N-CSR 1 c58740nvcsr.txt FORM N-CSR UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act File Number 811-4260 RIVERSOURCE GOVERNMENT INCOME SERIES, INC. (Exact name of registrant as specified in charter) 50606 Ameriprise Financial Center, Minneapolis, Minnesota 55474 (Address of principal executive offices) (Zip code) Scott R. Plummer - 5228 Ameriprise Financial Center, Minneapolis, MN 55474 (Name and address of agent for service) Registrant's telephone number, including area code: (612) 671-1947 Date of fiscal year end: May 31 Date of reporting period: May 31, 2010 ITEM 1. REPORTS TO STOCKHOLDERS. ANNUAL REPORT Annual Report and Prospectus (COLUMBIA MANAGEMENT LOGO) RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -------------------------------------------------------------------------------- ANNUAL REPORT FOR THE PERIOD ENDED MAY 31, 2010 (Prospectus also enclosed) RIVERSOURCE SHORT DURATION U. S. GOVERNMENT FUND SEEKS TO PROVIDE SHAREHOLDERS WITH A HIGH LEVEL OF CURRENT INCOME AND SAFETY OF PRINCIPAL CONSISTENT WITH INVESTMENT IN U.S. GOVERNMENT AND GOVERNMENT AGENCY SECURITIES. This annual report includes a prospectus that describes in detail the Fund's objective, investment strategy, risks, sales charges, fees and other matters of interest. Please read the prospectus carefully before you invest or send money. NOT FDIC INSURED - NO BANK GUARANTEE - MAY LOSE VALUE TABLE OF CONTENTS -------------------------------------------------------------- Your Fund at a Glance.............. 3 Manager Commentary................. 6 The Fund's Long-term Performance... 14 Fund Expenses Example.............. 16 Portfolio of Investments........... 19 Statement of Assets and Liabilities...................... 32 Statement of Operations............ 34 Statements of Changes in Net Assets........................... 35 Financial Highlights............... 37 Notes to Financial Statements...... 42 Report of Independent Registered Public Accounting Firm........... 61 Federal Income Tax Information..... 63 Board Members and Officers......... 64 Approval of Investment Management Services Agreement............... 70 Proxy Voting....................... 73
-------------------------------------------------------------------------------- 2 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT YOUR FUND AT A GLANCE ---------------------------------------------------------- FUND SUMMARY -------------------------------------------------------------------------------- > RiverSource Short Duration U.S. Government Fund (the Fund) Class A shares rose 5.11% (excluding sales charge) for the 12 months ended May 31, 2010. > The Fund outperformed its benchmark, the Barclays Capital U.S. 1-3 Year Government Index, which gained 2.21%. > The Fund also outperformed the Lipper Short U.S. Government Funds Index, representing the Fund's peer group, which advanced 3.41% during the same time frame. ANNUALIZED TOTAL RETURNS (for period ended May 31, 2010) --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS --------------------------------------------------------------------- RiverSource Short Duration U.S. Government Fund Class A (excluding sales charge) +5.11% +3.23% +3.15% +3.80% --------------------------------------------------------------------- Barclays Capital U.S. 1-3 Year Government Index (unmanaged) +2.21% +4.92% +4.31% +4.59% --------------------------------------------------------------------- Lipper Short U.S. Government Funds Index +3.41% +4.20% +3.80% +4.05% ---------------------------------------------------------------------
(See "The Fund's Long-term Performance" for Index descriptions) The performance information shown represents past performance and is not a guarantee of future results. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by contacting your financial intermediary, visiting riversource.com/funds or calling 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. 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. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 3 YOUR FUND AT A GLANCE (continued) ---------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS --------------------------------------------------------------------------------
AT MAY 31, 2010 SINCE Without sales charge 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION* Class A (inception 8/19/95) +5.11% +3.23% +3.15% +3.80% N/A -------------------------------------------------------------------------- Class B (inception 3/20/95) +4.31% +2.45% +2.38% +3.02% N/A -------------------------------------------------------------------------- Class C (inception 6/26/00) +4.31% +2.45% +2.38% N/A +2.92% -------------------------------------------------------------------------- Class I (inception 3/4/04) +5.28% +3.62% +3.57% N/A +3.05% -------------------------------------------------------------------------- Class R2 (inception 8/3/09) N/A N/A N/A N/A +3.47%** -------------------------------------------------------------------------- Class R4 (inception 3/20/95) +4.96% +3.41% +3.34% +3.98% N/A -------------------------------------------------------------------------- Class W (inception 12/1/06) +4.81% +3.16% N/A N/A +3.12% -------------------------------------------------------------------------- With sales charge Class A (inception 8/19/95) +1.96% +2.19% +2.53% +3.48% N/A -------------------------------------------------------------------------- Class B (inception 3/20/95) -0.69% +1.48% +2.02% +3.02% N/A -------------------------------------------------------------------------- Class C (inception 6/26/00) +3.31% +2.45% +2.38% N/A +2.92% --------------------------------------------------------------------------
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 managed accounts. *For classes with less than 10 years performance. **Not annualized. -------------------------------------------------------------------------------- 4 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- PORTFOLIO STATISTICS -------------------------------------------------------------------------------- Weighted average life(1) 2.3 years -------------------------------------- Effective duration(2) 1.3 years --------------------------------------
(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. 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 -- 2010 ANNUAL REPORT 5 MANAGER COMMENTARY ------------------------------------------------------------- Tom Heuer and Colin J. Lundgren replaced Todd White and joined Jason J. Callan as Portfolio Managers of RiverSource Short Duration U.S. Government Fund effective May 1, 2010. Dear Shareholders, RiverSource Short Duration U.S. Government Fund (the Fund) Class A shares rose 5.11% (excluding sales charge) for the 12 months ended May 31, 2010. The Fund outperformed its benchmark, the Barclays Capital U.S. 1-3 Year Government Index (Barclays Index), which gained 2.21%. The Fund also outperformed the Lipper Short U.S. Government Funds Index, representing the Fund's peer group, which advanced 3.41% during the same time frame. SIGNIFICANT PERFORMANCE FACTORS The broad fixed income market was dominated during the annual period ended May 31, 2010 first by the boost provided by various government purchase programs and subsequently by the removal of that support and the gradual shift toward normalized, self-supporting credit markets. The U.S. economy started to show signs of stabilizing after experiencing the deepest recession since the Great Depression. The first positive Gross Domestic Product (GDP) print occurred in the third quarter of 2009 after four consecutive quarters of negative growth. GDP numbers continued to show signs of improvement throughout the balance of the annual period PORTFOLIO BREAKDOWN(1) (at May 31, 2010) ---------------------------------------------------------------------
Asset-Backed 7.8% ------------------------------------------------ Commercial Mortgage-Backed 1.5% ------------------------------------------------ FDIC -- Insured Debt(2) 9.0% ------------------------------------------------ Government Guaranteed(3) 0.2% ------------------------------------------------ Residential Mortgage-Backed(4) 45.5% ------------------------------------------------ U.S. Government Obligations & Agencies 25.7% ------------------------------------------------ Other(5) 10.3% ------------------------------------------------
(1) Percentages indicated are based upon total investments (excluding Investments of Cash Collateral Received for Securities on Loan). 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 45.5%, 9.1% is due to forward commitment residential mortgage-backed securities activity. Short-term securities are held as collateral for these commitments. (5) Cash & Cash Equivalents. -------------------------------------------------------------------------------- 6 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- as business inventories began to stabilize and signs of job growth emerged. During the first nine months of the annual period, U.S. Treasury rates rose on long-term maturities while short-term rates, as measured by the Fed Funds Rate, were anchored near zero. As a result, the yield curve steepened dramatically, with the difference between 2-year Treasuries and 10-year Treasuries reaching as much as 2.90%. This yield curve steepening led to relative outperformance in the non-Treasury sectors of the market given the inverse relationship between yields and bond prices. Outside the Treasury market, fixed income sectors were supported by a significant amount of government sponsorship put in place during the earlier months of 2009. The mortgage market in particular was a significant benefactor of this support with the Federal Reserve Board (the Fed) implementing a $1.25 trillion purchase program of agency-issued mortgage-backed securities. The Treasury Department also had a purchase program for $200 billion of agency- issued mortgage-backed securities. Primarily as a result of these programs, spreads (yield differential between agency-issued mortgage-backed securities and U.S. Treasuries) tightened by approximately 30 basis points (0.30%) during the first nine QUALITY BREAKDOWN OF FIXED INCOME SECURITIES(1) (at May 31, 2010) ---------------------------------------------------------------------
AAA bonds 90.1% ------------------------------------------------ AA bonds 2.5% ------------------------------------------------ A bonds 0.8% ------------------------------------------------ BBB bonds 2.8% ------------------------------------------------ Non-investment grade bonds 0.5% ------------------------------------------------ Non-rated bonds 3.3% ------------------------------------------------
(1) Percentages indicated are based upon total fixed income securities (excluding Investments of Cash Collateral Received for Securities on Loan and Cash & Cash Equivalents). 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. Columbia Management Investment Advisers, LLC (formerly RiverSource Investments, LLC) (the Investment Manager) rates a security using an internal rating system when Moody's doesn't provide a rating. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 7 MANAGER COMMENTARY (continued) ------------------------------------------------- months of the annual period. On the last day of March 2010, the Fed completed its purchase program and allowed it to expire. From March 31, 2010 through the end of the annual period on May 31, 2010, agency-issued mortgage-backed security spreads widened by approximately 20 basis points (0.20%). Such widening was driven largely by renewed global fiscal and liquidity concerns, which, in turn, led to significant strength in U.S. Treasuries. Despite this widening, agency mortgages outperformed U.S. Treasuries for the annual period. Performance, however, was highly differentiated depending on the coupon, or the interest rate, the holder of a mortgage-backed security was paid. Higher coupon mortgage-backed securities produced the greatest returns during the annual period, as these borrowers continued to prepay at a slow rate given their lower credit characteristics and ongoing tight credit conditions. U.S. government sponsored enterprises Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) tightened their underwriting standards during the annual period, as they continued to lose money due to the unprecedented level of mortgage delinquencies. Tighter underwriting slowed repayments due to lack of refinancing options for many borrowers. This in turn drove pricing on those mortgage-backed securities higher as investors were able to collect higher coupon payments for a longer period of time. In the last weeks of the annual period, concerns regarding the sovereign deficit-to-GDP ratios of what are known as the PIIGS (Portugal, Italy, Ireland, Greece and Spain) dominated. As a result, there were significant investment flows out of the euro and into the U.S. dollar. With the short-term end of the yield curve anchored by the federal funds rate, this surge into the U.S. currency led to a significant flattening of the Treasury yield curve overall, whereby the differential between yields on long-term maturities and short-term maturities narrowed. Treasury rates rallied across the yield curve, but decreased more significantly on longer-term maturities. In turn, non-Treasury sectors, including mortgages, weakened in May 2010. The Fund's strong relative performance can be attributed primarily to its positioning in agency-issued mortgage-backed securities and smaller allocations to non-agency mortgage-backed securities and commercial -------------------------------------------------------------------------------- 8 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- mortgage-backed securities (CMBS). None of these three segments of the fixed income market are components of the Barclays Index, and thus the Fund's allocations to the solidly performing out-of-Index areas helped boost its relative results. Within agency-issued mortgage-backed securities, we had a significant allocation through most of the annual period to higher coupon 30-year-pass through securities and steered away from lower coupon pass-throughs. It had become evident to us that borrowers with higher coupons were rather inefficient at exercising their refinancing option as credit continued to tighten within Fannie Mae and Freddie Mac, and we sought to take advantage of the substantially higher yields the higher coupon securities provided. (Pass-through mortgages consist of a pool of residential mortgage loans, where homeowners' monthly payments of principal, interest and prepayments pass from the original bank through a government agency or investment bank to investors.) Based on various technicals within the market during the annual period, we decided to focus the Fund's exposure in the mortgage-backed security to-be-announced (TBA) market. We also added to the Fund's position in seasoned agency bonds with higher coupons that provided superior convexity. (Convexity is a volatility measure for bonds used in conjunction with modified duration in order to measure how the bond's price will change as interest rates change. It is equal to the negative of the second derivative of the bond's price relative to its yield, divided by its price. For example, since a non-callable bond's duration usually increases as interest rates decrease, its convexity is positive.) The Fund's strong relative performance can be attributed primarily to its positioning in agency-issued mortgage-backed securities and smaller allocations to non-agency mortgage-backed securities and commercial mortgage- backed securities (CMBS). -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 9 MANAGER COMMENTARY (continued) ------------------------------------------------- The Fund's allocations to and positioning within the non-agency mortgage-backed securities and CMBS sectors were also strong contributors to results. One of the primary drivers of strong price performance within the non-agency mortgage- backed securities and CMBS sectors was the implementation of the PPIP (Public- Private Investment Program) by the Treasury Department. In aggregate, PPIP produced nearly $40 billion of demand for non-agency mortgage-backed securities and CMBS, which in turn drove prices on these assets meaningfully higher. Another major driver of demand was the creation of re-REMICS, which allowed investment banks to restructure cash flows off poorly performing bonds to create newer, highly enhanced bonds that were rated AAA. Insurance companies in particular generated strong demand for these newly-created bonds. All told, re- REMICS took over $20 billion of non-agency mortgage-backed securities and CMBS out of the market during the annual period. During the annual period, we repositioned the Fund's non-agency and CMBS exposure into highly seasoned, shorter-maturity securities that provided attractive relative returns. Our investment thesis was that loans originated in 2004 and 2005 were underwritten to better quality standards than those generated in 2006 and 2007 and that the level of fundamental differentiation would prove to be significantly different. Indeed, as the annual period progressed, there was a meaningful delineation between the fundamental performances of those vintages, as the distinguishing loan characteristics became apparent. Such differentiation could be seen most readily in implied loan-to-value ratios, documentation levels, and the amortizing loans instead of interest-only loans, which became much more prevalent starting in 2006. The only detractor from the Fund's results during the annual period was the combined effect of its duration and yield curve positioning. The Fund was positioned slightly shorter than the Barclays Index throughout the annual period, which detracted modestly as interest rates declined. As the economy continued to marginally improve, we were concerned the Fed might take a more aggressive stance and begin to raise the targeted federal funds rate, but some of those concerns dissipated as the European fiscal issues moved to the forefront. Duration is a measure of the Fund's sensitivity to changes in interest rates. -------------------------------------------------------------------------------- 10 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- CHANGES TO THE FUND'S PORTFOLIO As spreads tightened during the first nine months of the annual period, we gradually reduced the Fund's exposure to agency-issued mortgage-backed securities overall. Elsewhere, as mentioned, we repositioned the Fund's allocations to both non-agency mortgage-backed securities and CMBS into shorter- maturity, seasoned collateral where we believed the underwriting to be of greater quality than the loans produced in 2006 and 2007. The Fund's portfolio turnover rate for the 12-month period was 329%.* * A significant portion of the turnover was the result of rolling-maturity mortgage securities, processing of prepayments and opportunistic changes we made at the margin in response to valuations or market developments. OUR FUTURE STRATEGY In general, we expect our strategy ahead for the Fund to remain fairly consistent with the views and positioning held at the end of the annual period. The broader U.S. economy seems to have stabilized, with three consecutive quarters of positive growth. However, much of that growth in GDP was a reflection of inventory stabilization and not improvement in final sales. Limited expansion of private payrolls and persistent slack in the labor force should continue to suppress inflation fears over the near term. In turn, we believe the Fed will likely remain on hold for the foreseeable future. We will continue to closely monitor the housing market. Housing prices in the U.S., as measured by the S&P/Case-Schiller Index, had stabilized during the period, primarily driven by the multiple home buyer tax credit and the simultaneous invoking of foreclosure moratoriums in the most troubled areas of the nation. Meanwhile, borrowers continued to default on their mortgages at historically elevated levels, thereby building a shadow inventory of eventual foreclosures. This shadow inventory combined with the existing housing supply at the end of May totaled nearly 20 months' supply of existing homes. New and existing home sales had shown some improvement, but this largely reflected an advance in demand among participants seeking to take advantage of the home buyer tax credit, which officially ended April 30. Clearly, we will be watching to see how new and existing home sales respond to the expiration of the government tax credits. At the end of the annual period, our major concerns were the fact that housing demand did not substantially pick up -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 11 MANAGER COMMENTARY (continued) ------------------------------------------------- based on low mortgage rates alone and the size of the shadow inventory that continues to weigh on the housing market. Given this backdrop, we intend to stay conservatively positioned in the Fund on a relative basis. We intend to maintain the Fund's duration below that of the Barclays Index, as we believe that yields will rise as the market digests record Treasury supply and the recent flight to quality abates. We further intend to maintain our focus on the purchase of mortgage-backed securities issued by U.S. government agencies, with a focus on higher coupon agency 30-year mortgage- backed securities. We continue to like CMBS, as we expect an improving economy to bode well for that sector. As always, our strategy is to look to provide added portfolio value with a moderate amount of risk. Quality issues and security selection remain a priority as we continue to seek attractive investment opportunities. Jason Callan Tom Heuer Colin Lundgren Portfolio Manager Portfolio Manager Portfolio Manager
Any specific securities mentioned are for illustrative purposes only and are not a complete list of securities that have increased or decreased in value. The views expressed in this statement reflect those of the portfolio manager(s) only through the end of the period of the report as stated on the cover and do not necessarily represent the views of Columbia Management Investment Advisers, LLC* (the Investment Manager) or any subadviser to the Fund or any other person in the Investment Manager or subadviser organizations. Any such views are subject to change at any time based upon market or other conditions and the Investment Manager disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for the Fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of the Fund. * Effective May 1, 2010, RiverSource Investments, LLC became known as Columbia Management Investment Advisers, LLC. -------------------------------------------------------------------------------- 12 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT THIS PAGE LEFT BLANK INTENTIONALLY THE FUND'S LONG-TERM PERFORMANCE ----------------------------------------------- The chart on the facing page illustrates the total value of an assumed $10,000 investment in RiverSource Short Duration U.S. Government Fund Class A shares (from 6/1/00 to 5/31/10) as compared to the performance of the Barclays Capital U.S. 1-3 Year Government Index and the Lipper Short U.S. Government Funds Index. In comparing the Fund's Class A shares to these indices, you should take into account the fact that the Fund's performance reflects the maximum initial sales charge of 3.00%, while such charges are not reflected in the performance of the indices. Returns for the Fund include the reinvestment of any distributions paid during each period. The performance information shown represents past performance and is not a guarantee of future results. The table below and the chart on the facing page do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by contacting your financial intermediary or visiting riversource.com/funds. Also see "Past Performance" in the Fund's current prospectus. COMPARATIVE RESULTS --------------------------------------------------------------------------------
Results at May 31, 2010 1 YEAR 3 YEARS 5 YEARS 10 YEARS RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND (INCLUDES SALES CHARGE) Class A Cumulative value of $10,000 $10,196 $10,671 $11,330 $14,081 ------------------------------------------------------------------------------------------ Average annual total return +1.96% +2.19% +2.53% +3.48% ------------------------------------------------------------------------------------------ BARCLAYS CAPITAL U.S. 1-3 YEAR GOVERNMENT INDEX(1) Cumulative value of $10,000 $10,221 $11,550 $12,351 $15,670 ------------------------------------------------------------------------------------------ Average annual total return +2.21% +4.92% +4.31% +4.59% ------------------------------------------------------------------------------------------ LIPPER SHORT U.S. GOVERNMENT FUNDS INDEX(2) Cumulative value of $10,000 $10,341 $11,313 $12,053 $14,874 ------------------------------------------------------------------------------------------ Average annual total return +3.41% +4.20% +3.80% +4.05% ------------------------------------------------------------------------------------------
Results for other share classes can be found on page 4. -------------------------------------------------------------------------------- 14 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- (VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND LINE GRAPH)
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND BARCLAYS CAPITAL CLASS A U.S.1-3 YEAR LIPPER SHORT (INCLUDES SALES U.S. GOVERNMENT U.S. GOVERNMENT CHARGE) INDEX(1) FUNDS INDEX(2) ----------------- ------------------ --------------- 5/00 $ 9,700 $10,000 $10,000 8/00 10,018 10,251 10,244 11/00 10,279 10,488 10,486 2/01 10,585 10,827 10,815 5/01 10,689 11,005 10,979 8/01 10,912 11,245 11,148 11/01 11,123 11,515 11,364 2/02 11,207 11,607 11,452 5/02 11,306 11,709 11,555 8/02 11,550 12,005 11,788 11/02 11,630 12,098 11,851 2/03 11,798 12,272 12,012 5/03 11,859 12,372 12,086 8/03 11,749 12,316 12,005 11/03 11,813 12,387 12,065 2/04 11,963 12,556 12,195 5/04 11,830 12,454 12,094 8/04 11,954 12,596 12,215 11/04 11,932 12,567 12,214 2/05 11,939 12,566 12,236 5/05 12,057 12,688 12,341 8/05 12,112 12,757 12,404 11/05 12,083 12,763 12,402 2/06 12,195 12,851 12,495 5/06 12,177 12,926 12,557 8/06 12,425 13,144 12,754 11/06 12,617 13,337 12,944 2/07 12,726 13,477 13,077 5/07 12,801 13,570 13,147 8/07 12,972 13,867 13,338 11/07 13,250 14,244 13,613 2/08 13,405 14,669 13,926 5/08 13,346 14,554 13,834 8/08 13,213 14,706 13,908 11/08 13,039 15,081 13,963 2/09 13,158 15,207 14,177 5/09 13,424 15,331 14,383 8/09 13,707 15,400 14,547 11/09 13,968 15,564 14,743 2/10 13,976 15,600 14,781 5/10 14,081 15,670 14,874
(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 -- 2010 ANNUAL REPORT 15 FUND EXPENSES EXAMPLE ---------------------------------------------------------- (UNAUDITED) As a shareholder of the Fund, you incur two types of costs: (i) transaction costs, including sales charges (loads) on purchase payments; and (ii) ongoing costs, which may include management fees; distribution and service (Rule 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 May 31, 2010. ACTUAL EXPENSES The first line of the table provides information about actual account values and actual expenses for each class. 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 actual expense ratio for each class and an assumed rate of return of 5% per year before expenses, which is not the actual return for the class. 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. -------------------------------------------------------------------------------- 16 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT --------------------------------------------------------------------------------
BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED DEC. 1, 2009 MAY 31, 2010 THE PERIOD(a) EXPENSE RATIO ------------------------------------------------------------------------------------------ Class A ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,010.20 $4.24(c) .86% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,020.30 $4.26(c) .86% ------------------------------------------------------------------------------------------ Class B ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,008.60 $7.98(c) 1.62% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,016.58 $8.01(c) 1.62% ------------------------------------------------------------------------------------------ Class C ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,006.40 $7.97(c) 1.62% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,016.58 $8.01(c) 1.62% ------------------------------------------------------------------------------------------ Class I ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,012.00 $2.37(c) .48% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,022.17 $2.38(c) .48% ------------------------------------------------------------------------------------------ Class R2 ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,008.10 $6.30(c) 1.28% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,018.24 $6.33(c) 1.28% ------------------------------------------------------------------------------------------ Class R4 ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,010.50 $3.85(c) .78% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,020.70 $3.86(c) .78% ------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 17 FUND EXPENSES EXAMPLE (continued) ----------------------------------------------
BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED DEC. 1, 2009 MAY 31, 2010 THE PERIOD(a) EXPENSE RATIO ------------------------------------------------------------------------------------------ Class W ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,009.80 $4.53(c) .92% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,020.01 $4.56(c) .92% ------------------------------------------------------------------------------------------
(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 179/365 (to reflect the one-half year period). (b) Based on the actual return for the six months ended May 31, 2010: +1.02% for Class A, +0.86% for Class B, +0.64% for Class C, +1.20% for Class I, +0.81% for Class R2, +1.05% for Class R4 and +0.98% for Class W. (c) Columbia Management Investment Advisers, LLC (formerly RiverSource Investments, LLC) (the Investment Manager) and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until July 31, 2011, unless sooner terminated at the sole discretion of the Fund's Board, such that net expenses (excluding fees and expenses of acquired funds), will not exceed 0.84% for Class A, 1.60% for Class B, 1.60% for Class C, 0.44% for Class I, 1.24% for Class R2, 0.74% for Class R4 and 0.89% for Class W. Any amounts waived will not be reimbursed by the Fund. This change is effective Aug. 1, 2010. Had this change been in place for the entire six month period ended May 31, 2010, the actual expenses paid would have been $4.14 for Class A, $7.88 for Class B, $7.87 for Class C, $2.17 for Class I, $6.11 for Class R2, $3.65 for Class R4 and $4.39 for Class W; the hypothetical expenses paid would have been $4.16 for Class A, $7.91 for Class B, $7.91 for Class C, $2.18 for Class I, $6.14 for Class R2, $3.67 for Class R4 and $4.41 for Class W. -------------------------------------------------------------------------------- 18 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT PORTFOLIO OF INVESTMENTS ------------------------------------------------------- MAY 31, 2010 (Percentages represent value of investments compared to net assets) INVESTMENTS IN SECURITIES
BONDS (89.0%) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) U.S. GOVERNMENT OBLIGATIONS & AGENCIES (28.4%) Federal Farm Credit Bank 04-19-12 1.350% $3,425,000 $3,425,257 Federal Home Loan Banks 05-10-11 0.600 2,625,000 2,625,123 05-16-11 0.610 2,105,000 2,105,179 05-20-11 2.625 2,565,000(e) 2,615,336 05-27-11 0.625 1,715,000 1,715,225 12-28-11 1.000 14,550,000 14,599,629 09-28-12 0.663 4,325,000(i) 4,331,059 10-18-13 3.625 2,000,000 2,128,184 11-17-17 5.000 500,000(e) 560,100 Federal Home Loan Mortgage Corp. 06-15-11 6.000 500,000 528,208 03-23-12 2.125 3,105,000 3,176,691 05-18-12 0.625 2,665,000(i) 2,665,181 07-27-12 1.125 9,520,000 9,530,853 08-20-12 5.500 2,610,000(e) 2,859,837 08-24-12 2.250 6,705,000 6,731,961 07-15-14 5.000 900,000 1,009,353 12-10-15 4.200 14,000,000 14,012,334 06-13-18 4.875 5,405,000(e) 5,959,961 Federal National Mortgage Association 06-09-10 3.255 580,000 580,524 08-12-10 3.250 870,000 875,158 06-22-12 1.250 15,000,000(e) 15,064,694 07-19-12 1.000 8,865,000(i) 8,869,841 10-29-12 1.875 15,000,000 15,061,606 11-19-12 4.750 730,000 791,692 04-09-13 3.250 1,960,000 2,061,661 05-07-13 1.750 12,390,000(e) 12,478,353 07-17-13 4.375 5,020,000 5,446,098 03-13-14 2.750 7,500,000 7,739,145 02-23-15 1.000 1,320,000(i) 1,321,819 02-13-17 5.000 2,500,000(e) 2,802,393 Private Export Funding Corp. U.S. Government Guaranty 10-15-14 3.050 5,675,000 5,849,722 U.S. Treasury 07-31-11 1.000 3,250,000 3,268,662 06-15-12 1.875 6,690,000(e) 6,840,525 02-15-13 1.375 9,785,000 9,835,454 04-30-15 2.500 2,080,000(e) 2,121,924 05-31-17 2.750 1,000,000(g) 999,531 02-15-20 3.625 1,000,000(e) 1,025,703 05-15-20 3.500 3,344,000(e) 3,399,377 --------------- Total 187,013,353 ------------------------------------------------------------------------------------- ASSET-BACKED (8.7%) Access Group, Inc. Series 2005-1 Class A1 06-22-18 0.351 1,861,810(i) 1,858,243 Banc of America Funding Corp. CMO Series 2009-R14A Class 1A1 09-26-37 1.445 4,384,400(d,i) 4,221,300 Bear Stearns Asset-Backed Securities Trust Series 2006-HE9 Class 1A1 11-25-36 0.393 816,184(i) 782,912 Carrington Mortgage Loan Trust Series 2006-RFC1 Class A2 05-25-36 0.443 3,143,430(i) 3,085,426 Chrysler Financial Lease Trust Series 2010-A Class A2 06-15-11 1.780 4,750,000(d) 4,740,547 Citigroup Mortgage Loan Trust, Inc. Series 2006-WFH4 Class A2 11-25-36 0.443 1,723,826(i) 1,680,313 Countrywide Asset-Backed Certificates Series 2005-SD1 Class A1C 05-25-35 0.733 1,931,981(d,i) 1,852,134 Countrywide Asset-Backed Certificates Series 2006-22 Class 2A1 (MGIC) 05-25-47 0.393 1,366,160(b,i) 1,324,706 Credit-Based Asset Servicing and Securitization LLC Series 2006-CB6 Class A22 07-25-36 0.433 1,697,438(i) 1,662,994
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 19 PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) ASSET-BACKED (CONT.) First Franklin Mortgage Loan Asset-Backed Certificates Series 2005-FFH3 Class 2A3 09-25-35 0.753% $35,156(i) $34,963 Jefferies & Co., Inc. CMO Series 2010-R1 Class 2A1 11-26-36 0.428 1,118,729(d,i) 1,062,793 Morgan Stanley ABS Capital I Series 2005-WMC5 Class M2 06-25-35 0.823 3,368,411(i) 3,325,971 Morgan Stanley ABS Capital I Series 2006-WMC1 Class A2B 12-25-35 0.543 1,731,047(i) 1,608,972 RAAC Series Series 2006-SP4 Class A1 11-25-36 0.443 1,025,564(i) 1,009,790 RBSSP Resecuritization Trust CMO Series 2009-10 Class 4A1 07-26-36 0.495 2,851,332(d,i) 2,731,831 RBSSP Resecuritization Trust CMO Series 2009-10 Class 7A1 03-26-37 0.445 1,967,944(d,i) 1,932,718 RBSSP Resecuritization Trust CMO Series 2009-11 Class 2A1 04-26-36 0.495 4,808,334(d,i) 4,437,644 RBSSP Resecuritization Trust CMO Series 2009-12 Class 2A1 10-25-32 4.770 2,140,302(d) 2,154,825 RBSSP Resecuritization Trust CMO Series 2009-13 Class 8A1 06-26-37 1.095 6,810,668(d,i) 6,508,803 Residential Asset Mortgage Products, Inc. Series 2004-RS8 Class AI4 06-25-32 5.060 1,998,681 1,952,227 Residential Asset Mortgage Products, Inc. Series 2006-RS4 Class A2 07-25-36 0.453 150,900 150,267 Small Business Administration Series 2002-P10B Class 1 08-10-12 5.199 208,706 219,023 Soundview Home Equity Loan Trust Series 2005-B Class M1 05-25-35 6.135 278,104(i) 277,656 Specialty Underwriting & Residential Finance Series 2005-BC3 Class M1 06-25-36 0.793 4,500,000(i) 4,138,380 Structured Asset Investment Loan Trust Series 2005-9 Class A5 11-25-35 0.573 1,907,394(i) 1,844,489 Structured Asset Securities Corp. CMO Series 2006-NC1 Class A6 05-25-36 0.393 1,047,842(i) 1,004,394 Structured Asset Securities Corp. Series 2007-WF2 Class A2 08-25-37 1.043 1,298,559(i) 1,279,666 --------------- Total 56,882,987 ------------------------------------------------------------------------------------- COMMERCIAL MORTGAGE-BACKED (1.6%)(f) Bear Stearns Commercial Mortgage Securities Series 2004-PWR6 Class A4 11-11-41 4.521 1,575,000 1,607,987 Federal Home Loan Mortgage Corp. Multifamily Structured Pass-Through Certificates Series K001 Class A2 04-25-16 5.651 4,570,479 5,075,842 JP Morgan Chase Commercial Mortgage Securities Corp. Series 2004-CBX Class A3 01-12-37 4.184 3,999,981 3,998,961 --------------- Total 10,682,790 ------------------------------------------------------------------------------------- RESIDENTIAL MORTGAGE-BACKED (50.3%)(f,l) Banc of America Funding Corp. CMO Series 2010-R4 Class 4A1 06-26-37 0.555 1,105,793(d,i) 1,056,032 BCAP LLC Trust CMO Series 2010-RR6 Class 6A1 07-26-37 4.000 6,572,000(d) 6,569,946 Citigroup Mortgage Loan Trust, Inc. CMO Series 2006-AR9 Class 1A1 11-25-36 0.413 204,199(i) 192,876 Citigroup Mortgage Loan Trust, Inc. CMO Series 2009-7 Class 4A2 09-25-35 2.848 5,600,980(d,i) 1,568,274
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 20 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT --------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) RESIDENTIAL MORTGAGE-BACKED (CONT.) Countrywide Alternative Loan Trust CMO Series 2006-OA11 Class A3B1 09-25-46 0.523% $1,244,821(i) $1,158,510 Countrywide Alternative Loan Trust CMO Series 2007-OH3 Class A3 09-25-47 0.843 3,409,582(i) 416,593 Countrywide Home Loan Mortgage Pass-Through Trust CMO Series 2005-R2 Class 2A1 06-25-35 7.000 3,315,868(d) 3,066,241 Credit Suisse First Boston Mortgage Securities Corp. CMO Series 2003-1 Class 1A1 02-25-33 7.000 934,399 968,402 Credit Suisse Mortgage Capital Certificates CMO Series 2009-12R Class 14A1 11-27-35 5.500 7,039,984(d) 7,142,996 Credit Suisse Mortgage Capital Certificates CMO Series 2009-12R Class 30A1 12-27-36 5.300 805,425(d) 776,295 Federal Home Loan Mortgage Corp. 06-01-25 4.500 3,000,000(g) 3,137,814 Federal Home Loan Mortgage Corp. #1G2547 12-01-36 6.119 848,318(i) 911,223 Federal Home Loan Mortgage Corp. #1G2598 01-01-37 5.984 1,187,091(i) 1,261,893 Federal Home Loan Mortgage Corp. #1J0614 09-01-37 5.666 2,039,783(i) 2,158,397 Federal Home Loan Mortgage Corp. #1Q0140 08-01-36 6.105 396,118(i) 419,369 Federal Home Loan Mortgage Corp. #A18107 01-01-34 5.500 2,144,624 2,296,925 Federal Home Loan Mortgage Corp. #B10459 10-01-18 5.500 695,874 753,508 Federal Home Loan Mortgage Corp. #C00351 07-01-24 8.000 181,152 207,199 Federal Home Loan Mortgage Corp. #C00385 01-01-25 9.000 310,004 350,900 Federal Home Loan Mortgage Corp. #C80329 08-01-25 8.000 56,425 64,561 Federal Home Loan Mortgage Corp. #E00398 10-01-10 7.000 25,601 25,923 Federal Home Loan Mortgage Corp. #E81240 06-01-15 7.500 1,832,457 1,975,223 Federal Home Loan Mortgage Corp. #E90650 07-01-12 5.500 38,679 39,874 Federal Home Loan Mortgage Corp. #E92454 11-01-17 5.000 1,704,394 1,830,377 Federal Home Loan Mortgage Corp. #E96624 05-01-18 5.000 849,151 911,917 Federal Home Loan Mortgage Corp. #G00363 06-01-25 8.000 227,441 260,235 Federal Home Loan Mortgage Corp. #G00501 05-01-26 9.000 411,179 477,167 Federal Home Loan Mortgage Corp. #G04710 09-01-38 6.000 1,351,944 1,459,495 Federal Home Loan Mortgage Corp. #G10669 03-01-12 7.500 388,715 410,037 Federal Home Loan Mortgage Corp. #G11243 04-01-17 6.500 7,734,203 8,386,781 Federal Home Loan Mortgage Corp. #G12100 11-01-13 5.000 1,424,515 1,479,934 Federal Home Loan Mortgage Corp. CMO I.O. Series 11 Class B 01-01-20 9.415 5,693(j) 1,421 Federal Home Loan Mortgage Corp. CMO I.O. Series 2471 Class SI 03-15-32 29.180 929,449(j) 128,661 Federal Home Loan Mortgage Corp. CMO I.O. Series 3430 Class IA 07-15-12 120.228 3,919,974(j) 22,539 Federal Home Loan Mortgage Corp. CMO I.O. Series 3447 Class AI 03-15-12 27.238 2,106,185(j) 28,270 Federal Home Loan Mortgage Corp. CMO I.O. Series 3455 Class AI 12-15-13 16.810 15,351,751(j) 376,416 Federal Home Loan Mortgage Corp. CMO I.O. Series 3517 Class JI 12-15-12 42.430 1,608,947(j) 20,388 Federal Home Loan Mortgage Corp. CMO I.O. Series 3578 04-15-12 47.734 22,478,310(j) 386,957 Federal Home Loan Mortgage Corp. CMO I.O. Series 3600 Class DI 01-15-13 6.466 25,123,265(j) 687,644
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 21 PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) RESIDENTIAL MORTGAGE-BACKED (CONT.) Federal Home Loan Mortgage Corp. CMO I.O. Series 3630 Class AI 03-15-17 0.000% $10,649,844(j) $532,492 Federal Home Loan Mortgage Corp. CMO Series 2617 Class HD 06-15-16 7.000 2,527,488 2,637,469 Federal Home Loan Mortgage Corp. Multifamily Structured Pass-Through Certificates Series K003 Class A1 07-25-13 2.225 4,626,781 4,683,161 Federal National Mortgage Association 06-01-25 5.000 19,000,000(g) 20,175,626 06-01-25 5.500 7,500,000(g) 8,053,125 06-01-40 4.500 7,000,000(g) 7,142,184 06-01-40 6.000 10,000,000(g) 10,770,310 06-01-40 6.500 15,500,000(g) 16,861,087 Federal National Mortgage Association #125032 11-01-21 8.000 83,109(o) 95,070 Federal National Mortgage Association #190129 11-01-23 6.000 641,048 693,276 Federal National Mortgage Association #190988 06-01-24 9.000 143,035 156,652 Federal National Mortgage Association #254384 06-01-17 7.000 192,634 210,926 Federal National Mortgage Association #254454 08-01-17 7.000 370,675 405,873 Federal National Mortgage Association #254723 05-01-23 5.500 5,435,159 5,868,166 Federal National Mortgage Association #255501 09-01-14 6.000 320,153 336,842 Federal National Mortgage Association #256901 09-01-37 6.500 960,064 1,038,482 Federal National Mortgage Association #303885 05-01-26 7.500 281,353 316,341 Federal National Mortgage Association #313007 07-01-11 7.500 24,175 24,565 Federal National Mortgage Association #336512 02-01-26 6.000 38,740 42,098 Federal National Mortgage Association #357485 02-01-34 5.500 8,340,849(o) 8,942,912 Federal National Mortgage Association #407327 01-01-14 5.500 158,943 170,940 Federal National Mortgage Association #456374 12-01-13 5.500 301,208 323,943 Federal National Mortgage Association #508402 08-01-14 6.500 157,845 170,422 Federal National Mortgage Association #545818 07-01-17 6.000 7,804,232 8,489,080 Federal National Mortgage Association #545864 08-01-17 5.500 6,625,243 7,197,984 Federal National Mortgage Association #545910 08-01-17 6.000 1,201,438 1,306,665 Federal National Mortgage Association #555063 11-01-17 5.500 5,038,545 5,469,658 Federal National Mortgage Association #555367 03-01-33 6.000 6,221,790 6,827,928 Federal National Mortgage Association #579485 04-01-31 6.500 1,471,591 1,646,317 Federal National Mortgage Association #593829 12-01-28 7.000 1,130,499 1,263,604 Federal National Mortgage Association #601416 11-01-31 6.500 523,063 585,170 Federal National Mortgage Association #630993 09-01-31 7.500 1,572,636 1,771,486 Federal National Mortgage Association #648040 06-01-32 6.500 1,621,246 1,798,254 Federal National Mortgage Association #648349 06-01-17 6.000 4,429,300 4,816,474 Federal National Mortgage Association #651284 07-01-17 6.000 825,427 892,579 Federal National Mortgage Association #662866 11-01-17 6.000 897,806 975,741 Federal National Mortgage Association #665752 09-01-32 6.500 729,447 809,088 Federal National Mortgage Association #678940 02-01-18 5.500 1,420,376 1,544,927 Federal National Mortgage Association #686227 02-01-18 5.500 1,823,103 1,982,670 Federal National Mortgage Association #696837 04-01-18 5.500 2,087,425 2,271,743 Federal National Mortgage Association #704610 06-01-33 5.500 8,058,047(o) 8,639,697 Federal National Mortgage Association #722325 07-01-33 4.946 3,998,685(i) 4,203,441
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 22 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT --------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) RESIDENTIAL MORTGAGE-BACKED (CONT.) Federal National Mortgage Association #725431 08-01-15 5.500% $3,539,283 $3,806,425 Federal National Mortgage Association #739243 09-01-33 6.000 2,292,010 2,553,778 Federal National Mortgage Association #739331 09-01-33 6.000 1,062,864 1,165,082 Federal National Mortgage Association #745392 12-01-20 4.500 711,657 754,616 Federal National Mortgage Association #791447 10-01-34 6.000 3,589,871 3,917,166 Federal National Mortgage Association #797046 07-01-34 5.500 2,380,450 2,568,030 Federal National Mortgage Association #799843 11-01-34 2.622 797,810(i) 823,059 Federal National Mortgage Association #829597 08-01-35 4.730 979,788(i) 1,014,806 Federal National Mortgage Association #832641 09-01-35 6.000 3,732,078 4,042,016 Federal National Mortgage Association #881886 04-01-36 5.352 572,681(i) 607,312 Federal National Mortgage Association #883267 07-01-36 6.500 2,990,451 3,270,432 Federal National Mortgage Association #886764 08-01-36 5.985 435,279(i) 463,612 Federal National Mortgage Association #887403 07-01-36 7.000 1,917,827 2,125,318 Federal National Mortgage Association #888989 06-01-37 5.738 2,632,067(i) 2,789,767 Federal National Mortgage Association #895834 04-01-36 5.965 723,299(i) 764,677 Federal National Mortgage Association #946609 09-01-37 5.711 647,207(i) 687,787 Federal National Mortgage Association CMO I.O. Series 163 Class 2 07-25-22 20.000 357,862(j) 59,483 Federal National Mortgage Association CMO I.O. Series 2002-18 Class SE 02-25-32 32.600 1,859,034(j) 242,462 Federal National Mortgage Association CMO I.O. Series 2003-26 Class MI 03-25-23 15.700 967,151(j) 105,754 Federal National Mortgage Association CMO I.O. Series 2003-63 Class IP 07-25-33 0.000 2,577,577(j) 535,774 Federal National Mortgage Association CMO I.O. Series 2003-71 Class IM 12-25-31 5.340 1,451,931(j) 176,261 Federal National Mortgage Association CMO I.O. Series 2008-40 Class AI 08-25-12 11.956 7,579,498(j) 128,625 Federal National Mortgage Association CMO I.O. Series 36 Class 2 08-01-18 12.100 3,099(j) 631 08-01-18 16.956 87(j) 18 Federal National Mortgage Association CMO I.O. Series 379 Class 2 05-01-37 0.000 51,235(j) 8,782 Federal National Mortgage Association CMO I.O. Series 396 Class 2 06-01-39 6.625 12,028(j) 2,924 Federal National Mortgage Association CMO I.O. Series 70 Class 2 01-15-20 20.000 139,845(j) 32,520 Federal National Mortgage Association CMO P.O. Series G-15 Class A 06-25-21 2.490 18,384(k) 16,963 Federal National Mortgage Association CMO Series 2003-W11 Class A1 06-25-33 3.354 87,510(i) 88,412 Federal National Mortgage Association CMO Series 2004-60 Class PA 04-25-34 5.500 2,345,025 2,517,307 First Horizon Asset Securities, Inc. CMO Series 2003-5 Class 1A2 06-25-30 5.250 1,557,160 1,559,145 Government National Mortgage Association #615740 08-15-13 6.000 352,052 380,847 Government National Mortgage Association #648339 10-15-35 5.500 1,087,376 1,173,527 Government National Mortgage Association #716007 08-15-39 6.000 3,302,592 3,578,572 Government National Mortgage Association #781507 09-15-14 6.000 1,595,707 1,688,361
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 23 PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) RESIDENTIAL MORTGAGE-BACKED (CONT.) Government National Mortgage Association CMO Series 2009-105 Class A 12-16-50 3.456% $7,101,884 $7,267,997 Government National Mortgage Association CMO Series 2009-114 Class A 12-16-38 3.103 7,395,358 7,517,233 Government National Mortgage Association CMO Series 2009-63 Class A 01-16-38 3.400 4,741,970 4,855,823 Government National Mortgage Association CMO Series 2009-71 Class A 04-16-38 3.304 7,048,386 7,203,098 Government National Mortgage Association CMO Series 2009-90 Class AC 01-16-33 3.137 5,400,000 5,488,548 Government National Mortgage Association CMO Series 2010-13 Class A 08-16-22 2.461 4,778,844 4,821,747 Government National Mortgage Association CMO Series 2010-18 Class A 12-16-50 3.100 4,830,201 4,866,097 Government National Mortgage Association CMO Series 2010-22 Class AC 12-16-30 2.229 3,824,071 3,834,057 Government National Mortgage Association CMO Series 2010-49 Class A 03-16-51 2.870 1,498,052 1,498,516 Government National Mortgage Association CMO Series 2010-65 Class A 11-16-28 2.017 3,700,000 3,682,356 Government National Mortgage Association 12-16-28 2.100 4,500,000(g) 4,500,000 GSR Mortgage Loan Trust CMO Series 2005-5F Class 2A3 06-25-35 5.500 3,022,682 3,065,928 Harborview Mortgage Loan Trust CMO Series 2004-4 Class 3A 06-19-34 1.464 233,933(i) 150,917 JP Morgan Mortgage Trust CMO Series 2004-S2 Class 1A4 11-25-19 4.750 2,203,605 2,196,977 Lehman XS Trust Series 2006-16N Class A1B 11-25-46 0.463 244,081(i) 241,440 LVII Resecuritization Trust CMO Series 2009-3 Class A1 11-27-37 5.780 1,162,864(d,i) 1,194,843 Residential Asset Securitization Trust CMO Series 2004-A7 Class A1 10-25-34 5.500 3,460,216 3,460,074 Thornburg Mortgage Securities Trust CMO I.O. Series 2006-5 Class AX 10-25-46 24.576 23,561,671(j) 1,081,106 Wells Fargo Mortgage-Backed Securities Trust CMO Series 2003-O Class 1A11 01-25-34 4.670 1,914,251(i) 1,930,127 Wells Fargo Mortgage-Backed Securities Trust CMO Series 2004-Q Class 1A2 09-25-34 4.870 3,719,489(i) 3,710,574 Wells Fargo Mortgage-Backed Securities Trust CMO Series 2005-14 Class 2A1 12-25-35 5.500 2,722,168 2,551,195 Wells Fargo Mortgage-Backed Securities Trust CMO Series 2005-AR16 Class 4A6 10-25-35 4.034 3,516,393(i) 3,462,750 Wells Fargo Mortgage-Backed Securities Trust CMO Series 2006-12 Class A1 10-25-36 6.000 3,323,319 3,274,681 --------------- Total 331,038,016 ------------------------------------------------------------------------------------- TOTAL BONDS (Cost: $575,322,025) $585,617,146 ------------------------------------------------------------------------------------- FDIC-INSURED DEBT (10.0%)(m) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) U.S. AGENCIES Bank of America Corp. FDIC Government Guaranty 04-30-12 2.100% $4,175,000 $4,262,462 06-15-12 3.125 3,810,000 3,966,492 Citigroup Funding, Inc. FDIC Government Guaranty 07-12-12 2.125 15,000,000 15,319,203
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 24 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT --------------------------------------------------------------------------------
FDIC-INSURED DEBT (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) U.S. AGENCIES (CONT.) 11-15-12 1.875% $3,055,000 $3,095,021 General Electric Capital Corp. FDIC Government Guaranty 12-09-11 3.000 11,525,000 11,888,879 12-28-12 2.625 7,580,000 7,823,048 JPMorgan Chase & Co. FDIC Government Guaranty 02-23-11 1.650 2,940,000 2,966,688 Morgan Stanley FDIC Government Guaranty 02-10-12 0.654 8,300,000 8,350,389 The Goldman Sachs Group, Inc. FDIC Government Guaranty 07-15-11 1.625 7,750,000 7,829,724 ------------------------------------------------------------------------------------- TOTAL FDIC-INSURED DEBT (Cost: $64,491,427) $65,501,906 -------------------------------------------------------------------------------------
GOVERNMENT GUARANTEED (0.2%)(n) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) FOREIGN AGENCIES (0.1%) Barclays Bank PLC Government Liquid Guaranteed 03-05-12 2.700% $780,000(c,d) $799,214 ------------------------------------------------------------------------------------- BANKING (0.1%) The Royal Bank of Scotland PLC Government Liquid Guaranteed 04-23-12 2.650 400,000(c) 409,490 ------------------------------------------------------------------------------------- TOTAL GOVERNMENT GUARANTEED (Cost: $1,187,124) $1,208,704 ------------------------------------------------------------------------------------- U.S. GOVERNMENT AGENCIES (9.3%) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) U.S. GOVERNMENT AGENCIES Federal Home Loan Bank Discount Notes 06-01-10 0.060% $6,000,000 $5,999,960 06-11-10 0.160 25,000,000 24,998,444 Federal Home Loan Mortgage Corp. Discount Notes 06-07-10 0.160 20,000,000 19,999,111 Federal National Mortgage Association Discount Notes 06-24-10 0.170 10,000,000(e) 9,998,725 ------------------------------------------------------------------------------------- TOTAL U.S. GOVERNMENT AGENCIES (Cost: $60,996,498) $60,996,240 -------------------------------------------------------------------------------------
MONEY MARKET FUND (2.1%) SHARES VALUE(a) RiverSource Short-Term Cash Fund, 0.218% 13,949,734(p) $13,949,734 ------------------------------------------------------------------------------------- TOTAL MONEY MARKET FUND (Cost: $13,949,734) $13,949,734 -------------------------------------------------------------------------------------
INVESTMENTS OF CASH COLLATERAL RECEIVED FOR SECURITIES ON LOAN (2.6%) AMOUNT EFFECTIVE PAYABLE AT ISSUER YIELD MATURITY VALUE(a) REPURCHASE AGREEMENTS(H) BNP Paribas Securities dated 05-28-10, matures 06-01-10, repurchase price $5,103,719 0.210% $5,103,600 $5,103,600 Goldman Sachs dated 05-28-10, matures 06-01-10, repurchase price $5,000,150 0.270 5,000,000 5,000,000 Mizuho Securities USA dated 05-28-10, matures 06-01-10, repurchase price $7,000,179 0.230 7,000,000 7,000,000 ------------------------------------------------------------------------------------- TOTAL INVESTMENTS OF CASH COLLATERAL RECEIVED FOR SECURITIES ON LOAN (Cost: $17,103,600) $17,103,600 ------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $733,050,408)(q) $744,377,330 =====================================================================================
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 25 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------- INVESTMENTS IN DERIVATIVES FUTURES CONTRACTS OUTSTANDING AT MAY 31, 2010
NUMBER OF UNREALIZED CONTRACTS NOTIONAL EXPIRATION APPRECIATION CONTRACT DESCRIPTION LONG (SHORT) MARKET VALUE DATE (DEPRECIATION) ------------------------------------------------------------------------------------ U.S. Treasury Note, 2- year 679 $148,117,484 Oct. 2010 $82,113 U.S. Treasury Note, 5- year (221) (25,953,687) July 2010 (120,185) U.S. Treasury Note, 5- year (368) (42,935,250) Oct. 2010 (35,802) U.S. Treasury Note, 10- year (55) (6,636,953) June 2010 (110,082) U.S. Treasury Note, 10- year (169) (20,258,875) Sept. 2010 (85,347) ------------------------------------------------------------------------------------ Total $(269,303) ------------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS CMO -- Collateralized Mortgage Obligation I.O. -- Interest Only P.O. -- Principal Only
(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 May 31, 2010, the value of foreign securities, excluding short-term securities, represented 0.18% 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. This security may be resold in transactions exempt from registration, normally to qualified institutional buyers. At May 31, 2010, the value of these securities amounted to $51,816,436 or 7.88% of net assets. (e) At May 31, 2010, security was partially or fully on loan. See Note 7 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) At May 31, 2010, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $71,321,105. See Note 2 to the financial statements. -------------------------------------------------------------------------------- 26 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- NOTES TO PORTFOLIO OF INVESTMENTS (CONTINUED) (h) The table below represents securities received as collateral for repurchase agreements. This collateral, which is generally high quality short-term obligations, is deposited with the Fund's custodian and, pursuant to the terms of the repurchase agreement, must have an aggregate market value greater than or equal to the repurchase price plus accrued interest at all times. The market value of securities held as collateral for repurchase agreements is monitored on a daily basis to ensure the existence of the proper level of collateral.
BNP PARIBAS SECURITIES (0.210%) SECURITY DESCRIPTION VALUE(a) ----------------------------------------------------------- Fannie Mae Pool $3,711,455 Freddie Mac Gold Pool 1,494,217 ----------------------------------------------------------- Total market value of collateral securities $5,205,672 ----------------------------------------------------------- GOLDMAN SACHS (0.270%) SECURITY DESCRIPTION VALUE(a) ----------------------------------------------------------- Allied Irish Banks PLC/New York NY $2,300,000 Natixis/New York NY 2,732,215 Standard Chartered Banking 217,785 ----------------------------------------------------------- Total market value of collateral securities $5,250,000 ----------------------------------------------------------- MIZUHO SECURITIES USA (0.230%) SECURITY DESCRIPTION VALUE(a) ----------------------------------------------------------- Fannie Mae Grantor Trust $4,975 Fannie Mae Pool 502,654 Fannie Mae REMICS 3,812,064 Fannie Mae Whole Loan 14,163 FHLMC Structured Pass Through Securities 9,427 Freddie Mac Non Gold Pool 132,341 Freddie Mac REMICS 1,893,105 Government National Mortgage Association 771,271 ----------------------------------------------------------- Total market value of collateral securities $7,140,000 -----------------------------------------------------------
(i) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on May 31, 2010. (j) Interest only represents securities that entitle holders to receive only interest payments on the underlying mortgages. The yield to maturity of an interest only security is extremely sensitive to the rate of principal payments on the underlying mortgage assets. A rapid (slow) rate of principal repayments may have an adverse (positive) effect on yield to maturity. The principal amount shown is the notional amount of the underlying mortgages. The interest rate disclosed represents yield based upon the estimated timing and amount of future cash flows at May 31, 2010. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 27 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------- NOTES TO PORTFOLIO OF INVESTMENTS (CONTINUED) (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 security is sensitive to the rate of principal payments on the underlying mortgage assets. A slow (rapid) rate of principal repayments may have an adverse (positive) effect on yield to maturity. Interest rate disclosed represents yield based upon the estimated timing of future cash flows at May 31, 2010. (l) Represents comparable securities held to satisfy future delivery requirements of the following open forward sale commitments at May 31, 2010:
PRINCIPAL SETTLEMENT PROCEEDS SECURITY AMOUNT DATE RECEIVABLE VALUE ---------------------------------------------------------------------------- Federal National Mortgage Association 06-01-40 5.50% $11,350,000 06-14-10 $11,928,141 $12,107,261
(m) 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. (n) This debt is guaranteed by the HM Treasury, United Kingdom. (o) At May 31, 2010, investments in securities included securities valued at $731,599 that were partially pledged as collateral to cover initial margin deposits on open interest rate futures contracts. (p) Affiliated Money Market Fund -- See Note 9 to the financial statements. The rate shown is the seven-day current annualized yield at May 31, 2010. (q) At May 31, 2010, the cost of securities for federal income tax purposes was $738,115,619 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $11,301,039 Unrealized depreciation (5,039,328) ----------------------------------------------------------- Net unrealized appreciation $6,261,711 -----------------------------------------------------------
-------------------------------------------------------------------------------- 28 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL 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. Short-term securities are valued using amortized cost, as permitted under Rule 2a-7 of the Investment Company Act of 1940, as amended. Generally, amortized cost approximates the current fair value of these securities, but because the value is not obtained from a quoted price in an active market, such securities are reflected as Level 2. 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 -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 29 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------- FAIR VALUE MEASUREMENTS (CONTINUED) 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. The following table is a summary of the inputs used to value the Fund's investments as of May 31, 2010:
FAIR VALUE AT MAY 31, 2010 ---------------------------------------------------------------- LEVEL 1 LEVEL 2 QUOTED PRICES OTHER LEVEL 3 IN ACTIVE SIGNIFICANT SIGNIFICANT MARKETS FOR OBSERVABLE UNOBSERVABLE DESCRIPTION(A) IDENTICAL ASSETS INPUTS INPUTS TOTAL --------------------------------------------------------------------------------------------- Bonds U.S. Government Obligations & Agencies $27,491,176 $159,522,177 $-- $187,013,353 Asset-Backed Securities -- 51,598,894 5,284,093 56,882,987 Commercial Mortgage- Backed Securities -- 10,682,790 -- 10,682,790 Residential Mortgage- Backed Securities -- 315,616,429 15,421,587 331,038,016 --------------------------------------------------------------------------------------------- Total Bonds 27,491,176 537,420,290 20,705,680 585,617,146 --------------------------------------------------------------------------------------------- Short-Term Securities U.S. Government Agencies -- 60,996,240 -- 60,996,240 --------------------------------------------------------------------------------------------- Total Short-Term Securities -- 60,996,240 -- 60,996,240 --------------------------------------------------------------------------------------------- Other FDIC-Insured Debt Securities -- 65,501,906 -- 65,501,906 Government Guaranteed -- 1,208,704 -- 1,208,704 Affiliated Money Market Fund(b) 13,949,734 -- -- 13,949,734 Investments of Cash Collateral Received for Securities on Loan -- 17,103,600 -- 17,103,600 --------------------------------------------------------------------------------------------- Total Other 13,949,734 83,814,210 -- 97,763,944 --------------------------------------------------------------------------------------------- Investments in Securities 41,440,910 682,230,740 20,705,680 744,377,330 Other Financial Instruments(c) (269,303) -- -- (269,303) --------------------------------------------------------------------------------------------- Total $41,171,607 $682,230,740 $20,705,680 $744,108,027 ---------------------------------------------------------------------------------------------
(a) See the Portfolio of Investments for all investment classifications not indicated in the table. (b) Money market fund that is a sweep investment for cash balances in the Fund at May 31, 2010. -------------------------------------------------------------------------------- 30 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- FAIR VALUE MEASUREMENTS (CONTINUED) (c) 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 ASSET-BACKED MORTGAGE-BACKED SECURITIES SECURITIES TOTAL ------------------------------------------------------------------------------------ Balance as of May 31, 2009 $3,336,800 $2,972,070 $6,308,870 Accrued discounts/premiums 92,632 (33,864) 58,768 Realized gain (loss) 235,010 (671,606) (436,596) Change in unrealized appreciation (depreciation)* 22,512 1,925,738 1,948,250 Net purchases (sales) 1,597,139 12,387,760 13,984,899 Transfers in and/or out of Level 3 -- (1,158,511) (1,158,511) ------------------------------------------------------------------------------------ Balance as of May 31, 2010 $5,284,093 $15,421,587 $20,705,680 ------------------------------------------------------------------------------------
* Change in unrealized appreciation (depreciation) relating to securities held at May 31, 2010 was $763,381, which is comprised of Asset-Back Securities of $22,415 and Residential Mortgage-Backed Securities of $740,966. 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 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 800.221.2450. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 31 STATEMENT OF ASSETS AND LIABILITIES -------------------------------------------- MAY 31, 2010
ASSETS Investments in securities, at value Unaffiliated issuers* (identified cost $701,997,074) $ 713,323,996 Affiliated money market fund (identified cost $13,949,734) 13,949,734 Investments of cash collateral received for securities on loan (identified cost $17,103,600) 17,103,600 -------------------------------------------------------------------------------- Total investments in securities (identified cost $733,050,408) 744,377,330 Capital shares receivable 840,554 Dividends and accrued interest receivable 3,083,074 Receivable for investment securities sold 12,393,455 -------------------------------------------------------------------------------- Total assets 760,694,314 -------------------------------------------------------------------------------- LIABILITIES Forward sale commitments, at value (proceeds receivable $11,928,141) 12,107,261 Disbursements in excess of cash 53,165 Dividends payable to shareholders 259,374 Capital shares payable 995,647 Payable for investment securities purchased 71,401,514 Payable upon return of securities loaned 17,103,600 Variation margin payable on futures contracts 39,413 Accrued investment management services fees 8,644 Accrued distribution fees 118,844 Accrued transfer agency fees 3,129 Accrued administrative services fees 1,239 Accrued plan administration services fees 1,533 Other accrued expenses 623,334 -------------------------------------------------------------------------------- Total liabilities 102,716,697 -------------------------------------------------------------------------------- Net assets applicable to outstanding capital stock $ 657,977,617 -------------------------------------------------------------------------------- REPRESENTED BY Capital stock -- $.01 par value $ 1,385,727 Additional paid-in capital 746,435,560 Excess of distributions over net investment income (200,707) Accumulated net realized gain (loss) (100,521,462) Unrealized appreciation (depreciation) on investments 10,878,499 -------------------------------------------------------------------------------- Total -- representing net assets applicable to outstanding capital stock $ 657,977,617 -------------------------------------------------------------------------------- *Value of securities on loan $ 56,803,338 --------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 32 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE NET ASSETS SHARES OUTSTANDING NET ASSET VALUE PER SHARE Class A $488,090,547 102,802,359 $4.75(1) Class B $ 66,777,148 14,065,529 $4.75 Class C $ 27,832,188 5,862,287 $4.75 Class I $ 67,563,272 14,218,020 $4.75 Class R2 $ 2,999,953 631,892 $4.75 Class R4 $ 4,709,513 991,519 $4.75 Class W $ 4,996 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 -- 2010 ANNUAL REPORT 33 STATEMENT OF OPERATIONS -------------------------------------------------------- YEAR ENDED MAY 31, 2010
INVESTMENT INCOME Income: Interest 21,831,297 Income distributions from affiliated money market fund 20,899 Income from securities lending -- net 131,932 ------------------------------------------------------------------------------ Total income 21,984,128 ------------------------------------------------------------------------------ Expenses: Investment management services fees 3,287,540 Distribution fees Class A 1,289,353 Class B 810,418 Class C 242,435 Class R2 11,521 Class W 12 Transfer agency fees Class A 1,007,346 Class B 167,917 Class C 49,741 Class R2 1,152 Class R4 2,098 Class W 10 Administrative services fees 470,119 Plan administration services fees Class R2 5,760 Class R4 10,493 Compensation of board members 21,109 Custodian fees 26,505 Printing and postage 124,853 Registration fees 72,270 Professional fees 35,147 Other 43,989 ------------------------------------------------------------------------------ Total expenses 7,679,788 Expenses waived/reimbursed by the Investment Manager and its affiliates (1,201,170) ------------------------------------------------------------------------------ Total net expenses 6,478,618 ------------------------------------------------------------------------------ Investment income (loss) -- net 15,505,510 ------------------------------------------------------------------------------ REALIZED AND UNREALIZED GAIN (LOSS) -- NET Net realized gain (loss) on: Security transactions 3,427,974 Futures contracts 722,882 Options contracts written 50,491 ------------------------------------------------------------------------------ Net realized gain (loss) on investments 4,201,347 Net change in unrealized appreciation (depreciation) on investments 12,661,886 ------------------------------------------------------------------------------ Net gain (loss) on investments 16,863,233 ------------------------------------------------------------------------------ Net increase (decrease) in net assets resulting from operations $32,368,743 ------------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- 34 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT STATEMENTS OF CHANGES IN NET ASSETS --------------------------------------------
YEAR ENDED MAY 31, 2010 2009 OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ 15,505,510 $ 22,192,236 Net realized gain (loss) on investments 4,201,347 (24,011,105) Net change in unrealized appreciation (depreciation) on investments 12,661,886 4,441,905 ----------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 32,368,743 2,623,036 ----------------------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income Class A (12,668,025) (16,331,022) Class B (1,425,001) (2,826,872) Class C (407,301) (237,025) Class I (1,538,428) (2,172,593) Class R2 (47,161) N/A Class R4 (104,118) (134,786) Class W (116) (139) ----------------------------------------------------------------------------------------------- Total distributions (16,190,150) (21,702,437) -----------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 35 STATEMENTS OF CHANGES IN NET ASSETS (continued) --------------------------------
YEAR ENDED MAY 31, 2010 2009 CAPITAL SHARE TRANSACTIONS Proceeds from sales Class A shares $ 88,786,015 $ 226,294,351 Class B shares 7,530,462 33,777,836 Class C shares 7,364,078 7,040,083 Class I shares 31,799,700 13,901,496 Class R2 shares 952,078 N/A Class R4 shares 2,462,644 2,274,007 Fund merger (Note 12) 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 11,449,031 14,899,763 Class B shares 1,328,133 2,659,409 Class C shares 301,069 215,459 Class I shares 1,516,948 2,176,497 Class R2 shares 8,199 N/A Class R4 shares 103,225 134,521 Conversions from Class B to Class A Class A shares 26,046,599 20,630,333 Class B shares (26,046,599) (20,630,333) Payments for redemptions Class A shares (213,595,187) (258,638,948) Class B shares (36,237,124) (57,874,364) Class C shares (9,903,018) (3,812,662) Class I shares (8,886,058) (64,443,360) Class R2 shares (1,415,514) N/A Class R4 shares (2,288,821) (2,725,737) ----------------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions (59,953,113) (84,121,649) ----------------------------------------------------------------------------------------------- Proceeds from regulatory settlement (Note 11) 112,925 -- ----------------------------------------------------------------------------------------------- Total increase (decrease) in net assets (43,661,595) (103,201,050) Net assets at beginning of year 701,639,212 804,840,262 ----------------------------------------------------------------------------------------------- Net assets at end of year $ 657,977,617 $ 701,639,212 ----------------------------------------------------------------------------------------------- Undistributed (excess of distributions over) net investment income $ (200,707) $ 430,828 -----------------------------------------------------------------------------------------------
Certain line items from 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. -------------------------------------------------------------------------------- 36 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 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.
YEAR ENDED MAY 31, CLASS A ------------------------------------------------- PER SHARE DATA 2010 2009 2008 2007 2006 Net asset value, beginning of period $4.63 $4.74 $4.73 $4.68 $4.79 ---------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .11 .14 .19 .19 .15 Net gains (losses) (both realized and unrealized) .12 (.11) .01 .05 (.10) ---------------------------------------------------------------------------------------------------- Total from investment operations .23 .03 .20 .24 .05 ---------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.11) (.14) (.19) (.19) (.16) ---------------------------------------------------------------------------------------------------- Proceeds from regulatory settlement .00(a) -- -- -- -- ---------------------------------------------------------------------------------------------------- Net asset value, end of period $4.75 $4.63 $4.74 $4.73 $4.68 ---------------------------------------------------------------------------------------------------- TOTAL RETURN 5.11%(b) .59% 4.27% 5.12% 1.00% ---------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(c) Gross expenses prior to expense waiver/reimbursement 1.04% 1.02% 1.04% 1.03% 1.06% ---------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(d) .86% .89% .89%(e) .89% .89% ---------------------------------------------------------------------------------------------------- Net investment income (loss) 2.35% 3.00% 3.93% 3.99% 3.27% ---------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $488 $529 $539 $514 $641 ---------------------------------------------------------------------------------------------------- Portfolio turnover rate(f) 329% 271% 209% 168% 194% ----------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Highlights. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 37 FINANCIAL HIGHLIGHTS (continued) -----------------------------------------------
YEAR ENDED MAY 31, CLASS B ------------------------------------------------- PER SHARE DATA 2010 2009 2008 2007 2006 Net asset value, beginning of period $4.63 $4.74 $4.73 $4.68 $4.79 ---------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .08 .10 .15 .15 .12 Net gains (losses) (both realized and unrealized) .12 (.11) .01 .05 (.11) ---------------------------------------------------------------------------------------------------- Total from investment operations .20 (.01) .16 .20 .01 ---------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.08) (.10) (.15) (.15) (.12) ---------------------------------------------------------------------------------------------------- Proceeds from regulatory settlement .00(a) -- -- -- -- ---------------------------------------------------------------------------------------------------- Net asset value, end of period $4.75 $4.63 $4.74 $4.73 $4.68 ---------------------------------------------------------------------------------------------------- TOTAL RETURN 4.31%(b) (.18%) 3.48% 4.34% .26% ---------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(c) Gross expenses prior to expense waiver/reimbursement 1.80% 1.78% 1.80% 1.79% 1.82% ---------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(d) 1.62% 1.65% 1.65%(e) 1.64% 1.64% ---------------------------------------------------------------------------------------------------- Net investment income (loss) 1.64% 2.26% 3.18% 3.23% 2.50% ---------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $67 $113 $159 $216 $338 ---------------------------------------------------------------------------------------------------- Portfolio turnover rate(f) 329% 271% 209% 168% 194% ----------------------------------------------------------------------------------------------------
YEAR ENDED MAY 31, CLASS C ------------------------------------------------- PER SHARE DATA 2010 2009 2008 2007 2006 Net asset value, beginning of period $4.63 $4.74 $4.73 $4.68 $4.79 ---------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .07 .10 .15 .15 .12 Net gains (losses) (both realized and unrealized) .13 (.11) .02 .05 (.11) ---------------------------------------------------------------------------------------------------- Total from investment operations .20 (.01) .17 .20 .01 ---------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.08) (.10) (.16) (.15) (.12) ---------------------------------------------------------------------------------------------------- Proceeds from regulatory settlement .00(a) -- -- -- -- ---------------------------------------------------------------------------------------------------- Net asset value, end of period $4.75 $4.63 $4.74 $4.73 $4.68 ---------------------------------------------------------------------------------------------------- TOTAL RETURN 4.31%(b) (.17%) 3.49% 4.34% .26% ---------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(C) Gross expenses prior to expense waiver/reimbursement 1.80% 1.78% 1.80% 1.80% 1.83% ---------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(d) 1.62% 1.65% 1.65%(e) 1.64% 1.64% ---------------------------------------------------------------------------------------------------- Net investment income (loss) 1.51% 2.21% 3.18% 3.24% 2.51% ---------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $28 $13 $10 $10 $15 ---------------------------------------------------------------------------------------------------- Portfolio turnover rate(f) 329% 271% 209% 168% 194% ----------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Highlights. -------------------------------------------------------------------------------- 38 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT --------------------------------------------------------------------------------
YEAR ENDED MAY 31, CLASS I ------------------------------------------------- PER SHARE DATA 2010 2009 2008 2007 2006 Net asset value, beginning of period $4.64 $4.74 $4.74 $4.69 $4.79 ---------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .13 .16 .20 .20 .17 Net gains (losses) (both realized and unrealized) .11 (.11) .01 .05 (.10) ---------------------------------------------------------------------------------------------------- Total from investment operations .24 .05 .21 .25 .07 ---------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.13) (.15) (.21) (.20) (.17) ---------------------------------------------------------------------------------------------------- Proceeds from regulatory settlement .00(a) -- -- -- -- ---------------------------------------------------------------------------------------------------- Net asset value, end of period $4.75 $4.64 $4.74 $4.74 $4.69 ---------------------------------------------------------------------------------------------------- TOTAL RETURN 5.28%(b) 1.18% 4.45% 5.50% 1.56% ---------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(c) Gross expenses prior to expense waiver/reimbursement .60% .60% .60% .59% .62% ---------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(d) .48% .51% .51%(e) .54% .58% ---------------------------------------------------------------------------------------------------- Net investment income (loss) 2.67% 3.49% 4.23% 4.37% 3.66% ---------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $68 $42 $93 $55 $62 ---------------------------------------------------------------------------------------------------- Portfolio turnover rate(f) 329% 271% 209% 168% 194% ----------------------------------------------------------------------------------------------------
CLASS R2 PERIOD ENDED PER SHARE DATA MAY 31, 2010(g) Net asset value, beginning of period $4.66 ------------------------------------------------------------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .07 Net gains (losses) (both realized and unrealized) .09 ------------------------------------------------------------------ Total from investment operations .16 ------------------------------------------------------------------ LESS DISTRIBUTIONS: Dividends from net investment income (.07) ------------------------------------------------------------------ Proceeds from regulatory settlement .00(a) ------------------------------------------------------------------ Net asset value, end of period $4.75 ------------------------------------------------------------------ TOTAL RETURN 3.47%(b) ------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS(c) Gross expenses prior to expense waiver/reimbursement 1.40%(h) ------------------------------------------------------------------ Net expenses after expense waiver/reimbursement(d) 1.28%(h) ------------------------------------------------------------------ Net investment income (loss) 1.76%(h) ------------------------------------------------------------------ SUPPLEMENTAL DATA Net assets, end of period (in millions) $3 ------------------------------------------------------------------ Portfolio turnover rate(f) 329% ------------------------------------------------------------------
See accompanying Notes to Financial Highlights. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 39 FINANCIAL HIGHLIGHTS (continued) -----------------------------------------------
YEAR ENDED MAY 31, CLASS R4 ------------------------------------------------- PER SHARE DATA 2010 2009 2008 2007 2006 Net asset value, beginning of period $4.64 $4.74 $4.73 $4.68 $4.79 ---------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .11 .15 .19 .19 .16 Net gains (losses) (both realized and unrealized) .12 (.11) .02 .05 (.11) ---------------------------------------------------------------------------------------------------- Total from investment operations .23 .04 .21 .24 .05 ---------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.12) (.14) (.20) (.19) (.16) ---------------------------------------------------------------------------------------------------- Proceeds from regulatory settlement .00(a) -- -- -- -- ---------------------------------------------------------------------------------------------------- Net asset value, end of period $4.75 $4.64 $4.74 $4.73 $4.68 ---------------------------------------------------------------------------------------------------- TOTAL RETURN 4.96%(b) .93% 4.41% 5.31% 1.19% ---------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(c) Gross expenses prior to expense waiver/reimbursement .90% .90% .90% .86% .88% ---------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(d) .78% .76% .76%(e) .72% .72% ---------------------------------------------------------------------------------------------------- Net investment income (loss) 2.43% 3.15% 4.06% 4.09% 3.27% ---------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $5 $4 $5 $4 $19 ---------------------------------------------------------------------------------------------------- Portfolio turnover rate(f) 329% 271% 209% 168% 194% ----------------------------------------------------------------------------------------------------
YEAR ENDED MAY 31, CLASS W ---------------------------------------- PER SHARE DATA 2010 2009 2008 2007(i) Net asset value, beginning of period $4.63 $4.74 $4.73 $4.75 ------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .11 .14 .18 .08 Net gains (losses) (both realized and unrealized) .11 (.12) .02 (.02) ------------------------------------------------------------------------------------------- Total from investment operations .22 .02 .20 .06 ------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.11) (.13) (.19) (.08) ------------------------------------------------------------------------------------------- Proceeds from regulatory settlement .00(a) -- -- -- ------------------------------------------------------------------------------------------- Net asset value, end of period $4.74 $4.63 $4.74 $4.73 ------------------------------------------------------------------------------------------- TOTAL RETURN 4.81%(b) .52% 4.21% 1.42% ------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(c) Gross expenses prior to expense waiver/reimbursement 1.04% 1.04% 1.06% 1.00%(h) ------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(d) .92% .96% .95% .95%(h) ------------------------------------------------------------------------------------------- Net investment income (loss) 2.29% 2.95% 3.87% 4.02%(h) ------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- $-- $-- $-- ------------------------------------------------------------------------------------------- Portfolio turnover rate(f) 329% 271% 209% 168% -------------------------------------------------------------------------------------------
See accompanying Notes to Financial Highlights. -------------------------------------------------------------------------------- 40 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- NOTES TO FINANCIAL HIGHLIGHTS (a) Rounds less than $0.01 per share. (b) During the year ended May 31, 2010, the Fund received proceeds from a regulatory settlement. Had the Fund not received these proceeds, the total return would have been lower by 0.02%. (c) In addition to the fees and expenses which the Fund bears directly, the Fund indirectly bears a pro rata share of the fees and expenses of the acquired funds in which it invests. Such indirect expenses are not included in the reported expense ratios. (d) The Investment Manager and its affiliates agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (e) 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. (f) Includes mortgage dollar rolls. If mortgage dollar roll transactions were excluded, the portfolio turnover would have been 286% and 199% for the years ended May 31, 2010 and 2009, respectively. (g) For the period from Aug. 3, 2009 (when shares became publicly available) to May 31, 2010. (h) Annualized. (i) 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. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 41 NOTES TO FINANCIAL STATEMENTS -------------------------------------------------- 1. ORGANIZATION RiverSource Short Duration U.S. Government Fund (the Fund) is a series of RiverSource Government Income Series, Inc. (the Corporation) and is registered under the Investment Company Act of 1940, as amended (the 1940 Act), as a diversified, open-end management investment company. The Corporation has 10 billion authorized shares of capital stock that can be allocated among the separate series as designated by the Corporation'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 may invest to a substantial degree in securities issued by various entities sponsored by the U.S. government. The Fund may also invest in debt securities that are not issued by the U.S. government, its agencies or instrumentalities, as well as securities that are denominated in currencies other than U.S. dollar. 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 shares 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 May 31, 2010, Columbia Management Investment Advisers, LLC (formerly RiverSource Investments, LLC) (the Investment Manager) and affiliated funds-of- funds owned 100% of Class I shares, and the Investment Manager owned 100% of Class W shares. All classes of shares have identical voting, dividend and liquidation rights. Class specific expenses (e.g., distribution and service fees, transfer agency fees, plan -------------------------------------------------------------------------------- 42 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- 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. 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 an 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 from the primary exchange. 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 -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 43 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- 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 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. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements. Generally, securities received as collateral subject to repurchase agreements are deposited with the Fund's custodian and, pursuant to the terms of the repurchase agreement, must have an aggregate market value greater than or equal to the repurchase price plus accrued interest at all times. The market value of securities held as collateral for repurchase agreements is monitored on a daily basis to ensure the existence of the proper level of collateral. 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 May 31, 2010, the Fund has outstanding when-issued securities of $71,321,105. 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. -------------------------------------------------------------------------------- 44 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- Unsettled forward sale commitments are valued at the current market value of the underlying securities, generally according to the procedures described under "Valuation of securities" above. The forward sale commitment is "marked-to- market" daily and the change in market value is recorded by the Fund as an unrealized gain or loss. If the forward sale commitment is closed through the acquisition of an offsetting purchase commitment, the Fund realizes a gain or loss. If the Fund delivers securities under the commitment, the Fund realizes a gain or a loss from the sale of the securities based upon the market price established at the date the commitment was entered into. Forward sale commitments outstanding at period end are listed in the Notes to Portfolio of Investments. GUARANTEES AND INDEMNIFICATIONS Under the Fund's organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, certain of the Fund's contracts with its service providers contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown since the amount of any future claims that may be made against the Fund cannot be determined and the Fund has no historical basis for predicting the likelihood of any such claims. 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 tax returns filed for the last three years. RECENT ACCOUNTING PRONOUNCEMENT On Jan. 21, 2010, the FASB issued an Accounting Standards Update (the amendment), Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements, which provides guidance on how investment assets and liabilities are to be valued and disclosed. Specifically, the amendment requires reporting entities to disclose the input and valuation techniques used to measure fair value for both recurring and non-recurring fair value measurements for Level 2 and Level 3 positions. The amendment also requires that transfers between all levels (including Level 1 and Level 2) be disclosed on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and the reason(s) for the transfer. Additionally purchases, sales, issuances and settlements must be disclosed on a gross basis in the Level 3 -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 45 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- rollforward. The effective date of the amendment is for interim and annual periods beginning after Dec. 15, 2009, however, the requirement to provide the Level 3 activity for purchases, sales, issuances and settlements on a gross basis will be effective for interim and annual periods beginning after Dec. 15, 2010. At this time the Fund is evaluating the implications of the amendment and the impact to the financial statements. DIVIDENDS TO SHAREHOLDERS Dividends from net investment income, declared daily and payable monthly, when available, are reinvested in additional shares of the Fund at net asset value or payable in cash. Capital gains, when available, are distributed along with the last income dividend of the calendar year. 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 to mitigate certain investment risks, such as foreign currency exchange rate risk, interest rate risk, and credit risk. Investments in derivative instruments may expose the Fund to certain additional risks, including those detailed below. 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 -------------------------------------------------------------------------------- 46 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- 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. OPTIONS TRANSACTIONS The Fund may buy and write options traded on any U.S. or foreign exchange, or in the over-the-counter (OTC) market to produce incremental earnings, protect gains, and facilitate buying and selling of securities for investments. The Fund may also buy and sell put and call options and write covered call options on portfolio securities. This may include purchasing mortgage-backed security (MBS) put spread options and writing covered MBS call spread options. MBS spread options are based upon the changes in the price spread between a specified mortgage-backed security and a like-duration Treasury security. Options are contracts which entitle the holder to purchase or sell securities or other financial instruments at a specified price, or in the case of index options, to receive or pay the difference between the index value and the strike price of the index option. Completion of transactions for options traded in the OTC market depends upon the performance of the other party. Cash collateral may be collected or posted by the Fund to secure certain OTC options trades. Cash collateral held or posted by the Fund for such option trades must be returned to the counterparty or the Fund upon closure, exercise or expiration of the contract. Option contracts purchased are recorded as investments and options contracts written are recorded as liabilities of the Fund. Option contracts are valued daily at the closing prices on their primary exchanges and unrealized appreciation or depreciation is recorded. Option contracts, including OTC option contracts, with no readily available market value are valued using quotations obtained from independent brokers as of the close of the NYSE. The Fund will realize a gain or loss when the option transaction expires or is exercised. When options on debt securities or futures are exercised, the Fund will realize a gain or loss. When other options are exercised, the proceeds on sales for a written call option, the purchase cost for a written put option or the cost of a security for a purchased put or call option is adjusted by the amount of premium received or paid. The risk in buying an option is that the Fund pays a premium whether or not the option is exercised. The Fund also has the additional risk of being unable to enter -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 47 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- into a closing transaction if a liquid secondary market does not exist. The risk in writing a call option is that the Fund gives up the opportunity for profit if the market price of the security increases. The risk in writing a put option is that the Fund may incur a loss if the market price of the security decreases and the option is exercised. The Fund's maximum payout in the case of written put option contracts represents the maximum potential amount of future payments (undiscounted) that the Fund could be required to make as a guarantor for written put options. The maximum payout amount may be offset by the subsequent sale, if any, of assets obtained upon the exercise of the put options by holders of the option contracts or proceeds received upon entering into the contracts. For OTC options contracts, the transaction is also subject to counterparty credit risk. 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. FAIR VALUES OF DERIVATIVE INSTRUMENTS AT MAY 31, 2010
ASSET DERIVATIVES LIABILITY DERIVATIVES ------------------------------- ------------------------------- STATEMENT OF ASSETS STATEMENT OF ASSETS RISK EXPOSURE AND LIABILITIES AND LIABILITIES CATEGORY LOCATION FAIR VALUE LOCATION FAIR VALUE ------------------------------------------------------------------------------------------- Net assets --unrealized Interest rate depreciation on contracts N/A N/A investments $269,303* -------------------------------------------------------------------------------------------
* 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 MAY 31, 2010
AMOUNT OF REALIZED GAIN (LOSS) ON DERIVATIVES RECOGNIZED IN INCOME ------------------------------------------------------------------------ RISK EXPOSURE CATEGORY FUTURES OPTIONS TOTAL ------------------------------------------------------------------------ Interest rate contracts $722,882 $50,491 $773,373 ------------------------------------------------------------------------
-------------------------------------------------------------------------------- 48 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVES RECOGNIZED IN INCOME ---------------------------------------------------------------------------- RISK EXPOSURE CATEGORY FUTURES OPTIONS TOTAL ---------------------------------------------------------------------------- Interest rate contracts $(1,172,732) $-- $(1,172,732) ----------------------------------------------------------------------------
VOLUME OF DERIVATIVE ACTIVITY FUTURES The gross notional amount of long and short contracts outstanding was approximately $148.1 million and $95.8 million, respectively, at May 31, 2010. The monthly average gross notional amounts for long and short contracts was $102.4 million and $52.8 million, respectively, for the year ended May 31, 2010. The fair value of such contracts at May 31, 2010 is set forth in the table above. OPTIONS At May 31, 2010, the Fund had no outstanding options contracts. During the year ended May 31, 2010, the Fund entered into, and subsequently closed, 270 options contracts, of which, the average gross notional amount was approximately $118,241. 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 management fee for the year ended May 31, 2010 was 0.48% of the Fund's average daily net assets. ADMINISTRATIVE SERVICES FEES Under an Administrative Services Agreement, the Fund pays Ameriprise Financial 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 year ended May 31, 2010 was 0.07% of the Fund's average daily net assets. OTHER FEES Other expenses are for, among other things, certain expenses of the Fund or the Board including: Fund boardroom and office expense, employee compensation, employee health and retirement benefits, and certain other expenses. Payment of these Fund and Board expenses is facilitated by a company providing limited administrative services to the Fund and the Board. For the year ended May 31, 2010, there were no expenses incurred for these particular items. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 49 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- 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 RiverSource, Seligman and Threadneedle 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, Columbia Management Investment Services Corp. (formerly 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. The Fund and certain other associated investment companies (together, the Guarantors), have severally, but not jointly, guaranteed the performance and observance of all the terms and conditions of a lease entered into by Seligman Data Corp. (SDC), the former transfer agent of Seligman U.S. Government Fund, which was acquired by the Fund on Aug. 28, 2009 (See Note 12), including the payment of rent by SDC (the Guaranty). The lease and the Guaranty expire in January 2019. At May 31, 2010, the Fund's total potential future obligation over the life of the Guaranty is $93,960. The liability remaining at May 31, 2010 for Non-Recurring Charges amounted to $47,906 and is included within other accrued expenses in the 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. -------------------------------------------------------------------------------- 50 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- DISTRIBUTION FEES The Fund has an agreement with Columbia Management Investment Distributors, Inc. (formerly 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 $3,602,000 and $145,000 for Class B and Class C shares, respectively. These amounts are based on the most recent information available as of Jan. 31, 2010, 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 $358,649 for Class A, $29,709 for Class B and $3,881 for Class C for the year ended May 31, 2010. EXPENSES WAIVED/REIMBURSED BY THE INVESTMENT MANAGER AND ITS AFFILIATES For the year ended May 31, 2010, 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.............................................. 0.92
The waived/reimbursed fees and expenses for the transfer agency fees at the class level were as follows: Class A........................................... $336,882 Class B........................................... 54,459 Class C........................................... 15,836
The management fees waived/reimbursed at the Fund level were $793,993. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 51 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- Under an agreement which is effective until July 31, 2010, the Investment Manager and its affiliates have contractually agreed to waive certain fees and reimburse certain expenses 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
Effective Aug. 1, 2010, the Investment Manager and its affiliates have contractually agreed to waive certain fees and expenses until July 31, 2011, unless sooner terminated at the sole 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.............................................. 0.84% Class B.............................................. 1.60 Class C.............................................. 1.60 Class I.............................................. 0.44 Class R2............................................. 1.24 Class R4............................................. 0.74 Class W.............................................. 0.89
* 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 $2,266,757,959 for the year ended May 31, 2010 (including $68,506,478* from Seligman U.S. Government Securities Fund that was acquired in the fund merger as described in Note 12). Proceeds from sales of securities (other than short-term obligations, but including mortgage dollar rolls) aggregated $2,360,931,834 for the year ended May 31, 2010, 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. * This purchase amount is excluded for purposes of calculating the Fund's portfolio turnover rate. -------------------------------------------------------------------------------- 52 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- 6. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the periods indicated were as follows:
YEAR ENDED MAY 31, 2010 2009* ------------------------------------------------------------------- CLASS A Sold 18,853,705 48,901,406 Fund merger 7,186,369 N/A Converted from Class B** 5,576,336 4,370,833 Reinvested distributions 2,438,534 3,226,458 Redeemed (45,489,263) (56,089,954) ------------------------------------------------------------------- Net increase (decrease) (11,434,319) 408,743 ------------------------------------------------------------------- CLASS B Sold 1,600,644 7,298,534 Fund merger 1,049,408 N/A Reinvested distributions 283,399 575,044 Converted to Class A** (5,576,350) (4,370,833) Redeemed (7,723,130) (12,533,807) ------------------------------------------------------------------- Net increase (decrease) (10,366,029) (9,031,062) ------------------------------------------------------------------- CLASS C Sold 1,563,844 1,525,411 Fund merger 3,561,144 N/A Reinvested distributions 64,062 46,643 Redeemed (2,103,348) (827,332) ------------------------------------------------------------------- Net increase (decrease) 3,085,702 744,722 ------------------------------------------------------------------- CLASS I Sold 6,758,907 2,986,449 Reinvested distributions 322,307 469,925 Redeemed (1,885,792) (13,974,458) ------------------------------------------------------------------- Net increase (decrease) 5,195,422 (10,518,084) ------------------------------------------------------------------- CLASS R2 Sold 201,664 N/A Fund merger 728,900 N/A Reinvested distributions 1,739 N/A Redeemed (300,411) N/A ------------------------------------------------------------------- Net increase (decrease) 631,892 N/A ------------------------------------------------------------------- CLASS R4 Sold 522,899 491,850 Reinvested distributions 21,965 29,090 Redeemed (487,406) (590,144) ------------------------------------------------------------------- Net increase (decrease) 57,458 (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. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 53 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- 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 are disclosed in the Statement of Assets and Liabilities along with the related obligation to return the collateral upon the return of the securities loaned. At May 31, 2010, securities valued at $56,803,338 were on loan, secured by U.S. government securities valued at $40,813,959 and by cash collateral of $17,103,600 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 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 $131,932 earned from securities lending for the year ended May 31, 2010 is included in the Statement of Operations. The Fund also continues to earn interest and dividends on the securities loaned. -------------------------------------------------------------------------------- 54 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- 8. OPTIONS CONTRACTS WRITTEN Contracts and premiums associated with options contracts written during the year ended May 31, 2010, are as follows:
CALLS PUTS ------------------- ------------------- CONTRACTS PREMIUMS CONTRACTS PREMIUMS -------------------------------------------------------------------------- Balance May 31, 2009............ -- $ -- -- $ -- Opened.......................... 100 32,579 170 56,217 Closed.......................... (100) (32,579) (170) (56,217) Balance May 31, 2010............ -- $ -- -- $ --
9. 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 RiverSource, Seligman and Threadneedle funds and other institutional clients of the Investment Manager. The cost of the Fund's purchases and proceeds from sales of shares of RiverSource Short-Term Cash Fund aggregated $84,381,710 and $95,861,197, respectively, for the year ended May 31, 2010. The income distributions received with respect to the Fund's investment in RiverSource Short-Term Cash Fund can be found in the Statement of Operations and the Fund's invested balance in RiverSource Short-Term Cash Fund at May 31, 2010, can be found in the Portfolio of Investments. 10. 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 RiverSource, Seligman and Threadneedle 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 (i) 1.25% per annum plus (ii) 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 -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 55 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- 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 RiverSource, Seligman and Threadneedle 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 year ended May 31, 2010. 11. PROCEEDS FROM REGULATORY SETTLEMENT During the year ended May 31, 2010, as a result of a settlement of an administrative proceeding brought by the Securities and Exchange Commission against an unaffiliated third party relating to market timing and/or late trading of mutual funds, the Fund received $112,925, which represented the Fund's portion of the proceeds from the settlement (the Fund was not a party to the proceeding). The proceeds received by the Fund were recorded as an increase to additional paid-in capital. 12. 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
-------------------------------------------------------------------------------- 56 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- For financial reporting purposes, net assets received and shares issued by RiverSource Short Duration U.S. Government Fund were recorded at fair value; however, Seligman U.S. Government Securities Fund's cost of investments was carried forward to align ongoing reporting of RiverSource Short Duration U.S. Government Fund's realized and unrealized gains and losses with amounts distributable to shareholders for tax purposes. The components of Seligman U.S. Government Securities Fund's net assets after adjustments for any permanent book-to-tax differences at the merger date were as follows: Total net assets................................. $58,771,027 Capital stock.................................... $62,591,453 Excess of distributions over net investment income......................................... $ (59,434) Accumulated net realized loss.................... $(5,240,048) Unrealized appreciation.......................... $ 1,479,056
The financial statements reflect the operations of 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 Seligman U.S. Government Securities 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, 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 year ended May 31, 2010 would have been $15.4 million, $4.5 million, and $32.6 million, respectively. 13. 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 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 were recorded by the Fund. In the Statement of Assets and Liabilities, as a result of permanent book-to-tax differences, excess of distributions over net investment income has been decreased by $112,539 and accumulated net realized loss has been decreased by -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 57 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- $386 resulting in a net reclassification adjustment to decrease paid-in capital by $112,925. The tax character of distributions paid for the years indicated is as follows:
YEAR ENDED MAY 31, 2010 2009 ------------------------------------------------------------------ Ordinary income......................... $16,190,150 $21,702,437 Long-term capital gain.................. -- --
At May 31, 2010, the components of distributable earnings on a tax basis are as follows: Undistributed ordinary income................... $ 357,382 Undistributed accumulated long-term gain........ $ -- Accumulated realized loss....................... $(93,995,687) Unrealized appreciation (depreciation).......... $ 4,054,009
For federal income tax purposes, the Fund had a capital loss carry-over of $93,995,687 at May 31, 2010, that if not offset by capital gains will expire as follows:
2012 2013 2014 2015 2017 2018 $1,261,719 $38,180,597 $22,499,962 $9,579,187 $3,846,817 $18,627,405
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. 14. 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 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. 15. 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 -------------------------------------------------------------------------------- 58 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- 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 (the Supreme Court), asking the Supreme Court to stay the District Court proceedings while the 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. On March 30, 2010, the Supreme Court issued its ruling in Jones v. Harris Associates, and on April 5, 2010, the Supreme Court vacated the Eighth Circuit's decision in the Gallus case and remanded the case to the Eighth Circuit for further consideration in light of the Supreme Court's decision in Jones v. Harris Associates. On June 4, 2010, the Eighth Circuit remanded the Gallus case to the District Court for further consideration in light of the Supreme Court's decision in Jones v. Harris Associates. 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, Seligman and Threadneedle funds' Boards of Directors/Trustees. Ameriprise Financial and certain of its affiliates have historically been involved in a number of legal, arbitration and regulatory proceedings, including routine litigation, class actions, and governmental actions, concerning matters arising in -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 59 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- 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. -------------------------------------------------------------------------------- 60 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ------------------------ TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND: We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of RiverSource Short Duration U.S. Government Fund (the Fund) (one of the portfolios constituting the RiverSource Government Income Series, Inc.) as of May 31, 2010, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the three years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights of the Fund for the periods presented through May 31, 2007, were audited by other auditors whose report dated July 20, 2007, expressed an unqualified opinion on those financial highlights. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of May 31, 2010, by correspondence with the custodian and brokers, or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 61 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (continued) ------------ In our opinion, the financial statements and financial highlights audited by us as referred to above present fairly, in all material respects, the financial position of RiverSource Short Duration U.S. Government Fund of the RiverSource Government Income Series, Inc. at May 31, 2010, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the three years in the period then ended, in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLP Minneapolis, Minnesota July 21, 2010 -------------------------------------------------------------------------------- 62 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT FEDERAL INCOME TAX INFORMATION ------------------------------------------------- (UNAUDITED) The Fund is required by the Internal Revenue Code of 1986 to tell its shareholders about the tax treatment of the dividends it pays during its fiscal year. The dividends listed below are reported to you on Form 1099-DIV, Dividends and Distributions. Shareholders should consult a tax advisor on how to report distributions for state and local tax purposes. Fiscal year ended May 31, 2010
INCOME DISTRIBUTIONS - the Fund designates the following tax attributes for distributions: Qualified Dividend Income for individuals.................... 0.00% Dividends Received Deduction for corporations................ 0.00% U.S. Government Obligations.................................. 18.53%
The Fund designates as distributions of long-term gains, to the extent necessary to fully distribute such capital gains, earnings and profits distributed to shareholders on the redemption of shares. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 63 BOARD MEMBERS AND OFFICERS ----------------------------------------------------- Shareholders elect a Board that oversees the Fund's operations. The Board appoints officers who are responsible for day-to-day business decisions based on policies set by the Board. The following is a list of the Fund's Board members. Each Board member oversees 152 RiverSource, Seligman and Threadneedle funds. Under current Board policy, members generally serve until the next regular shareholders' meeting, until he or she reaches the mandatory retirement age established by the Board, or the fifteenth anniversary of the first Board meeting they attended as members of the Board. INDEPENDENT BOARD MEMBERS*
OTHER PRESENT OR NAME, POSITION HELD PAST DIRECTORSHIPS ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION (WITHIN PAST 5 AGE LENGTH OF SERVICE DURING PAST FIVE YEARS YEARS) ------------------------------------------------------------------------------------------------------------------------------ Kathleen Blatz Board member since Chief Justice, Minnesota Supreme Court, 1998-2006; None 901 S. Marquette Ave. 1/11/06 Attorney Minneapolis, MN 55402 Age 55 ------------------------------------------------------------------------------------------------------------------------------ Arne H. Carlson Board member since Chair, RiverSource and Threadneedle Funds, 1999-2006; None 901 S. Marquette Ave. 1/5/99 former Governor of Minnesota Minneapolis, MN 55402 Age 75 ------------------------------------------------------------------------------------------------------------------------------ Pamela G. Carlton Board member since President, Springboard -- Partners in Cross Cultural None 901 S. Marquette Ave. 11/11/07 Leadership (consulting company) Minneapolis, MN 55402 Age 55 ------------------------------------------------------------------------------------------------------------------------------ Patricia M. Flynn Board member since Trustee Professor of Economics and Management, Bentley None 901 S. Marquette Ave. 11/1/04 University; former Dean, McCallum Graduate School of Minneapolis, MN 55402 Business, Bentley University Age 59 ------------------------------------------------------------------------------------------------------------------------------ Anne P. Jones Board member since Attorney and Consultant None 901 S. Marquette Ave. 3/1/85 Minneapolis, MN 55402 Age 75 ------------------------------------------------------------------------------------------------------------------------------ Jeffrey Laikind, CFA Board member since Former Managing Director, Shikiar Asset Management American Progressive 901 S. Marquette Ave. 11/1/05 Insurance; Hapoalim Minneapolis, MN 55402 Securities USA, Inc. Age 74 ------------------------------------------------------------------------------------------------------------------------------ Stephen R. Lewis, Jr. Chair of the Board President Emeritus and Professor of Economics, Carleton Valmont Industries, 901 S. Marquette Ave. since 1/1/07, College Inc. (manufactures Minneapolis, MN 55402 Board member irrigation systems) Age 71 since 1/1/02 ------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 64 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- INDEPENDENT BOARD MEMBERS (CONTINUED)
OTHER PRESENT OR NAME, POSITION HELD PAST DIRECTORSHIPS ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION (WITHIN PAST 5 AGE LENGTH OF SERVICE DURING PAST FIVE YEARS YEARS) ------------------------------------------------------------------------------------------------------------------------------ John F. Maher Board member Retired President and Chief Executive Officer and None 901 S. Marquette Ave. since 11/7/08 former Director, Great Western Financial Corporation Minneapolis, MN 55402 (financial services), 1986-1997 Age 67 ------------------------------------------------------------------------------------------------------------------------------ Catherine James Paglia Board member since Director, Enterprise Asset Management, Inc. (private None 901 S. Marquette Ave. 11/1/04 real estate and asset management company) Minneapolis, MN 55402 Age 57 ------------------------------------------------------------------------------------------------------------------------------ Leroy C. Richie Board member Counsel, Lewis & Munday, P.C. since 1987; Vice Digital Ally, Inc. 901 S. Marquette Ave. since 11/7/08 President and General Counsel, Automotive Legal (digital imaging); Minneapolis, MN 55402 Affairs, Chrysler Corporation, 1990-1997 Infinity, Inc. (oil Age 68 and gas exploration and production); OGE Energy Corp. (energy and energy services) ------------------------------------------------------------------------------------------------------------------------------ Alison Taunton-Rigby Board member since Chief Executive Officer and Director, RiboNovix, Inc. Idera 901 S. Marquette Ave. 11/13/02 since 2003 (biotechnology); former President, Aquila Pharmaceuticals, Minneapolis, MN 55402 Biopharmaceuticals Inc. Age 66 (biotechnology); Healthways, Inc. (health management programs) ------------------------------------------------------------------------------------------------------------------------------
* Mr. Laikind may be deemed, as a technical matter, an interested person of RiverSource International Managers Series, Inc. and RiverSource Variable Series Trust because he serves as an independent director of a broker-dealer that has executed transactions for subadvisers to certain of the funds. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 65 BOARD MEMBERS AND OFFICERS (continued) ----------------------------------------- BOARD MEMBER AFFILIATED WITH THE INVESTMENT MANAGER*
OTHER PRESENT OR NAME, POSITION HELD PAST DIRECTORSHIPS ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION (WITHIN PAST 5 AGE LENGTH OF SERVICE DURING PAST FIVE YEARS YEARS) ------------------------------------------------------------------------------------------------------------------------------ William F. Truscott Board member Chairman of the Board, Columbia Management Investment None 53600 Ameriprise since 11/7/01, Advisers, LLC (formerly RiverSource Investments, LLC) Financial Center Vice President since since May 2010 (previously President, Chairman of the Minneapolis, MN 55474 2002 Board and Chief Investment Officer, 2001-April 2010); Age 49 Senior Vice President, Atlantic Funds, Columbia Funds and Nations Funds since May 2010; Chief Executive Officer, U.S. Asset Management & President -- Annuities, Ameriprise Financial, Inc. since May 2010 (previously President -- U.S. Asset Management and Chief Investment Officer, 2005-April 2010 and Senior Vice President -- Chief Investment Officer, 2001-2005); Director, President and Chief Executive Officer, Ameriprise Certificate Company since 2006; Director, Columbia Management Investment Distributors, Inc. (formerly RiverSource Fund Distributors, Inc.) since May 2010 (previously Chairman of the Board and Chief Executive Officer, 2008-April 2010); Chairman of the Board and Chief Executive Officer, RiverSource Distributors, Inc. since 2006; former Chief Investment Officer and Managing Director, Zurich Scudder Investments ------------------------------------------------------------------------------------------------------------------------------
* Interested person (as defined under the 1940 Act) by reason of being an officer, director, security holder and/or employee of the investment manager or Ameriprise Financial. The SAI has additional information about the Fund's Board members and is available, without charge, upon request by calling 800.221.2450; contacting your financial intermediary; or visiting riversource.com/funds. -------------------------------------------------------------------------------- 66 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- The Board has appointed officers who are responsible for day-to-day business decisions based on policies it has established. The officers serve at the pleasure of the Board. In addition to Mr. Truscott, who is Vice President, the Fund's other officers are: FUND OFFICERS
NAME, POSITION HELD ADDRESS, WITH FUNDS AND PRINCIPAL OCCUPATION AGE LENGTH OF SERVICE DURING PAST FIVE YEARS -------------------------------------------------------------------------------------------------------- J. Kevin Connaughton President since Senior Vice President and General Manager -- Mutual One Financial Center 5/1/10 Fund Products, Columbia Management Investment Advisers, Boston, MA 02111 LLC since May 2010; President, Columbia Funds since Age 46 2009 (previously Senior Vice President and Chief Financial Officer, June 2008 -- January 2009); President, Atlantic Funds and Nations Funds since 2009; Managing Director of Columbia Management Advisors, LLC, December 2004 -- April 2010; Treasurer, Columbia Funds, October 2003 -- May 2008; Treasurer, the Liberty Funds, Stein Roe Funds and Liberty All-Star Funds, December 2000 -- December 2006; Senior Vice President -- Columbia Management Advisors, LLC, April 2003 -- December 2004; President, Columbia Funds, Liberty Funds and Stein Roe Funds, February 2004 -- October 2004 -------------------------------------------------------------------------------------------------------- Amy K. Johnson Vice President since Senior Vice President and Chief Operating Officer, 5228 Ameriprise Financial 12/5/06 Columbia Management Investment Advisers, LLC (formerly Center Minneapolis, MN RiverSource Investments, LLC) since May 2010 55474 (previously Chief Administrative Officer, 2009 -- April Age 44 2010 and Vice President -- Asset Management and Trust Company Services, 2006-2009 and Vice President -- Operations and Compliance, 2004-2006); Senior Vice President, Atlantic Funds, Columbia Funds and Nations Funds since May 2010; Director of Product Development -- Mutual Funds, Ameriprise Financial, Inc., 2001-2004 -------------------------------------------------------------------------------------------------------- Jeffrey P. Fox Treasurer since Chief Financial Officer, Columbia Management Investment 105 Ameriprise 7/10/02 Distributors, Inc. (formerly RiverSource Fund Financial Center Distributors, Inc.) and of Seligman Data Corp. since Minneapolis, MN 55474 2008; Vice President -- Investment Accounting, Age 54 Ameriprise Financial, Inc. since 2002; Chief Financial Officer, RiverSource Distributors, Inc. since 2006 --------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 67 BOARD MEMBERS AND OFFICERS (continued) ----------------------------------------- FUND OFFICERS (CONTINUED)
NAME, POSITION HELD ADDRESS, WITH FUNDS AND PRINCIPAL OCCUPATION AGE LENGTH OF SERVICE DURING PAST FIVE YEARS -------------------------------------------------------------------------------------------------------- Scott R. Plummer Vice President, Chief Legal Officer and Assistant Secretary, Columbia 5228 Ameriprise Financial General Counsel and Management Investment Advisers, LLC (formerly Center Secretary since RiverSource Investments, LLC) since June 2005; Vice Minneapolis, MN 55474 12/5/06 President and Lead Chief Counsel -- Asset Management, Age 50 Ameriprise Financial, Inc. since May 2010 (previously Vice President and Chief Counsel -- Asset Management, 2005-April 2010 and Vice President -- Asset Management Compliance, 2004-2005); Senior Vice President, Secretary and Chief Legal Officer, Atlantic Funds, Columbia Funds and Nations Funds since May 2010; Vice President, Chief Counsel and Assistant Secretary, Columbia Management Investment Distributors, Inc. (formerly RiverSource Fund Distributors, Inc.) since 2008; Vice President, General Counsel and Secretary, Ameriprise Certificate Company since 2005; Chief Counsel, RiverSource Distributors, Inc. since 2006; Senior Vice President and Chief Compliance Officer, USBancorp Asset Management, 2002-2004 -------------------------------------------------------------------------------------------------------- Michael A. Jones Vice President since Director and President, Columbia Management Investment 100 Federal Street 5/1/10 Advisers, LLC since May 2010; President and Director, Boston, MA 02110 Columbia Management Investment Distributors, Inc. since Age 51 May 2010; Senior Vice President, Atlantic Funds, Columbia Funds and Nations Funds since May 2010; Manager, Chairman, Chief Executive Officer and President, Columbia Management Advisors, LLC, 2007 -- April 2010; Chief Executive Officer, President and Director, Columbia Management Distributors, Inc., 2006 -- April 2010; former Co-President and Senior Managing Director, Robeco Investment Management -------------------------------------------------------------------------------------------------------- Colin Moore Vice President since Chief Investment Officer, Columbia Management One Financial Center 5/1/10 Investment Advisers, LLC since May 2010; Senior Vice Boston, MA 02111 President, Atlantic Funds, Columbia Funds and Nations Age 52 Funds since May 2010; Manager, Managing Director and Chief Investment Officer, Columbia Management Advisors, LLC, 2007- April 2010; Head of Equities, Columbia Management Advisors, LLC, 2002-Sept. 2007 -------------------------------------------------------------------------------------------------------- Linda Wondrack Chief Compliance Vice President and Chief Compliance Officer, Columbia One Financial Center Officer since 5/1/10 Management Investment Advisers, LLC since May 2010; Boston, MA 02111 Chief Compliance Officer, Columbia Funds since 2007; Age 46 Senior Vice President and Chief Compliance Officer, Atlantic Funds and Nations Funds since 2007; Director (Columbia Management Group, LLC and Investment Product Group Compliance), Bank of America, June 2005 -- April 2010; Director of Corporate Compliance and Conflicts Officer, MFS Investment Management (investment management), August 2004 -- May 2005 --------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 68 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- FUND OFFICERS (CONTINUED)
NAME, POSITION HELD ADDRESS, WITH FUNDS AND PRINCIPAL OCCUPATION AGE LENGTH OF SERVICE DURING PAST FIVE YEARS -------------------------------------------------------------------------------------------------------- Neysa M. Alecu Money Laundering Vice President -- Compliance, Ameriprise Financial, 2934 Ameriprise Financial Prevention Officer Inc. since 2008; Anti-Money Laundering Officer and Center since 11/9/05 and Identity Theft Prevention Officer, Columbia Management Minneapolis, MN 55474 Identity Theft Investment Distributors, Inc. (formerly RiverSource Age 46 Prevention Officer Fund Distributors, Inc.) since 2008; Anti-Money since 2008 Laundering Officer, Ameriprise Financial, Inc. since 2005; Compliance Director, Ameriprise Financial, Inc., 2004-2008 --------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 69 APPROVAL OF INVESTMENT MANAGEMENT SERVICES AGREEMENT ---------------------------------------------------------------------- Columbia Management Investment Advisers, LLC ("Columbia Management" or the "investment manager"), formerly known as RiverSource Investments, LLC, a wholly- owned subsidiary of Ameriprise Financial, Inc. ("Ameriprise Financial"), serves as the investment manager to the Fund. Under an investment management services agreement (the "IMS Agreement"), Columbia Management provides investment advice and other services to the Fund and all RiverSource funds (collectively, the "Funds"). On an annual basis, the Fund's Board of Directors (the "Board"), including the independent Board members (the "Independent Directors"), considers renewal of the IMS Agreement. Columbia Management prepared detailed reports for the Board and its Contracts Committee in March and April 2010, including reports based on data provided by independent organizations and a comprehensive response to each item of information requested by independent legal counsel to the Independent Directors ("Independent Legal Counsel") in a letter to the investment manager, to assist the Board in making this determination. All of the materials presented in March and April 2010 were first supplied in draft form to designated representatives of the Independent Directors, i.e., Independent Legal Counsel, the Chair of the Board and the Chair of the Contracts Committee (including materials relating to the Fund's new expense cap), and the final materials were revised to reflect comments provided by these Board representatives. In addition, throughout the year, the Board (or its committees) reviews information prepared by Columbia Management addressing the services Columbia Management provides and Fund performance. The Board accords particular weight to the work, deliberations and conclusions of the Contracts Committee, the Investment Review Committee and the Compliance Committee in determining whether to continue the IMS Agreement. At the April 6-8, 2010 in-person Board meeting, Independent Legal Counsel reviewed with the Independent Directors various factors relevant to the Board's consideration of advisory agreements and the Board's legal responsibilities related to such consideration. Following an analysis and discussion of the factors identified below, the Board, including all of the Independent Directors, approved renewal of the IMS Agreement. Nature, Extent and Quality of Services Provided by Columbia Management: The Board analyzed various reports and presentations it had received detailing the services performed by Columbia Management, as well as its expertise, resources and capabilities. The Board specifically considered many developments during the past year concerning the services provided by Columbia Management, including, in particular, the continued investment in, and resources dedicated to, the Fund's operations, most notably, management's announcement of the massive -------------------------------------------------------------------------------- 70 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- investment made in the acquisition of the long-term asset management business of Columbia Management Group, LLC (the "Columbia Transaction") and the completed integration of J. & W. Seligman & Co. Incorporated, acquisitions which should continue to enhance investment capabilities and provide access to a greater depth of experienced portfolio managers in key categories. The Board noted, in particular, that upon the close of the Columbia Transaction, the investment manager will have grown to 10 investment offices (compared to 6 in 2009). In addition, the Board reviewed information concerning the investment manager's new Chief Investment Officer upon the close of the Columbia Transaction, including the application of his particular investment philosophy, which is intended to enhance the risk and portfolio management oversight of the entire fund family. Moreover, in connection with the Board's evaluation of the overall package of services provided by Columbia Management, the Board considered the quality of the administrative and transfer agency services provided by Columbia Management's affiliates to the Fund. The Board also reviewed the financial condition of Columbia Management and its affiliates, and each entity's ability to carry out its responsibilities under the IMS Agreement. Further, the Board considered Columbia Management's ability to retain key personnel in certain targeted areas and its expectations in this regard. The Board also discussed the acceptability of the terms of the IMS Agreement (including the relatively broad scope of services required to be performed by Columbia Management). The Board concluded that the services being performed under the IMS Agreement were of a reasonably high quality. Based on the foregoing, and based on other information received (both oral and written, including the information on investment performance referenced below) and other considerations, the Board concluded that Columbia Management and its affiliates were in a position to continue to provide a high quality and level of services to the Fund. Investment Performance: For purposes of evaluating the nature, extent and quality of services provided under the IMS Agreement, the Board carefully reviewed the investment performance of the Fund. In this regard, the Board considered detailed reports containing data prepared by an independent organization showing, for various periods, the performance of the Fund, the performance of a benchmark index, the percentage ranking of the Fund among its comparison group and the net assets of the Fund. The Board observed that the Fund's investment performance met expectations. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 71 APPROVAL OF INVESTMENT MANAGEMENT SERVICES AGREEMENT (continued) ---------------------------------------------------------- Comparative Fees, Costs of Services Provided and the Profits Realized By Columbia Management and its Affiliates from their Relationships with the Fund: The Board reviewed comparative fees and the costs of services to be provided under the IMS Agreement. The Board members considered detailed comparative information set forth in an annual report on fees and expenses, including, among other things, data (prepared by an independent organization) showing a comparison of the Fund's expenses with median expenses paid by funds in its peer group, as well as data showing the Fund's contribution to Columbia Management's profitability. They also reviewed information in the report showing the fees charged by Columbia Management to other client accounts (with similar investment strategies to those of the Fund). The Board accorded particular weight to the notion that the level of fees should reflect a rational pricing model applied consistently across the various product lines in the Funds' family, while assuring that the overall fees for each fund (with few defined exceptions) are generally in line with the "pricing philosophy" (i.e., that the total expense ratio of each fund, with few exceptions, is at or below the median expense ratio of funds in the same comparison group). The Board took into account that the Fund's total expense ratio (after considering proposed expense caps/waivers) approximated the peer group's median expense ratio. Based on its review, the Board concluded that the Fund's management fee was fair and reasonable in light of the extent and quality of services that the Fund receives. The Board also considered various preliminary integration plans in connection with the Columbia Transaction which, if implemented, would impact the fee structures of various RiverSource Funds. The Board was satisfied with the principles underlying these plans, which, at their preliminary stage, are designed to achieve a rational, consistent pricing model across the combined fund families, as well as preserve the "pricing philosophy" of the Funds. The Board also considered the expected profitability of Columbia Management and its affiliates in connection with Columbia Management providing investment management services to the Fund. In this regard, the Board referred to a detailed profitability report, discussing the profitability to Columbia Management and Ameriprise Financial from managing and operating the Fund, including data showing comparative profitability over the past two years. In this regard, the Board observed slightly reduced profitability in 2009 vs. 2008. The Board also considered the services acquired by the investment manager through the use of commission dollars paid by the Funds on portfolio transactions. The Board noted that the fees paid by the Fund should permit the investment manager to offer -------------------------------------------------------------------------------- 72 RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- competitive compensation to its personnel, make necessary investments in its business and earn an appropriate profit. The Board concluded that profitability levels were reasonable. Economies of Scale to be Realized: The Board also considered the economies of scale that might be realized by Columbia Management as the Fund grows and took note of the extent to which Fund shareholders might also benefit from such growth. The Board considered that the IMS Agreement provides for lower fees as assets increase at pre-established breakpoints and concluded that the IMS Agreement satisfactorily provided for sharing these economies of scale. Based on the foregoing, the Board, including all of the Independent Directors, concluded that the investment management service fees were fair and reasonable in light of the extent and quality of services provided. In reaching this conclusion, no single factor was determinative. On April 8, 2010, the Board, including all of the Independent Directors, approved the renewal of the IMS Agreement for an additional annual period. 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 800.221.2450; contacting your financial intermediary; visiting riversource.com/funds; or searching the website of the Securities and Exchange Commission (SEC) at http://www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities is filed with the SEC by August 31 for the most recent 12-month period ending June 30 of that year, and is available without charge by visiting riversource.com/funds; or searching the website of the SEC at www.sec.gov. -------------------------------------------------------------------------------- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND -- 2010 ANNUAL REPORT 73 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 Columbia Management Investment Distributors, Inc. (formerly known as RiverSource Fund Distributors, Inc.), member FINRA, and managed by Columbia Management Investment Advisers, LLC (formerly known as RiverSource Investments, LLC). (C)2010 Columbia Management Investment Advisers, LLC. All (COLUMBIA MANAGEMENT LOGO) rights reserved. S-6042 AG (7/10)
Annual Report and Prospectus (COLUMBIA MANAGEMENT LOGO) RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -------------------------------------------------------------------------------- ANNUAL REPORT FOR THE PERIOD ENDED MAY 31, 2010 (Prospectus also enclosed) RIVERSOURCE U. S. GOVERNMENT MORTGAGE FUND SEEKS TO PROVIDE SHAREHOLDERS WITH CURRENT INCOME AS ITS PRIMARY OBJECTIVE AND, AS ITS SECONDARY OBJECTIVE, PRESERVATION OF CAPITAL. This annual report includes a prospectus that describes in detail the Fund's objective, investment strategy, risks, sales charges, fees and other matters of interest. Please read the prospectus carefully before you invest or send money. NOT FDIC INSURED - NO BANK GUARANTEE - MAY LOSE VALUE TABLE OF CONTENTS -------------------------------------------------------------- Your Fund at a Glance.............. 3 Manager Commentary................. 5 The Fund's Long-term Performance... 12 Fund Expenses Example.............. 14 Portfolio of Investments........... 16 Statement of Assets and Liabilities...................... 27 Statement of Operations............ 28 Statements of Changes in Net Assets........................... 29 Financial Highlights............... 31 Notes to Financial Statements...... 36 Report of Independent Registered Public Accounting Firm........... 51 Federal Income Tax Information..... 53 Board Members and Officers......... 54 Approval of Investment Management Services Agreement............... 60 Proxy Voting....................... 63
-------------------------------------------------------------------------------- 2 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT YOUR FUND AT A GLANCE ---------------------------------------------------------- FUND SUMMARY -------------------------------------------------------------------------------- > RiverSource U.S. Government Mortgage Fund (the Fund) Class A shares rose 13.32% (excluding sales charge) for the 12 months ended May 31, 2010. > The Fund outperformed the Barclays Capital U.S. Mortgage-Backed Securities Index, which gained 6.41% during the same period. > The Fund also outperformed the Lipper U.S. Mortgage Funds Index, representing the Fund's peer group, which advanced 9.27% during the same time frame. ANNUALIZED TOTAL RETURNS (for period ended May 31, 2010) --------------------------------------------------------------------------------
SINCE INCEPTION 1 YEAR 3 YEARS 5 YEARS 2/14/02 ---------------------------------------------------------------------- RiverSource U.S. Government Mortgage Fund Class A (excluding sales charge) +13.32% +6.08% +4.90% +4.85% ---------------------------------------------------------------------- Barclays Capital U.S. Mortgage- Backed Securities Index (unmanaged) +6.41% +7.67% +6.09% +5.68% ---------------------------------------------------------------------- Lipper U.S. Mortgage Funds Index +9.27% +6.26% +5.03% +4.78% ----------------------------------------------------------------------
(See "The Fund's Long-term Performance" for Index descriptions) The performance information shown represents past performance and is not a guarantee of future results. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by contacting your financial intermediary, visiting riversource.com/funds or calling 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/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. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 3 YOUR FUND AT A GLANCE (continued) ---------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS --------------------------------------------------------------------------------
AT MAY 31, 2010 SINCE Without sales charge 1 YEAR 3 YEARS 5 YEARS INCEPTION Class A (inception 2/14/02) +13.32% +6.08% +4.90% +4.85% ---------------------------------------------------------------------- Class B (inception 2/14/02) +12.46% +5.28% +4.12% +4.07% ---------------------------------------------------------------------- Class C (inception 2/14/02) +12.47% +5.28% +4.12% +4.07% ---------------------------------------------------------------------- Class I (inception 3/4/04) +13.58% +6.52% +5.34% +4.99% ---------------------------------------------------------------------- Class R4 (inception 2/14/02) +13.25% +6.82% +5.46% +5.23% ---------------------------------------------------------------------- With sales charge Class A (inception 2/14/02) +7.94% +4.38% +3.89% +4.23% ---------------------------------------------------------------------- Class B (inception 2/14/02) +7.46% +4.37% +3.77% +4.07% ---------------------------------------------------------------------- Class C (inception 2/14/02) +11.47% +5.28% +4.12% +4.07% ----------------------------------------------------------------------
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. PORTFOLIO STATISTICS -------------------------------------------------------------------------------- Weighted average life(1) 4.0 years -------------------------------------- Effective duration(2) 1.6 years --------------------------------------
(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. 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 -- 2010 ANNUAL REPORT MANAGER COMMENTARY ------------------------------------------------------------- At May 31, 2010, approximately 56% of the Fund's shares were owned in the aggregate by affiliated funds-of-funds managed by Columbia Management Investment Advisers, LLC (formerly known as RiverSource Investments, LLC) (the Investment Manager). As a result of asset allocation decisions by the Investment Manager, it is possible that RiverSource U.S. Government Mortgage Fund may experience relatively large purchases or redemptions from affiliated funds-of-funds (see page 46, Class I capital share transactions for related activity during the most recent fiscal period). While the Investment Manager seeks to minimize the impact of these transactions by structuring them over a reasonable period of time, RiverSource U.S. Government Mortgage Fund may experience increased expenses as it buys and sells securities as a result of purchases or redemptions by affiliated funds-of-funds. For more information on the Fund's expenses, see the discussions beginning on pages 14 and 43. Tom Heuer and Colin J. Lundgren replaced Todd White and joined Jason J. Callan as portfolio managers of RiverSource U.S. Government Mortgage Fund effective May 1, 2010. Dear Shareholders, RiverSource U.S. Government Mortgage Fund (the Fund) Class A shares rose 13.32% (excluding sales charge) for the 12 months ended May 31, 2010. The Fund outperformed the Barclays Capital U.S. Mortgage-Backed Securities Index (Barclays Index), which gained 6.41%. The Fund also outperformed the Lipper U.S. Mortgage Funds Index, representing the Fund's peer group, which advanced 9.27% during the same time frame. SECTOR BREAKDOWN(1) (at May 31, 2010) ---------------------------------------------------------------------
Asset-Backed 4.4% ------------------------------------------------ Commercial Mortgage-Backed 4.4% ------------------------------------------------ Residential Mortgage-Backed(2) 87.3% ------------------------------------------------ Other(3) 3.9% ------------------------------------------------
(1) Percentages indicated are based upon total investments. The Fund's composition is subject to change. (2) Of the 87.3%, 22.4% is due to forward commitment residential mortgage-backed securities activity. Short-term securities are held as collateral for these commitments. (3) Cash & Cash Equivalents. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 5 MANAGER COMMENTARY (continued) ------------------------------------------------- SIGNIFICANT PERFORMANCE FACTORS The mortgage market overall rallied strongly during the annual period ended May 31, 2010, supported by several factors. Perhaps the most dominant supporting factor was the significant amount of government sponsorship of agency mortgages that was put in place during the earlier months of 2009 in an effort to stabilize and support the non-Treasury sectors of the fixed income market in general and the mortgage market in particular. The Federal Reserve Board (the Fed) had implemented a program whereby it bought $1.25 trillion of agency-issued mortgage-backed securities. In addition, the Treasury Department implemented a purchase program for $200 billion of agency-issued mortgage backed securities. As a result of these programs, spreads (the yield differential between agency- issued mortgage-backed securities and U.S. Treasuries) tightened by approximately 30 basis points (0.30%) from the start of the annual period on June 1, 2009 through March 31, 2010 allowing for significant price return across the sector. On the last day of March, the Fed completed its purchase program and allowed it to expire. From that point on through the end of the annual period on May 31, 2010, agency-issued mortgage-backed security spreads widened by approximately 20 basis points (0.20%). Such widening was driven largely by renewed QUALITY BREAKDOWN OF FIXED INCOME SECURITIES(1) (at May 31, 2010) ---------------------------------------------------------------------
AAA bonds 93.8% ------------------------------------------------ AA bonds 0.2% ------------------------------------------------ A bonds 0.8% ------------------------------------------------ BBB bonds 3.0% ------------------------------------------------ Non-investment grade bonds 1.1% ------------------------------------------------ Non-rated bonds 1.1% ------------------------------------------------
(1) Percentages indicated are based upon total fixed income securities (excluding Cash & Cash Equivalents). 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. Columbia Management Investment Advisers, LLC (formerly RiverSource Investments, LLC) (the Investment Manager) rates a security using an internal rating system when Moody's doesn't provide a rating. -------------------------------------------------------------------------------- 6 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- global fiscal and liquidity concerns, which in turn led to a flight to quality away from all risk assets. Without that government support still in place, the mortgage market took a step back. While agency mortgage-backed securities (MBS) outperformed U.S. Treasuries for the annual period overall, performance was highly differentiated depending on the coupon -- the interest rate the holder of a mortgage-backed security was paid. Higher coupon MBS produced the greatest returns during the annual period, as these borrowers continued to prepay at a slow rate given their lower credit characteristics and ongoing tight credit conditions. U.S. government sponsored enterprises FNMA (Fannie Mae) and FHLMC (Freddie Mac) tightened their underwriting standards during the annual period due to the unprecedented level of mortgage delinquencies. Tighter underwriting slowed repayments due to lack of refinancing options for many borrowers, which in turn drove pricing on those higher coupon securities higher. In the last weeks of the annual period, concerns regarding the sovereign deficit-to-Gross Domestic Product (GDP) ratios of the PIIGS (Portugal, Italy, Ireland, Greece and Spain) dominated. As a result, there were significant investment flows out of the euro and into the U.S. dollar. With the short-term end of the yield curve anchored by the federal funds rate, this surge into the U.S. currency led to a significant flattening of the Treasury yield curve overall, whereby the differential between yields on long-term maturities and short-term maturities narrowed. In turn, non-Treasury sectors, including mortgages, weakened in May 2010. The Fund's strong relative performance can be attributed to its positioning within agency-issued mortgage-backed securities and to its smaller allocations to non-agency mortgage-backed securities and commercial mortgage-backed securities (CMBS). Within agency-issued mortgage-backed securities, we established an increasingly significant allocation to higher coupon 30-year pass-through securities and steered away from lower coupon pass-throughs. (Pass- through mortgages consist of a pool of residential mortgage loans, where homeowners' monthly payments of principal, interest and prepayments pass from the original bank through a government agency or investment bank to investors.) It had become evident to us that borrowers with higher coupons were rather inefficient at exercising their refinancing option as credit continued to tighten within -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 7 MANAGER COMMENTARY (continued) ------------------------------------------------- Fannie Mae and Freddie Mac, as discussed above, and we sought to take advantage of the substantially higher yields the higher coupon securities provided. Based on various technical factors within the market during the annual period, we decided to focus the Fund's exposure in the mortgage-backed security to-be- announced (TBA) market. We also added to the Fund's position in seasoned agency bonds with higher coupons that provided superior convexity. (Convexity is a volatility measure for bonds used in conjunction with modified duration in order to measure how a bond's price will change as interest rates change. For example, since a non-callable bond's duration usually increases as interest rates decrease, its convexity is positive.) The Fund's allocations to and positioning within the non-agency mortgage-backed securities and CMBS sectors were also incremental to results. Neither non-agency mortgage-backed securities nor CMBS are components of the Barclays Index, and thus the Fund's allocations to the solidly performing out-of-Index sectors helped its relative results. One of the primary drivers of strong price performance within the non-agency mortgage-backed securities and CMBS sectors was the implementation of the PPIP (Public-Private Investment Program) by the Treasury Department. In aggregate, PPIP produced nearly $40 billion of demand for non-agency mortgage-backed securities and CMBS, which in turn drove prices on these assets meaningfully higher. Another major driver of demand was the creation of re-REMICS, which allowed investment banks to restructure cash flows off poorly performing bonds to create newer, highly enhanced bonds that were rated AAA. Insurance companies in particular generated strong demand for these newly-created bonds. All told, re-REMICS took over $20 billion of non-agency mortgage-backed securities and CMBS out of the market during the annual period. During the annual period, we repositioned the Fund's non-agency and CMBS exposure into highly seasoned, shorter-maturity securities that provided attractive relative returns. Our investment thesis was that loans originated in 2004 and 2005 were underwritten to better quality standards than those generated in 2006 and 2007 and that the level of fundamental differentiation would prove to be significantly different. Indeed, as the annual period progressed, there was a meaningful delineation between the fundamental performances of those vintages, as the distinguishing loan -------------------------------------------------------------------------------- 8 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- characteristics became apparent. Such differentiation could be seen most readily in implied loan-to-value ratios, documentation levels, and the amortizing loans instead of interest-only loans, which became much more prevalent starting in 2006. The only real detractor from the Fund's results during the annual period was the combined effect of its duration and yield curve positioning. Duration is a measure of the Fund's sensitivity to changes in interest rates. The Fund was positioned slightly shorter than the Barclays Index throughout the annual period, which detracted modestly as interest rates declined. As the economy continued to marginally improve, we were concerned the Fed might take a more aggressive stance and begin to raise the targeted federal funds rate, but some of those concerns dissipated as the European fiscal issues moved to the forefront. CHANGES TO THE FUND'S PORTFOLIO As mentioned earlier, within the agency-issued mortgage-backed securities sector, we increased the Fund's positions in higher-coupon 30-year pass-through mortgage-backed securities and reduced its exposure to lower-coupon securities. Elsewhere, we repositioned the Fund's allocations to both non-agency mortgage- backed securities and CMBS into shorter-maturity, seasoned collateral where we believed the underwriting to be of greater quality than the loans produced in 2006 and 2007. The Fund's portfolio turnover rate for the 12-month period was 519%.* * A significant portion of the turnover was the result of rolling-maturity mortgage securities, processing of prepayments and opportunistic changes we made at the margin in response to valuations or market developments The Fund's strong relative performance can be attributed to its positioning within agency-issued mortgage-backed securities and to its allocations to non- agency mortgage-backed securities and commercial mortgage-backed securities (CMBS) -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 9 MANAGER COMMENTARY (continued) ------------------------------------------------- OUR FUTURE STRATEGY In general, our go forward strategy remains fairly consistent with the views and positioning held at the end of the annual period. The broader U.S. economy seems to have stabilized, with three consecutive quarters of positive growth. However, much of that growth in GDP was a reflection of inventory stabilization and not improvement in final sales. Limited expansion of private payrolls and persistent slack in the labor force should continue to suppress inflation fears over the near term. In turn, we believe the Fed will likely remain on hold for the foreseeable future. We will continue to closely monitor the housing market. Housing prices in the U.S., as measured by the S&P/Case-Schiller Index, had stabilized during the period, primarily driven by the multiple home buyer tax credit and the simultaneous invoking of foreclosure moratoriums in the most troubled areas of the nation. Meanwhile, borrowers continued to default on their mortgages at historically elevated levels, thereby building a shadow inventory of eventual foreclosures. This shadow inventory combined with the existing housing supply at the end of May totaled nearly 20 months' supply of existing homes. New and existing home sales had shown some improvement, but this largely reflected an advance in demand among participants seeking to take advantage of the home buyer tax credit, which officially ended April 30. Clearly, we will be watching to see how new and existing home sales respond to the expiration of the government tax credits. At the end of the annual period, our major concerns were the fact that housing demand did not substantially pick up based on low mortgage rates alone and the size of the shadow inventory that continues to weigh on the housing market. Given this backdrop, we intend to stay conservatively positioned in the Fund on a relative basis. We currently intend to maintain the Fund's duration below that of its benchmark index, as we believe that yields will rise as the market digests record Treasury supply and the recent flight to quality abates. We further intend to maintain our focus on the purchase of mortgage-backed securities issued by U.S. government agencies, with a focus on higher coupon agency 30-year mortgage-backed securities. We continue to like CMBS, as we expect an improving economy to bode well -------------------------------------------------------------------------------- 10 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- for that sector. Quality issues and security selection remain a priority as we continue to seek attractive investment opportunities. Jason Callan Tom Heuer Colin Lundgren Portfolio Manager Portfolio Manager Portfolio Manager
Any specific securities mentioned are for illustrative purposes only and are not a complete list of securities that have increased or decreased in value. The views expressed in this statement reflect those of the portfolio manager(s) only through the end of the period of the report as stated on the cover and do not necessarily represent the views of Columbia Management Investment Advisers, LLC* (the Investment Manager) or any subadviser to the Fund or any other person in the Investment Manager or subadviser organizations. Any such views are subject to change at any time based upon market or other conditions and the Investment Manager disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for the Fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of the Fund. * Effective May 1, 2010, RiverSource Investments, LLC became known as Columbia Management Investment Advisers, LLC. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 11 THE FUND'S LONG-TERM PERFORMANCE ----------------------------------------------- The chart on the facing page illustrates the total value of an assumed $10,000 investment in RiverSource U.S. Government Mortgage Fund Class A shares (from 2/14/02 to 5/31/10) as compared to the performance of the Barclays Capital U.S. Mortgage-Backed Securities Index and the Lipper U.S. Mortgage Funds Index. In comparing the Fund's Class A shares to these indices, you should take into account the fact that the Fund's performance reflects the maximum initial sales charge of 4.75%, while such charges are not reflected in the performance of the indices. Returns for the Fund include the reinvestment of any distributions paid during each period. The performance information shown represents past performance and is not a guarantee of future results. The table below and the chart on the facing page do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by contacting your financial intermediary or visiting riversource.com/funds. Also see "Past Performance" in the Fund's current prospectus. COMPARATIVE RESULTS --------------------------------------------------------------------------------
Results at May 31, 2010 SINCE INCEPTION 1 YEAR 3 YEARS 5 YEARS 2/14/2002 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND (INCLUDES SALES CHARGE) Class A Cumulative value of $10,000 $10,794 $11,371 $12,102 $14,106 ------------------------------------------------------------------------------------------- Average annual total return +7.94% +4.38% +3.89% +4.23% ------------------------------------------------------------------------------------------- BARCLAYS CAPITAL U.S. MORTGAGE-BACKED SECURITIES INDEX(1) Cumulative value of $10,000 $10,641 $12,483 $13,439 $15,811 ------------------------------------------------------------------------------------------- Average annual total return +6.41% +7.67% +6.09% +5.68% ------------------------------------------------------------------------------------------- LIPPER U.S. MORTGAGE FUNDS INDEX(2) Cumulative value of $10,000 $10,927 $11,998 $12,783 $14,728 ------------------------------------------------------------------------------------------- Average annual total return +9.27% +6.26% +5.03% +4.78% -------------------------------------------------------------------------------------------
Results for other share classes can be found on page 4. -------------------------------------------------------------------------------- 12 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- (VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND LINE GRAPH)
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND CLASS BARCLAYS CAPITAL LIPPER U.S. A (INCLUDES U.S. MORTGAGE-BACKED MORTGAGE FUNDS SALES CHARGE) SECURITIES INDEX(1) INDEX(2) ------------------- -------------------- --------------- 2/14/02 $ 9,525 $10,000 $10,000 2/02 9,574 10,056 10,054 5/02 9,692 10,212 10,183 8/02 9,961 10,496 10,475 11/02 10,080 10,603 10,553 2/03 10,282 10,812 10,755 5/03 10,364 10,867 10,802 8/03 10,239 10,757 10,718 11/03 10,406 10,925 10,860 2/04 10,667 11,205 11,101 5/04 10,496 11,029 10,945 8/04 10,813 11,399 11,229 11/04 10,869 11,480 11,280 2/05 10,933 11,569 11,341 5/05 11,103 11,766 11,523 8/05 11,170 11,853 11,607 11/05 11,075 11,747 11,506 2/06 11,242 11,956 11,646 5/06 11,116 11,833 11,548 8/06 11,434 12,201 11,871 11/06 11,682 12,517 12,175 2/07 11,785 12,644 12,279 5/07 11,817 12,667 12,277 8/07 11,931 12,848 12,391 11/07 12,219 13,306 12,727 2/08 12,351 13,592 12,916 5/08 12,326 13,608 12,813 8/08 12,091 13,751 12,789 11/08 11,831 14,217 12,785 2/09 12,013 14,565 13,096 5/09 12,425 14,857 13,479 8/09 12,980 15,097 13,900 11/09 13,503 15,525 14,354 2/10 13,630 15,537 14,449 5/10 14,106 15,811 14,728
(1) The Barclays Capital U.S. Mortgage-Backed Securities Index, an unmanaged index, includes 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and Federal National Mortgage Association (FNMA). The index reflects reinvestment of all distributions and changes in market prices. (2) The Lipper U.S. Mortgage Funds Index includes the 10 largest U.S. mortgage funds tracked by Lipper Inc. The index's returns include net reinvested dividends. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 13 FUND EXPENSES EXAMPLE ---------------------------------------------------------- (UNAUDITED) As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments; and (2) ongoing costs, which may include management fees; distribution and service (Rule 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 May 31, 2010. ACTUAL EXPENSES The first line of the table provides information about actual account values and actual expenses for each class. 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 actual expense ratio for each class and an assumed rate of return of 5% per year before expenses, which is not the actual return for the class. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads). Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. -------------------------------------------------------------------------------- 14 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT --------------------------------------------------------------------------------
BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED DEC. 1, 2009 MAY 31, 2010 THE PERIOD(a) EXPENSE RATIO ------------------------------------------------------------------------------------------ Class A ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,042.70 $4.46 .89% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,020.16 $4.41 .89% ------------------------------------------------------------------------------------------ Class B ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,038.70 $8.25 1.65% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,016.43 $8.16 1.65% ------------------------------------------------------------------------------------------ Class C ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,038.80 $8.20 1.64% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,016.48 $8.11 1.64% ------------------------------------------------------------------------------------------ Class I ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,042.80 $2.35(c) .47% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,022.22 $2.33(c) .47% ------------------------------------------------------------------------------------------ Class R4 ------------------------------------------------------------------------------------------ Actual(b) $1,000 $1,041.30 $3.85(c) .77% ------------------------------------------------------------------------------------------ Hypothetical (5% return before expenses) $1,000 $1,020.74 $3.82(c) .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 179/365 (to reflect the one-half year period). (b) Based on the actual return for the six months ended May 31, 2010: +4.27% for Class A, +3.87% for Class B, +3.88% for Class C, +4.28% for Class I and +4.13% for Class R4. (c) Columbia Management Investment Advisers, LLC (formerly RiverSource Investments, LLC) (the Investment Manager) and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until July 31, 2011, unless sooner terminated at the sole discretion of the Fund's Board, such that net expenses (excluding fees and expenses of acquired funds), will not exceed 0.48% for Class I and 0.78% for Class R4. Any amounts waived will not be reimbursed by the Fund. This change is effective Aug. 1, 2010. Had this change been in place for the entire six month period ended May 31, 2010, the actual expenses paid would have been $2.40 for Class I and $3.90 for Class R4; the hypothetical expenses paid would have been $2.38 for Class I and $3.86 for Class R4. The actual and hypothetical expenses paid for Class A, Class B and Class C would have been the same as those expenses presented in the table above. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 15 PORTFOLIO OF INVESTMENTS ------------------------------------------------------- MAY 31, 2010 (Percentages represent value of investments compared to net assets) INVESTMENTS IN SECURITIES
BONDS (123.8%) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) ASSET-BACKED (5.7%) Bear Stearns Asset-Backed Securities Trust Series 2006-HE9 Class 1A1 11-25-36 0.393% $354,167(h) $339,729 Carrington Mortgage Loan Trust Series 2006-RFC1 Class A2 05-25-36 0.443 1,047,810(h) 1,028,475 Chrysler Financial Lease Trust Series 2010-A Class C 09-16-13 4.490 1,000,000(d) 997,286 Citigroup Mortgage Loan Trust, Inc. Series 2006-WFH4 Class A2 11-25-36 0.443 484,417(h) 472,189 Countrywide Asset-Backed Certificates Series 2005-3 Class AF3 08-25-35 4.823 109,816 108,669 Countrywide Asset-Backed Certificates Series 2005-SD1 Class A1C 05-25-35 0.733 892,650(d,h) 855,758 Credit-Based Asset Servicing and Securitization LLC Series 2006-CB5 Class A2 06-25-36 0.453 87,296(h) 86,501 First Franklin Mortgage Loan Asset-Backed Certificates Series 2005-FFH3 Class 2A3 09-25-35 0.753 16,299(h) 16,210 Jefferies & Co., Inc. CMO Series 2010-R1 Class 2A1 11-26-36 0.428 1,076,519(d,h) 1,022,693 Mastr Asset-Backed Securities Trust Series 2005-FRE1 Class A4 10-25-35 0.593 380,881(h) 363,283 RAAC Series Series 2006-SP4 Class A1 11-25-36 0.443 404,487(h) 398,265 RBSSP Resecuritization Trust CMO Series 2009-9 Class 10A1 10-26-36 0.445 1,578,451(d,h) 1,562,657 Renaissance Home Equity Loan Trust Series 2005-2 Class AF3 08-25-35 4.499 1,701,789(h) 1,626,153 Renaissance Home Equity Loan Trust Series 2006-4 Class AF1 01-25-37 5.545 78,860 77,771 Renaissance Home Equity Loan Trust Series 2007-2 Class M4 06-25-37 6.313 195,000(g) 7,091 Renaissance Home Equity Loan Trust Series 2007-2 Class M5 06-25-37 6.660 130,000(g) 3,289 Renaissance Home Equity Loan Trust Series 2007-2 Class M6 06-25-37 7.006 190,000(g) 2,761 Residential Asset Mortgage Products, Inc. Series 2006-RS4 Class A2 07-25-36 0.453 70,664 70,368 Soundview Home Equity Loan Trust Series 2006-OPT3 Class 2A3 06-25-36 0.513 1,000,000(h) 760,508 Structured Asset Investment Loan Trust Series 2005-9 Class A5 11-25-35 0.573 884,506(h) 855,336 Structured Asset Securities Corp. CMO Series 2006-NC1 Class A6 05-25-36 0.393 221,211(h) 212,039 Structured Asset Securities Corp. Series 2007-BC1 Class A2 02-25-37 0.393 1,259,672(h) 1,188,420 Structured Asset Securities Corp. Series 2007-WF2 Class A2 08-25-37 1.043 1,333,829(h) 1,314,423 --------------- Total 13,369,874 ------------------------------------------------------------------------------------- COMMERCIAL MORTGAGE-BACKED (5.6%)(e) Bear Stearns Commercial Mortgage Securities Series 2004-PWR6 Class A4 11-11-41 4.521 3,100,000 3,164,927
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 16 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT --------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) COMMERCIAL MORTGAGE-BACKED (CONT.) Federal Home Loan Mortgage Corp. Multifamily Structured Pass-Through Certificates Series K001 Class A2 04-25-16 5.651% $1,536,459 $1,706,347 GS Mortgage Securities Corp. H Series 2007-EOP Class J 03-06-20 1.135 1,000,000(d,h) 845,668 GS Mortgage Securities Corp. H Series 2007-GG10 Class A4 08-10-45 5.805 6,000,000 5,582,255 JP Morgan Chase Commercial Mortgage Securities Corp. Series 2007-CB20 Class A4 02-12-51 5.794 1,000,000 990,893 Morgan Stanley Reremic Trust Series 2009-GG10 Class A4A 08-12-45 5.805 1,000,000(d) 1,002,432 --------------- Total 13,292,522 ------------------------------------------------------------------------------------- RESIDENTIAL MORTGAGE-BACKED (112.5%)(e) Banc of America Funding Corp. CMO Series 2009-R7A Class 4A2 08-26-35 5.368 1,033,717(b,d,h) 310,115 08-26-35 5.368 4,377,258(d,h) 1,313,178 Banc of America Mortgage Securities, Inc. CMO Series 2005-E Class 2A5 06-25-35 3.861 439,343(h) 437,280 ChaseFlex Trust CMO Series 2005-2 Class 2A2 06-25-35 6.500 475,414 398,308 Citigroup Mortgage Loan Trust, Inc. CMO Series 2009-9 Class 1A3 04-25-34 4.902 2,489,441(d,h) 634,807 Countrywide Alternative Loan Trust CMO I.O. Series 2007-8CB Class A13 05-25-37 32.110 1,341,252(f) 150,243 Countrywide Alternative Loan Trust CMO Series 2007-OH3 Class A3 09-25-47 0.843 1,653,750(h) 202,060 Countrywide Home Loan Mortgage Pass-Through Trust CMO Series 2003-18 Class A3 07-25-33 5.250 99,323 99,409 Countrywide Home Loan Mortgage Pass-Through Trust CMO Series 2005-R2 Class 2A1 06-25-35 7.000 347,182(d) 321,045 Credit Suisse Mortgage Capital Certificates CMO Series 2009-12R Class 14A1 11-27-35 5.500 1,988,297(d) 2,017,391 Credit Suisse Mortgage Capital Certificates CMO Series 2009-12R Class 30A1 12-27-36 5.300 227,273(d) 219,053 Credit Suisse Mortgage Capital Certificates CMO Series 2009-2R Class 1A16 09-26-34 3.084 17,500,000(d,h) 5,586,843 Federal Home Loan Mortgage Corp. 06-01-40 5.000 1,050,000(b) 1,099,219 06-01-40 5.500 3,700,000(b) 3,940,500 06-01-40 6.000 4,200,000(b) 4,526,810 06-01-40 6.500 800,000(b) 871,375 Federal Home Loan Mortgage Corp. #555300 10-01-17 8.000 135,512 142,981 Federal Home Loan Mortgage Corp. #A10892 07-01-33 6.000 361,204 396,626 Federal Home Loan Mortgage Corp. #A15111 10-01-33 6.000 610,181 666,289 Federal Home Loan Mortgage Corp. #A21059 04-01-34 6.500 429,748 472,975 Federal Home Loan Mortgage Corp. #A25174 08-01-34 6.500 233,222 256,681 Federal Home Loan Mortgage Corp. #A90176 12-01-39 5.000 4,892,369 5,138,369 Federal Home Loan Mortgage Corp. #C53098 06-01-31 8.000 203,966 233,459 Federal Home Loan Mortgage Corp. #C53878 12-01-30 5.500 677,118 726,111 Federal Home Loan Mortgage Corp. #C69665 08-01-32 6.500 1,445,691 1,598,336 Federal Home Loan Mortgage Corp. #C79930 06-01-33 5.500 891,403 955,542 Federal Home Loan Mortgage Corp. #D95232 03-01-22 6.500 208,687 230,010 Federal Home Loan Mortgage Corp. #D95371 04-01-22 6.500 243,518 269,074 Federal Home Loan Mortgage Corp. #E81240 06-01-15 7.500 362,836 391,105
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 17 PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) RESIDENTIAL MORTGAGE-BACKED (CONT.) Federal Home Loan Mortgage Corp. #E88036 02-01-17 6.500% $621,272 $674,183 Federal Home Loan Mortgage Corp. #E88468 12-01-16 6.500 172,451 189,160 Federal Home Loan Mortgage Corp. #E89232 04-01-17 7.000 291,572 317,079 Federal Home Loan Mortgage Corp. #E92454 11-01-17 5.000 864,041 927,908 Federal Home Loan Mortgage Corp. #E99684 10-01-18 5.000 242,990 261,723 Federal Home Loan Mortgage Corp. #G01169 01-01-30 5.500 891,868 956,519 Federal Home Loan Mortgage Corp. #G01535 04-01-33 6.000 1,420,087 1,574,913 Federal Home Loan Mortgage Corp. #G02757 06-01-36 5.000 5,931,315 6,238,306 Federal Home Loan Mortgage Corp. #G03419 07-01-37 6.000 3,357,223 3,626,063 Federal Home Loan Mortgage Corp. #G12101 11-01-18 5.000 486,040 521,966 Federal Home Loan Mortgage Corp. CMO I.O. Series 2136 Class S 03-15-29 18.890 3,323,747(f) 495,304 Federal Home Loan Mortgage Corp. CMO I.O. Series 2471 Class SI 03-15-32 29.180 178,731(f) 24,741 Federal Home Loan Mortgage Corp. CMO I.O. Series 2639 Class UI 03-15-22 10.090 700,137(f) 75,259 Federal Home Loan Mortgage Corp. CMO I.O. Series 2795 Class IY 07-15-17 99.990 139,735(f) 3,007 Federal Home Loan Mortgage Corp. CMO I.O. Series 2817 Class SA 06-15-32 20.000 475,704(f) 34,133 Federal Home Loan Mortgage Corp. CMO I.O. Series 2824 Class EI 09-15-20 0.000 764,020(f) 15,425 Federal Home Loan Mortgage Corp. CMO I.O. Series 3155 Class PS 05-15-36 16.470 1,329,782(f) 178,443 Federal Home Loan Mortgage Corp. CMO I.O. Series 3588 Class WI 10-15-12 21.127 12,170,128(f) 1,014,908 Federal Home Loan Mortgage Corp. CMO I.O. Series 3600 Class DI 01-15-13 6.466 9,501,347(f) 260,059 Federal Home Loan Mortgage Corp. CMO I.O. Series 3630 Class AI 03-15-17 0.000 3,013,373(f) 150,669 Federal National Mortgage Association 06-01-25 4.500 7,000,000(b) 7,322,658 06-01-25 5.000 390,000(b) 414,131 06-01-25 5.500 12,000,000(b) 12,885,001 06-01-40 4.500 7,500,000(b) 7,652,340 06-01-40 5.000 7,500,000(b) 7,850,394 06-01-40 5.500 7,000,000(b) 7,467,033 06-01-40 6.000 6,000,000(b) 6,462,186 06-01-40 6.500 5,100,000(b) 5,547,841 Federal National Mortgage Association #190353 08-01-34 5.000 1,156,333 1,216,852 Federal National Mortgage Association #252409 03-01-29 6.500 927,753 1,031,012 Federal National Mortgage Association #254793 07-01-33 5.000 1,498,117 1,578,397 Federal National Mortgage Association #254916 09-01-23 5.500 1,201,756 1,297,497 Federal National Mortgage Association #313470 08-01-10 7.500 1,812 1,826 Federal National Mortgage Association #323362 11-01-28 6.000 1,614,866 1,777,235 Federal National Mortgage Association #323715 05-01-29 6.000 293,129 322,602 Federal National Mortgage Association #344909 04-01-25 8.000 434,766 487,655 Federal National Mortgage Association #357514 03-01-34 5.500 1,659,640 1,779,437 Federal National Mortgage Association #483691 12-01-28 7.000 936,112 1,062,904 Federal National Mortgage Association #487757 09-01-28 7.500 544,308 611,293 Federal National Mortgage Association #514704 01-01-29 6.000 192,171 211,493
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 18 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT --------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) RESIDENTIAL MORTGAGE-BACKED (CONT.) Federal National Mortgage Association #545008 06-01-31 7.000% $1,113,490 $1,260,271 Federal National Mortgage Association #545339 11-01-31 6.500 158,455 177,269 Federal National Mortgage Association #545818 07-01-17 6.000 1,402,400 1,525,466 Federal National Mortgage Association #555458 05-01-33 5.500 1,284,455 1,373,969 Federal National Mortgage Association #555528 04-01-33 6.000 1,254,891 1,377,145 Federal National Mortgage Association #555734 07-01-23 5.000 514,478 547,312 Federal National Mortgage Association #581418 06-01-31 7.000 644,355 723,146 Federal National Mortgage Association #583088 06-01-29 6.000 2,151,133 2,363,130 Federal National Mortgage Association #592270 01-01-32 6.500 448,083 504,796 Federal National Mortgage Association #596505 08-01-16 6.500 83,432 88,513 Federal National Mortgage Association #601416 11-01-31 6.500 194,489 217,582 Federal National Mortgage Association #624979 01-01-32 6.000 446,806 495,793 Federal National Mortgage Association #626670 03-01-32 7.000 453,665 516,780 Federal National Mortgage Association #627426 03-01-17 6.500 316,330 344,310 Federal National Mortgage Association #630992 09-01-31 7.000 1,383,721 1,573,060 Federal National Mortgage Association #630993 09-01-31 7.500 1,220,915 1,375,292 Federal National Mortgage Association #631388 05-01-32 6.500 1,105,938 1,245,936 Federal National Mortgage Association #632856 03-01-17 6.000 301,834 327,721 Federal National Mortgage Association #633674 06-01-32 6.500 783,114 881,792 Federal National Mortgage Association #635231 04-01-32 7.000 71,767 81,035 Federal National Mortgage Association #635908 04-01-32 6.500 774,944 873,037 Federal National Mortgage Association #636812 04-01-32 7.000 89,673 101,884 Federal National Mortgage Association #640200 10-01-31 9.500 99,286 114,522 Federal National Mortgage Association #640207 03-01-17 7.000 31,754 33,362 Federal National Mortgage Association #640208 04-01-17 7.500 35,595 36,958 Federal National Mortgage Association #644805 05-01-32 7.000 806,553 916,185 Federal National Mortgage Association #645053 05-01-32 7.000 346,393 388,564 Federal National Mortgage Association #646189 05-01-32 6.500 333,820(i) 370,267 Federal National Mortgage Association #654071 09-01-22 6.500 412,758 459,556 Federal National Mortgage Association #654685 11-01-22 6.000 456,852 503,270 Federal National Mortgage Association #655635 08-01-32 6.500 518,373 583,994 Federal National Mortgage Association #656514 09-01-17 6.500 712,291 775,403 Federal National Mortgage Association #660186 11-01-32 6.000 1,780,233 1,984,784 Federal National Mortgage Association #665752 09-01-32 6.500 683,008 757,579 Federal National Mortgage Association #667011 11-01-17 5.000 702,525(b) 754,014 Federal National Mortgage Association #667302 01-01-33 7.000 478,107 543,325 Federal National Mortgage Association #670382 09-01-32 6.000 742,785 815,149 Federal National Mortgage Association #676683 12-01-32 6.000 702,184 770,592 Federal National Mortgage Association #677089 01-01-33 5.500 361,567(i) 387,666 Federal National Mortgage Association #677294 01-01-33 6.000 876,243(i) 961,608 Federal National Mortgage Association #681080 02-01-18 5.000 483,149 518,560 Federal National Mortgage Association #684585 02-01-33 5.500 1,035,202 1,117,695
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 19 PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) RESIDENTIAL MORTGAGE-BACKED (CONT.) Federal National Mortgage Association #684853 03-01-33 6.500% $206,953 $230,579 Federal National Mortgage Association #688002 03-01-33 5.500 1,020,366 1,104,856 Federal National Mortgage Association #689026 05-01-33 5.500 290,588 313,909 Federal National Mortgage Association #689093 07-01-28 5.500 613,480 660,639 Federal National Mortgage Association #694628 04-01-33 5.500 1,549,122 1,681,155 Federal National Mortgage Association #694795 04-01-33 5.500 1,817,305 1,967,103 Federal National Mortgage Association #697145 03-01-23 5.500 605,158 648,379 Federal National Mortgage Association #699424 04-01-33 5.500 1,208,414 1,311,420 Federal National Mortgage Association #701101 04-01-33 6.000 1,344,575 1,473,885 Federal National Mortgage Association #704610 06-01-33 5.500 1,556,086 1,668,408 Federal National Mortgage Association #705655 05-01-33 5.000 529,228 557,588 Federal National Mortgage Association #708503 05-01-33 6.000 252,702 280,267 Federal National Mortgage Association #708504 05-01-33 6.000 382,876 424,859 Federal National Mortgage Association #710780 05-01-33 6.000 164,665 180,501 Federal National Mortgage Association #711206 05-01-33 5.500 790,923 848,014 Federal National Mortgage Association #711239 07-01-33 5.500 435,286 466,706 Federal National Mortgage Association #711501 05-01-33 5.500 579,488 628,578 Federal National Mortgage Association #723771 08-01-28 5.500 677,376 729,445 Federal National Mortgage Association #725017 12-01-33 5.500 2,153,209 2,338,178 Federal National Mortgage Association #725232 03-01-34 5.000 1,217,454 1,282,694 Federal National Mortgage Association #725424 04-01-34 5.500 3,026,879 3,245,367 Federal National Mortgage Association #725684 05-01-18 6.000 439,818 477,105 Federal National Mortgage Association #726940 08-01-23 5.500 938,999 1,011,583 Federal National Mortgage Association #730153 08-01-33 5.500 464,125 497,627 Federal National Mortgage Association #733367 08-01-23 5.500 709,978 765,289 Federal National Mortgage Association #735212 12-01-34 5.000 6,511,123 6,851,899 Federal National Mortgage Association #743524 11-01-33 5.000 1,493,687 1,573,730 Federal National Mortgage Association #743579 11-01-33 5.500 1,009,050 1,081,886 Federal National Mortgage Association #747339 10-01-23 5.500 859,052 925,830 Federal National Mortgage Association #753507 12-01-18 5.000 624,036 673,339 Federal National Mortgage Association #759342 01-01-34 6.500 285,058 315,783 Federal National Mortgage Association #770403 04-01-34 5.000 1,163,436 1,224,327 Federal National Mortgage Association #776962 04-01-29 5.000 1,010,306 1,067,540 Federal National Mortgage Association #779676 06-01-34 5.000 1,776,238 1,869,202 Federal National Mortgage Association #793622 09-01-34 5.500 4,980,431 5,335,262 Federal National Mortgage Association #797232 09-01-34 5.500 3,273,472 3,506,690 Federal National Mortgage Association #845109 05-01-36 6.000 3,999,614 4,324,270 Federal National Mortgage Association #886020 07-01-36 6.500 698,640 763,651 Federal National Mortgage Association #886291 07-01-36 7.000 503,464 558,094 Federal National Mortgage Association #888414 11-01-35 5.000 2,902,461 3,048,926 Federal National Mortgage Association #889620 08-01-37 5.500 2,767,691 2,959,686 Federal National Mortgage Association #928870 11-01-37 8.500 113,891 127,698
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- 20 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT --------------------------------------------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) RESIDENTIAL MORTGAGE-BACKED (CONT.) Federal National Mortgage Association #932624 03-01-40 4.500% $10,795,897 $11,036,275 Federal National Mortgage Association #933966 07-01-23 6.000 1,815,662 1,959,134 Federal National Mortgage Association #941285 06-01-37 6.000 3,514,925 3,855,936 Federal National Mortgage Association #960606 10-01-36 5.500 2,957,044 3,190,050 Federal National Mortgage Association #986196 07-01-23 5.000 5,301,815 5,638,204 Federal National Mortgage Association #AD4319 04-01-40 4.500 7,482,879 7,647,152 Federal National Mortgage Association CMO I.O. Series 2003-119 Class GI 12-25-33 5.440 636,624(f) 127,882 Federal National Mortgage Association CMO I.O. Series 2003-63 Class IP 07-25-33 0.000 1,330,214(f) 276,498 Federal National Mortgage Association CMO I.O. Series 2003-71 Class IM 12-25-31 5.340 322,651(f) 39,169 Federal National Mortgage Association CMO I.O. Series 2004-31 Class SM 05-25-34 15.179 3,507,276(f) 518,381 Federal National Mortgage Association CMO I.O. Series 2004-84 Class GI 12-25-22 20.000 110,123(f) 7,362 Federal National Mortgage Association CMO I.O. Series 2005-70 Class YJ 08-25-35 0.000 1,341,645(f) 121,736 Federal National Mortgage Association CMO I.O. Series 2007-22 Class JS 03-25-37 21.830 1,022,423(f) 131,183 Government National Mortgage Association 06-01-40 5.000 2,000,000(b) 2,107,812 Government National Mortgage Association #518371 02-15-30 7.000 114,590 129,776 Government National Mortgage Association #528344 03-15-30 7.000 110,567 125,221 Government National Mortgage Association #556293 12-15-31 6.500 267,266 297,605 Government National Mortgage Association #583182 02-15-32 6.500 457,776 507,166 Government National Mortgage Association #595256 12-15-32 6.000 253,959 278,990 Government National Mortgage Association #619613 09-15-33 5.000 920,756 979,364 Government National Mortgage Association #727847 03-15-40 5.000 3,112,494 3,289,213 Government National Mortgage Association #743790 05-15-40 5.000 1,057,925 1,117,991 Government National Mortgage Association #743793 05-15-40 5.000 1,001,141 1,057,983 GSR Mortgage Loan Trust CMO Series 2005-5F Class 2A3 06-25-35 5.500 856,659 868,915 Indymac Index Mortgage Loan Trust CMO I.O. Series 2005-AR8 Class AX1 04-25-35 0.000 4,902,377(c,f) -- Indymac Index Mortgage Loan Trust CMO I.O. Series 2006-AR25 Class 3A3 09-25-36 20.000 8,856,057(f) 95,112 Jefferies & Co., Inc. CMO Series 2009-R6 Class 4A2 04-26-35 4.869 5,125,699(d) 1,262,203 JP Morgan Mortgage Trust CMO Series 2004-S2 Class 4A5 11-25-34 6.000 771,808 667,343 JP Morgan Reremic CMO Series 2009-3 Class 1A2 02-26-35 2.867 1,449,242(d,h) 534,987 MASTR Alternative Loans Trust CMO Series 2004-7 Class 8A1 08-25-19 5.000 243,895 231,916 MASTR Alternative Loans Trust CMO Series 2004-8 Class 7A1 09-25-19 5.000 367,460 349,259 Prime Mortgage Trust CMO Series 2005-1 Class 2A1 09-25-34 5.000 406,209(d) 412,261 Structured Asset Mortgage Investments, Inc. CMO Series 2006-AR7 Class A8 08-25-36 0.413 423,483(h) 422,412 Thornburg Mortgage Securities Trust CMO I.O. Series 2006-5 Class AX 10-25-46 24.576 7,266,910(f) 333,436
See accompanying Notes to Portfolio of Investments. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 21 PORTFOLIO OF INVESTMENTS (continued) -------------------------------------------
BONDS (CONTINUED) COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) RESIDENTIAL MORTGAGE-BACKED (CONT.) WaMu Mortgage Pass-Through Certificates CMO Series 2004-AR9 Class A6 08-25-34 2.950% $322,096(h) $320,185 Wells Fargo Mortgage-Backed Securities Trust CMO Series 2003-O Class 1A11 01-25-34 4.670 545,260(h) 549,782 Wells Fargo Mortgage-Backed Securities Trust CMO Series 2004-F Class A3 06-25-34 4.719 617,998(h) 620,396 Wells Fargo Mortgage-Backed Securities Trust CMO Series 2004-Q Class 1A2 09-25-34 4.870 1,308,062(h) 1,304,927 Wells Fargo Mortgage-Backed Securities Trust CMO Series 2005-14 Class 2A1 12-25-35 5.500 432,428 405,268 Wells Fargo Mortgage-Backed Securities Trust CMO Series 2005-AR16 Class 4A6 10-25-35 4.034 1,230,077(h) 1,211,313 Wells Fargo Mortgage-Backed Securities Trust CMO Series 2007-8 Class 2A7 07-25-37 6.000 1,406,766 1,368,443 --------------- Total 265,296,770 ------------------------------------------------------------------------------------- TOTAL BONDS (Cost: $278,833,916) $291,955,625 -------------------------------------------------------------------------------------
MONEY MARKET FUND (5.0%) SHARES VALUE(a) RiverSource Short-Term Cash Fund, 0.218% 11,866,911(j) $11,866,911 ------------------------------------------------------------------------------------- TOTAL MONEY MARKET FUND (Cost: $11,866,911) $11,866,911 ------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $290,700,827)(k) $303,822,536 =====================================================================================
INVESTMENTS IN DERIVATIVES FUTURES CONTRACTS OUTSTANDING AT MAY 31, 2010
NUMBER OF UNREALIZED CONTRACTS NOTIONAL EXPIRATION APPRECIATION CONTRACT DESCRIPTION LONG (SHORT) MARKET VALUE DATE (DEPRECIATION) ------------------------------------------------------------------------------------ U.S. Treasury Note, 2- year 5 $1,090,703 Oct. 2010 $305 U.S. Treasury Note, 5- year (107) (12,565,812) July 2010 (162,161) U.S. Treasury Note, 5- year (163) (19,017,516) Oct. 2010 (38,447) U.S. Treasury Note, 10- year 87 10,429,125 Sept. 2010 (22,560) ------------------------------------------------------------------------------------ Total $(222,863) ------------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS CMO -- Collateralized Mortgage Obligation I.O -- Interest Only
(a) Securities are valued by using policies described in Note 2 to the financial statements. (b) At May 31, 2010, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $69,507,935. See Note 2 to the financial statements. (c) Negligible market value. -------------------------------------------------------------------------------- 22 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- 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. This security may be resold in transactions exempt from registration, normally to qualified institutional buyers. At May 31, 2010, the value of these securities amounted to $18,898,377 or 8.02% of net assets. (e) 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. (f) Interest only represents securities that entitle holders to receive only interest payments on the underlying mortgages. The yield to maturity of an interest only security is extremely sensitive to the rate of principal payments on the underlying mortgage assets. A rapid (slow) rate of principal repayments may have an adverse (positive) effect on yield to maturity. The principal amount shown is the notional amount of the underlying mortgages. The interest rate disclosed represents yield based upon the estimated timing and amount of future cash flows at May 31, 2010. (g) This position is in bankruptcy. (h) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on May 31, 2010. (i) At May 31, 2010, investments in securities included securities valued at $150,839 that were partially pledged as collateral to cover initial margin deposits on open interest rate futures contracts. (j) Affiliated Money Market Fund -- See Note 8 to the financial statements. The rate shown is the seven-day current annualized yield at May 31, 2010. (k) At May 31, 2010, the cost of securities for federal income tax purposes was $295,897,102 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $11,222,232 Unrealized depreciation (3,296,798) ----------------------------------------------------------- Net unrealized appreciation $7,925,434 -----------------------------------------------------------
-------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 23 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------- 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 -------------------------------------------------------------------------------- 24 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- 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 May 31, 2010:
FAIR VALUE AT MAY 31, 2010 ---------------------------------------------------------------- LEVEL 1 LEVEL 2 QUOTED PRICES OTHER LEVEL 3 IN ACTIVE SIGNIFICANT SIGNIFICANT MARKETS FOR OBSERVABLE UNOBSERVABLE DESCRIPTION(A) IDENTICAL ASSETS INPUTS INPUTS TOTAL --------------------------------------------------------------------------------------------- Bonds Asset-Backed Securities $-- $12,347,181 $1,022,693 $13,369,874 Commercial Mortgage- Backed Securities -- 13,292,522 -- 13,292,522 Residential Mortgage- Backed Securities -- 261,527,145 3,766,084 265,293,229 --------------------------------------------------------------------------------------------- Total Bonds -- 287,166,848 4,788,777 291,955,625 --------------------------------------------------------------------------------------------- Other Affiliated Money Market Fund(b) 11,866,911 -- -- 11,866,911 --------------------------------------------------------------------------------------------- Total Other 11,866,911 -- -- 11,866,911 --------------------------------------------------------------------------------------------- Investments in Securities 11,866,911 287,166,848 4,788,777 303,822,536 Other Financial Instruments(c) (222,863) -- -- (222,863) --------------------------------------------------------------------------------------------- Total $11,644,048 $287,166,848 $4,788,777 $303,599,673 ---------------------------------------------------------------------------------------------
(a) See the Portfolio of Investments for all investment classifications not indicated in the table. (b) Money market fund that is a sweep investment for cash balances in the Fund at May 31, 2010. (c) 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. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 25 PORTFOLIO OF INVESTMENTS (continued) ------------------------------------------- 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 $- $8,941,664 $8,941,664 Accrued discounts/premiums 7,317 50,063 57,380 Realized gain (loss) - (1,776,927) (1,776,927) Change in unrealized appreciation (depreciation)* 4,482 4,231,911 4,236,393 Net purchases (sales) 1,010,894 (3,475,084) (2,464,190) Transfers in and/or out of Level 3 - (4,205,543) (4,205,543) --------------------------------------------------------------------------------- Balance as of May 31, 2010 $1,022,693 $3,766,084 $4,788,777 ---------------------------------------------------------------------------------
* Change in unrealized appreciation (depreciation) relating to securities held at May 31, 2010 was $865,064, which is comprised of Asset-Backed Securities of $4,482 and Residential Mortgage-Backed Securities of $860,582. 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 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 800.221.2450. -------------------------------------------------------------------------------- 26 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT STATEMENT OF ASSETS AND LIABILITIES -------------------------------------------- MAY 31, 2010
ASSETS Investments in securities, at value Unaffiliated issuers (identified cost $278,833,916) $291,955,625 Affiliated money market fund (identified cost $11,866,911) 11,866,911 ------------------------------------------------------------------------------- Total investments in securities (identified cost $290,700,827) 303,822,536 Cash 790,416 Capital shares receivable 213,752 Dividends and accrued interest receivable 1,232,177 Receivable for investment securities sold 17,971,160 ------------------------------------------------------------------------------- Total assets 324,030,041 ------------------------------------------------------------------------------- LIABILITIES Dividends payable to shareholders 215,794 Capital shares payable 366,456 Payable for investment securities purchased 17,957,238 Payable for securities purchased on a forward-commitment basis 69,507,935 Variation margin payable on futures contracts 76,265 Accrued investment management services fees 3,099 Accrued distribution fees 20,482 Accrued transfer agency fees 574 Accrued administrative services fees 452 Accrued plan administration services fees 17 Other accrued expenses 94,289 ------------------------------------------------------------------------------- Total liabilities 88,242,601 ------------------------------------------------------------------------------- Net assets applicable to outstanding capital stock $235,787,440 ------------------------------------------------------------------------------- REPRESENTED BY Capital stock -- $.01 par value $ 457,564 Additional paid-in capital 238,947,995 Undistributed net investment income 772,657 Accumulated net realized gain (loss) (17,289,622) Unrealized appreciation (depreciation) on investments 12,898,846 ------------------------------------------------------------------------------- Total -- representing net assets applicable to outstanding capital stock $235,787,440 -------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE NET ASSETS SHARES OUTSTANDING NET ASSET VALUE PER SHARE Class A $ 80,371,258 15,588,925 $5.16(1) Class B $ 17,619,412 3,416,007 $5.16 Class C $ 5,217,051 1,011,314 $5.16 Class I $132,494,594 25,723,583 $5.15 Class R4 $ 85,125 16,536 $5.15 ------------------------------------------------------------------------------
(1) The maximum offering price per share for Class A is $5.42. The offering price is calculated by dividing the net asset value by 1.0 minus the maximum sales charge of 4.75%. The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 27 STATEMENT OF OPERATIONS -------------------------------------------------------- YEAR ENDED MAY 31, 2010
INVESTMENT INCOME Income: Interest $15,112,142 Income distributions from affiliated money market fund 20,680 ------------------------------------------------------------------------------ Total income 15,132,822 ------------------------------------------------------------------------------ Expenses: Investment management services fees 1,247,010 Distribution fees Class A 195,150 Class B 198,412 Class C 44,904 Transfer agency fees Class A 168,939 Class B 45,633 Class C 9,941 Class R4 37 Administrative services fees 181,856 Plan administration services fees -- Class R4 184 Compensation of board members 7,851 Custodian fees 25,560 Printing and postage 44,519 Registration fees 52,660 Professional fees 34,875 Other 16,458 ------------------------------------------------------------------------------ Total expenses 2,273,989 Expenses waived/reimbursed by the Investment Manager and its affiliates (438,001) ------------------------------------------------------------------------------ Total net expenses 1,835,988 ------------------------------------------------------------------------------ Investment income (loss) -- net 13,296,834 ------------------------------------------------------------------------------ REALIZED AND UNREALIZED GAIN (LOSS) -- NET Net realized gain (loss) on: Security transactions 6,151,500 Futures contracts (550,868) Options contracts written 9,872 ------------------------------------------------------------------------------ Net realized gain (loss) on investments 5,610,504 Net change in unrealized appreciation (depreciation) on investments 15,111,335 ------------------------------------------------------------------------------ Net gain (loss) on investments 20,721,839 ------------------------------------------------------------------------------ Net increase (decrease) in net assets resulting from operations $34,018,673 ------------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- 28 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT STATEMENTS OF CHANGES IN NET ASSETS --------------------------------------------
YEAR ENDED MAY 31, 2010 2009 OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ 13,296,834 $ 17,054,737 Net realized gain (loss) on investments 5,610,504 (18,382,125) Net change in unrealized appreciation (depreciation) on investments 15,111,335 2,926,890 ---------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 34,018,673 1,599,502 ---------------------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income Class A (3,655,773) (3,899,777) Class B (774,677) (1,013,132) Class C (176,588) (152,824) Class I (7,949,684) (11,827,943) Class R4 (3,511) (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 (12,560,233) (19,851,352) ----------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 29 STATEMENTS OF CHANGES IN NET ASSETS (continued) --------------------------------
YEAR ENDED MAY 31, 2010 2009 CAPITAL SHARE TRANSACTIONS Proceeds from sales Class A shares $ 21,150,672 $ 16,869,316 Class B shares 2,177,805 7,170,065 Class C shares 1,884,834 1,148,620 Class I shares 47,538,482 73,431,416 Class R4 shares 79,055 75,985 Reinvestment of distributions at net asset value Class A shares 3,233,010 4,107,536 Class B shares 701,020 1,103,090 Class C shares 159,138 167,436 Class I shares 7,904,537 13,610,360 Class R4 shares 2,968 161,216 Conversions from Class B to Class A Class A shares 2,163,974 3,005,081 Class B shares (2,163,974) (3,005,081) Payments for redemptions Class A shares (31,160,763) (36,083,563) Class B shares (8,833,451) (13,405,861) Class C shares (1,262,692) (1,228,211) Class I shares (158,033,789) (75,837,805) Class R4 shares (66,388) (41,377,098) ---------------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions (114,525,562) (50,087,498) ---------------------------------------------------------------------------------------------- Total increase (decrease) in net assets (93,067,122) (68,339,348) Net assets at beginning of year 328,854,562 397,193,910 ---------------------------------------------------------------------------------------------- Net assets at end of year $ 235,787,440 $328,854,562 ---------------------------------------------------------------------------------------------- Undistributed net investment income $ 772,657 $ 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. -------------------------------------------------------------------------------- 30 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 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 -------------------------------------------------- PER SHARE DATA 2010 2009 2008 2007 2006 Net asset value, beginning of period $4.77 $4.99 $5.00 $4.92 $5.12 ----------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .25 .21 .23 .22 .21 Net gains (losses) (both realized and unrealized) .37 (.18) (.02) .09 (.20) ----------------------------------------------------------------------------------------------------- Total from investment operations .62 .03 .21 .31 .01 ----------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.23) (.21) (.22) (.23) (.20) Distributions from realized gains -- (.04) -- -- (.01) ----------------------------------------------------------------------------------------------------- Total distributions (.23) (.25) (.22) (.23) (.21) ----------------------------------------------------------------------------------------------------- Net asset value, end of period $5.16 $4.77 $4.99 $5.00 $4.92 ----------------------------------------------------------------------------------------------------- TOTAL RETURN 13.32% .79% 4.31% 6.30% .12% ----------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(a) Gross expenses prior to expense waiver/reimbursement 1.09% 1.08% 1.09% 1.17% 1.19% ----------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(b) .89% .89% .89% .89% .89% ----------------------------------------------------------------------------------------------------- Net investment income (loss) 4.98% 4.51% 4.56% 4.45% 4.08% ----------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $80 $79 $95 $111 $126 ----------------------------------------------------------------------------------------------------- Portfolio turnover rate(c) 519% 431% 354% 306% 178% -----------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Highlights. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 31 FINANCIAL HIGHLIGHTS (continued) -----------------------------------------------
YEAR ENDED MAY 31, CLASS B -------------------------------------------------- PER SHARE DATA 2010 2009 2008 2007 2006 Net asset value, beginning of period $4.77 $4.99 $5.00 $4.93 $5.12 ----------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .21 .18 .19 .19 .17 Net gains (losses) (both realized and unrealized) .37 (.18) (.01) .07 (.19) ----------------------------------------------------------------------------------------------------- Total from investment operations .58 -- .18 .26 (.02) ----------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.19) (.18) (.19) (.19) (.16) Distributions from realized gains -- (.04) -- -- (.01) ----------------------------------------------------------------------------------------------------- Total distributions (.19) (.22) (.19) (.19) (.17) ----------------------------------------------------------------------------------------------------- Net asset value, end of period $5.16 $4.77 $4.99 $5.00 $4.93 ----------------------------------------------------------------------------------------------------- TOTAL RETURN 12.46% .03% 3.53% 5.30% (.42%) ----------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(a) Gross expenses prior to expense waiver/reimbursement 1.85% 1.84% 1.86% 1.94% 1.95% ----------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(b) 1.65% 1.65% 1.65% 1.64% 1.64% ----------------------------------------------------------------------------------------------------- Net investment income (loss) 4.18% 3.75% 3.79% 3.70% 3.31% ----------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $18 $24 $34 $44 $64 ----------------------------------------------------------------------------------------------------- Portfolio turnover rate(c) 519% 431% 354% 306% 178% -----------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Highlights. -------------------------------------------------------------------------------- 32 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT --------------------------------------------------------------------------------
YEAR ENDED MAY 31, CLASS C -------------------------------------------------- PER SHARE DATA 2010 2009 2008 2007 2006 Net asset value, beginning of period $4.77 $4.99 $5.00 $4.93 $5.12 ----------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .21 .18 .19 .19 .17 Net gains (losses) (both realized and unrealized) .37 (.18) (.01) .07 (.19) ----------------------------------------------------------------------------------------------------- Total from investment operations .58 -- .18 .26 (.02) ----------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.19) (.18) (.19) (.19) (.16) Distributions from realized gains -- (.04) -- -- (.01) ----------------------------------------------------------------------------------------------------- Total distributions (.19) (.22) (.19) (.19) (.17) ----------------------------------------------------------------------------------------------------- Net asset value, end of period $5.16 $4.77 $4.99 $5.00 $4.93 ----------------------------------------------------------------------------------------------------- TOTAL RETURN 12.47% .03% 3.53% 5.30% (.43%) ----------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(a) Gross expenses prior to expense waiver/reimbursement 1.85% 1.83% 1.85% 1.94% 1.95% ----------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(b) 1.65% 1.65% 1.65% 1.64% 1.64% ----------------------------------------------------------------------------------------------------- Net investment income (loss) 4.27% 3.76% 3.80% 3.70% 3.31% ----------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $5 $4 $4 $5 $7 ----------------------------------------------------------------------------------------------------- Portfolio turnover rate(c) 519% 431% 354% 306% 178% -----------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Highlights. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 33 FINANCIAL HIGHLIGHTS (continued) -----------------------------------------------
YEAR ENDED MAY 31, CLASS I -------------------------------------------------- PER SHARE DATA 2010 2009 2008 2007 2006 Net asset value, beginning of period $4.77 $4.99 $5.00 $4.92 $5.11 ----------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .26 .23 .25 .24 .22 Net gains (losses) (both realized and unrealized) .37 (.18) (.02) .08 (.19) ----------------------------------------------------------------------------------------------------- Total from investment operations .63 .05 .23 .32 .03 ----------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.25) (.23) (.24) (.24) (.21) Distributions from realized gains -- (.04) -- -- (.01) ----------------------------------------------------------------------------------------------------- Total distributions (.25) (.27) (.24) (.24) (.22) ----------------------------------------------------------------------------------------------------- Net asset value, end of period $5.15 $4.77 $4.99 $5.00 $4.92 ----------------------------------------------------------------------------------------------------- TOTAL RETURN 13.58% 1.21% 4.74% 6.68% .59% ----------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(a) Gross expenses prior to expense waiver/reimbursement .62% .61% .63% .63% .73% ----------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(b) .47% .48% .48% .54% .54% ----------------------------------------------------------------------------------------------------- Net investment income (loss) 5.33% 4.93% 4.97% 4.90% 4.99% ----------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $132 $222 $222 $207 $6 ----------------------------------------------------------------------------------------------------- Portfolio turnover rate(c) 519% 431% 354% 306% 178% -----------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Highlights. -------------------------------------------------------------------------------- 34 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT --------------------------------------------------------------------------------
YEAR ENDED MAY 31, CLASS R4 -------------------------------------------------- PER SHARE DATA 2010 2009 2008 2007 2006 Net asset value, beginning of period $4.77 $4.99 $5.00 $4.92 $5.11 ----------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .25 .23 .23 .23 .21 Net gains (losses) (both realized and unrealized) .37 (.10) (.01) .08 (.19) ----------------------------------------------------------------------------------------------------- Total from investment operations .62 .13 .22 .31 .02 ----------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.24) (.31) (.23) (.23) (.20) Distributions from realized gains -- (.04) -- -- (.01) ----------------------------------------------------------------------------------------------------- Total distributions (.24) (.35) (.23) (.23) (.21) ----------------------------------------------------------------------------------------------------- Net asset value, end of period $5.15 $4.77 $4.99 $5.00 $4.92 ----------------------------------------------------------------------------------------------------- TOTAL RETURN 13.25% 2.82% 4.46% 6.51% .49% ----------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS(a) Gross expenses prior to expense waiver/reimbursement .93% .89% .93% .99% 1.04% ----------------------------------------------------------------------------------------------------- Net expenses after expense waiver/reimbursement(b) .77% .70% .75% .71% .71% ----------------------------------------------------------------------------------------------------- Net investment income (loss) 5.09% 4.38% 4.69% 4.63% 4.40% ----------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA Net assets, end of period (in millions) $-- $-- $42 $40 $35 ----------------------------------------------------------------------------------------------------- Portfolio turnover rate(c) 519% 431% 354% 306% 178% -----------------------------------------------------------------------------------------------------
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) The Investment Manager and its affiliates agreed to waive/reimburse certain fees and expenses (excluding fees and expenses of acquired funds). (c) Includes mortgage dollar rolls. If mortgage dollar roll transactions were excluded, the portfolio turnover would have been 246% and 162% for the years ended May 31, 2010 and 2009, respectively. The accompanying Notes to Financial Statements are an integral part of this statement. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 35 NOTES TO FINANCIAL STATEMENTS -------------------------------------------------- 1. ORGANIZATION RiverSource U.S. Government Mortgage Fund (the Fund) is a series of RiverSource Government Income Series, Inc. (the Corporation) and is registered under the Investment Company Act of 1940, as amended (the 1940 Act), as a diversified, open-end management investment company. The Corporation has 10 billion authorized shares of capital stock that can be allocated among the separate series as designated by the Corporation'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 May 31, 2010, Columbia Management Investment Advisers, LLC (formerly RiverSource Investments, LLC) (the Investment Manager) and affiliated funds-of- funds owned 100% of Class I shares. At May 31, 2010, the Investment Manager, RiverSource Life Insurance Company and affiliated funds-of-funds owned approximately 56% 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. -------------------------------------------------------------------------------- 36 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- 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 an 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 from the primary exchange. 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 market value on the 61st day before maturity. Short-term securities maturing in -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 37 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- 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 May 31, 2010, the Fund has outstanding when-issued securities of $67,722,492 and other forward-commitments of $1,785,443. The Fund also enters into transactions to sell purchase commitments to third parties at current market values and concurrently acquires other purchase commitments for similar securities at later dates. As an inducement for the Fund to "roll over" its purchase commitments, the Fund receives negotiated amounts in the form of reductions of the purchase price of the commitment. The Fund records the incremental difference between the forward purchase and sale of each forward roll as realized gain or loss. Losses may arise due to changes in the value of the securities or if a counterparty does not perform under the terms of the agreement. If a counterparty files for bankruptcy or becomes insolvent, the Fund's right to repurchase or sell securities may be limited. FORWARD SALE COMMITMENTS The Fund may enter into forward sale commitments to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. Proceeds of forward sale commitments are not received until the contractual settlement date. During the time a forward sale commitment is outstanding, equivalent deliverable securities, or an offsetting forward purchase commitment deliverable on or before the sale commitment date, are used to satisfy the commitment. Unsettled forward sale commitments are valued at the current market value of the underlying securities, generally according to the procedures described under "Valuation of securities" above. The forward sale commitment is "marked-to- market" daily and the change in market value is recorded by the Fund as an unrealized gain or loss. If the forward sale commitment is closed through the acquisition of an offsetting purchase commitment, the Fund realizes a gain or loss. If the Fund delivers securities under the commitment, the Fund realizes a gain or a loss from the sale of the securities based upon the market price established at the date the commitment was entered into. At May 31, 2010, the Fund had no outstanding forward sale commitments. -------------------------------------------------------------------------------- 38 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- 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 tax returns filed for the last three years. RECENT ACCOUNTING PRONOUNCEMENT On Jan. 21, 2010, the FASB issued an Accounting Standards Update (the amendment), Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements, which provides guidance on how investment assets and liabilities are to be valued and disclosed. Specifically, the amendment requires reporting entities to disclose the input and valuation techniques used to measure fair value for both recurring and non-recurring fair value measurements for Level 2 and Level 3 positions. The amendment also requires that transfers between all levels (including Level 1 and Level 2) be disclosed on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and the reason(s) for the transfer. Additionally purchases, sales, issuances and settlements must be disclosed on a gross basis in the Level 3 rollforward. The effective date of the amendment is for interim and annual periods beginning after Dec. 15, 2009, however, the requirement to provide the Level 3 activity for purchases, sales, issuances and settlements on a gross basis will be effective for interim and annual periods beginning after Dec. 15, 2010. At this time the Fund is evaluating the implications of the amendment and the impact to the financial statements. DIVIDENDS TO SHAREHOLDERS Dividends from net investment income, declared daily and payable monthly, when available, are reinvested in additional shares of the Fund at net asset value or payable in cash. Capital gains, when available, are distributed along with the last income dividend of the calendar year. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 39 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- OTHER Security transactions are accounted for on the date securities are purchased or sold. Dividend income, if any, is recognized on the ex-dividend date and interest income, including amortization of premium, market discount and original issue discount using the effective interest method, is accrued daily. 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 to mitigate certain investment risks, such as foreign currency exchange rate risk, interest rate risk, and credit risk. Investments in derivative instruments may expose the Fund to certain additional risks, including those detailed below. 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. -------------------------------------------------------------------------------- 40 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- OPTION TRANSACTIONS The Fund may buy and write options traded on any U.S. or foreign exchange, or in the over-the-counter (OTC) market to produce incremental earnings, protect gains, and facilitate buying and selling of securities for investments. The Fund may also buy and sell put and call options and write covered call options on portfolio securities. Options are contracts which entitle the holder to purchase or sell securities or other financial instruments at a specified price, or in the case of index options, to receive or pay the difference between the index value and the strike price of the index option. Completion of transactions for options traded in the OTC market depends upon the performance of the other party. Cash collateral may be collected or posted by the Fund to secure certain OTC options trades. Cash collateral held or posted by the Fund for such option trades must be returned to the counterparty or the Fund upon closure, exercise or expiration of the contract. Option contracts purchased are recorded as investments and options contracts written are recorded as liabilities of the Fund. Option contracts are valued daily at the closing prices on their primary exchanges and unrealized appreciation or depreciation is recorded. Option contracts, including OTC option contracts, with no readily available market value are valued using quotations obtained from independent brokers as of the close of the NYSE. The Fund will realize a gain or loss when the option transaction expires or is exercised. When options on debt securities or futures are exercised, the Fund will realize a gain or loss. When other options are exercised, the proceeds on sales for a written call option, the purchase cost for a written put option or the cost of a security for a purchased put or call option is adjusted by the amount of premium received or paid. The risk in buying an option is that the Fund pays a premium whether or not the option is exercised. The Fund also has the additional risk of being unable to enter into a closing transaction if a liquid secondary market does not exist. The risk in writing a call option is that the Fund gives up the opportunity for profit if the market price of the security increases. The risk in writing a put option is that the Fund may incur a loss if the market price of the security decreases and the option is exercised. The Fund's maximum payout in the case of written put option contracts represents the maximum potential amount of future payments (undiscounted) that the Fund could be required to make as a guarantor for written put options. The maximum payout amount may be offset by the subsequent sale, if any, of assets obtained upon the exercise of the put options by holders of the option contracts or proceeds received upon entering into the contracts. For OTC options contracts, the transaction is also subject to counterparty credit risk. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 41 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- 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. FAIR VALUES OF DERIVATIVE INSTRUMENTS AT MAY 31, 2010
ASSET DERIVATIVES LIABILITY DERIVATIVES ------------------------------- ------------------------------- STATEMENT OF ASSETS STATEMENT OF ASSETS RISK EXPOSURE AND LIABILITIES AND LIABILITIES CATEGORY LOCATION FAIR VALUE LOCATION FAIR VALUE ------------------------------------------------------------------------------------------- Net assets -- unrealiz- Interest rate ed depreciation on contracts N/A N/A investments $222,863* -------------------------------------------------------------------------------------------
* 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 MAY 31, 2010
AMOUNT OF REALIZED GAIN (LOSS) ON DERIVATIVES RECOGNIZED IN INCOME -------------------------------------------------------------------------- RISK EXPOSURE CATEGORY FUTURES OPTIONS TOTAL -------------------------------------------------------------------------- Interest rate contracts $(550,868) $9,872 $(540,996) --------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVES RECOGNIZED IN INCOME -------------------------------------------------------------------------- RISK EXPOSURE CATEGORY FUTURES OPTIONS TOTAL -------------------------------------------------------------------------- Interest rate contracts $(386,427) $-- $(386,427) --------------------------------------------------------------------------
VOLUME OF DERIVATIVE ACTIVITY FUTURES The gross notional amount of long and short contracts outstanding was $11.5 million and $31.6 million, respectively, at May 31, 2010. The monthly average gross notional amount for long and short contracts was $7.1 million and $28.7 million, respectively, for the year ended May 31, 2010. The fair value of such contracts on May 31, 2010 is set forth in the table above. -------------------------------------------------------------------------------- 42 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- OPTIONS At May 31, 2010, the Fund had no outstanding options contracts. During the year ended May 31, 2010, the Fund entered into, and subsequently closed, 199 options contracts, of which, the average gross notional amount was $117,500. 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 management fee for the year ended May 31, 2010 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., 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 year ended May 31, 2010 was 0.07% of the Fund's average daily net assets. OTHER FEES Other expenses are for, among other things, certain expenses of the Fund or the Board including: Fund boardroom and office expense, employee compensation, employee health and retirement benefits, and certain other expenses. Payment of these Fund and Board expenses is facilitated by a company providing limited administrative services to the Fund and the Board. For the year ended May 31, 2010, other expenses paid to this company were $1,322. 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 RiverSource, Seligman and Threadneedle 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, Columbia Management Investment Services Corp. (formerly RiverSource Service Corporation) (the Transfer Agent) maintains Fund shareholder accounts and records and provides Fund shareholder -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 43 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- 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. 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 Columbia Management Investment Distributors, Inc. (formerly 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 $909,000 and $46,000 for Class B and Class C shares, respectively. These amounts are based on the most recent information available as of Jan. 31, 2010, 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 $104,356 for Class A, $4,978 for Class B and $349 for Class C for the year ended May 31, 2010. -------------------------------------------------------------------------------- 44 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- EXPENSES WAIVED/REIMBURSED BY THE INVESTMENT MANAGER AND ITS AFFILIATES For the year ended May 31, 2010, 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............................................ $36,237 Class B............................................ 9,919 Class C............................................ 2,085
The management fees waived/reimbursed at the Fund level were $389,760. The Investment Manager and its affiliates have contractually agreed to waive certain fees and expenses until July 31, 2010, unless sooner terminated at the sole 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
Effective Aug. 1, 2010, the Investment Manager and its affiliates have contractually agreed to waive certain fees and expenses until July 31, 2011, unless sooner terminated at the sole 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.............................................. 1.64 Class I.............................................. 0.48 Class R4............................................. 0.78
* 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 -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 45 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- 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 $1,674,006,897 and $1,788,692,264, respectively, for the year ended May 31, 2010. 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:
YEAR ENDED MAY 31, 2010 2009* ------------------------------------------------------------------- CLASS A Sold 4,220,355 3,541,015 Converted from Class B** 445,069 607,087 Reinvested distributions 646,902 866,721 Redeemed (6,266,469) (7,573,975) ------------------------------------------------------------------- Net increase (decrease) (954,143) (2,559,152) ------------------------------------------------------------------- CLASS B Sold 438,011 1,504,114 Reinvested distributions 140,388 232,629 Converted to Class A** (445,069) (607,087) Redeemed (1,782,051) (2,806,248) ------------------------------------------------------------------- Net increase (decrease) (1,648,721) (1,676,592) ------------------------------------------------------------------- CLASS C Sold 376,318 240,131 Reinvested distributions 31,772 35,345 Redeemed (253,514) (256,741) ------------------------------------------------------------------- Net increase (decrease) 154,576 18,735 ------------------------------------------------------------------- CLASS I Sold 9,430,678 15,087,681 Reinvested distributions 1,590,429 2,874,393 Redeemed (31,772,779) (15,906,305) ------------------------------------------------------------------- Net increase (decrease) (20,751,672) 2,055,769 ------------------------------------------------------------------- CLASS R4 Sold 15,627 22,129 Reinvested distributions 593 32,732 Redeemed (13,111) (8,546,518) ------------------------------------------------------------------- Net increase (decrease) 3,109 (8,491,657) -------------------------------------------------------------------
* Certain line items from the prior year have been renamed to conform to the current year presentation. -------------------------------------------------------------------------------- 46 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- ** Automatic conversion of Class B shares to Class A shares based on the original purchase date. 7. OPTIONS CONTRACTS WRITTEN Contracts and premiums associated with options contracts written during the year ended May 31, 2010, are as follows:
PUTS CONTRACTS PREMIUMS ----------------------------------------------------------------- Balance May 31, 2009 -- $ -- Opened 199 50,773 Expired (199) (50,773) ----------------------------------------------------------------- Balance May 31, 2010 -- $ -- -----------------------------------------------------------------
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 RiverSource, Seligman and Threadneedle funds and other institutional clients of the Investment Manager. The cost of the Fund's purchases and proceeds from sales of shares of RiverSource Short-Term Cash Fund aggregated $256,488,758 and $253,242,308, respectively, for the year ended May 31, 2010. The income distributions received with respect to the Fund's investment in RiverSource Short-Term Cash Fund can be found in the Statement of Operations and the Fund's invested balance in RiverSource Short-Term Cash Fund at May 31, 2010, 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 RiverSource, Seligman and Threadneedle 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 (i) 1.25% per annum plus (ii) if one-month LIBOR exceeds the federal funds rate, the amount -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 47 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- 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 RiverSource, Seligman and Threadneedle 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 year ended May 31, 2010. 10. 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 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. The tax character of distributions paid for the years indicated is as follows:
YEAR ENDED MAY 31, 2010 2010 2009 ------------------------------------------------------------------ Ordinary income $12,560,233 $17,183,865 Long-term capital gain -- 2,667,487
At May 31, 2010, the components of distributable earnings on a tax basis are as follows: Undistributed ordinary income................... $ 1,340,032 Undistributed accumulated long-term gain........ $ -- Accumulated realized loss....................... $(12,077,144) Unrealized appreciation (depreciation).......... $ 7,334,787
For federal income tax purposes, the Fund had a capital loss carry-over of $12,077,144 at May 31, 2010, that if not offset by capital gains will expire as follows:
2017 2018 $410,120 $11,667,024
-------------------------------------------------------------------------------- 48 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- 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. 11. 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 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. 12. INFORMATION REGARDING PENDING AND SETTLED LEGAL PROCEEDINGS In June 2004, an action captioned John E. Gallus et al. v. American Express Financial Corp. and American Express Financial Advisors Inc. was filed in the United States District Court for the District of Arizona. The plaintiffs allege that they are investors in several American Express Company (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 (the Supreme Court), asking the Supreme Court to stay the District Court proceedings while the 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. On March 30, 2010, the Supreme Court issued its ruling in Jones v. Harris Associates, and on April 5, 2010, the Supreme Court vacated the Eighth Circuit's decision in the Gallus case and remanded the case to the Eighth Circuit for further consideration in light of the Supreme Court's decision in Jones v. Harris Associates. On June 4, 2010, the Eighth Circuit -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 49 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------- remanded the Gallus case to the District Court for further consideration in light of the Supreme Court's decision in Jones v. Harris Associates. 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, Seligman and Threadneedle funds' Boards of Directors/Trustees. Ameriprise Financial and certain of its affiliates have historically been involved in a number of legal, arbitration and regulatory proceedings, including routine litigation, class actions, and governmental actions, concerning matters arising in connection with the conduct of their business activities. Ameriprise Financial believes that the Funds are not currently the subject of, and that neither Ameriprise Financial nor any of its affiliates are the subject of, any pending legal, arbitration or regulatory proceedings that are likely to have a material adverse effect on the Funds or the ability of Ameriprise Financial or its affiliates to perform under their contracts with the Funds. Ameriprise Financial is required to make 10-Q, 10-K and, as necessary, 8-K filings with the Securities and Exchange Commission on legal and regulatory matters that relate to Ameriprise Financial and its affiliates. Copies of these filings may be obtained by accessing the SEC website at www.sec.gov. There can be no assurance that these matters, or the adverse publicity associated with them, will not result in increased fund redemptions, reduced sale of fund shares or other adverse consequences to the Funds. Further, although we believe proceedings are not likely to have a material adverse effect on the Funds or the ability of Ameriprise Financial or its affiliates to perform under their contracts with the Funds, these proceedings are subject to uncertainties and, as such, we are unable to estimate the possible loss or range of loss that may result. An adverse outcome in one or more of these proceedings could result in adverse judgments, settlements, fines, penalties or other relief that could have a material adverse effect on the consolidated financial condition or results of operations of Ameriprise Financial. -------------------------------------------------------------------------------- 50 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ------------------------ TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND: We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of RiverSource U.S. Government Mortgage Fund (the Fund) (one of the portfolios constituting the RiverSource Government Income Series, Inc.) as of May 31, 2010, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the three years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights of the Fund for the periods presented through May 31, 2007, were audited by other auditors whose report dated July 20, 2007, expressed an unqualified opinion on those financial highlights. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of May 31, 2010, by correspondence with the custodian and brokers, or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 51 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (continued) ------------ In our opinion, the financial statements and financial highlights audited by us as referred to above present fairly, in all material respects, the financial position of RiverSource U.S. Government Mortgage Fund of the RiverSource Government Income Series, Inc. at May 31, 2010, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the three years in the period then ended, in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLP Minneapolis, Minnesota July 21, 2010 -------------------------------------------------------------------------------- 52 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT FEDERAL INCOME TAX INFORMATION ------------------------------------------------- (UNAUDITED) The Fund is required by the Internal Revenue Code of 1986 to tell its shareholders about the tax treatment of the dividends it pays during its fiscal year. The dividends listed below are reported to you on Form 1099-DIV, Dividends and Distributions. Shareholders should consult a tax advisor on how to report distributions for state and local tax purposes. Fiscal year ended May 31, 2010
INCOME DISTRIBUTIONS - the Fund designates the following tax attributes for distributions: Qualified Dividend Income for individuals.................... 0.00% Dividends Received Deduction for corporations................ 0.00% U.S. Government Obligations.................................. 0.02%
The Fund designates as distributions of long-term gains, to the extent necessary to fully distribute such capital gains, earnings and profits distributed to shareholders on the redemption of shares. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 53 BOARD MEMBERS AND OFFICERS ----------------------------------------------------- Shareholders elect a Board that oversees the Fund's operations. The Board appoints officers who are responsible for day-to-day business decisions based on policies set by the Board. The following is a list of the Fund's Board members. Each Board member oversees 152 RiverSource, Seligman and Threadneedle funds. Under current Board policy, members generally serve until the next regular shareholders' meeting, until he or she reaches the mandatory retirement age established by the Board, or the fifteenth anniversary of the first Board meeting they attended as members of the Board. INDEPENDENT BOARD MEMBERS*
OTHER PRESENT OR NAME, POSITION HELD PAST DIRECTORSHIPS ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION (WITHIN PAST 5 AGE LENGTH OF SERVICE DURING PAST FIVE YEARS YEARS) ------------------------------------------------------------------------------------------------------------------------------ Kathleen Blatz Board member since Chief Justice, Minnesota Supreme Court, 1998-2006; None 901 S. Marquette Ave. 1/11/06 Attorney Minneapolis, MN 55402 Age 55 ------------------------------------------------------------------------------------------------------------------------------ Arne H. Carlson Board member since Chair, RiverSource and Threadneedle Funds, 1999-2006; None 901 S. Marquette Ave. 1/5/99 former Governor of Minnesota Minneapolis, MN 55402 Age 75 ------------------------------------------------------------------------------------------------------------------------------ Pamela G. Carlton Board member since President, Springboard -- Partners in Cross Cultural None 901 S. Marquette Ave. 11/11/07 Leadership (consulting company) Minneapolis, MN 55402 Age 55 ------------------------------------------------------------------------------------------------------------------------------ Patricia M. Flynn Board member since Trustee Professor of Economics and Management, Bentley None 901 S. Marquette Ave. 11/1/04 University; former Dean, McCallum Graduate School of Minneapolis, MN 55402 Business, Bentley University Age 59 ------------------------------------------------------------------------------------------------------------------------------ Anne P. Jones Board member since Attorney and Consultant None 901 S. Marquette Ave. 3/1/85 Minneapolis, MN 55402 Age 75 ------------------------------------------------------------------------------------------------------------------------------ Jeffrey Laikind, CFA Board member since Former Managing Director, Shikiar Asset Management American Progressive 901 S. Marquette Ave. 11/1/05 Insurance; Hapoalim Minneapolis, MN 55402 Securities USA, Inc. Age 74 ------------------------------------------------------------------------------------------------------------------------------ Stephen R. Lewis, Jr. Chair of the Board President Emeritus and Professor of Economics, Carleton Valmont Industries, 901 S. Marquette Ave. since 1/1/07, College Inc. (manufactures Minneapolis, MN 55402 Board member irrigation systems) Age 71 since 1/1/02 ------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 54 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- INDEPENDENT BOARD MEMBERS (CONTINUED)
OTHER PRESENT OR NAME, POSITION HELD PAST DIRECTORSHIPS ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION (WITHIN PAST 5 AGE LENGTH OF SERVICE DURING PAST FIVE YEARS YEARS) ------------------------------------------------------------------------------------------------------------------------------ John F. Maher Board member Retired President and Chief Executive Officer and None 901 S. Marquette Ave. since 11/7/08 former Director, Great Western Financial Corporation Minneapolis, MN 55402 (financial services), 1986-1997 Age 67 ------------------------------------------------------------------------------------------------------------------------------ Catherine James Paglia Board member since Director, Enterprise Asset Management, Inc. (private None 901 S. Marquette Ave. 11/1/04 real estate and asset management company) Minneapolis, MN 55402 Age 57 ------------------------------------------------------------------------------------------------------------------------------ Leroy C. Richie Board member Counsel, Lewis & Munday, P.C. since 1987; Vice Digital Ally, Inc. 901 S. Marquette Ave. since 11/7/08 President and General Counsel, Automotive Legal (digital imaging); Minneapolis, MN 55402 Affairs, Chrysler Corporation, 1990-1997 Infinity, Inc. (oil Age 68 and gas exploration and production); OGE Energy Corp. (energy and energy services) ------------------------------------------------------------------------------------------------------------------------------ Alison Taunton-Rigby Board member since Chief Executive Officer and Director, RiboNovix, Inc. Idera 901 S. Marquette Ave. 11/13/02 since 2003 (biotechnology); former President, Aquila Pharmaceuticals, Minneapolis, MN 55402 Biopharmaceuticals Inc. Age 66 (biotechnology); Healthways, Inc. (health management programs) ------------------------------------------------------------------------------------------------------------------------------
* Mr. Laikind may be deemed, as a technical matter, an interested person of RiverSource International Managers Series, Inc. and RiverSource Variable Series Trust because he serves as an independent director of a broker-dealer that has executed transactions for subadvisers to certain of the funds. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 55 BOARD MEMBERS AND OFFICERS (continued) ----------------------------------------- BOARD MEMBER AFFILIATED WITH THE INVESTMENT MANAGER*
OTHER PRESENT OR NAME, POSITION HELD PAST DIRECTORSHIPS ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION (WITHIN PAST 5 AGE LENGTH OF SERVICE DURING PAST FIVE YEARS YEARS) ------------------------------------------------------------------------------------------------------------------------------ William F. Truscott Board member Chairman of the Board, Columbia Management Investment None 53600 Ameriprise since 11/7/01, Advisers, LLC (formerly RiverSource Investments, LLC) Financial Center Vice President since since May 2010 (previously President, Chairman of the Minneapolis, MN 55474 2002 Board and Chief Investment Officer, 2001-April 2010); Age 49 Senior Vice President, Atlantic Funds, Columbia Funds and Nations Funds since May 2010; Chief Executive Officer, U.S. Asset Management & President -- Annuities, Ameriprise Financial, Inc. since May 2010 (previously President -- U.S. Asset Management and Chief Investment Officer, 2005-April 2010 and Senior Vice President -- Chief Investment Officer, 2001-2005); Director, President and Chief Executive Officer, Ameriprise Certificate Company since 2006; Director, Columbia Management Investment Distributors, Inc. (formerly RiverSource Fund Distributors, Inc.) since May 2010 (previously Chairman of the Board and Chief Executive Officer, 2008-April 2010); Chairman of the Board and Chief Executive Officer, RiverSource Distributors, Inc. since 2006; former Chief Investment Officer and Managing Director, Zurich Scudder Investments ------------------------------------------------------------------------------------------------------------------------------
* Interested person (as defined under the 1940 Act) by reason of being an officer, director, security holder and/or employee of the investment manager or Ameriprise Financial. The SAI has additional information about the Fund's Board members and is available, without charge, upon request by calling 800.221.2450; contacting your financial intermediary; or visiting riversource.com/funds. -------------------------------------------------------------------------------- 56 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- The Board has appointed officers who are responsible for day-to-day business decisions based on policies it has established. The officers serve at the pleasure of the Board. In addition to Mr. Truscott, who is Vice President, the Fund's other officers are: FUND OFFICERS
NAME, POSITION HELD ADDRESS, WITH FUNDS AND PRINCIPAL OCCUPATION AGE LENGTH OF SERVICE DURING PAST FIVE YEARS -------------------------------------------------------------------------------------------------------- J. Kevin Connaughton President since Senior Vice President and General Manager -- Mutual One Financial Center 5/1/10 Fund Products, Columbia Management Investment Advisers, Boston, MA 02111 LLC since May 2010; President, Columbia Funds since Age 46 2009 (previously Senior Vice President and Chief Financial Officer, June 2008 -- January 2009); President, Atlantic Funds and Nations Funds since 2009; Managing Director of Columbia Management Advisors, LLC, December 2004 -- April 2010; Treasurer, Columbia Funds, October 2003 -- May 2008; Treasurer, the Liberty Funds, Stein Roe Funds and Liberty All-Star Funds, December 2000 -- December 2006; Senior Vice President -- Columbia Management Advisors, LLC, April 2003 -- December 2004; President, Columbia Funds, Liberty Funds and Stein Roe Funds, February 2004 -- October 2004 -------------------------------------------------------------------------------------------------------- Amy K. Johnson Vice President since Senior Vice President and Chief Operating Officer, 5228 Ameriprise Financial 12/5/06 Columbia Management Investment Advisers, LLC (formerly Center Minneapolis, MN RiverSource Investments, LLC) since May 2010 55474 (previously Chief Administrative Officer, 2009 -- April Age 44 2010 and Vice President -- Asset Management and Trust Company Services, 2006-2009 and Vice President -- Operations and Compliance, 2004-2006); Senior Vice President, Atlantic Funds, Columbia Funds and Nations Funds since May 2010; Director of Product Development -- Mutual Funds, Ameriprise Financial, Inc., 2001-2004 -------------------------------------------------------------------------------------------------------- Jeffrey P. Fox Treasurer since Chief Financial Officer, Columbia Management Investment 105 Ameriprise 7/10/02 Distributors, Inc. (formerly RiverSource Fund Financial Center Distributors, Inc.) and of Seligman Data Corp. since Minneapolis, MN 55474 2008; Vice President -- Investment Accounting, Age 54 Ameriprise Financial, Inc. since 2002; Chief Financial Officer, RiverSource Distributors, Inc. since 2006 --------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 57 BOARD MEMBERS AND OFFICERS (continued) ----------------------------------------- FUND OFFICERS (CONTINUED)
NAME, POSITION HELD ADDRESS, WITH FUNDS AND PRINCIPAL OCCUPATION AGE LENGTH OF SERVICE DURING PAST FIVE YEARS -------------------------------------------------------------------------------------------------------- Scott R. Plummer Vice President, Chief Legal Officer and Assistant Secretary, Columbia 5228 Ameriprise Financial General Counsel and Management Investment Advisers, LLC (formerly Center Secretary since RiverSource Investments, LLC) since June 2005; Vice Minneapolis, MN 55474 12/5/06 President and Lead Chief Counsel -- Asset Management, Age 50 Ameriprise Financial, Inc. since May 2010 (previously Vice President and Chief Counsel -- Asset Management, 2005-April 2010 and Vice President -- Asset Management Compliance, 2004-2005); Senior Vice President, Secretary and Chief Legal Officer, Atlantic Funds, Columbia Funds and Nations Funds since May 2010; Vice President, Chief Counsel and Assistant Secretary, Columbia Management Investment Distributors, Inc. (formerly RiverSource Fund Distributors, Inc.) since 2008; Vice President, General Counsel and Secretary, Ameriprise Certificate Company since 2005; Chief Counsel, RiverSource Distributors, Inc. since 2006; Senior Vice President and Chief Compliance Officer, USBancorp Asset Management, 2002-2004 -------------------------------------------------------------------------------------------------------- Michael A. Jones Vice President since Director and President, Columbia Management Investment 100 Federal Street 5/1/10 Advisers, LLC since May 2010; President and Director, Boston, MA 02110 Columbia Management Investment Distributors, Inc. since Age 51 May 2010; Senior Vice President, Atlantic Funds, Columbia Funds and Nations Funds since May 2010; Manager, Chairman, Chief Executive Officer and President, Columbia Management Advisors, LLC, 2007 -- April 2010; Chief Executive Officer, President and Director, Columbia Management Distributors, Inc., 2006 -- April 2010; former Co-President and Senior Managing Director, Robeco Investment Management -------------------------------------------------------------------------------------------------------- Colin Moore Vice President since Chief Investment Officer, Columbia Management One Financial Center 5/1/10 Investment Advisers, LLC since May 2010; Senior Vice Boston, MA 02111 President, Atlantic Funds, Columbia Funds and Nations Age 52 Funds since May 2010; Manager, Managing Director and Chief Investment Officer, Columbia Management Advisors, LLC, 2007- April 2010; Head of Equities, Columbia Management Advisors, LLC, 2002-Sept. 2007 -------------------------------------------------------------------------------------------------------- Linda Wondrack Chief Compliance Vice President and Chief Compliance Officer, Columbia One Financial Center Officer since 5/1/10 Management Investment Advisers, LLC since May 2010; Boston, MA 02111 Chief Compliance Officer, Columbia Funds since 2007; Age 46 Senior Vice President and Chief Compliance Officer, Atlantic Funds and Nations Funds since 2007; Director (Columbia Management Group, LLC and Investment Product Group Compliance), Bank of America, June 2005 -- April 2010; Director of Corporate Compliance and Conflicts Officer, MFS Investment Management (investment management), August 2004 -- May 2005 --------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 58 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- FUND OFFICERS (CONTINUED)
NAME, POSITION HELD ADDRESS, WITH FUNDS AND PRINCIPAL OCCUPATION AGE LENGTH OF SERVICE DURING PAST FIVE YEARS -------------------------------------------------------------------------------------------------------- Neysa M. Alecu Money Laundering Vice President -- Compliance, Ameriprise Financial, 2934 Ameriprise Financial Prevention Officer Inc. since 2008; Anti-Money Laundering Officer and Center since 11/9/05 and Identity Theft Prevention Officer, Columbia Management Minneapolis, MN 55474 Identity Theft Investment Distributors, Inc. (formerly RiverSource Age 46 Prevention Officer Fund Distributors, Inc.) since 2008; Anti-Money since 2008 Laundering Officer, Ameriprise Financial, Inc. since 2005; Compliance Director, Ameriprise Financial, Inc., 2004-2008; --------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 59 APPROVAL OF INVESTMENT MANAGEMENT SERVICES AGREEMENT ---------------------------------------------------------------------- Columbia Management Investment Advisers, LLC ("Columbia Management" or the "investment manager"), formerly known as RiverSource Investments, LLC, a wholly- owned subsidiary of Ameriprise Financial, Inc. ("Ameriprise Financial"), serves as the investment manager to the Fund. Under an investment management services agreement (the "IMS Agreement"), Columbia Management provides investment advice and other services to the Fund and all RiverSource funds (collectively, the "Funds"). On an annual basis, the Fund's Board of Directors (the "Board"), including the independent Board members (the "Independent Directors"), considers renewal of the IMS Agreement. Columbia Management prepared detailed reports for the Board and its Contracts Committee in March and April 2010, including reports based on data provided by independent organizations and a comprehensive response to each item of information requested by independent legal counsel to the Independent Directors ("Independent Legal Counsel") in a letter to the investment manager, to assist the Board in making this determination. All of the materials presented in March and April 2010 were first supplied in draft form to designated representatives of the Independent Directors, i.e., Independent Legal Counsel, the Chair of the Board and the Chair of the Contracts Committee (including materials relating to the Fund's new expense cap), and the final materials were revised to reflect comments provided by these Board representatives. In addition, throughout the year, the Board (or its committees) reviews information prepared by Columbia Management addressing the services Columbia Management provides and Fund performance. The Board accords particular weight to the work, deliberations and conclusions of the Contracts Committee, the Investment Review Committee and the Compliance Committee in determining whether to continue the IMS Agreement. At the April 6-8, 2010 in-person Board meeting, Independent Legal Counsel reviewed with the Independent Directors various factors relevant to the Board's consideration of advisory agreements and the Board's legal responsibilities related to such consideration. Following an analysis and discussion of the factors identified below, the Board, including all of the Independent Directors, approved renewal of the IMS Agreement. Nature, Extent and Quality of Services Provided by Columbia Management: The Board analyzed various reports and presentations it had received detailing the services performed by Columbia Management, as well as its expertise, resources and capabilities. The Board specifically considered many developments during the past year concerning the services provided by Columbia Management, including, in particular, the continued investment in, and resources dedicated to, -------------------------------------------------------------------------------- 60 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- the Fund's operations, most notably, management's announcement of the massive investment made in the acquisition of the long-term asset management business of Columbia Management Group, LLC (the "Columbia Transaction") and the completed integration of J. & W. Seligman & Co. Incorporated, acquisitions which should continue to enhance investment capabilities and provide access to a greater depth of experienced portfolio managers in key categories. The Board noted, in particular, that upon the close of the Columbia Transaction, the investment manager will have grown to 10 investment offices (compared to 6 in 2009). In addition, the Board reviewed information concerning the investment manager's new Chief Investment Officer upon the close of the Columbia Transaction, including the application of his particular investment philosophy, which is intended to enhance the risk and portfolio management oversight of the entire fund family. Moreover, in connection with the Board's evaluation of the overall package of services provided by Columbia Management, the Board considered the quality of the administrative and transfer agency services provided by Columbia Management's affiliates to the Fund. The Board also reviewed the financial condition of Columbia Management and its affiliates, and each entity's ability to carry out its responsibilities under the IMS Agreement. Further, the Board considered Columbia Management's ability to retain key personnel in certain targeted areas and its expectations in this regard. The Board also discussed the acceptability of the terms of the IMS Agreement (including the relatively broad scope of services required to be performed by Columbia Management). The Board concluded that the services being performed under the IMS Agreement were of a reasonably high quality. Based on the foregoing, and based on other information received (both oral and written, including the information on investment performance referenced below) and other considerations, the Board concluded that Columbia Management and its affiliates were in a position to continue to provide a high quality and level of services to the Fund. Investment Performance: For purposes of evaluating the nature, extent and quality of services provided under the IMS Agreement, the Board carefully reviewed the investment performance of the Fund. In this regard, the Board considered detailed reports containing data prepared by an independent organization showing, for various periods, the performance of the Fund, the performance of a benchmark index, the percentage ranking of the Fund among its comparison group and the net assets of the Fund. The Board observed that the Fund's investment performance met expectations. -------------------------------------------------------------------------------- RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT 61 APPROVAL OF INVESTMENT MANAGEMENT SERVICES AGREEMENT (continued) ---------------------------------------------------------- Comparative Fees, Costs of Services Provided and the Profits Realized By Columbia Management and its Affiliates from their Relationships with the Fund: The Board reviewed comparative fees and the costs of services to be provided under the IMS Agreement. The Board members considered detailed comparative information set forth in an annual report on fees and expenses, including, among other things, data (prepared by an independent organization) showing a comparison of the Fund's expenses with median expenses paid by funds in its peer group, as well as data showing the Fund's contribution to Columbia Management's profitability. They also reviewed information in the report showing the fees charged by Columbia Management to other client accounts (with similar investment strategies to those of the Fund). The Board accorded particular weight to the notion that the level of fees should reflect a rational pricing model applied consistently across the various product lines in the Funds' family, while assuring that the overall fees for each fund (with few defined exceptions) are generally in line with the "pricing philosophy" (i.e., that the total expense ratio of each fund, with few exceptions, is at or below the median expense ratio of funds in the same comparison group). The Board took into account that the Fund's total expense ratio (after considering proposed expense caps/waivers) was slightly below the peer group's median expense ratio shown in the reports. Based on its review, the Board concluded that the Fund's management fee was fair and reasonable in light of the extent and quality of services that the Fund receives. The Board also considered various preliminary integration plans in connection with the Columbia Transaction which, if implemented, would impact the fee structures of various RiverSource Funds. The Board was satisfied with the principles underlying these plans, which, at their preliminary stage, are designed to achieve a rational, consistent pricing model across the combined fund families, as well as preserve the "pricing philosophy" of the Funds. The Board also considered the expected profitability of Columbia Management and its affiliates in connection with Columbia Management providing investment management services to the Fund. In this regard, the Board referred to a detailed profitability report, discussing the profitability to Columbia Management and Ameriprise Financial from managing and operating the Fund, including data showing comparative profitability over the past two years. In this regard, the Board observed slightly reduced profitability in 2009 vs. 2008. The Board also considered the services acquired by the investment manager through the use of commission dollars paid by the Funds on portfolio transactions. The Board noted that the fees paid by the Fund should permit the investment manager to offer -------------------------------------------------------------------------------- 62 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND -- 2010 ANNUAL REPORT -------------------------------------------------------------------------------- competitive compensation to its personnel, make necessary investments in its business and earn an appropriate profit. The Board concluded that profitability levels were reasonable. Economies of Scale to be Realized: The Board also considered the economies of scale that might be realized by Columbia Management as the Fund grows and took note of the extent to which Fund shareholders might also benefit from such growth. The Board considered that the IMS Agreement provides for lower fees as assets increase at pre-established breakpoints and concluded that the IMS Agreement satisfactorily provided for sharing these economies of scale. Based on the foregoing, the Board, including all of the Independent Directors, concluded that the investment management service fees were fair and reasonable in light of the extent and quality of services provided. In reaching this conclusion, no single factor was determinative. On April 8, 2010, the Board, including all of the Independent Directors, approved the renewal of the IMS Agreement for an additional annual period. 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 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 -- 2010 ANNUAL REPORT 63 RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND 734 Ameriprise Financial Center Minneapolis, MN 55474 RIVERSOURCE.COM/FUNDS This report must be accompanied or preceded by the Fund's current prospectus. RiverSource(R) mutual funds are distributed by Columbia Management Investment Distributors, Inc. (formerly known as RiverSource Fund Distributors, Inc.), member FINRA, and managed by Columbia Management Investment Advisers, LLC (formerly known as RiverSource Investments, LLC). (C)2010 Columbia Management Investment Advisers, LLC. All (COLUMBIA MANAGEMENT LOGO) rights reserved. S-6245 M (7/10)
Item 2. Code of Ethics. (a) The Registrant has adopted a code of ethics that applies to the Registrant's principal executive officer and principal financial officer. (b) During the period covered by this report, there were not any amendments to a provision of the code of ethics adopted in 2(a) above. (c) During the period covered by this report, there were no waivers, including any implicit waivers, from a provision of the code of ethics described in 2(a) above that relates to one or more of the items set forth in paragraph (b) of this item's instructions. Item 3. Audit Committee Financial Expert. The Registrant's board of directors has determined that independent directors Pamela G. Carlton, Jeffrey Laikind, John F. Maher and Anne P. Jones, each qualify as audit committee financial experts. Item 4. Principal Accountant Fees and Services (a) Audit Fees. The fees for the year ended May 31, to Ernst & Young LLP for professional services rendered for the audit of the annual financial statements for RiverSource Government Income Series, Inc. were as follows: 2010 - $52,346 2009 - $52,766 (b) Audit-Related Fees. The fees for the year ended May 31, to Ernst & Young LLP for additional professional services rendered related to the semiannual financial statement review, the 2010 transfer agent 17Ad-13 review and the registrant's 2009 security count pursuant to Rule 17f-2 for RiverSource Government Income Series, Inc. were as follows: 2010 - $1,378 2009 - $2,833 (c) Tax Fees. The fees for the year ended May 31, to Ernst & Young LLP for tax compliance related services rendered for RiverSource Government Income Series, Inc. were as follows: 2010 - $6,996 2009 - $8,514 (d) All Other Fees. The fees for the year ended May 31, to Ernst & Young LLP for additional professional services rendered for RiverSource Government Income Series, Inc. were as follows: 2010 - $0 2009 - $0 (e) (1) Audit Committee Pre-Approval Policy. Pursuant to Sarbanes-Oxley pre-approval requirements, all services to be performed by Ernst & Young LLP for the registrant and to the registrant's investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant must be pre-approved by the audit committee. (e) (2) 100% of the services performed for items (b) through (d) above during 2010 and 2009 were pre-approved by the audit committee. (f) Not applicable. (g) Non-Audit Fees. The fees for the year ended May 31, to Ernst & Young LLP by the registrant for non-audit fees and by the registrant's investment adviser, and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant were as follows: 2010 - $2,107,149 2009 - $587,353 (h) 100% of the services performed in item (g) above during 2010 and 2009 were pre-approved by the Ameriprise Financial Audit Committee and/or the RiverSource Mutual Funds Audit Committee. Item 5. Audit Committee of Listed Registrants. Not applicable. Item 6. Investments. (a) The registrant's "Schedule 1 - Investments in securities of unaffiliated issuers" (as set forth in 17 CFR 210.12-12) 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. Purchases 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. There were no material changes to the procedures by which shareholders may recommend nominees to the registrant's board of directors. Item 11. Controls and Procedures. (a) The registrant's principal executive officer and principal financial officer, based on their evaluation of the registrant's disclosure controls and procedures as of a date within 90 days of the filing of this report, have concluded that such controls and procedures are adequately designed to ensure that material information required to be disclosed by the registrant in Form N-CSR is accumulated and communicated to the registrant's management, including the principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. (b) There was no change in the registrant's internal control over financial reporting that occurred (the registrant's second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12. Exhibits. (a)(1) Code of ethics required to be disclosed under Item 2 of Form N-CSR, is attached as Exhibit 99.CODE ETH. (a)(2) Certifications pursuant to Rule 30a-2(a) under the Investment Company Act of 1940 (17 CFR 270.30a-2(a)) attached hereto as Exhibit 99.CERT. (a)(3) Not applicable. (b) Certification pursuant to Rule 30a-2(b) under the Investment Company Act of 1940 (17 CFR 270.30a-2(b)) attached hereto as Exhibit 99.906CERT. 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/ J. Kevin Connaughton ----------------------------------------- J. Kevin Connaughton President and Principal Executive Officer Date August 4, 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/ J. Kevin Connaughton ----------------------------------------- J. Kevin Connaughton President and Principal Executive Officer Date August 4, 2010 By /s/ Jeffrey P. Fox ----------------------------------------- Jeffrey P. Fox Treasurer and Principal Financial Officer Date August 4, 2010