPENSES AND SALES CHARGES INVESTMENT MANAGEMENT SERVICES FEES Under an Investment Management Services Agreement, the Investment Manager determines which securities will be purchased, held or sold. The management fee is equal to a percentage of the Fund's average daily net assets that declines from 0.48% to 0.25% annually as the Fund's net assets increase. The management fee for the year ended May 31, 2009 was 0.48% of the Fund's average daily net assets. ADMINISTRATIVE SERVICES FEES Under an Administrative Services Agreement, the Fund pays Ameriprise Financial, Inc. (Ameriprise Financial), parent company of the Investment Manager, a fee for administration and accounting services equal to a percentage of the Fund's average daily net assets that declines from 0.07% to 0.04% annually as the Fund's net assets increase. The fee for the year ended May 31, 2009 was 0.07% of the Fund's average daily net assets. OTHER FEES Other expenses are for, among other things, certain expenses of the Fund or the Board including: Fund boardroom and office expense, employee compensation, employee health and retirement benefits, and certain other expenses. Payment of these Fund and Board expenses is facilitated by a company providing limited administrative services to the Fund and the Board. For the year ended May 31, 2009, other expenses paid to this company were $4,802. COMPENSATION OF BOARD MEMBERS Under a Deferred Compensation Plan (the Plan), non-interested board members may defer receipt of their compensation. Deferred amounts are treated as though equivalent dollar amounts had been invested in shares of the Fund or other funds in the RiverSource Family of Funds. The Fund's liability for these amounts is adjusted for market value changes and remains in the Fund until distributed in accordance with the Plan. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 45 NOTES TO FINANCIAL STATEMENTS (continued) ------------------------------------- TRANSFER AGENCY FEES Under a Transfer Agency Agreement, RiverSource Service Corporation (the Transfer Agent) maintains shareholder accounts and records. The Fund pays the Transfer Agent an annual account-based fee at a rate equal to $20.50 for Class A, $21.50 for Class B and $21.00 for Class C for this service. The Fund also pays the Transfer Agent an annual asset-based fee at a rate of 0.05% of the Fund's average daily net assets attributable to Class R4 shares and an annual asset- based fee at a rate of 0.20% of the Fund's average daily net assets attributable to Class W shares. The Transfer Agent charges an annual fee of $5 per inactive account, charged on a pro rata basis for 12 months from the date the account becomes inactive. These fees are included in the transfer agency fees in the Statement of Operations. PLAN ADMINISTRATION SERVICES FEES Under a Plan Administration Services Agreement with the Transfer Agent, the Fund pays an annual fee at a rate of 0.25% of the Fund's average daily net assets attributable to Class R4 shares for the provision of various administrative, recordkeeping, communication and educational services. DISTRIBUTION FEES The Fund has agreements with RiverSource Distributors, Inc. and RiverSource Fund Distributors, Inc. (collectively, the Distributor) for distribution and shareholder services. Under a Plan and Agreement of Distribution pursuant to Rule 12b-1, the Fund pays a fee at an annual rate of up to 0.25% of the Fund's average daily net assets attributable to Class A and Class W shares and a fee at an annual rate of up to 1.00% of the Fund's average daily net assets attributable to Class B and Class C shares. For Class B and Class C shares, of the 1.00% fee, up to 0.75% is reimbursed for distribution expenses. The amount of distribution expenses incurred by the Distributor and not yet reimbursed (unreimbursed expense) was approximately $4,253,000 and $121,000 for Class B and Class C shares, respectively. These amounts are based on the most recent information available as of April 30, 2009, and may be recovered from future payments under the distribution plan or CDSC. To the extent the unreimbursed expense has been fully recovered, the distribution fee is reduced. SALES CHARGES Sales charges received by the Distributor for distributing Fund shares were $431,785 for Class A, $93,928 for Class B and $4,452 for Class C for the year ended May 31, 2009. -------------------------------------------------------------------------------- 46 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- EXPENSES WAIVED/REIMBURSED BY THE INVESTMENT MANAGER AND ITS AFFILIATES For the year ended May 31, 2009, the Investment Manager and its affiliates waived/reimbursed certain fees and expenses such that net expenses (excluding fees and expenses of acquired funds*) were as follows: Class A ............................................ 0.89% Class B ............................................ 1.65 Class C ............................................ 1.65 Class I ............................................ 0.51 Class R4 ........................................... 0.76 Class W ............................................ 0.96
The waived/reimbursed fees and expenses for the transfer agency fees at the class level were as follows: Class A ......................................... $251,512 Class B ......................................... 57,978 Class C ......................................... 5,025 Class R4 ........................................ 2,170
The waived/reimbursed fees and expenses for the plan administration services fees at the class level were as follows: Class R4 .......................................... $106
The management fees waived/reimbursed at the Fund level were $670,908. Under an agreement which was effective until May 31, 2009, the Investment Manager and its affiliates contractually agreed to waive certain fees and expenses such that net expenses (excluding fees and expenses of acquired funds*), would not exceed the following percentage of the class average daily net assets: Class A ............................................ 0.89% Class B ............................................ 1.65 Class C ............................................ 1.65 Class I ............................................ 0.51 Class R4 ........................................... 0.76 Class W ............................................ 0.96
Effective June 1, 2009, the Investment Manager and its affiliates have contractually agreed to waive certain fees and expenses until July 31, 2010, unless sooner terminated at the discretion of the Board, such that net expenses -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 47 NOTES TO FINANCIAL STATEMENTS (continued) ------------------------------------- (excluding fees and expenses of acquired funds*), will not exceed the following percentage of the class average daily net assets: Class A ............................................ 0.86% Class B ............................................ 1.62 Class C ............................................ 1.62 Class I ............................................ 0.48 Class R4 ........................................... 0.78 Class W ............................................ 0.93
* In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the funds in which it invests (also referred to as "acquired funds"), including affiliated and non-affiliated pooled investment vehicles (including mutual funds and exchange traded funds). Because the acquired funds have varied expense and fee levels and the Fund may own different proportions of acquired funds at different times, the amount of fees and expenses incurred indirectly by the Fund will vary. BANK FEE CREDITS During the year ended May 31, 2009, the Fund's transfer agency fees were reduced by $8,100 as a result of bank fee credits from overnight cash balances. CUSTODIAN FEES Effective Dec. 15, 2008, the Fund pays custodian fees to JPMorgan Chase Bank, N.A. For the period from June 1, 2008 to Dec. 15, 2008, the Fund paid custodian fees amounting to $63,466 to Ameriprise Trust Company, a subsidiary of Ameriprise Financial. 4. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term obligations, but including mortgage dollar rolls) aggregated $1,843,940,420 and $1,785,408,253, respectively, for the year ended May 31, 2009. Realized gains and losses are determined on an identified cost basis. -------------------------------------------------------------------------------- 48 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- 5. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the periods indicated are as follows:
YEAR ENDED MAY 31, 2009 ISSUED FOR REINVESTED NET SOLD DISTRIBUTIONS REDEEMED INCREASE (DECREASE) ---------------------------------------------------------------------------------- Class A 53,272,239 3,226,458 (56,089,954) 408,743 Class B 7,298,534 575,044 (16,904,640) (9,031,062) Class C 1,525,411 46,643 (827,332) 744,722 Class I 2,986,449 469,925 (13,974,458) (10,518,084) Class R4 491,850 29,090 (590,144) (69,204) ---------------------------------------------------------------------------------- YEAR ENDED MAY 31, 2008 ISSUED FOR REINVESTED NET SOLD DISTRIBUTIONS REDEEMED INCREASE (DECREASE) ---------------------------------------------------------------------------------- Class A 43,400,136 4,118,107 (42,186,985) 5,331,258 Class B 8,957,341 1,135,754 (22,307,379) (12,214,284) Class C 549,369 62,833 (750,024) (137,822) Class I 14,458,872 596,542 (7,078,714) 7,976,700 Class R4 587,072 38,907 (437,399) 188,580 ----------------------------------------------------------------------------------
6. LENDING OF PORTFOLIO SECURITIES Effective Dec. 1, 2008, the Fund has entered into a Master Securities Lending Agreement (the Agreement) with JPMorgan Chase Bank, National Association (JPMorgan). The Agreement authorizes JPMorgan as lending agent to lend securities to authorized borrowers in order to generate additional income on behalf of the Fund. Pursuant to the Agreement, the securities loaned are secured by cash or U.S. government securities equal to at least 100% of the market value of the loaned securities. Any additional collateral required to maintain those levels due to market fluctuations of the loaned securities is delivered the following business day. Cash collateral received is invested by the lending agent on behalf of the Fund into authorized investments pursuant to the Agreement. The investments made with the cash collateral are listed in the Portfolio of Investments. The values of such investments and any uninvested cash collateral balance are disclosed in the Statement of Assets and Liabilities along with the related obligation to return the collateral upon the return of the securities loaned. At May 31, 2009, securities valued at $132,128,881 were on loan, secured by U.S. government securities valued at $31,834,802 and by cash collateral of $102,551,624 invested in short-term securities or in cash equivalents. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 49 NOTES TO FINANCIAL STATEMENTS (continued) ------------------------------------- Pursuant to the Agreement, the Fund receives income for lending its securities either in the form of fees or by earning interest on invested cash collateral, net of negotiated rebates paid to borrowers and fees paid to the lending agent for services provided and any other securities lending expenses. Income of $241,833 earned from securities lending from Dec. 1, 2008 through May 31, 2009 is included in the Statement of Operations. The Fund also continues to earn interest and dividends on the securities loaned. Risks of delay in recovery of securities or even loss of rights in the securities may occur should the borrower of the securities fail financially. Risks may also arise to the extent that the value of the securities loaned increases above the value of the collateral received. JPMorgan will indemnify the Fund from losses resulting from a borrower's failure to return a loaned security when due. Such indemnification does not extend to losses associated with declines in the value of cash collateral investments. Loans are subject to termination by the Fund or the borrower at any time, and are, therefore, not considered to be illiquid investments. Prior to Dec. 1, 2008, the Investment Manager served as securities lending agent for the Fund under the Securities Lending Agency Agreement pursuant to which the Fund agreed to reimburse the Investment Manager for expenses incurred by it in connection with the lending program. Expenses paid to the Investment Manager as securities lending agent were $2,629 through Nov. 30, 2008 and are included in other expenses in the Statement of Operations. Cash collateral received on loaned securities had been invested in an affiliated money market fund. Income of $18,062 earned from securities lending from June 1, 2008 through Nov. 30, 2008 is included in the Statement of Operations. 7. AFFILIATED MONEY MARKET FUND The Fund may invest its daily cash balance in RiverSource Short-Term Cash Fund, a money market fund established for the exclusive use of the funds in the RiverSource Family of Funds and other institutional clients of RiverSource Investments. The cost of the Fund's purchases and proceeds from sales of shares of RiverSource Short-Term Cash Fund aggregated $455,393,792 and $442,866,545, respectively, for the year ended May 31, 2009. The income distributions received with respect to the Fund's investment in RiverSource Short-Term Cash Fund can be found in the Statement of Operations and the Fund's invested balance in RiverSource Short-Term Cash Fund at May 31, 2009, can be found in the Portfolio of Investments. -------------------------------------------------------------------------------- 50 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- 8. BANK BORROWINGS The Fund has entered into a revolving credit facility with a syndicate of banks led by JPMorgan Chase Bank, N.A. (the Administrative Agent), whereby the Fund may borrow for the temporary funding of shareholder redemptions or for other temporary or emergency purposes. The credit facility became effective on Oct. 16, 2008, replacing a prior credit facility. The credit facility agreement, which is a collective agreement between the Fund and certain other funds in the RiverSource Family of Funds, severally and not jointly, permits collective borrowings up to $475 million. The borrowers shall have the right, upon written notice to the Administrative Agent to request an increase of up to $175 million in the aggregate amount of the credit facility from new or existing lenders, provided that the aggregate amount of the credit facility shall at no time exceed $650 million. Participation in such increase by any existing lender shall be at such lender's sole discretion. Interest is charged to each Fund based on its borrowings at a rate equal to the federal funds rate plus 0.75%. Each borrowing under the credit facility matures no later than 60 days after the date of borrowing. The Fund also pays a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.06% per annum, in addition to an upfront fee equal to its pro rata share of 0.02% of the amount of the credit facility. The Fund had no borrowings during the year ended May 31, 2009. Under the prior credit facility which was effective until Oct. 15, 2008, the Fund had entered into a revolving credit facility with a syndicate of banks headed by JPMorgan Chase Bank, N.A., whereby the Fund was permitted to borrow for the temporary funding of shareholder redemptions or for other temporary or emergency purposes. The credit facility agreement, which was a collective agreement between the Fund and certain other RiverSource funds, severally and not jointly, permitted collective borrowings up to $500 million. Interest was charged to each Fund based on its borrowings at a rate equal to the federal funds rate plus 0.30%. Each borrowing under the credit facility matured no later than 60 days after the date of borrowing. The Fund also paid a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.06% per annum. 9. CAPITAL LOSS CARRY-OVER AND POST-OCTOBER LOSS For federal income tax purposes, the Fund had a capital loss carry-over of $70,163,196 at May 31, 2009, that if not offset by capital gains will expire as follows:
2013 2014 2015 2017 $36,267,962 $20,469,230 $9,579,187 $3,846,817
-------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 51 NOTES TO FINANCIAL STATEMENTS (continued) ------------------------------------- Because the measurement periods for a regulated investment company's income are different for excise tax purposes versus income tax purposes, special rules are in place to protect the amount of earnings and profits needed to support excise tax distributions. As a result, the Fund is permitted to treat net capital losses realized between Nov. 1, 2008 and its fiscal year end (post-October loss) as occurring on the first day of the following tax year. At May 31, 2009, the Fund had a post-October loss of $18,202,656 that is treated for income tax purposes as occurring on June 1, 2009. For the year ended May 31, 2009, $117,356,906 of capital loss carry-over expired unused. It is unlikely the Board will authorize a distribution of any net realized capital gains until the available capital loss carry-over has been offset or expires. 10. INFORMATION REGARDING PENDING AND SETTLED LEGAL PROCEEDINGS In June 2004, an action captioned John E. Gallus et al. v. American Express Financial Corp. and American Express Financial Advisors Inc., was filed in the United States District Court for the District of Arizona. The plaintiffs allege that they are investors in several American Express Company (now known as RiverSource) mutual funds and they purport to bring the action derivatively on behalf of those funds under the Investment Company Act of 1940. The plaintiffs allege that fees allegedly paid to the defendants by the funds for investment advisory and administrative services are excessive. The plaintiffs seek remedies including restitution and rescission of investment advisory and distribution agreements. The plaintiffs voluntarily agreed to transfer this case to the United States District Court for the District of Minnesota (the District Court). In response to defendants' motion to dismiss the complaint, the District Court dismissed one of plaintiffs' four claims and granted plaintiffs limited discovery. Defendants moved for summary judgment in April 2007. Summary judgment was granted in the defendants' favor on July 9, 2007. The plaintiffs filed a notice of appeal with the Eighth Circuit Court of Appeals (the Eighth Circuit) on August 8, 2007. On April 8, 2009, the Eighth Circuit reversed summary judgment and remanded to the District Court for further proceedings. In December 2005, without admitting or denying the allegations, American Express Financial Corporation (AEFC, which is now known as Ameriprise Financial, Inc. (Ameriprise Financial)), entered into settlement agreements with the Securities and Exchange Commission (SEC) and Minnesota Department of Commerce (MDOC) related to market timing activities. As a result, AEFC was censured and ordered to cease and desist from committing or causing any -------------------------------------------------------------------------------- 52 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- violations of certain provisions of the Investment Advisers Act of 1940, the Investment Company Act of 1940, and various Minnesota laws. AEFC agreed to pay disgorgement of $10 million and civil money penalties of $7 million. AEFC also agreed to retain an independent distribution consultant to assist in developing a plan for distribution of all disgorgement and civil penalties ordered by the SEC in accordance with various undertakings detailed at http://www.sec.gov/litigation/admin/ia-2451.pdf. Ameriprise Financial and its affiliates have cooperated with the SEC and the MDOC in these legal proceedings, and have made regular reports to the RiverSource Funds' Boards of Directors/Trustees. On November 7, 2008, RiverSource Investments, LLC, a subsidiary of Ameriprise Financial, Inc., acquired J. & W. Seligman & Co., Inc. (Seligman). In late 2003, Seligman conducted an extensive internal review concerning mutual fund trading practices. Seligman's review, which covered the period 2001-2003, noted one arrangement that permitted frequent trading in certain open-end registered investment companies managed by Seligman (the Seligman Funds); this arrangement was in the process of being closed down by Seligman before September 2003. Seligman identified three other arrangements that permitted frequent trading, all of which had been terminated by September 2002. In January 2004, Seligman, on a voluntary basis, publicly disclosed these four arrangements to its clients and to shareholders of the Seligman Funds. Seligman also provided information concerning mutual fund trading practices to the SEC and the Office of the Attorney General of the State of New York (NYAG). In September 2006, the NYAG commenced a civil action in New York State Supreme Court against Seligman, Seligman Advisors, Inc. (which is now known as RiverSource Fund Distributors, Inc.), Seligman Data Corp. and Brian T. Zino (collectively, the Seligman Parties), alleging, in substance, that the Seligman Parties permitted various persons to engage in frequent trading and, as a result, the prospectus disclosure used by the registered investment companies then managed by Seligman was and had been misleading. The NYAG included other related claims and also claimed that the fees charged by Seligman to the Seligman Funds were excessive. On March 13, 2009, without admitting or denying any violations of law or wrongdoing, the Seligman Parties entered into a stipulation of settlement with the NYAG and settled the claims made by the NYAG. Under the terms of the settlement, Seligman paid $11.3 million to four Seligman Funds. This settlement resolved all outstanding matters between the Seligman Parties and the NYAG. In addition to the foregoing matter, the New York staff of the SEC indicated in September 2005 that it was considering recommending to the Commissioners of the SEC the instituting of a formal action against Seligman and Seligman Advisors, Inc. relating to frequent trading -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 53 NOTES TO FINANCIAL STATEMENTS (continued) ------------------------------------- in the Seligman Funds. Seligman responded to the staff in October 2005 that it believed that any action would be both inappropriate and unnecessary, especially in light of the fact that Seligman had previously resolved the underlying issue with the Independent Directors of the Seligman Funds and made recompense to the affected Seligman Funds. There have been no further developments with the SEC on this matter. Ameriprise Financial and certain of its affiliates have historically been involved in a number of legal, arbitration and regulatory proceedings, including routine litigation, class actions, and governmental actions, concerning matters arising in connection with the conduct of their business activities. Ameriprise Financial believes that the Funds are not currently the subject of, and that neither Ameriprise Financial nor any of its affiliates are the subject of, any pending legal, arbitration or regulatory proceedings that are likely to have a material adverse effect on the Funds or the ability of Ameriprise Financial or its affiliates to perform under their contracts with the Funds. Ameriprise Financial is required to make 10-Q, 10-K and, as necessary, 8-K filings with the Securities and Exchange Commission on legal and regulatory matters that relate to Ameriprise Financial and its affiliates. Copies of these filings may be obtained by accessing the SEC website at www.sec.gov. There can be no assurance that these matters, or the adverse publicity associated with them, will not result in increased fund redemptions, reduced sale of fund shares or other adverse consequences to the Funds. Further, although we believe proceedings are not likely to have a material adverse effect on the Funds or the ability of Ameriprise Financial or its affiliates to perform under their contracts with the Funds, these proceedings are subject to uncertainties and, as such, we are unable to estimate the possible loss or range of loss that may result. An adverse outcome in one or more of these proceedings could result in adverse judgments, settlements, fines, penalties or other relief that could have a material adverse effect on the consolidated financial condition or results of operations of Ameriprise Financial. -------------------------------------------------------------------------------- 54 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ------------------------ TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND: We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of RiverSource Short Duration U.S. Government Fund (the Fund) (one of the portfolios constituting the RiverSource Government Income Series, Inc.) as of May 31, 2009, and the related statement of operations for the year then ended, and the statements of changes in net assets and the financial highlights for each of the two years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights of the Fund for the periods presented through May 31, 2007, were audited by other auditors whose report dated July 20, 2007, expressed an unqualified opinion on those financial highlights. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of May 31, 2009, by correspondence with the custodian and brokers, or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 55 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (continued) ----------- In our opinion, the financial statements and financial highlights audited by us as referred to above present fairly, in all material respects, the financial position of RiverSource Short Duration U.S. Government Fund of the RiverSource Government Income Series, Inc. at May 31, 2009, the results of its operations for the year then ended, and changes in its net assets and the financial highlights for each of the two years in the period then ended, in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLP Minneapolis, Minnesota July 21, 2009 -------------------------------------------------------------------------------- 56 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT FEDERAL INCOME TAX INFORMATION ------------------------------------------------- (UNAUDITED) The Fund is required by the Internal Revenue Code of 1986 to tell its shareholders about the tax treatment of the dividends it pays during its fiscal year. The dividends listed below are reported to you on Form 1099-DIV, Dividends and Distributions. Shareholders should consult a tax advisor on how to report distributions for state and local tax purposes. Fiscal year ended May 31, 2009
INCOME DISTRIBUTIONS - the Fund designates the following tax attributes for distributions: Qualified Dividend Income for individuals.................... 0.00% Dividends Received Deduction for corporations................ 0.00% U.S. Government Obligations.................................. 17.76%
The Fund designates as distributions of long-term gains, to the extent necessary to fully distribute such capital gains, earnings and profits distributed to shareholders on the redemption of shares. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 57 BOARD MEMBERS AND OFFICERS ----------------------------------------------------- Shareholders elect a Board that oversees the Fund's operations. The Board appoints officers who are responsible for day-to-day business decisions based on policies set by the Board. The following is a list of the Fund's Board members. The RiverSource Family of Funds that each Board member oversees consists of 149 funds, which includes 105 RiverSource funds and 44 Seligman funds. Board members serve until the next regular shareholders' meeting or until he or she reaches the mandatory retirement age established by the Board. INDEPENDENT BOARD MEMBERS
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION OTHER AGE LENGTH OF SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS ------------------------------------------------------------------------------------------------------------------------------ Kathleen Blatz Board member since Chief Justice, Minnesota Supreme Court, 1998-2006; None 901 S. Marquette Ave. 2006 Attorney Minneapolis, MN 55402 Age 55 ------------------------------------------------------------------------------------------------------------------------------ Arne H. Carlson Board member since Chair, RiverSource Family of Funds, 1999-2006; former None 901 S. Marquette Ave. 1999 Governor of Minnesota Minneapolis, MN 55402 Age 74 ------------------------------------------------------------------------------------------------------------------------------ Pamela G. Carlton Board member since President, Springboard -- Partners in Cross Cultural None 901 S. Marquette Ave. 2007 Leadership (consulting company) Minneapolis, MN 55402 Age 54 ------------------------------------------------------------------------------------------------------------------------------ Patricia M. Flynn Board member since Trustee Professor of Economics and Management, Bentley None 901 S. Marquette Ave. 2004 College; former Dean, McCallum Graduate School of Minneapolis, MN 55402 Business, Bentley University Age 58 ------------------------------------------------------------------------------------------------------------------------------ Anne P. Jones Board member since Attorney and Consultant None 901 S. Marquette Ave. 1985 Minneapolis, MN 55402 Age 74 ------------------------------------------------------------------------------------------------------------------------------ Jeffrey Laikind, CFA Board member since Former Managing Director, Shikiar Asset Management American Progressive 901 S. Marquette Ave. 2005 Insurance Minneapolis, MN 55402 Age 73 ------------------------------------------------------------------------------------------------------------------------------ Stephen R. Lewis, Jr. Chair of the Board President Emeritus and Professor of Economics, Carleton Valmont Industries, 901 S. Marquette Ave. since 2007, College Inc. (manufactures Minneapolis, MN 55402 Board member since irrigation systems) Age 70 2002 ------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 58 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- INDEPENDENT BOARD MEMBERS (CONTINUED)
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION OTHER AGE LENGTH OF SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS ------------------------------------------------------------------------------------------------------------------------------ John F. Maher Board member since Retired President and Chief Executive Officer and None 901 S. Marquette Ave. 2008 former Director, Great Western Financial Corporation Minneapolis, MN 55402 (financial services), 1986-1997 Age 66 ------------------------------------------------------------------------------------------------------------------------------ Catherine James Paglia Board member since Director, Enterprise Asset Management, Inc. (private None 901 S. Marquette Ave. 2004 real estate and asset management company) Minneapolis, MN 55402 Age 56 ------------------------------------------------------------------------------------------------------------------------------ Leroy C. Richie Board member since Counsel, Lewis & Munday, P.C. since 1987; Vice Digital Ally, Inc. 901 S. Marquette Ave. 2008 President and General Counsel, Automotive Legal (digital imaging); Minneapolis, MN 55402 Affairs, Chrysler Corporation, 1990-1997 Infinity, Inc. (oil Age 67 and gas exploration and production); OGE Energy Corp. (energy and energy services) ------------------------------------------------------------------------------------------------------------------------------ Alison Taunton-Rigby Board member since Chief Executive Officer and Director, RiboNovix, Inc. Idera 901 S. Marquette Ave. 2002 since 2003 (biotechnology); former President, Forester Pharmaceuticals, Minneapolis, MN 55402 Biotech Inc. Age 65 (biotechnology); Healthways, Inc. (health management programs) ------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 59 BOARD MEMBERS AND OFFICERS (continued) ----------------------------------------- BOARD MEMBER AFFILIATED WITH RIVERSOURCE INVESTMENTS*
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION OTHER AGE LENGTH OF SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS ------------------------------------------------------------------------------------------------------------------------------ William F. Truscott Board member since President -- U.S. Asset Management and Chief Investment None 53600 Ameriprise 2001, Officer, Ameriprise Financial, Inc. since 2005; Financial Center Vice President since President, Chairman of the Board and Chief Investment Minneapolis, MN 55474 2002 Officer, RiverSource Investments, LLC since 2001; Age 48 Director, President and Chief Executive Officer, Ameriprise Certificate Company since 2006; Chairman of the Board and Chief Executive Officer, RiverSource Distributors, Inc. since 2006 and of RiverSource Fund Distributors, Inc. since 2008; Senior Vice President -- Chief Investment Officer, Ameriprise Financial, Inc., 2001-2005 ------------------------------------------------------------------------------------------------------------------------------
* Interested person by reason of being an officer, director, security holder and/or employee of RiverSource Investments or Ameriprise Financial. The SAI has additional information about the Fund's Board members and is available, without charge, upon request by calling the RiverSource Family of Funds at 1(800) 221-2450; contacting your financial intermediary; or visiting riversource.com/funds. The Board has appointed officers who are responsible for day-to-day business decisions based on policies it has established. The officers serve at the pleasure of the Board. In addition to Mr. Truscott, who is Vice President, the Fund's other officers are: FUND OFFICERS
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION AGE LENGTH OF SERVICE DURING PAST FIVE YEARS -------------------------------------------------------------------------------------------------------- Patrick T. Bannigan President since 2006 Director and Senior Vice President -- Asset Management, 172 Ameriprise Financial Products and Marketing, RiverSource Investments, LLC Center and Director and Vice President -- Asset Management, Minneapolis, MN 55474 Products and Marketing, RiverSource Distributors, Inc. Age 43 since 2006 and of RiverSource Fund Distributors, Inc. since 2008; Managing Director and Global Head of Product, Morgan Stanley Investment Management, 2004- 2006; President, Touchstone Investments, 2002-2004 --------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 60 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- FUND OFFICERS (CONTINUED)
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION AGE LENGTH OF SERVICE DURING PAST FIVE YEARS -------------------------------------------------------------------------------------------------------- Michelle M. Keeley Vice President since Executive Vice President -- Equity and Fixed Income, 172 Ameriprise Financial 2004 Ameriprise Financial, Inc. and RiverSource Investments, Center LLC since 2006; Vice President -- Investments, Minneapolis, MN 55474 Ameriprise Certificate Company since 2003; Senior Vice Age 45 President -- Fixed Income, Ameriprise Financial, Inc., 2002-2006 and RiverSource Investments, LLC, 2004-2006 -------------------------------------------------------------------------------------------------------- Amy K. Johnson Vice President since Chief Administrative Officer, RiverSource Investments, 5228 Ameriprise Financial 2006 LLC since 2009; Vice President -- Asset Management and Center Minneapolis, MN Trust Company Services, RiverSource Investments, LLC, 55474 2006-2009; Vice President -- Operations and Compliance, Age 43 RiverSource Investments, LLC, 2004-2006; Director of Product Development -- Mutual Funds, Ameriprise Financial, Inc., 2001-2004 -------------------------------------------------------------------------------------------------------- Jeffrey P. Fox Treasurer since 2002 Vice President -- Investment Accounting, Ameriprise 105 Ameriprise Financial Financial, Inc. since 2002; Chief Financial Officer, Center RiverSource Distributors, Inc. since 2006 Minneapolis, MN 55474 Age 54 -------------------------------------------------------------------------------------------------------- Scott R. Plummer Vice President, Vice President and Chief Counsel -- Asset Management, 5228 Ameriprise Financial General Counsel and Ameriprise Financial, Inc. since 2005; Chief Counsel, Center Secretary since 2006 RiverSource Distributors, Inc. and Chief Legal Officer Minneapolis, MN 55474 and Assistant Secretary, RiverSource Investments, LLC Age 50 since 2006; Chief Counsel, RiverSource Fund Distributors, Inc. since 2008; Vice President, General Counsel and Secretary, Ameriprise Certificate Company since 2005; Vice President -- Asset Management Compliance, Ameriprise Financial, Inc., 2004-2005; Senior Vice President and Chief Compliance Officer, USBancorp Asset Management, 2002-2004 -------------------------------------------------------------------------------------------------------- Eleanor T.M. Hoagland Chief Compliance Chief Compliance Officer, RiverSource Investments, LLC, 100 Park Avenue Officer since 2009 Kenwood Capital Management LLC, Ameriprise Certificate New York, NY 10010 Company, RiverSource Service Corporation and Seligman Age 58 Data Corp. since 2009; Chief Compliance Officer for each of the Seligman funds since 2004 and all funds in the RiverSource Family of Funds since 2009; Anti-Money Laundering Prevention Officer and Identity Theft Prevention Officer for each of the Seligman funds since 2008; Managing Director, J. & W. Seligman & Co. Incorporated and Vice-President for each of the Seligman funds, 2004-2008 -------------------------------------------------------------------------------------------------------- Neysa M. Alecu Money Laundering Vice President -- Compliance, Ameriprise Financial, 2934 Ameriprise Financial Prevention Officer Inc. since 2008; Anti-Money Laundering Officer, Center since 2004 Ameriprise Financial, Inc. since 2004; Compliance Minneapolis, MN 55474 Director, Ameriprise Financial, Inc., 2004-2008 Age 45 --------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 61 APPROVAL OF INVESTMENT MANAGEMENT SERVICES AGREEMENT ---------------------------------------------------------------------- RiverSource Investments, LLC ("RiverSource Investments" or the "investment manager"), a wholly-owned subsidiary of Ameriprise Financial, Inc. ("Ameriprise Financial"), serves as the investment manager to the Fund. Under an investment management services agreement (the "IMS Agreement"), RiverSource Investments provides investment advice and other services to the Fund and all funds in the RiverSource Family of Funds (collectively, the "Funds"). On an annual basis, the Fund's Board of Directors (the "Board"), including the independent Board members (the "Independent Directors"), considers renewal of the IMS Agreement. RiverSource Investments prepared detailed reports for the Board and its Contracts Committee in March and April 2009, including reports based on data provided by independent organizations to assist the Board in making this determination. In addition, throughout the year, the Board (or its committees) reviews information prepared by RiverSource Investments addressing the services RiverSource Investments provides and Fund performance. The Board accords particular weight to the work, deliberations and conclusions of the Contracts, Investment Review and Compliance Committees in determining whether to continue the IMS Agreement. At the April 7-8, 2009 in-person Board meeting, independent legal counsel to the Independent Directors reviewed with the Independent Directors various factors relevant to the Board's consideration of advisory agreements and the Board's legal responsibilities related to such consideration. Following an analysis and discussion of the factors identified below, the Board, including all of the Independent Directors, approved renewal of the IMS Agreement. Nature, Extent and Quality of Services Provided by RiverSource Investments: The Board analyzed various reports and presentations it had received detailing the services performed by RiverSource Investments, as well as its expertise, resources and capabilities. The Board specifically considered many developments during the past year concerning the services provided by RiverSource Investments, including, in particular, the continued investment in, and resources dedicated to, the Fund's operations, most notably, the large investment made in the acquisition of J. & W. Seligman & Co. Incorporated, including its portfolio management operations, personnel and infrastructure (including the addition of two new offices in New York City and Palo Alto). Further, in connection with the Board's evaluation of the overall package of services provided by RiverSource Investments, the Board considered the quality of the administrative and transfer agency services provided by RiverSource Investments' affiliates to the Fund. The Board also reviewed the financial condition of RiverSource Investments (and its affiliates) and each entity's ability to carry out its responsibilities under the IMS -------------------------------------------------------------------------------- 62 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- Agreement. Further, the Board considered RiverSource Investments' ability to retain key personnel and its expectations in this regard. The Board also discussed the acceptability of the terms of the IMS Agreement (including the relatively broad scope of services required to be performed by RiverSource Investments). The Board concluded that the services being performed under the IMS Agreement were of a reasonably high quality, particularly in light of recent market conditions. Based on the foregoing, and based on other information received (both oral and written, including the information on investment performance referenced below) and other considerations, the Board concluded that RiverSource Investments and its affiliates were in a position to continue to provide a high quality and level of services to the Fund. Investment Performance: For purposes of evaluating the nature, extent and quality of services provided under the IMS Agreement, the Board carefully reviewed the investment performance of the Fund. In this regard, the Board considered: (i) detailed reports containing data prepared by an independent organization showing, for various periods, the performance of the Fund, the performance of a benchmark index, the percentage ranking of the Fund among its comparison group and the net assets of the Fund; and (ii) a report detailing the Fund's performance over various periods, recent Fund inflows (and outflows) and a comparison of the Fund's net assets from December 2007 to December 2008. The Board observed that the Fund's investment performance reflected the interrelationship of exceptionally challenging market conditions with the investment strategies employed by the portfolio management team. Further, the Board noted that appropriate measures have been taken by replacing the portfolio management team. Comparative Fees, Costs of Services Provided and the Profits Realized By RiverSource Investments and its Affiliates from their Relationships with the Fund: The Board reviewed comparative fees and the costs of services to be provided under the IMS Agreement. The Board members considered detailed comparative information set forth in an annual report on fees and expenses, including, among other things, data (prepared by an independent organization) showing a comparison of the Fund's expenses with median expenses paid by funds in its peer group, as well as data showing the Fund's contribution to RiverSource Investments' profitability. The Board accorded particular weight to the notion that the level of fees should reflect a rational pricing model applied consistently across the various product -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 63 APPROVAL OF INVESTMENT MANAGEMENT SERVICES AGREEMENT (continued) ---------------------------------------------------------- lines in the Funds' family, while assuring that the overall fees for each fund are generally in line with the "pricing philosophy" (i.e., that the total expense ratio of each fund (excluding the effect of a performance incentive adjustment, if applicable), with few exceptions, is at or below the median expense ratio of funds in the same comparison group). The Board took into account that the Fund's total expense ratio (after considering proposed expense caps/waivers) approximated the peer group's median expense ratio. The Board also considered the expected profitability of RiverSource Investments and its affiliates in connection with RiverSource Investments providing investment management services to the Fund. In this regard, the Board referred to a detailed profitability report, discussing the profitability to RiverSource Investments and Ameriprise Financial from managing and operating the Fund, including data showing comparative profitability over the past two years. The Board also considered the services acquired by the investment manager through the use of commission dollars paid by the Funds on portfolio transactions. The Board noted that the fees paid by the Fund should permit the investment manager to offer competitive compensation to its personnel, make necessary investments in its business and earn an appropriate profit. The Board concluded that profitability levels were reasonable. Economies of Scale to be Realized: The Board also considered the economies of scale that might be realized by RiverSource Investments as the Fund grows and took note of the extent to which Fund shareholders might also benefit from such growth. The Board considered that the IMS Agreement provides for lower fees as assets increase at pre-established breakpoints and concluded that the IMS Agreement satisfactorily provided for sharing these economies of scale. Based on the foregoing, the Board, including all of the Independent Directors, concluded that the investment management service fees were fair and reasonable in light of the extent and quality of services provided. In reaching this conclusion, no single factor was determinative. On April 8, 2009, the Board, including all of the Independent Directors, approved the renewal of the IMS Agreement for an additional annual period. -------------------------------------------------------------------------------- 64 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT PROXY VOTING ------------------------------------------------------------------- The policy of the Board is to vote the proxies of the companies in which the Fund holds investments consistent with the procedures as stated in the Statement of Additional Information (SAI). You may obtain a copy of the SAI without charge by calling the RiverSource Family of Funds at 1(800) 221-2450; contacting your financial intermediary; visiting riversource.com/funds; or searching the website of the Securities and Exchange Commission (SEC) at http://www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities is filed with the SEC by August 31 for the most recent 12-month period ending June 30 of that year, and is available without charge by visiting riversource.com/funds; or searching the website of the SEC at www.sec.gov. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 ANNUAL REPORT 65 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND 734 Ameriprise Financial Center Minneapolis, MN 55474 RIVERSOURCE.COM/FUNDS This report must be accompanied or preceded by the Fund's current prospectus. RiverSource(R) mutual funds are distributed by RiverSource Distributors, Inc., and RiverSource Fund Distributors, Inc., Members FINRA, and managed by RiverSource Investments, LLC. RiverSource is part of Ameriprise Financial, Inc. (RIVERSOURCE INVESTMENTS LOGO) (C)2009 RiverSource Investments, LLC. S-6042 AF (7/09)
Annual Report and Prospectus (RIVERSOURCE INVESTMENTS LOGO) RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND ANNUAL REPORT FOR THE PERIOD ENDED MAY 31, 2009 (Prospectus also enclosed) RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND SEEKS TO PROVIDE SHAREHOLDERS WITH CURRENT INCOME AS ITS PRIMARY OBJECTIVE AND, AS ITS SECONDARY OBJECTIVE, PRESERVATION OF CAPITAL. This annual report includes a prospectus that describes in detail the Fund's objective, investment strategy, risks, sales charges, fees and other matters of interest. Please read the prospectus carefully before you invest or send money. (SINGLE STRATEGY FUNDS ICON)
TABLE OF CONTENTS -------------------------------------------------------------- Your Fund at a Glance.............. 2 Manager Commentary................. 5 The Fund's Long-term Performance... 12 Fund Expenses Example.............. 14 Portfolio of Investments........... 16 Statement of Assets and Liabilities...................... 29 Statement of Operations............ 30 Statements of Changes in Net Assets........................... 31 Financial Highlights............... 32 Notes to Financial Statements...... 37 Report of Independent Registered Public Accounting Firm........... 53 Federal Income Tax Information..... 55 Board Members and Officers......... 56 Approval of Investment Management Services Agreement............... 60 Proxy Voting....................... 63
-------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT 1 YOUR FUND AT A GLANCE ---------------------------------------------------------- FUND SUMMARY -------------------------------------------------------------------------------- > RiverSource U.S. Government Mortgage Fund (the Fund) Class A shares rose 0.79% (excluding sales charge) for the 12 months ended May 31, 2009. > The Fund underperformed the Barclays Capital U.S. Mortgage-Backed Securities Index (Barclays Index), which gained 9.19% during the same period. > The Fund underperformed the Lipper U.S. Mortgage Funds Index, representing the Fund's peer group, which advanced 5.21% during the same time frame. ANNUALIZED TOTAL RETURNS (for period ended May 31, 2009) --------------------------------------------------------------------------------
Since inception 1 year 3 years 5 years 2/14/02 --------------------------------------------------------------------- RiverSource U.S. Government Mortgage Fund Class A (excluding sales charge) +0.79% +3.78% +3.43% +3.71% --------------------------------------------------------------------- Barclays Capital U.S. Mortgage- Backed Securities Index (unmanaged) +9.19% +7.89% +6.14% +5.58% --------------------------------------------------------------------- Lipper U.S. Mortgage Funds Index +5.21% +5.29% +4.26% +4.18% ---------------------------------------------------------------------
(See "The Fund's Long-term Performance" for Index descriptions) The performance information shown represents past performance and is not a guarantee of future results. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by contacting your financial intermediary or visiting riversource.com/funds. The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the table above. If reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. See the Average Annual Total Returns table for performance of other share classes of the Fund. The indices do not reflect the effects of sales charges, expenses (excluding Lipper) and taxes. It is not possible to invest directly in an index. -------------------------------------------------------------------------------- 2 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS --------------------------------------------------------------------------------
AT MAY 31, 2009 SINCE Without sales charge 1 YEAR 3 YEARS 5 YEARS INCEPTION Class A (inception 2/14/02) +0.79% +3.78% +3.43% +3.71% ---------------------------------------------------------------------- Class B (inception 2/14/02) +0.03% +2.93% +2.61% +2.94% ---------------------------------------------------------------------- Class C (inception 2/14/02) +0.03% +2.93% +2.62% +2.94% ---------------------------------------------------------------------- Class I (inception 3/4/04) +1.21% +4.18% +3.80% +3.35% ---------------------------------------------------------------------- Class R4 (inception 2/14/02) +2.82% +4.59% +3.99% +4.15% ---------------------------------------------------------------------- With sales charge Class A (inception 2/14/02) -4.00% +2.11% +2.43% +3.02% ---------------------------------------------------------------------- Class B (inception 2/14/02) -4.75% +1.70% +2.27% +2.94% ---------------------------------------------------------------------- Class C (inception 2/14/02) -0.92% +2.93% +2.62% +2.94% ----------------------------------------------------------------------
Class A share performance reflects the maximum sales charge of 4.75%. Class B share performance reflects a contingent deferred sales charge (CDSC) applied as follows: first year 5%; second and third* years 4%; fourth year 3%; fifth year 2%; sixth year 1%; no sales charge thereafter. Class C shares may be subject to a 1% CDSC if shares are sold within one year after purchase. Sales charges do not apply to Class I and Class R4 shares. Class I and Class R4 shares are available to institutional investors only. * For Class B shares purchased on or after June 13, 2009 the CDSC percentage for the third year will be 3%. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT 3 YOUR FUND AT A GLANCE (continued) ---------------------------------------------- STYLE MATRIX --------------------------------------------------------------------------------
DURATION SHORT INT. LONG X HIGH MEDIUM QUALITY LOW
Shading within the style matrix indicates areas in which the Fund is designed to generally invest. The style matrix can be a valuable tool for constructing and monitoring your portfolio. It provides a frame of reference for distinguishing the types of stocks or bonds owned by a mutual fund, and may serve as a guideline for helping you build a portfolio. Investment products, including shares of mutual funds, are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value. PORTFOLIO STATISTICS -------------------------------------------------------------------------------- Weighted average life(1) 4.0 years -------------------------------------- Effective duration(2) 2.5 years -------------------------------------- Weighted average bond rating(3) AAA --------------------------------------
ANNUAL OPERATING EXPENSE RATIO* (as of the current prospectus) --------------------------------------------------------------------------------
Total Net fund fund expenses expenses(a) ---------------------------------------- Class A 1.08% 0.89% ---------------------------------------- Class B 1.84% 1.65% ---------------------------------------- Class C 1.83% 1.65% ---------------------------------------- Class I 0.61% 0.47% ---------------------------------------- Class R4 0.89% 0.77% ----------------------------------------
(a) The Investment Manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until July 31, 2010, unless sooner terminated at the discretion of the Fund's Board. Any amounts waived will not be reimbursed by the Fund. Under this agreement, net fund expenses (excluding fees and expenses of acquired funds) will not exceed 0.89% for Class A, 1.65% for Class B, 1.65% for Class C, 0.47% for Class I and 0.77% for Class R4. (1) WEIGHTED AVERAGE LIFE measures a bond's maturity, which takes into consideration the possibility that the issuer may call the bond before its maturity date. (2) EFFECTIVE DURATION measures the sensitivity of a security's price to parallel shifts in the yield curve (the graphical depiction of the levels of interest rates from two years out to 30 years). Positive duration means that as rates rise, the price decreases, and negative duration means that as rates rise, the price increases. (3) WEIGHTED AVERAGE BOND RATING represents the average credit quality of the underlying bonds in the portfolio. * Fund expense ratios are calculated based on the fund's average net assets during the fund's most recently completed fiscal year, and have not been adjusted for current asset levels, including any decrease or increase in assets, which, if adjusted, would result in expense ratios that are higher or lower, respectively, than those that are expressed herein. Any fee waivers/expense caps would limit the impact that any decrease in assets will have on net expense ratios in the current fiscal year. Shares of the RiverSource U.S. Government Mortgage Fund are not insured or guaranteed by the U.S. government. There are risks associated with an investment in a bond fund, including the impact of interest rates and credit. These and other risk considerations are discussed in the fund's prospectus. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer- term securities. -------------------------------------------------------------------------------- 4 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT MANAGER COMMENTARY ------------------------------------------------------------- At May 31, 2009, approximately 67% of the Fund's shares were owned in the aggregate by affiliated funds-of-funds managed by RiverSource Investments, LLC (RiverSource). As a result of asset allocation decisions by RiverSource, it is possible that RiverSource U.S. Government Mortgage Fund may experience relatively large purchases or redemptions from affiliated funds-of-funds (see page 48, Class I capital share transactions for related activity during the most recent fiscal period). RiverSource seeks to minimize the impact of these transactions by structuring them over a reasonable period of time. RiverSource U.S. Government Mortgage Fund may experience increased expenses as it buys and sells securities as a result of purchases or redemptions by affiliated funds-of- funds. For more information on the Fund's expenses, see the discussions beginning on pages 14 and 44. Todd White replaced Scott Kirby as Portfolio Manager of RiverSource U.S. Government Mortgage Fund effective November 17, 2008. Jason Callan joined Mr. White as Co-Portfolio Manager of RiverSource U.S. Government Mortgage Fund effective April 21, 2009. Dear Shareholders, RiverSource U.S. Government Mortgage Fund (the Fund) Class A shares rose 0.79% (excluding sales charge) for the 12 months ended May 31, 2009. The Fund underperformed the Barclays Capital U.S. Mortgage-Backed Securities Index (Barclays Index), which gained 9.19% during the same period. The Fund also underperformed the Lipper U.S. Mortgage SECTOR DIVERSIFICATION (at May 31, 2009; % of portfolio assets) ---------------------------------------------------------------------
Asset-Backed 4.8% ------------------------------------------------ Commercial Mortgage-Backed 3.1% ------------------------------------------------ Consumer Discretionary 0.1% ------------------------------------------------ Energy 0.3% ------------------------------------------------ Industrials 0.1% ------------------------------------------------ Mortgage-Backed(1) 88.2% ------------------------------------------------ Telecommunication 0.6% ------------------------------------------------ Utilities 0.7% ------------------------------------------------ Other(2) 2.1% ------------------------------------------------
(1) Of the 88.2%, 17.6% is due to forward commitment mortgage-backed securities activity. Short-term securities are held as collateral for these commitments. (2) Cash & Cash Equivalents. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT 5 MANAGER COMMENTARY (continued) ------------------------------------------------- Funds Index, representing the Fund's peer group, which advanced 5.21% during the same time frame. SIGNIFICANT PERFORMANCE FACTORS The annual period ended May 31, 2009 was a tale of two halves for the mortgage market. During the first half, the mortgage market posted positive results -- but with returns of only about half that of posted Treasury returns. Mortgage securities, including high quality, premium coupon securities, were swept up in the bond market turmoil, as a wave of record-breaking bad economic news dominated and the flight to quality that began in the prior fiscal year intensified. Heightened fears, in turn, virtually froze liquidity. In response, the Federal Reserve Board (the Fed) lowered interest rates by an additional 100 basis points (1.00%) over these months. The Fed, along with the U.S. Treasury Department, also waged an aggressive campaign to stabilize credit markets and stimulate lending. Early in the period, mortgage-backed security spreads, or the difference in yields between these securities and Treasuries, widened to levels near the highest they had ever been, given ongoing deterioration in the housing market and continued interest rate volatility. Then, in September, amidst the demise of several global financial institutions, mortgage-backed securities actually performed reasonably well, generally keeping up with Treasury securities for the month. Mortgage-backed securities subsequently lagged Treasuries, but continued to perform well, QUALITY BREAKDOWN (at May 31, 2009; % of portfolio assets excluding cash equivalents) ---------------------------------------------------------------------
AAA bonds 96.0% ------------------------------------------------ AA bonds 0.6% ------------------------------------------------ A bonds 0.9% ------------------------------------------------ BBB bonds 1.3% ------------------------------------------------ Non-investment grade bonds 1.2% ------------------------------------------------
Bond ratings apply to the underlying holdings of the Fund and not the Fund itself. Whenever possible, the Standard and Poor's rating is used to determine the credit quality of a security. Standard and Poor's rates the creditworthiness of corporate bonds, with 15 categories, ranging from AAA (highest) to D (lowest). Ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories. If Standard and Poor's doesn't rate a security, then Moody's rating is used. RiverSource Investments, LLC, the Fund's investment manager, rates a security using an internal rating system when Moody's doesn't provide a rating. -------------------------------------------------------------------------------- 6 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- compared to other fixed income sectors through November. Commercial mortgage- backed securities (CMBS), on the other hand, lost nearly a third of their value during the first half of the fiscal year. The market for CMBS was particularly weak in November on fear that real estate investors would struggle to refinance their debt amidst tight credit conditions. During the second half of the annual period, strong government response, led by the Fed, the Treasury Department and the Federal Deposit Insurance Corporation (FDIC) served to stabilize and support the non-Treasury sectors of the fixed income market in general and the mortgage market in particular. Further, the economy was seen as bottoming, and, in turn, investor risk aversion ebbed. More specifically, the Fed reduced its targeted federal funds rate to a range of 0% to 0.25% and initiated quantitative easing measures -- purchasing Treasuries, agency debt and agency-issued mortgage-backed securities. The Fed initially announced it would buy $600 billion of agency-issued mortgage-backed securities alone -- a figure that was raised to $1.3 trillion in March. The creation of the Term Asset-Backed Securities Loan Facility (TALF), designed to increase the availability of consumer lending, and the introduction of the Public-Private Investment Program (PPIP) by the Treasury Department, proposed to further support asset prices of historically securitized products, further boosted the performance of both residential and commercial mortgage-backed securities. Overall, the performance of mortgage-backed securities became bifurcated for the annual period. The Fed's credit easing initiatives caused agency- All told, then, non-agency mortgage-backed securities experienced more dramatic price depreciation during the period than those mortgage securities backed by the federal government. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT 7 MANAGER COMMENTARY (continued) ------------------------------------------------- issued mortgage-backed securities to outperform Treasuries for the 12-month period as a whole, while poor fundamentals and a lack of Fed sponsorship caused non-agency-issued mortgage-backed securities to lag. Long-term interest rates were relatively stable throughout the annual period. Short-term interest rates, however, though pushed higher toward the end of the annual period, declined significantly overall during the 12 months. The Fund lagged the Barclays Index due primarily to its exposure to non-agency mortgage-backed securities during the first half of the annual period. These non-agency mortgage-backed securities, including both fixed-rate and adjustable- rate prime mortgages, were hurt both by a lack of liquidity due to massive deleveraging and by worsening housing fundamentals. The agency market was essentially guaranteed by the government, while the non-agency sector was left to falter. While the Fund's positions were primarily enhanced AAA-rated securities, lack of enough buyers in the market for these securities pushed yields well above 10%, contributing to the market loss. All told, non-agency mortgage-backed securities experienced more dramatic price depreciation during the first half of the period than those mortgage securities backed by the federal government. Similarly, the Fund's allocation to CMBS detracted from its results during the first half of the fiscal year, as spreads widened. The lack of buyers for these securities pushed yields to as high as 15%, even though fundamentals did not justify the valuations. Neither CMBS nor non-agency mortgage-backed securities are components of the Barclays Index, and the Fund's allocations to these poorly performing out-of-Index sectors hurt its results, relative to the Index, during the first half of the annual period. When we took over management of the Fund in mid-November, we rotated substantially out of non-agency mortgage-backed securities and re-positioned the Fund's exposure to CMBS, both of which helped the Fund's performance during the second half of the annual period. In addition to the implementation of these two strategies, our increase of the portfolio's allocation to agency mortgage-backed securities and our lengthening of its duration relative to the Barclays Index late in 2008 further boosted the Fund's performance during the second half of the -------------------------------------------------------------------------------- 8 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- annual period. Duration is a measure of the Fund's sensitivity to changes in interest rates. CHANGES TO THE FUND'S PORTFOLIO Since taking over management of the Fund in late 2008, we reduced the Fund's positions in non-agency mortgage-backed securities, CMBS, structured agency assets, and higher coupon mortgage securities. We correspondingly increased the Fund's exposure to lower coupon agency mortgages and, as mentioned, lengthened the Fund's duration. Toward the end of the annual period, we shifted the Fund's duration back to a more neutral position relative to the Barclays Index, given our view ahead for the economy and for interest rates. The Fund's portfolio turnover rate for the 12-month period was 431%.* * A significant portion of the turnover was the result of rolling-maturity mortgage securities, processing of prepayments and opportunistic changes we made at the margin in response to valuations or market developments. OUR FUTURE STRATEGY Over the last few months of the annual period, we saw signs of stabilization in some areas of the economy, as nightmares of a coordinated collapse of the banking system subsided. As asset prices improved from their lows, so, too, did the lending environment, with corporate bond issuance increasing meaningfully. It seemed, at the end of May, that the vicious cycle of declining confidence, spending and market values finally abated as nascent signs of optimism emerged. Looking forward, we expect further signs of stabilization through the end of the second quarter and gradual expansion during the second half of the year. We believe that Gross Domestic Product (GDP) is likely to grow at a below trend rate of approximately 1% during the second half of 2009, though with a cautionary note that the recovery may stall at some point during those months. We expect labor markets to lag, with the unemployment rate not peaking until the fourth quarter or beyond -- although we believe peak job losses are likely behind us. If the recovery in the economy and in financial market conditions is real, there is a likelihood that the Fed may reduce some of the quantitative easing measures it has put in place. On the one hand, this may calm concerns that such measures may lead to inflation. On the other hand, the -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT 9 MANAGER COMMENTARY (continued) ------------------------------------------------- Fed's reduction of its quantitative measures could add substantial volatility to the mortgage market once again. When interest rates were lower, the Fed was the buyer of last resort for mortgages. However, as long-term interest rates rose late in the period, it appears that the Fed will not be able to support the resulting lengthened duration in the mortgage market at its current pace of purchase. Any reduction in its rate of purchase of mortgage securities would only exacerbate market concerns. In our view, while some sectors of the economy have indeed improved, we believe we are still a long way from stabilization in both commercial and residential real estate prices. Therefore, until we see the true direction of the economy, we intend to position the Fund fairly conservatively (on a relative basis). We currently intend to maintain the Fund's neutral-to-the-Barclays Index duration. We further intend to maintain our focus on the purchase of mortgage-backed securities issued by U.S. government agencies that we believe will be targeted for ongoing purchase by the U.S. Treasury and the Fed. These are primarily lower coupon agency 30-year mortgage-backed securities, which should benefit from the government's announced massive buying programs. As always, our strategy is to look to provide added portfolio value with a moderate amount of risk. Quality issues and security selection remain a priority as we continue to seek attractive buying opportunities. Todd White Jason Callan Portfolio Manager Co-Portfolio Manager
Any specific securities mentioned are for illustrative purposes only and are not a complete list of securities that have increased or decreased in value. The views expressed in this statement reflect those of the portfolio manager(s) only through the end of the period of the report as stated on the cover and do not necessarily represent the views of RiverSource Investments, LLC (RiverSource) or any subadviser to the Fund or any other person in the RiverSource or subadviser organizations. Any such views are subject to change at any time based upon market or other conditions and RiverSource disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a RiverSource fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any RiverSource fund. -------------------------------------------------------------------------------- 10 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT THIS PAGE LEFT BLANK INTENTIONALLY THE FUND'S LONG-TERM PERFORMANCE ----------------------------------------------- The chart on the facing page illustrates the total value of an assumed $10,000 investment in RiverSource U.S. Government Mortgage Fund Class A shares (from 2/14/02 to 5/31/09) as compared to the performance of two widely cited performance indices, the Barclays Capital U.S. Mortgage-Backed Securities Index and the Lipper U.S. Mortgage Funds Index. In comparing the Fund's Class A shares to these indices, you should take into account the fact that the Fund's performance reflects the maximum sales charge of 4.75%, while such charges are not reflected in the performance of the indices. Returns for the Fund include the reinvestment of any distributions paid during each period. The performance information shown represents past performance and is not a guarantee of future results. The table below and the chart on the facing page do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by contacting your financial intermediary or visiting riversource.com/funds. Also see "Past Performance" in the Fund's current prospectus. COMPARATIVE RESULTS --------------------------------------------------------------------------------
Results at May 31, 2009 SINCE INCEPTION 1 YEAR 3 YEARS 5 YEARS 2/14/2002 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND (INCLUDES SALES CHARGE) Class A Cumulative value of $10,000 $9,600 $10,647 $11,274 $12,425 ------------------------------------------------------------------------------------------- Average annual total return -4.00% +2.11% +2.43% +3.02% ------------------------------------------------------------------------------------------- BARCLAYS CAPITAL U.S. MORTGAGE-BACKED SECURITIES INDEX(1) Cumulative value of $10,000 $10,919 $12,558 $13,473 $14,857 ------------------------------------------------------------------------------------------- Average annual total return +9.19% +7.89% +6.14% +5.58% ------------------------------------------------------------------------------------------- LIPPER U.S. MORTGAGE FUNDS INDEX(2) Cumulative value of $10,000 $10,521 $11,672 $12,317 $13,479 ------------------------------------------------------------------------------------------- Average annual total return +5.21% +5.29% +4.26% +4.18% -------------------------------------------------------------------------------------------
Results for other share classes can be found on page 3. -------------------------------------------------------------------------------- 12 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- (VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND LINE GRAPH)
RIVERSOURCE U.S. GOVERNMENT MORTGAGE BARCLAYS CAPITAL FUND CLASS FIXED RATE LIPPER U.S. A (INCLUDES MORTGAGE BACKED MORTGAGE FUNDS SALES CHARGE) SECURITIES INDEX(1) INDEX(2) ------------------- ------------------- -------------- 2/14/02 $ 9,525 $10,000 $10,000 2/02 9,574 10,056 10,054 5/02 9,692 10,212 10,183 8/02 9,961 10,496 10,475 11/02 10,080 10,603 10,553 2/03 10,282 10,812 10,755 5/03 10,364 10,867 10,802 8/03 10,239 10,757 10,718 11/03 10,406 10,925 10,860 2/04 10,667 11,205 11,101 5/04 10,496 11,029 10,945 8/04 10,813 11,399 11,229 11/04 10,869 11,480 11,280 2/05 10,933 11,569 11,341 5/05 11,103 11,766 11,523 8/05 11,170 11,853 11,607 11/05 11,075 11,747 11,506 2/06 11,242 11,956 11,646 5/06 11,116 11,833 11,548 8/06 11,434 12,201 11,871 11/06 11,682 12,517 12,175 2/07 11,785 12,644 12,279 5/07 11,817 12,667 12,277 8/07 11,931 12,848 12,391 11/07 12,219 13,306 12,727 2/08 13,351 13,592 12,916 5/08 12,326 13,608 12,813 8/08 12,091 13,751 12,789 11/08 11,831 14,271 12,785 2/09 12,013 14,565 13,096 5/09 12,425 14,857 13,479
(1) The Barclays Capital U.S. Mortgage-Backed Securities Index, an unmanaged index, includes 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and Federal National Mortgage Association (FNMA). The index reflects reinvestment of all distributions and changes in market prices. (2) The Lipper U.S. Mortgage Funds Index includes the 10 largest U.S. mortgage funds tracked by Lipper Inc. The index's returns include net reinvested dividends. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT 13 FUND EXPENSES EXAMPLE --------------------------------------------------------- (UNAUDITED) As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments; and (2) ongoing costs, which may include management fees; distribution and service (12b-1) fees; and other Fund fees and expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. In addition to the ongoing expenses which the Fund bears directly, the Fund's shareholders indirectly bear the expenses of the funds in which it invests (also referred to as "acquired funds"), including affiliated and non-affiliated pooled investment vehicles (including mutual funds and exchange traded funds). The Fund's indirect expense from investing in the acquired funds is based on the Fund's pro rata portion of the cumulative expenses charged by the acquired funds using the expense ratio of each of the acquired funds as of the acquired fund's most recent shareholder report. The example is based on an investment of $1,000 invested at the beginning of the period and held for the six months ended May 31, 2009. ACTUAL EXPENSES The first line of the table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading titled "Expenses paid during the period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of the table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads). Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. -------------------------------------------------------------------------------- 14 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT --------------------------------------------------------------------------------
BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED DEC. 1, 2008 MAY 31, 2009 THE PERIOD(A) EXPENSE RATIO ------------------------------------------------------------------------------------------ Class A ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,050.20 $4.55(c) .89% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,020.49 $4.48(c) .89% ------------------------------------------------------------------------------------------ Class B ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,046.20 $8.42(c) 1.65% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,016.70 $8.30(c) 1.65% ------------------------------------------------------------------------------------------ Class C ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,046.20 $8.42(c) 1.65% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,016.70 $8.30(c) 1.65% ------------------------------------------------------------------------------------------ Class I ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,054.60 $2.46(c) .48% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,022.54 $2.42(c) .48% ------------------------------------------------------------------------------------------ Class R4 ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,053.30 $3.84(c) .75% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,021.19 $3.78(c) .75% ------------------------------------------------------------------------------------------
(a) Expenses are equal to the annualized expense ratio for each class as indicated above, multiplied by the average account value over the period, multiplied by 182/365 (to reflect the one-half year period). (b) Based on the actual return for the six months ended May 31, 2009: +5.02% for Class A, +4.62% for Class B, +4.62% for Class C, +5.46% for Class I and +5.33% for Class R4. (c) The Investment Manager and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until July 31, 2010, unless sooner terminated at the discretion of the Fund's Board, such that net expenses (excluding fees and expenses of acquired funds), will not exceed 0.89% for Class A, 1.65% for Class B, 1.65% for Class C, 0.47% for Class I and 0.77% for Class R4. Any amounts waived will not be reimbursed by the Fund. This change was effective June 1, 2009. Had this change been in place for the entire six month period ended May 31, 2009, the actual expenses paid would have been $2.41 for Class I and $3.94 for Class R4; the hypothetical expenses paid would have been $2.37 for Class I and $3.88 for Class R4. The actual and hypothetical expenses for Class A, Class B and Class C would have been the same as those expenses presented in the table above. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT 15 PORTFOLIO OF INVESTMENTS ------------------------------------------------------ MAY 31, 2009 (Percentages represent value of investments compared to net assets) INVESTMENTS IN SECURITIES
BONDS (119.1%) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) ASSET-BACKED (5.8%) Asset Backed Securities Corp Home Equity Series 2005-HE2 Cl M1 02-25-35 0.76% $1,225,764(h) $966,407 Credit-Based Asset Servicing and Securitization LLC Series 2006-RP2 Cl A1 07-25-36 0.46 309,698(d,h) 287,973 Deutsche Mtge Securities Collateralized Mtge Obligation Series 2009-RS2 Cl 4A1 04-25-37 0.44 1,795,000(d,g) 1,543,700 First Franklin Mtge Loan Asset Backed Ctfs Series 2005-FF2 Cl A2C 03-25-35 0.62 357,051(h) 328,397 First Franklin Mtge Loan Asset-backed Ctfs Series 2005-FFH3 Cl 2A3 09-25-35 0.72 581,706(h) 531,941 First Franklin Mtge Loan Asset-backed Ctfs Series 2006-FF18 Cl A2A 12-25-37 0.38 745,285(h) 698,808 GSAMP Trust Series 2006-HE8 Cl A2A 01-25-37 0.38 2,111,328(h) 1,875,413 JPMorgan Mtge Acquisition Corp Series 2006-HE2 Cl A3 07-25-36 0.53 1,616,800(h) 1,395,362 JPMorgan Mtge Acquisition Corp Series 2006-RM1 Cl A2 08-25-36 0.39 341,327(h) 294,327 JPMorgan Mtge Acquisition Corp Series 2006-WMC3 Cl A2 08-25-36 0.36 64,154(h) 61,325 Long Beach Mtge Loan Trust Series 2006-4 Cl 2A2 05-25-36 0.41 788,257(h) 745,775 MASTR Asset Backed Securities Trust Series 2005-FRE1 Cl A4 10-25-35 0.56 613,947(h) 528,131 NovaStar Home Equity Loan Series 2006-4 Cl A2A (MGIC) 09-25-36 0.35 1,078,828(h,n) 1,022,417 Novistar Home Equity Loan Series 2007-2 Cl A2A 09-25-37 0.40 1,552,906(h) 1,285,690 RAAC Series Series 2006-SP4 Cl A1 11-25-36 0.41 1,554,217(h) 1,321,625 Renaissance Home Equity Loan Trust Series 2006-4 Cl AF1 01-25-37 5.55 132,416 127,736 Renaissance Home Equity Loan Trust Series 2007-2 Cl M4 06-25-37 6.31 195,000(k) 9,066 Renaissance Home Equity Loan Trust Series 2007-2 Cl M5 06-25-37 6.66 130,000(k) 5,301 Renaissance Home Equity Loan Trust Series 2007-2 Cl M6 06-25-37 7.01 190,000(k) 6,581 Residential Asset Mtge Products Series 2006-EFC1 Cl A2 02-25-36 0.51 537,998(h) 428,991 Residential Asset Securities Series 2007-KS3 Cl AI2 04-25-37 0.49 1,700,000(h) 914,001 Resmae Mtge Loan Trust Series 2006-1 Cl A2A 02-25-36 0.41 155,118(d,h) 152,350 Soundview Home Equity Loan Trust Series 2008-1 Cl A1 (FSA) 02-25-38 1.81 1,376,499(d,h,n) 982,944 Structured Asset Investment Loan Trust Series 2005-9 Cl A5 11-25-35 0.54 1,738,813(h) 1,480,598
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 16 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT --------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) ASSET-BACKED (CONT.) Structured Asset Securities Corp Collateralized Mtge Obligation Series 2006-NC1 Cl A6 05-25-36 0.36% $465,515(g) $431,898 Structured Asset Securities Corp Series 2007-BC1 Cl A2 02-25-37 0.36 1,985,383(h) 1,793,962 --------------- Total 19,220,719 ------------------------------------------------------------------------------------- COMMERCIAL MORTGAGE-BACKED (3.7%)(f) Citigroup/Deutsche Bank Commercial Mtge Trust Series 2007-CD4 Cl A2B 12-11-49 5.21 3,000,000 2,782,149 Crown Castle Towers LLC Series 2005-1A Cl AFX 06-15-35 4.64 3,450,000(d) 3,363,750 Federal Home Loan Mtge Corp Multifamily Structured Pass-Through Ctfs Series K001 Cl A2 04-25-16 5.65 1,816,232 1,978,088 GS Mtge Securities II Series 2007-EOP Cl J 03-06-20 1.26 1,000,000(d,h) 640,382 LB-UBS Commercial Mtge Trust Series 2004-C6 Cl A6 08-15-29 5.02 2,000,000 1,713,264 Wachovia Bank Commercial Mtge Trust Series 2003-C7 Cl A2 10-15-35 5.08 2,000,000(d) 1,868,364 --------------- Total 12,345,997 ------------------------------------------------------------------------------------- MORTGAGE-BACKED (107.4%)(f,m) American Home Mtge Assets Collateralized Mtge Obligation Series 2007-2 Cl A2A 03-25-47 0.47 1,167,530(g) 277,464 American Home Mtge Investment Trust Collateralized Mtge Obligation Series 2007-1 Cl GA1C 05-25-47 0.50 1,740,999(g) 677,608 Banc of America Alternative Loan Trust Collateralized Mtge Obligation Series 2003-11 Cl 1A1 01-25-34 6.00 487,048 438,689 Banc of America Funding Collateralized Mtge Obligation Series 2007-8 Cl 1A1 10-25-37 6.00 904,976 485,859 ChaseFlex Trust Collateralized Mtge Obligation Series 2005-2 Cl 2A2 06-25-35 6.50 501,901 434,301 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Interest Only Series 2007-8CB Cl A13 05-25-37 24.86 1,625,925(j) 212,538 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2003-20CB Cl 1A1 10-25-33 5.50 4,347,854 3,484,737 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-50CB Cl 2A1 11-25-35 6.00 860,378 484,937 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-6CB Cl 1A1 04-25-35 7.50 315,654 204,610 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-45T1 Cl 2A5 02-25-37 6.00 473,741 249,602 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2007-25 Cl 1A1 11-25-37 6.50 859,937 476,761 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2007-OA9 Cl A2 06-25-47 0.66 1,190,054(h) 292,825 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2007-OH3 Cl A3 09-25-47 0.81 1,753,979(h) 185,940
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT 17 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) MORTGAGE-BACKED (CONT.) Countrywide Home Loans Collateralized Mtge Obligation Series 2005-R2 Cl 2A1 06-25-35 7.00% $410,865(d) $327,408 Countrywide Home Loans Collateralized Mtge Obligation Series 2006-HYB1 Cl 1A1 03-20-36 5.32 377,303(g) 177,336 Credit Suisse Mtge Capital Ctfs Collateralized Mtge Obligation Series 2009-2R Cl 1A16 09-26-34 3.69 15,000,000(d,e,g) 1,650,000 Federal Home Loan Mtge Corp #G05058 12-01-38 6.00 3,758,395 3,935,298 Federal Home Loan Mtge Corp 06-01-39 4.50 3,000,000(e) 3,017,814 06-01-39 5.00 8,000,000(e) 8,182,496 06-01-39 5.50 2,500,000(e) 2,582,030 06-01-39 6.00 8,400,000(e) 8,785,879 06-01-39 6.50 1,000,000(e) 1,064,062 Federal Home Loan Mtge Corp #1B7116 08-01-36 5.90 3,548,320(g) 3,705,230 Federal Home Loan Mtge Corp #1J0149 11-01-36 6.09 1,865,539(g) 1,958,325 Federal Home Loan Mtge Corp #1J1621 05-01-37 5.87 2,621,251(g) 2,741,777 Federal Home Loan Mtge Corp #555300 10-01-17 8.00 160,074 170,769 Federal Home Loan Mtge Corp #A10892 07-01-33 6.00 512,747 539,642 Federal Home Loan Mtge Corp #A15111 10-01-33 6.00 716,474 754,604 Federal Home Loan Mtge Corp #A21059 04-01-34 6.50 437,582 468,354 Federal Home Loan Mtge Corp #A25174 08-01-34 6.50 293,967 314,639 Federal Home Loan Mtge Corp #A83607 12-01-38 5.50 6,031,377 6,236,105 Federal Home Loan Mtge Corp #C53098 06-01-31 8.00 233,475 256,358 Federal Home Loan Mtge Corp #C53878 12-01-30 5.50 784,879 815,275 Federal Home Loan Mtge Corp #C68876 07-01-32 7.00 129,031 139,145 Federal Home Loan Mtge Corp #C69665 08-01-32 6.50 1,873,794 2,014,934 Federal Home Loan Mtge Corp #C79930 06-01-33 5.50 1,126,995 1,169,539 Federal Home Loan Mtge Corp #D95232 03-01-22 6.50 220,857 237,503 Federal Home Loan Mtge Corp #D95371 04-01-22 6.50 258,768 278,899 Federal Home Loan Mtge Corp #E81240 06-01-15 7.50 505,408 537,356 Federal Home Loan Mtge Corp #E88036 02-01-17 6.50 841,613 891,397 Federal Home Loan Mtge Corp #E88468 12-01-16 6.50 204,932 219,427 Federal Home Loan Mtge Corp #E89232 04-01-17 7.00 389,415 415,306 Federal Home Loan Mtge Corp #E92454 11-01-17 5.00 1,107,570 1,155,286 Federal Home Loan Mtge Corp #E93685 01-01-18 5.50 904,222 950,241 Federal Home Loan Mtge Corp #E99684 10-01-18 5.00 298,465 309,542 Federal Home Loan Mtge Corp #G01169 01-01-30 5.50 1,208,730 1,255,870 Federal Home Loan Mtge Corp #G01535 04-01-33 6.00 1,722,269 1,831,143 Federal Home Loan Mtge Corp #G02757 06-01-36 5.00 7,317,302 7,501,759 Federal Home Loan Mtge Corp #G03419 07-01-37 6.00 4,010,927 4,199,942 Federal Home Loan Mtge Corp #G12101 11-01-18 5.00 606,238 632,355 Federal Home Loan Mtge Corp #G03180 08-01-37 5.00 9,534,691 9,764,616 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2471 Cl SI 03-15-32 52.06 227,689(j) 22,424
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 18 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT --------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) MORTGAGE-BACKED (CONT.) Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2639 Cl UI 03-15-22 14.96% $882,813(j) $86,639 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2795 Cl IY 07-15-17 82.15 279,960(j) 7,922 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2817 Cl SA 06-15-32 45.09 710,503(j) 54,453 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2824 Cl EI 09-15-20 49.66 1,762,683(j) 52,767 Federal Natl Mtge Assn 06-01-39 4.50 19,100,000(e) 19,243,251 06-01-39 5.50 10,000,000(e) 10,337,501 Federal Natl Mtge Assn #190353 08-01-34 5.00 1,392,337 1,429,770 Federal Natl Mtge Assn #252409 03-01-29 6.50 1,087,936 1,169,665 Federal Natl Mtge Assn #254759 06-01-18 4.50 1,562,822 1,616,039 Federal Natl Mtge Assn #254793 07-01-33 5.00 1,859,149 1,910,876 Federal Natl Mtge Assn #254916 09-01-23 5.50 1,500,390 1,561,489 Federal Natl Mtge Assn #256135 02-01-36 5.50 6,398,166 6,605,440 Federal Natl Mtge Assn #313470 08-01-10 7.50 49,064 49,928 Federal Natl Mtge Assn #323362 11-01-28 6.00 2,111,761 2,236,926 Federal Natl Mtge Assn #323715 05-01-29 6.00 395,252 418,678 Federal Natl Mtge Assn #344909 04-01-25 8.00 537,219 587,522 Federal Natl Mtge Assn #357514 03-01-34 5.50 1,948,064 2,022,739 Federal Natl Mtge Assn #483691 12-01-28 7.00 1,043,911 1,161,673 Federal Natl Mtge Assn #487757 09-01-28 7.50 659,028 726,472 Federal Natl Mtge Assn #514704 01-01-29 6.00 464,561 492,096 Federal Natl Mtge Assn #545008 06-01-31 7.00 1,241,795 1,365,007 Federal Natl Mtge Assn #545339 11-01-31 6.50 195,865 212,380 Federal Natl Mtge Assn #545818 07-01-17 6.00 1,819,622 1,921,098 Federal Natl Mtge Assn #545864 08-01-17 5.50 1,062,646 1,117,619 Federal Natl Mtge Assn #555458 05-01-33 5.50 1,447,857 1,498,083 Federal Natl Mtge Assn #555528 04-01-33 6.00 1,672,023 1,766,945 Federal Natl Mtge Assn #555734 07-01-23 5.00 614,657 633,430 Federal Natl Mtge Assn #581418 06-01-31 7.00 774,433 847,660 Federal Natl Mtge Assn #583088 06-01-29 6.00 2,407,612 2,574,761 Federal Natl Mtge Assn #592270 01-01-32 6.50 574,177 617,789 Federal Natl Mtge Assn #596505 08-01-16 6.50 118,398 126,438 Federal Natl Mtge Assn #601416 11-01-31 6.50 278,774 302,360 Federal Natl Mtge Assn #624979 01-01-32 6.00 564,510 600,486 Federal Natl Mtge Assn #626670 03-01-32 7.00 479,783 532,364 Federal Natl Mtge Assn #627426 03-01-17 6.50 380,927 406,813 Federal Natl Mtge Assn #630992 09-01-31 7.00 1,503,596 1,672,750 Federal Natl Mtge Assn #630993 09-01-31 7.50 1,602,478 1,769,710
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT 19 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #631388 05-01-32 6.50% $1,387,290 $1,506,993 Federal Natl Mtge Assn #632856 03-01-17 6.00 364,269 384,267 Federal Natl Mtge Assn #633674 06-01-32 6.50 802,900 873,741 Federal Natl Mtge Assn #635231 04-01-32 7.00 73,036 79,941 Federal Natl Mtge Assn #635908 04-01-32 6.50 995,342 1,080,757 Federal Natl Mtge Assn #636812 04-01-32 7.00 101,424 111,397 Federal Natl Mtge Assn #640200 10-01-31 9.50 100,838 114,778 Federal Natl Mtge Assn #640207 03-01-17 7.00 35,221 36,483 Federal Natl Mtge Assn #640208 04-01-17 7.50 41,716 42,938 Federal Natl Mtge Assn #644805 05-01-32 7.00 834,187 916,250 Federal Natl Mtge Assn #645053 05-01-32 7.00 508,950 555,589 Federal Natl Mtge Assn #646189 05-01-32 6.50 341,130(l) 367,504 Federal Natl Mtge Assn #654071 09-01-22 6.50 467,619 502,765 Federal Natl Mtge Assn #654685 11-01-22 6.00 479,934 507,564 Federal Natl Mtge Assn #655635 08-01-32 6.50 662,522 719,688 Federal Natl Mtge Assn #656514 09-01-17 6.50 894,056 954,143 Federal Natl Mtge Assn #660186 11-01-32 6.00 1,953,064 2,084,276 Federal Natl Mtge Assn #665752 09-01-32 6.50 1,054,195 1,135,698 Federal Natl Mtge Assn #667302 01-01-33 7.00 490,794 538,920 Federal Natl Mtge Assn #670382 09-01-32 6.00 949,925 1,003,853 Federal Natl Mtge Assn #676683 12-01-32 6.00 1,041,809 1,100,953 Federal Natl Mtge Assn #677089 01-01-33 5.50 481,584(l) 500,496 Federal Natl Mtge Assn #677294 01-01-33 6.00 1,208,860(l) 1,277,488 Federal Natl Mtge Assn #681080 02-01-18 5.00 644,323 671,790 Federal Natl Mtge Assn #682229 03-01-33 5.50 3,697,675 3,842,886 Federal Natl Mtge Assn #684585 02-01-33 5.50 1,250,111 1,305,956 Federal Natl Mtge Assn #684843 02-01-18 5.50 1,239,438 1,304,270 Federal Natl Mtge Assn #684853 03-01-33 6.50 210,990 226,873 Federal Natl Mtge Assn #688002 03-01-33 5.50 1,181,143 1,231,183 Federal Natl Mtge Assn #689026 05-01-33 5.50 342,519 357,512 Federal Natl Mtge Assn #689093 07-01-28 5.50 854,933 893,316 Federal Natl Mtge Assn #694628 04-01-33 5.50 1,790,532 1,874,190 Federal Natl Mtge Assn #694795 04-01-33 5.50 2,167,890 2,269,549 Federal Natl Mtge Assn #695460 04-01-18 5.50 1,598,165 1,681,742 Federal Natl Mtge Assn #697145 03-01-23 5.50 989,609 1,034,107 Federal Natl Mtge Assn #699424 04-01-33 5.50 1,393,595 1,459,000 Federal Natl Mtge Assn #701101 04-01-33 6.00 1,821,885 1,923,038 Federal Natl Mtge Assn #704610 06-01-33 5.50 1,787,461 1,855,981 Federal Natl Mtge Assn #705655 05-01-33 5.00 640,171 657,982 Federal Natl Mtge Assn #708503 05-01-33 6.00 262,826 279,462 Federal Natl Mtge Assn #708504 05-01-33 6.00 557,745(l) 593,214 Federal Natl Mtge Assn #710780 05-01-33 6.00 188,988 199,481
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 20 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT --------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #711206 05-01-33 5.50% $1,040,946 $1,080,849 Federal Natl Mtge Assn #711239 07-01-33 5.50 524,371 544,472 Federal Natl Mtge Assn #711501 05-01-33 5.50 663,529 695,367 Federal Natl Mtge Assn #723771 08-01-28 5.50 697,797 729,125 Federal Natl Mtge Assn #725017 12-01-33 5.50 2,505,862 2,623,873 Federal Natl Mtge Assn #725232 03-01-34 5.00 1,465,790 1,506,573 Federal Natl Mtge Assn #725424 04-01-34 5.50 7,855,423 8,156,548 Federal Natl Mtge Assn #725425 04-01-34 5.50 2,270,930 2,356,710 Federal Natl Mtge Assn #725684 05-01-18 6.00 580,388 616,621 Federal Natl Mtge Assn #725773 09-01-34 5.50 1,573,886 1,633,234 Federal Natl Mtge Assn #726940 08-01-23 5.50 1,139,860 1,193,666 Federal Natl Mtge Assn #730153 08-01-33 5.50 582,009 604,319 Federal Natl Mtge Assn #733367 08-01-23 5.50 847,783 888,039 Federal Natl Mtge Assn #735212 12-01-34 5.00 7,850,664 8,061,732 Federal Natl Mtge Assn #735841 11-01-19 4.50 4,990,662 5,154,364 Federal Natl Mtge Assn #743524 11-01-33 5.00 1,648,418 1,694,282 Federal Natl Mtge Assn #743579 11-01-33 5.50 1,403,448 1,457,247 Federal Natl Mtge Assn #745275 02-01-36 5.00 3,164,409 3,247,508 Federal Natl Mtge Assn #745355 03-01-36 5.00 3,304,360 3,391,134 Federal Natl Mtge Assn #747339 10-01-23 5.50 1,029,629 1,078,285 Federal Natl Mtge Assn #753507 12-01-18 5.00 781,935 811,530 Federal Natl Mtge Assn #759342 01-01-34 6.50 350,860 379,424 Federal Natl Mtge Assn #770403 04-01-34 5.00 1,337,034 1,372,981 Federal Natl Mtge Assn #776962 04-01-29 5.00 1,198,202 1,238,953 Federal Natl Mtge Assn #779676 06-01-34 5.00 2,281,807 2,343,154 Federal Natl Mtge Assn #785506 06-01-34 5.00 4,882,506 5,013,774 Federal Natl Mtge Assn #793622 09-01-34 5.50 5,448,938 5,654,408 Federal Natl Mtge Assn #797232 09-01-34 5.50 5,381,965 5,584,910 Federal Natl Mtge Assn #826585 08-01-35 5.00 2,055,481 2,109,459 Federal Natl Mtge Assn #841764 07-01-35 5.50 3,716,778 3,853,447 Federal Natl Mtge Assn #845109 05-01-36 6.00 5,076,462 5,324,997 Federal Natl Mtge Assn #869867 04-01-21 5.50 3,419,241 3,574,028 Federal Natl Mtge Assn #878661 02-01-36 5.50 1,741,405 1,789,837 Federal Natl Mtge Assn #881629 02-01-36 5.50 1,139,279 1,170,965 Federal Natl Mtge Assn #886020 07-01-36 6.50 897,193 968,780 Federal Natl Mtge Assn #886291 07-01-36 7.00 655,786 715,395 Federal Natl Mtge Assn #888414 11-01-35 5.00 3,490,547 3,582,210 Federal Natl Mtge Assn #893101 10-01-36 6.50 2,470,258 2,635,379 Federal Natl Mtge Assn #902818 11-01-36 5.91 2,621,523(g) 2,731,627 Federal Natl Mtge Assn #928046 01-01-37 6.00 3,224,195 3,382,046 Federal Natl Mtge Assn #928870 11-01-37 8.50 215,499 235,823 Federal Natl Mtge Assn #933966 07-01-23 6.00 2,270,436 2,398,277
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT 21 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #933985 08-01-23 5.50% $1,805,781 $1,886,579 Federal Natl Mtge Assn #941285 06-01-37 6.00 3,879,967 4,066,892 Federal Natl Mtge Assn #960606 10-01-36 5.50 3,245,178 3,367,548 Federal Natl Mtge Assn #984458 05-01-38 6.00 4,107,633 4,305,296 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-119 Cl GI 12-25-33 10.48 449,449(j) 73,633 12-25-33 10.74 256,728(j) 42,059 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-63 Cl IP 07-25-33 29.02 1,683,127(j) 175,344 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-71 Cl IM 12-25-31 22.49 389,413(j) 32,973 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2004-84 Cl GI 12-25-22 27.35 158,055(j) 10,200 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2005-70 Cl YJ 08-25-35 129.13 1,869,992(j) 44,986 Govt Natl Mtge Assn 06-01-39 4.50 10,000,000(e) 10,087,501 06-01-39 5.00 7,000,000(e) 7,201,250 Govt Natl Mtge Assn #3931 12-20-36 6.00 3,262,467 3,407,983 Govt Natl Mtge Assn #518371 02-15-30 7.00 117,064 127,828 Govt Natl Mtge Assn #528344 03-15-30 7.00 284,298 310,439 Govt Natl Mtge Assn #556293 12-15-31 6.50 337,251 361,870 Govt Natl Mtge Assn #583182 02-15-32 6.50 551,120 590,663 Govt Natl Mtge Assn #595256 12-15-32 6.00 281,382 296,524 Govt Natl Mtge Assn #619613 09-15-33 5.00 1,110,411 1,148,651 Govt Natl Mtge Assn #646077 12-15-37 6.00 427,182 447,099 Govt Natl Mtge Assn #656213 08-15-36 6.00 442,807 463,176 Govt Natl Mtge Assn #673220 10-15-38 6.00 425,102 444,524 Govt Natl Mtge Assn #677322 09-15-38 6.00 270,675 283,042 Govt Natl Mtge Assn #684307 02-15-38 6.00 416,665 435,701 Govt Natl Mtge Assn #691269 07-15-38 6.00 137,680 143,971 Govt Natl Mtge Assn #699075 09-15-38 6.00 435,208 455,092 Govt Natl Mtge Assn #699837 01-15-39 6.00 444,750 465,070 IndyMac Index Mtge Loan Trust Collateralized Mtge Obligation Interest Only Series 2005-AR8 Cl AX1 04-25-35 0.00 4,902,377(b,i,j) -- IndyMac Index Mtge Loan Trust Collateralized Mtge Obligation Interest Only Series 2006-AR25 Cl 3A3 09-25-36 6.72 9,803,607(j) 101,255 JPMorgan Mtge Trust Collateralized Mtge Obligation Series 2004-S2 4A5 11-25-34 6.00 854,202 650,161 Lehman XS Trust Collateralized Mtge Obligation Series 2007-5H Cl 1A1 05-25-37 6.50 4,530,769 2,108,224
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 22 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT --------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) MORTGAGE-BACKED (CONT.) MASTR Alternative Loan Trust Collateralized Mtge Obligation Series 2004-7 Cl 8A1 08-25-19 5.00% $298,277 $276,572 MASTR Alternative Loan Trust Collateralized Mtge Obligation Series 2004-8 Cl 7A1 09-25-19 5.00 421,873 377,230 MASTR Alternative Loan Trust Collateralized Mtge Obligation Series 2005-3 Cl 1A2 04-25-35 5.50 1,537,000 986,143 Nomura Asset Acceptance Corp Collateralized Mtge Obligation Series 2006-AF1 Cl 1A1A 05-25-36 0.41 1,416,424(h) 947,427 Residential Accredit Loans Collateralized Mtge Obligation Series 2002-QS14 Cl A12 09-25-32 5.50 2,578,849 2,116,280 Structured Asset Securities Collateralized Mtge Obligation Series 2003-33H Cl 1A1 10-25-33 5.50 520,617 474,534 Washington Mutual Alternative Mtge Pass-Through Ctfs Collateralized Mtge Obligation Series 2006-5 Cl 3A1B 07-25-36 0.37 728,945(h) 659,776 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2006-AR12 Cl 2A1 09-25-36 6.10 1,827,838(g) 1,254,566 --------------- Total 353,124,923 ------------------------------------------------------------------------------------- ELECTRIC (0.3%) FirstEnergy Sr Unsecured Series B 11-15-11 6.45 245,000 256,056 NiSource Finance 11-15-10 7.88 660,000 671,641 --------------- Total 927,697 ------------------------------------------------------------------------------------- GAS PIPELINES (0.6%) CenterPoint Energy Resources Sr Unsecured 02-15-11 7.75 400,000 415,797 Northern Natural Gas Sr Unsecured 06-01-11 7.00 500,000(d) 540,632 Transcontinental Gas Pipe Line LLC Sr Unsecured Series B 08-15-11 7.00 900,000 943,987 --------------- Total 1,900,416 ------------------------------------------------------------------------------------- INDEPENDENT ENERGY (0.3%) Anadarko Finance Series B 05-01-11 6.75 655,000(c) 682,958 Devon Financing 09-30-11 6.88 380,000(c) 411,928 --------------- Total 1,094,886 ------------------------------------------------------------------------------------- MEDIA CABLE (0.1%) Comcast 03-15-11 5.50 260,000 272,659 ------------------------------------------------------------------------------------- RAILROADS (0.1%) CSX Sr Unsecured 03-15-11 6.75 195,000 204,109 ------------------------------------------------------------------------------------- WIRELINES (0.8%) AT&T Sr Unsecured 03-15-11 6.25 660,000 703,078 Telefonica Emisiones SAU 06-20-11 5.98 195,000(c) 205,938 Telefonica Europe 09-15-10 7.75 195,000(c) 206,860 TELUS Sr Unsecured 06-01-11 8.00 655,000(c) 704,185
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT 23 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) WIRELINES (CONT.) Verizon Pennsylvania Sr Unsecured Series A 11-15-11 5.65% $685,000 $722,853 --------------- Total 2,542,914 ------------------------------------------------------------------------------------- TOTAL BONDS (Cost: $393,955,076) $391,634,320 -------------------------------------------------------------------------------------
MONEY MARKET FUND (2.6%) SHARES VALUE(a) RiverSource Short-Term Cash Fund, 0.27% 8,620,461(o) $8,620,461 ------------------------------------------------------------------------------------- TOTAL MONEY MARKET FUND (Cost: $8,620,461) $8,620,461 ------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $402,575,537)(p) $400,254,781 =====================================================================================
INVESTMENTS IN DERIVATIVES FUTURES CONTRACTS OUTSTANDING AT MAY 31, 2009
NUMBER OF UNREALIZED CONTRACTS NOTIONAL EXPIRATION APPRECIATION CONTRACT DESCRIPTION LONG (SHORT) MARKET VALUE DATE (DEPRECIATION) ------------------------------------------------------------------------------------ U.S. Treasury Note, 2- year (23) $(5,013,281) July 2009 $(2,197) U.S. Treasury Note, 5- year (17) (1,979,172) July 2009 12,455 U.S. Treasury Note, 10- year (67) (7,947,875) June 2009 198,758 U.S. Treasury Note, 10- year (35) (4,095,000) Sept. 2009 (45,452) ------------------------------------------------------------------------------------ Total $163,564 ------------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS (a) Securities are valued by using policies described in Note 1 to the financial statements. (b) Non-income producing. For long-term debt securities, item identified is in default as to payment of interest and/or principal. (c) Foreign security values are stated in U.S. dollars. For debt securities, principal amounts are denominated in U.S. dollar currency unless otherwise noted. At May 31, 2009, the value of foreign securities represented 0.7% of net assets. (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security may be determined to be liquid under guidelines established by the Fund's Board of Directors. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At May 31, 2009, the value of these securities amounted to $11,357,503 or 3.5% of net assets. (e) At May 31, 2009, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $72,304,471. See Note 1 to the financial statements. -------------------------------------------------------------------------------- 24 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- NOTES TO PORTFOLIO OF INVESTMENTS (CONTINUED) (f) Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property, and include single- and multi-class pass-through securities and collateralized mortgage obligations. These securities may be issued or guaranteed by U.S. government agencies or instrumentalities, or by private issuers, generally originators and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers and special purpose entities. The maturity dates shown represent the original maturity of the underlying obligation. Actual maturity may vary based upon prepayment activity on these obligations. Unless otherwise noted, the coupon rates presented are fixed rates. (g) Adjustable rate mortgage; interest rate varies to reflect current market conditions; rate shown is the effective rate on May 31, 2009. (h) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on May 31, 2009. (i) Negligible market value. (j) Interest only represents securities that entitle holders to receive only interest payments on the underlying mortgages. The yield to maturity of an interest only security is extremely sensitive to the rate of principal payments on the underlying mortgage assets. A rapid (slow) rate of principal repayments may have an adverse (positive) effect on yield to maturity. The principal amount shown is the notional amount of the underlying mortgages. The interest rate disclosed represents yield based upon the estimated timing and amount of future cash flows at May 31, 2009. (k) This position is in bankruptcy. (l) At May 31, 2009, investments in securities included securities valued at $540,421 that were partially pledged as collateral to cover initial margin deposits on open interest rate futures contracts. (m) Represents comparable securities held to satisfy future delivery requirements of the following open forward sale commitments at May 31, 2009:
PRINCIPAL SETTLEMENT PROCEEDS SECURITY AMOUNT DATE RECEIVABLE VALUE -------------------------------------------------------------------------- Federal Natl Mtge Assn 06-01-39 5.00% $8,200,000 06-11-09 $8,339,453 $8,394,750
(n) The following abbreviations are used in the portfolio security descriptions to identify the insurer of the issue: FSA -- Financial Security Assurance MGIC -- Mortgage Guaranty Insurance Corporation
-------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT 25 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------ NOTES TO PORTFOLIO OF INVESTMENTS (CONTINUED) (o) Affiliated Money Market Fund -- See Note 6 to the financial statements. The rate shown is the seven-day current annualized yield at May 31, 2009. (p) At May 31, 2009, the cost of securities for federal income tax purposes was $412,001,636 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $11,368,343 Unrealized depreciation (23,115,198) ----------------------------------------------------------- Net unrealized depreciation $(11,746,855) -----------------------------------------------------------
-------------------------------------------------------------------------------- 26 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- FAIR VALUE MEASUREMENTS Statement of Financial Accounting Standards No. 157 (SFAS 157) requires disclosures relating to the fair valuation of securities for financial statement purposes. Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in the three broad levels listed below: - Level 1 -- quoted prices in active markets for identical securities - Level 2 -- other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risks, etc.) - Level 3 -- significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments) Observable inputs are those based on market data obtained from sources independent of the Fund, and unobservable inputs reflect the Fund's own assumptions based on the best information available. The input levels are not necessarily an indication of the risk or liquidity associated with investments at that level. The following table is a summary of the inputs used to value the Fund's investments as of May 31, 2009:
FAIR VALUE AT MAY 31, 2009 ---------------------------------------------------------- LEVEL 1 LEVEL 2 QUOTED PRICES OTHER LEVEL 3 IN ACTIVE SIGNIFICANT SIGNIFICANT MARKETS FOR OBSERVABLE UNOBSERVABLE DESCRIPTION IDENTICAL ASSETS INPUTS INPUTS TOTAL ---------------------------------------------------------------------------------- Investments in securities $8,620,461 $382,692,656 $8,941,664 $400,254,781 Other financial instruments* 163,564 -- -- 163,564 ---------------------------------------------------------------------------------- Total $8,784,025 $382,692,656 $8,941,664 $400,418,345 ----------------------------------------------------------------------------------
* Other financial instruments are derivative instruments, such as futures, which are valued at the unrealized appreciation (depreciation) on the instrument. The following table is a reconciliation of Level 3 assets for which significant unobservable inputs were used to determine fair value.
INVESTMENTS IN SECURITIES --------------------------------------------------------------- Balance as of May 31, 2008 $8,131,384 Accrued discounts/premiums (56,711) Realized gain (loss) 1,379,691 Change in unrealized appreciation (depreciation)* (2,386,164) Net purchases (sales) 1,762,837 Transfers in and/or out of Level 3 110,627 --------------------------------------------------------------- Balance as of May 31, 2009 $8,941,664 ---------------------------------------------------------------
* Change in unrealized appreciation (depreciation) relating to securities held at May 31, 2009 was $(2,419,533). -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT 27 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------ HOW TO FIND INFORMATION ABOUT THE FUND'S QUARTERLY PORTFOLIO HOLDINGS (i) The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (Commission) for the first and third quarters of each fiscal year on Form N-Q; (ii) The Fund's Forms N-Q are available on the Commission's website at http://www.sec.gov; (iii)The Fund's Forms N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC (information on the operations of the Public Reference Room may be obtained by calling 1-800-SEC-0330); and (iv) The Fund's complete schedule of portfolio holdings, as filed on Form N-Q, can be obtained without charge, upon request, by calling the RiverSource Family of Funds at 1(800) 221-2450. -------------------------------------------------------------------------------- 28 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT STATEMENT OF ASSETS AND LIABILITIES -------------------------------------------- MAY 31, 2009
ASSETS Investments in securities, at value Unaffiliated issuers (identified cost $393,955,076) $391,634,320 Affiliated money market fund (identified cost $8,620,461) 8,620,461 -------------------------------------------------------------------------------------- Total investments in securities (identified cost $402,575,537) 400,254,781 Capital shares receivable 109,397 Dividends and accrued interest receivable 1,556,505 Receivable for investment securities sold 83,957,550 -------------------------------------------------------------------------------------- Total assets 485,878,233 -------------------------------------------------------------------------------------- LIABILITIES Forward sale commitments, at value (proceeds receivable $8,339,453) 8,394,750 Dividends payable to shareholders 119,892 Capital shares payable 331,942 Payable for investment securities purchased 75,619,285 Payable for securities purchased on a forward-commitment basis 72,304,471 Variation margin payable on futures contracts 127,773 Accrued investment management services fees 4,298 Accrued distribution fees 21,992 Accrued transfer agency fees 670 Accrued administrative services fees 627 Accrued plan administration services fees 13 Other accrued expenses 97,958 -------------------------------------------------------------------------------------- Total liabilities 157,023,671 -------------------------------------------------------------------------------------- Net assets applicable to outstanding capital stock $328,854,562 -------------------------------------------------------------------------------------- REPRESENTED BY Capital stock -- $.01 par value $ 689,532 Additional paid-in capital 353,241,589 Undistributed net investment income 36,056 Accumulated net realized gain (loss) (22,900,126) Unrealized appreciation (depreciation) on investments (2,212,489) -------------------------------------------------------------------------------------- Total -- representing net assets applicable to outstanding capital stock $328,854,562 --------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE NET ASSETS SHARES OUTSTANDING NET ASSET VALUE PER SHARE Class A $ 78,939,541 16,543,068 $4.77(1) Class B $ 24,176,629 5,064,728 $4.77 Class C $ 4,090,259 856,738 $4.77 Class I $221,584,142 46,475,255 $4.77 Class R4 $ 63,991 13,427 $4.77 -----------------------------------------------------------------------------------------
(1) The maximum offering price per share for Class A is $5.01. The offering price is calculated by dividing the net asset value by 1.0 minus the maximum sales charge of 4.75%. The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT 29 STATEMENT OF OPERATIONS ------------------------------------------------------- YEAR ENDED MAY 31, 2009
INVESTMENT INCOME Income: Interest $ 19,301,247 Income distributions from affiliated money market fund 213,377 Less foreign taxes withheld (517) -------------------------------------------------------------------------- Total income 19,514,107 -------------------------------------------------------------------------- Expenses: Investment management services fees 1,731,277 Distribution fees Class A 213,851 Class B 267,370 Class C 40,318 Transfer agency fees Class A 189,770 Class B 62,602 Class C 9,207 Class R4 3,392 Administrative services fees 252,478 Plan administration service fees -- Class R4 16,960 Compensation of board members 10,561 Custodian fees 60,875 Printing and postage 33,096 Registration fees 53,920 Professional fees 40,630 Other 15,303 -------------------------------------------------------------------------- Total expenses 3,001,610 Expenses waived/reimbursed by the Investment Manager and its affiliates (541,040) Earnings and bank fee credits on cash balances (1,200) -------------------------------------------------------------------------- Total net expenses 2,459,370 -------------------------------------------------------------------------- Investment income (loss) -- net 17,054,737 -------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) -- NET Net realized gain (loss) on: Security transactions (7,615,426) Futures contracts (10,766,699) -------------------------------------------------------------------------- Net realized gain (loss) on investments (18,382,125) Net change in unrealized appreciation (depreciation) on investments 2,926,890 -------------------------------------------------------------------------- Net gain (loss) on investments (15,455,235) -------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $ 1,599,502 --------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- 30 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT STATEMENTS OF CHANGES IN NET ASSETS --------------------------------------------
YEAR ENDED MAY 31, 2009 2008 OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ 17,054,737 $ 19,201,708 Net realized gain (loss) on investments (18,382,125) (883,804) Net change in unrealized appreciation (depreciation) on investments 2,926,890 282,877 ---------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 1,599,502 18,600,781 ---------------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income Class A (3,899,777) (4,636,312) Class B (1,013,132) (1,375,945) Class C (152,824) (166,238) Class I (11,827,943) (10,669,521) Class R4 (290,189) (1,927,487) Net realized gain Class A (635,778) -- Class B (193,543) -- Class C (29,317) -- Class I (1,808,398) -- Class R4 (451) -- ---------------------------------------------------------------------------------------- Total distributions (19,851,352) (18,775,503) ---------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS Proceeds from sales Class A shares 19,874,397 21,261,899 Class B shares 7,170,065 7,521,919 Class C shares 1,148,620 493,948 Class I shares 73,431,416 60,497,906 Class R4 shares 75,985 3,560,740 Reinvestment of distributions at net asset value Class A shares 4,107,536 4,221,397 Class B shares 1,103,090 1,272,184 Class C shares 167,436 153,418 Class I shares 13,610,360 10,765,444 Class R4 shares 161,216 1,945,056 Payments for redemptions Class A shares (36,083,563) (40,583,767) Class B shares (16,410,942) (19,411,598) Class C shares (1,228,211) (1,336,741) Class I shares (75,837,805) (57,241,980) Class R4 shares (41,377,098) (2,867,441) ---------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions (50,087,498) (9,747,616) ---------------------------------------------------------------------------------------- Total increase (decrease) in net assets (68,339,348) (9,922,338) Net assets at beginning of year 397,193,910 407,116,248 ---------------------------------------------------------------------------------------- Net assets at end of year $328,854,562 $397,193,910 ---------------------------------------------------------------------------------------- Undistributed net investment income $ 36,056 $ 69,436 ----------------------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT 31 FINANCIAL HIGHLIGHTS ---------------------------------------------------------- CLASS A
PER SHARE INCOME AND CAPITAL CHANGES(a) Fiscal period ended May 31, 2009 2008 2007 2006 2005 Net asset value, beginning of period $4.99 $5.00 $4.92 $5.12 $5.03 -------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .21(b) .23(b) .22 .21 .19 Net gains (losses) (both realized and unrealized) (.18) (.02) .09 (.20) .10 -------------------------------------------------------------------------------------------------------------- Total from investment operations .03 .21 .31 .01 .29 -------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.21) (.22) (.23) (.20) (.20) Distributions from realized gains (.04) -- -- (.01) -- -------------------------------------------------------------------------------------------------------------- Total distributions (.25) (.22) (.23) (.21) (.20) -------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.77 $4.99 $5.00 $4.92 $5.12 -------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $79 $95 $111 $126 $159 -------------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/reimbursement(c),(d) 1.08% 1.09% 1.17% 1.19% 1.10% -------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(d),(e),(f) .89% .89% .89% .89% .95% -------------------------------------------------------------------------------------------------------------- Net investment income (loss) 4.51% 4.56% 4.45% 4.08% 3.67% -------------------------------------------------------------------------------------------------------------- Portfolio turnover rate 431%(g) 354% 306% 178% 137% -------------------------------------------------------------------------------------------------------------- Total return(h) .79% 4.31% 6.30% .12% 5.78% --------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amounts have been calculated using the average shares outstanding method. (c) Expense ratio is before reduction for earnings and bank fee credits on cash balances. (d) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (e) The Investment Manager and its affiliates have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (f) Expense ratio is before reduction for earnings and bank fee credits on cash balances. Earnings and bank fee credits were less than 0.01% of average net assets for the years ended May 31, 2009 and 2008. (g) Includes mortgage dollar rolls. If mortgage dollar roll transactions were excluded, the portfolio turnover would have been 162% for the year ended May 31, 2009. (h) Total return does not reflect payment of a sales charge. The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- 32 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- CLASS B
PER SHARE INCOME AND CAPITAL CHANGES(a) Fiscal period ended May 31, 2009 2008 2007 2006 2005 Net asset value, beginning of period $4.99 $5.00 $4.93 $5.12 $5.04 -------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .18(b) .19(b) .19 .17 .15 Net gains (losses) (both realized and unrealized) (.18) (.01) .07 (.19) .09 -------------------------------------------------------------------------------------------------------------- Total from investment operations -- .18 .26 (.02) .24 -------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.18) (.19) (.19) (.16) (.16) Distributions from realized gains (.04) -- -- (.01) -- -------------------------------------------------------------------------------------------------------------- Total distributions (.22) (.19) (.19) (.17) (.16) -------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.77 $4.99 $5.00 $4.93 $5.12 -------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $24 $34 $44 $64 $98 -------------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/reimbursement(c),(d) 1.84% 1.86% 1.94% 1.95% 1.86% -------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(d),(e),(f) 1.65% 1.65% 1.64% 1.64% 1.69% -------------------------------------------------------------------------------------------------------------- Net investment income (loss) 3.75% 3.79% 3.70% 3.31% 2.90% -------------------------------------------------------------------------------------------------------------- Portfolio turnover rate 431%(g) 354% 306% 178% 137% -------------------------------------------------------------------------------------------------------------- Total return(h) .03% 3.53% 5.30% (.42%) 4.78% --------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amounts have been calculated using the average shares outstanding method. (c) Expense ratio is before reduction for earnings and bank fee credits on cash balances. (d) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (e) The Investment Manager and its affiliates have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (f) Expense ratio is before reduction for earnings and bank fee credits on cash balances. Earnings and bank fee credits were less than 0.01% of average net assets for the years ended May 31, 2009 and 2008. (g) Includes mortgage dollar rolls. If mortgage dollar roll transactions were excluded, the portfolio turnover would have been 162% for the year ended May 31, 2009. (h) Total return does not reflect payment of a sales charge. The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT 33 FINANCIAL HIGHLIGHTS (continued) ---------------------------------------------- CLASS C
PER SHARE INCOME AND CAPITAL CHANGES(a) Fiscal period ended May 31, 2009 2008 2007 2006 2005 Net asset value, beginning of period $4.99 $5.00 $4.93 $5.12 $5.04 -------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .18(b) .19(b) .19 .17 .15 Net gains (losses) (both realized and unrealized) (.18) (.01) .07 (.19) .09 -------------------------------------------------------------------------------------------------------------- Total from investment operations -- .18 .26 (.02) .24 -------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.18) (.19) (.19) (.16) (.16) Distributions from realized gains (.04) -- -- (.01) -- -------------------------------------------------------------------------------------------------------------- Total distributions (.22) (.19) (.19) (.17) (.16) -------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.77 $4.99 $5.00 $4.93 $5.12 -------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $4 $4 $5 $7 $11 -------------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/reimbursement(c),(d) 1.83% 1.85% 1.94% 1.95% 1.85% -------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(d),(e),(f) 1.65% 1.65% 1.64% 1.64% 1.70% -------------------------------------------------------------------------------------------------------------- Net investment income (loss) 3.76% 3.80% 3.70% 3.31% 2.90% -------------------------------------------------------------------------------------------------------------- Portfolio turnover rate 431%(g) 354% 306% 178% 137% -------------------------------------------------------------------------------------------------------------- Total return(h) .03% 3.53% 5.30% (.43%) 4.79% --------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amounts have been calculated using the average shares outstanding method. (c) Expense ratio is before reduction for earnings and bank fee credits on cash balances. (d) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (e) The Investment Manager and its affiliates have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (f) Expense ratio is before reduction for earnings and bank fee credits on cash balances. Earnings and bank fee credits were less than 0.01% of average net assets for the years ended May 31, 2009 and 2008. (g) Includes mortgage dollar rolls. If mortgage dollar roll transactions were excluded, the portfolio turnover would have been 162% for the year ended May 31, 2009. (h) Total return does not reflect payment of a sales charge. The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- 34 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- CLASS I
PER SHARE INCOME AND CAPITAL CHANGES(a) Fiscal period ended May 31, 2009 2008 2007 2006 2005 Net asset value, beginning of period $4.99 $5.00 $4.92 $5.11 $5.03 -------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .23(b) .25(b) .24 .22 .20 Net gains (losses) (both realized and unrealized) (.18) (.02) .08 (.19) .09 -------------------------------------------------------------------------------------------------------------- Total from investment operations .05 .23 .32 .03 .29 -------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.23) (.24) (.24) (.21) (.21) Distributions from realized gains (.04) -- -- (.01) -- -------------------------------------------------------------------------------------------------------------- Total distributions (.27) (.24) (.24) (.22) (.21) -------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.77 $4.99 $5.00 $4.92 $5.11 -------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $222 $222 $207 $6 $-- -------------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/reimbursement(c),(d) .61% .63% .63% .73% .66% -------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(d),(e),(f) .48% .48% .54% .54% .62% -------------------------------------------------------------------------------------------------------------- Net investment income (loss) 4.93% 4.97% 4.90% 4.99% 3.99% -------------------------------------------------------------------------------------------------------------- Portfolio turnover rate 431%(g) 354% 306% 178% 137% -------------------------------------------------------------------------------------------------------------- Total return 1.21% 4.74% 6.68% .59% 5.92% --------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amounts have been calculated using the average shares outstanding method. (c) Expense ratio is before reduction for earnings and bank fee credits on cash balances. (d) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (e) The Investment Manager and its affiliates have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (f) Expense ratio is before reduction for earnings and bank fee credits on cash balances. Earnings and bank fee credits were less than 0.01% of average net assets for the years ended May 31, 2009 and 2008. (g) Includes mortgage dollar rolls. If mortgage dollar roll transactions were excluded, the portfolio turnover would have been 162% for the year ended May 31, 2009. The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT 35 FINANCIAL HIGHLIGHTS (continued) ---------------------------------------------- CLASS R4
PER SHARE INCOME AND CAPITAL CHANGES(a) Fiscal period ended May 31, 2009 2008 2007 2006 2005 Net asset value, beginning of period $4.99 $5.00 $4.92 $5.11 $5.03 -------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .23(b) .23(b) .23 .21 .20 Net gains (losses) (both realized and unrealized) (.10) (.01) .08 (.19) .08 -------------------------------------------------------------------------------------------------------------- Total from investment operations .13 .22 .31 .02 .28 -------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.31) (.23) (.23) (.20) (.20) Distributions from realized gains (.04) -- -- (.01) -- -------------------------------------------------------------------------------------------------------------- Total distributions (.35) (.23) (.23) (.21) (.20) -------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.77 $4.99 $5.00 $4.92 $5.11 -------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- $42 $40 $35 $-- -------------------------------------------------------------------------------------------------------------- Gross expenses prior to expense waiver/reimbursement(c),(d) .89% .93% .99% 1.04% .94% -------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(d),(e),(f) .70% .75% .71% .71% .77% -------------------------------------------------------------------------------------------------------------- Net investment income (loss) 4.38% 4.69% 4.63% 4.40% 3.99% -------------------------------------------------------------------------------------------------------------- Portfolio turnover rate 431%(g) 354% 306% 178% 137% -------------------------------------------------------------------------------------------------------------- Total return 2.82% 4.46% 6.51% .49% 5.75% --------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Per share amounts have been calculated using the average shares outstanding method. (c) Expense ratio is before reduction for earnings and bank fee credits on cash balances. (d) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the above reported expense ratios. (e) The Investment Manager and its affiliates have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (f) Expense ratio is before reduction for earnings and bank fee credits on cash balances. Earnings and bank fee credits were less than 0.01% of average net assets for the years ended May 31, 2009 and 2008. (g) Includes mortgage dollar rolls. If mortgage dollar roll transactions were excluded, the portfolio turnover would have been 162% for the year ended May 31, 2009. The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- 36 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS -------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES RiverSource U.S. Government Mortgage Fund (the Fund) is a series of RiverSource Government Income Series, Inc. and is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. RiverSource Government Income Series, Inc. has 10 billion authorized shares of capital stock that can be allocated among the separate series as designated by the Board of Directors (the Board). The Fund invests primarily in mortgage-backed securities that either are issued or guaranteed as to principal and interest by the U.S. government, its agencies, authorities or instrumentalities. The Fund offers Class A, Class B, Class C, Class I and Class R4 shares. - Class A shares are sold with a front-end sales charge. - Class B shares may be subject to a contingent deferred sales charge (CDSC) and automatically convert to Class A shares during the ninth year of ownership. - Class C shares may be subject to a CDSC. - Class I and Class R4 shares are sold without a front-end sales charge or CDSC and are offered to qualifying institutional investors. At May 31, 2009, RiverSource Investments, LLC (RiverSource Investments or the Investment Manager) and the RiverSource affiliated funds-of-funds owned 100% of Class I shares. At May 31, 2009, the Investment Manager, RiverSource Life Insurance Company and the RiverSource affiliated funds-of-funds owned approximately 67% of the total outstanding Fund shares. All classes of shares have identical voting, dividend and liquidation rights. Class specific expenses (e.g., distribution and service fees, transfer agency fees, plan administration services fees) differ among classes. Income, expenses (other than class specific expenses) and realized and unrealized gains or losses on investments are allocated to each class of shares based upon its relative net assets. The Fund's significant accounting policies are summarized below: USE OF ESTIMATES Preparing financial statements that conform to U.S. generally accepted accounting principles requires management to make estimates (e.g., on assets, liabilities and contingent assets and liabilities) that could differ from actual results. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT 37 NOTES TO FINANCIAL STATEMENTS (continued) ------------------------------------- VALUATION OF SECURITIES Effective June 1, 2008, the Fund adopted Statement of Financial Accounting Standards No. 157 "Fair Value Measurements" (SFAS 157). SFAS 157 establishes an authoritative definition of fair value, sets out a hierarchy for measuring fair value, and requires additional disclosures about the inputs used to develop the measurements of fair value and the effect of certain measurements reported in the Statement of Operations for a fiscal period. There was no impact to the Fund's net assets or results of operations upon adoption. The fair valuation measurements disclosure can be found following the Notes to Portfolio of Investments. All securities are valued at the close of each business day. Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price. Debt securities are generally traded in the over-the-counter market and are valued at a price that reflects fair value as quoted by dealers in these securities or by an independent pricing service. When market quotes are not readily available, the pricing service, in determining fair values of debt securities, takes into consideration such factors as current quotations by broker/dealers, coupon, maturity, quality, type of issue, trading characteristics, and other yield and risk factors it deems relevant in determining valuations. The procedures adopted by the Board generally contemplate the use of fair valuation in the event that price quotations or valuations are not readily available, price quotations or valuations from other sources are not reflective of market value and thus deemed unreliable, or a significant event has occurred in relation to a security or class of securities that is not reflected in price quotations or valuations from other sources. A fair value price is a good faith estimate of the value of a security at a given point in time. Swap transactions are valued through an authorized pricing service, broker, or an internal model. Short-term securities maturing in more than 60 days from the valuation date are valued at the market price or approximate market value based on current interest rates; those maturing in 60 days or less are valued at amortized cost, which approximates fair value. Investments in money market funds are valued at net asset value. SECURITIES PURCHASED ON A FORWARD-COMMITMENT BASIS Delivery and payment for securities that have been purchased by the Fund on a forward-commitment basis, including when-issued securities and other forward- commitments, can take place one month or more after the transaction date. During this period, such securities are subject to market fluctuations, and they may affect the Fund's net assets the same as owned securities. The Fund designates cash or liquid securities at least equal to the amount of its forward- -------------------------------------------------------------------------------- 38 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- commitments. At May 31, 2009, the Fund has outstanding when-issued securities of $70,723,354 and other forward-commitments of $1,581,117. The Fund also enters into transactions to sell purchase commitments to third parties at current market values and concurrently acquires other purchase commitments for similar securities at later dates. As an inducement for the Fund to "roll over" its purchase commitments, the Fund receives negotiated amounts in the form of reductions of the purchase price of the commitment. The Fund records the incremental difference between the forward purchase and sale of each forward roll as realized gain or loss. Losses may arise due to changes in the value of the securities or if a counterparty does not perform under the terms of the agreement. If a counterparty files for bankruptcy or becomes insolvent, the Fund's right to repurchase or sell securities may be limited. FORWARD SALE COMMITMENTS The Fund may enter into forward sale commitments to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. Proceeds of forward sale commitments are not received until the contractual settlement date. During the time a forward sale commitment is outstanding, equivalent deliverable securities, or an offsetting forward purchase commitment deliverable on or before the sale commitment date, are used to satisfy the commitment. Unsettled forward sale commitments are valued at the current market value of the underlying securities, generally according to the procedures described under "Valuation of securities" above. The forward sale commitment is "marked-to- market" daily and the change in market value is recorded by the Fund as an unrealized gain or loss. If the forward sale commitment is closed through the acquisition of an offsetting purchase commitment, the Fund realizes a gain or loss. If the Fund delivers securities under the commitment, the Fund realizes a gain or a loss from the sale of the securities based upon the market price established at the date the commitment was entered into. GUARANTEES AND INDEMNIFICATIONS Under the Fund's organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, certain of the Fund's contracts with its service providers contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown since the amount of any future claims that may be made against the Fund cannot be determined and the Fund has no historical basis for predicting the likelihood of any such claims. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT 39 NOTES TO FINANCIAL STATEMENTS (continued) ------------------------------------- FEDERAL TAXES The Fund's policy is to comply with Subchapter M of the Internal Revenue Code that applies to regulated investment companies and to distribute substantially all of its taxable income to shareholders. No provision for income or excise taxes is thus required. Management of the Fund has concluded that there are no significant uncertain tax positions that would require recognition in the financial statements. Generally, the tax authorities can examine all the tax returns filed for the last three years. Net investment income (loss) and net realized gains (losses) may differ for financial statement and tax purposes primarily because of futures and options contracts, recognition of unrealized appreciation (depreciation) for certain derivative investments, post-October losses and losses deferred due to wash sales. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. Also, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains (losses) were recorded by the Fund. In the Statement of Assets and Liabilities, as a result of permanent book-to-tax differences, undistributed net investment income has been increased by $95,748 and accumulated net realized loss has been increased by $95,748. The tax character of distributions paid for the years indicated is as follows:
YEAR ENDED MAY 31, 2009 2008 -------------------------- -------------------------- ORDINARY LONG-TERM ORDINARY LONG-TERM INCOME CAPITAL GAIN INCOME CAPITAL GAIN ------------------------------------------------------- Class A $ 4,535,555 $-- $ 4,636,312 $-- Class B 1,206,675 -- 1,375,945 -- Class C 182,141 -- 166,238 -- Class I 13,636,341 -- 10,669,521 -- Class R4 290,640 -- 1,927,487 --
At May 31, 2009, the components of distributable earnings on a tax basis are as follows: Undistributed ordinary income.................. $ 342,467 Undistributed accumulated long-term gain....... $ -- Accumulated realized loss...................... $(13,435,568) Unrealized appreciation (depreciation)......... $(11,863,566)
-------------------------------------------------------------------------------- 40 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- RECENT ACCOUNTING PRONOUNCEMENTS The Fund has adopted FASB Staff Position No. 133-1 and FIN No. 45-4 (FSP FAS 133-1 and FIN 45-4), "Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45." The amendments to FSP FAS 133-1 and FIN 45-4 require enhanced disclosures about a fund's derivatives and guarantees. Funds are required to provide enhanced disclosures about (a) how and why a fund uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, (c) how derivative instruments and related hedged items affect a fund's financial position, financial performance, and cash flows and (d) the current status of the payment/performance risk of the credit derivative. The amendments to FSP FAS 133-1 and FIN 45-4 also require additional disclosures about the current status of the payment/performance risk of a guarantee. At May 31, 2009, the Fund did not own nor was it a party to any credit derivative contracts within the scope of these amendments. The Fund has adopted Statement of Financial Accounting Standards No. 161 (SFAS 161), "Disclosures about Derivative Instruments and Hedging Activities -- an amendment of FASB Statement No. 133," which requires enhanced disclosures about a fund's derivative and hedging activities. See Investments in Derivatives below for more information. On April 9, 2009, the FASB issued Staff Position No. 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly" (FSP 157-4). FSP 157-4 provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased. FSP 157-4 also requires additional disaggregation of the current SFAS 157 required disclosures. FSP 157-4 is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Management is currently evaluating the impact that the adoption of FSP 157-4 will have on the amounts and disclosures within the Fund's financial statements. DIVIDENDS TO SHAREHOLDERS Dividends from net investment income, declared daily and payable monthly, when available, are reinvested in additional shares of the Fund at net asset value or payable in cash. Capital gains, when available, are distributed along with the last income dividend of the calendar year. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT 41 NOTES TO FINANCIAL STATEMENTS (continued) ------------------------------------- OTHER Security transactions are accounted for on the date securities are purchased or sold. Dividend income, if any, is recognized on the ex-dividend date and interest income, including amortization of premium, market discount and original issue discount using the effective interest method, is accrued daily. 2. INVESTMENTS IN DERIVATIVES The Fund may invest in certain derivative instruments, which are transactions whose values depend on or are derived from (in whole or in part) the value of one or more other assets, such as securities, currencies, commodities or indices. Such derivative instruments may be used to maintain cash reserves while maintaining exposure to certain other assets, to offset anticipated declines in values of investments, to facilitate trading, to reduce transaction costs, and to pursue higher investment returns. The Fund may also use derivative instruments to mitigate certain investment risks, such as foreign currency exchange rate risk, interest rate risk, and credit risk. FUTURES TRANSACTIONS The Fund may buy and sell financial futures contracts traded on any U.S. or foreign exchange to produce incremental earnings, hedge existing positions or protect against market changes in the value of equities, interest rates or foreign currencies. The Fund may also buy and write put and call options on these futures contracts. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date. Futures and options on futures are valued daily based upon the last sale price at the close of the market on the principal exchange on which they are traded. Upon entering into a futures contract, the Fund is required to deposit either cash or securities in an amount (initial margin) equal to a certain percentage of the contract value. Subsequent payments (variation margin) are made or received by the Fund each day. The variation margin payments are equal to the daily changes in the contract value and are recorded as unrealized gains and losses. The Fund recognizes a realized gain or loss when the contract is closed or expires. Upon entering into futures contracts, the Fund bears the risk of interest rates, exchange rates or securities prices moving unexpectedly, in which case, the Fund may not achieve the anticipated benefits of the futures contracts and may realize a loss. Additional risks include counterparty credit risk, the possibility of an illiquid market, and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. -------------------------------------------------------------------------------- 42 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- The gross notional amount of short contracts was $19 million at May 31, 2009. The monthly average gross notional contract amount for these contracts was $63 million for the year ended May 31, 2009. TOTAL RETURN SWAP TRANSACTIONS The Fund may enter into total return swap agreements to gain exposure to the total return on a specified security, a basket of securities or a security index during the specified period, in return for periodic payments based on a fixed or variable interest rate. Total return swap agreements may be used to obtain exposure to a security or market without owning or taking physical custody of such security or securities in a market. Under the terms of a total return swap agreement, payments made by the Fund or the counterparty are based on the total return of a particular reference asset or assets (such as an equity security, a combination of equity securities, a mortgage-backed security, a combination of mortgage-backed securities, or an index) in exchange for a specified interest rate. The notional amounts of swap contracts are not recorded in the financial statements. Swap contracts are valued daily, and the change in value is recorded as unrealized appreciation (depreciation) until the termination of the swap, at which time the Fund will realize a gain or (loss). Periodic payments received (or made) by the Fund over the term of the contract are recorded as realized gains (losses). Total return swap agreements may be subject to liquidity risk, which exists when a particular swap is difficult to purchase or sell. It may not be possible for the Fund to initiate a transaction or liquidate a position at an advantageous time or price, which may result in significant losses. Total return swaps are subject to the risk associated with the investment in the underlying securities. The risk in the case of short total return swap transactions is unlimited based on the potential for unlimited increases in the market value of the referenced securities. This risk may be offset if the Fund holds any of the referenced assets. The risk in the case of long total return swap transactions is limited to the current notional amount of the total return swap. Total return swaps are also subject to the risk of the counterparty not fulfilling its obligations under the agreement. The counterparty risk may be offset by any collateral held by the Fund related to the swap transactions. At May 31, 2009, and for the year then ended, the Fund had no outstanding total return swap contracts. EFFECTS OF DERIVATIVE TRANSACTIONS ON THE FINANCIAL STATEMENTS The following tables are intended to provide additional information about the effect of derivatives on the financial statements of the Fund including: the fair value of derivatives by risk category and the location of those fair values in the Statement of Assets and Liabilities; the impact of derivative transactions on the -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT 43 NOTES TO FINANCIAL STATEMENTS (continued) ------------------------------------- Fund's operations over the period including realized gains or losses and unrealized gains or losses. The derivative schedules following the Portfolio of Investments present additional information regarding derivative instruments outstanding at the end of the period, if any. FAIR VALUES OF DERIVATIVE INSTRUMENTS AS OF MAY 31, 2009
ASSET DERIVATIVES LIABILITY DERIVATIVES ------------------------------------------------------------------------ STATEMENT OF ASSETS STATEMENT OF ASSETS RISK EXPOSURE AND LIABILITIES AND LIABILITIES CATEGORY LOCATION FAIR VALUE LOCATION FAIR VALUE ----------------------------------------------------------------------------------------------- Interest rate Net Assets -- Net Assets -- contracts Unrealized appreciation 211,213* Unrealized depreciation $47,649* ----------------------------------------------------------------------------------------------- Total 211,213 47,649 -----------------------------------------------------------------------------------------------
* Includes cumulative appreciation (depreciation) of futures contracts as reported in the Futures Contracts Outstanding table following the Portfolio of Investments. Only the current day's variation margin of futures contracts is reported in receivables or payables in the Statement of Assets and Liabilities. EFFECT OF DERIVATIVE INSTRUMENTS ON THE STATEMENT OF OPERATIONS FOR THE YEAR ENDED MAY 31, 2009
AMOUNT OF REALIZED GAIN OR (LOSS) ON DERIVATIVES RECOGNIZED IN INCOME ----------------------------------------------------------------------------------------------- RISK EXPOSURE CATEGORY FUTURES ----------------------------------------------------------------------------------------------- Interest rate contracts $(10,766,699) ----------------------------------------------------------------------------------------------- TOTAL $(10,766,699) -----------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION OR (DEPRECIATION) ON DERIVATIVES RECOGNIZED IN INCOME ----------------------------------------------------------------------------------------------- RISK EXPOSURE CATEGORY FUTURES ----------------------------------------------------------------------------------------------- Interest rate contracts $(691,566) ----------------------------------------------------------------------------------------------- TOTAL $(691,566) -----------------------------------------------------------------------------------------------
3. EXPENSES AND SALES CHARGES INVESTMENT MANAGEMENT SERVICES FEES Under an Investment Management Services Agreement, the Investment Manager determines which securities will be purchased, held or sold. The management fee is a percentage of the Fund's average daily net assets that declines from 0.48% to 0.29% annually as the Fund's net assets increase. The management fee for the year ended May 31, 2009 was 0.48% of the Fund's average daily net assets. ADMINISTRATIVE SERVICES FEES Under an Administrative Services Agreement, the Fund pays Ameriprise Financial, Inc. (Ameriprise Financial), parent company of the Investment Manager, a fee for administration and accounting services at a percentage of the -------------------------------------------------------------------------------- 44 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- Fund's average daily net assets that declines from 0.07% to 0.04% annually as the Fund's net assets increase. The fee for the year ended May 31, 2009 was 0.07% of the Fund's average daily net assets. OTHER FEES Other expenses are for, among other things, certain expenses of the Fund or the Board including: Fund boardroom and office expense, employee compensation, employee health and retirement benefits, and certain other expenses. Payment of these Fund and Board expenses is facilitated by a company providing limited administrative services to the Fund and the Board. For the year ended May 31, 2009, other expenses paid to this company were $2,147. COMPENSATION OF BOARD MEMBERS Under a Deferred Compensation Plan (the Plan), non-interested board members may defer receipt of their compensation. Deferred amounts are treated as though equivalent dollar amounts had been invested in shares of the Fund or other funds in the RiverSource Family of Funds. The Fund's liability for these amounts is adjusted for market value changes and remains in the Fund until distributed in accordance with the Plan. TRANSFER AGENCY FEES Under a Transfer Agency Agreement, RiverSource Service Corporation (the Transfer Agent) maintains shareholder accounts and records. The Fund pays the Transfer Agent an annual account-based fee at a rate equal to $20.50 for Class A, $21.50 for Class B and $21.00 for Class C for this service. The Fund also pays the Transfer Agent an annual asset-based fee at a rate of 0.05% of the Fund's average daily net assets attributable to Class R4 shares. The Transfer Agent charges an annual fee of $5 per inactive account, charged on a pro rata basis for 12 months from the date the account becomes inactive. These fees are included in the transfer agency fees in the Statement of Operations. PLAN ADMINISTRATION SERVICES FEES Under a Plan Administration Services Agreement with the Transfer Agent, the Fund pays an annual fee at a rate of 0.25% of the Fund's average daily net assets attributable to Class R4 shares for the provision of various administrative, recordkeeping, communication and educational services. DISTRIBUTION FEES The Fund has agreements with RiverSource Distributors, Inc. and RiverSource Fund Distributors, Inc. (collectively, the Distributor) for distribution and shareholder services. Under a Plan and Agreement of Distribution pursuant to Rule 12b-1, the Fund pays a fee at an annual rate of up to 0.25% of the Fund's average daily net assets attributable to Class A shares and a fee at an annual rate -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT 45 NOTES TO FINANCIAL STATEMENTS (continued) ------------------------------------- of up to 1.00% of the Fund's average daily net assets attributable to Class B and Class C shares. For Class B and Class C shares, of the 1.00% fee, up to 0.75% is reimbursed for distribution expenses. The amount of distribution expenses incurred by the Distributor and not yet reimbursed (unreimbursed expense) was approximately $1,009,000 and $36,000 for Class B and Class C shares, respectively. These amounts are based on the most recent information available as of April 30, 2009, and may be recovered from future payments under the distribution plan or CDSC. To the extent the unreimbursed expense has been fully recovered, the distribution fee is reduced. SALES CHARGES Sales charges received by the Distributor for distributing Fund shares were $78,259 for Class A, $22,751 for Class B and $197 for Class C for the year ended May 31, 2009. EXPENSES WAIVED/REIMBURSED BY THE INVESTMENT MANAGER AND ITS AFFILIATES For the year ended May 31, 2009, the Investment Manager and its affiliates waived/reimbursed certain fees and expenses such that net expenses (excluding fees and expenses of acquired funds*) were as follows: Class A............................................. 0.89% Class B............................................. 1.65 Class C............................................. 1.65 Class I............................................. 0.48 Class R4............................................ 0.70
The waived/reimbursed fees and expenses for the transfer agency fees at the class level were as follows: Class A........................................... $52,313 Class B........................................... 16,615 Class C........................................... 2,466 Class R4.......................................... 2,916
The waived/reimbursed fees and expenses for the plan administration services fees at the class level were as follows: Class R4.......................................... $1,183
The management fees waived/reimbursed at the Fund level were $465,547. Under an agreement which was effective until May 31, 2009, the Investment Manager and its affiliates have contractually agreed to waive certain fees and expenses such that net expenses (excluding fees and expenses of acquired -------------------------------------------------------------------------------- 46 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- funds*), would not exceed the following percentage of the class average daily net assets: Class A............................................. 0.89% Class B............................................. 1.65 Class C............................................. 1.65 Class I............................................. 0.48 Class R4............................................ 0.75
Effective June 1, 2009, the Investment Manager and its affiliates have contractually agreed to waive certain fees and expenses until July 31, 2010, unless sooner terminated at the discretion of the Board, such that net expenses (excluding fees and expenses of acquired funds*), will not exceed the following percentage of the class average daily net assets: Class A............................................. 0.89% Class B............................................. 1.65 Class C............................................. 1.65 Class I............................................. 0.47 Class R4............................................ 0.77
* In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the funds in which it invests (also referred to as "acquired funds"), including affiliated and non-affiliated pooled investment vehicles (including mutual funds and exchange traded funds). Because the acquired funds have varied expense and fee levels and the Fund may own different proportions of acquired funds at different times, the amount of fees and expenses incurred indirectly by the Fund will vary. BANK FEE CREDITS During the year ended May 31, 2009, the Fund's transfer agency fees were reduced by $1,200 as a result of bank fee credits from overnight cash balances. CUSTODIAN FEES Effective Dec. 15, 2008, the Fund pays custodian fees to JPMorgan Chase Bank, N.A. For the period from June 1, 2008 to Dec. 15, 2008, the Fund paid custodian fees amounting to $63,152 to Ameriprise Trust Company, a subsidiary of Ameriprise Financial. 4. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term obligations, but including mortgage-dollar rolls) aggregated $1,906,701,335 and $2,023,202,969, respectively, for the year ended May 31, 2009. Realized gains and losses are determined on an identified cost basis. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT 47 NOTES TO FINANCIAL STATEMENTS (continued) ------------------------------------- 5. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the periods indicated are as follows:
YEAR ENDED MAY 31, 2009 ISSUED FOR REINVESTED NET SOLD DISTRIBUTIONS REDEEMED INCREASE (DECREASE) ---------------------------------------------------------------------------------- Class A 4,148,102 866,721 (7,573,975) (2,559,152) Class B 1,504,114 232,629 (3,413,335) (1,676,592) Class C 240,131 35,345 (256,741) 18,735 Class I 15,087,681 2,874,393 (15,906,305) 2,055,769 Class R4 22,129 32,732 (8,546,518) (8,491,657) ---------------------------------------------------------------------------------- YEAR ENDED MAY 31, 2008 ISSUED FOR REINVESTED NET SOLD DISTRIBUTIONS REDEEMED INCREASE (DECREASE) ---------------------------------------------------------------------------------- Class A 4,250,751 842,644 (8,112,975) (3,019,580) Class B 1,496,899 253,951 (3,883,104) (2,132,254) Class C 98,644 30,621 (266,401) (137,136) Class I 12,137,691 2,151,644 (11,378,602) 2,910,733 Class R4 715,755 388,748 (571,898) 532,605 ----------------------------------------------------------------------------------
6. AFFILIATED MONEY MARKET FUND The Fund may invest its daily cash balance in RiverSource Short-Term Cash Fund, a money market fund established for the exclusive use of the funds in the RiverSource Family of Funds and other institutional clients of RiverSource Investments. The cost of the Fund's purchases and proceeds from sales of shares of the RiverSource Short-Term Cash Fund aggregated $219,092,879 and $235,368,190, respectively, for the year ended May 31, 2009. The income distributions received with respect to the Fund's investment in RiverSource Short-Term Cash Fund can be found in the Statement of Operations and the Fund's invested balance in RiverSource Short-Term Cash Fund at May 31, 2009, can be found in the Portfolio of Investments. 7. BANK BORROWINGS The Fund has entered into a revolving credit facility with a syndicate of banks led by JPMorgan Chase Bank, N.A. (the Administrative Agent), whereby the Fund may borrow for the temporary funding of shareholder redemptions or for other temporary or emergency purposes. The credit facility became effective on Oct. 16, 2008, replacing a prior credit facility. The credit facility agreement, -------------------------------------------------------------------------------- 48 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- which is a collective agreement between the Fund and certain other funds in the RiverSource Family of Funds, severally and not jointly, permits collective borrowings up to $475 million. The borrowers shall have the right, upon written notice to the Administrative Agent to request an increase of up to $175 million in the aggregate amount of the credit facility from new or existing lenders, provided that the aggregate amount of the credit facility shall at no time exceed $650 million. Participation in such increase by any existing lender shall be at such lender's sole discretion. Interest is charged to each Fund based on its borrowings at a rate equal to the federal funds rate plus 0.75%. Each borrowing under the credit facility matures no later than 60 days after the date of borrowing. The Fund also pays a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.06% per annum, in addition to an upfront fee equal to its pro rata share of 0.02% of the amount of the credit facility. The Fund had no borrowings during the year ended May 31, 2009. Under the prior credit facility which was effective until Oct. 15, 2008, the Fund had entered into a revolving credit facility with a syndicate of banks headed by JPMorgan Chase Bank, N.A., whereby the Fund was permitted to borrow for the temporary funding of shareholder redemptions or for other temporary or emergency purposes. The credit facility agreement, which was a collective agreement between the Fund and certain other RiverSource funds, severally and not jointly, permitted collective borrowings up to $500 million. Interest was charged to each Fund based on its borrowings at a rate equal to the federal funds rate plus 0.30%. Each borrowing under the credit facility matured no later than 60 days after the date of borrowing. The Fund also paid a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.06% per annum. 8. CAPITAL LOSS CARRY-OVER AND POST-OCTOBER LOSS For federal income tax purposes, the Fund had a capital loss carry-over of $410,120 at May 31, 2009, that if not offset by capital gains will expire in 2017. Because the measurement periods for a regulated investment company's income are different for excise tax purposes versus income tax purposes, special rules are in place to protect the amount of earnings and profits needed to support excise tax distributions. As a result, the Fund is permitted to treat net capital losses realized between Nov. 1, 2008 and its fiscal year end (post-October loss) as occurring on the first day of the following tax year. At May 31, 2009, the Fund had a post-October loss of $13,025,448 that is treated for income tax purposes as occurring on June 1, 2009. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT 49 NOTES TO FINANCIAL STATEMENTS (continued) ------------------------------------- It is unlikely the Board will authorize a distribution of any net realized capital gains until the available capital loss carry-over has been offset or expires. 9. INFORMATION REGARDING PENDING AND SETTLED LEGAL PROCEEDINGS In June 2004, an action captioned John E. Gallus et al. v. American Express Financial Corp. and American Express Financial Advisors Inc., was filed in the United States District Court for the District of Arizona. The plaintiffs allege that they are investors in several American Express Company (now known as RiverSource) mutual funds and they purport to bring the action derivatively on behalf of those funds under the Investment Company Act of 1940. The plaintiffs allege that fees allegedly paid to the defendants by the funds for investment advisory and administrative services are excessive. The plaintiffs seek remedies including restitution and rescission of investment advisory and distribution agreements. The plaintiffs voluntarily agreed to transfer this case to the United States District Court for the District of Minnesota (the District Court). In response to defendants' motion to dismiss the complaint, the District Court dismissed one of plaintiffs' four claims and granted plaintiffs limited discovery. Defendants moved for summary judgment in April 2007. Summary judgment was granted in the defendants' favor on July 9, 2007. The plaintiffs filed a notice of appeal with the Eighth Circuit Court of Appeals (the Eighth Circuit) on August 8, 2007. On April 8, 2009, the Eighth Circuit reversed summary judgment and remanded to the District Court for further proceedings. In December 2005, without admitting or denying the allegations, American Express Financial Corporation (AEFC, which is now known as Ameriprise Financial, Inc. (Ameriprise Financial)), entered into settlement agreements with the Securities and Exchange Commission (SEC) and Minnesota Department of Commerce (MDOC) related to market timing activities. As a result, AEFC was censured and ordered to cease and desist from committing or causing any violations of certain provisions of the Investment Advisers Act of 1940, the Investment Company Act of 1940, and various Minnesota laws. AEFC agreed to pay disgorgement of $10 million and civil money penalties of $7 million. AEFC also agreed to retain an independent distribution consultant to assist in developing a plan for distribution of all disgorgement and civil penalties ordered by the SEC in accordance with various undertakings detailed at http://www.sec.gov/litigation/admin/ia-2451.pdf. Ameriprise Financial and its affiliates have cooperated with the SEC and the MDOC in these legal proceedings, and have made regular reports to the RiverSource Funds' Boards of Directors/Trustees. -------------------------------------------------------------------------------- 50 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- On November 7, 2008, RiverSource Investments, LLC, a subsidiary of Ameriprise Financial, Inc., acquired J. & W. Seligman & Co., Inc. (Seligman). In late 2003, Seligman conducted an extensive internal review concerning mutual fund trading practices. Seligman's review, which covered the period 2001-2003, noted one arrangement that permitted frequent trading in certain open-end registered investment companies managed by Seligman (the Seligman Funds); this arrangement was in the process of being closed down by Seligman before September 2003. Seligman identified three other arrangements that permitted frequent trading, all of which had been terminated by September 2002. In January 2004, Seligman, on a voluntary basis, publicly disclosed these four arrangements to its clients and to shareholders of the Seligman Funds. Seligman also provided information concerning mutual fund trading practices to the SEC and the Office of the Attorney General of the State of New York (NYAG). In September 2006, the NYAG commenced a civil action in New York State Supreme Court against Seligman, Seligman Advisors, Inc. (which is now known as RiverSource Fund Distributors, Inc.), Seligman Data Corp. and Brian T. Zino (collectively, the Seligman Parties), alleging, in substance, that the Seligman Parties permitted various persons to engage in frequent trading and, as a result, the prospectus disclosure used by the registered investment companies then managed by Seligman was and had been misleading. The NYAG included other related claims and also claimed that the fees charged by Seligman to the Seligman Funds were excessive. On March 13, 2009, without admitting or denying any violations of law or wrongdoing, the Seligman Parties entered into a stipulation of settlement with the NYAG and settled the claims made by the NYAG. Under the terms of the settlement, Seligman paid $11.3 million to four Seligman Funds. This settlement resolved all outstanding matters between the Seligman Parties and the NYAG. In addition to the foregoing matter, the New York staff of the SEC indicated in September 2005 that it was considering recommending to the Commissioners of the SEC the instituting of a formal action against Seligman and Seligman Advisors, Inc. relating to frequent trading in the Seligman Funds. Seligman responded to the staff in October 2005 that it believed that any action would be both inappropriate and unnecessary, especially in light of the fact that Seligman had previously resolved the underlying issue with the Independent Directors of the Seligman Funds and made recompense to the affected Seligman Funds. There have been no further developments with the SEC on this matter. Ameriprise Financial and certain of its affiliates have historically been involved in a number of legal, arbitration and regulatory proceedings, including routine litigation, class actions, and governmental actions, concerning matters arising in connection with the conduct of their business activities. Ameriprise Financial -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT 51 NOTES TO FINANCIAL STATEMENTS (continued) ------------------------------------- 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. -------------------------------------------------------------------------------- 52 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ------------------------ TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND: We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of RiverSource U.S. Government Mortgage Fund (the Fund) (one of the portfolios constituting the RiverSource Government Income Series, Inc.) as of May 31, 2009, and the related statement of operations for the year then ended, and the statements of changes in net assets and the financial highlights for each of the two years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights of the Fund for the periods presented through May 31, 2007, were audited by other auditors whose report dated July 20, 2007, expressed an unqualified opinion on those financial highlights. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of May 31, 2009, by correspondence with the custodian and brokers, or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT 53 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (continued) ----------- In our opinion, the financial statements and financial highlights audited by us as referred to above present fairly, in all material respects, the financial position of RiverSource U.S. Government Mortgage Fund of the RiverSource Government Income Series, Inc. at May 31, 2009, the results of its operations for the year then ended, and changes in its net assets and the financial highlights for each of the two years in the period then ended, in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLP Minneapolis, Minnesota July 21, 2009 -------------------------------------------------------------------------------- 54 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT FEDERAL INCOME TAX INFORMATION ------------------------------------------------- (UNAUDITED) The Fund is required by the Internal Revenue Code of 1986 to tell its shareholders about the tax treatment of the dividends it pays during its fiscal year. The dividends listed below are reported to you on Form 1099-DIV, Dividends and Distributions. Shareholders should consult a tax advisor on how to report distributions for state and local tax purposes. Fiscal year ended May 31, 2009
INCOME DISTRIBUTIONS - the Fund designates the following tax attributes for distributions: Qualified Dividend Income for individuals.................... 0.00% Dividends Received Deduction for corporations................ 0.00% U.S. Government Obligations.................................. 3.56%
The Fund also designates as distributions of long-term gains, to the extent necessary to fully distribute such capital gains, earnings and profits distributed to shareholders on the redemption of shares. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT 55 BOARD MEMBERS AND OFFICERS ----------------------------------------------------- Shareholders elect a Board that oversees the Fund's operations. The Board appoints officers who are responsible for day-to-day business decisions based on policies set by the Board. The following is a list of the Fund's Board members. The RiverSource Family of Funds that each Board member oversees consists of 149 funds, which includes 105 RiverSource funds and 44 Seligman funds. Board members serve until the next regular shareholders' meeting or until he or she reaches the mandatory retirement age established by the Board. INDEPENDENT BOARD MEMBERS
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION OTHER AGE LENGTH OF SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS ------------------------------------------------------------------------------------------------------------------------------ Kathleen Blatz Board member since Chief Justice, Minnesota Supreme Court, 1998-2006; None 901 S. Marquette Ave. 2006 Attorney Minneapolis, MN 55402 Age 55 ------------------------------------------------------------------------------------------------------------------------------ Arne H. Carlson Board member since Chair, RiverSource Family of Funds, 1999-2006; former None 901 S. Marquette Ave. 1999 Governor of Minnesota Minneapolis, MN 55402 Age 74 ------------------------------------------------------------------------------------------------------------------------------ Pamela G. Carlton Board member since President, Springboard -- Partners in Cross Cultural None 901 S. Marquette Ave. 2007 Leadership (consulting company) Minneapolis, MN 55402 Age 54 ------------------------------------------------------------------------------------------------------------------------------ Patricia M. Flynn Board member since Trustee Professor of Economics and Management, Bentley None 901 S. Marquette Ave. 2004 College; former Dean, McCallum Graduate School of Minneapolis, MN 55402 Business, Bentley University Age 58 ------------------------------------------------------------------------------------------------------------------------------ Anne P. Jones Board member since Attorney and Consultant None 901 S. Marquette Ave. 1985 Minneapolis, MN 55402 Age 74 ------------------------------------------------------------------------------------------------------------------------------ Jeffrey Laikind, CFA Board member since Former Managing Director, Shikiar Asset Management American Progressive 901 S. Marquette Ave. 2005 Insurance Minneapolis, MN 55402 Age 73 ------------------------------------------------------------------------------------------------------------------------------ Stephen R. Lewis, Jr. Chair of the Board President Emeritus and Professor of Economics, Carleton Valmont Industries, 901 S. Marquette Ave. since 2007, College Inc. (manufactures Minneapolis, MN 55402 Board member since irrigation systems) Age 70 2002 ------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 56 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- INDEPENDENT BOARD MEMBERS (CONTINUED)
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION OTHER AGE LENGTH OF SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS ------------------------------------------------------------------------------------------------------------------------------ John F. Maher Board member since Retired President and Chief Executive Officer and None 901 S. Marquette Ave. 2008 former Director, Great Western Financial Corporation Minneapolis, MN 55402 (financial services), 1986-1997 Age 66 ------------------------------------------------------------------------------------------------------------------------------ Catherine James Paglia Board member since Director, Enterprise Asset Management, Inc. (private None 901 S. Marquette Ave. 2004 real estate and asset management company) Minneapolis, MN 55402 Age 56 ------------------------------------------------------------------------------------------------------------------------------ Leroy C. Richie Board member since Counsel, Lewis & Munday, P.C. since 1987; Vice Digital Ally, Inc. 901 S. Marquette Ave. 2008 President and General Counsel, Automotive Legal (digital imaging); Minneapolis, MN 55402 Affairs, Chrysler Corporation, 1990-1997 Infinity, Inc. (oil Age 67 and gas exploration and production); OGE Energy Corp. (energy and energy services) ------------------------------------------------------------------------------------------------------------------------------ Alison Taunton-Rigby Board member since Chief Executive Officer and Director, RiboNovix, Inc. Idera 901 S. Marquette Ave. 2002 since 2003 (biotechnology); former President, Forester Pharmaceuticals, Minneapolis, MN 55402 Biotech Inc. Age 65 (biotechnology); Healthways, Inc. (health management programs) ------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT 57 BOARD MEMBERS AND OFFICERS (continued) ----------------------------------------- BOARD MEMBER AFFILIATED WITH RIVERSOURCE INVESTMENTS*
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION OTHER AGE LENGTH OF SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS ------------------------------------------------------------------------------------------------------------------------------ William F. Truscott Board member since President -- U.S. Asset Management and Chief Investment None 53600 Ameriprise 2001, Officer, Ameriprise Financial, Inc. since 2005; Financial Center Vice President since President, Chairman of the Board and Chief Investment Minneapolis, MN 55474 2002 Officer, RiverSource Investments, LLC since 2001; Age 48 Director, President and Chief Executive Officer, Ameriprise Certificate Company since 2006; Chairman of the Board and Chief Executive Officer, RiverSource Distributors, Inc. since 2006 and of RiverSource Fund Distributors, Inc. since 2008; Senior Vice President -- Chief Investment Officer, Ameriprise Financial, Inc., 2001-2005 ------------------------------------------------------------------------------------------------------------------------------
* Interested person by reason of being an officer, director, security holder and/or employee of RiverSource Investments or Ameriprise Financial. The SAI has additional information about the Fund's Board members and is available, without charge, upon request by calling the RiverSource Family of Funds at 1(800) 221-2450; contacting your financial intermediary; or visiting riversource.com/funds. The Board has appointed officers who are responsible for day-to-day business decisions based on policies it has established. The officers serve at the pleasure of the Board. In addition to Mr. Truscott, who is Vice President, the Fund's other officers are: FUND OFFICERS
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION AGE LENGTH OF SERVICE DURING PAST FIVE YEARS -------------------------------------------------------------------------------------------------------- Patrick T. Bannigan President since 2006 Director and Senior Vice President -- Asset Management, 172 Ameriprise Financial Products and Marketing, RiverSource Investments, LLC Center and Director and Vice President -- Asset Management, Minneapolis, MN 55474 Products and Marketing, RiverSource Distributors, Inc. Age 43 since 2006 and of RiverSource Fund Distributors, Inc. since 2008; Managing Director and Global Head of Product, Morgan Stanley Investment Management, 2004- 2006; President, Touchstone Investments, 2002-2004 --------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 58 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- FUND OFFICERS (CONTINUED)
NAME, POSITION HELD ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION AGE LENGTH OF SERVICE DURING PAST FIVE YEARS -------------------------------------------------------------------------------------------------------- Michelle M. Keeley Vice President since Executive Vice President -- Equity and Fixed Income, 172 Ameriprise Financial 2004 Ameriprise Financial, Inc. and RiverSource Investments, Center LLC since 2006; Vice President -- Investments, Minneapolis, MN 55474 Ameriprise Certificate Company since 2003; Senior Vice Age 45 President -- Fixed Income, Ameriprise Financial, Inc., 2002-2006 and RiverSource Investments, LLC, 2004-2006 -------------------------------------------------------------------------------------------------------- Amy K. Johnson Vice President since Chief Administrative Officer, RiverSource Investments, 5228 Ameriprise Financial 2006 LLC since 2009; Vice President -- Asset Management and Center Minneapolis, MN Trust Company Services, RiverSource Investments, LLC, 55474 2006-2009; Vice President -- Operations and Compliance, Age 43 RiverSource Investments, LLC, 2004-2006; Director of Product Development -- Mutual Funds, Ameriprise Financial, Inc., 2001-2004 -------------------------------------------------------------------------------------------------------- Jeffrey P. Fox Treasurer since 2002 Vice President -- Investment Accounting, Ameriprise 105 Ameriprise Financial Financial, Inc. since 2002; Chief Financial Officer, Center RiverSource Distributors, Inc. since 2006 Minneapolis, MN 55474 Age 54 -------------------------------------------------------------------------------------------------------- Scott R. Plummer Vice President, Vice President and Chief Counsel -- Asset Management, 5228 Ameriprise Financial General Counsel and Ameriprise Financial, Inc. since 2005; Chief Counsel, Center Secretary since 2006 RiverSource Distributors, Inc. and Chief Legal Officer Minneapolis, MN 55474 and Assistant Secretary, RiverSource Investments, LLC Age 50 since 2006; Chief Counsel, RiverSource Fund Distributors, Inc. since 2008; Vice President, General Counsel and Secretary, Ameriprise Certificate Company since 2005; Vice President -- Asset Management Compliance, Ameriprise Financial, Inc., 2004-2005; Senior Vice President and Chief Compliance Officer, USBancorp Asset Management, 2002-2004 -------------------------------------------------------------------------------------------------------- Eleanor T.M. Hoagland Chief Compliance Chief Compliance Officer, RiverSource Investments, LLC, 100 Park Avenue Officer since 2009 Kenwood Capital Management LLC, Ameriprise Certificate New York, NY 10010 Company, RiverSource Service Corporation and Seligman Age 58 Data Corp. since 2009; Chief Compliance Officer for each of the Seligman funds since 2004 and all funds in the RiverSource Family of Funds since 2009; Anti-Money Laundering Prevention Officer and Identity Theft Prevention Officer for each of the Seligman funds since 2008; Managing Director, J. & W. Seligman & Co. Incorporated and Vice-President for each of the Seligman funds, 2004-2008 -------------------------------------------------------------------------------------------------------- Neysa M. Alecu Money Laundering Vice President -- Compliance, Ameriprise Financial, 2934 Ameriprise Financial Prevention Officer Inc. since 2008; Anti-Money Laundering Officer, Center since 2004 Ameriprise Financial, Inc. since 2004; Compliance Minneapolis, MN 55474 Director, Ameriprise Financial, Inc., 2004-2008 Age 45 --------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT 59 APPROVAL OF INVESTMENT MANAGEMENT SERVICES AGREEMENT ---------------------------------------------------------------------- RiverSource Investments, LLC ("RiverSource Investments" or the "investment manager"), a wholly-owned subsidiary of Ameriprise Financial, Inc. ("Ameriprise Financial"), serves as the investment manager to the Fund. Under an investment management services agreement (the "IMS Agreement"), RiverSource Investments provides investment advice and other services to the Fund and all funds in the RiverSource Family of Funds (collectively, the "Funds"). On an annual basis, the Fund's Board of Directors (the "Board"), including the independent Board members (the "Independent Directors"), considers renewal of the IMS Agreement. RiverSource Investments prepared detailed reports for the Board and its Contracts Committee in March and April 2009, including reports based on data provided by independent organizations to assist the Board in making this determination. In addition, throughout the year, the Board (or its committees) reviews information prepared by RiverSource Investments addressing the services RiverSource Investments provides and Fund performance. The Board accords particular weight to the work, deliberations and conclusions of the Contracts, Investment Review and Compliance Committees in determining whether to continue the IMS Agreement. At the April 7-8, 2009 in-person Board meeting, independent legal counsel to the Independent Directors reviewed with the Independent Directors various factors relevant to the Board's consideration of advisory agreements and the Board's legal responsibilities related to such consideration. Following an analysis and discussion of the factors identified below, the Board, including all of the Independent Directors, approved renewal of the IMS Agreement. Nature, Extent and Quality of Services Provided by RiverSource Investments: The Board analyzed various reports and presentations it had received detailing the services performed by RiverSource Investments, as well as its expertise, resources and capabilities. The Board specifically considered many developments during the past year concerning the services provided by RiverSource Investments, including, in particular, the continued investment in, and resources dedicated to, the Fund's operations, most notably, the large investment made in the acquisition of J. & W. Seligman & Co. Incorporated, including its portfolio management operations, personnel and infrastructure (including the addition of two new offices in New York City and Palo Alto). Further, in connection with the Board's evaluation of the overall package of services provided by RiverSource Investments, the Board considered the quality of the administrative and transfer agency services provided by RiverSource Investments' affiliates to the Fund. The Board also reviewed the financial condition of RiverSource Investments (and its affiliates) and each entity's ability to carry out its responsibilities under the IMS -------------------------------------------------------------------------------- 60 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT -------------------------------------------------------------------------------- Agreement. Further, the Board considered RiverSource Investments' ability to retain key personnel and its expectations in this regard. The Board also discussed the acceptability of the terms of the IMS Agreement (including the relatively broad scope of services required to be performed by RiverSource Investments). The Board concluded that the services being performed under the IMS Agreement were of a reasonably high quality, particularly in light of recent market conditions. Based on the foregoing, and based on other information received (both oral and written, including the information on investment performance referenced below) and other considerations, the Board concluded that RiverSource Investments and its affiliates were in a position to continue to provide a high quality and level of services to the Fund. Investment Performance: For purposes of evaluating the nature, extent and quality of services provided under the IMS Agreement, the Board carefully reviewed the investment performance of the Fund. In this regard, the Board considered: (i) detailed reports containing data prepared by an independent organization showing, for various periods, the performance of the Fund, the performance of a benchmark index, the percentage ranking of the Fund among its comparison group and the net assets of the Fund; and (ii) a report detailing the Fund's performance over various periods, recent Fund inflows (and outflows) and a comparison of the Fund's net assets from December 2007 to December 2008. The Board observed that the Fund's investment performance was appropriate in light of the particular management style and the exceptionally challenging market conditions involved. Comparative Fees, Costs of Services Provided and the Profits Realized By RiverSource Investments and its Affiliates from their Relationships with the Fund: The Board reviewed comparative fees and the costs of services to be provided under the IMS Agreement. The Board members considered detailed comparative information set forth in an annual report on fees and expenses, including, among other things, data (prepared by an independent organization) showing a comparison of the Fund's expenses with median expenses paid by funds in its peer group, as well as data showing the Fund's contribution to RiverSource Investments' profitability. The Board accorded particular weight to the notion that the level of fees should reflect a rational pricing model applied consistently across the various product lines in the Funds' family, while assuring that the overall fees for each fund are generally in line with the "pricing philosophy" (i.e., that the total expense ratio -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT 61 APPROVAL OF INVESTMENT MANAGEMENT SERVICES AGREEMENT (continued) ---------------------------------------------------------- of each fund (excluding the effect of a performance incentive adjustment, if applicable), with few exceptions, is at or below the median expense ratio of funds in the same comparison group). The Board took into account that the Fund's total expense ratio (after considering proposed expense caps/waivers) was below the peer group's median expense ratio shown in the reports. The Board also considered the expected profitability of RiverSource Investments and its affiliates in connection with RiverSource Investments providing investment management services to the Fund. In this regard, the Board referred to a detailed profitability report, discussing the profitability to RiverSource Investments and Ameriprise Financial from managing and operating the Fund, including data showing comparative profitability over the past two years. The Board also considered the services acquired by the investment manager through the use of commission dollars paid by the Funds on portfolio transactions. The Board noted that the fees paid by the Fund should permit the investment manager to offer competitive compensation to its personnel, make necessary investments in its business and earn an appropriate profit. The Board concluded that profitability levels were reasonable. Economies of Scale to be Realized: The Board also considered the economies of scale that might be realized by RiverSource Investments as the Fund grows and took note of the extent to which Fund shareholders might also benefit from such growth. The Board considered that the IMS Agreement provides for lower fees as assets increase at pre-established breakpoints and concluded that the IMS Agreement satisfactorily provided for sharing these economies of scale. Based on the foregoing, the Board, including all of the Independent Directors, concluded that the investment management service fees were fair and reasonable in light of the extent and quality of services provided. In reaching this conclusion, no single factor was determinative. On April 8, 2009, the Board, including all of the Independent Directors, approved the renewal of the IMS Agreement for an additional annual period. -------------------------------------------------------------------------------- 62 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT PROXY VOTING ------------------------------------------------------------------- The policy of the Board is to vote the proxies of the companies in which the Fund holds investments consistent with the procedures as stated in the Statement of Additional Information (SAI). You may obtain a copy of the SAI without charge by calling the RiverSource Family of Funds at 1(800) 221-2450; contacting your financial intermediary; visiting riversource.com/funds; or searching the website of the Securities and Exchange Commission (SEC) at http://www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities is filed with the SEC by August 31 for the most recent 12-month period ending June 30 of that year, and is available without charge by visiting riversource.com/funds; or searching the website of the SEC at www.sec.gov. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 ANNUAL REPORT 63 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND 734 Ameriprise Financial Center Minneapolis, MN 55474 RIVERSOURCE.COM/FUNDS This report must be accompanied or preceded by the Fund's current prospectus. RiverSource(R) mutual funds are distributed by RiverSource Distributors, Inc., and RiverSource Fund Distributors, Inc., Members FINRA, and managed by RiverSource Investments, LLC. RiverSource is part of Ameriprise Financial, Inc. (RIVERSOURCE INVESTMENTS LOGO) (C)2009 RiverSource Investments, LLC. S-6245 L (7/09)
Item 2. (a) The Registrant has adopted a code of ethics that applies to the Registrant's principal executive officer and principal financial officer. A copy of the code of ethics is filed as an exhibit to this form N-CSR. (b) During the period covered by this report, there were not any amendments to the provisions of the code of ethics adopted in 2(a) above. (c) During the period covered by this report, there were not any implicit or explicit waivers to the provisions of the code of ethics adopted in 2(a). Item 3. The Registrant's board of directors has determined that independent directors Pamela G. Carlton, Jeffrey Laikind, John F. Maher and Anne P. Jones, each qualify as audit committee financial experts. Item 4. Principal Accountant Fees and Services Fund - Related Fees (a) Audit Fees. The fees for the year ended May 31, to Ernst & Young LLP for professional services rendered for the audit of the annual financial statements for RiverSource Government Income Series, Inc. were as follows: 2009 - $52,766 2008 - $49,300 (b) Audit - Related Fees. The fees for the year ended May 31, to Ernst & Young LLP for additional professional services rendered in connection with the registrant's security count pursuant to Rule 17f-2 and the semiannual financial statement review for RiverSource Government Income Series, Inc. were as follows: 2009 - $2,833 2008 - $1,590 (c) Tax Fees. The fees for the year ended May 31, to Ernst & Young LLP for tax compliance related services for RiverSource Government Income Series, Inc. were as follows: 2009 - $8,514 2008 - $6,600 (d) All Other Fees. The fees for the year ended May 31, to Ernst & Young LLP for additional professional services rendered for RiverSource Government Income Series, Inc. were as follows: 2009 - $0 2008 - $0 (e) (1) Audit Committee Pre-Approval Policy. Pursuant to Sarbanes-Oxley pre-approval requirements, all services to be performed by Ernst & Young LLP for the registrant and to the registrant's investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant must be pre-approved by the audit committee. (e) (2) 100% of the services performed for items (b) through (d) above during 2009 and 2008 were pre-approved by the audit committee. (f) Not applicable. (g) Non-Audit Fees. The fees for the year ended May 31, to Ernst & Young LLP by the registrant for non-audit fees and by the registrant's investment adviser, and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant were as follows: 2009 - $587,353 2008 - $619,990 (h) 100% of the services performed in item (g) above during 2009 and 2008 were pre-approved by the Ameriprise Financial Audit Committee and/or the RiverSource Mutual Funds Audit Committee. Item 5. Audit Committee of Listed Registrants. Not applicable. Item 6. 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) Code of ethics as applies to the Registrant's principal executive officer and principal financial officer, as required to be disclosed under Item 2 of Form N-CSR, is attached as Ex. 99.CODE ETH. (a)(2) Separate certification for the Registrant's principal executive officer and principal financial officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company Act of 1940, are attached as EX.99.CERT. (a)(3) Not applicable. (b) A certification by the Registrant's principal executive officer and principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(b) under the Investment Company Act of 1940, is attached as EX.99.906 CERT. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) RiverSource Government Income Series, Inc. By /s/ Patrick T. Bannigan --------------------------------- Patrick T. Bannigan President and Principal Executive Officer Date August 4, 2009 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By /s/ Patrick T. Bannigan --------------------------------- Patrick T. Bannigan President and Principal Executive Officer Date August 4, 2009 By /s/ Jeffrey P. Fox --------------------------------- Jeffrey P. Fox Treasurer and Principal Financial Officer Date August 4, 2009