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 811-2503
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AXP FIXED INCOME SERIES, INC.
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(Exact name of registrant as specified in charter)
50606 AXP Financial Center, Minneapolis, Minnesota 55474
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(Address of principal executive offices) (Zip code)
Leslie L. Ogg - 901 S. Marquette Avenue, Suite 2810, Minneapolis, MN 55402-3268
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(Name and address of agent for service)
Registrant's telephone number, including area code: (612) 330-9283
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Date of fiscal year end: 8/31
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Date of reporting period: 8/31
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Annual Report (logo)
RiverSource(SM)
Investments
RiverSource(SM)
Diversified Bond Fund
Annual Report for the
Period Ended Aug. 31, 2005
> RiverSource Diversified Bond Fund (formerly AXP(R) Diversified Bond Fund)
seeks to provide shareholders with a high level of current income while
conserving the value of the investment for the longest period of time.
Table of Contents
Fund Snapshot 3
Performance Summary 4
Questions & Answers
with Portfolio Management 5
The Fund's Long-term Performance 10
Investments in Securities 12
Financial Statements 25
Notes to Financial Statements 28
Report of Independent Registered
Public Accounting Firm 41
Federal Income Tax Information 42
Fund Expenses Example 45
Board Members and Officers 47
Approval of Investment Management
Services Agreement 50
Proxy Voting 52
[DALBAR LOGO]
American Express(R) Funds'* reports to shareholders have been awarded the
Communications Seal from Dalbar Inc., an independent financial services research
firm. The Seal recognizes communications demonstrating a level of excellence in
the industry.
* As of Oct. 1, 2005, the RiverSource brand replaced "American Express" as
the name of the American Express Funds.
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2 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Fund Snapshot AT AUG. 31, 2005
PORTFOLIO MANAGERS
Portfolio managers Since Years in industry
Jamie Jackson, CFA 6/03 17
Scott Kirby 2/03 19
Tom Murphy, CFA 2/03 19
Nicholas Pifer, CFA 2/03 15
Jennifer Ponce de Leon 2/03 16
FUND OBJECTIVE
For investors seeking a high level of current income while conserving the value
of the investment for the longest period of time.
Inception dates by class
A: 10/3/74 B: 3/20/95 C: 6/26/00 I: 3/4/04 Y: 3/20/95
Ticker symbols by class
A: INBNX B: ININX C: AXBCX I: -- Y: IDBYX
Total net assets $2.479 billion
Number of holdings 399
Weighted average life(1) 6.10 years
Effective duration(2) 3.8 years
Weighted average bond rating(3) AA+
STYLE MATRIX
Shading within the style matrix indicates areas in which the Fund generally
invests.
DURATION
SHORT INT. LONG
X HIGH
X MEDIUM QUALITY
X LOW
SECTOR COMPOSITION
Percentage of portfolio assets
(PIE CHART)
Mortgage-Backed 36.9%
Corporate Bonds* 21.6%
U.S. Government Obligations & Agencies 20.6%
Commercial
Mortgage-Backed 11.0%
Short-Term Securities** 4.2%
Asset-Backed 3.8%
Foreign Government 1.8%
Other 0.1%
* Includes 7.8% Financials, 5.2% Telecommunication, 3.2% Utilities, 2.0%
Consumer Discretionary, 1.4% Industrials, 0.7% Health Care, 0.5% Energy,
0.5% Materials and 0.3% Consumer Staples.
** Of the 4.2%, 0.7% is due to security lending activity and 3.5% is the
Fund's cash equivalent position.
CREDIT QUALITY SUMMARY
Percentage of bond portfolio assets
AAA bonds 76.2%
AA bonds 6.4
A bonds 5.8
BBB bonds 7.8
Non-investment grade bonds 3.8
Individual security ratings are based on information from Standard & Poor's
Corp. and Moody's Investors Service. If a rating is unavailable, the rating
is determined through an internal analysis, if appropriate. 0.3% of the
portfolio rating above was determined through internal analysis.
(1) Weighted average life measures a bond's maturity, which takes into
consideration the possibility that the issuer may call the bond before its
maturity date.
(2) Effective duration measures the sensitivity of a security's price to
parallel shifts in the yield curve (the graphical depiction of the levels
of interest rates from two years out to 30 years). Positive duration means
that as rates rise, the price decreases, and negative duration means that
as rates rise, the price increases.
(3) Weighted average bond rating represents the average credit quality of the
underlying bonds in the portfolio.
Investment products, including shares of mutual funds, involve investment risks
including possible loss of principal and fluctuation in value.
There are risks associated with an investment in a bond fund, including the
impact of interest rates 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.
Lower-rated bonds generally have more volatile prices and carry more risk to
principal and income than investment grade securities.
Fund holdings are subject to change.
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3 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Performance Summary
[BAR CHART]
PERFORMANCE COMPARISON
For the year ended Aug. 31, 2005
+4.38% +4.15% +4.38%
+4.38% = RiverSource Diversified Bond Fund Class A (excluding sales charge)
+4.15% = Lehman Brothers Aggregate Bond Index (unmanaged)
+4.38% = Lipper Intermediate Investment Grade Index
(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 calling (800) 862-7919 or visiting
www.riversource.com/investments.
The 4.75% sales charge applicable to Class A shares of the Fund is not reflected
in the bar chart. If reflected, returns would be lower than those shown. The
performance of other classes may vary from that shown because of differences in
expenses.
The indices do not reflect the effects of sales charges, expenses (excluding
Lipper) and taxes.
AVERAGE ANNUAL TOTAL RETURNS
Class A Class B Class C Class I Class Y
(Inception dates) (10/3/74) (3/20/95) (6/26/00) (3/4/04) (3/20/95)
After After
NAV(1) POP(2) NAV(1) CDSC(3) NAV(1) CDSC(4) NAV(5) NAV(6)
at Aug. 31, 2005
1 year +4.38% -0.58% +3.39% -1.61% +3.60% +2.60% +4.53% +4.34%
3 years +4.94% +3.25% +4.15% +2.91% +4.22% +4.22% N/A +5.11%
5 years +5.66% +4.64% +4.86% +4.53% +4.86% +4.86% N/A +5.83%
10 years +5.86% +5.34% +5.06% +5.06% N/A N/A N/A +6.01%
Since inception +9.41% +9.24% +5.74% +5.74% +5.20% +5.20% +4.00% +6.70%
at Sept. 30, 2005
1 year +2.88% -2.00% +2.11% -2.84% +2.12% +1.13% +3.24% +3.05%
3 years +4.32% +2.64% +3.53% +2.27% +3.60% +3.60% N/A +4.48%
5 years +5.39% +4.37% +4.60% +4.26% +4.60% +4.60% N/A +5.52%
10 years +5.61% +5.10% +4.81% +4.81% N/A N/A N/A +5.76%
Since inception +9.35% +9.18% +5.59% +5.59% +4.92% +4.92% +3.19% +6.55%
(1) Excluding sales charge.
(2) Returns at public offering price (POP) reflect a sales charge of 4.75%.
(3) Returns at maximum contingent deferred sales charge (CDSC). CDSC applies as
follows: first year 5%; second and third year 4%; fourth year 3%; fifth
year 2%; sixth year 1%; no sales charge thereafter.
(4) 1% CDSC applies to redemptions made within the first year of purchase.
(5) Sales charge is not applicable to these shares. Shares available to
eligible investors only, currently limited to RiverSource Portfolio Builder
Funds, six affiliated funds-of-funds.
(6) Sales charge is not applicable to these shares. Shares available to
institutional investors only.
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4 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Questions & Answers
WITH PORTFOLIO MANAGEMENT
Below, the portfolio management team for RiverSource Diversified Bond Fund
(formerly AXP Diversified Bond Fund) discusses the Fund's results and
positioning for the annual period ended Aug. 31, 2005.
Q: How did RiverSource Diversified Bond Fund perform for the fiscal year?
A: RiverSource Diversified Bond Fund's Class A shares gained 4.38%, excluding
sales charge, for the 12 months ended Aug. 31, 2005. The Fund outperformed
its benchmark, the Lehman Brothers Aggregate Bond Index (Lehman Index),
which rose 4.15%, and performed in line with the Lipper Intermediate
Investment Grade Index, representing the Fund's peer group, which advanced
4.38%.
Q: What market conditions were present during the annual period?
A: Overall, the fixed income yield curve flattened significantly during the
fiscal year, with long-term rates falling while short-term rates rose. This
dramatic reshaping of the yield curve was driven by the Federal Reserve
Board's (the Fed) decision to tighten monetary policy a total of eight times
during the period. This put upward pressure on short-term bond yields, and
moderate economic growth put downward pressure on intermediate/long-term
bond yields. Strong global demand for U.S. financial assets -- notably from
foreign central banks -- also contributed to keeping intermediate bond
yields low.
High yield and emerging market debt outperformed other fixed income assets
during the period, as these sectors benefited from both solid fundamentals
and a strong demand for the extra yield these sectors historically can
provide. Investment grade corporate bonds also performed well for the fiscal
year, but stumbled significantly in March and April.
SEC YIELDS
At Aug. 31, 2005 by class
A: 3.61% B: 3.03% C: 3.04% I: 4.12% Y: 3.95%
At Sept. 30, 2005 by class
A: 3.65% B: 3.08% C: 3.08% I: 4.18% Y: 3.97%
The Securities and Exchange Commission (SEC) yield is calculated by dividing
anticipated net investment income during a 31-day period by the public offering
price (POP) per share on the last day of the period, and converting the results
to yearly figures. See Average Annual Total Returns on page 4 for additional
performance information.
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5 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Questions & Answers
[BEGIN CALLOUT QUOTE]> The Fund's returns were also helped by a modest
position in non-U.S. dollar bonds. [END CALLOUT QUOTE]
Mortgages performed well during the period because the environment was
generally positive for mortgages, as volatility declined significantly and
prepayments were fairly predictable. Somewhat offsetting these positives
were important changes in the agencies, such as Fannie Mae and Freddie Mac,
which began to shrink their portfolio of mortgage-backed securities in
response to increased oversight from Congress. Also, the dramatic flattening
of the yield curve lessened the incentive for banks and other financers to
borrow via short rates and invest in longer maturities.
Q: What factors most significantly affected Fund performance?
A: On the positive side, the Fund maintained a shorter duration than the Lehman
Index throughout the period, since we believed interest rates were headed
higher as the economy gained traction and the Fed continued to tighten
monetary policy as a result. The Fund's duration was 3.8 years as of Aug.
31, 2005. In addition, for the first half of the fiscal year, we emphasized
longer maturity bonds and cash over short- to intermediate-term maturities.
As the yield curve flattened through the second half of the period, with
short-term rates rising more than long-term rates, the portfolio benefited
from this strategy.
The Fund benefited from its exposure to high quality commercial
mortgage-backed securities, which are securities based on pools of
commercial mortgages, and asset-backed securities. The Fund had a sizable
exposure to investment grade corporate bonds for most of the fiscal year,
and strong issue selection helped the Fund's results. A modest allocation to
high yield bonds further boosted the Fund's performance, as this sector as a
whole performed well during the period.
The Fund's returns were also helped by a modest position in non-U.S. dollar
bonds. We successfully were able to add value when the U.S. dollar weakened
in the latter months of 2004. Although the dollar fully regained its ground
in the first seven months of 2005, it weakened again in August. As the value
of the U.S. dollar decreases, the dollar value of foreign investments
typically increases and vice versa.
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6 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Questions & Answers
Detracting somewhat from Fund returns were the Fund's holdings within the
mortgage sector. The Fund maintained a defensive profile within this sector
of higher coupon securities and bonds that we believed would hold their
values as rates migrated higher. However, the path to higher rates was quite
gradual during the fiscal period. This defensive positioning did not provide
a significant performance advantage.
Q: What changes did you make to the Fund and how is it currently positioned?
A: We kept the Fund's duration shorter than the Lehman Index throughout the
period, but we made minor adjustments to portfolio duration based on
changing market conditions.
As the yield curve flattened dramatically, we reduced the portfolio's
sensitivity to changes in interest rates. We did this by seeking exposure to
securities with maturities more evenly distributed across the yield curve.
In our view, the yield curve flattening had largely run its course.
The Fund's sector positioning remained generally unchanged. Through the
year, we did adjust the Fund's exposure to high yield securities in response
to shifts in the difference between the yields of these securities and U.S.
Treasuries. We ended the fiscal year with the Fund near its lowest
allocation to high yield bonds held during the 12 months. Generally, though,
we continued to favor more conservative alternatives, such as AAA-rated
commercial mortgage-backed securities, asset-backed securities and certain
mortgage products, which, in our view, offer attractive yield as well as the
kind of defensive characteristics we want in the current market environment.
In all, the Fund's portfolio turnover was high but added value to the
portfolio. A significant portion of the Fund's 300% turnover rate this past
fiscal year was the result of "roll" transactions in liquid derivatives and
U.S. Treasury notes. In the derivative securities, positions in expiring
contracts are liquidated and simultaneously replaced with positions in new
contracts with equivalent characteristics. For U.S. Treasury notes, existing
holdings are sold and newly minted securities with better liquidity are
purchased. These transactions affect the Fund's turnover rate but do not
change the risk exposure or result in material transaction costs.
Q: How do you intend to manage the Fund in the coming months?
A: We intend to maintain the Fund's duration shorter than that of the
benchmark, the Lehman Index, for the near term. Our best assessment at this
time leads us to believe that the devastation caused by Hurricane Katrina
will have only a transitory impact on the
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7 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Questions & Answers
[BEGIN CALLOUT QUOTE]> We will continue to monitor job creation and inflation
numbers, as they remain key indicators for the economy in the coming months --
especially so in the aftermath of Hurricane Katrina. [END CALLOUT QUOTE]
U.S. economy overall. We expect energy shortages to be temporary and oil
prices to recede as refining and production capacities come back in line. We
expect the Fed to focus on the risks to higher inflation caused by higher
energy prices, supply-chain disruptions and the strain on resources
resulting from the massive rescue, relief and rebuilding efforts now
underway. As a result, we expect the Fed to continue to raise the targeted
federal funds rate through the balance of 2005.
We believe fixed income yields will move higher in the months ahead. From a
sector perspective, we intend to cautiously increase the Fund's allocation
to investment grade corporate bonds, though, importantly, we continue to be
very selective in adding names to the portfolio. We intend to maintain our
position in commercial mortgage-backed securities and asset-backed
securities because they offer higher yields. In mortgages, we plan to remain
defensively positioned, emphasizing premium coupons, 15-year mortgages and
attractive structural attributes. We intend to maintain the Fund's modest
position in high yield bonds and may increase it if the market offers
opportunities.
Finally, we intend to maintain the Fund's moderate exposure to non-U.S.
dollar bonds. The U.S. dollar's pressured path may experience fits and
starts with short-lived periods of currency strength. However, we believe
the U.S. dollar will likely remain at relatively weak levels going forward,
as we expect the currency's structural problems to continue.
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8 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Questions & Answers
We will continue to monitor job creation and inflation numbers, as they
remain key indicators for the economy in the coming months -- especially so
in the aftermath of Hurricane Katrina. As always, we will maintain a
disciplined focus on individual security selection with a goal of having
larger positions than the Lehman Index in bonds that offer the greatest
potential for outperforming the Lehman Index.
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9 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
The Fund's Long-term Performance
The chart on the facing page illustrates the total value of an assumed $10,000
investment in RiverSource Diversified Bond Fund Class A shares (from 9/1/95 to
8/31/05) as compared to the performance of two widely cited performance indices,
the Lehman Brothers Aggregate Bond Index and the Lipper Intermediate Investment
Grade Index. In comparing the Fund's Class A shares to these indices, you should
take into account the fact that the Fund's performance reflects the maximum
sales charge of 4.75%, while such charges are not reflected in the performance
of the indices. Returns for the Fund include the reinvestment of any
distribution paid during each period.
The performance information shown represents past performance and is not a
guarantee of future results. The investment return and principal value of your
investment will fluctuate so that your shares, when redeemed, may be worth more
or less than their original cost. Current performance may be lower or higher
than the performance information shown. You may obtain performance information
current to the most recent month-end by calling (800) 862-7919 or visiting
www.riversource.com/investments. Also see "Past Performance" in the Fund's
current prospectus.
DISTRIBUTION SUMMARY
The table below details the Fund's income and capital gain distributions for the
fiscal years shown. More information on the other classes can be found in the
Financial Highlights section of this report's Notes to Financial Statements.
Class A
Short-term Long-term
Fiscal year ended Income capital gains capital gains Total
Aug. 31, 2005 $0.19 $-- $-- $0.19
Aug. 31, 2004 0.17 -- -- 0.17
Aug. 31, 2003 0.20 -- -- 0.20
Aug. 31, 2002 0.26 -- -- 0.26
Aug. 31, 2001 0.32 -- -- 0.32
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10 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
[LINE CHART]
VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN RIVERSOURCE DIVERSIFIED BOND FUND
RiverSource Diversified Bond Fund Class A
(includes sales charge) $9,525 $10,074 $11,289 $12,011 $12,210 $12,781 $14,120 $14,562 $15,277 $16,123 $16,830
Lehman Brothers Aggregate
Bond Index(1) $10,000 $10,411 $11,452 $12,663 $12,764 $13,729 $15,424 $16,675 $17,402 $18,469 $19,236
Lipper Intermediate Investment
Grade Index(2) $10,000 $10,394 $11,391 $12,473 $12,528 $13,352 $14,996 $15,873 $16,727 $17,754 $18,532
`95 `96 `97 `98 `99 `00 `01 `02 `03 `04 `05
COMPARATIVE RESULTS
Results at Aug. 31, 2005 Since
1 year 3 years 5 years 10 years inception(3)
RiverSource Diversified Bond Fund (includes sales charge)
Class A Cumulative value of $10,000 $9,942 $11,007 $12,546 $16,829 $140,598
Average annual total return -0.58% +3.25% +4.64% +5.34% +9.24%
Lehman Brothers Aggregate Bond Index(1)
Cumulative value of $10,000 $10,415 $11,537 $14,012 $19,236 N/A
Average annual total return +4.15% +4.88% +6.98% +6.76% N/A
Lipper Intermediate Investment Grade Index(2)
Cumulative value of $10,000 $10,438 $11,676 $13,875 $18,532 N/A
Average annual total return +4.38% +5.30% +6.77% +6.36% N/A
Results for other share classes can be found on page 4.
(1) The Lehman Brothers Aggregate Bond Index, an unmanaged index, is made up of
a representative list of government, corporate, asset-backed and
mortgage-backed securities. The index is frequently used as a general
measure of bond market performance. The index reflects reinvestment of all
distributions and changes in market prices, but excludes brokerage
commissions or other fees.
(2) The Lipper Intermediate Investment Grade Index includes the 30 largest
investment grade funds tracked by Lipper Inc. The index's returns include
net reinvested dividends.
(3) Fund data is from Oct. 3, 1974. The Fund began operating before the
inception of the Lehman Brothers Aggregate Bond Index and its Lipper peer
group.
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11 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Investments in Securities
RiverSource Diversified Bond Fund
Aug. 31, 2005
(Percentages represent value of investments compared to net assets)
Bonds (98.7%)
Issuer Coupon Principal Value(a)
Rate Amount
Sovereign (1.9%)
Bundesrepublik Deutschland
(European Monetary Unit)
01-04-07 6.00% 18,818,000(c) $24,359,708
United Kingdom Treasury
(British Pound)
12-07-06 7.50 8,906,000(c) 16,710,308
United Mexican States
09-27-34 6.75 4,880,000(c) 5,289,920
Total 46,359,936
U.S. Government Obligations & Agencies (21.2%)
Federal Farm Credit Bank
10-10-08 4.25 9,800,000 9,856,046
Federal Home Loan Bank
04-18-08 4.13 5,615,000 5,626,926
Federal Home Loan Mtge Corp
06-15-08 3.88 51,935,000 51,671,170
10-15-08 5.13 33,750,000 34,775,089
03-18-09 3.76 6,890,000 6,807,065
07-12-10 4.13 42,370,000 42,293,692
Federal Natl Mtge Assn
04-13-06 2.15 33,200,000 32,835,265
08-15-08 3.25 86,170,000 84,227,728
U.S. Treasury
05-15-15 4.13 18,590,000(r) 18,709,813
08-15-15 4.25 32,765,000 33,384,455
08-15-23 6.25 90,504,000(p) 112,147,217
02-15-26 6.00 56,232,000 68,958,876
U.S. Treasury Inflation-Indexed Bond
01-15-15 1.63 25,602,511(h) 25,572,008
Total 526,865,350
Asset-Backed (4.0%)
Aesop Funding II LLC
Series 2002-1A Cl A1 (AMBAC)
10-20-06 3.85 2,363,333(d,l) 2,363,187
Series 2004-2A Cl A1 (FGIC)
04-20-08 2.76 2,000,000(d,l) 1,959,323
Bonds (continued)
Issuer Coupon Principal Value(a)
Rate Amount
Asset-Backed (cont.)
AmeriCredit Automobile Receivables Trust
Series 2002-C Cl A4 (FSA)
02-12-09 3.55% $2,660,000(l) $2,647,671
Series 2004-CA Cl A3 (AMBAC)
03-06-09 3.00 5,500,000(l) 5,438,983
Series 2005-BM Cl A3 (MBIA)
02-06-10 4.05 8,750,000(l) 8,710,354
ARG Funding
Series 2005-1A Cl A3 (MBIA)
04-20-10 4.29 6,300,000(d,l) 6,257,918
Capital Auto Receivables Asset Trust
Series 2004-1
09-15-10 2.84 3,000,000 2,924,645
Series 2005-1 Cl A4
07-15-09 4.05 7,100,000 7,110,792
Capital One Auto Finance Trust
Series 2005-BSS Cl A3
11-15-09 4.08 4,700,000 4,668,510
Carmax Auto Owner Trust
Series 2005-1 Cl A4
03-15-10 4.35 2,400,000 2,406,635
Honda Auto Receivables Owner Trust
Series 2005-1 Cl A3
10-21-08 3.53 4,500,000 4,453,740
Long Beach Auto Receivables Trust
Series 2004-C Cl A3 (FSA)
09-15-09 3.40 4,000,000(l) 3,958,280
Metris Master Trust
Series 2001-2 Cl C
11-20-09 5.51 3,425,000(d,m) 3,425,000
Series 2004-2 Cl D
10-20-10 6.86 1,200,000(d,m) 1,218,000
Series 2004-2 Cl M
10-20-10 4.00 2,700,000(m) 2,702,565
Series 2005-1A Cl D
03-21-11 5.51 1,375,000(d,m) 1,374,995
Morgan Stanley Auto Loan Trust
Series 2004-HB2 Cl A3
03-16-09 2.94 4,300,000 4,236,506
See accompanying notes to investments in securities.
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12 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
Rate Amount
Asset-Backed (cont.)
Nissan Auto Lease Trust
Series 2004-A Cl A3
08-15-07 2.90% $3,000,000 $2,968,921
Nissan Auto Receivables Owner Trust
Series 2005-A Cl A3
10-15-08 3.54 5,475,000 5,418,443
Popular ABS Mtge Pass-Through Trust
Series 2005-A Cl AF2
06-25-35 4.49 2,660,000 2,647,942
Residential Asset Securities
Series 2002-KS1 Cl AI4 (AMBAC)
11-25-29 5.86 1,178,876(l) 1,176,306
Triad Auto Receivables Owner Trust
Series 2005-A Cl A3 (AMBAC)
03-12-10 4.05 7,600,000(l) 7,561,696
WFS Financial Owner Trust
Series 2004-3 Cl A3
03-17-09 3.30 5,000,000 4,952,182
World Omni Auto Receivables Trust
Series 2005-A Cl A3
06-12-09 3.54 7,500,000 7,423,950
Total 98,006,544
Commercial Mortgage-Backed(f) (11.2%)
Banc of America Commercial Mtge
Series 2005-1 Cl A4
11-10-42 5.03 3,600,000 3,699,823
Bank of America-First Union NB Commercial Mtge
Series 2001-3 Cl A1
04-11-37 4.89 3,308,970 3,344,098
Bear Stearns Commercial Mtge Securities
Series 2004-T16 Cl A3
02-13-46 4.03 3,240,000 3,194,726
Series 2005-PWR8 Cl A1
06-11-41 4.21 7,410,978 7,392,006
California State Teachers' Retirement System Trust
Series 2002-C6 Cl A3
11-20-14 4.46 6,645,827(d) 6,660,137
CDC Commercial Mtge Trust
Series 2002-FX1 Cl A2
11-15-30 5.68 4,500,000 4,747,593
Citigroup Commercial Mtge Trust
Series 2005-EMG Cl A1
09-20-51 4.15 12,141,109(d) 12,098,072
Commercial Mtge Pass-Through Ctfs
Series 2004-CNL Cl A1
09-15-14 3.79 6,000,000(d,m) 5,973,120
Bonds (continued)
Issuer Coupon Principal Value(a)
Rate Amount
Commercial Mortgage-Backed(f) (cont.)
CS First Boston Mtge Securities
Series 2002-CKS4 Cl A1
11-15-36 4.49% $4,931,045 $4,938,080
Series 2004-C1 Cl A2
01-15-37 3.52 3,000,000 2,933,706
Federal Natl Mtge Assn #385683
02-01-13 4.83 6,321,619 6,438,261
Federal Natl Mtge Assn #385717
11-01-12 4.84 1,172,908 1,192,226
Federal Natl Mtge Assn #386599
11-01-10 4.47 1,645,633 1,638,888
Federal Natl Mtge Assn #555264
02-01-13 5.02 5,743,751 5,915,413
Federal Natl Mtge Assn #555806
10-01-13 5.11 537,301 557,756
GE Capital Commercial Mtge
Series 2004-C2 Cl A2
03-10-40 4.12 3,000,000 2,958,600
Series 2005-C3 Cl A1
07-10-45 4.59 4,590,000 4,624,331
Series 2005-C3 Cl A2
07-10-45 4.85 3,460,000 3,517,649
General Electric Capital Assurance
Series 2003-1 Cl A3
05-12-35 4.77 7,650,000(d) 7,725,504
General Electric Capital Commercial Mtge
Series 2001-3 Cl A1
06-10-38 5.56 3,516,761 3,612,410
GMAC Commercial Mtge Securities
Series 1999-C1 Cl B
05-15-33 6.30 5,800,000 6,143,449
Series 2004-C3 Cl A4
12-10-41 4.55 4,700,000 4,690,168
Series 2005-C1 Cl A1
05-10-43 4.21 3,632,143 3,620,863
Greenwich Capital Commercial Funding
Series 2004-GG1 Cl A5
06-10-36 4.88 2,400,000 2,443,639
Series 2005-GG3 Cl A1
08-10-42 3.92 3,387,067 3,363,019
Series 2005-GG3 Cl A3
08-10-42 4.57 7,225,000 7,229,214
GS Mtge Securities II
Series 2004-GG2 Cl A4
08-10-38 4.96 4,300,000 4,383,521
Series 2005-GG4 Cl A1
07-10-39 4.37 5,797,892 5,801,369
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
13 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
Rate Amount
Commercial Mortgage-Backed(f) (cont.)
JPMorgan Chase Commercial Mtge Securities
Series 2002-CIB5 Cl A1
10-12-37 4.37% $3,784,852 $3,786,302
Series 2003-CB6 Cl A1
07-12-37 4.39 7,651,905 7,613,646
Series 2003-CB6 Cl A2
07-12-37 5.26 4,200,000 4,376,803
Series 2003-LN1 Cl A1
10-15-37 4.13 3,457,029 3,406,364
Series 2003-ML1A Cl A1
03-12-39 3.97 3,029,203 2,979,707
Series 2004-CBX Cl A3
01-12-37 4.18 3,000,000 2,967,024
Series 2004-CBX Cl A5
01-12-37 4.65 5,000,000 5,021,358
Series 2005-CB11 Cl A3
08-12-37 5.20 4,700,000 4,863,327
Series 2005-LDP2 Cl A1
07-15-42 4.33 5,721,867 5,737,144
LB-UBS Commercial Mtge Trust
Series 2002-C2 Cl A3
06-15-26 5.39 7,360,000 7,640,829
Series 2002-C4 Cl A4
09-15-26 4.56 5,200,000 5,206,430
Series 2002-C4 Cl A5
09-15-31 4.85 6,000,000 6,100,501
Series 2003-C8 Cl A2
11-15-27 4.21 7,500,000 7,452,300
Series 2003-C8 Cl A3
11-15-27 4.83 5,250,000 5,322,765
Series 2004-C2 Cl A3
03-15-29 3.97 3,275,000 3,165,026
Series 2004-C4 Cl A3
06-15-29 5.16 3,000,000(m) 3,099,411
Series 2004-C6 Cl A2
08-15-29 4.19 5,250,000 5,208,945
Series 2004-C6 Cl A4
08-15-29 4.58 4,425,000 4,440,719
Series 2004-C7 Cl A2
10-15-29 3.99 5,400,000 5,304,420
Series 2004-C8 Cl A2
12-15-29 4.20 5,800,000 5,748,496
Series 2005-C3 Cl A1
07-15-30 4.39 3,902,242 3,910,475
Series 2005-C5 Cl A2
09-15-40 4.89 4,600,000 4,667,988
Bonds (continued)
Issuer Coupon Principal Value(a)
Rate Amount
Commercial Mortgage-Backed(f) (cont.)
Merrill Lynch Mtge Trust
Series 2005-MCP1 Cl A1
06-12-43 4.22% $4,569,849 $4,557,707
Morgan Stanley Capital I
Series 2003-IQ4 Cl A1
05-15-40 3.27 5,400,919 5,165,854
Series 2004-HQ4 Cl A5
04-14-40 4.59 3,600,000 3,597,948
Series 2004-IQ8 Cl A2
06-15-40 3.96 4,884,318 4,840,891
Morgan Stanley, Dean Witter Capital I
Series 2002-TOP7 Cl A2
01-15-39 5.98 10,900,000 11,768,644
Prudential Commercial Mtge Trust
Series 2003-PWR1 Cl A1
02-11-36 3.67 4,340,476 4,241,613
Wachovia Bank Commercial Mtge Trust
Series 2005-C16 Cl A2
10-15-41 4.38 2,000,000 1,992,985
Series 2005-C16 Cl A3
10-15-41 4.62 5,500,000 5,515,590
Total 280,538,853
Mortgage-Backed(f,n) (38.0%)
Adjustable Rate Mtge Trust
Series 2004-2 Cl 6A1
02-25-35 5.27 5,603,629(k) 5,666,421
Series 2005-3 Cl 7A1
07-25-35 5.10 6,139,038(k) 6,178,417
Banc of America Mtge Securities
Series 2004-E Cl B1
06-25-34 4.04 2,942,734(k) 2,902,977
Series 2004-F Cl B1
07-25-34 4.14 5,294,199(k) 5,252,851
Bank of America Alternative Loan Trust
Series 2003-11 Cl 1A1
01-25-34 6.00 7,291,347 7,393,134
Series 2003-11 Cl 4A1
01-25-19 4.75 3,708,501 3,698,494
Series 2004-3 Cl 1A1
04-25-34 6.00 11,556,909 11,845,831
Bear Stearns Adjustable Rate Mtge Trust
Series 2004-10 Cl 13A1
01-25-35 5.03 7,520,943(k) 7,536,103
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
14 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
Rate Amount
Mortgage-Backed(f,n) (cont.)
Countrywide Alternative Loan Trust
Series 2003-11T1 Cl A1
07-25-18 4.75% $4,435,623 $4,410,359
Series 2005-6CB Cl 1A1
04-25-35 7.50 5,997,930 6,286,825
Countrywide Home Loans
Series 2004-12 Cl 1M
08-25-34 4.63 3,544,824(k) 3,485,568
Series 2005-R2 Cl 2A1
06-25-35 7.00 8,176,043(d) 8,669,161
CS First Boston Mtge Securities
Series 2003-29 Cl 8A1
11-25-18 6.00 3,715,185 3,786,886
Series 2004-AR5 Cl CB1
06-25-34 4.42 3,367,444(k) 3,314,749
Federal Home Loan Mtge Corp
Collateralized Mtge Obligation
01-15-18 6.50 3,873,181 4,125,454
03-15-22 7.00 1,660,835 1,658,043
02-15-27 5.00 10,070,000 10,191,724
10-15-27 5.00 21,553,000 21,792,004
06-15-28 5.00 13,925,000 14,095,999
12-15-28 5.50 6,005,000 6,166,619
02-15-33 5.50 9,099,150 9,433,938
Collateralized Mtge Obligation
Interest Only
02-15-14 7.40 3,690,563(i) 229,036
08-01-20 8.00 10,223,903(i) 1,763,521
10-15-22 14.56 10,672,675(i) 610,196
Collateralized Mtge Obligation
Principal Only
08-01-20 4.60 10,223,903(j) 8,399,754
Federal Home Loan Mtge Corp #290970
04-01-17 8.00 15,808 16,875
Federal Home Loan Mtge Corp #C00356
08-01-24 8.00 624,134 669,664
Federal Home Loan Mtge Corp #C00666
10-01-28 7.00 80,935 84,827
Federal Home Loan Mtge Corp #C53878
12-01-30 5.50 2,337,257 2,366,188
Federal Home Loan Mtge Corp #C78031
04-01-33 5.50 11,745,658 11,922,489
Federal Home Loan Mtge Corp #C79930
06-01-33 5.50 8,300,923 8,400,785
Federal Home Loan Mtge Corp #C90767
12-01-23 6.00 11,556,730 11,904,523
Federal Home Loan Mtge Corp #D96300
10-01-23 5.50 6,534,781 6,651,761
Bonds (continued)
Issuer Coupon Principal Value(a)
Rate Amount
Mortgage-Backed(f,n) (cont.)
Federal Home Loan Mtge Corp #E01127
02-01-17 6.50% $1,941,898 $2,010,138
Federal Home Loan Mtge Corp #E01419
05-01-18 5.50 4,549,999 4,651,301
Federal Home Loan Mtge Corp #E90216
05-01-17 6.00 2,069,339 2,135,147
Federal Home Loan Mtge Corp #E96516
05-01-13 4.50 3,126,398 3,122,161
Federal Home Loan Mtge Corp #E98725
08-01-18 5.00 14,419,765 14,549,256
Federal Home Loan Mtge Corp #E99684
10-01-18 5.00 9,250,763 9,335,142
Federal Home Loan Mtge Corp #G01108
04-01-30 7.00 5,093,691(g) 5,332,408
Federal Home Loan Mtge Corp #G01535
04-01-33 6.00 8,624,579 8,916,929
Federal Home Loan Mtge Corp #G30225
02-01-23 6.00 15,199,368 15,661,912
Federal Natl Mtge Assn
09-01-20 4.50 4,550,000(g) 4,511,607
09-01-20 6.00 24,000,000(g) 24,765,000
12-01-33 5.50 5,958,396 6,025,189
12-01-33 6.50 16,903,129 17,491,196
07-01-34 6.50 9,483,434 9,801,139
Collateralized Mtge Obligation
12-25-26 8.00 4,115,274 4,372,293
Collateralized Mtge Obligation
Interest Only
12-25-12 13.29 3,083,805(i) 128,336
12-25-31 1.19 2,997,188(i) 490,517
Federal Natl Mtge Assn #190899
04-01-23 8.50 691,252 745,517
Federal Natl Mtge Assn #190944
05-01-24 6.00 8,425,530 8,659,748
Federal Natl Mtge Assn #190988
06-01-24 9.00 592,157 640,068
Federal Natl Mtge Assn #231309
09-01-23 6.50 167,530 174,136
Federal Natl Mtge Assn #231310
09-01-23 6.50 530,658 551,582
Federal Natl Mtge Assn #250330
09-01-25 8.00 445,666 477,876
Federal Natl Mtge Assn #250495
03-01-26 7.00 1,019,300 1,072,872
Federal Natl Mtge Assn #252498
06-01-29 7.00 8,820 9,257
Federal Natl Mtge Assn #253883
08-01-16 6.00 4,640,029 4,792,353
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
15 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
Rate Amount
Mortgage-Backed(f,n) (cont.)
Federal Natl Mtge Assn #254608
12-01-17 6.50% $1,339,393 $1,388,487
Federal Natl Mtge Assn #254802
07-01-18 4.50 3,971,772 3,944,369
Federal Natl Mtge Assn #254916
09-01-23 5.50 10,454,827 10,639,996
Federal Natl Mtge Assn #268071
01-01-24 6.50 163,729 170,185
Federal Natl Mtge Assn #303226
02-01-25 8.00 201,866 216,503
Federal Natl Mtge Assn #313049
08-01-11 8.50 1,847,533 1,953,848
Federal Natl Mtge Assn #323654
04-01-14 6.50 1,105,313 1,146,548
Federal Natl Mtge Assn #323933
09-01-29 7.00 6,009,746 6,307,656
Federal Natl Mtge Assn #455791
01-01-29 6.50 674,373 700,032
Federal Natl Mtge Assn #489888
05-01-29 6.50 3,487,023 3,617,671
Federal Natl Mtge Assn #496029
01-01-29 6.50 4,246,764 4,408,597
Federal Natl Mtge Assn #50700
03-01-08 7.00 1,499,358 1,546,308
Federal Natl Mtge Assn #545342
04-01-13 7.00 4,627,493 4,772,395
Federal Natl Mtge Assn #545869
07-01-32 6.50 2,312,018 2,403,683
Federal Natl Mtge Assn #545910
08-01-17 6.00 7,295,950 7,554,568
Federal Natl Mtge Assn #555343
08-01-17 6.00 1,825,352 1,885,417
Federal Natl Mtge Assn #555375
04-01-33 6.00 25,228,537 26,013,313
Federal Natl Mtge Assn #555458
05-01-33 5.50 22,096,938 22,366,300
Federal Natl Mtge Assn #555734
07-01-23 5.00 7,351,062 7,363,536
Federal Natl Mtge Assn #555740
08-01-18 4.50 8,178,587 8,119,484
Federal Natl Mtge Assn #555794
09-01-28 7.50 1,301,201 1,383,293
Federal Natl Mtge Assn #567840
10-01-30 7.00 2,157,244 2,264,181
Federal Natl Mtge Assn #587859
12-01-16 5.50 7,033,699 7,189,301
Federal Natl Mtge Assn #597374
09-01-31 7.00 1,003,150 1,061,237
Bonds (continued)
Issuer Coupon Principal Value(a)
Rate Amount
Mortgage-Backed(f,n) (cont.)
Federal Natl Mtge Assn #638969
03-01-32 5.50% $1,951,630 $1,975,290
Federal Natl Mtge Assn #646147
06-01-32 7.00 3,519,163 3,704,808
Federal Natl Mtge Assn #646446
06-01-17 6.50 1,556,345 1,613,391
Federal Natl Mtge Assn #649068
06-01-17 6.50 2,780,638 2,892,464
Federal Natl Mtge Assn #649263
08-01-17 6.50 2,834,879 2,948,868
Federal Natl Mtge Assn #654208
10-01-32 6.50 2,862,683 2,964,719
Federal Natl Mtge Assn #654682
10-01-32 6.00 1,981,337 2,036,797
Federal Natl Mtge Assn #654689
11-01-32 6.00 1,966,180 2,021,184
Federal Natl Mtge Assn #656908
09-01-32 6.50 2,800,382 2,917,397
Federal Natl Mtge Assn #662809
09-01-17 6.50 3,244,057 3,362,963
Federal Natl Mtge Assn #667787
02-01-18 5.50 2,591,140 2,648,678
Federal Natl Mtge Assn #670382
09-01-32 6.00 15,960,099 16,351,933
Federal Natl Mtge Assn #670387
08-01-32 7.00 1,554,656 1,631,151
Federal Natl Mtge Assn #678028
09-01-17 6.00 1,359,078 1,403,800
Federal Natl Mtge Assn #678065
02-01-33 6.50 664,741 693,492
Federal Natl Mtge Assn #678937
01-01-18 5.50 4,146,084 4,245,988
Federal Natl Mtge Assn #678941
02-01-18 5.50 5,003,683 5,124,238
Federal Natl Mtge Assn #678944
01-01-18 5.50 2,401,887 2,459,769
Federal Natl Mtge Assn #679095
04-01-18 5.00 7,305,388 7,362,964
Federal Natl Mtge Assn #681400
03-01-18 5.50 7,352,297 7,522,689
Federal Natl Mtge Assn #683274
02-01-18 5.50 3,212,613 3,287,078
Federal Natl Mtge Assn #684586
03-01-33 6.00 5,096,687 5,235,207
Federal Natl Mtge Assn #687051
01-01-33 6.00 13,160,407 13,473,208
Federal Natl Mtge Assn #687302
11-01-32 7.00 1,455,078 1,526,178
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
16 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
Rate Amount
Mortgage-Backed(f,n) (cont.)
Federal Natl Mtge Assn #689093
07-01-28 5.50% $2,839,252 $2,873,672
Federal Natl Mtge Assn #694628
04-01-33 5.50 5,834,454 5,917,620
Federal Natl Mtge Assn #694795
04-01-33 5.50 7,515,706 7,629,798
Federal Natl Mtge Assn #694988
03-01-33 5.50 15,430,151 15,620,402
Federal Natl Mtge Assn #695202
03-01-33 6.50 6,246,202 6,463,510
Federal Natl Mtge Assn #695385
03-01-18 5.50 9,243,583 9,488,435
Federal Natl Mtge Assn #695909
05-01-18 5.50 3,288,547 3,367,835
Federal Natl Mtge Assn #709901
06-01-18 5.00 7,588,174 7,653,818
Federal Natl Mtge Assn #710823
05-01-33 5.50 879,427 891,965
Federal Natl Mtge Assn #720006
07-01-33 5.50 8,817,572 8,916,417
Federal Natl Mtge Assn #720378
06-01-18 4.50 6,275,690 6,232,392
Federal Natl Mtge Assn #723687
08-01-28 5.50 5,180,382 5,243,184
Federal Natl Mtge Assn #725232
03-01-34 5.00 21,324,820 21,240,157
Federal Natl Mtge Assn #725684
05-01-18 6.00 10,990,068 11,351,538
Federal Natl Mtge Assn #725719
07-01-33 4.85 6,242,791(k) 6,207,707
Federal Natl Mtge Assn #725737
08-01-34 4.53 6,327,018(k) 6,330,940
Federal Natl Mtge Assn #730153
08-01-33 5.50 875,217 885,029
Federal Natl Mtge Assn #735160
12-01-34 4.40 2,586,904(k) 2,581,575
Federal Natl Mtge Assn #743262
10-01-18 5.00 4,693,966 4,730,506
Federal Natl Mtge Assn #747786
10-01-18 6.00 2,452,852 2,533,798
Federal Natl Mtge Assn #753074
12-01-28 5.50 9,902,895 10,022,948
Federal Natl Mtge Assn #753919
12-01-33 4.95 7,758,768(k) 7,789,310
Federal Natl Mtge Assn #759342
01-01-34 6.50 1,248,772 1,297,598
Federal Natl Mtge Assn #765759
12-01-18 5.00 6,108,349 6,156,491
Bonds (continued)
Issuer Coupon Principal Value(a)
Rate Amount
Mortgage-Backed(f,n) (cont.)
Federal Natl Mtge Assn #766641
03-01-34 5.00% $5,900,296(g) $5,868,236
Federal Natl Mtge Assn #776962
04-01-29 5.00 17,655,239 17,544,567
Federal Natl Mtge Assn #790759
09-01-34 4.84 1,759,706(k) 1,766,256
Federal Natl Mtge Assn #811925
04-01-35 4.92 6,121,823(k) 6,163,315
Federal Natl Mtge Assn #837258
09-01-35 4.92 3,360,503(g,k) 3,378,213
First Horizon Alternative Mtge Securities
Series 2004-AA4 Cl A1
10-25-34 5.41 5,233,780(m) 5,338,613
Series 2005-AA2 Cl 2A1
04-25-35 5.43 6,015,205(m) 6,111,388
Series 2005-AA3 Cl 3A1
05-25-35 5.41 6,223,717(m) 6,291,244
Govt Natl Mtge Assn
09-01-35 5.00 13,650,000(g) 13,692,656
Collateralized Mtge Obligation
Interest Only
Series 2002-70 Cl IC
08-20-32 0.00 10,214,633(i) 1,337,623
Collateralized Mtge Obligation
Interest Only
Series 2002-80 Cl CI
01-20-32 0.00 2,303,524(i) 246,989
Govt Natl Mtge Assn #345538
02-15-24 8.00 217,162 233,213
Govt Natl Mtge Assn #398831
08-15-26 8.00 244,458 262,806
Govt Natl Mtge Assn #425004
10-15-33 5.50 4,552,190 4,644,658
Govt Natl Mtge Assn #426170
06-15-26 8.00 220,818 237,392
Govt Natl Mtge Assn #604708
10-15-33 5.50 9,918,654 10,120,131
Harborview Mtge Loan Trust
Series 2004-3 Cl B1
05-19-34 4.39 4,328,576(k) 4,273,123
IndyMac Index Mtge Loan Trust
Series 2005-AR3 Cl 3A1
04-25-35 5.34 3,671,672(k) 3,710,669
Series 2005-AR8 Cl AX1
Collateralized Mtge Obligation
Interest Only
04-25-35 4.50 192,739,443(i,k) 2,379,128
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
17 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
Rate Amount
Mortgage-Backed(f,n) (cont.)
Master Adjustable Rate Mtge Trust
Series 2004-5 Cl B1
07-25-34 4.40% $4,154,484(k) $4,100,060
Master Alternative Loans Trust
Series 2004-2 Cl 4A1
02-25-19 5.00 6,477,592 6,514,029
Series 2004-4 Cl 2A1
05-25-34 6.00 1,556,968 1,589,773
Series 2004-7 Cl 8A1
08-25-19 5.00 4,969,254 4,972,384
Series 2004-8 Cl 7A1
09-25-19 5.00 6,808,338 6,814,057
Structured Adjustable Rate Mtge Loan Trust
Series 2004-3AC Cl B1
03-25-34 4.93 5,562,433(k) 5,545,078
Series 2004-5 Cl B1
05-25-34 4.61 4,235,971(k) 4,173,872
Structured Asset Securities
Series 2003-33H Cl 1A1
10-25-33 5.50 14,679,726 14,763,922
Washington Mutual
Series 2003-AR10 Cl A7
10-25-33 4.07 6,650,000(k) 6,666,218
Series 2004-CB2 Cl 6A
07-25-19 4.50 4,278,238 4,175,688
Series 2004-CB4 Cl 22A
12-25-19 6.00 5,135,060 5,296,976
Series 2005-AR11 Cl A1B1
08-25-45 3.93 12,675,000(k) 12,675,000
Wells Fargo Mtge Backed Securities Trust
Series 2005
10-25-35 5.00 12,000,000(g) 12,061,875
Series 2005-5 Cl 2A1
05-25-35 5.50 10,678,903 10,828,805
Series 2005-AR1 Cl 1A1
02-25-35 4.56 9,806,695(k) 9,764,134
Total 944,124,154
Aerospace & Defense (0.1%)
L-3 Communications
06-15-12 7.63 2,000,000 2,120,000
07-15-13 6.13 190,000 191,900
Moog
Sr Sub Nts
01-15-15 6.25 165,000 165,000
Total 2,476,900
Bonds (continued)
Issuer Coupon Principal Value(a)
Rate Amount
Automotive (0.2%)
DaimlerChrysler NA Holding
11-15-13 6.50% $2,125,000 $2,285,544
Ford Motor
02-01-29 6.38 2,300,000 1,681,261
Total 3,966,805
Banking (4.2%)
Bank of America
Sr Unsecured
08-01-10 4.50 11,120,000 11,157,819
Banknorth Group
Sr Nts
05-01-08 3.75 3,960,000 3,916,876
Citigroup
08-03-10 4.63 32,600,000 32,873,285
Sr Nts
05-29-15 4.70 2,665,000 2,661,911
HSBC Bank USA
Sub Nts
08-15-35 5.63 5,500,000 5,674,202
KFW Intl Finance
10-17-05 2.50 18,400,000(c) 18,370,852
M&I Marshall & Ilsley Bank
Sub Nts
06-16-15 4.85 2,575,000 2,592,958
Wells Fargo Bank NA
Sub Nts
02-01-11 6.45 24,007,000 26,369,865
Total 103,617,768
Building Materials (--%)
Norcraft Companies LP/Finance
Sr Sub Nts
11-01-11 9.00 570,000 598,500
Chemicals (0.2%)
Airgas
10-01-11 9.13 1,500,000 1,612,500
Compass Minerals Group
08-15-11 10.00 1,000,000 1,095,000
Georgia Gulf
Sr Nts
12-15-13 7.13 1,525,000 1,582,188
MacDermid
07-15-11 9.13 575,000 618,125
Total 4,907,813
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
18 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
Rate Amount
Diversified Manufacturing (0.7%)
Tyco Intl Group
02-15-11 6.75% $15,205,000(c) $16,744,172
Electric (3.1%)
CMS Energy
Sr Nts
01-15-09 7.50 1,275,000 1,345,125
Consumers Energy
1st Mtge
09-15-35 5.80 5,340,000 5,566,800
Dayton Power & Light
1st Mtge
10-01-13 5.13 3,305,000 3,403,459
Dominion Resources
06-15-35 5.95 5,620,000 5,870,191
DPL
Sr Nts
09-01-11 6.88 2,755,000 3,016,725
Exelon
06-15-35 5.63 4,320,000 4,348,287
IPALCO Enterprises
Secured
11-14-08 8.38 400,000 429,000
11-14-11 8.63 3,680,000 4,140,000
NorthWestern Energy
Secured
11-01-14 5.88 645,000(d) 666,045
Ohio Edison
06-15-09 5.65 4,005,000(d) 4,123,548
Sr Nts
05-01-15 5.45 1,195,000 1,235,972
Ohio Power
Sr Nts Series H
01-15-14 4.85 7,395,000 7,451,498
Pacific Gas & Electric
03-01-34 6.05 4,580,000 5,018,718
Pacificorp
1st Mtge
06-15-35 5.25 2,825,000 2,842,190
Potomac Edison
1st Mtge
11-15-14 5.35 3,195,000(d) 3,310,308
08-15-15 5.13 2,275,000(d) 2,326,160
Southern California Edison
1st Mtge
07-15-35 5.35 5,710,000 5,830,875
Tenaska Alabama Partners LP
Secured
06-30-21 7.00 360,000(d) 375,548
Bonds (continued)
Issuer Coupon Principal Value(a)
Rate Amount
Electric (cont.)
Utilicorp Canada Finance
06-15-11 7.75% $1,915,000(c) $2,001,175
Westar Energy
1st Mtge
07-01-14 6.00 11,450,000 12,464,563
Total 75,766,187
Entertainment (0.5%)
Time Warner
05-15-29 6.63 4,940,000 5,374,068
United Artists Theatre
07-01-15 9.30 7,739,913 7,662,514
Total 13,036,582
Food and Beverage (0.3%)
Burns Philp Capital Property
Sr Sub Nts
02-15-11 10.75 940,000(c) 1,048,100
Cott Beverages
12-15-11 8.00 1,135,000 1,197,425
Kraft Foods
06-01-12 6.25 4,991,000 5,477,343
Total 7,722,868
Gaming (0.5%)
Boyd Gaming
Sr Sub Nts
12-15-12 7.75 375,000 399,375
04-15-14 6.75 455,000 464,669
Caesars Entertainment
Sr Nts
04-15-13 7.00 2,535,000 2,833,569
MGM MIRAGE
10-01-09 6.00 670,000 670,000
Sr Nts
02-27-14 5.88 720,000 694,800
07-15-15 6.63 2,165,000(d,g) 2,186,650
Mohegan Tribal Gaming Authority
Sr Nts
02-15-13 6.13 540,000 546,750
Sr Sub Nts
04-01-12 8.00 750,000 798,750
Station Casinos
Sr Nts
04-01-12 6.00 1,000,000 1,007,500
Sr Sub Nts
03-01-16 6.88 1,515,000(d,g) 1,556,663
Total 11,158,726
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
19 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
Rate Amount
Gas Pipelines (0.2%)
ANR Pipeline
03-15-10 8.88% $875,000 $954,587
Colorado Interstate Gas
Sr Nts
03-15-15 5.95 470,000(d) 466,475
El Paso Natural Gas
Sr Nts Series A
08-01-10 7.63 735,000 786,823
Southern Natural Gas
03-15-10 8.88 875,000 954,587
Southern Star Central
Secured
08-01-10 8.50 645,000 696,600
Transcontinental Gas Pipe Line
Series B
08-15-11 7.00 1,915,000 2,058,624
Total 5,917,696
Health Care (0.7%)
Cardinal Health
06-15-15 4.00 15,779,000 14,604,269
HCA
Sr Nts
03-15-14 5.75 1,000,000 988,267
Triad Hospitals
Sr Nts
05-15-12 7.00 1,000,000 1,035,000
Total 16,627,536
Home Construction (0.3%)
DR Horton
12-01-07 7.50 1,000,000 1,054,672
01-15-09 5.00 990,000 986,494
Sr Nts
02-15-15 5.25 4,290,000 4,121,039
Meritage Homes
03-15-15 6.25 445,000 416,631
Standard-Pacific
Sr Nts
08-15-15 7.00 930,000 916,050
Total 7,494,886
Independent Energy (0.3%)
Chesapeake Energy
01-15-15 7.75 1,275,000 1,370,625
Sr Nts
06-15-14 7.50 152,000 164,160
Sr Unsecured
08-15-17 6.50 1,860,000(d) 1,897,200
Bonds (continued)
Issuer Coupon Principal Value(a)
Rate Amount
Independent Energy (cont.)
Encore Acquisition
Sr Sub Nts
04-15-14 6.25% $590,000 $587,050
Newfield Exploration
Sr Nts
03-01-11 7.63 2,500,000 2,725,000
Sr Sub Nts
08-15-12 8.38 380,000 413,250
Plains Exploration & Production
Sr Nts
06-15-14 7.13 790,000 841,350
Total 7,998,635
Life Insurance (2.1%)
ASIF Global Financing XIX
Secured
01-17-13 4.90 5,748,000(d) 5,826,575
ING Security Life Institutional Funding
01-15-10 4.25 11,475,000(d) 11,397,326
Metlife
Sr Nts
06-15-35 5.70 9,600,000 9,974,506
Metropolitan Life Global Funding I
Sr Nts
08-19-10 4.63 3,360,000(d) 3,386,154
Pricoa Global Funding I
06-25-12 4.63 16,125,000(d) 16,154,880
Prudential Financial
06-13-35 5.40 4,720,000 4,698,788
Total 51,438,229
Lodging (0.1%)
Hilton Hotels
12-01-12 7.63 1,250,000 1,434,175
ITT
11-15-15 7.38 635,000 695,325
Total 2,129,500
Media Cable (0.2%)
Comcast
03-15-11 5.50 3,635,000 3,758,408
DIRECTV Holdings LLC/Finance
Sr Nts
03-15-13 8.38 406,000 445,585
Videotron Ltee
01-15-14 6.88 530,000(c) 544,575
Total 4,748,568
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
20 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
Rate Amount
Media Non Cable (0.7%)
Corus Entertainment
Sr Sub Nts
03-01-12 8.75% $395,000(c) $424,625
Dex Media West LLC/Finance
Sr Nts Series B
08-15-10 8.50 1,340,000 1,448,875
Emmis Operating
Sr Sub Nts
05-15-12 6.88 400,000 400,000
Lamar Media
01-01-13 7.25 375,000 394,688
Sr Sub Nts
08-15-15 6.63 805,000(d) 821,100
News America
12-15-34 6.20 9,392,000 9,731,812
Quebecor Media
Sr Nts
07-15-11 11.13 640,000(c) 704,000
Radio One
Series B
07-01-11 8.88 1,000,000 1,068,750
Sun Media
02-15-13 7.63 745,000(c) 786,906
Susquehanna Media
Sr Sub Nts
04-15-13 7.38 900,000 943,875
Total 16,724,631
Metals (0.1%)
Peabody Energy
Series B
03-15-13 6.88 1,640,000 1,707,650
Oil Field Services (0.2%)
Halliburton
10-15-10 5.50 3,450,000 3,608,327
Key Energy Services
Series C
03-01-08 8.38 1,250,000 1,293,750
Offshore Logistics
06-15-13 6.13 195,000 190,125
Pride Intl
Sr Nts
07-15-14 7.38 495,000 537,075
Total 5,629,277
Bonds (continued)
Issuer Coupon Principal Value(a)
Rate Amount
Other Financial Institutions (0.9%)
HSBC Finance
06-30-15 5.00% $15,705,000 $15,786,776
Residential Capital
06-30-10 6.38 6,745,000(d) 6,885,431
Total 22,672,207
Packaging (0.1%)
Owens-Illinois Glass Container
05-15-11 7.75 1,100,000 1,166,000
Silgan Holdings
Sr Sub Nts
11-15-13 6.75 615,000 628,069
Total 1,794,069
Paper (0.1%)
Crown Paper
Sr Sub Nts
09-01-05 11.00 6,950,000(b,o,q) ----
Louisiana-Pacific
Sr Nts
08-15-10 8.88 2,260,000 2,554,354
Total 2,554,354
Pharmaceuticals (0.1%)
Merck & Co
03-01-15 4.75 1,450,000 1,437,452
Property & Casualty (0.1%)
Willis Group North America
07-15-15 5.63 3,370,000 3,421,831
Railroads (0.5%)
Union Pacific
04-15-12 6.50 7,390,000 8,151,495
05-01-14 5.38 2,995,000 3,118,403
Total 11,269,898
REITS (0.6%)
Archstone-Smith Operating Trust
05-01-15 5.25 7,660,000 7,781,533
ERP Operating LP
04-01-13 5.20 2,815,000 2,871,337
Simon Property Group LP
06-15-15 5.10 4,975,000(d) 4,956,543
Total 15,609,413
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
21 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
Rate Amount
Retailers (0.4%)
United Auto Group
03-15-12 9.63% $455,000 $488,556
Wal-Mart Stores
09-01-35 5.25 1,395,000(g) 1,407,644
09-01-35 5.25 4,175,000 4,212,843
Series C
06-29-11 8.88 3,500,000 3,533,355
Total 9,642,398
Transportation Services (0.2%)
ERAC USA Finance
05-01-15 5.60 5,075,000(d) 5,241,490
Greater Beijing First Expressways
Sr Nts
06-15-07 9.50 3,640,000(b,c,o,q) ----
Total 5,241,490
Wireless (0.3%)
Nextel Communications
Sr Nts Series E
10-31-13 6.88 1,875,000 2,008,262
US Cellular
Sr Nts
12-15-33 6.70 5,835,000 6,254,583
Total 8,262,845
Wirelines (4.4%)
BellSouth
Sr Unsecured
11-15-34 6.00 2,775,000 2,929,690
Qwest
03-15-12 8.88 1,075,000 1,174,438
Sprint Capital
01-30-11 7.63 26,465,000 30,247,456
11-15-28 6.88 892,000 1,022,183
Telecom Italia Capital
09-30-34 6.00 6,265,000(c,d) 6,431,687
TELUS
06-01-11 8.00 20,552,500(c) 23,906,730
Verizon Pennsylvania
Series A
11-15-11 5.65 41,125,000 43,003,178
Total 108,715,362
Total Bonds
(Cost: $2,434,999,571) $2,446,929,085
Other (0.1%)
Issuer Shares Value(a)
Wayland Investment LLC 6,000,000(b,e,o) $3,053,100
Total Other
(Cost: $6,671,880) $3,053,100
Short-Term Securities (4.3%)(s)
Issuer Effective Amount Value(a)
Yield Payable at
Maturity
U.S. Government Agency (1.0%)
Federal Home Loan Mtge Corp Disc Nt
09-20-05 3.43% $25,000,000 $24,952,500
Commercial Paper (3.3%)
Jupiter Securitization
09-29-05 3.60 10,000,000(t) 9,971,080
Kitty Hawk Funding
09-07-05 3.51 9,310,000(t) 9,303,646
Morgan Stanley & Co
09-01-05 3.57 2,900,000 2,899,712
Park Avenue Receivables
09-22-05 3.55 15,000,000(t) 14,967,550
Thames Asset Global Securitization
09-21-05 3.55 25,000,000(t) 24,948,374
Thunder Bay Funding LLC
10-07-05 3.61 20,000,000(t) 19,926,000
Total 82,016,362
Total Short-Term Securities
(Cost: $106,979,365) $106,968,862
Total Investments in Securities
(Cost: $2,548,650,816)(u) $2,556,951,047
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
22 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Notes to Investments in Securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) Non-income producing. For long-term debt securities, item identified is in
default as to payment of interest and/or principal.
(c) Foreign security values are stated in U.S. dollars. For debt securities,
principal amounts are denominated in U.S. dollar currency unless otherwise
noted. At Aug. 31, 2005, the value of foreign securities represented 4.7%
of net assets.
(d) Represents a security sold under Rule 144A, which is exempt from
registration under the Securities Act of 1933, as amended. This security
has been determined to be liquid under guidelines established by the
Fund's Board of Directors. These securities may be resold in transactions
exempt from registration, normally to qualified institutional buyers. At
Aug. 31, 2005, the value of these securities amounted to $135,734,200 or
5.5% of net assets.
(e) The share amount for Limited Liability Companies (LLC) or Limited
Partnerships (LP) represents capital contributions.
(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 Aug. 31, 2005, the cost of securities purchased, including interest
purchased, on a when-issued and/or other forward-commitment basis was
$74,442,316.
(h) U.S. Treasury inflation-indexed bonds are securities in which the
principal amount is adjusted for inflation and the semiannual interest
payments equal a fixed percentage of the inflation-adjusted principal
amount.
(i) Interest only represents securities that entitle holders to receive only
interest payments on the underlying mortgages. The yield to maturity of
an interest only is extremely sensitive to the rate of principal
payments on the underlying mortgage assets. A rapid (slow) rate of
principal repayments may have an adverse (positive) effect on yield to
maturity. The principal amount shown is the notional amount of the
underlying mortgages. Interest rate disclosed represents yield based
upon the estimated timing and amount of future cash flows at Aug. 31,
2005.
(j) Principal only represents securities that entitle holders to receive only
principal payments on the underlying mortgages. The yield to maturity of a
principal only is sensitive to the rate of principal payments on the
underlying mortgage assets. A slow (rapid) rate of principal repayments
may have an adverse (positive) effect on yield to maturity. Interest rate
disclosed represents yield based upon the estimated timing of future cash
flows at Aug. 31, 2005.
(k) Adjustable rate mortgage; interest rate varies to reflect current market
conditions; rate shown is the effective rate on Aug. 31, 2005.
(l) The following abbreviations are used in the portfolio security
descriptions to identify the insurer of the issue:
AMBAC -- Ambac Assurance Corporation
FGIC -- Financial Guaranty Insurance Company
FSA -- Financial Security Assurance
MBIA -- MBIA Insurance Corporation
(m) Interest rate varies either based on a predetermined schedule or to
reflect current market conditions; rate shown is the effective rate on
Aug. 31, 2005.
(n) Comparable securities are held to satisfy future delivery requirements of
the following open forward sale commitments at Aug. 31, 2005:
Security Principal Settlement Proceeds Value
amount date receivable
Federal Natl Mtge Assn
09-01-20 5.00% $13,150,000 9-19-05 $13,139,726 $13,240,406
09-01-20 5.50 7,000,000 9-19-05 7,111,563 7,148,750
09-01-35 5.00 21,300,000 9-14-05 20,837,391 21,153,563
09-01-35 5.50 72,550,000 9-14-05 72,436,641 73,275,500
09-01-35 6.00 5,000,000 9-14-05 5,091,406 5,115,625
09-01-35 6.50 19,870,000 9-14-05 20,507,237 20,528,194
- --------------------------------------------------------------------------------
23 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Notes to Investments in Securities (continued)
(o) Identifies issues considered to be illiquid as to their marketability (see
Note 1 to the financial statements). These securities are valued at fair
value according to methods selected in good faith by the Fund's Board of
Directors. Information concerning such security holdings at Aug. 31, 2005,
is as follows:
Security Acquisition Cost
dates
Crown Paper
11.00% Sr Sub Nts 2005 02-10-00 thru 02-14-00 $4,216,724
Greater Beijing First Expressways
9.50% Sr Nts 2007 09-16-98 --
Wayland Investment LLC 05-19-00 6,671,880
(p) Partially pledged as initial deposit on the following open interest rate
futures contracts (see Note 6 to the financial statements):
Type of security Notional amount
Purchase contracts
U.S. Long Bond, Dec. 2005, 20-year $ 41,400,000
Sale contracts
U.S. Treasury Note, Sept. 2005, 5-year 19,900,000
U.S. Treasury Note, Sept. 2005, 10-year 13,300,000
U.S. Treasury Note, Dec. 2005, 5-year 66,300,000
U.S. Treasury Note, Dec. 2005, 10-year 141,900,000
(q) Negligible market value.
(r) At Aug. 31, 2005, security was partially or fully on loan. See Note 5 to
the financial statements.
(s) Cash collateral received from security lending activity is invested in
short-term securities and represents 0.7% of net assets. See Note 5 to the
financial statements. 3.6% of net assets is the Fund's cash equivalent
position.
(t) Commercial paper sold within terms of a private placement memorandum,
exempt from registration under Section 4(2) of the Securities Act of
1933, as amended, and may be sold only to dealers in that program or
other "accredited investors." This security has been determined to be
liquid under guidelines established by the Fund's Board of Directors.
These securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers. At Aug. 31, 2005, the value
of these securities amounted to $79,116,650 or 3.2% of net assets.
(u) At Aug. 31, 2005, the cost of securities for federal income tax purposes
was $2,549,111,156 and the aggregate gross unrealized appreciation and
depreciation based on that cost was:
Unrealized appreciation $ 29,407,129
Unrealized depreciation (21,567,238)
-----------
Net unrealized appreciation $ 7,839,891
------------
How to find information about the Fund's portfolio holdings
(i) The Fund files its complete schedule of portfolio holdings with the
Securities and Exchange Commission (Commission) for the first and third
quarters of each fiscal year on Form N-Q;
(ii) The Fund's Forms N-Q are available on the Commission's website at
http://www.sec.gov;
(iii) The Fund's Forms N-Q may be reviewed and copied at the Commission's Public
Reference Room in Washington, DC (information on the operations of the
Public Reference Room may be obtained by calling 1-800-SEC-0330); and
(iv) The Fund's complete schedule of portfolio holdings, as disclosed in its
annual and semiannual shareholder reports and in its filings on Form N-Q,
can be found at www.riversource.com/investments.
- --------------------------------------------------------------------------------
24 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Financial Statements
Statement of assets and liabilities
RiverSource Diversified Bond Fund
Aug. 31, 2005
Assets
Investments in securities, at value (Note 1)*
(identified cost $2,548,650,816) $2,556,951,047
Capital shares receivable 479,976
Accrued interest receivable 15,852,024
Receivable for investment securities sold 206,792,872
Unrealized appreciation on swap transactions, at value (Note 7) 878,275
-------
Total assets 2,780,954,194
-------------
Liabilities
Disbursements in excess of cash on demand deposit 887,631
Dividends payable to shareholders 451,716
Capital shares payable 164,578
Payable for investment securities purchased 140,630,243
Payable upon return of securities loaned (Note 5) 18,330,000
Accrued investment management services fee 33,907
Accrued distribution fee 538,031
Accrued service fee 553
Accrued transfer agency fee 2,626
Accrued administrative services fee 3,122
Other accrued expenses 324,785
Forward sale commitments, at value (proceeds receivable $139,123,964) (Note 1) 140,462,038
-----------
Total liabilities 301,829,230
-----------
Net assets applicable to outstanding capital stock $2,479,124,964
==============
Represented by
Capital stock -- $.01 par value (Note 1) $ 5,068,498
Additional paid-in capital 2,579,293,685
Undistributed net investment income 5,270,078
Accumulated net realized gain (loss) (Note 9) (117,341,155)
Unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies (Note 6) 6,833,858
---------
Total -- representing net assets applicable to outstanding capital stock $2,479,124,964
==============
Net assets applicable to outstanding shares: Class A $1,774,392,052
Class B $ 484,320,317
Class C $ 18,092,300
Class I $ 9,963
Class Y $ 202,310,332
Net asset value per share of outstanding capital stock: Class A shares 362,799,390 $ 4.89
Class B shares 99,003,330 $ 4.89
Class C shares 3,693,765 $ 4.90
Class I shares 2,037 $ 4.89
Class Y shares 41,351,259 $ 4.89
---------- --------------
*Including securities on loan, at value (Note 5) $ 18,115,920
--------------
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
25 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Statement of operations
RiverSource Diversified Bond Fund
Year ended Aug. 31, 2005
Investment income
Income:
Interest $120,064,422
Fee income from securities lending (Note 5) 361,192
-------
Total income 120,425,614
-----------
Expenses (Note 2):
Investment management services fee 13,003,467
Distribution fee
Class A 4,534,413
Class B 5,752,444
Class C 193,278
Transfer agency fee 4,365,376
Incremental transfer agency fee
Class A 239,386
Class B 149,792
Class C 5,897
Service fee -- Class Y 198,919
Administrative services fees and expenses 1,259,427
Compensation of board members 22,793
Custodian fees 207,936
Printing and postage 619,638
Registration fees 109,340
Audit fees 45,000
Other 105,201
-------
Total expenses 30,812,307
Expenses waived/reimbursed by Ameriprise Financial (fomerly AEFC) (Note 2) (2,024,845)
----------
28,787,462
Earnings credits on cash balances (Note 2) (117,177)
--------
Total net expenses 28,670,285
----------
Investment income (loss) -- net 91,755,329
----------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions (Note 3) 29,398,036
Foreign currency transactions (215,482)
Futures contracts 208,446
Swap transactions (467,823)
--------
Net realized gain (loss) on investments 28,923,177
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies (14,927,428)
-----------
Net gain (loss) on investments and foreign currencies 13,995,749
----------
Net increase (decrease) in net assets resulting from operations $105,751,078
============
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
26 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Statements of changes in net assets
RiverSource Diversified Bond Fund
Year ended Aug. 31, 2005 2004
Operations and distributions
Investment income (loss) -- net $ 91,755,329 $ 105,192,832
Net realized gain (loss) on investments 28,923,177 (4,621,473)
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies (14,927,428) 68,359,517
----------- ----------
Net increase (decrease) in net assets resulting from operations 105,751,078 168,930,876
----------- -----------
Distributions to shareholders from:
Net investment income
Class A (70,478,732) (72,912,216)
Class B (17,993,962) (21,667,704)
Class C (605,297) (659,148)
Class I (421) (1,353)
Class Y (8,081,878) (8,189,423)
---------- ----------
Total distributions (97,160,290) (103,429,844)
----------- ------------
Capital share transactions (Note 4)
Proceeds from sales
Class A shares (Note 2) 259,770,664 251,088,529
Class B shares 84,427,800 89,582,880
Class C shares 4,052,182 5,454,766
Class I shares -- 821,608
Class Y shares 41,037,278 71,322,514
Reinvestment of distributions at net asset value
Class A shares 56,221,455 56,831,525
Class B shares 15,935,666 18,955,456
Class C shares 543,915 580,863
Class I shares -- 1,139
Class Y shares 6,719,948 6,500,832
Payments for redemptions
Class A shares (480,335,355) (699,205,028)
Class B shares (Note 2) (245,851,411) (397,699,256)
Class C shares (Note 2) (7,443,384) (12,180,164)
Class I shares -- (814,281)
Class Y shares (49,568,951) (147,874,937)
----------- ------------
Increase (decrease) in net assets from capital share transactions (314,490,193) (756,633,554)
------------ ------------
Total increase (decrease) in net assets (305,899,405) (691,132,522)
Net assets at beginning of year 2,785,024,369 3,476,156,891
------------- -------------
Net assets at end of year $2,479,124,964 $2,785,024,369
============== ==============
Undistributed net investment income $ 5,270,078 $ 6,413,116
-------------- --------------
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
27 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Notes to Financial Statements
RiverSource Diversified Bond Fund (formerly AXP Diversified Bond Fund)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund is a series of AXP Fixed Income Series, Inc. and is registered under
the Investment Company Act of 1940 (as amended) as a diversified, open-end
management investment company. AXP Fixed Income Series, Inc. has 10 billion
authorized shares of capital stock that can be allocated among the separate
series as designated by the board. The Fund invests primarily in bonds and other
debt securities including securities issued by the U.S. government, corporate
bonds and mortgage- and asset-backed securities.
The Fund offers Class A, Class B, Class C and Class Y shares.
o Class A shares are sold with a front-end sales charge.
o Class B shares may be subject to a contingent deferred sales charge (CDSC)
and automatically convert to Class A shares during the ninth year of
ownership.
o Class C shares may be subject to a CDSC.
o Class Y shares have no sales charge and are offered only to qualifying
institutional investors.
The Fund offers an additional class of shares, Class I, exclusively to certain
institutional investors. Class I shares have no sales charge and are made
available through a separate prospectus supplement provided to investors
eligible to purchase the shares. At Aug. 31, 2005, Ameriprise Financial, Inc.
(Ameriprise Financial) (formerly American Express Financial Corporation) owned
100% of Class I shares.
All classes of shares have identical voting, dividend and liquidation rights.
The distribution fee, transfer agency fees and service fee (class specific
expenses) differ among classes. Income, expenses (other than class specific
expenses) and realized and unrealized gains or losses on investments are
allocated to each class of shares based upon its relative net assets.
The Fund's significant accounting policies are summarized below:
Use of estimates
Preparing financial statements that conform to U.S. generally accepted
accounting principles requires management to make estimates (e.g., on assets,
liabilities and contingent assets and liabilities) that could differ from actual
results.
Valuation of securities
All securities are valued at the close of each business day. Securities traded
on national securities exchanges or included in national market systems are
valued at the last quoted sales price. Debt securities are generally traded in
the over-the-counter market and are valued at a price that reflects fair value
as quoted by dealers in these securities or by an independent pricing service.
Securities for which market quotations are not readily available are valued at
fair value according to methods selected in good faith by the board. Short-term
securities maturing in more than 60 days from the valuation date are valued at
the market price or approximate market value based on current interest rates;
those maturing in 60 days or less are valued at amortized cost.
- --------------------------------------------------------------------------------
28 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Illiquid securities
At Aug. 31, 2005, investments in securities included issues that are illiquid
which the Fund currently limits to 10% of net assets, at market value, at the
time of purchase. The aggregate value of such securities at Aug. 31, 2005 was
$3,053,100 representing 0.12% of net assets. These securities are valued at fair
value according to methods selected in good faith by the board. According to
board guidelines, certain unregistered securities are determined to be liquid
and are not included within the 10% limitation specified above. Assets are
liquid if they can be sold or disposed of in the ordinary course of business
within seven days at approximately the value at which the asset is valued by the
Fund.
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 Aug. 31, 2005, the Fund has entered into outstanding
when-issued securities of $57,643,652 and other forward-commitments of
$16,798,664.
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.
Option transactions
To produce incremental earnings, protect gains, and facilitate buying and
selling of securities for investments, the Fund may buy and write options traded
on any U.S. or foreign exchange or in the over-the-counter market where
completing the obligation depends upon the credit standing of the other party.
The Fund also may buy and sell put and call options and write covered call
options on portfolio securities as well as write cash-secured put options. The
risk in writing a call option is that the 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 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.
Option contracts are valued daily at the closing prices on their primary
exchanges and unrealized appreciation or depreciation is recorded. The Fund will
realize a gain or loss when the option transaction expires or closes. 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.
- --------------------------------------------------------------------------------
29 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Futures transactions
To gain exposure to or protect itself from market changes, the Fund may buy and
sell financial futures contracts traded on any U.S. or foreign exchange. The
Fund also may buy and write put and call options on these futures contracts.
Risks of entering into futures contracts and related options include the
possibility of an illiquid market and that a change in the value of the contract
or option may not correlate with changes in the value of the underlying
securities.
Upon entering into a futures contract, the 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.
Foreign currency translations and foreign currency contracts
Securities and other assets and liabilities denominated in foreign currencies
are translated daily into U.S. dollars. Foreign currency amounts related to the
purchase or sale of securities and income and expenses are translated at the
exchange rate on the transaction date. The effect of changes in foreign exchange
rates on realized and unrealized security gains or losses is reflected as a
component of such gains or losses. In the statement of operations, net realized
gains or losses from foreign currency transactions, if any, may arise from sales
of foreign currency, closed forward contracts, exchange gains or losses realized
between the trade date and settlement date on securities transactions, and other
translation gains or losses on dividends, interest income and foreign
withholding taxes.
The Fund may enter into forward foreign currency exchange contracts for
operational purposes and to protect against adverse exchange rate fluctuation.
The net U.S. dollar value of foreign currency underlying all contractual
commitments held by the Fund and the resulting unrealized appreciation or
depreciation are determined using foreign currency exchange rates from an
independent pricing service. The Fund is subject to the credit risk that the
other party will not complete its contract obligations.
Forward sale commitments
The Fund may enter into forward sale commitments to hedge its portfolio
positions or to sell mortgage-backed securities it owns under delayed delivery
arrangements. Proceeds of forward sale commitments are not received until the
contractual settlement date. During the time a forward sale commitment is
outstanding, equivalent deliverable securities, or an offsetting forward
purchase commitment deliverable on or before the sale commitment date, are used
to satisfy the commitment.
Unsettled forward sale commitments are valued at the current market value of the
underlying securities, generally according to the procedures described under
"Valuation of securities" above. The forward sale commitment is
"marked-to-market" daily and the change in market value is recorded by the Fund
as an unrealized gain or loss. If the forward sale commitment is closed through
the acquisition of an offsetting purchase commitment, the Fund realizes a gain
or loss. If the Fund delivers securities under the commitment, the Fund realizes
a gain or a loss from the sale of the securities based upon the market price
established at the date the commitment was entered into. Forward sale
commitments outstanding at period end are listed in the "Notes to investments in
securities."
- --------------------------------------------------------------------------------
30 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Total return swap transactions
The Fund may enter into swap agreements to earn the total return on a specified
security or index of fixed income securities. Under the terms of the swaps, the
Fund either receives or pays the total return on a reference security or index
applied to a notional principal amount. In return, the Fund agrees to pay or
receive from the counterparty a floating rate, which is reset periodically based
on short-term interest rates, applied to the same notional amount.
The notional amounts of swap contracts are not recorded in the financial
statements. Swaps are valued daily, and the change in value is recorded as
unrealized appreciation (depreciation) until the termination of the swap, at
which time realized gain (loss) is recorded. Payments received or made are
recorded as realized gains (losses).
Total return swaps are subject to the risk that the counterparty will default on
its obligation to pay net amounts due to the Fund.
Guarantees and indemnifications
Under the Fund's organizational documents, its officers and directors are
indemnified against certain liabilities arising out of the performance of their
duties to the Fund. In addition, certain of the Fund's contracts with its
service providers contain general indemnification clauses. The Fund's maximum
exposure under these arrangements is unknown since the amount of any future
claims that may be made against the Fund cannot be determined and the Fund has
no historical basis for predicting the likelihood of any such claims.
Federal taxes
The Fund's policy is to comply with all sections of the Internal Revenue Code
that apply to regulated investment companies and to distribute substantially all
of its taxable income to shareholders. No provision for income or excise taxes
is thus required.
Net investment income (loss) and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of the deferred losses on
certain futures contracts, the recognition of certain foreign currency gains
(losses) as ordinary income (loss) for tax purposes and losses deferred due to
"wash sale" transactions. The character of distributions made during the year
from net investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. Also, due to the timing of
dividend distributions, the fiscal year in which amounts are distributed may
differ from the year that the income or realized gains (losses) were recorded by
the Fund.
On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed net investment income has been increased by
$4,261,923 and accumulated net realized loss has been increased by $4,261,923.
- --------------------------------------------------------------------------------
31 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
The tax character of distributions paid for the years indicated is as follows:
Year ended Aug. 31, 2005 2004
Class A
Distributions paid from:
Ordinary income $70,478,732 $72,912,216
Long-term capital gain -- --
Class B Distributions paid from:
Ordinary income 17,993,962 21,667,704
Long-term capital gain -- --
Class C Distributions paid from:
Ordinary income 605,297 659,148
Long-term capital gain -- --
Class I* Distributions paid from:
Ordinary income 421 1,353
Long-term capital gain -- --
Class Y Distributions paid from:
Ordinary income 8,081,878 8,189,423
Long-term capital gain -- --
* Inception date is March 4, 2004.
At Aug. 31, 2005, the components of distributable earnings on a tax basis are
as follows:
Undistributed ordinary income $ 1,823,333
Accumulated long-term gain (loss) $(104,817,787)
Unrealized appreciation (depreciation) $ (1,791,049)
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 is recognized on the ex-dividend date or upon receipt of
ex-dividend notification in the case of certain foreign securities. Interest
income, including amortization of premium, market discount and original issue
discount using the effective interest method, is accrued daily.
2. EXPENSES AND SALES CHARGES
Under an Investment Management Services Agreement, RiverSource Investments, LLC
(the Investment Manager) determines which securities will be purchased, held or
sold. Prior to Oct. 1, 2005, investment management services were provided by
Ameriprise Financial. The management fee is a percentage of the Fund's average
daily net assets that declines from 0.52% to 0.395% annually as the Fund's
assets increase.
- --------------------------------------------------------------------------------
32 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Under the current Administrative Services Agreement, the Fund pays Ameriprise
Financial a fee for administration and accounting services at a percentage of
the Fund's average daily net assets that declines from 0.05% to 0.025% annually
as the Fund's assets increase. Effective Oct. 1, 2005, the fee percentage of the
Fund's average daily net assets declines from 0.07% to 0.04% annually as the
Fund's assets increase. A minor portion of additional administrative service
expenses paid by the Fund are consultants' fees and fund office expenses. Under
this agreement, the Fund also pays taxes, audit and certain legal fees,
registration fees for shares, compensation of board members, corporate filing
fees and any other expenses properly payable by the Fund and approved by the
board.
Under a Deferred Compensation Plan (the Plan), non-interested board members may
defer receipt of their compensation. Deferred amounts are treated as though
equivalent dollar amounts had been invested in shares of the Fund or other
RiverSource funds. The Fund's liability for these amounts is adjusted for market
value changes and remains in the Fund until distributed in accordance with the
Plan.
Under a separate Transfer Agency Agreement, RiverSource Service Corporation
(formerly American Express Client Service Corporation) (the Transfer Agent)
maintains shareholder accounts and records. The Fund pays the Transfer Agent an
annual fee per shareholder account for this service as follows:
o Class A $20.50
o Class B $21.50
o Class C $21.00
o Class Y $18.50
The incremental transfer agency fee is the amount charged to the specific
classes for the additional expense above the fee for Class Y.
Class I pays a transfer agency fee at an annual rate per shareholder account of
$1. This amount is included in the transfer agency fee on the statement of
operations.
Beginning May 20, 2005, the Transfer Agent implemented an annual closed account
fee of $5 per inactive account, charged on a pro rata basis for 12 months from
the date the account becomes inactive. These fees were insignificant for the
year ended Aug. 31, 2005 and are included in the transfer agency fees on the
statement of operations.
The Fund has agreements with Ameriprise Financial Services, Inc. (formerly
American Express Financial Advisors Inc.) (the Distributor) for distribution and
shareholder services. Under a Plan and Agreement of Distribution pursuant to
Rule 12b-1, the Fund pays a fee at an annual rate up to 0.25% of the Fund's
average daily net assets attributable to Class A shares and up to 1.00% for
Class B and Class C shares.
Under a Shareholder Service Agreement, the Fund pays the Distributor a fee for
service provided to shareholders by financial advisors and other servicing
agents. The fee is calculated at a rate of 0.10% of the Fund's average daily net
assets attributable to Class Y shares.
Sales charges received by the Distributor for distributing Fund shares were
$2,348,664 for Class A, $521,325 for Class B and $4,955 for Class C for the year
ended Aug. 31, 2005.
- --------------------------------------------------------------------------------
33 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
For the year ended Aug. 31, 2005, Ameriprise Financial and its affiliates waived
certain fees and expenses to 0.94% for Class A, 1.70% for Class B, 1.70% for
Class C and 0.78% for Class Y. Of these waived fees and expenses, the transfer
agency fees waived for Class A, Class B, Class C and Class Y were $1,354,764,
$493,492, $17,606 and $158,983, respectively. In addition, Ameriprise Financial
and its affiliates agreed to extend the current agreement to waive certain fees
and expenses through Sept. 30, 2005. Beginning Oct. 1, 2005, a new agreement to
waive certain fees and expenses is effective until Aug. 31, 2006, such that net
expenses will not exceed 0.89% for Class A, 1.65% for Class B, 1.66% for Class
C, 0.59% for Class I and 0.73% for Class Y of the Fund's average daily net
assets.
During the year ended Aug. 31, 2005, the Fund's custodian and transfer agency
fees were reduced by $117,177 as a result of earnings credits from overnight
cash balances.
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $7,427,796,615 and $7,752,415,139, respectively, for the
year ended Aug. 31, 2005. Realized gains and losses are determined on an
identified cost basis.
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the years indicated are as follows:
Year ended Aug. 31, 2005
Class A Class B Class C Class I Class Y
Sold 53,307,133 17,309,061 829,459 -- 8,423,475
Issued for reinvested distributions 11,524,807 3,264,247 111,266 -- 1,376,611
Redeemed (98,492,883) (50,438,583) (1,524,135) -- (10,161,026)
------------ ----------- ---------- -------- -----------
Net increase (decrease) (33,660,943) (29,865,275) (583,410) -- (360,940)
------------ ----------- ---------- -------- -----------
Year ended Aug. 31, 2004
Class A Class B Class C Class I* Class Y
Sold 51,888,177 18,469,701 1,122,760 166,209 14,733,853
Issued for reinvested distributions 11,728,875 3,911,848 119,675 231 1,341,478
Redeemed (144,542,248) (82,296,004) (2,511,111) (164,403) (30,501,584)
------------ ----------- ---------- -------- -----------
Net increase (decrease) (80,925,196) (59,914,455) (1,268,676) 2,037 (14,426,253)
------------ ----------- ---------- -------- -----------
* Inception date is March 4, 2004.
5. LENDING OF PORTFOLIO SECURITIES
At Aug. 31, 2005, securities valued at $18,115,920 were on loan to brokers. For
collateral, the Fund received $18,330,000 in cash. Cash collateral received is
invested in short-term securities, which are included in the short-term section
of the "Investments in securities." Income from securities lending amounted to
$361,192 for the year ended Aug. 31, 2005. The risks to the Fund of securities
lending are that the borrower may not provide additional collateral when
required or return the securities when due.
- --------------------------------------------------------------------------------
34 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
6. INTEREST RATE FUTURES CONTRACTS
At Aug. 31, 2005, investments in securities included securities valued at
$1,734,797 that were pledged as collateral to cover initial margin deposits on
414 open purchase contracts and 2,414 open sale contracts. The notional market
value of the open purchase contracts at Aug. 31, 2005 was $48,864,938 with a net
unrealized gain of $696,969. The notional market value of the open sale
contracts at Aug. 31, 2005 was $267,507,820 with a net unrealized loss of
$1,700,150. See "Summary of significant accounting policies" and "Notes to
investments in securities."
7. SWAP CONTRACTS
At Aug. 31, 2005, the Fund had the following open total return swap contracts:
Termination Notional Unrealized
date principal appreciation
(depreciation)
Receive total return on Lehman Brothers Aaa 8.5+
Commercial Mortgage-Backed Securities Index and
pay a floating rate based on 1-month LIBOR less 0.55%.
Counterparty: Citigroup 09/01/05 $10,500,000 $228,249
Receive total return on Lehman Brothers AAA 8.5+
Commercial Mortgage-Backed Securities Index and
pay a floating rate based on 1-month LIBOR less 0.20%.
Counterparty: Citigroup 10/01/05 7,000,000 150,056
Receive total return on Lehman Brothers Aaa 8.5+
Commercial Mortgage-Backed Securities Index and
pay a floating rate based on 1-month LIBOR less 0.40%.
Counterparty: Citigroup 10/01/05 9,100,000 196,640
Receive total return on Lehman Brothers Aaa 8.5+
Commercial Mortgage-Backed Securities Index and
pay a floating rate based on 1-month LIBOR less 0.30%.
Counterparty: Citigroup 11/01/05 10,200,000 303,330
-------- ---------- -------
Total $878,275
--------
8. BANK BORROWINGS
The Fund has a revolving credit agreement with a syndicate of banks headed by
The Bank of New York, whereby the Fund may borrow for the temporary funding of
shareholder redemptions or for other temporary or emergency purposes. The
agreement went into effect Sept. 21, 2004. The Fund must maintain asset coverage
for borrowings of at least 300%. The agreement, which enables the Fund to
participate with other RiverSource funds, permits borrowings up to $500 million,
collectively. Interest is charged to each Fund based on its borrowings at a rate
equal to either the higher of the Federal Funds Effective Rate plus 0.50% or the
Prime Lending Rate. Borrowings are payable within 60 days after such loan is
executed. The Fund also pays a commitment fee equal to its pro rata share of the
amount of the credit facility at a rate of 0.09% per annum. Prior to this
agreement, the Fund had a revolving credit agreement that permitted borrowings
up to $500 million with Deutsche Bank. The Fund had no borrowings outstanding
during the year ended Aug. 31, 2005. Effective Sept. 20, 2005, the Fund entered
into a new revolving credit agreement with a syndicate of banks headed by
JPMorgan Chase Bank, N.A., whereby the Fund is permitted to have bank borrowings
for temporary or emergency purposes, including funding shareholder redemptions.
- --------------------------------------------------------------------------------
35 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
9. CAPITAL LOSS CARRY-OVER
For federal income tax purposes, the Fund had a capital loss carry-over of
$104,817,787 at Aug. 31, 2005, that if not offset by capital gains will expire
as follows:
2009 2010
$78,698,873 $26,118,914
It is unlikely the board will authorize a distribution of any net realized
capital gains until the available capital loss carry-over has been offset or
expires.
10. FINANCIAL HIGHLIGHTS
The tables below show certain important financial information for evaluating the
Fund's results.
Class A
Per share income and capital changes(a)
Fiscal period ended Aug. 31, 2005 2004 2003 2002 2001
Net asset value, beginning of period $4.87 $4.78 $4.75 $4.86 $4.70
----- ----- ----- ----- -----
Income from investment operations:
Net investment income (loss) .18 .18 .20 .25 .31
Net gains (losses) (both realized and unrealized) .03 .08 .03 (.10) .17
----- ----- ----- ----- -----
Total from investment operations .21 .26 .23 .15 .48
----- ----- ----- ----- -----
Less distributions:
Dividends from net investment income (.19) (.17) (.20) (.25) (.32)
Tax return of capital -- -- -- (.01) --
----- ----- ----- ----- -----
Total distributions (.19) (.17) (.20) (.26) (.32)
----- ----- ----- ----- -----
Net asset value, end of period $4.89 $4.87 $4.78 $4.75 $4.86
----- ----- ----- ----- -----
Ratios/supplemental data
Net assets, end of period (in millions) $1,774 $1,933 $2,280 $2,438 $2,390
Ratio of expenses to average daily net assets(b) .94%(c) .98%(c) .97% .95% .94%
Ratio of net investment income (loss) to average daily net assets 3.67% 3.55% 4.16% 5.17% 6.51%
Portfolio turnover rate (excluding short-term securities) 300% 279% 256% 169% 115%
Total return(d) 4.38% 5.54% 4.91% 3.13% 10.48%
(a) For a share outstanding throughout the period. Rounded to the nearest cent.
(b) Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
(c) Ameriprise Financial and its affiliates waived/reimbursed the Fund for
certain expenses. Had they not done so, the annual ratios of expenses for
Class A would have been 1.02% and 1.00% for the years ended Aug. 31, 2005
and 2004, respectively.
(d) Total return does not reflect payment of a sales charge.
- --------------------------------------------------------------------------------
36 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Class B
Per share income and capital changes(a)
Fiscal period ended Aug. 31, 2005 2004 2003 2002 2001
Net asset value, beginning of period $4.88 $4.78 $4.75 $4.86 $4.70
----- ----- ----- ----- -----
Income from investment operations:
Net investment income (loss) .15 .14 .16 .21 .27
Net gains (losses) (both realized and unrealized) .01 .09 .03 (.10) .17
----- ----- ----- ----- -----
Total from investment operations .16 .23 .19 .11 .44
----- ----- ----- ----- -----
Less distributions:
Dividends from net investment income (.15) (.13) (.16) (.21) (.28)
Tax return of capital -- -- -- (.01) --
----- ----- ----- ----- -----
Total distributions (.15) (.13) (.16) (.22) (.28)
----- ----- ----- ----- -----
Net asset value, end of period $4.89 $4.88 $4.78 $4.75 $4.86
----- ----- ----- ----- -----
Ratios/supplemental data
Net assets, end of period (in millions) $484 $628 $902 $1,047 $954
Ratio of expenses to average daily net assets(b) 1.70%(c) 1.73%(c) 1.73% 1.71% 1.70%
Ratio of net investment income (loss) to average daily net assets 2.92% 2.78% 3.40% 4.40% 5.74%
Portfolio turnover rate (excluding short-term securities) 300% 279% 256% 169% 115%
Total return(d) 3.39% 4.95% 4.12% 2.35% 9.65%
(a) For a share outstanding throughout the period. Rounded to the nearest cent.
(b) Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
(c) Ameriprise Financial and its affiliates waived/reimbursed the Fund for
certain expenses. Had they not done so, the annual ratios of expenses for
Class B would have been 1.78% and 1.75% for the years ended Aug. 31, 2005
and 2004, respectively.
(d) Total return does not reflect payment of a sales charge.
- --------------------------------------------------------------------------------
37 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Class C
Per share income and capital changes(a)
Fiscal period ended Aug. 31, 2005 2004 2003 2002 2001
Net asset value, beginning of period $4.88 $4.78 $4.75 $4.86 $4.71
Income from investment operations:
Net investment income (loss) .15 .14 .16 .21 .27
Net gains (losses) (both realized and unrealized) .02 .09 .03 (.10) .16
Total from investment operations .17 .23 .19 .11 .43
Less distributions:
Dividends from net investment income (.15) (.13) (.16) (.21) (.28)
Tax return of capital -- -- -- (.01) --
Total distributions (.15) (.13) (.16) (.22) (.28)
Net asset value, end of period $4.90 $4.88 $4.78 $4.75 $4.86
Ratios/supplemental data
Net assets, end of period (in millions) $18 $21 $27 $24 $10
Ratio of expenses to average daily net assets(b) 1.70%(c) 1.73%(c) 1.74% 1.72% 1.70%
Ratio of net investment income (loss) to average daily net assets 2.93% 2.79% 3.34% 4.33% 5.62%
Portfolio turnover rate (excluding short-term securities) 300% 279% 256% 169% 115%
Total return(d) 3.60% 4.95% 4.11% 2.35% 9.43%
(a) For a share outstanding throughout the period. Rounded to the nearest cent.
(b) Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
(c) Ameriprise Financial and its affiliates waived/reimbursed the Fund for
certain expenses. Had they not done so, the annual ratios of expenses for
Class C would have been 1.79% and 1.75% for the years ended Aug. 31, 2005
and 2004, respectively.
(d) Total return does not reflect payment of a sales charge.
- --------------------------------------------------------------------------------
38 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Class I
Per share income and capital changes(a)
Fiscal period ended Aug. 31, 2005 2004(b)
Net asset value, beginning of period $4.88 $4.91
----- -----
Income from investment operations:
Net investment income (loss) .20 .11
Net gains (losses) (both realized and unrealized) .02 (.04)
----- -----
Total from investment operations .22 .07
----- -----
Less distributions:
Dividends from net investment income (.21) (.10)
----- -----
Net asset value, end of period $4.89 $4.88
----- -----
Ratios/supplemental data
Net assets, end of period (in millions) $-- $--
Ratio of expenses to average daily net assets(c) .60% .59%(d)
Ratio of net investment income (loss) to average daily net assets 4.01% 3.13%(d)
Portfolio turnover rate (excluding short-term securities) 300% 279%
Total return(e) 4.53% 1.43%(f)
(a) For a share outstanding throughout the period. Rounded to the nearest cent.
(b) Inception date is March 4, 2004.
(c) Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
(d) Adjusted to an annual basis.
(e) Total return does not reflect payment of a sales charge.
(f) Not annualized.
- --------------------------------------------------------------------------------
39 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Class Y
Per share income and capital changes(a)
Fiscal period ended Aug. 31, 2005 2004 2003 2002 2001
Net asset value, beginning of period $4.88 $4.78 $4.75 $4.86 $4.70
----- ----- ----- ----- -----
Income from investment operations:
Net investment income (loss) .19 .18 .21 .25 .32
Net gains (losses) (both realized and unrealized) .02 .10 .03 (.10) .17
----- ----- ----- ----- -----
Total from investment operations .21 .28 .24 .15 .49
----- ----- ----- ----- -----
Less distributions:
Dividends from net investment income (.20) (.18) (.21) (.25) (.33)
Tax return of capital -- -- -- (.01) --
----- ----- ----- ----- -----
Total distributions (.20) (.18) (.21) (.26) (.33)
----- ----- ----- ----- -----
Net asset value, end of period $4.89 $4.88 $4.78 $4.75 $4.86
----- ----- ----- ----- -----
Ratios/supplemental data
Net assets, end of period (in millions) $202 $203 $268 $297 $533
Ratio of expenses to average daily net assets(b) .78%(c) .81%(c) .81% .78% .78%
Ratio of net investment income (loss) to average daily net assets 3.85% 3.70% 4.34% 5.30% 6.66%
Portfolio turnover rate (excluding short-term securities) 300% 279% 256% 169% 115%
Total return(d) 4.34% 5.92% 5.08% 3.29% 10.65%
(a) For a share outstanding throughout the period. Rounded to the nearest cent.
(b) Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
(c) Ameriprise Financial and its affiliates waived/reimbursed the Fund for
certain expenses. Had they not done so, the annual ratios of expenses for
Class Y would have been 0.86% and 0.83% for the years ended Aug. 31, 2005
and 2004, respectively.
(d) Total return does not reflect payment of a sales charge.
- --------------------------------------------------------------------------------
40 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Report of Independent
Registered Public Accounting Firm
THE BOARD AND SHAREHOLDERS
AXP FIXED INCOME SERIES, INC.
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments in securities, of RiverSource Diversified Bond Fund
(a series of AXP Fixed Income Series, Inc.) as of August 31, 2005, the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the years in the two-year period ended August 31, 2005,
and the financial highlights for each of the years in the five-year period ended
August 31, 2005. These financial statements and the financial highlights are the
responsibility of fund management. Our responsibility is to express an opinion
on these financial statements and the financial highlights based on our audits.
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 the financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of August 31, 2005, by correspondence with the custodian and
brokers or by other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
RiverSource Diversified Bond Fund as of August 31, 2005, and the results of its
operations, changes in its net assets and the financial highlights for each of
the periods stated in the first paragraph above, in conformity with U.S.
generally accepted accounting principles.
KPMG LLP
Minneapolis, Minnesota
October 20, 2005
- --------------------------------------------------------------------------------
41 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 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.
RiverSource Diversified Bond Fund
Fiscal year ended Aug. 31, 2005
Class A
Income distributions -- taxable as dividend income:
Qualified Dividend Income for individuals 0.00%
Dividends Received Deduction for corporations 0.00%
Payable date Per share
Sept. 24, 2004 $0.01500
Oct. 25, 2004 0.01511
Nov. 24, 2004 0.01499
Dec. 22, 2004 0.01775
Jan. 27, 2005 0.01500
Feb. 24, 2005 0.01600
March 30, 2005 0.01600
April 28, 2005 0.01700
May 26, 2005 0.01700
June 29, 2005 0.01600
July 28, 2005 0.01600
Aug. 29, 2005 0.01576
Total distributions $0.19161
Class B
Income distributions -- taxable as dividend income:
Qualified Dividend Income for individuals 0.00%
Dividends Received Deduction for corporations 0.00%
Payable date Per share
Sept. 24, 2004 $0.01200
Oct. 25, 2004 0.01181
Nov. 24, 2004 0.01197
Dec. 22, 2004 0.01494
Jan. 27, 2005 0.01135
Feb. 24, 2005 0.01318
March 30, 2005 0.01260
April 28, 2005 0.01412
May 26, 2005 0.01430
June 29, 2005 0.01258
July 28, 2005 0.01310
Aug. 29, 2005 0.01249
Total distributions $0.15444
- --------------------------------------------------------------------------------
42 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Class C
Income distributions -- taxable as dividend income:
Qualified Dividend Income for individuals 0.00%
Dividends Received Deduction for corporations 0.00%
Payable date Per share
Sept. 24, 2004 $0.01201
Oct. 25, 2004 0.01183
Nov. 24, 2004 0.01199
Dec. 22, 2004 0.01496
Jan. 27, 2005 0.01137
Feb. 24, 2005 0.01319
March 30, 2005 0.01263
April 28, 2005 0.01414
May 26, 2005 0.01432
June 29, 2005 0.01260
July 28, 2005 0.01312
Aug. 29, 2005 0.01258
Total distributions $0.15474
Class I
Income distributions -- taxable as dividend income:
Qualified Dividend Income for individuals 0.00%
Dividends Received Deduction for corporations 0.00%
Payable date Per share
Sept. 24, 2004 $0.01652
Oct. 25, 2004 0.01669
Nov. 24, 2004 0.01646
Dec. 22, 2004 0.01910
Jan. 27, 2005 0.01635
Feb. 24, 2005 0.01738
March 30, 2005 0.01766
April 28, 2005 0.01837
May 26, 2005 0.01832
June 29, 2005 0.01753
July 28, 2005 0.01729
Aug. 29, 2005 0.01729
Total distributions $0.20896
- --------------------------------------------------------------------------------
43 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Class Y
Income distributions -- taxable as dividend income:
Qualified Dividend Income for individuals 0.00%
Dividends Received Deduction for corporations 0.00%
Payable date Per share
Sept. 24, 2004 $0.01568
Oct. 25, 2004 0.01587
Nov. 24, 2004 0.01567
Dec. 22, 2004 0.01839
Jan. 27, 2005 0.01583
Feb. 24, 2005 0.01665
March 30, 2005 0.01678
April 28, 2005 0.01766
May 26, 2005 0.01761
June 29, 2005 0.01678
July 28, 2005 0.01667
Aug. 29, 2005 0.01649
Total distributions $0.20008
- --------------------------------------------------------------------------------
44 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Fund Expenses Example
(UNAUDITED)
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments; and (2) ongoing
costs, including management fees; distribution and service (12b-1) fees; and
other Fund expenses. This example is intended to help you understand your
ongoing costs (in dollars) of investing in the Fund and to compare these costs
with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the six months ended Aug. 31, 2005.
Actual Expenses
The first line of the table provides information about actual account values and
actual expenses. You may use the information in this line, together with the
amount you invested, to estimate the expenses that you paid over the period.
Simply divide your account value by $1,000 (for example, an $8,600 account value
divided by $1,000 = 8.6), then multiply the result by the number in the first
line under the heading titled "Expenses paid during the period" to estimate the
expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table provides information about hypothetical account
values and hypothetical expenses based on the Fund's actual expense ratio and an
assumed rate of return of 5% per year before expenses, which is not the Fund's
actual return. The hypothetical account values and expenses may not be used to
estimate the actual ending account balance or expenses you paid for the period.
You may use this information to compare the ongoing costs of investing in the
Fund and other funds. To do so, compare this 5% hypothetical example with the 5%
hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads). Therefore, the second line of the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
- --------------------------------------------------------------------------------
45 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Beginning Ending Expenses
account value account value paid during Annualized
March 1, 2005 Aug. 31, 2005 the period(a) expense ratio
Class A
Actual(b) $1,000 $1,022.20 $4.79(c) .94%
Hypothetical (5% return before expenses) $1,000 $1,020.47 $4.79(c) .94%
Class B
Actual(b) $1,000 $1,018.30 $8.65(c) 1.70%
Hypothetical (5% return before expenses) $1,000 $1,016.64 $8.64(c) 1.70%
Class C
Actual(b) $1,000 $1,018.30 $8.65(c) 1.70%
Hypothetical (5% return before expenses) $1,000 $1,016.64 $8.64(c) 1.70%
Class I
Actual(b) $1,000 $1,023.90 $3.06(c) .60%
Hypothetical (5% return before expenses) $1,000 $1,022.18 $3.06(c) .60%
Class Y
Actual(b) $1,000 $1,023.00 $3.98(c) .78%
Hypothetical (5% return before expenses) $1,000 $1,021.27 $3.97(c) .78%
(a) Expenses are equal to the Fund's annualized expense ratio as indicated
above, multiplied by the average account value over the period, multiplied
by 184/365 (to reflect the one-half year period).
(b) Based on the actual return for the six months ended Aug. 31, 2005: +2.22%
for Class A, +1.83% for Class B, +1.83% for Class C, +2.39% for Class I and
+2.30% for Class Y.
(c) Effective Oct. 1, 2005, the Fund's Board of Directors approved a change to
the fee schedule under the Administrative Services Agreement between
Ameriprise Financial and the Fund. Ameriprise Financial and its affiliates
have contractually agreed to waive certain fees and to absorb certain
expenses until Aug. 31, 2006, unless sooner terminated at the discretion of
the Board. Under this expense cap/fee waiver agreement, net expenses will
not exceed 0.89% for Class A; 1.65% for Class B; 1.66% for Class C; 0.59%
for Class I; and 0.73% for Class Y. If the revised fee schedule under the
Administrative Services Agreement and the cap/fee waiver agreement had been
in place for the entire six-month period ended Aug. 31, 2005, the actual
expenses paid would have been $4.54 for Class A, $8.39 for Class B, $8.44
for Class C, $3.01 for Class I and $3.72 for Class Y; the hypothetical
expenses paid would have been $4.53 for Class A, $8.39 for Class B, $8.44
for Class C, $3.01 for Class I and $3.72 for Class Y.
- --------------------------------------------------------------------------------
46 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
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 member oversees 14
Master Trust portfolios and 90 RiverSource funds. Board members serve until the
next regular shareholders' meeting or until he or she reaches the mandatory
retirement age established by the Board. Under the current Board policy, members
may serve until the end of the meeting following their 75th birthday, or the
fifteenth anniversary of the first Board meeting they attended as members of the
Board, whichever occurs first. This policy does not apply to Ms. Jones who must
retire after her 75th birthday.
Independent Board Members
Name, address, age Position held Principal occupation during Other directorships
with Fund and past five years
length of service
- -------------------------------------- ------------------ ------------------------------ ---------------------
Arne H. Carlson Board member Chair, Board Services
901 S. Marquette Ave. since 1999 Corporation (provides
Minneapolis, MN 55402 administrative services to
Age 71 boards); former Governor
of Minnesota
- -------------------------------------- ------------------ ------------------------------ ---------------------
Philip J. Carroll, Jr. Board member Retired Chairman and CEO, Scottish Power PLC,
901 S. Marquette Ave. since 2002 Fluor Corporation Vulcan Materials
Minneapolis, MN 55402 (engineering and Company, Inc.
Age 67 construction) (construction
materials/chemicals)
- -------------------------------------- ------------------ ------------------------------ ---------------------
Patricia M. Flynn Board member Trustee Professor of
901 S. Marquette Ave. since 2004 Economics and Management,
Minneapolis, MN 55402 Bentley College; former
Age 54 Dean, McCallum Graduate
School of Business, Bentley
College
- -------------------------------------- ------------------ ------------------------------ ---------------------
Anne P. Jones Board member Attorney and Consultant
901 S. Marquette Ave. since 1985
Minneapolis, MN 55402
Age 70
- -------------------------------------- ------------------ ------------------------------ ---------------------
Stephen R. Lewis, Jr. Board member President Emeritus and Valmont Industries,
901 S. Marquette Ave. since 2002 Professor of Economics, Inc. (manufactures
Minneapolis, MN 55402 Carleton College irrigation systems)
Age 65
- -------------------------------------- ------------------ ------------------------------ ---------------------
Catherine James Paglia Board member Director, Enterprise Asset Strategic
901 S. Marquette Ave. since 2004 Management, Inc. (private Distribution, Inc.
Minneapolis, MN 55402 real estate and asset (transportation,
Age 53 management company) distribution and
logistics
consultants)
- -------------------------------------- ------------------ ------------------------------ ---------------------
Alan K. Simpson Board member Former three-term United
1201 Sunshine Ave. since 1997 States Senator for Wyoming
Cody, WY 82414
Age 74
- -------------------------------------- ------------------ ------------------------------ ---------------------
Alison Taunton-Rigby Board member Chief Executive Officer, Hybridon, Inc.
901 S. Marquette Ave. since 2002 RiboNovix, Inc. since 2003 (biotechnology)
Minneapolis, MN 55402 (biotechnology); former
Age 61 President, Forester Biotech
- -------------------------------------- ------------------ ------------------------------ ---------------------
- --------------------------------------------------------------------------------
47 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Board Member Affiliated with Ameriprise Financial, Inc. (formerly AEFC)*
Name, address, age Position held Principal occupation during Other directorships
with Fund and past five years
length of service
- -------------------------------------- ------------------ ------------------------------ ---------------------
William F. Truscott Board member President - U.S. Asset
53600 Ameriprise Financial Center since 2001, Management and Chief
Minneapolis, MN 55474 Vice President Investment Officer of
Age 45 since 2002 Ameriprise Financial, Inc.
and President, Chairman of
the Board and Chief
Investment Officer of
RiverSource Investments, LLC
since 2005. Senior Vice
President - Chief Investment
Officer of Ameriprise
Financial, Inc. and Chairman
of the Board and Chief
Investment Officer of
RiverSource Investments,
LLC, 2001-2005; former Chief
Investment Officer and
Managing Director, Zurich
Scudder
- -------------------------------------- ------------------ ------------------------------ ---------------------
* Interested person by reason of being an officer, director and/or employee
of Ameriprise Financial, Inc. (formerly American Express Financial
Corporation) or of RiverSource Investments, LLC, its wholly owned
subsidiary.
- --------------------------------------------------------------------------------
48 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 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, address, age Position held Principal occupation during Other directorships
with Fund and past five years
length of service
- -------------------------------------- ------------------ ------------------------------ ---------------------
Jeffrey P. Fox Treasurer Vice President - Investment
105 Ameriprise Financial Center since 2002 Accounting, Ameriprise
Minneapolis, MN 55474 Financial, Inc., since 2002;
Age 50 Vice President - Finance,
American Express Company,
2000-2002; Vice President -
Corporate Controller,
Ameriprise Financial, Inc.,
1996-2000
- -------------------------------------- ------------------ ------------------------------ ---------------------
Paula R. Meyer President Senior Vice President -
596 Ameriprise Financial Center since 2002 Mutual Funds, Ameriprise
Minneapolis, MN 55474 Financial, Inc., since 2002
Age 51 and Senior Vice President,
RiverSource Investments, LLC
since 2004; Vice President
and Managing Director -
American Express Funds,
Ameriprise Financial, Inc.,
2000-2002; Vice President,
Ameriprise Financial, Inc.,
1998-2000
- -------------------------------------- ------------------ ------------------------------ ---------------------
Leslie L. Ogg Vice President, President of Board Services
901 S. Marquette Ave. General Counsel, Corporation
Minneapolis, MN 55402 and Secretary
Age 67 since 1978
- -------------------------------------- ------------------ ------------------------------ ---------------------
Beth E. Weimer Chief Compliance Vice President and Chief
172 Ameriprise Financial Center Officer since Compliance Officer,
Minneapolis, MN 55474 2004 Ameriprise Financial, Inc.,
Age 52 since 2001 and Chief
Compliance Officer,
RiverSource Investments, LLC
since 2005; Vice President
and Chief Compliance
Officer - Asset Management
and Insurance, Ameriprise
Financial Services, Inc.,
since 2001; Partner, Arthur
Andersen Regulatory Risk
Services, 1998-2001
- -------------------------------------- ------------------ ------------------------------ ---------------------
The SAI has additional information about the Fund's directors and is available,
without charge, upon request by calling (800) 862-7919.
- --------------------------------------------------------------------------------
49 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Approval of Investment Management Services Agreement
During the period covered by this report, Ameriprise Financial, Inc. (formerly
American Express Financial Corporation or AEFC) (the investment manager), a
wholly-owned subsidiary of American Express Company, served as the investment
manager to the Fund. Under an Investment Management Services Agreement (the
Agreement), the investment manager provides investment advice and other services
to the Fund. Throughout the year, the Funds' Board of Directors and the Board's
Investment Review Committee monitor these services.
Each year the Board determines whether to continue the Agreement by evaluating
the quality and level of service received and the costs associated with those
services. The investment manager prepares detailed reports for the Board and its
Contracts Committee in March and April and provides data prepared by independent
organizations to assist the Board in making this determination. The Board gives
considerable weight to the work, deliberations and conclusions of the Contracts
and Investment Review Committees in determining whether to continue the
Agreement.
On February 1, 2005, American Express Company announced its intention to pursue
a spin-off of AEFC by distributing shares of the common stock of AEFC to
shareholders of American Express Company. At a meeting held in person on April
14, 2005, the Board, including a majority of the independent members, approved
the continuation of the Agreement for an interim period, not to exceed one year,
ending on the later of (i) the effective date of the spin-off or (ii) the
approval by the Fund's shareholders of a new investment management services
agreement with the investment manager (the Interim Period). The spin-off will
not result in an "assignment" of the Agreement under the Investment Company Act
of 1940 and, therefore, will not cause the termination of the Agreement
according to its terms. In connection with the spin-off the investment manager
has proposed that going forward, services under the Agreement be provided by an
affiliate, RiverSource Investments, LLC (RiverSource Investments). Independent
counsel advised the Board that it would be prudent, in connection with the
spin-off, to consider a new agreement with RiverSource Investments and to seek
shareholder approval of that agreement as soon as practical thereafter.
Investment performance is a major factor in the evaluation process, and the
Board reviewed the Fund's performance over a range of different periods by
comparing its performance to relevant Lipper and broader market indices. The
Board considered that over time the Fund's investment performance should be
above median for a peer group of funds with similar investment goals and noted
that the Fund's investment performance in 2004 exceeded the median.
The Board noted that, in addition to portfolio management and investment
research, the investment manager provides portfolio trading, daily net asset
value calculation, management of cash flow, product development, administration
of its compliance and legal departments, access to distribution, accounting and
recordkeeping, and reporting to the Board and shareholders. To evaluate these
services, the Board referred to surveys and benchmarks established by commercial
providers, trade associations and the investment manager's internal processes.
The Board concluded that the services provided were consistent with services
provided by investment managers to comparable mutual funds.
- --------------------------------------------------------------------------------
50 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
The Board also evaluated the price paid for the services provided by the
investment manager, noting the existence of a pricing philosophy, established by
the Board and the investment manager, that seeks to maintain total Fund expenses
within a range of the median expenses charged to comparable funds sold through
financial advisors. The Board considered detailed information set forth in an
annual report on fees and expenses, including, among other things, data showing
a comparison of the Fund's expenses with median expenses paid by funds in its
comparison group and data showing the Fund's contribution to the investment
manager's profitability. The Board determined that while the Fund's expenses are
higher than the median for its comparison group, the existing fee waiver has
been increased to reduce further the expenses the Fund will pay.
The Board considered the economies of scale that might be realized by the
investment manager as the Fund grew and took note of the extent to which Fund
shareholders also might benefit from such growth. The Board considered that the
Agreement provided for lower fees as assets increase at pre-established
breakpoints and concluded that the Agreement satisfactorily provided for sharing
these economies of scale.
The Board took into account the Contracts Committee's discussion comparing the
fees the investment manager charges to the Fund with those it charges to
institutional clients, noting that the relatively higher fees paid by the Fund
were principally attributable to the additional services required to manage a
regulated mutual fund, like the Fund, and the operation of a large mutual fund
family. The Board also considered the profitability realized by the investment
manager and its affiliates from its relationship with the Fund. The Board took
into account the services acquired by the investment manager through the use of
commission dollars paid by the Fund on portfolio transactions. The Board
concluded that the investment manager's overall costs and profitability were
appropriate, although profitability may be too low on an ongoing basis.
The Board noted that the fees paid by the Fund should permit the investment
manager to offer competitive compensation to its personnel, make necessary
investments in its business and earn an appropriate profit. Based on the
foregoing, the Board concluded that the fees paid to the investment manager
under the Agreement were fair and reasonable and determined to approve renewal
of the Agreement for the Interim Period.
Following the period covered by this report, on September 8, 2005, the Board
approved a new investment management agreement with RiverSource Investments and
recommended its approval by shareholders. The agreement will be considered by
shareholders at a meeting scheduled to be held on February 15, 2006. If
approved, the new agreement would take effect shortly after such approval. The
Board based its approval on, among other factors, its determination that
RiverSource Investments, following the spin-off, would be in a position to
continue to provide the Fund with a level and quality of services that would
meet expectations. The Board also determined that fees to be paid under the new
agreement were fair and reasonable in light of the services to be provided.
- --------------------------------------------------------------------------------
51 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
Proxy Voting
The policy of the Board is to vote all proxies of the companies in which the
Fund holds investments. The procedures are stated in the Statement of Additional
Information (SAI). You may obtain a copy of the SAI without charge by calling
(800) 862-7919; by looking at the website www.riversource.com/investments; or by
searching the website of the Securities and Exchange Commission (SEC) at
http://www.sec.gov. Information regarding how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is
available without charge by calling the Fund's administrator, Board Services
Corporation, collect at (612) 330-9283; by looking at the website
www.riversource.com/investments; or by searching the website of the SEC at
www.sec.gov.
- --------------------------------------------------------------------------------
52 -- RIVERSOURCE DIVERSIFIED BOND FUND -- 2005 ANNUAL REPORT
(logo)
RiverSource(SM)
Investments
RiverSource Investments
200 Ameriprise Financial Center
Minneapolis, MN 55474
This report must be accompanied or preceded by the Fund's current prospectus.
Distributed by Ameriprise Financial Services, Inc. (formerly known as American
Express Financial Advisors Inc.). Member NASD.
Item 2. (a) The Registrant has adopted a code of ethics that applies to the
Registrant's principal executive officer and principal financial
officer. A copy of the code of ethics is filed as an exhibit to this
form N-CSR.
(b) During the period covered by this report, there were not any
amendments to the provisions of the code of ethics adopted in 2(a)
above.
(c) During the period covered by this report, there were not any
implicit or explicit waivers to the provisions of the code of ethics
adopted in 2(a).
Item 3. The Registrant's board of directors has determined that independent
directors Livio D. DeSimone and Anne P. Jones, each qualify as audit
committee financial experts.
Item 4. Principal Accountant Fees and Services
Fund - Related Fees*
(a) Audit Fees. The fees paid for the years ended Aug. 31, to KPMG LLP for
professional services rendered for the audits of the annual financial
statements for AXP Fixed Income Series, Inc. were as follows:
2005 - $43,500; 2004 - $43,383
(b) Audit - Related Fees. The fees paid for the years ended Aug. 31, to
KPMG LLP for additional professional services rendered in connection
with the registrant's security count pursuant to Rule 17f-2 for AXP
Fixed Income Series, Inc. were as follows:
2005 - $589; 2004 - $639
(c) Tax Fees. The fees paid for the years ended Aug. 31, to KPMG LLP for
tax compliance related services for AXP Fixed Income Series, Inc. were
as follows:
2005 - $2,575; 2004 - $1,994
(d) All Other Fees. The fees paid for the years ended Aug. 31, to KPMG LLP
for additional professional services rendered in connection to proxy
filing for AXP Fixed Income Series, Inc. were as follows:
2005 - $776; 2004 - None
(e) (1) Audit Committee Pre-Approval Policy. Pursuant to Sarbanes-Oxley
pre-approval requirements, all services to be performed by KPMG 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 2005 and 2004 were pre-approved by the audit committee.
(f) Not applicable.
(g) Non-Audit Fees. The fees paid for the years ended Aug. 31, by the
registrant for non-audit services to KPMG LLP were as follows:
2005 - None; 2004 - None
The fees paid for the years ended Aug. 31, to KPMG LLP 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:
2005 - $87,000; 2004 - $126,900
(h) 100% of the services performed in item (g) above during 2005 and 2004
were pre-approved by the audit committee.
*2004 represents bills paid 9/1/03 - 8/31/04
2005 represents bills paid 9/1/04 - 8/31/05
Item 5. Audit Committee of Listed Registrants. Not applicable.
Item 6. The complete schedule of investments is included in Item 1 of this
Form N-CSR.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies. Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9. Purchase of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers. Not applicable.
Item 10. Submission of matters to a vote of security holders. Not applicable.
Item 11. Controls and Procedures.
(a) Based upon their evaluation of the registrant's disclosure
controls and procedures as conducted within 90 days of the filing
date of this Form N-CSR, the registrant's Principal Financial
Officer and Principal Executive Officer have concluded that those
disclosure controls and procedures provide reasonable assurance
that the material information required to be disclosed by the
registrant on this report is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
(b) There were no changes in the registrant's internal controls over
financial reporting that occurred during the registrant's last fiscal
half-year (the registrant's second fiscal half-year in the case of an
annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over
financial reporting.
Item 12. Exhibits.
(a)(1) Code of ethics as applies to the Registrant's principal
executive officer and principal financial officer, as required to be
disclosed under Item 2 of Form N-CSR, is attached as Ex. 99.CODE ETH.
(a)(2) Separate certification for the Registrant's principal
executive officer and principal financial officer, as required by
Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a)
under the Investment Company Act of 1940, are attached as
EX.99.CERT.
(a)(3) Not applicable.
(b) A certification by the Registrant's principal executive officer
and principal financial officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and Rule 30a-2(b) under the Investment
Company Act of 1940, is attached as EX.99.906 CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) AXP Fixed Income Series, Inc.
By /s/ Paula R. Meyer
------------------
Paula R. Meyer
President and Principal Executive Officer
Date October 31, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/ Paula R. Meyer
------------------
Paula R. Meyer
President and Principal Executive Officer
Date October 31, 2005
By /s/ Jeffrey P. Fox
------------------
Jeffrey P. Fox
Treasurer and Principal Financial Officer
Date October 31, 2005