N-CSRS 1 c55210nvcsrs.txt FORM N-CSRS 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: 11/30 Semiannual Report (RIVERSOURCE INVESTMENTS LOGO) RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND SEMIANNUAL REPORT FOR THE PERIOD ENDED NOVEMBER 30, 2009 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. (SINGLE STRATEGY FUNDS ICON) TABLE OF CONTENTS -------------------------------------------------------------- Your Fund at a Glance.............. 2 Fund Expenses Example.............. 7 Portfolio of Investments........... 10 Statement of Assets and Liabilities...................... 22 Statement of Operations............ 24 Statements of Changes in Net Assets........................... 26 Financial Highlights............... 28 Notes to Financial Statements...... 35 Proxy Voting....................... 52
-------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT 1 YOUR FUND AT A GLANCE ---------------------------------------------------------- (UNAUDITED) FUND SUMMARY -------------------------------------------------------------------------------- > RiverSource Short Duration U.S. Government Fund (the Fund) Class A shares rose 4.05% (excluding sales charge) for the six months ended Nov. 30, 2009. > The Fund outperformed its benchmark, the Barclays Capital U.S. 1-3 Year Government Index, which gained 1.52% for the same period. > The Fund also outperformed the Lipper Short U.S. Government Funds Index, representing the Fund's peer group, which advanced 2.50% during the same time frame. ANNUALIZED TOTAL RETURNS (for period ended Nov. 30, 2009) --------------------------------------------------------------------------------
6 MONTHS* 1 YEAR 3 YEARS 5 YEARS 10 YEARS ------------------------------------------------------------------------- RiverSource Short Duration U.S. Government Fund Class A (excluding sales charge) +4.05% +7.12% +3.45% +3.20% +3.59% ------------------------------------------------------------------------- Barclays Capital U.S. 1-3 Year Government Index(1) (unmanaged) +1.52% +3.21% +5.29% +4.37% +4.73% ------------------------------------------------------------------------- Lipper Short U.S. Government Funds Index(2) +2.50% +5.58% +4.43% +3.84% +4.16% -------------------------------------------------------------------------
* Not annualized. The performance information shown represents past performance and is not a guarantee of future results. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by contacting your financial intermediary, visiting riversource.com/funds or calling 1(800) 221-2450. The 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 fees and expenses. The Fund's returns reflect the effect of fee waivers/expense reimbursements, if any. Without such waivers/reimbursements, the Fund's returns would be lower. See the Average Annual Total Returns table for performance of other share classes of the Fund. -------------------------------------------------------------------------------- 2 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT -------------------------------------------------------------------------------- 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. (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 SEMIANNUAL REPORT 3 YOUR FUND AT A GLANCE (continued) ---------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS --------------------------------------------------------------------------------
AT NOV. 30, 2009 Without sales SINCE charge 6 MONTHS* 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION** Class A (inception 8/19/85) +4.05% +7.12% +3.45% +3.20% +3.59% N/A ------------------------------------------------------------------------------- Class B (inception 3/20/95) +3.64% +6.07% +2.59% +2.39% +2.79% N/A ------------------------------------------------------------------------------- Class C (inception 6/26/00) +3.64% +6.30% +2.74% +2.43% N/A +3.03% ------------------------------------------------------------------------------- Class I (inception 3/4/04) +4.03% +7.53% +3.84% +3.54% N/A +3.10% ------------------------------------------------------------------------------- Class R2 (inception 8/3/09) N/A N/A N/A N/A N/A +2.64%* ------------------------------------------------------------------------------- Class R4 (inception 3/20/95) +3.86% +7.23% +3.58% +3.36% +3.75% N/A ------------------------------------------------------------------------------- Class W (inception 12/1/06) +3.79% +7.05% N/A N/A N/A +3.31% -------------------------------------------------------------------------------
SINCE With sales charge 6 MONTHS* 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION** Class A (inception 8/19/85) +0.93% +3.90% +2.41% +2.58% +3.28% N/A ------------------------------------------------------------------------------- Class B (inception 3/20/95) -1.86% +1.07% +1.64% +2.02% +2.79% N/A ------------------------------------------------------------------------------- Class C (inception 6/26/00) +2.64% +5.30% +2.74% +2.43% N/A +3.03% -------------------------------------------------------------------------------
*Not annualized. **For classes with less than 10 years performance. Class A share performance reflects the maximum initial sales charge of 3.00%. Class B share performance reflects a contingent deferred sales charge (CDSC) applied as follows: first year 5%; second year 4%; third and fourth years 3%; fifth year 2%; sixth year 1%; no sales charge thereafter. Class C shares may be subject to a 1% CDSC if shares are sold within one year after purchase. Sales charges do not apply to Class I, Class R2, Class R4, and Class W shares. Class I, Class R2 and Class R4 are available to qualifying institutional investors only. Class W shares are offered through qualifying discretionary accounts. -------------------------------------------------------------------------------- 4 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT -------------------------------------------------------------------------------- STYLE MATRIX --------------------------------------------------------------------------------
DURATION SHORT INT. LONG X HIGH MEDIUM QUALITY LOW
Shading within the style matrix approximates areas in which the Fund is designed to generally invest. The style matrix can be a valuable tool for constructing and monitoring your portfolio. It provides a frame of reference for distinguishing the types of stocks or bonds owned by a mutual fund, and may serve as a guideline for helping you build a portfolio. Investment products, including shares of mutual funds, are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value. PORTFOLIO STATISTICS ------------------------------------------------------ Weighted average life(1) 2.6 years -------------------------------------- Effective duration(2) 1.8 years -------------------------------------- Weighted average bond rating(3) AAA --------------------------------------
(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. Shares of RiverSource Short Duration U.S. Government 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. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT 5 YOUR FUND AT A GLANCE (continued) ---------------------------------------------- PORTFOLIO BREAKDOWN(1) (at Nov. 30, 2009; % of portfolio assets) ---------------------------------------------------------------------
Asset-Backed 8.3% ------------------------------------------------ Commercial Mortgage-Backed 1.7% ------------------------------------------------ FDIC - Insured Debt(2) 7.4% ------------------------------------------------ Foreign Government 0.1% ------------------------------------------------ Government Guaranteed(3) 0.1% ------------------------------------------------ Residential Mortgage-Backed(4) 39.9% ------------------------------------------------ U.S. Government Obligations & Agencies 38.7% ------------------------------------------------ Other(5) 3.8% ------------------------------------------------
(1) Percentages indicated are based upon total investments (excluding Investments of Cash Collateral Received for Securities on Loan) as of Nov. 30, 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 39.9%, 3.7% is due to forward commitment residential mortgage-backed securities activity. Short-term securities are held as collateral for these commitments. (5) Cash & Cash Equivalents. QUALITY BREAKDOWN (at Nov. 30, 2009; % of portfolio assets excluding cash equivalents) ---------------------------------------------------------------------
AAA bonds 91.8% ------------------------------------------------ AA bonds 3.1% ------------------------------------------------ A bonds 2.2% ------------------------------------------------ BBB bonds 1.5% ------------------------------------------------ Non-investment grade bonds 0.5% ------------------------------------------------ Non-rated bonds 0.9% ------------------------------------------------
Bond ratings apply to the underlying holdings of the Fund and not the Fund itself. Whenever possible, the Standard and Poor's rating is used to determine the credit quality of a security. Standard and Poor's rates the creditworthiness of corporate bonds, with 15 categories, ranging from AAA (highest) to D (lowest). Ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories. If Standard and Poor's doesn't rate a security, then Moody's rating is used. RiverSource Investments, LLC (the Investment Manager) rates a security using an internal rating system when Moody's doesn't provide a rating. -------------------------------------------------------------------------------- 6 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT FUND EXPENSES EXAMPLE ---------------------------------------------------------- (UNAUDITED) As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments; and (2) ongoing costs, 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 ongoing expenses of any funds in which the Fund 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 ongoing expenses charged by 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 indicated and held until Nov. 30, 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. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT 7 FUND EXPENSES EXAMPLE (continued) ----------------------------------------------
BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED JUNE 1, 2009(a) NOV. 30, 2009 THE PERIOD(b) EXPENSE RATIO -------------------------------------------------------------------------------------------- Class A -------------------------------------------------------------------------------------------- Actual(c) $1,000 $1,040.50 $4.45 .86% -------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,020.98 $4.40 .86% -------------------------------------------------------------------------------------------- Class B -------------------------------------------------------------------------------------------- Actual(c) $1,000 $1,036.40 $8.36 1.62% -------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,017.13 $8.28 1.62% -------------------------------------------------------------------------------------------- Class C -------------------------------------------------------------------------------------------- Actual(c) $1,000 $1,036.40 $8.36 1.62% -------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,017.13 $8.28 1.62% -------------------------------------------------------------------------------------------- Class I -------------------------------------------------------------------------------------------- Actual(c) $1,000 $1,040.30 $2.48 .48% -------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,022.91 $2.46 .48% -------------------------------------------------------------------------------------------- Class R2 -------------------------------------------------------------------------------------------- Actual(d) $1,000 $1,026.40 $4.23 1.28% -------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.85 $6.55 1.28% -------------------------------------------------------------------------------------------- Class R4 -------------------------------------------------------------------------------------------- Actual(c) $1,000 $1,038.60 $4.03 .78% -------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,021.39 $4.00 .78% --------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 8 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT --------------------------------------------------------------------------------
BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED JUNE 1, 2009(a) NOV. 30, 2009 THE PERIOD(b) EXPENSE RATIO -------------------------------------------------------------------------------------------- Class W -------------------------------------------------------------------------------------------- Actual(c) $1,000 $1,037.90 $4.80 .93% -------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,020.63 $4.76 .93% --------------------------------------------------------------------------------------------
(a) The beginning account values for Class R2 are as of the close of business on Aug. 3, 2009 (when shares of the class became publicly available) for actual expense calculations, and as of June 1, 2009 for hypothetical expense calculations. (b) Expenses for Classes A, B, C, I, R4 and W are equal to the annualized expense ratio for each class as indicated above, multiplied by the average account value over the period, multiplied by 185/365 (to reflect the one- half year period). Actual expenses for Class R2 are equal to the annualized expense ratio for the class as indicated above, multiplied by the average account value over the period, multiplied by 119/365 (to reflect the period from Aug. 3, 2009 to Nov. 30, 2009). Hypothetical expenses for Class R2 are equal to the annualized expense ratio for the class as indicated above, multiplied by the average account value over the period, multiplied by 185/365 (to reflect the one-half year period). (c) Based on the actual return for the six months ended Nov. 30, 2009: +4.05% for Class A, +3.64% for Class B, +3.64% for Class C, +4.03% for Class I, +3.86% for Class R4 and +3.79% for Class W. (d) Based on the actual return for Class R2 of +2.64% for the period from Aug. 3, 2009 (when shares of the Class became publicly available) to Nov. 30, 2009. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT 9 PORTFOLIO OF INVESTMENTS ------------------------------------------------------- NOV. 30, 2009 (UNAUDITED) (Percentages represent value of investments compared to net assets) INVESTMENTS IN SECURITIES
BONDS (91.6%) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) FOREIGN AGENCIES (0.1%)(C) KFW 04-16-12 2.25% $395,000 $404,966 ---------------------------------------------------------------------------------- U.S. GOVERNMENT OBLIGATIONS & AGENCIES (40.0%) Federal Home Loan Banks 05-20-11 2.63 2,565,000 2,643,825 09-16-11 1.23 14,000,000 14,004,844 09-28-11 1.25 14,000,000 14,009,142 09-29-11 1.30 12,000,000 12,008,400 12-28-11 1.00 14,550,000(l) 14,578,429 08-24-12 2.30 17,000,000 17,066,147 09-28-12 0.66 4,325,000(i) 4,341,448 10-18-13 3.63 2,000,000(l) 2,137,056 11-17-17 5.00 500,000(l) 555,827 Federal Home Loan Mtge Corp 06-15-11 6.00 500,000(l) 541,494 12-15-11 1.13 11,525,000(l) 11,599,773 02-24-12 2.05 5,880,000 5,899,351 03-23-12 2.13 3,105,000 3,181,892 08-17-12 2.18 6,425,000 6,447,076 08-17-12 2.25 9,640,000 9,670,925 08-20-12 5.50 2,610,000(l) 2,909,628 08-24-12 2.25 6,705,000 6,777,535 07-15-14 5.00 900,000 1,010,865 06-13-18 4.88 5,405,000 5,969,487 Federal Natl Mtge Assn 06-09-10 3.26 580,000 588,684 08-12-10 3.25 870,000 887,466 03-02-11 2.00 12,935,000 12,991,733 04-15-11 2.13 7,700,000 7,744,475 04-29-11 0.60 3,121,000(i) 3,121,120 10-29-12 1.88 15,000,000 15,096,630 11-19-12 4.75 730,000(l) 802,952 04-09-13 3.25 14,350,000(l) 15,172,915 07-17-13 4.38 5,020,000 5,476,740 01-02-14 5.13 9,000,000 9,726,660 02-05-14 2.75 7,335,000(l) 7,564,414 02-13-17 5.00 2,500,000(l) 2,805,813 Private Export Funding U.S. Govt Guaranty 10-15-14 3.05 5,675,000 5,833,686 U.S. Treasury 07-31-11 1.00 3,250,000 3,276,913 01-15-12 1.13 17,000,000 17,132,804 06-15-12 1.88 6,690,000(l) 6,856,728 11-15-12 1.38 13,890,000(l) 13,999,606 02-29-16 2.63 3,000,000 3,030,936 11-15-16 4.63 1,000,000 1,127,109 02-15-19 2.75 2,885,000 2,789,434 05-15-19 3.13 965,000 960,250 02-15-29 5.25 2,475,000(l) 2,864,040 02-15-31 5.38 375,000(l) 441,504 02-15-36 4.50 585,000 615,347 11-15-39 4.38 1,755,000 1,808,473 U.S. Treasury Inflation-Indexed Bond 04-15-14 1.25 3,183,866(g) 3,331,682 ----------- Total 281,401,258 ---------------------------------------------------------------------------------- ASSET-BACKED (8.6%) Ameriquest Mtge Securities Series 2005-R6 Cl A2 08-25-35 0.44 1,974,161(i) 1,734,792 Asset Backed Securities Home Equity Series 2005-HE2 Cl M1 02-25-35 0.69 2,146,738(i) 1,818,925 Banc of America Funding Collateralized Mtge Obligation Series 2009-R14A Cl 1A1 09-26-37 1.33 4,897,922(d,i) 4,702,006 Bank of America Credit Card Trust Series 2008-A5 Cl A5 12-16-13 1.44 2,025,000(i) 2,028,871 Bear Stearns Asset Backed Securities Trust Series 2006-HE9 Cl 1A1 11-25-36 0.29 1,118,670(i) 1,007,841 Countrywide Asset-Backed Ctfs Series 2005-SD1 Cl A1C 05-25-35 0.63 2,799,406(d,i) 2,623,763
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 10 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT --------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) ASSET-BACKED (CONT.) Credit-Based Asset Servicing and Securitization LLC Series 2007-CB4 Cl A1A 04-25-37 0.33% $2,774,542(i) $2,065,203 First Franklin Mtge Loan Asset-backed Ctfs Series 2005-FFH3 Cl 2A3 09-25-35 0.65 535,125(i) 520,507 First Franklin Mtge Loan Asset-backed Ctfs Series 2006-FF18 Cl A2A 12-25-37 0.31 529,301(i) 517,969 GSAA Trust Series 2006-10 Cl AV1 06-25-36 0.32 496,789(i) 482,601 GSAA Trust Series 2006-15 Cl AV1 09-25-36 0.29 2,749,472(i) 2,736,751 Morgan Stanley Capital I Series 2006-WMC1 Cl A2B 12-25-35 0.44 2,127,540(i) 1,920,912 Morgan Stanley Home Equity Loan Trust Series 2006-2 Cl A3 02-25-36 0.41 1,298,578(i) 1,159,378 NovaStar Home Equity Loan Series 2006-4 Cl A2A (MGIC) 09-25-36 0.28 201,066(b,i) 198,868 RAAC Series Series 2006-SP4 Cl A1 11-25-36 0.34 2,441,864(i) 2,275,609 RBSSP Resecuritization Trust Collateralized Mtge Obligation Series 2009-10 Cl 4A1 07-26-36 0.38 3,616,720(d,i) 3,399,716 RBSSP Resecuritization Trust Collateralized Mtge Obligation Series 2009-10 Cl 7A1 03-26-37 0.33 3,607,399(d,i) 3,499,177 RBSSP Resecuritization Trust Collateralized Mtge Obligation Series 2009-11 Cl 2A1 04-26-36 0.38 5,545,225(d,i) 5,323,416 RBSSP Resecuritization Trust Collateralized Mtge Obligation Series 2009-12 Cl 2A1 10-26-32 4.77 2,958,400(d) 2,936,212 Residential Asset Mtge Products Series 2004 RS8 Cl AI4 06-25-32 5.06 2,536,544 2,509,053 Residential Asset Mtge Products Series 2006 RS4 Cl A2 07-25-36 0.35 980,017 937,972 Small Business Administration Series 2002-P10B Cl 1 08-10-12 5.20 287,212 302,333 Structured Asset Investment Loan Trust Series 2005-9 Cl A5 11-25-35 0.47 2,587,236(i) 2,418,241 Structured Asset Securities Collateralized Mtge Obligation Series 2006-NC1 Cl A6 05-25-36 0.29 1,496,367(i) 1,422,056 Structured Asset Securities Series 2007-WF2 Cl A2 08-25-37 0.94 1,929,730(i) 1,894,988 Target Credit Card Master Trust Series 2005-1 Cl A 10-27-14 0.30 10,250,000(i) 10,071,203 ----------- Total 60,508,363 ---------------------------------------------------------------------------------- COMMERCIAL MORTGAGE-BACKED (1.7%)(f) Bear Stearns Commercial Mtge Securities Series 2004-PWR6 Cl A4 11-11-41 4.52 1,575,000 1,543,893 Federal Home Loan Mtge Corp Multifamily Structured Pass-Through Ctfs Series K001 Cl A2 04-25-16 5.65 4,976,687 5,556,530 JPMorgan Chase Commercial Mtge Securities Series 2004-CBX Cl A3 01-12-37 4.18 5,225,173 5,220,320 ----------- Total 12,320,743 ---------------------------------------------------------------------------------- RESIDENTIAL MORTGAGE-BACKED (41.2%)(f,h) Citigroup Mtge Loan Trust Collateralized Mtge Obligation Series 2006-AR9 Cl 1A1 11-25-36 0.31 346,262(i) 312,713
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT 11 PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) RESIDENTIAL MORTGAGE-BACKED (CONT.) Citigroup Mtge Loan Trust Collateralized Mtge Obligation Series 2009-3 Cl 3A2 01-19-34 4.68% $2,915,000(d,i) $2,813,554 Citigroup Mtge Loan Trust Collateralized Mtge Obligation Series 2009-7 Cl 4A2 09-25-35 4.56 5,600,980(d,i) 777,136 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-OA11 Cl A3B1 09-25-46 0.42 1,929,708(i) 1,503,874 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2007-OH3 Cl A3 09-25-47 0.74 3,533,775(i) 411,515 Countrywide Home Loans Collateralized Mtge Obligation Series 2005-R2 Cl 2A1 06-25-35 7.00 3,663,216(d) 3,197,832 Credit Suisse First Boston Mtge Securities Collateralized Mtge Obligation Series 2003-1 Cl 1A1 02-25-33 7.00 1,082,029 1,072,486 Federal Home Loan Mtge Corp 12-01-24 4.50 3,000,000(e) 3,140,157 12-01-39 5.50 3,250,000(e) 3,459,219 12-01-39 6.00 1,000,000(e) 1,072,656 Federal Home Loan Mtge Corp #1G2547 12-01-36 6.10 1,263,020(i) 1,350,997 Federal Home Loan Mtge Corp #1G2598 01-01-37 6.08 1,769,703(i) 1,876,756 Federal Home Loan Mtge Corp #1J0614 09-01-37 5.68 2,676,846(i) 2,836,145 Federal Home Loan Mtge Corp #1Q0140 08-01-36 6.16 671,445(i) 713,424 Federal Home Loan Mtge Corp #A18107 01-01-34 5.50 2,301,780 2,460,656 Federal Home Loan Mtge Corp #A75929 04-01-38 7.00 286,033 313,593 Federal Home Loan Mtge Corp #B10459 10-01-18 5.50 888,147 959,347 Federal Home Loan Mtge Corp #C00351 07-01-24 8.00 189,740 218,274 Federal Home Loan Mtge Corp #C00385 01-01-25 9.00 324,557 365,525 Federal Home Loan Mtge Corp #C80329 08-01-25 8.00 61,159 70,380 Federal Home Loan Mtge Corp #E00398 10-01-10 7.00 73,383 75,174 Federal Home Loan Mtge Corp #E81240 06-01-15 7.50 2,224,465 2,419,918 Federal Home Loan Mtge Corp #E90650 07-01-12 5.50 64,859 67,125 Federal Home Loan Mtge Corp #E92454 11-01-17 5.00 1,933,567 2,076,792 Federal Home Loan Mtge Corp #E96624 05-01-18 5.00 1,081,369 1,159,441 Federal Home Loan Mtge Corp #G00363 06-01-25 8.00 241,044 277,388 Federal Home Loan Mtge Corp #G00501 05-01-26 9.00 426,479 492,581 Federal Home Loan Mtge Corp #G04710 09-01-38 6.00 1,540,062 1,654,006 Federal Home Loan Mtge Corp #G10669 03-01-12 7.50 583,936 618,969 Federal Home Loan Mtge Corp #G11243 04-01-17 6.50 8,914,777 9,679,223 Federal Home Loan Mtge Corp #G12100 11-01-13 5.00 1,831,813 1,914,657 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 11 Cl B 01-01-20 2.97 6,050(j) 1,703 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2471 Cl SI 03-15-32 20.43 1,076,553(j) 167,108 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 3517 Cl JI 12-15-12 36.33 2,392,322(j) 34,010
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 12 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT --------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) RESIDENTIAL MORTGAGE-BACKED (CONT.) Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 3550 Cl GS 07-15-39 22.65% $11,454,955(j) $1,288,223 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 3578 04-15-12 31.61 47,665,045(j) 989,240 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 3600 Cl DI 01-15-13 0.00 38,102,622(j) 1,089,497 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Series 2617 Cl HD 06-15-16 7.00 3,482,095 3,674,096 Federal Home Loan Mtge Corp Multifamily Structured Pass-Through Ctfs Series K003 Cl A1 07-25-13 2.23 4,954,482 5,029,633 Federal Natl Mtge Assn 12-01-39 6.00 15,000,000(e) 16,078,124 12-01-39 6.50 3,000,000(e) 3,240,468 Federal Natl Mtge Assn #125032 11-01-21 8.00 90,237 102,852 Federal Natl Mtge Assn #190129 11-01-23 6.00 711,314 766,214 Federal Natl Mtge Assn #190988 06-01-24 9.00 162,405 177,471 Federal Natl Mtge Assn #254384 06-01-17 7.00 209,372 228,247 Federal Natl Mtge Assn #254454 08-01-17 7.00 414,555 451,927 Federal Natl Mtge Assn #254723 05-01-23 5.50 6,178,295 6,649,749 Federal Natl Mtge Assn #255501 09-01-14 6.00 416,860 441,656 Federal Natl Mtge Assn #256901 09-01-37 6.50 1,736,083 1,871,952 Federal Natl Mtge Assn #303885 05-01-26 7.50 320,902 364,630 Federal Natl Mtge Assn #313007 07-01-11 7.50 52,608 53,723 Federal Natl Mtge Assn #336512 02-01-26 6.00 41,141 44,478 Federal Natl Mtge Assn #357485 02-01-34 5.50 9,120,105 9,742,480 Federal Natl Mtge Assn #407327 01-01-14 5.50 225,820 243,782 Federal Natl Mtge Assn #456374 12-01-13 5.50 399,367 431,133 Federal Natl Mtge Assn #508402 08-01-14 6.50 201,949 219,381 Federal Natl Mtge Assn #545818 07-01-17 6.00 8,721,925 9,483,305 Federal Natl Mtge Assn #545864 08-01-17 5.50 7,601,596 8,241,641 Federal Natl Mtge Assn #545910 08-01-17 6.00 1,380,415 1,500,915 Federal Natl Mtge Assn #555063 11-01-17 5.50 5,735,799 6,228,394 Federal Natl Mtge Assn #555367 03-01-33 6.00 6,931,029 7,507,035 Federal Natl Mtge Assn #579485 04-01-31 6.50 1,708,678 1,884,678 Federal Natl Mtge Assn #593829 12-01-28 7.00 1,286,492 1,433,875 Federal Natl Mtge Assn #601416 11-01-31 6.50 605,488 661,066 Federal Natl Mtge Assn #630993 09-01-31 7.50 1,911,680 2,175,876 Federal Natl Mtge Assn #648040 06-01-32 6.50 1,816,568 1,980,308 Federal Natl Mtge Assn #648349 06-01-17 6.00 5,038,743 5,478,462 Federal Natl Mtge Assn #651284 07-01-17 6.00 989,513 1,075,922 Federal Natl Mtge Assn #662866 11-01-17 6.00 954,675 1,036,552 Federal Natl Mtge Assn #665752 09-01-32 6.50 934,841 1,019,105
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT 13 PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) RESIDENTIAL MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #678940 02-01-18 5.50% $1,542,628 $1,675,413 Federal Natl Mtge Assn #686227 02-01-18 5.50 2,073,496 2,254,666 Federal Natl Mtge Assn #696837 04-01-18 5.50 2,318,469 2,522,197 Federal Natl Mtge Assn #704610 06-01-33 5.50 8,445,941(n) 9,022,310 Federal Natl Mtge Assn #722325 07-01-33 4.95 4,223,434(i) 4,466,307 Federal Natl Mtge Assn #725425 04-01-34 5.50 6,943,650 7,429,968 Federal Natl Mtge Assn #725431 08-01-15 5.50 4,417,366 4,768,730 Federal Natl Mtge Assn #725773 09-01-34 5.50 5,944,232 6,347,093 Federal Natl Mtge Assn #739243 09-01-33 6.00 2,438,087 2,666,729 Federal Natl Mtge Assn #739331 09-01-33 6.00 1,222,996 1,322,340 Federal Natl Mtge Assn #743524 11-01-33 5.00 2,610,233 2,747,117 Federal Natl Mtge Assn #745275 02-01-36 5.00 830,843 873,115 Federal Natl Mtge Assn #745392 12-01-20 4.50 807,308 854,653 Federal Natl Mtge Assn #753508 11-01-33 5.00 2,625,712 2,763,408 Federal Natl Mtge Assn #791447 10-01-34 6.00 3,868,086 4,176,248 Federal Natl Mtge Assn #797046 07-01-34 5.50 2,455,359 2,621,767 Federal Natl Mtge Assn #799843 11-01-34 2.63 870,143(i) 881,118 Federal Natl Mtge Assn #815463 02-01-35 5.50 1,429,644 1,526,536 Federal Natl Mtge Assn #829597 08-01-35 4.73 1,096,678(i) 1,137,467 Federal Natl Mtge Assn #832641 09-01-35 6.00 5,237,756 5,641,943 Federal Natl Mtge Assn #881886 04-01-36 5.36 677,886(i) 713,691 Federal Natl Mtge Assn #883267 07-01-36 6.50 3,790,090 4,157,169 Federal Natl Mtge Assn #886764 08-01-36 6.00 556,996(i) 591,767 Federal Natl Mtge Assn #887403 07-01-36 7.00 2,362,087 2,632,706 Federal Natl Mtge Assn #888989 06-01-37 5.92 3,947,249(i) 4,223,557 Federal Natl Mtge Assn #895834 04-01-36 6.02 1,054,608(i) 1,119,783 Federal Natl Mtge Assn #919341 05-01-37 6.50 2,813,003 3,042,383 Federal Natl Mtge Assn #946609 09-01-37 5.80 839,041(i) 889,888 Federal Natl Mtge Assn #967656 12-01-37 6.50 3,101,630 3,354,546 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 163 Cl 2 07-25-22 22.15 394,671(j) 68,631 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2002-18 Cl SE 02-25-32 32.60 2,121,184(j) 282,202 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-26 Cl MI 03-25-23 15.70 1,112,303(j) 133,975 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-63 Cl IP 07-25-33 8.63 2,946,794(j) 375,830 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-71 Cl IM 12-25-31 5.34 1,586,467(j) 183,717
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 14 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT --------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) RESIDENTIAL MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2008-40 Cl AI 08-25-12 12.75% $10,083,986(j) $194,310 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 36 Cl 2 08-01-18 18.30 3,458(j) 630 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 70 Cl 2 01-15-20 16.12 152,522(j) 34,822 Federal Natl Mtge Assn Collateralized Mtge Obligation Principal Only Series G-15 Cl A 06-25-21 2.49 19,892(k) 18,576 Federal Natl Mtge Assn Collateralized Mtge Obligation Series 2003-W11 Cl A1 06-25-33 4.33 99,506(i) 90,614 Federal Natl Mtge Assn Collateralized Mtge Obligation Series 2004-60 Cl PA 04-25-34 5.50 2,560,497 2,745,857 Govt Natl Mtge Assn #615740 08-15-13 6.00 435,709 471,092 Govt Natl Mtge Assn #648339 10-15-35 5.50 1,307,964 1,400,096 Govt Natl Mtge Assn #716007 08-15-39 6.00 6,117,582 6,556,507 Govt Natl Mtge Assn #781507 09-15-14 6.00 2,031,813 2,150,806 Govt Natl Mtge Assn Collateralized Mtge Obligation Series 2004-3 Cl JB 05-20-29 5.00 152,358 153,772 Govt Natl Mtge Assn Collateralized Mtge Obligation Series 2009-105 Cl A 12-16-50 3.46 7,150,000 7,225,969 Govt Natl Mtge Assn Collateralized Mtge Obligation Series 2009-63 Cl A 01-16-38 3.40 4,796,887 4,883,104 Govt Natl Mtge Assn Collateralized Mtge Obligation Series 2009-71 Cl A 04-16-38 3.30 7,124,178 7,269,440 Govt Natl Mtge Assn Collateralized Mtge Obligation Series 2009-90 Cl AC 01-16-33 3.14 5,400,000 5,436,471 Harborview Mtge Loan Trust Collateralized Mtge Obligation Series 2004-4 Cl 3A 06-19-34 0.99 279,145(i) 175,361 Jefferies & Co Collateralized Mtge Obligation Series 2009-R10 Cl 1A1 06-26-47 0.36 534,040(d,i) 520,689 Jefferies & Co Collateralized Mtge Obligation Series 2009-R10 Cl 2A1 05-26-48 0.33 844,723(d,i) 819,381 Lehman XS Trust Series 2006-16N Cl A1B 11-25-46 0.36 848,187(i) 797,555 LVII Resecuritization Trust Collateralized Mtge Obligation Series 2009-3 Cl A1 11-27-37 5.76 1,425,009(d,i) 1,425,009 Morgan Stanley Mtge Loan Trust Series 2006-13AX Cl A1 10-25-36 0.33 1,451,183(i) 883,057 Structured Adjustable Rate Mtge Loan Trust Collateralized Mtge Obligation Series 2005-18 Cl 9A1 09-25-35 5.25 1,613,190(i) 1,551,997
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT 15 PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) RESIDENTIAL MORTGAGE-BACKED (CONT.) Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2005-14 Cl 2A1 12-25-35 5.50% $2,541,096 $2,316,467 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2006-12 Cl A1 10-25-36 6.00 3,701,241 3,630,110 ----------- Total 290,671,086 ---------------------------------------------------------------------------------- TOTAL BONDS (Cost: $630,044,809) $645,306,416 ---------------------------------------------------------------------------------- FDIC-INSURED DEBT (7.6%)(o) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) U.S. AGENCIES Bank of America FDIC Govt Guaranty 04-30-12 2.10% $4,175,000(l) $4,267,476 06-15-12 3.13 3,810,000 3,998,039 06-22-12 2.38 3,055,000(l) 3,152,500 Citigroup Funding FDIC Govt Guaranty 07-12-12 2.13 15,000,000(l) 15,354,159 General Electric Capital FDIC Govt Guaranty 12-28-12 2.63 7,580,000(l) 7,850,432 Goldman Sachs Group FDIC Govt Guaranty 07-15-11 1.63 7,750,000 7,863,414 JPMorgan Chase & Co FDIC Govt Guaranty 02-23-11 1.65 2,940,000(l) 2,983,625 Morgan Stanley FDIC Govt Guaranty 02-10-12 0.55 8,300,000 8,357,411 ---------------------------------------------------------------------------------- TOTAL FDIC-INSURED DEBT (Cost: $52,703,058) $53,827,056 ---------------------------------------------------------------------------------- GOVERNMENT GUARANTEED (0.1%)(m) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) UK Barclays Bank Govt Guaranty 03-05-12 2.70% $780,000(c,d) $805,449 ---------------------------------------------------------------------------------- TOTAL GOVERNMENT GUARANTEED (Cost: $779,329) $805,449 ---------------------------------------------------------------------------------- U.S. GOVERNMENT AGENCIES (1.4%) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) Federal Home Loan Bank Disc Nts 12-18-09 0.05% $10,000,000 $9,999,775 ---------------------------------------------------------------------------------- TOTAL U.S. GOVERNMENT AGENCIES (Cost: $9,999,788) $9,999,775 ----------------------------------------------------------------------------------
MONEY MARKET FUND (2.5%) SHARES VALUE(a) RiverSource Short-Term Cash Fund, 0.20% 17,695,714(p) $17,695,714 ------------------------------------------------------------------------------------- TOTAL MONEY MARKET FUND (Cost: $17,695,714) $17,695,714 ------------------------------------------------------------------------------------- INVESTMENTS OF CASH COLLATERAL RECEIVED FOR SECURITIES ON LOAN (12.4%) SHARES VALUE(a) CASH COLLATERAL REINVESTMENT FUND JPMorgan Prime Money Market Fund 87,374,221 $87,374,221 ------------------------------------------------------------------------------------- TOTAL INVESTMENTS OF CASH COLLATERAL RECEIVED FOR SECURITIES ON LOAN (Cost: $87,374,221) $87,374,221 ------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $798,596,919)(q) $815,008,631 =====================================================================================
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 16 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT -------------------------------------------------------------------------------- INVESTMENTS IN DERIVATIVES FUTURES CONTRACTS OUTSTANDING AT NOV. 30, 2009
NUMBER OF UNREALIZED CONTRACTS NOTIONAL EXPIRATION APPRECIATION/ CONTRACT DESCRIPTION LONG/(SHORT) MARKET VALUE DATE (DEPRECIATION) ------------------------------------------------------------------------------------ U.S. Long Bond, 20-year 12 $1,472,625 March 2010 $24,545 U.S. Treasury Note, 2- 75 16,341,797 April 2010 45,590 year U.S. Treasury Note, 5- (51) (5,980,547) April 2010 (160,585) year U.S. Treasury Note, 10- 209 25,066,938 March 2010 233,803 year ------------------------------------------------------------------------------------ Total $143,353 ------------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS (a) Securities are valued by using policies described in Note 2 to the financial statements. (b) The following abbreviation is used in the portfolio security description to identify the insurer of the issue: MGIC -- Mortgage Guaranty Insurance Corporation
(c) Foreign security values are stated in U.S. dollars. At Nov. 30, 2009, the value of foreign securities, excluding short-term securities, represented 0.2% of net assets. (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security 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 Nov. 30, 2009, the value of these securities amounted to $32,843,340 or 4.7% of net assets. (e) At Nov. 30, 2009, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $26,726,155. See Note 2 to the financial statements. (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) 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. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT 17 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------- NOTES TO PORTFOLIO OF INVESTMENTS (CONTINUED) (h) Represents comparable securities held to satisfy future delivery requirements of the following open forward sale commitments at Nov. 30, 2009:
PRINCIPAL SETTLEMENT PROCEEDS SECURITY AMOUNT DATE RECEIVABLE VALUE --------------------------------------------------------------------------- Federal Natl Mtge Assn 12-01-39 5.50% $16,000,000 12-14-09 $16,793,124 $17,015,008
(i) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on Nov. 30, 2009. (j) Interest only represents securities that entitle holders to receive only interest payments on the underlying mortgages. The yield to maturity of an interest only security is extremely sensitive to the rate of principal payments on the underlying mortgage assets. A rapid (slow) rate of principal repayments may have an adverse (positive) effect on yield to maturity. The principal amount shown is the notional amount of the underlying mortgages. The interest rate disclosed represents yield based upon the estimated timing and amount of future cash flows at Nov. 30, 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 Nov. 30, 2009. (l) At Nov. 30, 2009, security was partially or fully on loan. See Note 7 to the financial statements. (m) This debt is guaranteed by the HM Treasury, United Kingdom. (n) At Nov. 30, 2009, investments in securities included securities valued at $455,372 that were partially pledged as collateral to cover initial margin deposits on open interest rate futures contracts. (o) 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. (p) Affiliated Money Market Fund -- See Note 8 to the financial statements. The rate shown is the seven-day current annualized yield at Nov. 30, 2009. (q) At Nov. 30, 2009, the cost of securities for federal income tax purposes was approximately $798,597,000 and the approximate aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $21,924,000 Unrealized depreciation (5,512,000) ----------------------------------------------------------- Net unrealized appreciation $16,412,000 -----------------------------------------------------------
-------------------------------------------------------------------------------- 18 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT -------------------------------------------------------------------------------- FAIR VALUE MEASUREMENTS Generally accepted accounting principles (GAAP) require disclosure regarding the inputs and valuation techniques used to measure fair value and any changes in valuation inputs or techniques. In addition, investments shall be disclosed by major category. The Fund categorizes its fair value measurements according to a three-level hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs by prioritizing that the most observable input be used when available. Observable inputs are those that market participants would use in pricing an investment based on market data obtained from sources independent of the reporting entity. Unobservable inputs are those that reflect the Fund's assumptions about the information market participants would use in pricing an investment. An investment's level within the fair value hierarchy is based on the lowest level of any input that is deemed significant to the asset or liability's fair value measurement. The input levels are not necessarily an indication of the risk or liquidity associated with investments at that level. For example, certain U.S. government securities are generally high quality and liquid, however, they are reflected as Level 2 because the inputs used to determine fair value may not always be quoted prices in an active market. Fair value inputs are summarized in the three broad levels listed below: - Level 1 -- Valuations based on quoted prices for investments in active markets that the Fund has the ability to access at the measurement date. Valuation adjustments are not applied to Level 1 investments. - Level 2 -- Valuations based on other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risks, etc.). - Level 3 -- Valuations based on significant unobservable inputs (including the Fund's own assumptions and judgment in determining the fair value of investments). Inputs that are used in determining fair value of an investment may include price information, credit data, volatility statistics, and other factors. These inputs can be either observable or unobservable. The availability of observable inputs can vary between investments, and is affected by various factors such as the type of investment, and the volume and level of activity for that investment or similar investments in the marketplace. The inputs will be considered by the Fund Administrator, along with any other relevant factors in the calculation of an investment's fair value. The Fund uses prices and inputs that are current as of the measurement date, which may include periods of market dislocations. During these periods, the availability of prices and inputs may be reduced for many investments. This condition could cause an investment to be reclassified between the various levels within the hierarchy. Investments falling into the Level 3 category are primarily supported by quoted prices from brokers and dealers participating in the market for those investments. However, these may be classified as Level 3 investments due to lack of market transparency and corroboration to support these quoted prices. Additionally, valuation models may be used as the pricing source for any remaining investments classified as Level 3. These models rely on one or more significant unobservable inputs and/or significant assumptions by the Fund Administrator. Inputs used in a valuation model -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT 19 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------- FAIR VALUE MEASUREMENTS (CONTINUED) may include, but are not limited to, financial statement analysis, discount rates and estimated cash flows, and comparable company data. The following table is a summary of the inputs used to value the Fund's investments as of Nov. 30, 2009:
FAIR VALUE AT NOV. 30, 2009 ---------------------------------------------------------------- LEVEL 1 LEVEL 2 QUOTED PRICES OTHER LEVEL 3 IN ACTIVE SIGNIFICANT SIGNIFICANT MARKETS FOR OBSERVABLE UNOBSERVABLE DESCRIPTION IDENTICAL ASSETS INPUTS INPUTS TOTAL --------------------------------------------------------------------------------------------- Bonds Foreign Government Obligations & Agencies $-- $404,966 $-- $404,966 U.S. Government Obligations & Agencies 54,903,145 226,498,113 -- 281,401,258 Asset-Backed Securities -- 40,647,836 19,860,527 60,508,363 Commercial Mortgage- Backed Securities -- 12,320,743 -- 12,320,743 Residential Mortgage- Backed Securities -- 284,741,940 5,929,146 290,671,086 --------------------------------------------------------------------------------------------- Total Bonds 54,903,145 564,613,598 25,789,673 645,306,416 --------------------------------------------------------------------------------------------- Short-Term Securities U.S. Government Agencies -- 9,999,775 -- 9,999,775 --------------------------------------------------------------------------------------------- Total Short-Term Securities -- 9,999,775 -- 9,999,775 --------------------------------------------------------------------------------------------- Other FDIC-Insured Debt Securities -- 53,827,056 -- 53,827,056 Government Guaranteed -- 805,449 -- 805,449 Affiliated Money Market Fund(a) 17,695,714 -- -- 17,695,714 Investments of Cash Collateral Received for Securities on Loan 87,374,221 -- -- 87,374,221 --------------------------------------------------------------------------------------------- Total Other 105,069,935 54,632,505 -- 159,702,440 --------------------------------------------------------------------------------------------- Investments in Securities 159,973,080 629,245,878 25,789,673 815,008,631 Other Financial Instruments(b) 143,353 -- -- 143,353 --------------------------------------------------------------------------------------------- Total $160,116,433 $629,245,878 $25,789,673 $815,151,984 ---------------------------------------------------------------------------------------------
(a) Money market fund that is a sweep investment for cash balances in the Fund at Nov. 30, 2009. (b) Other Financial Instruments are derivative instruments, which are valued at the unrealized appreciation (depreciation) on the instrument. Derivative descriptions are located in the Investments in Derivatives section of the Portfolio of Investments. -------------------------------------------------------------------------------- 20 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT -------------------------------------------------------------------------------- FAIR VALUE MEASUREMENTS (CONTINUED) The following table is a reconciliation of Level 3 assets for which significant unobservable inputs were used to determine fair value.
RESIDENTIAL ASSET-BACKED MORTGAGE-BACKED SECURITIES SECURITIES TOTAL ---------------------------------------------------------------------------------- Balance as of May 31, 2009 $-- $6,308,870 $6,308,870 Accrued discounts/premiums 24,328 65,987 90,315 Realized gain (loss) 46,561 276,744 323,305 Change in unrealized appreciation (depreciation)* 95,423 415,714 511,137 Net purchases (sales) 19,694,215 (4,074,381) 15,619,837 Transfers in and/or out of Level 3 -- 2,936,212 2,936,212 ---------------------------------------------------------------------------------- Balance as of Nov. 30, 2009 $19,860,527 $5,929,146 $25,789,673 ----------------------------------------------------------------------------------
* Change in unrealized appreciation (depreciation) relating to securities held at Nov. 30, 2009 was $530,340. 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 SEMIANNUAL REPORT 21 STATEMENT OF ASSETS AND LIABILITIES -------------------------------------------- NOV. 30, 2009 (UNAUDITED)
ASSETS Investments in securities, at value Unaffiliated issuers* (identified cost $693,526,984) $ 709,938,696 Affiliated money market fund (identified cost $17,695,714) 17,695,714 Investments of cash collateral received for securities on loan (identified cost $87,374,221) 87,374,221 -------------------------------------------------------------------------------- Total investments in securities (identified cost $798,596,919) 815,008,631 Capital shares receivable 1,184,366 Dividends and accrued interest receivable 3,339,477 Receivable for investment securities sold 22,868,026 -------------------------------------------------------------------------------- Total assets 842,400,500 -------------------------------------------------------------------------------- LIABILITIES Forward sale commitments, at value (proceeds receivable $16,793,124) 17,015,008 Disbursements in excess of cash 31,301 Dividends payable to shareholders 315,353 Capital shares payable 944,397 Payable for investment securities purchased 31,757,492 Payable upon return of securities loaned 87,374,221 Variation margin payable on futures contracts 15,344 Accrued investment management services fees 27,768 Accrued distribution fees 147,881 Accrued transfer agency fees 10,644 Accrued administrative services fees 3,966 Accrued plan administration services fees 1,546 Other accrued expenses 655,775 -------------------------------------------------------------------------------- Total liabilities 138,300,696 -------------------------------------------------------------------------------- Net assets applicable to outstanding capital stock $ 704,099,804 -------------------------------------------------------------------------------- REPRESENTED BY Capital stock -- $.01 par value $ 1,483,565 Additional paid-in capital 792,754,667 Excess of distributions over net investment income (517,772) Accumulated net realized gain (loss) (105,953,837) Unrealized appreciation (depreciation) on investments 16,333,181 -------------------------------------------------------------------------------- Total -- representing net assets applicable to outstanding capital stock $ 704,099,804 -------------------------------------------------------------------------------- *Including securities on loan, at value $ 115,626,918 --------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 22 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE NET ASSETS SHARES OUTSTANDING NET ASSET VALUE PER SHARE Class A $531,544,102 112,007,326 $4.75(1) Class B $ 77,530,554 16,338,338 $4.75 Class C $ 28,399,208 5,984,363 $4.75 Class I $ 59,449,516 12,514,613 $4.75 Class R2 $ 3,043,745 641,411 $4.75 Class R4 $ 4,127,685 869,397 $4.75 Class W $ 4,994 1,053 $4.74 -----------------------------------------------------------------------------------------
(1) The maximum offering price per share for Class A is $4.90. 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 SEMIANNUAL REPORT 23 STATEMENT OF OPERATIONS ------------------------------------------------------- SIX MONTHS ENDED NOV. 30, 2009 (UNAUDITED)
INVESTMENT INCOME Income: Interest 12,004,428 Income distributions from affiliated money market fund 10,076 Income from securities lending -- net 119,015 ------------------------------------------------------------------------------ Total income 12,133,519 ------------------------------------------------------------------------------ Expenses: Investment management services fees 1,686,583 Distribution fees Class A 668,648 Class B 460,126 Class C 106,616 Class R2 4,181 Class W 6 Transfer agency fees Class A 455,544 Class B 85,429 Class C 18,820 Class R2 62 Class R4 632 Class W 5 Administrative services fees 241,063 Plan administration services fees Class R2 2,091 Class R4 5,208 Compensation of board members 10,170 Custodian fees 6,705 Printing and postage 116,332 Registration fees 39,100 Licensing fees 188 Professional fees 14,675 Other 13,380 ------------------------------------------------------------------------------ Total expenses 3,935,564 Expenses waived/reimbursed by the Investment Manager and its affiliates (573,599) ------------------------------------------------------------------------------ Total net expenses 3,361,965 ------------------------------------------------------------------------------ Investment income (loss) -- net 8,771,554 ------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 24 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT --------------------------------------------------------------------------------
------------------------------------------------------------------------------ REALIZED AND UNREALIZED GAIN (LOSS) -- NET Net realized gain (loss) on: Security transactions $(2,465,646) Futures contracts 1,303,257 ------------------------------------------------------------------------------ Net realized gain (loss) on investments (1,162,389) Net change in unrealized appreciation (depreciation) on investments 18,116,568 ------------------------------------------------------------------------------ Net gain (loss) on investments 16,954,179 ------------------------------------------------------------------------------ Net increase (decrease) in net assets resulting from operations $25,725,733 ------------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT 25 STATEMENTS OF CHANGES IN NET ASSETS -------------------------------------------
SIX MONTHS ENDED YEAR ENDED NOV. 30, 2009 MAY 31, 2009 (UNAUDITED) OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ 8,771,554 $ 22,192,236 Net realized gain (loss) on investments (1,162,389) (24,011,105) Net change in unrealized appreciation (depreciation) on investments 18,116,568 4,441,905 -------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 25,725,733 2,623,036 -------------------------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income Class A (7,481,265) (16,331,022) Class B (951,552) (2,826,872) Class C (228,900) (237,025) Class I (760,142) (2,172,593) Class R2 (22,527) N/A Class R4 (59,807) (134,786) Class W (68) (139) -------------------------------------------------------------------------------------------------- Total distributions (9,504,261) (21,702,437) --------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 26 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED NOV. 30, 2009 MAY 31, 2009 (UNAUDITED) CAPITAL SHARE TRANSACTIONS Proceeds from sales Class A shares $ 42,364,516 $ 226,294,351 Class B shares 4,259,880 33,777,836 Class C shares 3,125,110 7,040,083 Class I shares 17,406,287 13,901,496 Class R2 shares 407,355 N/A Class R4 shares 1,105,889 2,274,007 Fund merger (Note 10) Class A shares 33,719,721 N/A Class B shares 4,922,961 N/A Class C shares 16,708,376 N/A Class R2 shares 3,419,969 N/A Reinvestment of distributions at net asset value Class A shares 6,694,460 14,899,763 Class B shares 874,055 2,659,409 Class C shares 160,442 215,459 Class I shares 741,008 2,176,497 Class R2 shares 3,304 N/A Class R4 shares 59,015 134,521 Conversions from Class B to Class A Class A shares 25,761,662 20,630,333 Class B shares (25,761,662) (20,630,333) Payments for redemptions Class A shares (118,708,435) (258,638,948) Class B shares (22,075,172) (57,874,364) Class C shares (4,949,294) (3,812,662) Class I shares (1,713,307) (64,443,360) Class R2 shares (822,293) N/A Class R4 shares (1,464,727) (2,725,737) -------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions (13,760,880) (84,121,649) -------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets 2,460,592 (103,201,050) Net assets at beginning of period 701,639,212 804,840,262 -------------------------------------------------------------------------------------------------- Net assets at end of period $ 704,099,804 $ 701,639,212 -------------------------------------------------------------------------------------------------- Undistributed (excess of distributions over) net investment income $ (517,772) $ 430,828 --------------------------------------------------------------------------------------------------
Certain line items from the prior year have been renamed to conform to the current year presentation. The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT 27 FINANCIAL HIGHLIGHTS ----------------------------------------------------------- The following tables are intended to help you understand the Fund's financial performance. Certain information reflects financial results for a single share of a class held for the periods shown. For the periods 2008 and after, per share net investment income (loss) amounts are calculated based on average shares outstanding during the period. Total returns assume reinvestment of all dividends and distributions. Total returns do not reflect payment of sales charges, if any, and are not annualized for periods of less than one year.
SIX MONTHS ENDED YEAR ENDED MAY 31, CLASS A NOV. 30, 2009 ------------------------------------------------- PER SHARE DATA (UNAUDITED) 2009 2008 2007 2006 2005 Net asset value, beginning of period $4.63 $4.74 $4.73 $4.68 $4.79 $4.82 -------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .06 .14 .19 .19 .15 .12 Net gains (losses) (both realized and unrealized) .13 (.11) .01 .05 (.10) (.03) -------------------------------------------------------------------------------------------------------------------------- Total from investment operations .19 .03 .20 .24 .05 .09 -------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.07) (.14) (.19) (.19) (.16) (.12) -------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.75 $4.63 $4.74 $4.73 $4.68 $4.79 -------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN 4.05% .59% 4.27% 5.12% 1.00% 1.92% -------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(a) Gross expenses prior to expense waiver/reimbursement 1.03%(b) 1.02% 1.04% 1.03% 1.06% 1.01% -------------------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(c) .86%(b) .89% .89%(d) .89% .89% .93% -------------------------------------------------------------------------------------------------------------------------- Net investment income (loss) 2.59%(b) 3.00% 3.93% 3.99% 3.27% 2.49% -------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $532 $529 $539 $514 $641 $894 -------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate(e) 191% 271% 209% 168% 194% 169% --------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Highlights. -------------------------------------------------------------------------------- 28 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED MAY 31, CLASS B NOV. 30, 2009 ------------------------------------------------- PER SHARE DATA (UNAUDITED) 2009 2008 2007 2006 2005 Net asset value, beginning of period $4.63 $4.74 $4.73 $4.68 $4.79 $4.82 -------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .04 .10 .15 .15 .12 .08 Net gains (losses) (both realized and unrealized) .13 (.11) .01 .05 (.11) (.03) -------------------------------------------------------------------------------------------------------------------------- Total from investment operations .17 (.01) .16 .20 .01 .05 -------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.05) (.10) (.15) (.15) (.12) (.08) -------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.75 $4.63 $4.74 $4.73 $4.68 $4.79 -------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN 3.64% (.18%) 3.48% 4.34% .26% 1.16% -------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(a) Gross expenses prior to expense waiver/reimbursement 1.79%(b) 1.78% 1.80% 1.79% 1.82% 1.76% -------------------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(c) 1.62%(b) 1.65% 1.65%(d) 1.64% 1.64% 1.68% -------------------------------------------------------------------------------------------------------------------------- Net investment income (loss) 1.87%(b) 2.26% 3.18% 3.23% 2.50% 1.73% -------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $78 $113 $159 $216 $338 $588 -------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate(e) 191% 271% 209% 168% 194% 169% --------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Highlights. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT 29 FINANCIAL HIGHLIGHTS (continued) -----------------------------------------------
SIX MONTHS ENDED YEAR ENDED MAY 31, CLASS C NOV. 30, 2009 ------------------------------------------------- PER SHARE DATA (UNAUDITED) 2009 2008 2007 2006 2005 Net asset value, beginning of period $4.63 $4.74 $4.73 $4.68 $4.79 $4.82 -------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .04 .10 .15 .15 .12 .08 Net gains (losses) (both realized and unrealized) .13 (.11) .02 .05 (.11) (.03) -------------------------------------------------------------------------------------------------------------------------- Total from investment operations .17 (.01) .17 .20 .01 .05 -------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.05) (.10) (.16) (.15) (.12) (.08) -------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.75 $4.63 $4.74 $4.73 $4.68 $4.79 -------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN 3.64% (.17%) 3.49% 4.34% .26% 1.16% -------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(a) Gross expenses prior to expense waiver/reimbursement 1.79%(b) 1.78% 1.80% 1.80% 1.83% 1.77% -------------------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(c) 1.62%(b) 1.65% 1.65%(d) 1.64% 1.64% 1.68% -------------------------------------------------------------------------------------------------------------------------- Net investment income (loss) 1.74%(b) 2.21% 3.18% 3.24% 2.51% 1.73% -------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $28 $13 $10 $10 $15 $24 -------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate(e) 191% 271% 209% 168% 194% 169% --------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Highlights. -------------------------------------------------------------------------------- 30 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED MAY 31, CLASS I NOV. 30, 2009 ------------------------------------------------- PER SHARE DATA (UNAUDITED) 2009 2008 2007 2006 2005 Net asset value, beginning of period $4.64 $4.74 $4.74 $4.69 $4.79 $4.83 -------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .07 .16 .20 .20 .17 .14 Net gains (losses) (both realized and unrealized) .11 (.11) .01 .05 (.10) (.04) -------------------------------------------------------------------------------------------------------------------------- Total from investment operations .18 .05 .21 .25 .07 .10 -------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.07) (.15) (.21) (.20) (.17) (.14) -------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.75 $4.64 $4.74 $4.74 $4.69 $4.79 -------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN 4.03% 1.18% 4.45% 5.50% 1.56% 2.06% -------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(a) Gross expenses prior to expense waiver/reimbursement .59%(b) .60% .60% .59% .62% .57% -------------------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(c) .48%(b) .51% .51%(d) .54% .58% .57% -------------------------------------------------------------------------------------------------------------------------- Net investment income (loss) 2.95%(b) 3.49% 4.23% 4.37% 3.66% 2.98% -------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $59 $42 $93 $55 $62 $31 -------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate(e) 191% 271% 209% 168% 194% 169% --------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Highlights. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT 31 FINANCIAL HIGHLIGHTS (continued) -----------------------------------------------
PERIOD ENDED CLASS R2 NOV. 30, 2009(f) PER SHARE DATA (UNAUDITED) Net asset value, beginning of period $4.66 ------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .03 Net gains (losses) (both realized and unrealized) .09 ------------------------------------------------------------------- Total from investment operations .12 ------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.03) ------------------------------------------------------------------- Net asset value, end of period $4.75 ------------------------------------------------------------------- TOTAL RETURN 2.64% ------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(a) Gross expenses prior to expense waiver/reimbursement 1.39%(b) ------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(c) 1.28%(b) ------------------------------------------------------------------- Net investment income (loss) 1.91%(b) ------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $3 ------------------------------------------------------------------- Portfolio turnover rate(e) 191% -------------------------------------------------------------------
See accompanying Notes to Financial Highlights. -------------------------------------------------------------------------------- 32 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED MAY 31, CLASS R4 NOV. 30, 2009 ------------------------------------------------- PER SHARE DATA (UNAUDITED) 2009 2008 2007 2006 2005 Net asset value, beginning of period $4.64 $4.74 $4.73 $4.68 $4.79 $4.82 -------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .06 .15 .19 .19 .16 .13 Net gains (losses) (both realized and unrealized) .12 (.11) .02 .05 (.11) (.03) -------------------------------------------------------------------------------------------------------------------------- Total from investment operations .18 .04 .21 .24 .05 .10 -------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.07) (.14) (.20) (.19) (.16) (.13) -------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $4.75 $4.64 $4.74 $4.73 $4.68 $4.79 -------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN 3.86% .93% 4.41% 5.31% 1.19% 2.10% -------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(a) Gross expenses prior to expense waiver/reimbursement .89%(b) .90% .90% .86% .88% .84% -------------------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(c) .78%(b) .76% .76%(d) .72% .72% .76% -------------------------------------------------------------------------------------------------------------------------- Net investment income (loss) 2.69%(b) 3.15% 4.06% 4.09% 3.27% 2.66% -------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $4 $4 $5 $4 $19 $100 -------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate(e) 191% 271% 209% 168% 194% 169% --------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Highlights. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT 33 FINANCIAL HIGHLIGHTS (continued) -----------------------------------------------
SIX MONTHS ENDED YEAR ENDED MAY 31, CLASS W NOV. 30, 2009 ----------------------------- PER SHARE DATA (UNAUDITED) 2009 2008 2007(g) Net asset value, beginning of period $4.63 $4.74 $4.73 $4.75 ------------------------------------------------------------------------------------------------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .06 .14 .18 .08 Net gains (losses) (both realized and unrealized) .11 (.12) .02 (.02) ------------------------------------------------------------------------------------------------------ Total from investment operations .17 .02 .20 .06 ------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS: Dividends from net investment income (.06) (.13) (.19) (.08) ------------------------------------------------------------------------------------------------------ Net asset value, end of period $4.74 $4.63 $4.74 $4.73 ------------------------------------------------------------------------------------------------------ TOTAL RETURN 3.79% .52% 4.21% 1.42% ------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS(a) Gross expenses prior to expense waiver/reimbursement 1.02%(b) 1.04% 1.06% 1.00%(b) ------------------------------------------------------------------------------------------------------ Net expenses after expense waiver/reimbursement(c) .93%(b) .96% .95% .95%(b) ------------------------------------------------------------------------------------------------------ Net investment income (loss) 2.55%(b) 2.95% 3.87% 4.02%(b) ------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- $-- $-- $-- ------------------------------------------------------------------------------------------------------ Portfolio turnover rate(e) 191% 271% 209% 168% ------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (a) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the reported expense ratios. (b) Annualized. (c) The Investment Manager and its affiliates have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (d) For the year ended May 31, 2008, the ratio of net expenses after reduction for waiver/reimbursement, if any, and after reduction for earnings and bank fee credits was 0.88% for Class A, 1.64% for Class B, 1.64% for Class C, 0.50% for Class I and 0.75% for Class R4. (e) Includes mortgage dollar rolls. If mortgage dollar roll transactions were excluded, the portfolio turnover would have been 173% for the six months ended Nov. 30, 2009 and 199% for the year ended May 31, 2009. (f) For the period from Aug. 3, 2009 (when shares became publicly available) to Nov. 30, 2009. (g) For the period from Dec. 1, 2006 (when shares became publicly available) to May 31, 2007. The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- 34 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT NOTES TO FINANCIAL STATEMENTS -------------------------------------------------- (UNAUDITED AS OF NOV. 30, 2009) 1. ORGANIZATION 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 (the 1940 Act) 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 Fund's 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 R2, Class R4 and Class W shares. - Class A shares are offered with a front-end sales charge, which may be waived under certain circumstances. - Class B shares may be subject to a contingent deferred sales charge (CDSC) and automatically convert to Class A shares one month after the completion of the eighth year of ownership if originally purchased in a RiverSource fund on or after May 21, 2005 or originally purchased in a Seligman fund on or after June 13, 2009. Class B shares originally purchased in a RiverSource fund prior to May 21, 2005 will convert to Class A shares in the ninth calendar year of ownership. Class B shares originally purchased in a Seligman fund prior to June 13, 2009 will convert to Class A shares in the month prior to the ninth year of ownership. - Class C shares may be subject to a CDSC. - Class I, Class R2 and Class R4 shares are offered without a front-end sales charge or CDSC to qualifying institutional investors. Class R2 became available effective Aug. 3, 2009. - Class W shares are offered without a front-end sales charge or CDSC and are offered through qualifying discretionary accounts. At Nov. 30, 2009, RiverSource Investments, LLC (RiverSource Investments or the Investment Manager) and affiliated funds-of-funds in the RiverSource Family 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. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT 35 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ADOPTION OF NEW ACCOUNTING STANDARD In June 2009, the Financial Accounting Standards Board (FASB) established the FASB Accounting Standards Codification(TM )(Codification) as the single source of authoritative accounting principles recognized by the FASB in the preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP). The Codification supersedes existing non-grandfathered, non- SEC accounting and reporting standards. The Codification did not change GAAP but rather organized it into a hierarchy where all guidance within the Codification carries an equal level of authority. The Codification became effective for financial statements issued for interim and annual periods ending after Sept. 15, 2009. The Codification did not have a material effect on the Fund's financial statements. USE OF ESTIMATES Preparing financial statements that conform to U.S. generally accepted accounting principles requires management to make estimates (e.g., on assets, liabilities and contingent assets and liabilities) that could differ from actual results. VALUATION OF SECURITIES All securities are valued at the close of business of the New York Stock Exchange (NYSE). Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price. Debt securities are generally traded in the over-the-counter market and are valued by an independent pricing service using an evaluated bid. When market quotes are not readily available, the pricing service, in determining fair values of debt securities, takes into consideration such factors as current quotations by broker/dealers, coupon, maturity, quality, type of issue, trading characteristics, and other yield and risk factors it deems relevant in determining valuations. 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. Typically, those maturing in 60 days or less that originally had maturities of more than 60 days at acquisition date are valued at amortized cost using the -------------------------------------------------------------------------------- 36 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT -------------------------------------------------------------------------------- market value on the 61st day before maturity. Short-term securities maturing in 60 days or less at acquisition date are valued at amortized cost. Amortized cost is an approximation of market value. Investments in money market funds are valued at net asset value. SECURITIES PURCHASED ON A FORWARD-COMMITMENT BASIS Delivery and payment for securities that have been purchased by the Fund on a forward-commitment basis, including when-issued securities and other forward- commitments, can take place one month or more after the transaction date. During this period, such securities are subject to market fluctuations, and they may affect the Fund's net assets the same as owned securities. The Fund designates cash or liquid securities at least equal to the amount of its forward- commitments. At Nov. 30, 2009, the Fund has outstanding when-issued securities of $26,726,155. 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 -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT 37 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- 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. FEDERAL TAXES The Fund's policy is to comply with Subchapter M of the Internal Revenue Code that applies to regulated investment companies and to distribute substantially all of its taxable income (which includes net short-term capital gains) to shareholders. No provision for income or excise taxes is thus required. Management of the Fund has concluded that there are no significant uncertain tax positions that would require recognition in the financial statements. Generally, the tax authorities can examine all the tax returns filed for the last three years. DIVIDENDS TO SHAREHOLDERS Dividends from net investment income, declared daily and payable monthly, when available, are reinvested in additional shares of the Fund at net asset value or payable in cash. Capital gains, when available, are distributed along with the last income dividend of the calendar year. 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. 3. INVESTMENTS IN DERIVATIVES The Fund may invest in certain derivative instruments, which are transactions whose values depend on or are derived from (in whole or in part) the value of one or more other assets, such as securities, currencies, commodities or indices. Such derivative instruments may be used to maintain cash reserves while maintaining exposure to certain other assets, to offset anticipated declines in values of investments, to facilitate trading, to reduce transaction costs, and to -------------------------------------------------------------------------------- 38 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT -------------------------------------------------------------------------------- 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. 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 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. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT 39 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- FAIR VALUES OF DERIVATIVE INSTRUMENTS AT NOV. 30, 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 contracts assets -- unrealiz- ed appreciation on investments $143,353* N/A N/A ------------------------------------------------------------------------------------------- Total $143,353 N/A -------------------------------------------------------------------------------------------
* Includes cumulative appreciation (depreciation) of futures contracts as reported in the Futures Contracts Outstanding table following the Portfolio of Investments. Only the current day's variation margin is reported in receivables or payables in the Statement of Assets and Liabilities. EFFECT OF DERIVATIVE INSTRUMENTS IN THE STATEMENT OF OPERATIONS FOR THE YEAR ENDED NOV. 30, 2009
AMOUNT OF REALIZED GAIN (LOSS) ON DERIVATIVES RECOGNIZED IN INCOME ------------------------------------------------------------------ RISK EXPOSURE CATEGORY FUTURES ------------------------------------------------------------------ Interest rate contracts $1,303,257 ------------------------------------------------------------------ Total $1,303,257 ------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVES RECOGNIZED IN INCOME ----------------------------------------------------------------- RISK EXPOSURE CATEGORY FUTURES ----------------------------------------------------------------- Interest rate contracts $(760,076) ----------------------------------------------------------------- Total $(760,076) -----------------------------------------------------------------
VOLUME OF DERIVATIVE ACTIVITY FUTURES The gross notional amount of long and short contracts outstanding was $42.9 million and $6.0 million, respectively, at Nov. 30, 2009. The monthly average gross notional amounts for long and short contracts was $107.5 million and $61.6 million, respectively, for the six months ended Nov. 30, 2009. The fair value of such contracts on Nov. 30, 2009 is set forth in the table above. 4. EXPENSES AND SALES CHARGES INVESTMENT MANAGEMENT SERVICES FEES Under an Investment Management Services Agreement, the Investment Manager determines which securities will be purchased, held or sold. The management fee is an annual fee that is equal to a percentage of the Fund's average daily net assets that declines from 0.48% to 0.25% as the Fund's net assets increase. The -------------------------------------------------------------------------------- 40 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT -------------------------------------------------------------------------------- management fee for the six months ended Nov. 30, 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, an annual fee for administration and accounting services equal to a percentage of the Fund's average daily net assets that declines from 0.07% to 0.04% as the Fund's net assets increase. The fee for the six months ended Nov. 30, 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 six months ended Nov. 30, 2009, there were no expenses incurred for these particular items. COMPENSATION OF BOARD MEMBERS Under a Deferred Compensation Plan (the Plan), the board members who are not "interested persons" of the Fund under the 1940 Act may defer receipt of their compensation. Deferred amounts are treated as though equivalent dollar amounts had been invested in shares of the Fund or other funds in the RiverSource Family of Funds. The Fund's liability for these amounts is adjusted for market value changes and remains in the funds until distributed in accordance with the Plan. TRANSFER AGENCY FEES Under a Transfer Agency Agreement, RiverSource Service Corporation (the Transfer Agent) maintains Fund shareholder accounts and records and provides Fund shareholder services. The Fund pays the Transfer Agent an annual account-based fee at a rate equal to $20.50 for Class A, $21.50 for Class B and $21.00 for Class C for this service. The Transfer Agent also charges an annual fee of $3 per account serviced directly by the Fund or its designated agent for Class A, Class B and Class C shares. The Fund also pays the Transfer Agent an annual asset-based fee at a rate of 0.05% of the Fund's average daily net assets attributable to Class R2 and 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 the 12 month period from the date the account becomes inactive. These fees are included in the transfer agency fees in the Statement of Operations. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT 41 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- In connection with the acquisition of Seligman U.S. Government Securities Fund (see Note 10), the Fund assumed the obligations of Seligman U.S. Government Securities Fund, which, together with certain other associated investment companies (together, the Guarantors), has severally, but not jointly, guaranteed the performance and observance of all terms and conditions of a lease entered into by Seligman Data Corp. (SDC), the former transfer agent of Seligman U.S. Government Securities Fund, including the payment of rent by SDC (the Guaranty). The lease and the Guaranty expire in January 2019. At Nov. 30, 2009, the Fund's total potential future obligation over the life of the Guaranty is $99,095. Seligman U.S. Government Securities Fund expensed $50,896 related to the Guaranty prior to acquisition by the Fund. This amount is included within other accrued expenses in the Fund's Statement of Assets and Liabilities. PLAN ADMINISTRATION SERVICES FEES Under a Plan Administration Services Agreement with the Transfer Agent, the Fund pays an annual fee at a rate of 0.25% of the Fund's average daily net assets attributable to Class R2 and Class R4 shares for the provision of various administrative, recordkeeping, communication and educational services. DISTRIBUTION FEES The Fund has an agreement with RiverSource Fund Distributors, Inc. (the Distributor) for distribution and shareholder services. Under a Plan and Agreement of Distribution pursuant to Rule 12b-1, the Fund pays a fee at an annual rate of up to 0.25% of the Fund's average daily net assets attributable to Class A and Class W shares, a fee at an annual rate of up to 0.50% of the Fund's average daily net assets attributable to Class R2 shares and a fee at an annual rate of up to 1.00% of the Fund's average daily net assets attributable to Class B and Class C shares. For Class B and Class C shares, of the 1.00% fee, up to 0.75% is reimbursed for distribution expenses. The amount of distribution expenses incurred by the Distributor and not yet reimbursed (unreimbursed expense) was approximately $3,765,000 and $112,000 for Class B and Class C shares, respectively. These amounts are based on the most recent information available as of Oct. 31, 2009, and may be recovered from future payments under the distribution plan or CDSC. To the extent the unreimbursed expense has been fully recovered, the distribution fee is reduced. SALES CHARGES Sales charges, including front-end and CDSCs, received by the Distributor for distributing Fund shares were $167,725 for Class A, $15,049 for Class B and $1,577 for Class C for the six months ended Nov. 30, 2009. -------------------------------------------------------------------------------- 42 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT -------------------------------------------------------------------------------- EXPENSES WAIVED/REIMBURSED BY THE INVESTMENT MANAGER AND ITS AFFILIATES For the six months ended Nov. 30, 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............................................. 0.86% Class B............................................. 1.62 Class C............................................. 1.62 Class I............................................. 0.48 Class R2............................................ 1.28 Class R4............................................ 0.78 Class W............................................. 0.93
The waived/reimbursed fees and expenses for the transfer agency fees at the class level were as follows: Class A.......................................... $167,915 Class B.......................................... 29,366 Class C.......................................... 6,863
The management fees waived/reimbursed at the Fund level were $369,455. 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............................................. 0.86% Class B............................................. 1.62 Class C............................................. 1.62 Class I............................................. 0.48 Class R2............................................ 1.28 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. 5. SECURITIES TRANSACTIONS Cost of purchases of securities (other than short-term obligations, but including mortgage dollar rolls) aggregated $1,379,087,754 for the six months ended Nov. 30, 2009 including $68,506,478* from Seligman U.S. Government -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT 43 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- Securities Fund that was acquired in the fund merger as described in Note 10. Proceeds from sales of securities (other than short-term obligations, but including mortgage dollar rolls) aggregated $1,430,081,661 for the six months ended Nov. 30, 2009, including $2,166,264* of sales to realign the Fund's portfolio following the fund merger. Realized gains and losses are determined on an identified cost basis. * Amounts are excluded for purposes of calculating the Fund's portfolio turnover rate. 6. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the periods indicated are as follows:
SIX MONTHS ENDED YEAR ENDED NOV. 30, 2009 MAY 31, 2009* --------------------------------------------------------------------- CLASS A Sold 9,023,928 48,901,406 Fund merger 7,186,369 N/A Converted from Class B** 5,515,899 4,370,833 Reinvested distributions 1,430,117 3,226,458 Redeemed (25,385,665) (56,089,954) --------------------------------------------------------------------- Net increase (decrease) (2,229,352) 408,743 --------------------------------------------------------------------- CLASS B Sold 908,581 7,298,534 Fund merger 1,049,408 N/A Reinvested distributions 187,039 575,044 Converted to Class A** (5,515,913) (4,370,833) Redeemed (4,722,335) (12,533,807) --------------------------------------------------------------------- Net increase (decrease) (8,093,220) (9,031,062) --------------------------------------------------------------------- CLASS C Sold 666,421 1,525,411 Fund merger 3,561,144 N/A Reinvested distributions 34,220 46,643 Redeemed (1,054,007) (827,332) --------------------------------------------------------------------- Net increase (decrease) 3,207,778 744,722 --------------------------------------------------------------------- CLASS I Sold 3,700,308 2,986,449 Reinvested distributions 157,996 469,925 Redeemed (366,289) (13,974,458) --------------------------------------------------------------------- Net increase (decrease) 3,492,015 (10,518,084) ---------------------------------------------------------------------
-------------------------------------------------------------------------------- 44 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED NOV. 30, 2009 MAY 31, 2009* --------------------------------------------------------------------- CLASS R2 Sold 86,367 N/A Fund merger 728,900 N/A Reinvested distributions 701 N/A Redeemed (174,557) N/A --------------------------------------------------------------------- Net increase (decrease) 641,411 N/A --------------------------------------------------------------------- CLASS R4 Sold 235,697 491,850 Reinvested distributions 12,601 29,090 Redeemed (312,962) (590,144) --------------------------------------------------------------------- Net increase (decrease) (64,664) (69,204) ---------------------------------------------------------------------
* Certain line items from the prior year have been renamed to conform to the current year presentation. ** Automatic conversion of Class B shares to Class A shares based on the original purchase date. 7. LENDING OF PORTFOLIO SECURITIES 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 Nov. 30, 2009, securities valued at $115,626,918 were on loan, secured by U.S. government securities valued at $30,176,610 and by cash collateral of $87,374,221 invested in short-term securities or in cash equivalents. Risks of delay in recovery of securities or even loss of rights in the securities may occur should the borrower of the securities fail financially. Risks may also arise to the extent that the value of the securities loaned increases above the value of the collateral received. JPMorgan will indemnify the Fund from losses resulting from a borrower's failure to return a loaned security when due. Such -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT 45 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- indemnification does not extend to losses associated with declines in the value of cash collateral investments. Loans are subject to termination by the Fund or the borrower at any time, and are, therefore, not considered to be illiquid investments. Pursuant to the Agreement, the Fund receives income for lending its securities either in the form of fees or by earning interest on invested cash collateral, net of negotiated rebates paid to borrowers and fees paid to the lending agent for services provided and any other securities lending expenses. Net income of $119,015 earned from securities lending for the six months ended Nov. 30, 2009 is included in the Statement of Operations. The Fund also continues to earn interest and dividends on the securities loaned. 8. AFFILIATED MONEY MARKET FUND The Fund may invest its daily cash balance in RiverSource Short-Term Cash Fund, a money market fund established for the exclusive use of the funds in the RiverSource Family of Funds and other institutional clients of RiverSource Investments. The cost of the Fund's purchases and proceeds from sales of shares of RiverSource Short-Term Cash Fund aggregated $55,852,309 and $63,585,816, respectively, for the six months ended Nov. 30, 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 Nov. 30, 2009, can be found in the Portfolio of Investments. 9. BANK BORROWINGS The Fund has entered into a revolving credit facility with a syndicate of banks led by JPMorgan Chase Bank, N.A. (the Administrative Agent), whereby the Fund may borrow for the temporary funding of shareholder redemptions or for other temporary or emergency purposes. The credit facility became effective on Oct. 15, 2009, 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 $300 million. The borrowers shall have the right, upon written notice to the Administrative Agent to request an increase of up to $200 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 $500 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 sum of the federal funds rate plus (A) 1.25% per annum plus (B) if one-month LIBOR exceeds the federal funds rate, the -------------------------------------------------------------------------------- 46 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT -------------------------------------------------------------------------------- amount of such excess. 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 0.10% per annum, in addition to an upfront fee equal to its pro rata share of 0.04% of the amount of the credit facility. Prior to Oct. 15, 2009, the credit facility agreement, which was a collective agreement between the Fund and certain other funds in the RiverSource Family of Funds, severally and not jointly, permitted collective borrowings up to $475 million. Interest was charged to each Fund based on its borrowings at a rate equal to the federal funds rate plus 0.75%. 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, 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 six months ended Nov. 30, 2009. 10. FUND MERGER At the close of business on Aug. 28, 2009, RiverSource Short Duration U.S. Government Fund acquired the assets and assumed the identified liabilities of Seligman U.S. Government Securities Fund. The reorganization was completed after shareholders approved the plan on June 29, 2009. The aggregate net assets of RiverSource Short Duration U.S. Government Fund immediately before the acquisition were $655,221,348 and the combined net assets immediately after the acquisition were $713,992,375. The merger was accomplished by a tax-free exchange of 8,071,788 shares of Seligman U.S. Government Securities Fund valued at $58,771,027. In exchange for Seligman U.S. Government Securities Fund shares and net assets, RiverSource Short Duration U.S. Government Fund issued the following number of shares:
SHARES ------------------------------------------------------------ Class A.......................................... 7,186,369 Class B.......................................... 1,049,408 Class C.......................................... 3,561,144 Class R2......................................... 728,900
For financial reporting purposes, net assets received and shares issued by the RiverSource Short Duration U.S. Government Fund were recorded at fair value; however, the Seligman U.S. Government Fund's cost of investments was carried forward to align ongoing reporting of the RiverSource Short Duration U.S. Government Fund's realized and unrealized gains and losses with amounts distributable to shareholders for tax purposes. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT 47 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- The components of Seligman U.S. Government Securities Fund's net assets at the merger date were as follows:
EXCESS OF ACCUMULATED DISTRIBUTIONS OVER TOTAL CAPITAL UNREALIZED NET NET NET ASSETS STOCK APPRECIATION REALIZED LOSS INVESTMENT INCOME --------------------------------------------------------------------------------- $58,771,027 $62,781,203 $1,514,018 $(5,308,301) $(215,893)
The financial statements reflect the operations of the RiverSource Short Duration U.S. Government Fund for the period prior to the merger and the combined Fund for the period subsequent to the merger. Because the combined investment portfolios have been managed as a single integrated portfolio since the merger was completed, it is not practicable to separate the amounts of revenue and earnings of the Seligman U.S. Government Fund that have been included in the combined Fund's Statement of Operations since the merger was completed. Assuming the merger had been completed on June 1, 2009, the RiverSource Short Duration U.S. Government Fund's pro-forma net investment income, net gain on investments, and net increase in net assets from operations for the six months ended Nov. 30, 2009 would have been $5.7 million, $17.3 million, and $23.0 million, respectively. 11. FEDERAL TAX INFORMATION Net investment income (loss) and net realized gains (losses) may differ for financial statement and tax purposes primarily because of futures and options contracts, 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. 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
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 -------------------------------------------------------------------------------- 48 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT -------------------------------------------------------------------------------- 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. There is no assurance that the Fund will be able to utilize all of its capital loss carry-over before it expires. 12. SUBSEQUENT EVENTS Management has evaluated Fund related events and transactions that occurred during the period from the date of the Statement of Assets and Liabilities through Jan. 20, 2010, the date of issuance of the Fund's financial statements. There were no events or transactions that occurred during the period that materially impacted the amounts or disclosures in the Fund's financial statements. 13. INFORMATION REGARDING PENDING AND SETTLED LEGAL PROCEEDINGS In June 2004, an action captioned John E. Gallus et al. v. American Express Financial Corp. and American Express Financial Advisors Inc. was filed in the United States District Court for the District of Arizona. The plaintiffs allege that they are investors in several American Express Company (now known as RiverSource) mutual funds and they purport to bring the action derivatively on behalf of those funds under the Investment Company Act of 1940. The plaintiffs allege that fees allegedly paid to the defendants by the funds for investment advisory and administrative services are excessive. The plaintiffs seek remedies including restitution and rescission of investment advisory and distribution agreements. The plaintiffs voluntarily agreed to transfer this case to the United States District Court for the District of Minnesota (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. On August 6, 2009, defendants filed a writ of certiorari with the U.S. Supreme Court, asking the U.S. Supreme Court to stay the District Court proceedings -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT 49 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- while the U.S. Supreme Court considers and rules in a case captioned Jones v. Harris Associates, which involves issues of law similar to those presented in the Gallus case. In December 2005, without admitting or denying the allegations, American Express Financial Corporation (AEFC, which is now known as Ameriprise Financial, Inc. (Ameriprise Financial)), entered into settlement agreements with the Securities and Exchange Commission (SEC) and Minnesota Department of Commerce (MDOC) related to market timing activities. As a result, AEFC was censured and ordered to cease and desist from committing or causing any violations of certain provisions of the Investment Advisers Act of 1940, the Investment Company Act of 1940, and various Minnesota laws. AEFC agreed to pay disgorgement of $10 million and civil money penalties of $7 million. AEFC also agreed to retain an independent distribution consultant to assist in developing a plan for distribution of all disgorgement and civil penalties ordered by the SEC in accordance with various undertakings detailed at http://www.sec.gov/litigation/admin/ia-2451.pdf. Ameriprise Financial and its affiliates have cooperated with the SEC and the MDOC in these legal proceedings, and have made regular reports to the RiverSource Funds' Boards of Directors/Trustees. On November 7, 2008, RiverSource Investments, LLC, a subsidiary of Ameriprise Financial, Inc., acquired J. & W. Seligman & Co. Incorporated (Seligman). In late 2003, Seligman conducted an extensive internal review concerning mutual fund trading practices. Seligman's review, which covered the period 2001-2003, noted one arrangement that permitted frequent trading in certain open-end registered investment companies managed by Seligman (the Seligman Funds); this arrangement was in the process of being closed down by Seligman before September 2003. Seligman identified three other arrangements that permitted frequent trading, all of which had been terminated by September 2002. In January 2004, Seligman, on a voluntary basis, publicly disclosed these four arrangements to its clients and to shareholders of the Seligman Funds. Seligman also provided information concerning mutual fund trading practices to the SEC and the Office of the Attorney General of the State of New York (NYAG). In September 2006, the NYAG commenced a civil action in New York State Supreme Court against Seligman, Seligman Advisors, Inc. (now known as RiverSource Fund Distributors, 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 -------------------------------------------------------------------------------- 50 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT -------------------------------------------------------------------------------- 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 believes that the Funds are not currently the subject of, and that neither Ameriprise Financial nor any of its affiliates are the subject of, any pending legal, arbitration or regulatory proceedings that are likely to have a material adverse effect on the Funds or the ability of Ameriprise Financial or its affiliates to perform under their contracts with the Funds. Ameriprise Financial is required to make 10-Q, 10-K and, as necessary, 8-K filings with the Securities and Exchange Commission on legal and regulatory matters that relate to Ameriprise Financial and its affiliates. Copies of these filings may be obtained by accessing the SEC website at www.sec.gov. There can be no assurance that these matters, or the adverse publicity associated with them, will not result in increased fund redemptions, reduced sale of fund shares or other adverse consequences to the Funds. Further, although we believe proceedings are not likely to have a material adverse effect on the Funds or the ability of Ameriprise Financial or its affiliates to perform under their contracts with the Funds, these proceedings are subject to uncertainties and, as such, we are unable to estimate the possible loss or range of loss that may result. An adverse outcome in one or more of these proceedings could result in adverse judgments, settlements, fines, penalties or other relief that could have a material adverse effect on the consolidated financial condition or results of operations of Ameriprise Financial. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT 51 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. -------------------------------------------------------------------------------- 52 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2009 SEMIANNUAL REPORT 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 Fund Distributors, Inc., Member FINRA, and managed by RiverSource Investments, LLC. RiverSource is part of Ameriprise Financial, Inc. (RIVERSOURCE INVESTMENTS LOGO) (C)2010 RiverSource Investments, LLC. S-6442 AA (1/10)
Semiannual Report (RIVERSOURCE INVESTMENTS LOGO) RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND SEMIANNUAL REPORT FOR THE PERIOD ENDED NOVEMBER 30, 2009 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. (SINGLE STRATEGY FUNDS ICON) TABLE OF CONTENTS -------------------------------------------------------------- Your Fund at a Glance.............. 2 Fund Expenses Example.............. 6 Portfolio of Investments........... 8 Statement of Assets and Liabilities...................... 20 Statement of Operations............ 21 Statements of Changes in Net Assets........................... 22 Financial Highlights............... 24 Notes to Financial Statements...... 29 Proxy Voting....................... 43
-------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT 1 YOUR FUND AT A GLANCE ---------------------------------------------------------- (UNAUDITED) FUND SUMMARY -------------------------------------------------------------------------------- > RiverSource U.S. Government Mortgage Fund (the Fund) Class A shares rose 8.89% (excluding sales charge) for the six months ended Nov. 30, 2009. > The Fund outperformed the Barclays Capital U.S. Mortgage-Backed Securities Index (Barclays Index), which gained 4.49% for the same period. > The Fund also outperformed the Lipper U.S. Mortgage Funds Index, representing the Fund's peer group, which advanced 6.49% during the same time frame. ANNUALIZED TOTAL RETURNS (for period ended Nov. 30, 2009) --------------------------------------------------------------------------------
SINCE INCEPTION 6 MONTHS* 1 YEAR 3 YEARS 5 YEARS 2/14/02 -------------------------------------------------------------------------- RiverSource U.S. Government Mortgage Fund Class A (excluding sales charge) +8.89% +14.14% +4.95% +4.43% +4.58% -------------------------------------------------------------------------- Barclays Capital U.S. Mortgage-Backed Securities Index(1) (unmanaged) +4.49% +9.19% +7.45% +6.23% +5.81% -------------------------------------------------------------------------- Lipper U.S. Mortgage Funds Index(2) +6.49% +12.28% +5.64% +4.94% +4.89% --------------------------------------------------------------------------
* Not annualized. The performance information shown represents past performance and is not a guarantee of future results. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by contacting your financial intermediary, visiting riversource.com/funds or calling 1(800) 221-2450. The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the table above. If reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in fees and expenses. The Fund's returns reflect the effect of fee waivers/ -------------------------------------------------------------------------------- 2 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT -------------------------------------------------------------------------------- expense reimbursements, if any. Without such waivers/reimbursements, the Fund's returns would be lower. See the Average Annual Total Returns table for performance of other share classes of the Fund. The indices do not reflect the effects of sales charges, expenses (excluding Lipper) and taxes. It is not possible to invest directly in an index. (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. AVERAGE ANNUAL TOTAL RETURNS --------------------------------------------------------------------------------
AT NOV. 30, 2009 SINCE Without sales charge 6 MONTHS* 1 YEAR 3 YEARS 5 YEARS INCEPTION Class A (inception 2/14/02) +8.89% +14.14% +4.95% +4.43% +4.58% -------------------------------------------------------------------------- Class B (inception 2/14/02) +8.48% +13.27% +4.16% +3.65% +3.80% -------------------------------------------------------------------------- Class C (inception 2/14/02) +8.48% +13.28% +4.16% +3.65% +3.80% -------------------------------------------------------------------------- Class I (inception 3/4/04) +8.92% +14.86% +5.44% +4.86% +4.59% -------------------------------------------------------------------------- Class R4 (inception 2/14/02) +8.76% +14.56% +5.83% +4.99% +5.00% -------------------------------------------------------------------------- With sales charge Class A (inception 2/14/02) +3.73% +8.73% +3.26% +3.42% +3.93% -------------------------------------------------------------------------- Class B (inception 2/14/02) +3.48% +8.27% +3.23% +3.31% +3.80% -------------------------------------------------------------------------- Class C (inception 2/14/02) +7.48% +12.28% +4.16% +3.65% +3.80% --------------------------------------------------------------------------
Class A share performance reflects the maximum initial sales charge of 4.75%. Class B share performance reflects a contingent deferred sales charge (CDSC) applied as follows: first year 5%; second year 4%; third and fourth years 3%; fifth year 2%; sixth year 1%; no sales charge thereafter. Class C shares may be subject to a 1% CDSC if shares are sold within one year after purchase. Sales charges do not apply to Class I and Class R4 shares. Class I and Class R4 shares are available to qualifying institutional investors only. * Not annualized. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT 3 YOUR FUND AT A GLANCE (continued) ---------------------------------------------- STYLE MATRIX --------------------------------------------------------------------------------
DURATION SHORT INT. LONG X HIGH MEDIUM QUALITY LOW
Shading within the style matrix approximates areas in which the Fund is designed to generally invest. The style matrix can be a valuable tool for constructing and monitoring your portfolio. It provides a frame of reference for distinguishing the types of stocks or bonds owned by a mutual fund, and may serve as a guideline for helping you build a portfolio. Investment products, including shares of mutual funds, are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value. PORTFOLIO STATISTICS -------------------------------------------------------------------------------- Weighted average life(1) 3.2 years -------------------------------------- Effective duration(2) 1.5 years -------------------------------------- Weighted average bond rating(3) AAA --------------------------------------
(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. Shares of 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 SEMIANNUAL REPORT -------------------------------------------------------------------------------- SECTOR DIVERSIFICATION(1) (at Nov. 30, 2009; % of portfolio assets) --------------------------------------------------------------------- Asset-Backed 3.7% ------------------------------------------------ Commercial Mortgage-Backed 4.7% ------------------------------------------------ Residential Mortgage-Backed(2) 89.2% ------------------------------------------------ Other(3) 2.4% ------------------------------------------------
(1) Percentages indicated are based upon total investments (excluding Investments of Cash Collateral Received for Securities on Loan) as of Nov. 30, 2009. The Fund's composition is subject to change. (2) Of the 89.2%, 24.4% is due to forward commitment residential mortgage-backed securities activity. Short-term securities are held as collateral for these commitments. (3) Cash & Cash Equivalents. QUALITY BREAKDOWN (at Nov. 30, 2009; % of portfolio assets excluding cash equivalents and equities) --------------------------------------------------------------------- AAA bonds 95.4% ------------------------------------------------ AA bonds 1.2% ------------------------------------------------ A bonds 0.8% ------------------------------------------------ BBB bonds 0.6% ------------------------------------------------ Non-investment grade bonds 1.0% ------------------------------------------------ Non-rated bonds 1.0% ------------------------------------------------
Bond ratings apply to the underlying holdings of the Fund and not the Fund itself. Whenever possible, the Standard and Poor's rating is used to determine the credit quality of a security. Standard and Poor's rates the creditworthiness of corporate bonds, with 15 categories, ranging from AAA (highest) to D (lowest). Ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories. If Standard and Poor's doesn't rate a security, then Moody's rating is used. RiverSource Investments, LLC (the Investment Manager) rates a security using an internal rating system when Moody's doesn't provide a rating. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT 5 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 ongoing expenses of any funds in which the Fund 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 ongoing expenses charged by 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 Nov. 30, 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. -------------------------------------------------------------------------------- 6 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT --------------------------------------------------------------------------------
BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED JUNE 1, 2009 NOV. 30, 2009 THE PERIOD(a) EXPENSE RATIO ------------------------------------------------------------------------------------------ Class A ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,088.90 $4.71 .89% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,020.83 $4.56 .89% ------------------------------------------------------------------------------------------ Class B ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,084.80 $8.72 1.65% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,016.98 $8.43 1.65% ------------------------------------------------------------------------------------------ Class C ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,084.80 $8.72 1.65% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,016.98 $8.43 1.65% ------------------------------------------------------------------------------------------ Class I ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,089.20 $2.49 .47% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,022.96 $2.41 .47% ------------------------------------------------------------------------------------------ Class R4 ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,087.60 $4.07 .77% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,021.44 $3.94 .77% ------------------------------------------------------------------------------------------
(a) Expenses are equal to the annualized expense ratio for each class as indicated above, multiplied by the average account value over the period, multiplied by 185/365 (to reflect the one-half year period). (b) Based on the actual return for the six months ended Nov. 30, 2009: +8.89% for Class A, +8.48% for Class B, +8.48% for Class C, +8.92% for Class I and +8.76% for Class R4. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT 7 PORTFOLIO OF INVESTMENTS ------------------------------------------------------- NOV. 30, 2009 (UNAUDITED) (Percentages represent value of investments compared to net assets) INVESTMENTS IN SECURITIES
BONDS (122.4%) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) ASSET-BACKED (4.6%) Asset Backed Securities Home Equity Series 2005-HE2 Cl M1 02-25-35 0.69% $984,632(i) $834,276 Bear Stearns Asset Backed Securities Trust Series 2006-HE9 Cl 1A1 11-25-36 0.29 485,424(i) 437,332 Chase Funding Mtge Loan Asset-Backed Ctfs Series 2004-1 Cl 1A4 08-25-30 4.11 580,523 521,228 Countrywide Asset-Backed Ctfs Series 2005-3 Cl AF3 08-25-35 4.82 316,966 312,884 Countrywide Asset-Backed Ctfs Series 2005-SD1 Cl A1C 05-25-35 0.63 1,293,434(d,i) 1,212,280 Credit-Based Asset Servicing and Securitization LLC Series 2006-RP2 Cl A1 07-25-36 0.39 110,054(d,i) 107,489 First Franklin Mtge Loan Asset-backed Ctfs Series 2005-FFH3 Cl 2A3 09-25-35 0.65 248,097(i) 241,319 First Franklin Mtge Loan Asset-backed Ctfs Series 2006-FF18 Cl A2A 12-25-37 0.31 240,322(i) 235,177 Fremont Home Loan Trust Series 2005-A Cl M1 01-25-35 0.67 721,405(i) 716,524 JPMorgan Mtge Acquisition Series 2006-RM1 Cl A2 08-25-36 0.32 81,666(i) 62,074 JPMorgan Mtge Acquisition Series 2006-WMC3 Cl A2 08-25-36 0.29 12,814(i) 12,649 Long Beach Mtge Loan Trust Series 2006-4 Cl 2A2 05-25-36 0.34 313,459(i) 305,134 MASTR Asset Backed Securities Trust Series 2005-FRE1 Cl A4 10-25-35 0.49 467,657(i) 423,094 Morgan Stanley Home Equity Loan Trust Series 2006-2 Cl A3 02-25-36 0.41 486,967(i) 434,767 NovaStar Home Equity Loan Series 2006-4 Cl A2A (MGIC) 09-25-36 0.28 134,044(e,i) 132,579 RAAC Series Series 2006-SP4 Cl A1 11-25-36 0.34 963,081(i) 897,509 RBSSP Resecuritization Trust Collateralized Mtge Obligation Series 2009-9 Cl 10A1 10-26-36 0.33 488,369(d,i) 474,953 Renaissance Home Equity Loan Trust Series 2006-4 Cl AF1 01-25-37 5.55 97,020 96,260 Renaissance Home Equity Loan Trust Series 2007-2 Cl M4 06-25-37 6.31 195,000(h) 10,357 Renaissance Home Equity Loan Trust Series 2007-2 Cl M5 06-25-37 6.66 130,000(h) 5,482 Renaissance Home Equity Loan Trust Series 2007-2 Cl M6 06-25-37 7.01 190,000(h) 6,074 Residential Asset Mtge Products Series 2006 RS4 Cl A2 07-25-36 0.35 458,926 439,237 Structured Asset Investment Loan Trust Series 2005-9 Cl A5 11-25-35 0.47 1,199,766(i) 1,121,399 Structured Asset Securities Collateralized Mtge Obligation Series 2006-NC1 Cl A6 05-25-36 0.29 315,900(i) 300,212 Structured Asset Securities Series 2007-BC1 Cl A2 02-25-37 0.29 1,557,458(i) 1,459,656
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 8 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT --------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) ASSET-BACKED (CONT.) Target Credit Card Master Trust Series 2005-1 Cl A 10-27-14 0.30% $1,500,000(i) $1,473,834 --------------- Total 12,273,779 ------------------------------------------------------------------------------------- COMMERCIAL MORTGAGE-BACKED (5.9%)(f) Bear Stearns Commercial Mtge Securities Series 2004-PWR5 Cl A3 07-11-42 4.57 3,122,000 3,135,951 Bear Stearns Commercial Mtge Securities Series 2004-PWR6 Cl A4 11-11-41 4.52 3,100,000 3,038,774 Citigroup/Deutsche Bank Commercial Mtge Trust Series 2007-CD4 Cl A2B 12-11-49 5.21 3,000,000 3,024,480 Federal Home Loan Mtge Corp Multifamily Structured Pass-Through Ctfs Series K001 Cl A2 04-25-16 5.65 1,673,014 1,867,940 GS Mtge Securities II Series 2007-EOP Cl J 03-06-20 1.09 1,000,000(d,i) 814,806 LB-UBS Commercial Mtge Trust Series 2004-C6 Cl A6 08-15-29 5.02 2,000,000 1,907,722 Wachovia Bank Commercial Mtge Trust Series 2003-C7 Cl A2 10-15-35 5.08 2,000,000(d) 2,033,888 --------------- Total 15,823,561 ------------------------------------------------------------------------------------- RESIDENTIAL MORTGAGE-BACKED (111.9%)(f) Banc of America Funding Collateralized Mtge Obligation Series 2007-8 Cl 1A1 10-25-37 6.00 853,066 460,194 Banc of America Funding Collateralized Mtge Obligation Series 2009-R7A Cl 4A2 08-26-35 5.39 5,410,975(d,i) 882,665 ChaseFlex Trust Collateralized Mtge Obligation Series 2005-2 Cl 2A2 06-25-35 6.50 492,429 408,793 Citigroup Mtge Loan Trust Collateralized Mtge Obligation Series 2009-3 Cl 3A2 01-19-34 4.68 3,335,000(d,i) 3,218,938 Citigroup Mtge Loan Trust Collateralized Mtge Obligation Series 2009-9 Cl 1A3 04-25-34 4.91 2,489,441(d,i) 497,888 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Interest Only Series 2007-8CB Cl A13 05-25-37 41.52 1,481,856(g) 129,737 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2005-50CB Cl 2A1 11-25-35 6.00 828,442 548,542 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2006-45T1 Cl 2A5 02-25-37 6.00 448,860 301,578 Countrywide Alternative Loan Trust Collateralized Mtge Obligation Series 2007-OH3 Cl A3 09-25-47 0.74 1,713,986(i) 199,597 Countrywide Home Loans Collateralized Mtge Obligation Series 2005-R2 Cl 2A1 06-25-35 7.00 383,550(d) 334,823 Countrywide Home Loans Collateralized Mtge Obligation Series 2006-HYB1 Cl 1A1 03-20-36 5.30 354,243(i) 187,922 Credit Suisse Mtge Capital Ctfs Collateralized Mtge Obligation Series 2009-2R Cl 1A16 09-26-34 3.12 17,500,000(d,i) 4,812,500 Federal Home Loan Mtge Corp 12-01-39 4.50 3,000,000(b) 3,075,468 12-01-39 5.00 3,050,000(b) 3,197,257 12-01-39 5.50 2,500,000(b) 2,660,938 12-01-39 6.00 8,400,000(b) 9,010,311
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT 9 PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) RESIDENTIAL MORTGAGE-BACKED (CONT.) Federal Home Loan Mtge Corp #555300 10-01-17 8.00% $148,377 $159,328 Federal Home Loan Mtge Corp #A10892 07-01-33 6.00 508,019 550,746 Federal Home Loan Mtge Corp #A15111 10-01-33 6.00 662,215 716,111 Federal Home Loan Mtge Corp #A21059 04-01-34 6.50 433,634 470,814 Federal Home Loan Mtge Corp #A25174 08-01-34 6.50 290,915 315,859 Federal Home Loan Mtge Corp #A82297 10-01-38 6.50 753,186 814,076 Federal Home Loan Mtge Corp #A83607 12-01-38 5.50 5,423,044 5,780,109 Federal Home Loan Mtge Corp #C53098 06-01-31 8.00 231,588 266,631 Federal Home Loan Mtge Corp #C53878 12-01-30 5.50 744,259 796,968 Federal Home Loan Mtge Corp #C68876 07-01-32 7.00 127,947 142,053 Federal Home Loan Mtge Corp #C69665 08-01-32 6.50 1,461,437 1,592,224 Federal Home Loan Mtge Corp #C79930 06-01-33 5.50 989,868 1,058,965 Federal Home Loan Mtge Corp #D95232 03-01-22 6.50 214,819 235,650 Federal Home Loan Mtge Corp #D95371 04-01-22 6.50 251,252 276,112 Federal Home Loan Mtge Corp #E81240 06-01-15 7.50 440,456 479,157 Federal Home Loan Mtge Corp #E88036 02-01-17 6.50 707,857 766,597 Federal Home Loan Mtge Corp #E88468 12-01-16 6.50 191,567 210,245 Federal Home Loan Mtge Corp #E89232 04-01-17 7.00 309,343 336,373 Federal Home Loan Mtge Corp #E92454 11-01-17 5.00 980,220 1,052,828 Federal Home Loan Mtge Corp #E93685 01-01-18 5.50 695,600 752,124 Federal Home Loan Mtge Corp #E99684 10-01-18 5.00 266,203 287,135 Federal Home Loan Mtge Corp #G01169 01-01-30 5.50 1,027,879 1,100,914 Federal Home Loan Mtge Corp #G01535 04-01-33 6.00 1,579,370 1,731,387 Federal Home Loan Mtge Corp #G02757 06-01-36 5.00 6,684,770 7,023,839 Federal Home Loan Mtge Corp #G03117 11-01-36 6.50 88,605 95,787 Federal Home Loan Mtge Corp #G03419 07-01-37 6.00 3,714,801 3,993,919 Federal Home Loan Mtge Corp #G03994 03-01-38 6.50 19,344 20,908 Federal Home Loan Mtge Corp #G05058 12-01-38 6.00 3,378,884 3,628,876 Federal Home Loan Mtge Corp #G12101 11-01-18 5.00 547,810 587,360 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2471 Cl SI 03-15-32 20.43 207,019(g) 32,134 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2639 Cl UI 03-15-22 10.09 790,100(g) 86,299 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2795 Cl IY 07-15-17 60.42 211,432(g) 6,692 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2817 Cl SA 06-15-32 45.07 582,278(g) 30,603 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 2824 Cl EI 09-15-20 0.00 1,274,615(g) 46,457
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 10 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT --------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) RESIDENTIAL MORTGAGE-BACKED (CONT.) Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 3155 Cl PS 05-15-36 20.38% $1,422,326(g) $192,764 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 3550 Cl GS 07-15-39 22.65 5,015,614(g) 564,055 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 3588 Cl WI 10-15-12 17.14 20,376,345(g) 1,898,982 Federal Home Loan Mtge Corp Collateralized Mtge Obligation Interest Only Series 3600 Cl DI 01-15-13 15.00 14,410,000(g) 412,036 Federal Natl Mtge Assn 12-01-24 4.50 7,000,000(b) 7,332,500 12-01-24 5.00 20,215,000(b) 21,472,131 12-01-39 5.50 7,800,000(b) 8,294,817 12-01-39 6.00 6,000,000(b) 6,431,250 Federal Natl Mtge Assn #190353 08-01-34 5.00 1,260,887 1,327,010 Federal Natl Mtge Assn #252409 03-01-29 6.50 997,915 1,088,471 Federal Natl Mtge Assn #254759 06-01-18 4.50 1,363,759 1,450,131 Federal Natl Mtge Assn #254793 07-01-33 5.00 1,638,810 1,724,751 Federal Natl Mtge Assn #254916 09-01-23 5.50 1,321,611 1,422,460 Federal Natl Mtge Assn #313470 08-01-10 7.50 21,996 22,150 Federal Natl Mtge Assn #323362 11-01-28 6.00 1,835,004 1,992,090 Federal Natl Mtge Assn #323715 05-01-29 6.00 334,486 363,120 Federal Natl Mtge Assn #344909 04-01-25 8.00 508,666 571,733 Federal Natl Mtge Assn #357514 03-01-34 5.50 1,782,649 1,904,301 Federal Natl Mtge Assn #483691 12-01-28 7.00 1,026,239 1,162,030 Federal Natl Mtge Assn #487757 09-01-28 7.50 597,116 677,007 Federal Natl Mtge Assn #514704 01-01-29 6.00 268,964 291,988 Federal Natl Mtge Assn #545008 06-01-31 7.00 1,191,586 1,343,655 Federal Natl Mtge Assn #545339 11-01-31 6.50 176,156 194,827 Federal Natl Mtge Assn #545818 07-01-17 6.00 1,567,307 1,704,125 Federal Natl Mtge Assn #545864 08-01-17 5.50 938,080 1,017,065 Federal Natl Mtge Assn #555458 05-01-33 5.50 1,358,429 1,448,004 Federal Natl Mtge Assn #555528 04-01-33 6.00 1,444,142 1,564,158 Federal Natl Mtge Assn #555734 07-01-23 5.00 557,832 591,969 Federal Natl Mtge Assn #581418 06-01-31 7.00 724,522 808,845 Federal Natl Mtge Assn #583088 06-01-29 6.00 2,362,484 2,583,978 Federal Natl Mtge Assn #592270 01-01-32 6.50 513,131 560,190 Federal Natl Mtge Assn #596505 08-01-16 6.50 103,368 112,368 Federal Natl Mtge Assn #601416 11-01-31 6.50 225,137 245,802 Federal Natl Mtge Assn #624979 01-01-32 6.00 518,231 566,184 Federal Natl Mtge Assn #626670 03-01-32 7.00 475,651 537,444 Federal Natl Mtge Assn #627426 03-01-17 6.50 339,477 369,601 Federal Natl Mtge Assn #630992 09-01-31 7.00 1,439,482 1,631,608 Federal Natl Mtge Assn #630993 09-01-31 7.50 1,484,131 1,689,240
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT 11 PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) RESIDENTIAL MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #631388 05-01-32 6.50% $1,226,335 $1,351,132 Federal Natl Mtge Assn #632856 03-01-17 6.00 341,482 371,272 Federal Natl Mtge Assn #633674 06-01-32 6.50 793,178 878,057 Federal Natl Mtge Assn #635231 04-01-32 7.00 72,413 80,717 Federal Natl Mtge Assn #635908 04-01-32 6.50 912,328 1,008,412 Federal Natl Mtge Assn #636812 04-01-32 7.00 92,106 103,243 Federal Natl Mtge Assn #640200 10-01-31 9.50 100,072 115,061 Federal Natl Mtge Assn #640207 03-01-17 7.00 33,519 35,208 Federal Natl Mtge Assn #640208 04-01-17 7.50 38,719 40,256 Federal Natl Mtge Assn #644805 05-01-32 7.00 822,919 927,345 Federal Natl Mtge Assn #645053 05-01-32 7.00 466,171 517,687 Federal Natl Mtge Assn #646189 05-01-32 6.50 337,537(j) 367,962 Federal Natl Mtge Assn #654071 09-01-22 6.50 438,642 480,956 Federal Natl Mtge Assn #654685 11-01-22 6.00 468,582 510,297 Federal Natl Mtge Assn #655635 08-01-32 6.50 570,961 625,032 Federal Natl Mtge Assn #656514 09-01-17 6.50 806,077 878,753 Federal Natl Mtge Assn #660186 11-01-32 6.00 1,850,362 2,026,728 Federal Natl Mtge Assn #665752 09-01-32 6.50 875,326 954,225 Federal Natl Mtge Assn #667302 01-01-33 7.00 485,696 547,084 Federal Natl Mtge Assn #670382 09-01-32 6.00 828,716 897,587 Federal Natl Mtge Assn #676683 12-01-32 6.00 920,806 997,330 Federal Natl Mtge Assn #677089 01-01-33 5.50 410,585(j) 438,989 Federal Natl Mtge Assn #677294 01-01-33 6.00 1,196,212 1,295,624 Federal Natl Mtge Assn #681080 02-01-18 5.00 562,653 603,363 Federal Natl Mtge Assn #684585 02-01-33 5.50 1,159,747 1,248,417 Federal Natl Mtge Assn #684843 02-01-18 5.50 1,113,151 1,210,783 Federal Natl Mtge Assn #684853 03-01-33 6.50 209,076 228,597 Federal Natl Mtge Assn #688002 03-01-33 5.50 1,112,326 1,200,863 Federal Natl Mtge Assn #689026 05-01-33 5.50 315,044 338,994 Federal Natl Mtge Assn #689093 07-01-28 5.50 693,939 745,849 Federal Natl Mtge Assn #694628 04-01-33 5.50 1,631,799 1,760,554 Federal Natl Mtge Assn #694795 04-01-33 5.50 1,997,623 2,155,828 Federal Natl Mtge Assn #695460 04-01-18 5.50 1,391,546 1,511,575 Federal Natl Mtge Assn #697145 03-01-23 5.50 804,703 861,403 Federal Natl Mtge Assn #699424 04-01-33 5.50 1,295,161 1,397,598 Federal Natl Mtge Assn #701101 04-01-33 6.00 1,592,906 1,722,298 Federal Natl Mtge Assn #704610 06-01-33 5.50 1,630,992 1,742,294 Federal Natl Mtge Assn #705655 05-01-33 5.00 583,598 614,203 Federal Natl Mtge Assn #708503 05-01-33 6.00 257,839 281,628 Federal Natl Mtge Assn #708504 05-01-33 6.00 549,697 600,435 Federal Natl Mtge Assn #710780 05-01-33 6.00 166,896 180,453 Federal Natl Mtge Assn #711206 05-01-33 5.50 809,417 864,654
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 12 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT --------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) RESIDENTIAL MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn #711239 07-01-33 5.50% $518,048 $553,401 Federal Natl Mtge Assn #711501 05-01-33 5.50 590,174 631,651 Federal Natl Mtge Assn #723771 08-01-28 5.50 687,788 739,237 Federal Natl Mtge Assn #725017 12-01-33 5.50 2,336,677 2,524,431 Federal Natl Mtge Assn #725232 03-01-34 5.00 1,325,572 1,395,087 Federal Natl Mtge Assn #725424 04-01-34 5.50 6,870,698 7,339,569 Federal Natl Mtge Assn #725425 04-01-34 5.50 1,994,899 2,134,618 Federal Natl Mtge Assn #725684 05-01-18 6.00 506,992 551,354 Federal Natl Mtge Assn #725773 09-01-34 5.50 1,393,820 1,488,284 Federal Natl Mtge Assn #726940 08-01-23 5.50 1,089,378 1,170,737 Federal Natl Mtge Assn #730153 08-01-33 5.50 534,110 570,559 Federal Natl Mtge Assn #733367 08-01-23 5.50 771,409 829,328 Federal Natl Mtge Assn #735212 12-01-34 5.00 7,125,097 7,498,748 Federal Natl Mtge Assn #743524 11-01-33 5.00 1,587,892 1,671,163 Federal Natl Mtge Assn #743579 11-01-33 5.50 1,157,136 1,236,102 Federal Natl Mtge Assn #745275 02-01-36 5.00 2,858,098 3,003,515 Federal Natl Mtge Assn #745355 03-01-36 5.00 2,978,921 3,130,485 Federal Natl Mtge Assn #747339 10-01-23 5.50 939,662 1,010,040 Federal Natl Mtge Assn #753507 12-01-18 5.00 699,108 753,344 Federal Natl Mtge Assn #759342 01-01-34 6.50 336,735 371,195 Federal Natl Mtge Assn #770403 04-01-34 5.00 1,268,534 1,335,057 Federal Natl Mtge Assn #776962 04-01-29 5.00 1,099,399 1,164,543 Federal Natl Mtge Assn #779676 06-01-34 5.00 1,982,604 2,086,574 Federal Natl Mtge Assn #793622 09-01-34 5.50 5,096,579 5,441,992 Federal Natl Mtge Assn #797232 09-01-34 5.50 4,066,355 4,341,946 Federal Natl Mtge Assn #826585 08-01-35 5.00 1,871,467 1,966,685 Federal Natl Mtge Assn #845109 05-01-36 6.00 4,481,772 4,819,218 Federal Natl Mtge Assn #886020 07-01-36 6.50 840,968 919,405 Federal Natl Mtge Assn #886291 07-01-36 7.00 595,963 662,884 Federal Natl Mtge Assn #888414 11-01-35 5.00 3,172,343 3,333,749 Federal Natl Mtge Assn #889565 08-01-37 5.50 57 61 Federal Natl Mtge Assn #893101 10-01-36 6.50 2,141,980 2,318,986 Federal Natl Mtge Assn #928046 01-01-37 6.00 2,885,247 3,102,486 Federal Natl Mtge Assn #928870 11-01-37 8.50 198,576 220,217 Federal Natl Mtge Assn #933966 07-01-23 6.00 2,087,707 2,250,714 Federal Natl Mtge Assn #933985 08-01-23 5.50 1,716,107 1,839,910 Federal Natl Mtge Assn #941285 06-01-37 6.00 3,709,602 3,983,693 Federal Natl Mtge Assn #960606 10-01-36 5.50 3,151,316 3,364,892 Federal Natl Mtge Assn #984458 05-01-38 6.00 3,885,956 4,170,647 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-119 Cl GI 12-25-33 5.44 668,690(g) 138,717
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT 13 PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) RESIDENTIAL MORTGAGE-BACKED (CONT.) Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-63 Cl IP 07-25-33 8.63% $1,520,756(g) $193,955 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2003-71 Cl IM 12-25-31 5.34 352,548(g) 40,826 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2004-84 Cl GI 12-25-22 7.82 131,759(g) 10,112 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2005-70 Cl YJ 08-25-35 0.00 1,535,290(g) 63,883 Federal Natl Mtge Assn Collateralized Mtge Obligation Interest Only Series 2007-22 Cl JS 03-25-37 31.01 1,151,163(g) 123,822 Govt Natl Mtge Assn 12-01-39 4.50 10,000,000(b) 10,281,251 12-01-39 5.00 7,000,000(b) 7,357,659 12-01-39 6.00 2,500,000(b) 2,675,780 Govt Natl Mtge Assn #3931 12-20-36 6.00 2,527,380 2,718,399 Govt Natl Mtge Assn #518371 02-15-30 7.00 115,850 129,418 Govt Natl Mtge Assn #528344 03-15-30 7.00 208,563 232,989 Govt Natl Mtge Assn #556293 12-15-31 6.50 303,118 330,345 Govt Natl Mtge Assn #583182 02-15-32 6.50 545,622 593,098 Govt Natl Mtge Assn #595256 12-15-32 6.00 267,422 289,450 Govt Natl Mtge Assn #619613 09-15-33 5.00 1,041,120 1,103,058 IndyMac Index Mtge Loan Trust Collateralized Mtge Obligation Interest Only Series 2005-AR8 Cl AX1 04-25-35 0.00 4,902,377(c,g) -- IndyMac Index Mtge Loan Trust Collateralized Mtge Obligation Interest Only Series 2006-AR25 Cl 3A3 09-25-36 20.00 9,247,385(g) 99,076 Jefferies & Co Collateralized Mtge Obligation Series 2009-R10 Cl 1A1 06-26-47 0.36 249,713(d,i) 243,470 Jefferies & Co Collateralized Mtge Obligation Series 2009-R10 Cl 2A1 05-26-48 0.33 396,730(d,i) 384,828 Jefferies & Co Collateralized Mtge Obligation Series 2009-R6 Cl 4A2 04-26-35 4.87 5,125,699(d) 1,025,140 JP Morgan Reremic Collateralized Mtge Obligation Series 2009-3 Cl 1A2 02-26-35 4.49 1,449,242(d,i) 154,431 JPMorgan Mtge Trust Collateralized Mtge Obligation Series 2004-S2 Cl 4A5 11-25-34 6.00 799,321 712,644 JPMorgan Mtge Trust Collateralized Mtge Obligation Series 2006-S4 Cl A6 01-25-37 6.00 668,695 639,200 MASTR Alternative Loan Trust Collateralized Mtge Obligation Series 2004-7 Cl 8A1 08-25-19 5.00 270,884 257,245 MASTR Alternative Loan Trust Collateralized Mtge Obligation Series 2004-8 Cl 7A1 09-25-19 5.00 399,732 379,506
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 14 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT --------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) RESIDENTIAL MORTGAGE-BACKED (CONT.) Washington Mutual Alternative Mtge Pass-Through Ctfs Collateralized Mtge Obligation Series 2006-5 Cl 3A1B 07-25-36 0.30% $59,563(i) $58,420 Washington Mutual Mtge Pass-Through Ctfs Collateralized Mtge Obligation Series 2004-AR9 Cl A6 08-25-34 2.95 1,212,021(i) 1,195,437 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2004-F Cl A3 06-25-34 4.72 1,020,502(i) 1,009,338 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2006-12 Cl A1 10-25-36 6.00 1,369,459 1,343,141 Wells Fargo Mtge Backed Securities Trust Collateralized Mtge Obligation Series 2007-8 Cl 2A7 07-25-37 6.00 1,841,209 1,751,125 --------------- Total 299,118,287 ------------------------------------------------------------------------------------- TOTAL BONDS (Cost: $312,384,581) $327,215,627 -------------------------------------------------------------------------------------
MONEY MARKET FUND (3.0%) SHARES VALUE(a) RiverSource Short-Term Cash Fund, 0.20% 8,133,522(k) $8,133,522 ------------------------------------------------------------------------------------- TOTAL MONEY MARKET FUND (Cost: $8,133,522) $8,133,522 ------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $320,518,103)(l) $335,349,149 =====================================================================================
INVESTMENTS IN DERIVATIVES FUTURES CONTRACTS OUTSTANDING AT NOV. 30, 2009
NUMBER OF UNREALIZED CONTRACTS NOTIONAL EXPIRATION APPRECIATION CONTRACT DESCRIPTION LONG (SHORT) MARKET VALUE DATE (DEPRECIATION) ------------------------------------------------------------------------------------ U.S. Treasury Note, 2- year (265) $(58,022,579) Jan. 2010 $(309,460) U.S. Treasury Note, 5- year (9) (1,066,148) Jan. 2010 (24,881) U.S. Treasury Note, 10- year 133 15,951,687 March 2010 102,535 ------------------------------------------------------------------------------------ Total $(231,806) ------------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS (a) Securities are valued by using policies described in Note 2 to the financial statements. (b) At Nov. 30, 2009, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $81,094,933. See Note 2 to the financial statements. (c) Negligible market value. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT 15 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------- NOTES TO PORTFOLIO OF INVESTMENTS (CONTINUED) (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 Nov. 30, 2009, the value of these securities amounted to $16,198,099 or 6.1% of net assets. (e) The following abbreviation is used in the portfolio security description to identify the insurer of the issue: MGIC -- Mortgage Guaranty Insurance Corporation (f) Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property, and include single- and multi-class pass-through securities and collateralized mortgage obligations. These securities may be issued or guaranteed by U.S. government agencies or instrumentalities, or by private issuers, generally originators and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers and special purpose entities. The maturity dates shown represent the original maturity of the underlying obligation. Actual maturity may vary based upon prepayment activity on these obligations. Unless otherwise noted, the coupon rates presented are fixed rates. (g) Interest only represents securities that entitle holders to receive only interest payments on the underlying mortgages. The yield to maturity of an interest only 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 Nov. 30, 2009. (h) This position is in bankruptcy. (i) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on Nov. 30, 2009. (j) At Nov. 30, 2009, investments in securities included securities valued at $164,494 that were partially pledged as collateral to cover initial margin deposits on open interest rate futures contracts. (k) Affiliated Money Market Fund -- See Note 7 to the financial statements. The rate shown is the seven-day current annualized yield at Nov. 30, 2009. (l) At Nov. 30, 2009, the cost of securities for federal income tax purposes was approximately $320,518,000 and the approximate aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $18,555,000 Unrealized depreciation (3,724,000) ----------------------------------------------------------- Net unrealized appreciation $14,831,000 -----------------------------------------------------------
-------------------------------------------------------------------------------- 16 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT -------------------------------------------------------------------------------- FAIR VALUE MEASUREMENTS Generally accepted accounting principles (GAAP) require disclosure regarding the inputs and valuation techniques used to measure fair value and any changes in valuation inputs or techniques. In addition, investments shall be disclosed by major category. The Fund categorizes its fair value measurements according to a three-level hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs by prioritizing that the most observable input be used when available. Observable inputs are those that market participants would use in pricing an investment based on market data obtained from sources independent of the reporting entity. Unobservable inputs are those that reflect the Fund's assumptions about the information market participants would use in pricing an investment. An investment's level within the fair value hierarchy is based on the lowest level of any input that is deemed significant to the asset or liability's fair value measurement. The input levels are not necessarily an indication of the risk or liquidity associated with investments at that level. For example, certain U.S. government securities are generally high quality and liquid, however, they are reflected as Level 2 because the inputs used to determine fair value may not always be quoted prices in an active market. Fair value inputs are summarized in the three broad levels listed below: - Level 1 -- Valuations based on quoted prices for investments in active markets that the Fund has the ability to access at the measurement date. Valuation adjustments are not applied to Level 1 investments. - Level 2 -- Valuations based on other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risks, etc.). - Level 3 -- Valuations based on significant unobservable inputs (including the Fund's own assumptions and judgment in determining the fair value of investments). Inputs that are used in determining fair value of an investment may include price information, credit data, volatility statistics, and other factors. These inputs can be either observable or unobservable. The availability of observable inputs can vary between investments, and is affected by various factors such as the type of investment, and the volume and level of activity for that investment or similar investments in the marketplace. The inputs will be considered by the Fund Administrator, along with any other relevant factors in the calculation of an investment's fair value. The Fund uses prices and inputs that are current as of the measurement date, which may include periods of market dislocations. During these periods, the availability of prices and inputs may be reduced for many investments. This condition could cause an investment to be reclassified between the various levels within the hierarchy. Investments falling into the Level 3 category are primarily supported by quoted prices from brokers and dealers participating in the market for those investments. However, these may be classified as Level 3 investments due to lack of market transparency and corroboration to support these quoted prices. Additionally, valuation models may be used as the pricing source for any remaining investments classified as Level 3. These models rely on one or more significant unobservable inputs and/or significant assumptions by the Fund Administrator. Inputs used in a valuation model may include, but are not limited to, financial statement analysis, discount rates and estimated cash flows, and comparable company data. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT 17 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------- FAIR VALUE MEASUREMENTS (CONTINUED) The following table is a summary of the inputs used to value the Fund's investments as of Nov. 30, 2009:
FAIR VALUE AT NOV. 30, 2009 ---------------------------------------------------------------- LEVEL 1 LEVEL 2 QUOTED PRICES OTHER LEVEL 3 IN ACTIVE SIGNIFICANT SIGNIFICANT MARKETS FOR OBSERVABLE UNOBSERVABLE DESCRIPTION IDENTICAL ASSETS INPUTS INPUTS TOTAL --------------------------------------------------------------------------------------------- Bonds Asset-Backed Securities $-- $12,273,779 $-- $12,273,779 Commercial Mortgage- Backed Securities -- 15,823,561 -- 15,823,561 Residential Mortgage- Backed Securities -- 290,305,645 8,812,642 299,118,287 --------------------------------------------------------------------------------------------- Total Bonds -- 318,402,985 8,812,642 327,215,627 --------------------------------------------------------------------------------------------- Other Affiliated Money Market Fund(a) 8,133,522 -- -- 8,133,522 --------------------------------------------------------------------------------------------- Total Other 8,133,522 -- -- 8,133,522 --------------------------------------------------------------------------------------------- Investments in Securities 8,133,522 318,402,985 8,812,642 335,349,149 Other Financial Instruments(b) (231,806) -- -- (231,806) --------------------------------------------------------------------------------------------- Total $7,901,716 $318,402,985 $8,812,642 $335,117,343 ---------------------------------------------------------------------------------------------
(a) Money market fund that is a sweep investment for cash balances in the Fund at Nov. 30, 2009. (b) Other Financial Instruments are derivative instruments, which are valued at the unrealized appreciation (depreciation) on the instrument. Derivative descriptions are located in the Investments in Derivatives section of the Portfolio of Investments. The following table is a reconciliation of Level 3 assets for which significant unobservable inputs were used to determine fair value.
RESIDENTIAL MORTGAGE-BACKED SECURITIES ----------------------------------------------------------------- Balance as of May 30, 2009 $8,941,664 Accrued discounts/premiums 78,815 Realized gain (loss) (1,263,316) Change in unrealized appreciation (depreciation)* 6,033,254 Net purchases (sales) (3,072,394) Transfers in and/or out of Level 3 (1,905,381) ----------------------------------------------------------------- Balance as of Nov. 30, 2009 $8,812,642 -----------------------------------------------------------------
* Change in unrealized appreciation (depreciation) relating to securities held at Nov. 30, 2009 was $7,056,216. -------------------------------------------------------------------------------- 18 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL 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 U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT 19 STATEMENT OF ASSETS AND LIABILITIES -------------------------------------------- NOV. 30, 2009 (UNAUDITED)
ASSETS Investments in securities, at value Unaffiliated issuers (identified cost $312,384,581) $327,215,627 Affiliated money market fund (identified cost $8,133,522) 8,133,522 ------------------------------------------------------------------------------- Total investments in securities (identified cost $320,518,103) 335,349,149 Capital shares receivable 133,490 Dividends and accrued interest receivable 1,661,949 Receivable for investment securities sold 23,022,814 ------------------------------------------------------------------------------- Total assets 360,167,402 ------------------------------------------------------------------------------- LIABILITIES Disbursements in excess of cash 192,683 Dividends payable to shareholders 273,919 Capital shares payable 420,798 Payable for investment securities purchased 10,635,729 Payable for securities purchased on a forward-commitment basis 81,094,933 Variation margin payable on futures contracts 31,064 Accrued investment management services fees 10,548 Accrued distribution fees 23,983 Accrued transfer agency fees 1,824 Accrued administrative services fees 1,538 Accrued plan administration services fees 14 Other accrued expenses 56,909 ------------------------------------------------------------------------------- Total liabilities 92,743,942 ------------------------------------------------------------------------------- Net assets applicable to outstanding capital stock $267,423,460 ------------------------------------------------------------------------------- REPRESENTED BY Capital stock -- $.01 par value $ 527,176 Additional paid-in capital 273,702,727 Undistributed net investment income 446,264 Accumulated net realized gain (loss) (21,851,947) Unrealized appreciation (depreciation) on investments 14,599,240 ------------------------------------------------------------------------------- Total -- representing net assets applicable to outstanding capital stock $267,423,460 -------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE NET ASSETS SHARES OUTSTANDING NET ASSET VALUE PER SHARE Class A $ 78,953,667 15,557,288 $5.08(1) Class B $ 19,647,042 3,869,743 $5.08 Class C $ 4,530,027 892,122 $5.08 Class I $164,228,429 32,385,757 $5.07 Class R4 $ 64,295 12,685 $5.07 -----------------------------------------------------------------------------------------
(1) The maximum offering price per share for Class A is $5.33. 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. -------------------------------------------------------------------------------- 20 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT STATEMENT OF OPERATIONS ------------------------------------------------------- SIX MONTHS ENDED NOV. 30, 2009 (UNAUDITED)
INVESTMENT INCOME Income: Interest $ 8,465,945 Income distributions from affiliated money market fund 12,571 ------------------------------------------------------------------------------ Total income 8,478,516 ------------------------------------------------------------------------------ Expenses: Investment management services fees 731,827 Distribution fees Class A 99,593 Class B 108,031 Class C 21,549 Transfer agency fees Class A 88,308 Class B 25,370 Class C 4,896 Class R4 16 Administrative services fees 106,725 Plan administration services fees -- Class R4 81 Compensation of board members 4,374 Custodian fees 7,775 Printing and postage 20,349 Registration fees 27,600 Professional fees 16,438 Other 7,349 ------------------------------------------------------------------------------ Total expenses 1,270,281 Expenses waived/reimbursed by the Investment Manager and its affiliates (233,479) ------------------------------------------------------------------------------ Total net expenses 1,036,802 ------------------------------------------------------------------------------ Investment income (loss) -- net 7,441,714 ------------------------------------------------------------------------------ REALIZED AND UNREALIZED GAIN (LOSS) -- NET Net realized gain (loss) on: Security transactions 853,136 Futures contracts 195,043 ------------------------------------------------------------------------------ Net realized gain (loss) on investments 1,048,179 Net change in unrealized appreciation (depreciation) on investments 16,811,729 ------------------------------------------------------------------------------ Net gain (loss) on investments 17,859,908 ------------------------------------------------------------------------------ Net increase (decrease) in net assets resulting from operations $25,301,622 ------------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT 21 STATEMENTS OF CHANGES IN NET ASSETS --------------------------------------------
SIX MONTHS ENDED YEAR ENDED NOV. 30, 2009 MAY 31, 2009 (UNAUDITED) OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ 7,441,714 $ 17,054,737 Net realized gain (loss) on investments 1,048,179 (18,382,125) Net change in unrealized appreciation (depreciation) on investments 16,811,729 2,926,890 ------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 25,301,622 1,599,502 ------------------------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income Class A (1,762,018) (3,899,777) Class B (393,043) (1,013,132) Class C (79,203) (152,824) Class I (4,795,772) (11,827,943) Class R4 (1,470) (290,189) 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 (7,031,506) (19,851,352) -------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 22 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED NOV. 30, 2009 MAY 31, 2009 (UNAUDITED) CAPITAL SHARE TRANSACTIONS Proceeds from sales Class A shares $ 7,869,828 $ 16,869,316 Class B shares 1,300,996 7,170,065 Class C shares 744,596 1,148,620 Class I shares 4,319,981 73,431,416 Class R4 shares 287 75,985 Reinvestment of distributions at net asset value Class A shares 1,537,866 4,107,536 Class B shares 346,739 1,103,090 Class C shares 70,459 167,436 Class I shares 4,705,400 13,610,360 Class R4 shares 1,208 161,216 Conversions from Class B to Class A Class A shares 2,147,725 3,005,081 Class B shares (2,147,725) (3,005,081) Payments for redemptions Class A shares (16,374,691) (36,083,563) Class B shares (5,321,668) (13,405,861) Class C shares (639,706) (1,228,211) Class I shares (78,257,415) (75,837,805) Class R4 shares (5,098) (41,377,098) ------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions (79,701,218) (50,087,498) ------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets (61,431,102) (68,339,348) Net assets at beginning of period 328,854,562 397,193,910 ------------------------------------------------------------------------------------------------- Net assets at end of period $267,423,460 $328,854,562 ------------------------------------------------------------------------------------------------- Undistributed net investment income $ 446,264 $ 36,056 -------------------------------------------------------------------------------------------------
Certain line items from the prior year have been renamed to conform to the current year presentation. The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT 23 FINANCIAL HIGHLIGHTS ----------------------------------------------------------- The following tables are intended to help you understand the Fund's financial performance. Certain information reflects financial results for a single share of a class held for the periods shown. For periods ended 2008 and after, per share net investment income (loss) amounts are calculated based on average shares outstanding during the period. Total returns assume reinvestment of all dividends and distributions. Total returns do not reflect payment of sales charges, if any, and are not annualized for periods of less than one year.
YEAR ENDED MAY 31, CLASS A SIX MONTHS ENDED ------------------------------------------------- PER SHARE DATA NOV. 30, 2009 2009 2008 2007 2006 2005 (UNAUDITED) Net asset value, beginning of period $4.77 $4.99 $5.00 $4.92 $5.12 $5.03 -------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .12 .21 .23 .22 .21 .19 Net gains (losses) (both realized and unrealized) .30 (.18) (.02) .09 (.20) .10 -------------------------------------------------------------------------------------------------------------------------- Total from investment operations .42 .03 .21 .31 .01 .29 -------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.11) (.21) (.22) (.23) (.20) (.20) Distributions from realized gains -- (.04) -- -- (.01) -- -------------------------------------------------------------------------------------------------------------------------- Total distributions (.11) (.25) (.22) (.23) (.21) (.20) -------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $5.08 $4.77 $4.99 $5.00 $4.92 $5.12 -------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN 8.89% .79% 4.31% 6.30% .12% 5.78% -------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(a) Gross expenses prior to expense waiver/reimbursement 1.08%(b) 1.08% 1.09% 1.17% 1.19% 1.10% -------------------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/ reimbursement(c) .89%(b) .89% .89% .89% .89% .95% -------------------------------------------------------------------------------------------------------------------------- Net investment income (loss) 4.68%(b) 4.51% 4.56% 4.45% 4.08% 3.67% -------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $79 $79 $95 $111 $126 $159 -------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate(d) 266% 431% 354% 306% 178% 137% --------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Highlights. -------------------------------------------------------------------------------- 24 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT --------------------------------------------------------------------------------
YEAR ENDED MAY 31, CLASS B SIX MONTHS ENDED ------------------------------------------------- PER SHARE DATA NOV. 30, 2009 2009 2008 2007 2006 2005 (UNAUDITED) Net asset value, beginning of period $4.77 $4.99 $5.00 $4.93 $5.12 $5.04 -------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .10 .18 .19 .19 .17 .15 Net gains (losses) (both realized and unrealized) .30 (.18) (.01) .07 (.19) .09 -------------------------------------------------------------------------------------------------------------------------- Total from investment operations .40 -- .18 .26 (.02) .24 -------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.09) (.18) (.19) (.19) (.16) (.16) Distributions from realized gains -- (.04) -- -- (.01) -- -------------------------------------------------------------------------------------------------------------------------- Total distributions (.09) (.22) (.19) (.19) (.17) (.16) -------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $5.08 $4.77 $4.99 $5.00 $4.93 $5.12 -------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN 8.48% .03% 3.53% 5.30% (.42%) 4.78% -------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(a) Gross expenses prior to expense waiver/reimbursement 1.84%(b) 1.84% 1.86% 1.94% 1.95% 1.86% -------------------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/ reimbursement(c) 1.65%(b) 1.65% 1.65% 1.64% 1.64% 1.69% -------------------------------------------------------------------------------------------------------------------------- Net investment income (loss) 3.92%(b) 3.75% 3.79% 3.70% 3.31% 2.90% -------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $20 $24 $34 $44 $64 $98 -------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate(d) 266% 431% 354% 306% 178% 137% --------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Highlights. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT 25 FINANCIAL HIGHLIGHTS (continued) -----------------------------------------------
YEAR ENDED MAY 31, CLASS C SIX MONTHS ENDED ------------------------------------------------- PER SHARE DATA NOV. 30, 2009 2009 2008 2007 2006 2005 (UNAUDITED) Net asset value, beginning of period $4.77 $4.99 $5.00 $4.93 $5.12 $5.04 -------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .10 .18 .19 .19 .17 .15 Net gains (losses) (both realized and unrealized) .30 (.18) (.01) .07 (.19) .09 -------------------------------------------------------------------------------------------------------------------------- Total from investment operations .40 -- .18 .26 (.02) .24 -------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.09) (.18) (.19) (.19) (.16) (.16) Distributions from realized gains -- (.04) -- -- (.01) -- -------------------------------------------------------------------------------------------------------------------------- Total distributions (.09) (.22) (.19) (.19) (.17) (.16) -------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $5.08 $4.77 $4.99 $5.00 $4.93 $5.12 -------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN 8.48% .03% 3.53% 5.30% (.43%) 4.79% -------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(a) Gross expenses prior to expense waiver/reimbursement 1.84%(b) 1.83% 1.85% 1.94% 1.95% 1.85% -------------------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/ reimbursement(c) 1.65%(b) 1.65% 1.65% 1.64% 1.64% 1.70% -------------------------------------------------------------------------------------------------------------------------- Net investment income (loss) 3.94%(b) 3.76% 3.80% 3.70% 3.31% 2.90% -------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $5 $4 $4 $5 $7 $11 -------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate(d) 266% 431% 354% 306% 178% 137% --------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Highlights. -------------------------------------------------------------------------------- 26 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT --------------------------------------------------------------------------------
YEAR ENDED MAY 31, CLASS I SIX MONTHS ENDED ------------------------------------------------- PER SHARE DATA NOV. 30, 2009 2009 2008 2007 2006 2005 (UNAUDITED) Net asset value, beginning of period $4.77 $4.99 $5.00 $4.92 $5.11 $5.03 -------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .13 .23 .25 .24 .22 .20 Net gains (losses) (both realized and unrealized) .29 (.18) (.02) .08 (.19) .09 -------------------------------------------------------------------------------------------------------------------------- Total from investment operations .42 .05 .23 .32 .03 .29 -------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.12) (.23) (.24) (.24) (.21) (.21) Distributions from realized gains -- (.04) -- -- (.01) -- -------------------------------------------------------------------------------------------------------------------------- Total distributions (.12) (.27) (.24) (.24) (.22) (.21) -------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $5.07 $4.77 $4.99 $5.00 $4.92 $5.11 -------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN 8.92% 1.21% 4.74% 6.68% .59% 5.92% -------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(a) Gross expenses prior to expense waiver/reimbursement .60%(b) .61% .63% .63% .73% .66% -------------------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/ reimbursement(c) .47%(b) .48% .48% .54% .54% .62% -------------------------------------------------------------------------------------------------------------------------- Net investment income (loss) 5.09%(b) 4.93% 4.97% 4.90% 4.99% 3.99% -------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $164 $222 $222 $207 $6 $-- -------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate(d) 266% 431% 354% 306% 178% 137% --------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Highlights. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT 27 FINANCIAL HIGHLIGHTS (continued) -----------------------------------------------
YEAR ENDED MAY 31, CLASS R4 SIX MONTHS ENDED ------------------------------------------------- PER SHARE DATA NOV. 30, 2009 2009 2008 2007 2006 2005 (UNAUDITED) Net asset value, beginning of period $4.77 $4.99 $5.00 $4.92 $5.11 $5.03 -------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .12 .23 .23 .23 .21 .20 Net gains (losses) (both realized and unrealized) .29 (.10) (.01) .08 (.19) .08 -------------------------------------------------------------------------------------------------------------------------- Total from investment operations .41 .13 .22 .31 .02 .28 -------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.11) (.31) (.23) (.23) (.20) (.20) Distributions from realized gains -- (.04) -- -- (.01) -- -------------------------------------------------------------------------------------------------------------------------- Total distributions (.11) (.35) (.23) (.23) (.21) (.20) -------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $5.07 $4.77 $4.99 $5.00 $4.92 $5.11 -------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN 8.76% 2.82% 4.46% 6.51% .49% 5.75% -------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(a) Gross expenses prior to expense waiver/reimbursement .91%(b) .89% .93% .99% 1.04% .94% -------------------------------------------------------------------------------------------------------------------------- Net expenses after expense waiver/ reimbursement(c) .77%(b) .70% .75% .71% .71% .77% -------------------------------------------------------------------------------------------------------------------------- Net investment income (loss) 4.80%(b) 4.38% 4.69% 4.63% 4.40% 3.99% -------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- $-- $42 $40 $35 $-- -------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate(d) 266% 431% 354% 306% 178% 137% --------------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (a) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the reported expense ratios. (b) Annualized. (c) The Investment Manager and its affiliates have agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (d) Includes mortgage dollar rolls. If mortgage dollar roll transactions were excluded, the portfolio turnover would have been 136% for the six months ended Nov. 30, 2009 and 162% for the year ended May 31, 2009. The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- 28 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT NOTES TO FINANCIAL STATEMENTS -------------------------------------------------- (UNAUDITED AS OF NOV. 30, 2009) 1. ORGANIZATION 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 (the 1940 Act) 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 Fund's 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 offered with a front-end sales charge, which may be waived under certain circumstances. - Class B shares may be subject to a contingent deferred sales charge (CDSC) and automatically convert to Class A shares one month after the completion of the eighth year of ownership if originally purchased in a RiverSource fund on or after May 21, 2005 or originally purchased in a Seligman fund on or after June 13, 2009. Class B shares originally purchased in a RiverSource fund prior to May 21, 2005 will convert to Class A shares in the ninth calendar year of ownership. Class B shares originally purchased in a Seligman fund prior to June 13, 2009 will convert to Class A shares in the month prior to the ninth year of ownership. - Class C shares may be subject to a CDSC. - Class I and Class R4 shares are offered without a front-end sales charge or CDSC to qualifying institutional investors. At Nov. 30, 2009, RiverSource Investments, LLC (RiverSource Investments or the Investment Manager) and affiliated funds-of-funds in the RiverSource Family of Funds owned 100% of Class I shares. At Nov. 30, 2009, the Investment Manager, RiverSource Life Insurance Company and affiliated funds-of-funds in the RiverSource Family of Funds owned approximately 61% 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. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT 29 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ADOPTION OF NEW ACCOUNTING STANDARD In June 2009, the Financial Accounting Standards Board (FASB) established the FASB Accounting Standards Codification(TM) (Codification) as the single source of authoritative accounting principles recognized by the FASB in the preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP). The Codification supersedes existing non-grandfathered, non- SEC accounting and reporting standards. The Codification did not change GAAP but rather organized it into a hierarchy where all guidance within the Codification carries an equal level of authority. The Codification became effective for financial statements issued for interim and annual periods ending after Sept. 15, 2009. The Codification did not have a material effect on the Fund's financial statements. USE OF ESTIMATES Preparing financial statements that conform to U.S. generally accepted accounting principles requires management to make estimates (e.g., on assets, liabilities and contingent assets and liabilities) that could differ from actual results. VALUATION OF SECURITIES All securities are valued at the close of business of the New York Stock Exchange (NYSE). Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price. Debt securities are generally traded in the over-the-counter market and are valued by an independent pricing service using an evaluated bid. When market quotes are not readily available, the pricing service, in determining fair values of debt securities, takes into consideration such factors as current quotations by broker/dealers, coupon, maturity, quality, type of issue, trading characteristics, and other yield and risk factors it deems relevant in determining valuations. 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. Typically, those maturing in 60 days or less that originally had maturities of more than 60 days at acquisition date are valued at amortized cost using the -------------------------------------------------------------------------------- 30 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT -------------------------------------------------------------------------------- market value on the 61st day before maturity. Short-term securities maturing in 60 days or less at acquisition date are valued at amortized cost. Amortized cost is an approximation of market value. Investments in money market funds are valued at net asset value. SECURITIES PURCHASED ON A FORWARD-COMMITMENT BASIS Delivery and payment for securities that have been purchased by the Fund on a forward-commitment basis, including when-issued securities and other forward- commitments, can take place one month or more after the transaction date. During this period, such securities are subject to market fluctuations, and they may affect the Fund's net assets the same as owned securities. The Fund designates cash or liquid securities at least equal to the amount of its forward- commitments. At Nov. 30, 2009, the Fund has outstanding when-issued securities of $81,094,933. 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 -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT 31 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- price established at the date the commitment was entered into. At Nov. 30, 2009, the Fund had no outstanding forward sale commitments. GUARANTEES AND INDEMNIFICATIONS Under the Fund's organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, certain of the Fund's contracts with its service providers contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown since the amount of any future claims that may be made against the Fund cannot be determined and the Fund has no historical basis for predicting the likelihood of any such claims. FEDERAL TAXES The Fund's policy is to comply with Subchapter M of the Internal Revenue Code that applies to regulated investment companies and to distribute substantially all of its taxable income (which includes net short-term capital gains) 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. 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. 3. INVESTMENTS IN DERIVATIVES The Fund may invest in certain derivative instruments, which are transactions whose values depend on or are derived from (in whole or in part) the value of one or more other assets, such as securities, currencies, commodities or indices. Such derivative instruments may be used to maintain cash reserves while maintaining exposure to certain other assets, to offset anticipated declines in values of investments, to facilitate trading, to reduce transaction costs, and to pursue higher investment returns. The Fund may also use derivative instruments -------------------------------------------------------------------------------- 32 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT -------------------------------------------------------------------------------- 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. 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 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. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT 33 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- FAIR VALUES OF DERIVATIVE INSTRUMENTS AT NOV. 30, 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 contracts assets -- unrealiz- ed depreciation on N/A N/A investments $231,806* ------------------------------------------------------------------------------------------- Total N/A $231,806 -------------------------------------------------------------------------------------------
* Includes cumulative appreciation (depreciation) of futures contracts as reported in the Futures Contracts Outstanding table following the Portfolio of Investments. Only the current day's variation margin is reported in receivables or payables in the Statement of Assets and Liabilities. EFFECT OF DERIVATIVE INSTRUMENTS IN THE STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED NOV. 30, 2009
AMOUNT OF REALIZED GAIN (LOSS) ON DERIVATIVES RECOGNIZED IN INCOME -------------------------------------------------------------------------------------- RISK EXPOSURE CATEGORY FUTURES -------------------------------------------------------------------------------------- Interest rate contracts $195,043 -------------------------------------------------------------------------------------- Total $195,043 --------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVES RECOGNIZED IN INCOME -------------------------------------------------------------------------------------- RISK EXPOSURE CATEGORY FUTURES -------------------------------------------------------------------------------------- Interest rate contracts $(395,370) -------------------------------------------------------------------------------------- Total $(395,370) --------------------------------------------------------------------------------------
VOLUME OF DERIVATIVE ACTIVITY FUTURES The gross notional amount of long and short contracts outstanding was $16 million and $59.1 million, respectively, at Nov. 30, 2009. The monthly average gross notional amount for long and short contracts was $4.1 million and $23.1 million, respectively, for the six months ended Nov. 30, 2009. The fair value of such contracts on Nov. 30, 2009 is set forth in the table above. 4. EXPENSES AND SALES CHARGES INVESTMENT MANAGEMENT SERVICES FEES Under an Investment Management Services Agreement, the Investment Manager determines which securities will be purchased, held or sold. The management fee is an annual fee that is equal to a percentage of the Fund's average daily net assets that declines from 0.48% to 0.29% as the Fund's net assets increase. The -------------------------------------------------------------------------------- 34 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT -------------------------------------------------------------------------------- management fee for the six months ended Nov. 30, 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), the parent company of the Investment Manager, an annual fee for administration and accounting services equal to a percentage of the Fund's average daily net assets that declines from 0.07% to 0.04% as the Fund's net assets increase. The fee for the six months ended Nov. 30, 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 six months ended Nov. 30, 2009, other expenses paid to this company were $915. COMPENSATION OF BOARD MEMBERS Under a Deferred Compensation Plan (the Plan), the board members who are not "interested persons" of the Fund under the 1940 Act may defer receipt of their compensation. Deferred amounts are treated as though equivalent dollar amounts had been invested in shares of the Fund or other funds in the RiverSource Family of Funds. The Fund's liability for these amounts is adjusted for market value changes and remains in the funds until distributed in accordance with the Plan. TRANSFER AGENCY FEES Under a Transfer Agency Agreement, RiverSource Service Corporation (the Transfer Agent) maintains Fund shareholder accounts and records and provides Fund shareholder services. The Fund pays the Transfer Agent an annual account-based fee at a rate equal to $20.50 for Class A, $21.50 for Class B and $21.00 for Class C for this service. The Transfer Agent also charges an annual fee of $3 per account serviced directly by the Fund or its designated agent for Class A, Class B and Class C shares. The Fund also pays the Transfer Agent an annual asset-based fee at a rate of 0.05% of the Fund's average daily net assets attributable to Class R4 shares. The Transfer Agent charges an annual fee of $5 per inactive account, charged on a pro rata basis for the 12 month period from the date the account becomes inactive. These fees are included in the transfer agency fees in the Statement of Operations. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT 35 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- 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 an agreement with RiverSource Fund Distributors, Inc. (the Distributor) for distribution and shareholder services. Under a Plan and Agreement of Distribution pursuant to Rule 12b-1, the Fund pays a fee at an annual rate of up to 0.25% of the Fund's average daily net assets attributable to Class A 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 $927,000 and $39,000 for Class B and Class C shares, respectively. These amounts are based on the most recent information available as of Oct. 31, 2009, and may be recovered from future payments under the distribution plan or CDSC. To the extent the unreimbursed expense has been fully recovered, the distribution fee is reduced. SALES CHARGES Sales charges, including front-end and CDSCs, received by the Distributor for distributing Fund shares were $37,424 for Class A, $2,455 for Class B and $64 for Class C for the six months ended Nov. 30, 2009. EXPENSES WAIVED/REIMBURSED BY THE INVESTMENT MANAGER AND ITS AFFILIATES For the six months ended Nov. 30, 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............................................. 0.47 Class R4............................................ 0.77
The waived/reimbursed fees and expenses for the transfer agency fees at the class level were as follows: Class A........................................... $20,584 Class B........................................... 5,924 Class C........................................... 1,114
-------------------------------------------------------------------------------- 36 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT -------------------------------------------------------------------------------- The management fees waived/reimbursed at the Fund level were $205,857. 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. 5. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term obligations, but including mortgage-dollar rolls) aggregated $969,330,057 and $1,044,138,971, respectively, for the six months ended Nov. 30, 2009. Realized gains and losses are determined on an identified cost basis. 6. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the periods indicated are as follows:
SIX MONTHS ENDED YEAR ENDED NOV. 30, 2009 MAY 31, 2009* --------------------------------------------------------------------- CLASS A Sold 1,610,275 3,541,015 Converted from Class B** 441,920 607,087 Reinvested distributions 312,897 866,721 Redeemed (3,350,872) (7,573,975) --------------------------------------------------------------------- Net increase (decrease) (985,780) (2,559,152) --------------------------------------------------------------------- CLASS B Sold 265,685 1,504,114 Reinvested distributions 70,620 232,629 Converted to Class A** (441,920) (607,087) Redeemed (1,089,370) (2,806,248) --------------------------------------------------------------------- Net increase (decrease) (1,194,985) (1,676,592) ---------------------------------------------------------------------
-------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT 37 NOTES TO FINANCIAL STATEMENTS (continued) --------------------------------------
SIX MONTHS ENDED YEAR ENDED NOV. 30, 2009 MAY 31, 2009* --------------------------------------------------------------------- CLASS C Sold 151,854 240,131 Reinvested distributions 14,322 35,345 Redeemed (130,792) (256,741) --------------------------------------------------------------------- Net increase (decrease) 35,384 18,735 --------------------------------------------------------------------- CLASS I Sold 889,677 15,087,681 Reinvested distributions 959,782 2,874,393 Redeemed (15,938,957) (15,906,305) --------------------------------------------------------------------- Net increase (decrease) (14,089,498) 2,055,769 --------------------------------------------------------------------- CLASS R4 Sold 59 22,129 Reinvested distributions 246 32,732 Redeemed (1,047) (8,546,518) --------------------------------------------------------------------- Net increase (decrease) (742) (8,491,657) ---------------------------------------------------------------------
* Certain line items from the prior year have been renamed to conform to the current year presentation. ** Automatic conversion of Class B shares to Class A shares based on the original purchase date. 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 $97,015,317 and $97,502,256, respectively, for the six months ended Nov. 30, 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 Nov. 30, 2009, can be found in the Portfolio of Investments. 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. 15, 2009, replacing a prior credit facility. The credit facility agreement, which is a collective agreement between the Fund and certain other funds in the -------------------------------------------------------------------------------- 38 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT -------------------------------------------------------------------------------- RiverSource Family of Funds, severally and not jointly, permits collective borrowings up to $300 million. The borrowers shall have the right, upon written notice to the Administrative Agent to request an increase of up to $200 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 $500 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 sum of the federal funds rate plus (A) 1.25% per annum plus (B) if one-month LIBOR exceeds the federal funds rate, the amount of such excess. 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 0.10% per annum, in addition to an upfront fee equal to its pro rata share of 0.04% of the amount of the credit facility. Prior to Oct. 15, 2009, the credit facility agreement, which was a collective agreement between the Fund and certain other funds in the RiverSource Family of Funds, severally and not jointly, permitted collective borrowings up to $475 million. Interest was charged to each Fund based on its borrowings at a rate equal to the federal funds rate plus 0.75%. 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, 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 six months ended Nov. 30, 2009. 9. FEDERAL TAX INFORMATION Net investment income (loss) and net realized gains (losses) may differ for financial statement and tax purposes primarily because of futures and options contracts, 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. 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 -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT 39 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- 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. It is unlikely the Board will authorize a distribution of any net realized capital gains until the available capital loss carry-over has been offset or expires. There is no assurance that the Fund will be able to utilize all of its capital loss carry-over before it expires. 10. SUBSEQUENT EVENTS Management has evaluated Fund related events and transactions that occurred during the period from the date of the Statement of Assets and Liabilities through Jan. 20, 2010, the date of issuance of the Fund's financial statements. There were no events or transactions that occurred during the period that materially impacted the amounts or disclosures in the Fund's financial statements. 11. 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. On August 6, 2009, defendants filed a writ of certiorari with the U.S. Supreme Court, asking the U.S. Supreme Court to stay the District Court proceedings while the U.S. Supreme Court considers and rules in a case captioned Jones v. -------------------------------------------------------------------------------- 40 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT -------------------------------------------------------------------------------- Harris Associates, which involves issues of law similar to those presented in the Gallus case. In December 2005, without admitting or denying the allegations, American Express Financial Corporation (AEFC, which is now known as Ameriprise Financial, Inc. (Ameriprise Financial)), entered into settlement agreements with the Securities and Exchange Commission (SEC) and Minnesota Department of Commerce (MDOC) related to market timing activities. As a result, AEFC was censured and ordered to cease and desist from committing or causing any violations of certain provisions of the Investment Advisers Act of 1940, the Investment Company Act of 1940, and various Minnesota laws. AEFC agreed to pay disgorgement of $10 million and civil money penalties of $7 million. AEFC also agreed to retain an independent distribution consultant to assist in developing a plan for distribution of all disgorgement and civil penalties ordered by the SEC in accordance with various undertakings detailed at http://www.sec.gov/litigation/admin/ia-2451.pdf. Ameriprise Financial and its affiliates have cooperated with the SEC and the MDOC in these legal proceedings, and have made regular reports to the RiverSource Funds' Boards of Directors/Trustees. On November 7, 2008, RiverSource Investments, LLC, a subsidiary of Ameriprise Financial, Inc., acquired J. & W. Seligman & Co. Incorporated (Seligman). In late 2003, Seligman conducted an extensive internal review concerning mutual fund trading practices. Seligman's review, which covered the period 2001-2003, noted one arrangement that permitted frequent trading in certain open-end registered investment companies managed by Seligman (the Seligman Funds); this arrangement was in the process of being closed down by Seligman before September 2003. Seligman identified three other arrangements that permitted frequent trading, all of which had been terminated by September 2002. In January 2004, Seligman, on a voluntary basis, publicly disclosed these four arrangements to its clients and to shareholders of the Seligman Funds. Seligman also provided information concerning mutual fund trading practices to the SEC and the Office of the Attorney General of the State of New York (NYAG). In September 2006, the NYAG commenced a civil action in New York State Supreme Court against Seligman, Seligman Advisors, Inc. (now known as RiverSource Fund Distributors, 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 -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL REPORT 41 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- 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 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. -------------------------------------------------------------------------------- 42 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2009 SEMIANNUAL 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 SEMIANNUAL REPORT 43 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 Fund Distributors, Inc., Member FINRA, and managed by RiverSource Investments, LLC. RiverSource is part of Ameriprise Financial, Inc. (RIVERSOURCE INVESTMENTS LOGO) (C)2010 RiverSource Investments, LLC. S-6256 J (1/10)
Item 2. Code of Ethics. Not applicable for semi-annual reports. Item 3. Audit Committee Financial Expert. Not applicable for semi-annual reports. Item 4. Principal Accountant Fees and Services. Not applicable for semi-annual reports. Item 5. Audit Committee of Listed Registrants. Not applicable. Item 6. Investments. (a) The complete schedule of investments is included in Item 1 of this Form N-CSR. (b) Not applicable. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable. Item 8. Portfolio Managers of Closed-End Management Investment Companies. Not applicable. Item 9. Purchase of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. Not applicable. Item 10. Submission of matters to a vote of security holders. Not applicable. Item 11. Controls and Procedures. (a) Based upon their evaluation of the registrant's disclosure controls and procedures as conducted within 90 days of the filing date of this Form N-CSR, the registrant's Principal Financial Officer and Principal Executive Officer have concluded that those disclosure controls and procedures provide reasonable assurance that the material information required to be disclosed by the registrant on this report is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. (b) There were no changes in the registrant's internal controls over financial reporting that occurred during the registrant's last fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12. Exhibits. (a)(1) Not applicable for semi-annual reports. (a)(2) Separate certification for the Registrant's principal executive officer and principal financial officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company Act of 1940, are attached as EX.99.CERT. (a)(3) Not applicable. (b) A certification by the Registrant's principal executive officer and principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(b) under the Investment Company Act of 1940, is attached as EX.99.906 CERT. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) RiverSource Government Income Series, Inc. By /s/ Patrick T. Bannigan ---------------------------------- Patrick T. Bannigan President and Principal Executive Officer Date February 3, 2010 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By /s/ Patrick T. Bannigan ---------------------------------- Patrick T. Bannigan President and Principal Executive Officer Date February 3, 2010 By /s/ Jeffrey P. Fox ---------------------------------- Jeffrey P. Fox Treasurer and Principal Financial Officer Date February 3, 2010