UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
AMENDMENT TO CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-4260
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RIVERSOURCE GOVERNMENT INCOME SERIES, INC.
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(Exact name of registrant as specified in charter)
50606 Ameriprise 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: 5/31
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Date of reporting period: 5/31
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Annual Report
RIVERSOURCE [LOGO](SM)
INVESTMENTS
RIVERSOURCE(SM)
SHORT DURATION U.S. GOVERNMENT FUND
ANNUAL REPORT FOR THE
PERIOD ENDED MAY 31, 2006
> RIVERSOURCE SHORT DURATION
U.S. GOVERNMENT FUND SEEKS TO
PROVIDE SHAREHOLDERS WITH A HIGH
LEVEL OF CURRENT INCOME AND SAFETY OF
PRINCIPAL CONSISTENT WITH INVESTMENT
IN U.S. GOVERNMENT AND GOVERNMENT
AGENCY SECURITIES.
TABLE OF CONTENTS
Fund Snapshot ............................................................. 2
Performance Summary ....................................................... 3
Questions & Answers with Portfolio Management ............................. 4
The Fund's Long-term Performance .......................................... 8
Investments in Securities ................................................. 10
Financial Statements ...................................................... 16
Notes to Financial Statements ............................................. 19
Report of Independent Registered Public Accounting Firm ................... 33
Federal Income Tax Information ............................................ 34
Fund Expenses Example ..................................................... 37
Board Members and Officers ................................................ 39
Approval of Investment Management Services Agreement ...................... 42
Proxy Voting .............................................................. 42
Results of Meeting of Shareholders ........................................ 43
[LOGO]
DALBAR RATED
2006
FOR COMMUNICATION
RiverSource Funds' shareholder reports 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.
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RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT --- 1
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FUND SNAPSHOT AT MAY 31, 2006
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PORTFOLIO MANAGERS
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PORTFOLIO MANAGERS* SINCE YEARS IN INDUSTRY
Jamie Jackson 6/03 18
Scott Kirby 6/01 20
* The Fund is managed by a team of portfolio managers led by Jamie Jackson and
Scott Kirby.
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FUND OBJECTIVE
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For investors seeking a high level of current income and safety of principal
consistent with investment in U.S. government and government agency securities.
Inception dates by class
A: 8/19/85 B: 3/20/95 C: 6/26/00 I: 3/4/04 Y: 3/20/95
Ticker symbols by class
A: IFINX B: ISHOX C: AXFCX I: AGMIX Y: IDFYX
Total net assets $1.075 billion
Number of holdings 161
Weighted average life(1) 3.9 years
Effective duration(2) 2.9 years
Weighted average bond rating(3) AAA
(1) WEIGHTED AVERAGE LIFE measures a bond's maturity, which takes into
consideration the possibility that the issuer may call the bond before its
maturity date.
(2) EFFECTIVE DURATION measures the sensitivity of a security's price to
parallel shifts in the yield curve (the graphical depiction of the levels
of interest rates from two years out to 30 years). Positive duration means
that as rates rise, the price decreases, and negative duration means that
as rates rise, the price increases.
(3) WEIGHTED AVERAGE BOND RATING represents the average credit quality of the
underlying bonds in the portfolio.
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CREDIT QUALITY SUMMARY
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Percentage of bond portfolio assets
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AAA bonds 100.0%
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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.
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SECTOR COMPOSITION
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Percentage of portfolio assets
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Mortgage-Backed 51.8%
U.S. Government Obligations & Agencies 43.8%
Short-Term Securities* 3.8%
Commercial Mortgage-Backed 0.6%
* Of the 3.8%, 1.7% is due to security lending activity and 2.1% is the
Fund's cash equivalent position.
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STYLE MATRIX
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Shading within the style matrix indicates areas in which the Fund generally
invests.
DURATION
SHORT INT. LONG
X HIGH
MEDIUM QUALITY
LOW
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SEC YIELDS
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At May 31, 2006 by class
A: 3.94% B: 3.39% C: 3.39% I: 4.49% Y: 4.31%
At June 30, 2006 by class
A: 4.40% B: 3.88% C: 3.86% I: 4.98% Y: 4.79%
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 3 for additional
performance information.
Investment products, including shares of mutual funds, involve investment risks
including possible loss of principal and fluctuation in value.
Shares of the RiverSource Short Duration U.S. Government Fund are not insured or
guaranteed by the U.S. government.
There are risks associated with an investment in a bond fund, including credit
risk, interest rate risk, and prepayment and extension risk. See the Fund's
prospectus for information on these and other risks associated with the Fund. In
general, bond prices rise when interest rates fall and vice versa. This effect
is usually more pronounced for longer-term securities.
Fund holdings are as of the date given, are subject to change at any time, and
are not recommendations to buy or sell any security.
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2 --- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT
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PERFORMANCE SUMMARY
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PERFORMANCE COMPARISON
For the year ended May 31, 2006
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
+1.00% RiverSource Short Duration U.S. Government Fund
Class A (excluding sales charge)
+1.87% Lehman Brothers 1-3 Year Government Index (unmanaged)
+1.76% Lipper Short U.S. Government Funds 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 contacting your financial institution or
visiting www.riversource.com/funds.
The 4.75% sales charge applicable to Class A shares of the Fund is not reflected
in the bar chart. If reflected, returns would be lower than those shown. The
performance of other classes may vary from that shown because of differences in
expenses.
The indices do not reflect the effects of sales charges, expenses (excluding
Lipper) and taxes.
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AVERAGE ANNUAL TOTAL RETURNS
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CLASS A CLASS B CLASS C CLASS I CLASS Y
(INCEPTION DATES) (8/19/85) (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(5)
AT MAY 31, 2006
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1 year +1.00% -3.80% +0.26% -4.63% +0.26% -0.72% +1.56% +1.19%
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3 years +0.89% -0.73% +0.14% -1.14% +0.14% +0.14% N/A +1.07%
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5 years +2.64% +1.65% +1.88% +1.51% +1.88% +1.88% N/A +2.82%
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10 years +4.29% +3.79% +3.51% +3.51% N/A N/A N/A +4.44%
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Since inception +6.17% +5.92% +3.89% +3.89% +2.92% +2.92% +1.22% +4.84%
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AT JUNE 30, 2006
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1 year +0.92% -3.88% +0.17% -4.70% +0.17% -0.80% +1.47% +1.32%
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3 years +0.93% -0.70% +0.18% -1.10% +0.18% +0.18% N/A +1.18%
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5 years +2.62% +1.63% +1.86% +1.49% +1.86% +1.86% N/A +2.84%
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10 years +4.22% +3.72% +3.44% +3.44% N/A N/A N/A +4.40%
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Since inception +6.15% +5.90% +3.86% +3.86% +2.88% +2.88% +1.22% +4.83%
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(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
institutional investors only.
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RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT --- 3
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QUESTIONS & ANSWERS
WITH PORTFOLIO MANAGEMENT
Below, the Fund's portfolio managers Jamie Jackson and Scott Kirby discuss the
Fund's results and positioning for the annual period ended May 31, 2006.
Q: How did RiverSource Short Duration U.S. Government Fund perform for the
fiscal year?
A: RiverSource Short Duration U.S. Government Fund's Class A shares
(excluding sales charge) rose 1.00% for the 12 months ended May 31, 2006.
The Fund underperformed the Lehman Brothers 1-3 Year Government Index
(Lehman Index), which gained 1.87%. The Fund also underperformed the
Lipper Short U.S. Government Funds Index, representing the Fund's peer
group, which rose 1.76% during the same time frame.
Q: What factors most significantly affected Fund performance during the
annual period?
A: Returns for the Fund and its Lehman Index benchmark were positive but
modest. Overall, fixed income market performance was muted during the
annual period by sharply rising interest rates across the spectrum of
maturities, or yield curve. Higher rates drove bond prices down, partially
eclipsing the coupon return of the bonds and eroding principal. Interest
rates rose during the annual period largely in reaction to continued
policy tightening by the Federal Reserve Board (the Fed), which hiked
interest rates eight more times, bringing the targeted federal funds rate
to 5% by the end of May 2006. Rates also rose in response to signs that
economic expansion was continuing at a brisk pace.
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4 --- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT
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QUESTIONS & ANSWERS
> OVERALL, FIXED INCOME MARKET PERFORMANCE WAS MUTED
DURING THE ANNUAL PERIOD BY SHARPLY RISING INTEREST RATES
ACROSS THE SPECTRUM OF MATURITIES, OR YIELD CURVE.
The primary detractor from the Fund's annual results was its comparatively
longer duration positioning than the Lehman Index, as rates rose dramatically
during the period. Duration is a measure of the Fund's sensitivity to changes in
interest rates. The Fund also lagged its Lipper peer group due to its
comparatively defensive positioning, generally maintaining a more conservative
risk profile than the peer group.
The Fund's performance did benefit from its sizable allocation to non-Treasury
sectors, as agencies and high-quality mortgage-backed securities outperformed
U.S. Treasuries during the annual period. Effective issue selection within the
Fund's allocation to mortgages helped most -- in particular, premium-coupon
securities, hybrid adjustable-rate mortgages (ARMs) and well-structured
collateralized mortgage obligations (CMOs).
The Fund's position in Treasury Inflation Protected Securities (TIPS) also
helped its results, though more modestly, as TIPS outperformed nominal Treasury
securities, or non-inflation protected Treasury securities, during the fiscal
year. TIPS benefited from continued volatility in energy prices and the market's
higher expectations for inflation. We sold the Fund's TIPS holdings in March
2006, as these securities reached the price targets we had set for them.
Finally, yields moved higher across the yield curve during the 12-month period,
though significantly more so at the front end than at the longer end, causing a
significant yield curve flattening. We had prudently positioned the portfolio
for just such a yield curve flattening scenario.
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RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT --- 5
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QUESTIONS & ANSWERS
Q: What changes did you make to the Fund and how is it currently positioned?
A: While we kept a rather defensive positioning throughout the annual period,
we extended the Fund's duration a bit as we believe the Fed is nearing an
end to its current tightening cycle and therefore it would be appropriate
to add some interest rate sensitivity.
Also, we increased the Fund's allocation to non-Treasury sectors,
especially mortgage-backed securities, during periods of weakness, such as
the fourth quarter of 2005 and again in the last few months of the fiscal
year. We had started to see better value in these securities, and we
believed they looked increasingly attractive.
Q: How do you intend to manage the Fund in the coming months?
A: U.S. interest rates across the range of maturities, or yield curve, have
risen to levels that seem reasonable given our economic view. We believe
the most likely scenario is for inflation to be nudged higher but also for
a modest economic slowdown to become apparent in the second half of 2006,
with a slowdown in the housing sector the likely catalyst. We thus believe
the Fed may soon pause in its current tightening cycle.
Based on this view, we intend to implement a somewhat more aggressive
strategy in the non-Treasury sectors, investing in some lower coupon
mortgage-backed securities and pass-through mortgages. Pass-through
mortgage securities consist of a pool of residential mortgage loans, where
homeowners' monthly payments of principal, interest and prepayments
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6 --- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT
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QUESTIONS & ANSWERS
pass from the original bank through a government agency or investment bank
to investors. At the same time, we intend to maintain our overall
defensive positioning within the mortgage sector, with an emphasis on
premium coupons, 15-year mortgages and attractively structured hybrid ARMs
and CMOs. As we anticipate the end of the Fed's current tightening cycle
to be near, we also intend to maintain the Fund's current duration
positioning for the near term.
We will continue to monitor job creation and inflation numbers, as they
remain key indicators for the economy in the coming months. As always, our
strategy is to provide added portfolio value with a moderate amount of
risk. Quality issues and security selection remain a priority as we
continue to seek attractive buying opportunities.
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RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT --- 7
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THE FUND'S LONG-TERM PERFORMANCE
The chart on the facing page illustrates the total value of an assumed $10,000
investment in RiverSource Short Duration U.S. Government Fund Class A shares
(from 6/1/96 to 5/31/06) as compared to the performance of two widely cited
performance indices, the Lehman Brothers 1-3 Year Government Index and the
Lipper Short U.S. Government Funds Index. In comparing the Fund's Class A shares
to these indices, you should take into account the fact that the Fund's
performance reflects the maximum sales charge of 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 contacting your financial institution or
visiting www.riversource.com/funds. 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.
CAPTION>
CLASS A
------------------------------------------------
Short-term Long-term
Fiscal year ended Income capital gains capital gains TOTAL
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May 31, 2006 $0.16 $-- $-- $0.16
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May 31, 2005 0.12 -- -- 0.12
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May 31, 2004 0.11 -- -- 0.11
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May 31, 2003 0.15 -- -- 0.15
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May 31, 2002 0.20 -- -- 0.20
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8 --- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT
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VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN RIVERSOURCE SHORT DURATION U.S.
GOVERNMENT FUND
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
RiverSource Short Duration
U.S. Government Fund Class A Lehman Brothers 1-3 Year Lipper Short U.S.
(includes sales charge) U.S. Government Index(1) Government Funds Index(2)
'96 $9,525 $10,000 $10,000
'97 $10,261 $10,661 $10,650
'98 $11,098 $11,404 $11,357
'99 $11,551 $12,006 $11,903
'00 $11,550 $12,490 $12,343
'01 $12,727 $13,747 $13,551
'02 $13,462 $14,626 $14,261
'03 $14,121 $15,453 $14,917
'04 $14,087 $15,555 $14,928
'05 $14,358 $15,847 $15,231
'06 $14,501 $16,143 $15,499
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COMPARATIVE RESULTS
Results at May 31, 2006
SINCE
1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION(3)
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND (INCLUDES SALES CHARGE)
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Class A Cumulative value of $10,000 $9,620 $9,783 $10,853 $14,501 $33,042
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Average annual total return -3.80% -0.73% +1.65% +3.79% +5.92%
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LEHMAN BROTHERS 1-3 YEAR GOVERNMENT INDEX(1)
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Cumulative value of $10,000 $10,187 $10,448 $11,745 $16,143 $35,662
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Average annual total return +1.87% +1.47% +3.27% +4.91% +6.32%
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LIPPER SHORT U.S. GOVERNMENT FUNDS INDEX(2)
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Cumulative value of $10,000 $10,176 $10,389 $11,436 $15,499 N/A
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Average annual total return +1.76% +1.28% +2.72% +4.48% N/A
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Results for other share classes can be found on page 3.
(1) The Lehman Brothers 1-3 Year Government Index, an unmanaged index, is made
up of all publicly issued, non-convertible domestic debt of the U.S.
government, or agency thereof, or any quasi-federal corporation. The index
also includes corporate debt guaranteed by the U.S. government. Only notes
and bonds with a minimum maturity of one year up to a maximum maturity of
2.9 years are included. The index reflects reinvestment of all
distributions and changes in market prices, but excludes brokerage
commissions or other fees.
(2) The Lipper Short U.S. Government Funds Index includes the 30 largest short
U.S. government funds tracked by Lipper Inc. The index's returns include
net reinvested dividends.
(3) Fund data is from Aug. 19, 1985. Lehman Brothers 1-3 Government Index data
is from Sept. 1, 1985. The Fund began operating before the inception of
the Lipper peer group.
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RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT --- 9
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INVESTMENTS IN SECURITIES
RiverSource Short Duration U.S. Government Fund
MAY 31, 2006
(Percentages represent value of investments compared to net assets)
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BONDS (104.4%)
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ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
U.S. GOVERNMENT OBLIGATIONS & AGENCIES (47.5%)
Federal Farm Credit Bank
10-10-08 4.25% $ 6,015,000 $ 5,878,959
Federal Home Loan Bank
09-15-06 3.50 30,000,000 29,850,720
10-19-07 4.13 35,000,000 34,437,375
01-18-08 4.63 22,000,000 21,775,820
02-08-08 4.63 22,510,000 22,254,557
11-21-08 4.63 6,500,000 6,395,123
Federal Home Loan Mtge Corp
09-15-06 3.63 34,500,000 34,343,405
01-30-07 3.00 10,950,000 10,782,454
08-17-07 4.00 16,890,000 16,625,739
10-15-08 5.13 11,385,000 11,331,639
Federal Natl Mtge Assn
03-02-07 3.00 16,000,000 15,723,104
10-15-08 4.50 22,165,000 21,774,519
U.S. Treasury
06-30-07 3.63 79,119,000 77,898,193
09-30-07 4.00 15,520,000 15,308,416
11-30-07 4.25 39,901,000 39,438,068
02-15-08 3.38 93,880,000(l) 91,342,329
05-15-09 4.88 15,420,000 15,354,943
05-15-16 5.13 21,475,000(b) 21,491,772
05-15-18 9.13 4,205,000 5,635,028
08-15-23 6.25 4,355,000 4,784,717
02-15-26 6.00 7,160,000 7,719,375
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Total 510,146,255
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COMMERCIAL MORTGAGE-BACKED (0.7%)(F)
Federal Natl Mtge Assn #360800
01-01-09 5.74 3,138,085 3,134,463
Federal Natl Mtge Assn #381990
10-01-09 7.11 4,211,846 4,392,966
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Total 7,527,429
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MORTGAGE-BACKED (56.2%)(F,G)
Countrywide Alternative Loan Trust
Collateralized Mtge Obligation
Series 2005-6CB Cl 1A1
04-25-35 7.50 2,174,154 2,219,675
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BONDS (CONTINUED)
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ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Countrywide Alternative Loan Trust
Collateralized Mtge Obligation
Series 2006-2CB Cl A11
03-25-36 6.00% $ 7,451,844 $ 7,337,362
Countrywide Home Loans
Collateralized Mtge Obligation
Series 2005-R2 Cl 2A1
06-25-35 7.00 6,680,013(d) 6,822,263
Countrywide Home Loans
Collateralized Mtge Obligation
Series 2006-OA5 Cl 2A2
04-25-46 5.38 3,571,279(k) 3,573,904
CS First Boston Mtge Securities
Collateralized Mtge Obligation
Series 2005-8 Cl 7A1
09-25-35 7.00 5,373,644 5,417,306
Federal Home Loan Mtge Corp #A18107
01-01-34 5.50 3,830,195 3,701,067
Federal Home Loan Mtge Corp #B16408
09-01-19 5.50 1,573,756 1,550,549
Federal Home Loan Mtge Corp #B16409
09-01-19 5.50 2,171,205 2,139,187
Federal Home Loan Mtge Corp #C00351
07-01-24 8.00 362,097 385,044
Federal Home Loan Mtge Corp #C00385
01-01-25 9.00 564,583 612,137
Federal Home Loan Mtge Corp #C80329
08-01-25 8.00 115,695 123,009
Federal Home Loan Mtge Corp #D54959
07-01-24 8.00 45,418 48,297
Federal Home Loan Mtge Corp #E00398
10-01-10 7.00 666,930 679,770
Federal Home Loan Mtge Corp #E81240
06-01-15 7.50 5,753,545 5,984,410
Federal Home Loan Mtge Corp #E90650
07-01-12 5.50 384,589 379,030
Federal Home Loan Mtge Corp #E92454
11-01-17 5.00 4,171,306 4,039,223
Federal Home Loan Mtge Corp #E93465
11-01-17 5.50 7,147,017 7,052,331
See accompanying notes to investments in securities.
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10 --- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT
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BONDS (CONTINUED)
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ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Home Loan Mtge Corp #G00363
06-01-25 8.00% $ 445,423 $ 473,580
Federal Home Loan Mtge Corp #G00501
05-01-26 9.00 846,528 917,552
Federal Home Loan Mtge Corp #G10669
03-01-12 7.50 2,909,753 3,022,522
Federal Home Loan Mtge Corp #G11243
04-01-17 6.50 19,383,020 19,741,880
Federal Home Loan Mtge Corp #G12099
06-01-13 4.50 17,972,789 17,167,784
Federal Home Loan Mtge Corp #G12100
11-01-13 5.00 5,194,725 5,035,601
Federal Home Loan Mtge Corp #M30074
09-01-09 6.50 176,366 178,778
Federal Home Loan Mtge Corp
Collateralized Mtge Obligation
06-15-16 7.00 9,964,799 10,269,260
Federal Home Loan Mtge Corp
Collateralized Mtge Obligation
Interest Only
12-15-12 12.70 6,548,764(i) 287,016
02-15-14 17.16 6,986,675(i) 391,181
01-01-20 18.04 10,813(i) 2,409
03-15-25 14.63 8,656,392(i) 708,835
Federal Home Loan Mtge Corp
Collateralized Mtge Obligation
Interest Only/Inverse Floater
11-15-19 14.18 8,894,978(h,i) 620,150
03-15-32 17.31 2,074,274(h,i) 170,427
Federal Natl Mtge Assn
06-01-36 5.00 5,280,000(e) 4,951,647
06-01-36 6.50 54,325,000(e) 54,800,343
06-01-36 7.00 8,000,000(e) 8,195,000
Federal Natl Mtge Assn #124528
10-01-07 7.50 177,122 178,202
Federal Natl Mtge Assn #125032
11-01-21 8.00 181,700 192,475
Federal Natl Mtge Assn #190129
11-01-23 6.00 1,332,941 1,323,772
Federal Natl Mtge Assn #190353
08-01-34 5.00 8,093,701 7,615,077
Federal Natl Mtge Assn #190764
09-01-07 8.50 15,669 15,652
Federal Natl Mtge Assn #190785
05-01-09 7.50 724,084 728,500
Federal Natl Mtge Assn #190988
06-01-24 9.00 405,723 433,615
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BONDS (CONTINUED)
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ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn #254384
06-01-17 7.00% $ 559,161 $ 574,024
Federal Natl Mtge Assn #254454
08-01-17 7.00 976,114 1,002,060
Federal Natl Mtge Assn #254723
05-01-23 5.50 11,940,308 11,647,397
Federal Natl Mtge Assn #254748
04-01-13 5.50 9,932,607 9,785,946
Federal Natl Mtge Assn #254757
05-01-13 5.00 13,017,360 12,728,285
Federal Natl Mtge Assn #254774
05-01-13 5.50 3,109,862 3,075,653
Federal Natl Mtge Assn #254864
08-01-13 4.50 6,667,992 6,425,305
Federal Natl Mtge Assn #255501
09-01-14 6.00 1,365,164 1,375,268
Federal Natl Mtge Assn #303885
05-01-26 7.50 634,473 658,530
Federal Natl Mtge Assn #313007
07-01-11 7.50 466,753 478,020
Federal Natl Mtge Assn #313428
12-01-08 7.50 289,233 290,997
Federal Natl Mtge Assn #336512
02-01-26 6.00 67,047 66,550
Federal Natl Mtge Assn #357485
02-01-34 5.50 16,909,060 16,347,512
Federal Natl Mtge Assn #407327
01-01-14 5.50 632,263 624,961
Federal Natl Mtge Assn #456374
12-01-13 5.50 1,248,382 1,233,965
Federal Natl Mtge Assn #508402
08-01-14 6.50 332,171 338,019
Federal Natl Mtge Assn #545818
07-01-17 6.00 20,957,485 21,133,130
Federal Natl Mtge Assn #545864
08-01-17 5.50 16,012,891 15,820,319
Federal Natl Mtge Assn #545910
08-01-17 6.00 3,090,011 3,115,906
Federal Natl Mtge Assn #555063
11-01-17 5.50 11,647,569 11,504,917
Federal Natl Mtge Assn #555367
03-01-33 6.00 13,182,820 13,063,558
Federal Natl Mtge Assn #579485
04-01-31 6.50 3,033,176 3,084,589
Federal Natl Mtge Assn #593829
12-01-28 7.00 1,960,650 2,014,079
Federal Natl Mtge Assn #601416
11-01-31 6.50 1,209,800 1,230,021
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT --- 11
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn #630993
09-01-31 7.50% $ 2,758,188 $ 2,864,468
Federal Natl Mtge Assn #648040
06-01-32 6.50 3,060,437 3,095,976
Federal Natl Mtge Assn #648349
06-01-17 6.00 10,301,462 10,387,787
Federal Natl Mtge Assn #651284
07-01-17 6.00 2,207,500 2,226,002
Federal Natl Mtge Assn #662866
11-01-17 6.00 1,354,484 1,370,483
Federal Natl Mtge Assn #665752
09-01-32 6.50 1,700,336 1,720,081
Federal Natl Mtge Assn #670782
11-01-12 5.00 644,897 630,803
Federal Natl Mtge Assn #670830
12-01-12 5.00 926,077 909,484
Federal Natl Mtge Assn #671415
01-01-10 5.00 545,595 536,634
Federal Natl Mtge Assn #678938
02-01-18 5.50 3,407,201 3,365,223
Federal Natl Mtge Assn #678940
02-01-18 5.50 3,015,975 2,978,805
Federal Natl Mtge Assn #678944
01-01-18 5.50 1,467,830 1,449,849
Federal Natl Mtge Assn #686227
02-01-18 5.50 4,324,013 4,270,126
Federal Natl Mtge Assn #695838
04-01-18 5.50 5,455,695 5,387,120
Federal Natl Mtge Assn #696154
04-01-33 4.56 7,682,140(k) 7,535,751
Federal Natl Mtge Assn #696837
04-01-18 5.50 4,468,999 4,413,232
Federal Natl Mtge Assn #703440
05-01-18 5.50 1,027,423 1,014,308
Federal Natl Mtge Assn #704610
06-01-33 5.50 14,050,797 13,584,171
Federal Natl Mtge Assn #705114
05-01-33 4.60 7,293,656(k) 7,161,808
Federal Natl Mtge Assn #709527
06-01-18 5.50 614,310 606,678
Federal Natl Mtge Assn #712602
06-01-13 5.00 1,885,361 1,844,143
Federal Natl Mtge Assn #722325
07-01-33 4.97 6,143,061(k) 5,955,818
Federal Natl Mtge Assn #722589
08-01-33 3.20 844,850(k) 864,740
BONDS (CONTINUED)
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn #725232
03-01-34 5.00% $12,160,165 $ 11,455,006
Federal Natl Mtge Assn #725425
04-01-34 5.50 12,012,308 11,620,463
Federal Natl Mtge Assn #725431
08-01-15 5.50 13,275,894 13,122,573
Federal Natl Mtge Assn #725737
08-01-34 4.53 4,681,489(k) 4,636,921
Federal Natl Mtge Assn #725773
09-01-34 5.50 10,193,303 9,842,980
Federal Natl Mtge Assn #730632
08-01-33 4.11 2,662,579(k) 2,563,462
Federal Natl Mtge Assn #739243
09-01-33 6.00 3,748,453 3,720,824
Federal Natl Mtge Assn #739331
09-01-33 6.00 2,006,389 1,987,598
Federal Natl Mtge Assn #743524
11-01-33 5.00 3,822,259 3,600,610
Federal Natl Mtge Assn #753508
11-01-33 5.00 4,170,767 3,928,908
Federal Natl Mtge Assn #791447
10-01-34 6.00 6,300,443 6,235,620
Federal Natl Mtge Assn #797042
06-01-34 5.50 3,380,475 3,264,295
Federal Natl Mtge Assn #797046
07-01-34 5.50 3,949,532 3,813,795
Federal Natl Mtge Assn #797048
06-01-34 5.50 1,494,038 1,442,691
Federal Natl Mtge Assn #799769
11-01-34 5.06 5,497,015(k) 5,406,204
Federal Natl Mtge Assn #801344
10-01-34 5.08 6,135,399(k) 6,065,823
Federal Natl Mtge Assn #815463
02-01-35 5.50 3,114,899 3,007,846
Federal Natl Mtge Assn #832641
09-01-35 6.00 8,738,164 8,637,647
Federal Natl Mtge Assn #836561
10-01-35 6.00 5,572,763 5,508,658
Federal Natl Mtge Assn #845070
12-01-35 5.10 2,901,165(k) 2,858,371
Federal Natl Mtge Assn #849082
01-01-36 5.86 3,542,206(k) 3,537,655
Federal Natl Mtge Assn #849170
01-01-36 5.98 4,871,261(k) 4,881,180
Federal Natl Mtge Assn #878661
02-01-36 5.50 10,020,155(e) 9,619,349
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
12 --- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
08-01-18 8.60% $ 6,390(i) $ 1,651
01-15-20 20.00 274,532(i) 56,315
07-25-22 20.00 839,287(i) 145,107
01-25-36 8.73 3,444,676(i) 961,653
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 2003-24
12-25-12 20.00 4,990,127(i) 208,962
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 2003-26
03-25-23 8.45 2,282,596(i) 481,562
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 2003-71
12-25-31 10.63 2,824,224(i) 590,307
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 2003-81
11-25-13 10.08 9,703,335(i) 611,493
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only/Inverse Floater
Series 2002-18
02-25-32 18.45 4,162,935(h,i) 345,395
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Principal Only
06-25-21 4.50 40,611(j) 34,504
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Series 2003-133
12-25-26 8.00 2,855,934 3,032,522
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Series 2003-94
07-25-23 5.50 15,640,786 15,572,341
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Series 2003-W11 Cl A1
06-25-33 6.97 559,328(k) 563,093
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Series 2004-60
04-25-34 5.50% $ 4,297,673 $ 4,246,473
Govt Natl Mtge Assn #615740
08-15-13 6.00 1,342,608 1,353,517
Govt Natl Mtge Assn #781507
09-15-14 6.00 6,321,692 6,372,535
Govt Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 2003-62
03-20-29 7.17 4,499,426(i) 363,923
GSR Mtge Loan Trust
Collateralized Mtge Obligation
Series 2005-AR2 Cl 2A1
04-25-35 4.86 58,673(k) 57,703
Harborview Mtge Loan Trust
Collateralized Mtge Obligation
Series 2004-4 Cl 3A
06-19-34 2.97 5,721,244(k) 5,610,234
TBW Mtge Backed Pass Through Ctfs
Collateralized Mtge Obligation
Series 2006-2 Cl 6A1
07-25-36 7.00 4,498,095 4,534,793
Washington Mutual
Collateralized Mtge Obligation
Series 2002-AR15 Cl A5
12-25-32 4.38 5,032,398(k) 4,942,741
Wells Fargo Mtge Backed Securities Trust
Collateralized Mtge Obligation
Series 2005-10 Cl A1
10-25-35 5.00 6,836,160 6,453,745
Wells Fargo Mtge Backed Securities Trust
Collateralized Mtge Obligation
Series 2005-5 Cl 2A1
05-25-35 5.50 5,510,963 5,276,747
Wells Fargo Mtge Backed Securities Trust
Collateralized Mtge Obligation
Series 2005-AR2 Cl 2A2
03-25-35 4.55 41,194(k) 40,065
--------------
Total 603,894,183
- --------------------------------------------------------------------------------
TOTAL BONDS
(Cost: $1,142,348,010) $1,121,567,867
- --------------------------------------------------------------------------------
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT --- 13
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHORT-TERM SECURITIES (4.1%)(c)
- --------------------------------------------------------------------------------
ISSUER EFFECTIVE AMOUNT VALUE(a)
YIELD PAYABLE AT
MATURITY
U.S. GOVERNMENT AGENCIES (3.0%)
Federal Natl Mtge Assn Disc Nts
06-01-06 4.85% $32,700,000 $ 32,695,595
- --------------------------------------------------------------------------------
COMMERCIAL PAPER (1.1%)
Park Granada LLC
06-13-06 5.04 10,000,000(m) 9,981,836
Sigma Finance
06-01-06 5.08 1,900,000 1,899,732
--------------
Total 11,881,568
- --------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES
(Cost: $44,583,233) $ 44,577,163
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(Cost: $1,186,931,243)(n) $1,166,145,030
================================================================================
- --------------------------------------------------------------------------------
NOTES TO INVESTMENTS IN SECURITIES
- --------------------------------------------------------------------------------
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) At May 31, 2006, security was partially or fully on loan. See Note 6 to
the financial statements.
(c) Cash collateral received from security lending activity is invested in
short-term securities and represents 1.8% of net assets. See Note 6 to the
financial statements. 2.3% of net assets is the Fund's cash equivalent
position.
(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
May 31, 2006, the value of these securities amounted to $6,822,263 or 0.6%
of net assets.
(e) At May 31, 2006, the cost of securities purchased, including interest
purchased, on a when-issued and/or other forward-commitment basis was
$77,928,961.
(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) Comparable securities are held to satisfy future delivery requirements of
the following open forward sale commitment at May 31, 2006:
SECURITY PRINCIPAL SETTLEMENT PROCEEDS VALUE
AMOUNT DATE RECEIVABLE
------------------------------------------------------------------------------------
Federal Natl Mtge Assn
06-01-21 5.50% $18,500,000 6-19-06 $18,245,625 $18,216,728
(h) Inverse floaters represent securities that pay interest at a rate that
increases (decreases) in the same magnitude as, or in a multiple of, a
decline (increase) in the LIBOR (London InterBank Offering Rate) Index.
Interest rate disclosed is the rate in effect on May 31, 2006. At May 31,
2006, the value of inverse floaters represented 0.1% of net assets.
- --------------------------------------------------------------------------------
14 --- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO INVESTMENTS IN SECURITIES (CONTINUED)
- --------------------------------------------------------------------------------
(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 May 31, 2006.
(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 May 31, 2006.
(k) Adjustable rate mortgage; interest rate varies to reflect current market
conditions; rate shown is the effective rate on May 31, 2006.
(l) Partially pledged as initial deposit on the following open interest rate
futures contracts (see Note 5 to the financial statements):
TYPE OF SECURITY NOTIONAL AMOUNT
--------------------------------------------------------------------------
PURCHASE CONTRACTS
U.S. Long Bond, Sept. 2006, 20-year $ 9,600,000
U.S. Treasury Note, Sept. 2006, 2-year 57,000,000
U.S. Treasury Note, Sept. 2006, 5-year 21,300,000
SALE CONTRACTS
U.S. Treasury Note, June 2006, 10-year 13,100,000
(m) 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 May 31, 2006, the value of
these securities amounted to $9,981,836 or 0.9% of net assets.
(n) At May 31, 2006, the cost of securities for federal income tax purposes
was $1,189,674,177 and the aggregate gross unrealized appreciation and
depreciation based on that cost was:
Unrealized appreciation $ 1,935,145
Unrealized depreciation (25,464,292)
--------------------------------------------------------------------------
Net unrealized depreciation $(23,529,147)
--------------------------------------------------------------------------
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/funds.
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT --- 15
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
RiverSource Short Duration U.S. Government Fund
MAY 31, 2006
- ----------------------------------------------------------------------------------------------------------
ASSETS
- ----------------------------------------------------------------------------------------------------------
Investments in securities, at value (Note 1)*
(identified cost $1,186,931,243) $1,166,145,030
Capital shares receivable 599,958
Accrued interest receivable 7,476,199
Receivable for investment securities sold 45,619,932
- ----------------------------------------------------------------------------------------------------------
Total assets 1,219,841,119
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
LIABILITIES
- ----------------------------------------------------------------------------------------------------------
Disbursements in excess of cash on demand deposit 527,365
Dividends payable to shareholders 584,369
Capital shares payable 420,399
Payable for investment securities purchased 27,098,658
Payable for securities purchased on a forward-commitment basis (Note 1) 77,928,961
Payable upon return of securities loaned (Note 6) 19,433,750
Accrued investment management services fee 14,110
Accrued distribution fee 243,104
Accrued service fee 51
Accrued transfer agency fee 5,320
Accrued administrative services fee 1,976
Other accrued expenses 641,374
Forward sale commitments, at value (proceeds receivable $18,245,625) (Note 1) 18,216,728
- ----------------------------------------------------------------------------------------------------------
Total liabilities 145,116,165
- ----------------------------------------------------------------------------------------------------------
Net assets applicable to outstanding capital stock $1,074,724,954
- ----------------------------------------------------------------------------------------------------------
REPRESENTED BY
- ----------------------------------------------------------------------------------------------------------
Capital stock -- $.01 par value (Note 1) $ 2,295,410
Additional paid-in capital 1,315,461,619
Excess of distributions over net investment income (751,758)
Accumulated net realized gain (loss) (Note 8) (221,380,866)
Unrealized appreciation (depreciation) on investments (Note 5) (20,899,451)
- ----------------------------------------------------------------------------------------------------------
Total -- representing net assets applicable to outstanding capital stock $1,074,724,954
==========================================================================================================
Net assets applicable to outstanding shares: Class A $ 640,796,129
Class B $ 338,374,051
Class C $ 14,524,073
Class I $ 62,447,956
Class Y $ 18,582,745
Net asset value per share of outstanding capital stock: Class A shares 136,877,022 $ 4.68
Class B shares 72,270,651 $ 4.68
Class C shares 3,102,467 $ 4.68
Class I shares 13,322,741 $ 4.69
Class Y shares 3,968,098 $ 4.68
- ----------------------------------------------------------------------------------------------------------
*Including securities on loan, at value (Note 6) $ 19,014,820
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
16 --- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
RiverSource Short Duration U.S Government Fund
PERIOD FROM PERIOD FROM TOTAL
JUNE 1, 2005 TO OCT. 18, 2005 TO JUNE 1, 2005 TO
OCT. 17, 2005 MAY 31, 2006 MAY 31, 2006
- -------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
- -------------------------------------------------------------------------------------------------------------------
Income:
Interest $ 21,834,797 $ 32,632,011 $ 54,466,808
Fee income from securities lending (Note 6) 78,977 196,380 275,357
- -------------------------------------------------------------------------------------------------------------------
Total income 21,913,774 32,828,391 54,742,165
- -------------------------------------------------------------------------------------------------------------------
Expenses (Note 2):
Investment management services fee 2,926,614 3,756,587 6,683,201
Distribution fee
Class A 804,657 1,120,860 1,925,517
Class B 1,990,132 2,447,855 4,437,987
Class C 82,716 105,722 188,438
Transfer agency fee 1,041,004 1,184,158 2,225,162
Incremental transfer agency fee
Class A 47,037 67,908 114,945
Class B 49,318 65,388 114,706
Class C 2,511 3,388 5,899
Service fee -- Class Y 25,314 12,040 37,354
Administrative services fees and expenses 295,951 525,131 821,082
Compensation of board members 4,699 6,578 11,277
Custodian fees 75,680 74,117 149,797
Printing and postage 160,360 137,305 297,665
Registration fees 30,220 42,720 72,940
Audit fees 18,490 31,510 50,000
Other 49,588 27,807 77,395
- -------------------------------------------------------------------------------------------------------------------
Total expenses 7,604,291 9,609,074 17,213,365
Expenses waived/reimbursed by the
Investment Manager and its affiliates (Note 2) (1,061,369) (1,146,381) (2,207,750)
- -------------------------------------------------------------------------------------------------------------------
6,542,922 8,462,693 15,005,615
Earnings credits on cash balances (Note 2) (48,181) (91,443) (139,624)
- -------------------------------------------------------------------------------------------------------------------
Total net expenses 6,494,741 8,371,250 14,865,991
- -------------------------------------------------------------------------------------------------------------------
Investment income (loss) -- net 15,419,033 24,457,141 39,876,174
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) -- NET
- -------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on:
Security transactions (Note 3) (1,386,547) (8,593,263) (9,979,810)
Futures contracts (62,558) 214,212 151,654
- -------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (1,449,105) (8,379,051) (9,828,156)
Net change in unrealized appreciation
(depreciation) on investments (13,544,648) (5,669,439) (19,214,087)
- -------------------------------------------------------------------------------------------------------------------
Net gain (loss) on investments (14,993,753) (14,048,490) (29,042,243)
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ 425,280 $ 10,408,651 $ 10,833,931
===================================================================================================================
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT --- 17
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
RiverSource Short Duration U.S. Government Fund
YEAR ENDED MAY 31, 2006 2005
- -----------------------------------------------------------------------------------------------------------
OPERATIONS AND DISTRIBUTIONS
- -----------------------------------------------------------------------------------------------------------
Investment income (loss) -- net $ 39,876,174 $ 44,021,997
Net realized gain (loss) on investments (9,828,156) (25,384,686)
Net change in unrealized appreciation (depreciation) on investments (19,214,087) 12,004,347
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 10,833,931 30,641,658
- -----------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
Class A (25,344,232) (27,188,188)
Class B (11,112,963) (13,508,603)
Class C (475,216) (552,010)
Class I (1,917,196) (370,986)
Class Y (1,202,674) (2,998,869)
- -----------------------------------------------------------------------------------------------------------
Total distributions (40,052,281) (44,618,656)
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
- -----------------------------------------------------------------------------------------------------------
Proceeds from sales
Class A shares (Note 2) 152,023,244 238,048,631
Class B shares 57,560,792 101,336,355
Class C shares 2,800,362 5,860,931
Class I shares 40,699,356 32,075,351
Class Y shares 8,191,458 22,393,741
Reinvestment of distributions at net asset value
Class A shares 22,725,811 24,424,025
Class B shares 10,224,074 12,662,464
Class C shares 442,952 516,851
Class I shares 1,887,079 361,220
Class Y shares 1,156,490 2,010,628
Payments for redemptions
Class A shares (410,945,903) (548,605,037)
Class B shares (Note 2) (307,798,780) (483,681,823)
Class C shares (Note 2) (11,908,336) (20,526,865)
Class I shares (10,310,796) (5,183,945)
Class Y shares (89,611,333) (39,177,481)
- -----------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets from capital share transactions (532,863,530) (657,484,954)
- -----------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (562,081,880) (671,461,952)
Net assets at beginning of year 1,636,806,834 2,308,268,786
- -----------------------------------------------------------------------------------------------------------
Net assets at end of year $ 1,074,724,954 $ 1,636,806,834
===========================================================================================================
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
18 --- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
RiverSource Short Duration U.S. Government Fund
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund is a series of RiverSource Government Income Series, Inc. (formerly AXP
Government Income Series, Inc.) and is registered under the Investment Company
Act of 1940 (as amended) as a diversified, open-end management investment
company. RiverSource Government Income Series, Inc. has 10 billion authorized
shares of capital stock that can be allocated among the separate series as
designated by the Board. The Fund invests in direct obligations of the U.S.
government, such as Treasury bonds, bills and notes, and of its agencies and
instrumentalities.
The Fund offers Class A, Class B, Class C 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 May 31, 2006, Ameriprise Financial, Inc.
(Ameriprise Financial) and the affiliated funds-of-funds owned 100% of Class I
shares, which represents 5.81% of the Fund's net assets.
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.
Prior to Oct. 18, 2005, the Fund invested all of its assets in the Government
Income Portfolio (the Portfolio). The Fund recorded its daily share of the
Portfolio's income, expenses and realized and unrealized gains and losses.
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RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT --- 19
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Effective at the close of business on Oct. 17, 2005, the Portfolio was
liquidated and the Fund exchanged its interest in the Portfolio for its
proportionate share (99.99%) of the Portfolio's assets and liabilities. Within
the statement of operations for the period from June 1, 2005 to Oct. 17, 2005,
income and expense amounts include allocations from the Portfolio in the
following amounts: Interest income $21,834,797
- --------------------------------------------------------------------------------
Fee income form securities lending $78,977
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Investment management services fee $2,926,614
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Custodian fees $75,680
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Audit fees $13,899
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Other $37,334
- --------------------------------------------------------------------------------
Earnings credits on cash balances $(946)
- --------------------------------------------------------------------------------
All realized and unrealized gains (losses) presented for the period from June 1,
2005 to Oct. 17, 2005 were as a result of allocations from the Portfolio.
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.
SECURITIES PURCHASED ON A FORWARD-COMMITMENT BASIS
Delivery and payment for securities that have been purchased by the Fund on a
forward-commitment basis, including when-issued securities and other
forward-commitments, can take place one month or more after the transaction
date. During this period, such securities are subject to market fluctuations,
and they may affect the Fund's net assets the same as owned securities. The Fund
designates cash or liquid securities at least equal to the amount of its
forward-commitments. At May 31, 2006, the Fund has entered into outstanding
when-issued securities of $68,309,612 and other forward-commitments of
$9,619,349.
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20 --- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT
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The Fund also enters into transactions to sell purchases commitments to third
parties at current market values and concurrently acquires other purchases
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 purchases 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 sell put and call options
and write put and call options. This may include purchasing mortgage-backed
security (MBS) put spread options and writing covered MBS call spread options.
MBS spread options are based upon the changes in the price spread between a
specified mortgage-backed security and a like-duration Treasury security. 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. The Fund also may write over-the-counter
options where completing the obligation depends upon the credit standing of the
other party.
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.
FUTURES TRANSACTIONS
To gain exposure to or protect itself from market changes, the Fund may buy and
sell financial 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.
SHORT SALES
The Fund may engage in short sales. In these transactions, the Fund sells a
security that it does not own. The Fund is obligated to replace the security
that was short by purchasing it at the market price at the time of replacement
or entering into an offsetting transaction with the broker. The price at such
time may be more or less than the price at which the Portfolio sold the
security.
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RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT --- 21
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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."
GUARANTEES AND INDEMNIFICATIONS
Under the Fund's organizational documents, its officers and directors are
indemnified against certain liabilities arising out of the performance of their
duties to the Fund. In addition, certain of the Fund's contracts with its
service providers contain general indemnification clauses. The Fund's maximum
exposure under these arrangements is unknown since the amount of any future
claims that may be made against the Fund cannot be determined and the Fund has
no historical basis for predicting the likelihood of any such claims.
FEDERAL TAXES
The Fund's policy is to comply with Subchapter M of the Internal Revenue Code
that applies to regulated investment companies and to distribute substantially
all of its taxable income to the 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 deferred losses on
certain futures contracts 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 $37,183
and accumulated net realized loss has been increased by $37,539 resulting in a
reclassification adjustment to increase paid-in capital by $356.
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22 --- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT
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The tax character of distributions paid for the years indicated is as follows:
YEAR ENDED MAY 31, 2006 2005
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CLASS A
Distributions paid from:
Ordinary income ........................ $25,344,232 $27,188,188
Long-term capital gain ................. -- --
CLASS B
Distributions paid from:
Ordinary income ........................ 11,112,963 13,508,603
Long-term capital gain ................. -- --
CLASS C
Distributions paid from:
Ordinary income ........................ 475,216 552,010
Long-term capital gain ................. -- --
CLASS I
Distributions paid from:
Ordinary income ........................ 1,917,196 370,986
Long-term capital gain ................. -- --
CLASS Y
Distributions paid from:
Ordinary income ........................ 1,202,674 2,998,869
Long-term capital gain ................. -- --
At May 31, 2006, the components of distributable earnings on a tax basis are as
follows:
Undistributed ordinary income ................................. $ 699,619
Accumulated long-term gain (loss) ............................. $(216,881,168)
Unrealized appreciation (depreciation) ........................ $ (26,266,157)
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. 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
Effective Oct. 18, 2005, the Fund entered into an Investment Management Services
Agreement with RiverSource Investments, LLC (the Investment Manager) to
determine which securities will be purchased, held or sold. Prior to the
withdrawal of the Fund's assets from the Portfolio, Income Trust, on behalf of
the Portfolio, had an Investment Management Services Agreement with Ameriprise
Financial. Prior to Oct. 18, 2005, the investment management fee was assessed at
the Portfolio level. The management fee is a percentage of the Fund's average
daily net assets that declines from 0.48% to 0.25% annually as the Fund's assets
increase. Prior to March 1, 2006, the management fee percentage of the Fund's
average daily net assets declined from 0.52% to 0.395% annually as the Fund's
assets increased.
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RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT --- 23
- --------------------------------------------------------------------------------
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 0.07% to 0.04% annually
as the Fund's assets increase. Prior to Oct. 1, 2005, the fee percentage of the
Fund's average daily net assets declined from 0.05% to 0.025% annually as the
Fund's assets increased. 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 (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 are included in the transfer
agency fees on the statement of operations.
The Fund has agreements with Ameriprise Financial Services, Inc. (the
Distributor) for distribution and shareholder services. Under a Plan and
Agreement of Distribution pursuant to Rule 12b-1, 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
$967,861 for Class A, $935,310 for Class B and $5,789 for Class C for the year
ended May 31, 2006.
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24 --- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT
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For the year ended May 31, 2006, the Investment Manager and its affiliates
waived certain fees and expenses to 0.89% for Class A, 1.64% for Class B, 1.64%
for Class C, 0.58% for Class I and 0.72% 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 $995,559, $628,041, $27,630 and $47,290, respectively, and the
management fees waived at the Fund level were $509,230. Under this agreement
which was effective until Feb. 28, 2006, net expenses would not exceed 0.89% for
Class A, 1.64% for Class B, 1.64% for Class C, 0.59% for Class I and 0.72% for
Class Y of the Fund's average daily net assets. Effective as of March 1, 2006,
the Investment Manager and its affiliates have agreed to waive certain fees and
expenses until May 31, 2007, unless sooner terminated at the discretion of the
Board, such that net expenses will not exceed 0.89% for Class A, 1.64% for Class
B, 1.64% for Class C, 0.54% for Class I and 0.72% for Class Y of the Fund's
average daily net assets.
During the period from June 1, 2005 to Oct. 17, 2005, the Fund's custodian and
transfer agency fees were reduced by $48,181 as a result of earnings credits
from overnight cash balances. During the period from Oct. 18, 2005 to May 31,
2006, the Fund's custodian and transfer agency fees were reduced by $91,443 as a
result of earnings credits from overnight cash balances. The Fund also pays
custodian fees to Ameriprise Trust Company, an affiliate of Ameriprise
Financial.
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $915,766,592 and $1,173,419,591, respectively, for the
period from June 1, 2005 to Oct. 17, 2005 and $1,553,139,977 and $1,717,359,606,
respectively, for the period from Oct. 18, 2005 to May 31, 2006. 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 MAY 31, 2006
CLASS A CLASS B CLASS C CLASS I CLASS Y
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Sold 32,049,091 12,143,861 590,775 8,560,843 1,723,849
Issued for reinvested distributions 4,799,507 2,159,088 93,548 398,566 243,480
Redeemed (86,699,539) (64,869,864) (2,511,821) (2,172,038) (18,793,148)
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) (49,850,941) (50,566,915) (1,827,498) 6,787,371 (16,825,819)
- -------------------------------------------------------------------------------------------------------------
YEAR ENDED MAY 31, 2005
CLASS A CLASS B CLASS C CLASS I CLASS Y
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Sold 49,509,431 21,094,221 1,219,375 6,690,057 4,661,213
Issued for reinvested distributions 5,087,150 2,636,716 107,621 75,207 418,767
Redeemed (114,279,241) (100,713,445) (4,275,447) (1,075,526) (8,163,718)
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) (59,682,660) (76,982,508) (2,948,451) 5,689,738 (3,083,738)
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RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT --- 25
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5. INTEREST RATE FUTURES CONTRACTS
At May 31, 2006, investments in securities included securities valued at
$345,404 that were pledged as collateral to cover initial margin deposits on 594
open purchase contracts and 131 open sale contracts. The notional market value
of the open purchase contracts at May 31, 2006 was $90,183,142 with a net
unrealized loss of $197,663. The notional market value of the open sale
contracts at May 31, 2006 was $13,765,235 with a net unrealized gain of $55,528.
See "Summary of significant accounting policies" and "Notes to investments in
securities."
6. LENDING OF PORTFOLIO SECURITIES
At May 31, 2006, securities valued at $19,014,820 were on loan to brokers. For
collateral, the Fund received $19,433,750 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
$275,357 for the year ended May 31, 2006. 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.
7. BANK BORROWINGS
The Fund has a revolving credit agreement with a syndicate of banks headed by
JPMorgan Chase Bank, N.A. (JPMCB), 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. 20, 2005. 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
0.40% or the JPMCB Prime Commercial 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 0.07%
per annum. Prior to this agreement, the Fund had a revolving credit agreement
that permitted borrowings up to $500 million with the Bank of New York. The Fund
had no borrowings outstanding during the year ended May 31, 2006.
8. CAPITAL LOSS CARRY-OVER
For federal income tax purposes, the Fund had a capital loss carry-over of
$216,881,168 at May 31, 2006, that if not offset by capital gains will expire as
follows:
2008 2009 2013 2014 2015
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$35,174,077 $117,356,906 $36,267,962 $20,469,230 $7,612,993
- --------------------------------------------------------------------------------
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.
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26 --- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT
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9. INFORMATION REGARDING PENDING AND SETTLED LEGAL PROCEEDINGS
In December 2005, without admitting or denying the allegations, American Express
Financial Corporation (AEFC, which is now known as Ameriprise Financial, Inc.
(Ameriprise Financial)), the parent company of RiverSource Investments, LLC
(RiverSource Investments), entered into settlement agreements with the
Securities and Exchange Commission (SEC) and Minnesota Department of Commerce
(MDOC) related to market timing activities. In connection with these matters,
the SEC and MDOC issued orders (the Orders) alleging that AEFC violated certain
provisions of the federal and Minnesota securities laws by failing to adequately
disclose market timing activities by allowing certain identified market timers
to continue to market time contrary to disclosures in mutual fund and variable
annuity product prospectuses. The Orders also alleged that AEFC failed to
implement procedures to detect and prevent market timing in 401(k) plans for
employees of AEFC and related companies and failed to adequately disclose that
there were no such procedures. Pursuant to the MDOC Order, the MDOC also alleged
that AEFC allowed inappropriate market timing to occur by failing to have
written policies and procedures and failing to properly supervise its employees.
As a result of the Orders, AEFC was censured and ordered to cease and desist
from committing or causing any violations of certain provisions of the
Investment Advisers Act of 1940, the Investment Company Act of 1940, and various
Minnesota laws. Pursuant to the terms of the Orders, AEFC agreed to pay
disgorgement of $10 million and civil money penalties of $7 million. AEFC also
agreed to make presentations at least annually to its board of directors and the
relevant mutual funds' board that include an overview of policies and procedures
to prevent market timing, material changes to these policies and procedures and
whether disclosures related to market timing are consistent with the SEC order
and federal securities laws. AEFC also agreed to retain an independent
distribution consultant to assist in developing a plan for distribution of all
disgorgement and civil penalties ordered by the SEC in accordance with various
undertakings detailed at http://www.sec.gov/litigation/admin/ia-2451.pdf. In
addition, AEFC agreed to complete and submit to the MDOC a compliance review of
its procedures regarding market timing within one year of the MDOC Order,
including a summary of actions taken to ensure compliance with applicable laws
and regulations and certification by a senior officer regarding compliance and
supervisory procedures.
Ameriprise Financial and its affiliates have cooperated with the SEC and the
MDOC in these legal proceedings, and have made regular reports to the
RiverSource Funds' Boards of Directors/Trustees.
Ameriprise Financial and certain of its affiliates have historically been
involved in a number of legal, arbitration and regulatory proceedings, including
routine litigation, class actions, and governmental actions, concerning matters
arising in connection with the conduct of their business activities. Ameriprise
Financial believes that the Funds are not currently the subject of, and that
neither Ameriprise Financial nor any of its affiliates are the subject of, any
pending legal, arbitration or regulatory proceedings that are likely to have a
material adverse effect on the Funds or the ability of Ameriprise Financial or
its affiliates to perform under their contracts with the Funds. Ameriprise
Financial is required to make 10-Q, 10-K and, as necessary, 8-K filings with the
Securities and Exchange Commission on legal and regulatory matters that relate
to Ameriprise Financial and its affiliates. Copies of these filings may be
obtained by accessing the SEC website at www.sec.gov.
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RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT --- 27
- --------------------------------------------------------------------------------
There can be no assurance that these matters, or the adverse publicity
associated with them, will not result in increased fund redemptions, reduced
sale of fund shares or other adverse consequences to the Funds.
10. FINANCIAL HIGHLIGHTS
The tables below show certain important financial information for evaluating the
Fund's results.
CLASS A
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PER SHARE INCOME AND CAPITAL CHANGES(a)
- -----------------------------------------------------------------------------------------------------------------------------
Fiscal period ended May 31, 2006 2005 2004 2003 2002
Net asset value, beginning of period $4.79 $4.82 $4.94 $4.85 $4.78
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .15 .12 .11 .15 .19
Net gains (losses) (both realized and unrealized) (.10) (.03) (.12) .09 .08
- -----------------------------------------------------------------------------------------------------------------------------
Total from investment operations .05 .09 (.01) .24 .27
- -----------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.16) (.12) (.11) (.15) (.20)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $4.68 $4.79 $4.82 $4.94 $4.85
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in millions) $ 641 $ 894 $1,188 $1,728 $1,185
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average daily net assets(b) .89%(c) .93%(c) .97% .95% .95%
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average daily net assets 3.27% 2.49% 2.19% 2.90% 4.01%
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (excluding short-term securities) 194% 169% 125% 218% 267%
- -----------------------------------------------------------------------------------------------------------------------------
Total return(d) 1.00% 1.92% (.24%) 4.90% 5.77%
- -----------------------------------------------------------------------------------------------------------------------------
(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) The Investment Manager and its affiliates waived/reimbursed the Fund for
certain expenses. Had they not done so, the annual ratios of expenses for
Class A would have been 1.06% and 1.01% for the years ended May 31, 2006
and 2005, respectively.
(d) Total return does not reflect payment of a sales charge.
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28 --- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT
- --------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------
PER SHARE INCOME AND CAPITAL CHANGES(a)
- -----------------------------------------------------------------------------------------------------------------------------
Fiscal period ended May 31, 2006 2005 2004 2003 2002
Net asset value, beginning of period $4.79 $4.82 $4.94 $4.85 $4.78
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .12 .08 .07 .11 .16
Net gains (losses) (both realized and unrealized) (.11) (.03) (.12) .09 .08
- -----------------------------------------------------------------------------------------------------------------------------
Total from investment operations .01 .05 (.05) .20 .24
- -----------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.12) (.08) (.07) (.11) (.17)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $4.68 $4.79 $4.82 $4.94 $4.85
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in millions) $ 338 $ 588 $ 963 $1,578 $1,104
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average daily net assets(b) 1.64%(c) 1.68%(c) 1.72% 1.71% 1.71%
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average daily net assets 2.50% 1.73% 1.44% 2.15% 3.25%
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (excluding short-term securities) 194% 169% 125% 218% 267%
- -----------------------------------------------------------------------------------------------------------------------------
Total return(d) .26% 1.16% (.99%) 4.11% 4.98%
- -----------------------------------------------------------------------------------------------------------------------------
(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) The Investment Manager and its affiliaties waived/reimbursed the Fund for
certain expenses. Had they not done so, the annual ratios of expenses for
Class B would have been 1.82% and 1.76% for the years ended May 31, 2006
and 2005, respectively.
(d) Total return does not reflect payment of a sales charge.
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RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT --- 29
- --------------------------------------------------------------------------------
CLASS C
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PER SHARE INCOME AND CAPITAL CHANGES(a)
- -----------------------------------------------------------------------------------------------------------------------------
Fiscal period ended May 31, 2006 2005 2004 2003 2002
Net asset value, beginning of period $4.79 $4.82 $4.94 $4.85 $4.78
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .12 .08 .07 .11 .16
Net gains (losses) (both realized and unrealized) (.11) (.03) (.12) .09 .08
- -----------------------------------------------------------------------------------------------------------------------------
Total from investment operations .01 .05 (.05) .20 .24
- -----------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.12) (.08) (.07) (.11) (.17)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $4.68 $4.79 $4.82 $4.94 $4.85
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in millions) $ 15 $ 24 $ 38 $ 58 $ 29
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average daily net assets(b) 1.64%(c) 1.68%(c) 1.73% 1.72% 1.72%
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average daily net assets 2.51% 1.73% 1.44% 2.10% 3.09%
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (excluding short-term securities) 194% 169% 125% 218% 267%
- -----------------------------------------------------------------------------------------------------------------------------
Total return(d) .26% 1.16% (.99%) 4.11% 4.98%
- -----------------------------------------------------------------------------------------------------------------------------
(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) The Investment Manager and its affiliates waived/reimbursed the Fund for
certain expenses. Had they not done so, the annual ratios of expenses for
Class C would have been 1.83% and 1.77% for the years ended May 31, 2006
and 2005, respectively.
(d) Total return does not reflect payment of a sales charge.
- --------------------------------------------------------------------------------
30 --- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT
- --------------------------------------------------------------------------------
CLASS I
PER SHARE INCOME AND CAPITAL CHANGES(a)
- ---------------------------------------------------------------------------------------------------------
Fiscal period ended May 31, 2006 2005 2004(b)
Net asset value, beginning of period $4.79 $4.83 $4.90
- ---------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .17 .14 .03
Net gains (losses) (both realized and unrealized) (.10) (.04) (.07)
- ---------------------------------------------------------------------------------------------------------
Total from investment operations .07 .10 (.04)
- ---------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.17) (.14) (.03)
- ---------------------------------------------------------------------------------------------------------
Net asset value, end of period $4.69 $4.79 $4.83
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------------
Net assets, end of period (in millions) $ 62 $ 31 $ 4
- ---------------------------------------------------------------------------------------------------------
Ratio of expenses to average daily net assets(c) .58%(d) .57% .63%(e)
- ---------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average daily net assets 3.66% 2.98% 2.74%(e)
- ---------------------------------------------------------------------------------------------------------
Portfolio turnover rate (excluding short-term securities) 194% 169% 125%
- ---------------------------------------------------------------------------------------------------------
Total return(f) 1.56% 2.06% (.87%)(g)
- ---------------------------------------------------------------------------------------------------------
(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) The Investment Manager and its affiliates waived/reimbursed the Fund for
certain expenses. Had they not done so, the annual ratio of expenses for
Class I would have been 0.62% for the year ended May 31, 2006.
(e) Adjusted to an annual basis.
(f) Total return does not reflect payment of a sales charge.
(g) Not annualized.
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT --- 31
- --------------------------------------------------------------------------------
CLASS Y
- -----------------------------------------------------------------------------------------------------------------------------
PER SHARE INCOME AND CAPITAL CHANGES(a)
- -----------------------------------------------------------------------------------------------------------------------------
Fiscal period ended May 31, 2006 2005 2004 2003 2002
Net asset value, beginning of period $4.79 $4.82 $4.94 $4.85 $4.78
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .16 .13 .12 .15 .20
Net gains (losses) (both realized and unrealized) (.11) (.03) (.12) .09 .08
- -----------------------------------------------------------------------------------------------------------------------------
Total from investment operations .05 .10 -- .24 .28
- -----------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.16) (.13) (.12) (.15) (.21)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $4.68 $4.79 $4.82 $4.94 $4.85
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in millions) $ 19 $ 100 $ 115 $ 164 $ 188
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average daily net assets(b) .72%(c) .76%(c) .81% .79% .79%
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average daily net assets 3.27% 2.66% 2.35% 3.12% 4.17%
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (excluding short-term securities) 194% 169% 125% 218% 267%
- -----------------------------------------------------------------------------------------------------------------------------
Total return(d) 1.19% 2.10% (.08%) 5.07% 5.93%
- -----------------------------------------------------------------------------------------------------------------------------
(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) The Investment Manager and its affiliates waived/reimbursed the Fund for
certain expenses. Had they not done so, the annual ratios of expenses for
Class Y would have been 0.88% and 0.84% for the years ended May 31, 2006
and 2005, respectively.
(d) Total return does not reflect payment of a sales charge.
- --------------------------------------------------------------------------------
32 --- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD AND SHAREHOLDERS
RIVERSOURCE GOVERNMENT INCOME SERIES, INC.
We have audited the accompanying statement of assets and liabilities of
RiverSource Short Duration U.S. Government Fund (a series of RiverSource
Government Income Series, Inc.) as of May 31, 2006, 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 May 31, 2006, and the financial
highlights for each of the years in the five-year period ended May 31, 2006.
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 May 31, 2006, 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 Short Duration U.S. Government Fund as of May 31, 2006, 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
July 20, 2006
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT --- 33
- --------------------------------------------------------------------------------
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 Short Duration U.S. Government Fund
Fiscal year ended May 31, 2006
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
June 29, 2005 ..................................................... $0.00900
July 28, 2005 ..................................................... 0.01031
Aug. 29, 2005 ..................................................... 0.01300
Sept. 29, 2005 .................................................... 0.01300
Oct. 27, 2005 ..................................................... 0.01300
Nov. 29, 2005 ..................................................... 0.01300
Dec. 22, 2005 ..................................................... 0.01605
Jan. 26, 2006 ..................................................... 0.01300
Feb. 27, 2006 ..................................................... 0.01481
March 27, 2006 .................................................... 0.01300
April 26, 2006 .................................................... 0.01400
May 25, 2006 ...................................................... 0.01400
Total distributions ............................................... $0.15617
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
June 29, 2005 ..................................................... $0.00565
July 28, 2005 ..................................................... 0.00746
Aug. 29, 2005 ..................................................... 0.00983
Sept. 29, 2005 .................................................... 0.00996
Oct. 27, 2005 ..................................................... 0.01040
Nov. 29, 2005 ..................................................... 0.00979
Dec. 22, 2005 ..................................................... 0.01381
Jan. 26, 2006 ..................................................... 0.00959
Feb. 27, 2006 ..................................................... 0.01169
March 27, 2006 .................................................... 0.01028
April 26, 2006 .................................................... 0.01110
May 25, 2006 ...................................................... 0.01120
Total distributions ............................................... $0.12076
- --------------------------------------------------------------------------------
34 --- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 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
June 29, 2005 ..................................................... $0.00565
July 28, 2005 ..................................................... 0.00746
Aug. 29, 2005 ..................................................... 0.00986
Sept. 29, 2005 .................................................... 0.00996
Oct. 27, 2005 ..................................................... 0.01040
Nov. 29, 2005 ..................................................... 0.00979
Dec. 22, 2005 ..................................................... 0.01381
Jan. 26, 2006 ..................................................... 0.00959
Feb. 27, 2006 ..................................................... 0.01169
March 27, 2006 .................................................... 0.01029
April 26, 2006 .................................................... 0.01110
May 25, 2006 ...................................................... 0.01120
Total distributions ............................................... $0.12080
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
June 29, 2005 ..................................................... $0.01043
July 28, 2005 ..................................................... 0.01141
Aug. 29, 2005 ..................................................... 0.01427
Sept. 29, 2005 .................................................... 0.01423
Oct. 27, 2005 ..................................................... 0.01415
Nov. 29, 2005 ..................................................... 0.01430
Dec. 22, 2005 ..................................................... 0.01760
Jan. 26, 2006 ..................................................... 0.01438
Feb. 27, 2006 ..................................................... 0.01607
March 27, 2006 .................................................... 0.01428
April 26, 2006 .................................................... 0.01537
May 25, 2006 ...................................................... 0.01533
Total distributions ............................................... $0.17182
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT --- 35
- --------------------------------------------------------------------------------
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
June 29, 2005 ..................................................... $0.00976
July 28, 2005 ..................................................... 0.01162
Aug. 29, 2005 ..................................................... 0.01371
Sept. 29, 2005 .................................................... 0.01367
Oct. 27, 2005 ..................................................... 0.01367
Nov. 29, 2005 ..................................................... 0.01373
Dec. 22, 2005 ..................................................... 0.01655
Jan. 26, 2006 ..................................................... 0.01378
Feb. 27, 2006 ..................................................... 0.01551
March 27, 2006 .................................................... 0.01362
April 26, 2006 .................................................... 0.01466
May 25, 2006 ...................................................... 0.01464
Total distributions ............................................... $0.16492
- --------------------------------------------------------------------------------
36 --- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 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 May 31, 2006.
ACTUAL EXPENSES
The first line of the table provides information about actual account values and
actual expenses. You may use the information in this line, together with the
amount you invested, to estimate the expenses that you paid over the period.
Simply divide your account value by $1,000 (for example, an $8,600 account value
divided by $1,000 = 8.6), then multiply the result by the number in the first
line under the heading titled "Expenses paid during the period" to estimate the
expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table provides information about hypothetical account
values and hypothetical expenses based on the Fund's actual expense ratio and an
assumed rate of return of 5% per year before expenses, which is not the Fund's
actual return. The hypothetical account values and expenses may not be used to
estimate the actual ending account balance or expenses you paid for the period.
You may use this information to compare the ongoing costs of investing in the
Fund and other funds. To do so, compare this 5% hypothetical example with the 5%
hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads). Therefore, the second line of the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT --- 37
- --------------------------------------------------------------------------------
BEGINNING ENDING EXPENSES ANNUALIZED
ACCOUNT VALUE ACCOUNT VALUE PAID DURING EXPENSE
DEC. 1, 2005 MAY 31, 2006 THE PERIOD(a) RATIO
- ---------------------------------------------------------------------------------------------------------
Class A
- ---------------------------------------------------------------------------------------------------------
Actual(b) $1,000 $1,007.80 $4.46(c) .89%
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.49 $4.48(c) .89%
- ---------------------------------------------------------------------------------------------------------
Class B
- ---------------------------------------------------------------------------------------------------------
Actual(b) $1,000 $1,004.00 $8.19(c) 1.64%
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.75 $8.25(c) 1.64%
- ---------------------------------------------------------------------------------------------------------
Class C
- ---------------------------------------------------------------------------------------------------------
Actual(b) $1,000 $1,004.00 $8.19(c) 1.64%
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.75 $8.25(c) 1.64%
- ---------------------------------------------------------------------------------------------------------
Class I
- ---------------------------------------------------------------------------------------------------------
Actual(b) $1,000 $1,009.60 $2.81(c) .56%
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,022.14 $2.82(c) .56%
- ---------------------------------------------------------------------------------------------------------
Class Y
- ---------------------------------------------------------------------------------------------------------
Actual(b) $1,000 $1,008.60 $3.61(c) .72%
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.34 $3.63(c) .72%
- ---------------------------------------------------------------------------------------------------------
(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 182/365 (to reflect the one-half year period).
(b) Based on the actual return for the six months ended May 31, 2006: +0.78%
for Class A, +0.40% for Class B, +0.40% for Class C, +0.96% for Class I
and +0.86% for Class Y.
(c) Effective as of March 1, 2006, the Investment Manager and its affiliates
have contractually agreed to waive certain fees and expenses until May 31,
2007, unless sooner terminated at the discretion of the Board, such that
net expenses will not exceed 0.89% for Class A; 1.64% for Class B; 1.64%
for Class C; 0.54% for Class I and 0.72% for Class Y. In addition, on Feb.
15, 2006, shareholders approved a change to the Investment Management
Services Agreement. If these revised fee schedules had been in place for
the entire six-month period ended May 31, 2006, the actual and
hypothetical expenses paid would have been the same as those expenses
presented in the table above for all classes, except Class I. The actual
expenses paid would have been $2.71 for Class I and the hypothetical
expenses paid would have been $2.72 for Class I.
- --------------------------------------------------------------------------------
38 --- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 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 99
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 may retire after her 75th
birthday.
INDEPENDENT BOARD MEMBERS
NAME, POSITION HELD
ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION OTHER
AGE LENGTH OF SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS
- --------------------------------------------------------------------------------------------------------------------------------
Kathleen Blatz Board member Chief Justice, Minnesota Supreme
901 S. Marquette Ave. since 2006 Court, 1998-2005
Minneapolis, MN 55402
Age 52
- --------------------------------------------------------------------------------------------------------------------------------
Arne H. Carlson Board member Chair, Board Services Corporation
901 S. Marquette Ave. since 1999 (provides administrative services
Minneapolis, MN 55402 to boards); former Governor
Age 71 of Minnesota
- --------------------------------------------------------------------------------------------------------------------------------
Patricia M. Flynn Board member Trustee Professor of Economics and
901 S. Marquette Ave. since 2004 Management, Bentley College;
Minneapolis, MN 55402 former Dean, McCallum Graduate
Age 55 School of Business, Bentley College
- --------------------------------------------------------------------------------------------------------------------------------
Anne P. Jones Board member Attorney and Consultant
901 S. Marquette Ave. since 1985
Minneapolis, MN 55402
Age 71
- --------------------------------------------------------------------------------------------------------------------------------
Jeffrey Laikind Board member Former Managing Director, American Progressive
901 S. Marquette Ave. since 2005 Shikiar Asset Management Insurance
Minneapolis, MN 55402
Age 70
- --------------------------------------------------------------------------------------------------------------------------------
Stephen R. Lewis, Jr. Board member President Emeritus and Valmont Industries, Inc.
901 S. Marquette Ave. since 2002 Professor of Economics, (manufactures irrigation
Minneapolis, MN 55402 Carleton College systems)
Age 67
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT --- 39
- --------------------------------------------------------------------------------
INDEPENDENT BOARD MEMBERS (CONTINUED)
NAME, POSITION HELD
ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION OTHER
AGE LENGTH OF SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS
- ------------------------------------------------------------------------------------------------------------------------------------
Catherine James Paglia Board member Director, Enterprise Asset Strategic Distribution, Inc.
901 S. Marquette Ave. since 2004 Management, Inc. (private real (transportation, distribution
Minneapolis, MN 55402 estate and asset management and logistics consultants)
Age 53 company)
- ------------------------------------------------------------------------------------------------------------------------------------
Vikki L. Pryor Board member President and Chief Executive
901 S. Marquette Ave. since 2006 Officer, SBLI USA Mutual Life
Minneapolis, MN 55402 Insurance Company, Inc. since 1999
Age 52
- ------------------------------------------------------------------------------------------------------------------------------------
Alan K. Simpson Board member Former three-term United States
1201 Sunshine Ave. since 1997 Senator for Wyoming
Cody, WY 82414
Age 74
- ------------------------------------------------------------------------------------------------------------------------------------
Alison Taunton-Rigby Board member Chief Executive Officer, RiboNovix, Hybridon, Inc.
901 S. Marquette Ave. since 2002 Inc. since 2003 (biotechnology); (biotechnology); American
Minneapolis, MN 55402 former President, Forester Biotech Healthways, Inc. (health
Age 62 management programs)
- ------------------------------------------------------------------------------------------------------------------------------------
BOARD MEMBER AFFILIATED WITH RIVERSOURCE INVESTMENTS*
NAME, POSITION HELD
ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION OTHER
AGE LENGTH OF SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS
- ------------------------------------------------------------------------------------------------------------------------------------
William F. Truscott Board member President - U.S. Asset Management
53600 Ameriprise Financial Center since 2001, and Chief Investment Officer,
Minneapolis, MN 55474 Vice President Ameriprise Financial, Inc. and
Age 45 since 2002 President, Chairman of the Board
and Chief Investment Officer,
RiverSource Investments, LLC
since 2005; Senior Vice President -
Chief Investment Officer, Ameriprise
Financial, Inc. and Chairman of the
Board and Chief Investment Officer,
RiverSource Investments, LLC,
2001-2005
- ------------------------------------------------------------------------------------------------------------------------------------
* Interested person by reason of being an officer, director, security holder
and/or employee of RiverSource Investments.
- --------------------------------------------------------------------------------
40 --- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT
- --------------------------------------------------------------------------------
The Board has appointed officers who are responsible for day-to-day business
decisions based on policies it has established. The officers serve at the
pleasure of the Board. In addition to Mr. Truscott, who is Vice President, the
Fund's other officers are:
FUND OFFICERS
NAME, POSITION HELD
ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION
AGE LENGTH OF SERVICE DURING PAST FIVE YEARS
- -----------------------------------------------------------------------------------------------------------------------------------
Jeffrey P. Fox Treasurer Vice President - Investment Accounting, Ameriprise Financial, Inc.,
105 Ameriprise Financial Center since 2002 since 2002; Vice President - Finance, American Express Company,
Minneapolis, MN 55474 2000-2002
Age 51
- -----------------------------------------------------------------------------------------------------------------------------------
Michelle M. Keeley Vice President Executive Vice President - Equity and Fixed Income, Ameriprise
172 Ameriprise Financial Center since 2004 Financial, Inc. and RiverSource Investments, LLC since 2006;
Minneapolis, MN 55474 Senior Vice President - Fixed Income, Ameriprise Financial, Inc.,
Age 42 2002-2006 and RiverSource Investments, LLC, 2004-2006;
Managing Director, Zurich Global Assets, 2001-2002
- -----------------------------------------------------------------------------------------------------------------------------------
Paula R. Meyer President Senior Vice President - Mutual Funds, Ameriprise Financial, Inc.,
596 Ameriprise Financial Center since 2002 since 2002 and Senior Vice President, RiverSource Investments,
Minneapolis, MN 55474 LLC since 2004; Vice President and Managing Director -
Age 52 American Express Funds, Ameriprise Financial, Inc., 2000-2002
- -----------------------------------------------------------------------------------------------------------------------------------
Leslie L. Ogg Vice President, President of Board Services Corporation
901 S. Marquette Ave. General Counsel,
Minneapolis, MN 55402 and Secretary
Age 67 since 1978
- -----------------------------------------------------------------------------------------------------------------------------------
Edward S. Dryden Acting Chief Vice President - Asset Management Compliance, RiverSource
1875 Ameriprise Financial Center Compliance Officer Investments, LLC since 2006; Chief Compliance Officer - Mason
Minneapolis, MN 55474 since 2006 Street Advisors, LLC, 2002-2006
Age 40
- -----------------------------------------------------------------------------------------------------------------------------------
Neysa M. Alecu Anti-Money Compliance Director and Anti-Money Laundering Officer,
2934 Ameriprise Financial Center Laundering Officer Ameriprise Financial, Inc. since 2004; Manager Anti-Money
Minneapolis, MN 55474 since 2004 Laundering, Ameriprise Financial, Inc., 2003-2004; Compliance
Age 42 Director and Bank Secrecy Act Officer, American Express
Centurion Bank, 2000-2003
- -----------------------------------------------------------------------------------------------------------------------------------
The SAI has additional information about the Fund's directors and is available,
without charge, upon request by calling RiverSource Funds at (888) 791-3380;
contacting your financial institution; or visiting www.riversource.com/funds.
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT --- 41
- --------------------------------------------------------------------------------
APPROVAL OF INVESTMENT MANAGEMENT SERVICES AGREEMENT
During the period covered by this report, RiverSource Investments, LLC
("RiverSource Investments" or the "investment manager"), a wholly-owned
subsidiary of Ameriprise Financial, Inc. ("Ameriprise Financial"), served as the
investment manager to RiverSource funds under an Investment Management Services
Agreement ("IMS Agreement").
The Board of Directors (the "Board") annually determines whether to continue the
IMS Agreement and subadvisory agreements, as applicable, by evaluating the
quality and level of services received and the costs associated with those
services. The Board did not make the specific determination this year as each
fund's IMS Agreement was approved by the vote of a majority of the outstanding
voting securities of the funds at a shareholder meeting held on Feb. 15, 2006.
PROXY VOTING
The policy of the Board is to vote all proxies of the companies in which the
Fund holds investments. The procedures are stated in the Statement of Additional
Information (SAI). You may obtain a copy of the SAI without charge by calling
RiverSource Funds at (888) 791-3380; contacting your financial institution;
visiting www.riversource.com/funds; or searching the website of the Securities
and Exchange Commission (SEC) at http://www.sec.gov. Information regarding how
the Fund voted proxies relating to portfolio securities during the most recent
12-month period ended June 30 is available without charge by visiting
www.riversource.com/funds; or searching the website of the SEC at www.sec.gov.
- --------------------------------------------------------------------------------
42 --- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT
- --------------------------------------------------------------------------------
RESULTS OF MEETING OF SHAREHOLDERS
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND
REGULAR MEETING OF SHAREHOLDERS HELD ON FEB. 15, 2006
(UNAUDITED)
A brief description of each proposal voted upon at the meeting and the votes
cast for, against or withheld, as well as the number of abstentions and broker
non-votes as to each proposal is set forth below. A vote is based on total
dollar interest in a fund.
ELECTION OF BOARD MEMBERS
AFFIRMATIVE WITHHOLD
- --------------------------------------------------------------------------------
Kathleen Blatz 925,025,591.91 25,403,300.36
- --------------------------------------------------------------------------------
Arne H. Carlson 923,219,045.23 27,209,847.04
- --------------------------------------------------------------------------------
Patricia M. Flynn 925,603,425.07 24,825,467.20
- --------------------------------------------------------------------------------
Anne P. Jones 923,145,992.32 27,282,899.95
- --------------------------------------------------------------------------------
Jeffrey Laikind 922,812,735.15 27,616,157.12
- --------------------------------------------------------------------------------
Stephen R. Lewis, Jr. 925,073,042.16 25,355,850.11
- --------------------------------------------------------------------------------
Catherine James Paglia 925,106,117.19 25,322,775.08
- --------------------------------------------------------------------------------
Vikki L. Pryor 925,336,280.40 25,092,611.87
- --------------------------------------------------------------------------------
Alan K. Simpson 921,602,698.25 28,826,194.02
- --------------------------------------------------------------------------------
Alison Taunton-Rigby 925,167,257.29 25,261,634.98
- --------------------------------------------------------------------------------
William F. Truscott 925,406,303.24 25,022,589.03
- --------------------------------------------------------------------------------
AMEND THE ARTICLES OF INCORPORATION TO PERMIT THE BOARD TO ESTABLISH THE MINIMUM
ACCOUNT VALUE AND TO CHANGE THE NAME OF THE CORPORATION
AFFIRMATIVE AGAINST ABSTAIN BROKER NON-VOTES
- --------------------------------------------------------------------------------
900,952,440.08 30,238,068.17 19,225,594.04 12,789.98
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT --- 43
- --------------------------------------------------------------------------------
APPROVE AN INVESTMENT MANAGEMENT SERVICES AGREEMENT WITH RIVERSOURCE
INVESTMENTS, LLC
AFFIRMATIVE AGAINST ABSTAIN BROKER NON-VOTES
- -------------------------------------------------------------------------------------------------
908,861,532.03 23,023,778.88 18,530,791.38 12,789.98
- -------------------------------------------------------------------------------------------------
APPROVE CHANGES IN FUNDAMENTAL INVESTMENT POLICIES
DIVERSIFICATION
AFFIRMATIVE AGAINST ABSTAIN BROKER NON-VOTES
- -------------------------------------------------------------------------------------------------
906,295,891.36 24,997,604.83 19,122,606.10 12,789.98
- -------------------------------------------------------------------------------------------------
TEN PERCENT LIMITATION IN SINGLE ISSUER
AFFIRMATIVE AGAINST ABSTAIN BROKER NON-VOTES
- -------------------------------------------------------------------------------------------------
902,336,672.53 29,370,863.05 18,708,566.71 12,789.98
- -------------------------------------------------------------------------------------------------
LENDING
AFFIRMATIVE AGAINST ABSTAIN BROKER NON-VOTES
- -------------------------------------------------------------------------------------------------
902,435,207.09 29,128,965.06 18,851,930.14 12,789.98
- -------------------------------------------------------------------------------------------------
BORROWING
AFFIRMATIVE AGAINST ABSTAIN BROKER NON-VOTES
- -------------------------------------------------------------------------------------------------
904,969,770.98 27,634,608.62 17,811,722.69 12,789.98
- -------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
44 --- RIVERSOURCE SHORT DURATION U.S. GOVERNMENT FUND --- 2006 ANNUAL REPORT
- --------------------------------------------------------------------------------
RIVERSOURCE(SM) SHORT DURATION U.S. GOVERNMENT FUND
734 Ameriprise Financial Center
Minneapolis, MN 55474
RIVERSOURCE.COM/FUNDS
This report must be accompanied or preceded by the
Fund's current prospectus. RiverSource Funds are managed
RIVERSOURCE [LOGO](SM) by RiverSource Investments, LLC and distributed by
INVESTMENTS Ameriprise Financial Services, Inc., Member NASD. Both
companies are part of Ameriprise Financial, Inc.
S-6042 AC (7/06)
Annual Report
RIVERSOURCE [LOGO] (SM)
INVESTMENTS
RIVERSOURCE (SM)
U.S. GOVERNMENT MORTGAGE FUND
- --------------------------------------------------------------------------------
ANNUAL REPORT FOR THE
PERIOD ENDED MAY 31, 2006
> RIVERSOURCE U.S. GOVERNMENT
MORTGAGE FUND SEEKS TO PROVIDE
SHAREHOLDERS WITH CURRENT INCOME
AS ITS PRIMARY OBJECTIVE AND, AS ITS
SECONDARY OBJECTIVE, PRESERVATION
OF CAPITAL.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Fund Snapshot ............................................................... 2
Performance Summary ......................................................... 4
Questions & Answers
with Portfolio Management ................................................ 5
The Fund's Long-term Performance ............................................ 8
Investments in Securities ................................................... 10
Financial Statements ........................................................ 17
Notes to Financial Statements ............................................... 20
Report of Independent Registered
Public Accounting Firm ................................................... 34
Federal Income Tax Information .............................................. 35
Fund Expenses Example ....................................................... 38
Board Members and Officers .................................................. 40
Approval of Investment Management
Services Agreement ....................................................... 43
Proxy Voting ................................................................ 43
Results of Meeting of Shareholders .......................................... 44
DALBAR [LOGO] RATED
2006
FOR COMMUNICATION
RiverSource Funds' shareholder reports 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.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT - 1
- --------------------------------------------------------------------------------
FUND SNAPSHOT
AT MAY 31, 2006
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER <
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER SINCE YEARS IN INDUSTRY
Scott Kirby* 2/02 20
* The Fund is managed by a team of investment professionals led by Scott
Kirby.
- --------------------------------------------------------------------------------
FUND OBJECTIVE <
- --------------------------------------------------------------------------------
The Fund seeks to provide shareholders with current income as its primary goal
and, as its secondary goal, preservation of capital.
Inception dates by class
A: 2/14/02 B: 2/14/02 C: 2/14/02 I: 3/4/04 Y: 2/14/02
Ticker symbols by class
A: AUGAX B: AUGBX C: AUGCX I: -- Y: RSGYX
Total net assets $238.4 million
Number of holdings 201
Weighted average life(1) 6.7 years
Effective duration(2) 4.3 years
Weighted average bond rating(3) AAA
(1) WEIGHTED AVERAGE LIFE measures a bond's maturity, which takes into
consideration the possibility that the issuer may call the bond before its
maturity date.
(2) EFFECTIVE DURATION measures the sensitivity of a security's price to
parallel shifts in the yield curve (the graphical depiction of the levels
of interest rates from two years out to 30 years). Positive duration means
that as rates rise, the price decreases, and negative duration means that
as rates rise, the price increases.
(3) WEIGHTED AVERAGE BOND RATING represents the average credit quality of the
underlying bonds in the portfolio.
- --------------------------------------------------------------------------------
STYLE MATRIX <
- --------------------------------------------------------------------------------
Shading within the style matrix indicates areas in which the Fund generally
invests.
DURATION
SHORT INT. LONG
X HIGH
MEDIUM QUALITY
LOW
- --------------------------------------------------------------------------------
CREDIT QUALITY SUMMARY <
- --------------------------------------------------------------------------------
Percentage of bond portfolio assets
AAA bonds 99.2%
- --------------------------------------------------------------------------------
AA bonds 0.8
- --------------------------------------------------------------------------------
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.
Investment products, including shares of mutual funds, involve investment risks
including possible loss of principal and fluctuation in value.
Shares of the RiverSource U.S. Government Mortgage Fund are not insured or
guaranteed by the U.S. government.
There are risks associated with an investment in a bond fund, including credit
risk, interest rate risk, and prepayment and extension risk. See the Fund's
prospectus for information on these and other risks associated with the Fund. In
general, bond prices rise when interest rates fall and vice versa. This effect
is usually more pronounced for longer-term securities.
Fund holdings are as of the date given, are subject to change at any time, and
are not recommendations to buy or sell any security.
- --------------------------------------------------------------------------------
2 - RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT
- --------------------------------------------------------------------------------
FUND SNAPSHOT
- --------------------------------------------------------------------------------
SECTOR COMPOSITION <
- --------------------------------------------------------------------------------
Percentage of portfolio assets at May 31, 2006
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Mortgage-Backed* 95.6%
Short-Term Securities* 4.1%
Asset-Backed 0.3%
* Of the 95.6%, 8.7% is due to forward commitment mortgage-backed securities
activity. Short-term securities are held as collateral for these
commitments.
- --------------------------------------------------------------------------------
SEC YIELDS <
- --------------------------------------------------------------------------------
At May 31, 2006 by class
A: 4.11% B: 3.56% C: 3.56% I: 4.84% Y: 4.50%
At June 30, 2006 by class
A: 4.41% B: 3.86% C: 3.86% I: 5.00% Y: 4.80%
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.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT - 3
- --------------------------------------------------------------------------------
PERFORMANCE SUMMARY
PERFORMANCE COMPARISON
For the year ended May 31, 2006
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
RiverSource U.S. Government Mortgage Fund
Class A (excluding sales charge) +0.12%
Lehman Brothers Mortgage-Backed
Securities Index (unmanaged) +0.56%
Lipper U.S. Mortgage Funds Index +0.23%
(see "The Fund's Long-term Performance" for Index descriptions)
The performance information shown represents past performance and is not a
guarantee of future results. The investment return and principal value of your
investment will fluctuate so that your shares, when redeemed, may be worth more
or less than their original cost. Current performance may be lower or higher
than the performance information shown. You may obtain performance information
current to the most recent month-end by contacting your financial institution or
visiting www.riversource.com/funds.
The 4.75% sales charge applicable to Class A shares of the Fund is not reflected
in the bar chart. If reflected, returns would be lower than those shown. The
performance of other classes may vary from that shown because of differences in
expenses.
The indices do not reflect the effects of sales charges, expenses (excluding
Lipper) and taxes.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS <
- --------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS I CLASS Y
(INCEPTION DATES) (2/14/02) (2/14/02) (2/14/02) (3/4/04) (2/14/02)
AFTER AFTER
NAV(1) POP(2) NAV(1) CDSC(3) NAV(1) CDSC(4) NAV(5) NAV(5)
AT MAY 31, 2006
- -----------------------------------------------------------------------------------------------------------
1 year +0.12% -4.63% -0.42% -5.24% -0.43% -1.39% +0.59% +0.49%
- -----------------------------------------------------------------------------------------------------------
3 years +2.36% +0.71% +1.60% +0.36% +1.60% +1.60% N/A +2.54%
- -----------------------------------------------------------------------------------------------------------
Since inception +3.66% +2.49% +2.95% +2.53% +2.94% +2.94% +2.23% +3.84%
- -----------------------------------------------------------------------------------------------------------
AT JUNE 30, 2006
- -----------------------------------------------------------------------------------------------------------
1 year +0.17% -4.59% -0.37% -5.19% -0.57% -1.53% +0.45% +0.35%
- -----------------------------------------------------------------------------------------------------------
3 years +2.33% +0.68% +1.63% +0.40% +1.64% +1.64% N/A +2.51%
- -----------------------------------------------------------------------------------------------------------
Since inception +3.63% +2.48% +2.91% +2.50% +2.91% +2.91% +2.24% +3.81%
- -----------------------------------------------------------------------------------------------------------
(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
institutional investors only.
- --------------------------------------------------------------------------------
4 - RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT
- --------------------------------------------------------------------------------
QUESTIONS & ANSWERS
WITH PORTFOLIO MANAGEMENT
Below, portfolio manager Scott Kirby discusses the Fund's results and
positioning for the annual period ended May 31, 2006.
Q: How did RiverSource U.S. Government Mortgage Fund perform for the fiscal
year?
A: RiverSource U.S. Government Mortgage Fund's Class A shares (excluding
sales charge) rose 0.12% for the 12 months ended May 31, 2006. The Fund
underperformed the Lehman Brothers Mortgage-Backed Securities Index
(Lehman Index), which gained 0.56%. The Fund also underperformed the
Lipper U.S. Mortgage Funds Index, representing the Fund's peer group,
which advanced 0.23% during the same time frame.
Q: What factors most significantly affected the Fund's performance during the
annual period?
A: Overall, the mortgage market had what might be termed a "roller coaster"
annual period. The Federal Reserve Board (the Fed) raised interest rates
eight times during the 12 months, bringing the targeted federal funds rate
to 5% by the end of May. The U.S. Treasury yield curve flattened
dramatically, i.e., the difference in yields between short- and long-term
maturities narrowed. As mortgages are highly sensitive to changes in
interest rates, slightly higher volatility and fears of a continued
measured pace of rate hikes by the Fed particularly weighed on the
mortgage sector's performance in October and November of 2005. From
December 2005 through February 2006, mortgages performed quite well,
actually producing the sector's best performance in five years. From March
through May 2006, mortgages struggled again, as rates moved dramatically
higher.
Through these ups and downs, we had defensively positioned the Fund within
the mortgage sector, focusing on issues with reduced sensitivity to
changes in interest rates. The Fund benefited most from effective issue
selection in premium-coupon securities, hybrid adjustable-rate mortgages
(ARMs) and well-structured collateralized mortgage obligations (CMOs).
Higher coupon bonds outperformed U.S. Treasuries during the period, and
mortgage investors favored ARMs and CMOs for their defensive
characteristics.
The Fund further benefited during the period from its comparatively
shorter duration than that of the Lehman Index, as rates rose materially.
Duration is a measure of the Fund's sensitivity to changes in interest
rates. We had also prudently positioned the portfolio for higher rates and
for the yield curve flattening scenario that occurred during the period.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT - 5
- --------------------------------------------------------------------------------
QUESTIONS & ANSWERS
> WE HAD ALSO PRUDENTLY POSITIONED THE PORTFOLIO FOR
HIGHER RATES AND FOR THE YIELD CURVE FLATTENING SCENARIO
THAT OCCURRED DURING THE PERIOD.
On the other hand, many of the Fund's long-held specified pools of
mortgages began to erode over the annual period as interest rates rose and
refinancing became less likely. Thus, these holdings detracted modestly
from the Fund's results.
Detracting from the Fund's results relative to its Lipper peer group was
the Fund's more conservative risk profile and its inherent bias toward
higher quality issues, namely securities issued by government mortgage
agencies and those rated AAA. During the annual period, lower quality
issues outperformed higher quality issues.
Q: What changes did you make to the Fund and how is it currently positioned?
A: Early in the annual period, we sold the Fund's positions in commercial
mortgage-backed securities (CMBS). This proved a prudent strategy, as CMBS
generally underperformed the other securities held in the Fund's portfolio
during the 12 months.
During those periods of mortgage underperformance, such as the fourth
quarter of 2005 and again in the last few months of the fiscal year, we
began to implement a somewhat more aggressive strategy, selling not only
CMBS but also CMOs and investing in some lower coupon mortgage-backed
securities and pass-through mortgages on market weakness. Pass-through
mortgage securities consist of a pool of residential mortgage loans, where
homeowners' monthly payments of principal, interest and prepayments pass
from the original bank through a government agency or investment bank to
investors. Historically, mortgages tend to perform better in a stable rate
environment, and we believe we are about to enter such a phase.
- --------------------------------------------------------------------------------
6 - RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT
- --------------------------------------------------------------------------------
QUESTIONS & ANSWERS
At the same time, we maintained our overall defensive positioning. We
continued to emphasize those securities issued by government mortgage
agencies, including Ginnie Mae, Fannie Mae and Freddie Mac. We maintained
our focus on higher coupon mortgage securities and emphasized investment
in more seasoned pools of mortgages.
In early May, we extended the Fund's duration a bit to bring it to a
neutral position relative to the Lehman Index, as we believe the Fed is
nearing an end to its current tightening cycle and therefore it would be
appropriate to add some interest rate sensitivity.
Q: How do you intend to manage the Funds in the coming months?
A: U.S. interest rates across the range of maturities, or yield curve, have
risen to levels that seem reasonable given our economic view. We believe
the most likely scenario is for inflation to be nudged higher but also for
a modest economic slowdown to become apparent in the second half of 2006,
with a slowdown in the housing industry the likely catalyst. We thus
believe the Fed may soon pause in its current tightening cycle.
Based on this view, we intend to maintain the Fund's current neutral
duration positioning for the near term. We also intend to continue
implementing a somewhat more aggressive strategy within the mortgage
sector. As always, however, our strategy is to provide added portfolio
value with a moderate amount of risk. Quality issues and security
selection remain a priority as we continue to seek attractive buying
opportunities.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT - 7
- --------------------------------------------------------------------------------
THE FUND'S LONG-TERM PERFORMANCE
The chart on the facing page illustrates the total value of an assumed $10,000
investment in RiverSource U.S. Government Mortgage Fund Class A shares (from
3/1/02 to 5/31/06)* as compared to the performance of two widely cited
performance indices, the Lehman Brothers Mortgage-Backed Securities Index and
the Lipper U.S. Mortgage Funds Index. In comparing the Fund's Class A shares to
these indices, you should take into account the fact that the Fund's performance
reflects the maximum sales charge of 4.75%, while such charges are not reflected
in the performance of the indices. Returns for the Fund include the reinvestment
of any 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 contacting your financial institution or
visiting www.riversource.com/funds. Also see "Past Performance" in the Fund's
current prospectus.
* Fund data is from Feb. 14, 2002. Lehman Brothers Mortgage-Backed
Securities Index and Lipper peer group data is from March 1, 2002.
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
- -------------------------------------------------------------------------------
May 31, 2006 $ 0.20 $ 0.01 $ -- $ 0.21
- -------------------------------------------------------------------------------
May 31, 2005 0.20 -- -- 0.20
- -------------------------------------------------------------------------------
May 31, 2004 0.17 0.06 -- 0.23(1)
- -------------------------------------------------------------------------------
May 31, 2003 0.20 0.02 -- 0.22
- -------------------------------------------------------------------------------
May 31, 2002(2) 0.03 -- -- 0.03
- -------------------------------------------------------------------------------
(1) $0.01 per share represents a tax return of capital.
(2) For the period from Feb. 14, 2002 (when shares became publicly available)
to May 31, 2002.
- --------------------------------------------------------------------------------
8 - RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN RIVERSOURCE
U.S. GOVERNMENT MORTGAGE FUND
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
RiverSource U.S. Government Lehman Brothers
Mortgage Fund Class A Mortgage-Backed Lipper U.S. Mortgage
(includes sales charge) Securities Index(1) Funds Index(2)
3/1/02 9,525 10,000 10,000
5/31/02 9,692 10,169 10,128
5/31/03 10,363 10,822 10,744
5/31/04 10,495 10,984 10,887
5/31/05 11,102 11,719 11,463
5/31/06 11,115 11,785 11,489
- --------------------------------------------------------------------------------
COMPARATIVE RESULTS
Results at May 31, 2006
SINCE
1 YEAR 3 YEARS INCEPTION(3)
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND (INCLUDES SALES CHARGE)
- ------------------------------------------------------------------------------------------------------
Class A Cumulative value of $10,000 $ 9,537 $ 10,215 $ 11,115
- ------------------------------------------------------------------------------------------------------
Average annual total return -4.63% +0.71% +2.49%
- ------------------------------------------------------------------------------------------------------
LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX(1)
- ------------------------------------------------------------------------------------------------------
Cumulative value of $10,000 $ 10,056 $ 10,889 $ 11,785
- ------------------------------------------------------------------------------------------------------
Average annual total return +0.56% +2.88% +3.90%
- ------------------------------------------------------------------------------------------------------
LIPPER U.S. MORTGAGE FUNDS INDEX(2)
- ------------------------------------------------------------------------------------------------------
Cumulative value of $10,000 $ 10,023 $ 10,693 $ 11,489
- ------------------------------------------------------------------------------------------------------
Average annual total return +0.23% +2.26% +3.32%
- ------------------------------------------------------------------------------------------------------
Results for other share classes can be found on page 4.
(1) The Lehman Brothers Mortgage-Backed Securities Index, an unmanaged index,
includes 15- and 30-year fixed-rate securities backed by mortgage pools of
the Government National Mortgage Association (GNMA), Federal Home Loan
Mortgage Corporation (FHLMC), and Federal National Mortgage Association
(FNMA). The index reflects reinvestment of all distributions and changes
in market prices, but excludes brokerage commissions or other fees.
(2) The Lipper U.S. Mortgage Funds Index includes the 10 largest U.S. mortgage
funds tracked by Lipper Inc. The index's returns include net reinvested
dividends.
(3) Fund data is from Feb. 14, 2002. Lehman Brothers Mortgage-Backed
Securities Index and Lipper peer group data is from March 1, 2002.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT - 9
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
RiverSource U.S. Government Mortgage Fund
MAY 31, 2006
(Percentages represent value of investments compared to net assets)
- --------------------------------------------------------------------------------
BONDS (106.4%)
- --------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
ASSET-BACKED (0.3%)
Residential Asset Securities
Series 2006-KS1 Cl A2
02-25-36 5.22% $ 830,000(i) $ 830,519
- --------------------------------------------------------------------------------
MORTGAGE-BACKED (106.1%)(f)
Adjustable Rate Mtge Trust
Collateralized Mtge Obligation
Series 2005-12 Cl 2A1
03-25-36 5.73 868,515(c) 862,280
Banc of America Mtge Securities
Collateralized Mtge Obligation
Series 2004-F Cl B1
07-25-34 4.13 540,446(c) 526,113
Bank of America Alternative Loan Trust
Collateralized Mtge Obligation
Series 2003-11 Cl 1A1
01-25-34 6.00 677,808 666,983
Bank of America Alternative Loan Trust
Collateralized Mtge Obligation
Series 2003-11 Cl 4A1
01-25-19 4.75 361,210 343,149
Chaseflex Trust
Collateralized Mtge Obligation
Series 2005-2 Cl 2A2
06-25-35 6.50 731,750 735,638
Countrywide Alternative Loan Trust
Collateralized Mtge Obligation
Series 2005-54CB Cl 2A3
11-25-35 5.50 610,772 602,848
Countrywide Alternative Loan Trust
Collateralized Mtge Obligation
Series 2005-6CB Cl 1A1
04-25-35 7.50 536,633 547,869
Countrywide Alternative Loan Trust
Collateralized Mtge Obligation
Series 2006-2CB Cl A11
03-25-36 6.00 1,935,544 1,905,808
Countrywide Home Loans
Collateralized Mtge Obligation
Series 2004-12 Cl 1M
08-25-34 4.58 373,826(c) 360,938
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Countrywide Home Loans
Collateralized Mtge Obligation
Series 2005-HYB1 Cl 6A1
03-25-35 5.19% $ 1,361,781(c) $ 1,334,617
Countrywide Home Loans
Collateralized Mtge Obligation
Series 2005-R2 Cl 2A1
06-25-35 7.00 699,418(e) 714,312
Countrywide Home Loans
Collateralized Mtge Obligation
Series 2006-HYB1 Cl 1A1
03-20-36 5.41 619,221(c) 611,301
CS First Boston Mtge Securities
Collateralized Mtge Obligation
Series 2004-AR5 Cl CB1
06-25-34 4.44 369,604(c) 356,720
CS First Boston Mtge Securities
Collateralized Mtge Obligation
Series 2005-12 Cl 3A1
01-25-36 7.00 1,015,115 1,023,873
CS First Boston Mtge Securities
Collateralized Mtge Obligation
Series 2005-8 Cl 7A1
09-25-35 7.00 1,151,495 1,160,851
Downey Savings & Loan Assn Mtge Loan Trust
Collateralized Mtge Obligation
Interest Only
Series 2005-AR5 Cl X1
08-19-45 6.38 6,885,137(g) 92,519
Federal Home Loan Mtge Corp #555140
03-01-10 8.00 201,515 205,075
Federal Home Loan Mtge Corp #555300
10-01-17 8.00 362,963 376,524
Federal Home Loan Mtge Corp #89232
04-01-17 7.00 851,147 876,850
Federal Home Loan Mtge Corp #A10892
07-01-33 6.00 740,573 737,735
Federal Home Loan Mtge Corp #A15111
10-01-33 6.00 1,122,953 1,113,445
Federal Home Loan Mtge Corp #A21059
04-01-34 6.50 647,530 655,046
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
10 - RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Home Loan Mtge Corp #A25174
08-01-34 6.50% $ 617,932 $ 625,104
Federal Home Loan Mtge Corp #C53098
06-01-31 8.00 363,892 385,918
Federal Home Loan Mtge Corp #C53878
12-01-30 5.50 1,220,800 1,182,669
Federal Home Loan Mtge Corp #C68876
07-01-32 7.00 134,759 138,263
Federal Home Loan Mtge Corp #C69665
08-01-32 6.50 2,951,096 2,991,878
Federal Home Loan Mtge Corp #C79930
06-01-33 5.50 1,856,716 1,796,426
Federal Home Loan Mtge Corp #D95232
03-01-22 6.50 423,669 430,726
Federal Home Loan Mtge Corp #D95371
04-01-22 6.50 491,358 500,698
Federal Home Loan Mtge Corp #E00285
01-01-09 7.00 131,587 133,122
Federal Home Loan Mtge Corp #E81240
06-01-15 7.50 1,139,233 1,184,946
Federal Home Loan Mtge Corp #E88036
02-01-17 6.50 1,615,927 1,643,097
Federal Home Loan Mtge Corp #E88468
12-01-16 6.50 333,193 340,051
Federal Home Loan Mtge Corp #E92454
11-01-17 5.00 2,114,640 2,047,681
Federal Home Loan Mtge Corp #E93685
01-01-18 5.50 1,468,983 1,449,521
Federal Home Loan Mtge Corp #E99684
10-01-18 5.00 482,107 466,741
Federal Home Loan Mtge Corp #G01169
01-01-30 5.50 1,899,610 1,840,263
Federal Home Loan Mtge Corp #G01535
04-01-33 6.00 2,416,785 2,403,650
Federal Home Loan Mtge Corp #G12101
11-01-18 5.00 1,015,000 982,408
Federal Home Loan Mtge Corp
Collateralized Mtge Obligation
02-15-33 5.50 3,082,851 3,074,747
Federal Home Loan Mtge Corp
Collateralized Mtge Obligation
Interest Only
02-15-14 17.16 869,329(g) 48,673
07-15-17 7.50 690,283(g) 89,034
03-15-22 8.43 1,502,161(g) 253,547
10-15-22 14.56 1,012,099(g) 57,080
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Home Loan Mtge Corp
Collateralized Mtge Obligation
Interest Only/Inverse Floater
11-15-19 14.18% $ 1,334,247(d,g) $ 93,022
03-15-22 8.43 398,879(d,g) 32,773
Federal Natl Mtge Assn
06-01-21 5.00 4,725,000(b) 4,562,578
06-01-21 5.50 400,000(b) 393,875
06-01-36 5.00 1,000,000(b) 937,812
06-01-36 5.50 2,000,000(b) 1,925,624
06-01-36 6.00 2,500,000(b) 2,468,750
06-01-36 6.50 10,700,000(b) 10,793,624
06-01-36 7.00 2,000,000(b) 2,048,750
Federal Natl Mtge Assn #13481
05-01-08 7.75 100,953 102,416
Federal Natl Mtge Assn #190353
08-01-34 5.00 1,902,020 1,789,543
Federal Natl Mtge Assn #252409
03-01-29 6.50 1,911,828 1,951,851
Federal Natl Mtge Assn #254793
07-01-33 5.00 2,751,503 2,591,946
Federal Natl Mtge Assn #254916
09-01-23 5.50 2,369,841 2,311,706
Federal Natl Mtge Assn #313470
08-01-10 7.50 366,825 373,760
Federal Natl Mtge Assn #323362
11-01-28 6.00 3,513,914 3,486,413
Federal Natl Mtge Assn #323715
05-01-29 6.00 623,052 618,176
Federal Natl Mtge Assn #344909
04-01-25 8.00 975,096 1,038,113
Federal Natl Mtge Assn #357514
03-01-34 5.50 2,847,428 2,752,865
Federal Natl Mtge Assn #357947
09-01-35 6.00 1,882,186 1,860,534
Federal Natl Mtge Assn #426860
10-01-09 8.50 37,161 37,277
Federal Natl Mtge Assn #483691
12-01-28 7.00 1,321,876 1,371,177
Federal Natl Mtge Assn #487757
09-01-28 7.50 1,019,161 1,057,434
Federal Natl Mtge Assn #514704
01-01-29 6.00 955,857 948,376
Federal Natl Mtge Assn #545008
06-01-31 7.00 1,897,951 1,955,929
Federal Natl Mtge Assn #545339
11-01-31 6.50 335,176 340,803
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT - 11
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn #545818
07-01-17 6.00% $ 3,766,006 $ 3,797,569
Federal Natl Mtge Assn #545864
08-01-17 5.50 1,976,081 1,952,317
Federal Natl Mtge Assn #555063
11-01-17 5.50 1,443,333 1,425,656
Federal Natl Mtge Assn #555458
05-01-33 5.50 1,979,569 1,913,392
Federal Natl Mtge Assn #555734
07-01-23 5.00 878,661 837,808
Federal Natl Mtge Assn #555740
08-01-18 4.50 4,603,877 4,371,525
Federal Natl Mtge Assn #581418
06-01-31 7.00 1,175,472 1,212,837
Federal Natl Mtge Assn #583088
06-01-29 6.00 3,518,935 3,501,760
Federal Natl Mtge Assn #592270
01-01-32 6.50 863,721 878,247
Federal Natl Mtge Assn #596505
08-01-16 6.50 255,097 260,531
Federal Natl Mtge Assn #601416
11-01-31 6.50 449,836 457,354
Federal Natl Mtge Assn #624979
01-01-32 6.00 1,014,160 1,007,354
Federal Natl Mtge Assn #626670
03-01-32 7.00 737,143 763,801
Federal Natl Mtge Assn #627426
03-01-17 6.50 637,829 651,415
Federal Natl Mtge Assn #630992
09-01-31 7.00 2,212,219 2,293,990
Federal Natl Mtge Assn #630993
09-01-31 7.50 2,141,317 2,223,827
Federal Natl Mtge Assn #631388
05-01-32 6.50 2,267,868 2,302,490
Federal Natl Mtge Assn #632412
12-01-17 5.50 1,578,683 1,559,180
Federal Natl Mtge Assn #632856
03-01-17 6.00 711,928 717,889
Federal Natl Mtge Assn #633674
06-01-32 6.50 1,005,600 1,026,315
Federal Natl Mtge Assn #635231
04-01-32 7.00 409,243 421,135
Federal Natl Mtge Assn #635908
04-01-32 6.50 1,701,061 1,727,610
Federal Natl Mtge Assn #636812
04-01-32 7.00 165,617 170,804
Federal Natl Mtge Assn #640200
10-01-31 9.50 104,827 115,459
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn #640207
03-01-17 7.00% $ 44,237 $ 45,286
Federal Natl Mtge Assn #640208
04-01-17 7.50 83,051 86,584
Federal Natl Mtge Assn #644805
05-01-32 7.00 1,419,498 1,458,553
Federal Natl Mtge Assn #645053
05-01-32 7.00 870,134 892,837
Federal Natl Mtge Assn #646189
05-01-32 6.50 642,133 649,589
Federal Natl Mtge Assn #654071
09-01-22 6.50 718,003 728,388
Federal Natl Mtge Assn #654685
11-01-22 6.00 609,590 608,212
Federal Natl Mtge Assn #655635
08-01-32 6.50 1,090,869 1,108,863
Federal Natl Mtge Assn #656514
09-01-17 6.50 1,477,273 1,507,450
Federal Natl Mtge Assn #660186
11-01-32 6.00 2,941,912 2,921,643
Federal Natl Mtge Assn #663651
10-01-17 5.50 689,167 680,649
Federal Natl Mtge Assn #663667
11-01-17 5.50 588,779 581,454
Federal Natl Mtge Assn #665752
09-01-32 6.50 1,592,086 1,610,574
Federal Natl Mtge Assn #667302
01-01-33 7.00 855,183 881,867
Federal Natl Mtge Assn #667604
10-01-32 5.50 629,913 609,167
Federal Natl Mtge Assn #670382
09-01-32 6.00 1,505,872 1,492,249
Federal Natl Mtge Assn #676683
12-01-32 6.00 1,409,496 1,396,744
Federal Natl Mtge Assn #677089
01-01-33 5.50 791,424 765,359
Federal Natl Mtge Assn #677294
01-01-33 6.00 1,919,267 1,901,904
Federal Natl Mtge Assn #681080
02-01-18 5.00 1,151,743 1,115,594
Federal Natl Mtge Assn #682229
03-01-33 5.50 2,791,416 2,699,483
Federal Natl Mtge Assn #684585
02-01-33 5.50 1,888,913 1,827,758
Federal Natl Mtge Assn #684843
02-01-18 5.50 2,260,767 2,232,873
Federal Natl Mtge Assn #684853
03-01-33 6.50 316,595 320,695
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
12 - RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn #688002
03-01-33 5.50% $ 1,991,583 $ 1,927,598
Federal Natl Mtge Assn #689026
05-01-33 5.50 454,094 439,244
Federal Natl Mtge Assn #689093
07-01-28 5.50 1,215,772 1,177,065
Federal Natl Mtge Assn #694628
04-01-33 5.50 2,484,418 2,404,726
Federal Natl Mtge Assn #694795
04-01-33 5.50 3,149,676 3,048,510
Federal Natl Mtge Assn #695220
04-01-33 5.50 1,753,529 1,695,294
Federal Natl Mtge Assn #695460
04-01-18 5.50 2,866,522 2,830,643
Federal Natl Mtge Assn #697145
03-01-23 5.50 1,555,946 1,521,059
Federal Natl Mtge Assn #699424
04-01-33 5.50 2,015,866 1,951,202
Federal Natl Mtge Assn #701101
04-01-33 6.00 2,702,822 2,677,509
Federal Natl Mtge Assn #704610
06-01-33 5.50 2,713,342 2,623,233
Federal Natl Mtge Assn #705655
05-01-33 5.00 890,014 838,403
Federal Natl Mtge Assn #708503
05-01-33 6.00 380,008 376,608
Federal Natl Mtge Assn #708504
05-01-33 6.00 771,672 766,336
Federal Natl Mtge Assn #710780
05-01-33 6.00 327,997 324,926
Federal Natl Mtge Assn #711206
05-01-33 5.50 1,638,090 1,583,689
Federal Natl Mtge Assn #711239
07-01-33 5.50 664,349 642,286
Federal Natl Mtge Assn #711501
05-01-33 5.50 1,008,511 976,290
Federal Natl Mtge Assn #720006
07-01-33 5.50 2,549,703(h) 2,465,028
Federal Natl Mtge Assn #720378
06-01-18 4.50 2,006,084 1,904,488
Federal Natl Mtge Assn #723771
08-01-28 5.50 1,099,225 1,064,229
Federal Natl Mtge Assn #725232
03-01-34 5.00 2,041,171 1,922,805
Federal Natl Mtge Assn #725425
04-01-34 5.50 3,451,117 3,338,540
Federal Natl Mtge Assn #725684
05-01-18 6.00 1,091,707 1,098,743
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn #725719
07-01-33 4.84% $ 638,551(c) $ 620,064
Federal Natl Mtge Assn #725773
09-01-34 5.50 2,565,900 2,477,716
Federal Natl Mtge Assn #726940
08-01-23 5.50 1,704,802 1,656,256
Federal Natl Mtge Assn #730153
08-01-33 5.50 973,601 941,268
Federal Natl Mtge Assn #733367
08-01-23 5.50 1,430,972 1,389,888
Federal Natl Mtge Assn #735057
01-01-19 4.50 7,230,998 6,864,793
Federal Natl Mtge Assn #743524
11-01-33 5.00 2,325,208 2,190,371
Federal Natl Mtge Assn #743579
11-01-33 5.50 2,044,236 1,976,347
Federal Natl Mtge Assn #747339
10-01-23 5.50 1,555,136 1,510,407
Federal Natl Mtge Assn #747536
11-01-33 5.00 2,227,051 2,097,906
Federal Natl Mtge Assn #750932
10-01-18 4.50 1,029,803 977,650
Federal Natl Mtge Assn #753507
12-01-18 5.00 1,384,597 1,341,370
Federal Natl Mtge Assn #753940
12-01-18 5.00 1,394,046 1,350,292
Federal Natl Mtge Assn #759342
01-01-34 6.50 560,329 568,142
Federal Natl Mtge Assn #761141
12-01-18 5.00 1,859,125 1,800,773
Federal Natl Mtge Assn #765760
02-01-19 5.00 1,236,482 1,197,673
Federal Natl Mtge Assn #766641
03-01-34 5.00 3,574,469 3,363,091
Federal Natl Mtge Assn #776962
04-01-29 5.00 1,546,425 1,456,417
Federal Natl Mtge Assn #796728
09-01-19 6.00 925,427 931,378
Federal Natl Mtge Assn #845070
12-01-35 5.10 631,361(c) 622,048
Federal Natl Mtge Assn #878661
02-01-36 5.50 2,492,699(b) 2,392,991
Federal Natl Mtge Assn #881629
02-01-36 5.50 1,592,683(b) 1,526,092
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
01-25-36 8.73 1,812,987(g) 506,133
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT - 13
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 2003-119
12-25-33 6.56% $ 576,190(g) $ 151,794
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 2003-24
12-25-12 20.00 611,036(g) 25,587
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 2003-71
12-25-31 10.63 627,605(g) 131,179
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Interest Only
Series 2004-84
12-25-22 9.25 277,533(g) 46,087
Federal Natl Mtge Assn
Collateralized Mtge Obligation
Series 2003-133
12-25-26 8.00 407,991 433,217
First Horizon Alternative Mtge Securities
Collateralized Mtge Obligation
Series 2005-AA3 Cl 3A1
05-25-35 5.38 926,623 915,875
First Horizon Alternative Mtge Securities
Collateralized Mtge Obligation
Series 2005-AA4 Cl B1
06-25-35 5.37 349,193 355,744
Govt Natl Mtge Assn #518371
02-15-30 7.00 123,468 127,655
Govt Natl Mtge Assn #528344
03-15-30 7.00 385,476 398,547
Govt Natl Mtge Assn #556293
12-15-31 6.50 498,099 507,765
Govt Natl Mtge Assn #583182
02-15-32 6.50 683,493 696,414
Govt Natl Mtge Assn #595256
12-15-32 6.00 458,023 456,850
Govt Natl Mtge Assn #619613
09-15-33 5.00 1,974,451 1,878,806
Harborview Mtge Loan Trust
Collateralized Mtge Obligation
Series 2005-16 Cl 3A1B
01-19-36 5.42 562(c) 562
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
IndyMac Index Mtge Loan Trust
Collateralized Mtge Obligation
Interest Only
Series 2005-AR8 Cl AX1
04-25-35 4.50% $ 14,438,127(g) $ 151,149
IndyMac Index Mtge Loan Trust
Collateralized Mtge Obligation
Series 2005-AR3 Cl 3A1
04-25-35 5.32 279,504(c) 276,479
Master Alternative Loans Trust
Collateralized Mtge Obligation
Series 2004-2 Cl 4A1
02-25-19 5.00 556,759 540,230
Master Alternative Loans Trust
Collateralized Mtge Obligation
Series 2004-7 Cl 8A1
08-25-19 5.00 472,851 460,074
Master Alternative Loans Trust
Collateralized Mtge Obligation
Series 2004-8 Cl 7A1
09-25-19 5.00 658,638 641,098
Master Alternative Loans Trust
Collateralized Mtge Obligation
Series 2005-3 Cl 1A2
04-25-35 5.50 1,537,000 1,451,420
Sequoia Alternative Loan Trust
Collateralized Mtge Obligation
Series 2006-1 Cl A2
02-25-36 6.18 925,404 925,164
Structured Adjustable Rate Mtge Loan Trust
Collateralized Mtge Obligation
Series 2004-5 Cl B1
05-25-34 4.59 422,739(c) 408,433
Structured Adjustable Rate Mtge Loan Trust
Collateralized Mtge Obligation
Series 2005-15 Cl 4A1
07-25-35 5.53 1,334,372(c) 1,301,013
Structured Asset Securities
Collateralized Mtge Obligation
Series 2003-33H Cl 1A1
10-25-33 5.50 1,384,780 1,323,140
TBW Mtge Backed Pass Through Ctfs
Collateralized Mtge Obligation
Series 2006-2 Cl 6A1
07-25-36 7.00 999,577 1,007,732
Washington Mutual
Collateralized Mtge Obligation
Series 2004-CB2 Cl 6A
07-25-19 4.50 757,012 716,345
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
14 - RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Washington Mutual
Collateralized Mtge Obligation
Series 2004-CB4 Cl 22A
12-25-19 6.00% $ 1,867,184 $ 1,856,205
Washington Mutual
Collateralized Mtge Obligation
Series 2005-AR17 Cl A1C1
12-25-45 5.27 472,385(c) 472,712
Wells Fargo Mtge Backed Securities Trust
Collateralized Mtge Obligation
Series 2005-10 Cl A1
10-25-35 5.00 2,441,486 2,304,909
Wells Fargo Mtge Backed Securities Trust
Collateralized Mtge Obligation
Series 2005-5 Cl 2A1
05-25-35 5.50 918,494 879,458
Wells Fargo Mtge Backed Securities Trust
Collateralized Mtge Obligation
Series 2005-AR1 Cl 1A1
02-25-35 4.55 13,228(c) 12,862
- --------------------------------------------------------------------------------
BONDS (CONTINUED)
- --------------------------------------------------------------------------------
ISSUER COUPON PRINCIPAL VALUE(a)
RATE AMOUNT
MORTGAGE-BACKED (CONT.)
Wells Fargo Mtge Backed Securities Trust
Collateralized Mtge Obligation
Series 2005-AR16 Cl 6A3
10-25-35 5.00% $ 1,274,387(c) $ 1,242,744
-------------
Total 252,890,673
- --------------------------------------------------------------------------------
TOTAL BONDS
(Cost: $261,003,210) $ 253,721,192
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHORT-TERM SECURITIES (4.5%)
- --------------------------------------------------------------------------------
ISSUER EFFECTIVE AMOUNT VALUE(a)
YIELD PAYABLE AT
MATURITY
COMMERCIAL PAPER
Citibank Credit Card Dakota Nts
06-13-06 5.02% $ 5,000,000(j) $ 4,990,954
HSBC Finance
06-01-06 5.08 5,800,000 5,799,182
- --------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES
(Cost: $10,791,650) $ 10,790,136
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(Cost: $271,794,860)(k) $ 264,511,328
================================================================================
- --------------------------------------------------------------------------------
NOTES TO INVESTMENTS IN SECURITIES
- --------------------------------------------------------------------------------
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) At May 31, 2006, the cost of securities purchased, including interest
purchased, on a when-issued and/or other forward-commitment basis was
$27,173,586.
(c) Adjustable rate mortgage; interest rate varies to reflect current market
conditions; rate shown is the effective rate on May 31, 2006.
(d) Inverse floaters represent securities that pay interest at a rate that
increases (decreases) in the same magnitude as, or in a multiple of, a
decline (increase) in the LIBOR (London InterBank Offering Rate) Index.
Interest rate disclosed is the rate in effect on May 31, 2006. At May 31,
2006, the value of inverse floaters represented 0.1% of net assets.
(e) 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
May 31, 2006, the value of these securities amounted to $714,312 or 0.3%
of net assets.
(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.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT - 15
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO INVESTMENTS IN SECURITIES (CONTINUED)
- --------------------------------------------------------------------------------
(g) Interest only represents securities that entitle holders to receive only
interest payments on the underlying mortgages. The yield to maturity of an
interest only 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 May 31, 2006.
(h) Partially pledged as initial deposit on the following open interest rate
futures contracts (see Note 5 to the financial statements):
TYPE OF SECURITY NOTIONAL AMOUNT
------------------------------------------------------------------------
PURCHASE CONTRACTS
U.S. Long Bond, Sept. 2006, 20-year $ 7,200,000
U.S. Treasury Note, Sept. 2006, 5-year 3,400,000
SALE CONTRACTS
U.S. Treasury Note, June 2006, 10-year 4,000,000
(i) Interest rate varies either based on a predetermined schedule or to
reflect current market conditions; rate shown is the effective rate on May
31, 2006.
(j) 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 May 31, 2006, the value of
these securities amounted to $4,990,954 or 2.1% of net assets.
(k) At May 31, 2006, the cost of securities for federal income tax purposes
was $271,815,422 and the aggregate gross unrealized appreciation and
depreciation based on that cost was:
Unrealized appreciation $ 225,479
Unrealized depreciation (7,529,573)
--------------------------------------------------------------------------
Net unrealized depreciation $ (7,304,094)
--------------------------------------------------------------------------
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/funds.
- --------------------------------------------------------------------------------
16 - RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
RiverSource U.S. Government Mortgage Fund
MAY 31, 2006
- ------------------------------------------------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------------------------------------------------
Investments in securities, at value (Note 1)
(identified cost $271,794,860) $ 264,511,328
Cash in bank on demand deposit 93,693
Capital shares receivable 17,768
Accrued interest receivable 1,197,665
Receivable for investment securities sold 4,111,745
- ------------------------------------------------------------------------------------------------------------------
Total assets 269,932,199
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES
- ------------------------------------------------------------------------------------------------------------------
Dividends payable to shareholders 164,985
Capital shares payable 11,339
Payable for investment securities purchased 4,094,590
Payable for securities purchased on a forward-commitment basis (Note 1) 27,173,586
Accrued investment management services fee 3,139
Accrued distribution fee 48,291
Accrued service fee 95
Accrued transfer agency fee 465
Accrued administrative services fee 458
Other accrued expenses 78,359
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 31,575,307
- ------------------------------------------------------------------------------------------------------------------
Net assets applicable to outstanding capital stock $ 238,356,892
==================================================================================================================
- ------------------------------------------------------------------------------------------------------------------
REPRESENTED BY
- ------------------------------------------------------------------------------------------------------------------
Capital stock -- $.01 par value (Note 1) $ 484,065
Additional paid-in capital 247,093,055
Undistributed net investment income 242,172
Accumulated net realized gain (loss) (Note 7) (2,158,899)
Unrealized appreciation (depreciation) on investments (7,303,501)
- ------------------------------------------------------------------------------------------------------------------
Total -- representing net assets applicable to outstanding capital stock $ 238,356,892
==================================================================================================================
Net assets applicable to outstanding shares: Class A $ 126,321,891
Class B $ 64,490,312
Class C $ 6,740,180
Class I $ 6,171,017
Class Y $ 34,633,492
Net asset value per share of outstanding capital stock: Class A shares 25,654,153 $ 4.92
Class B shares 13,091,553 $ 4.93
Class C shares 1,368,131 $ 4.93
Class I shares 1,254,745 $ 4.92
Class Y shares 7,037,905 $ 4.92
==================================================================================================================
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT - 17
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
RiverSource U.S. Government Mortgage Fund
YEAR ENDED MAY 31, 2006
- ------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
- ------------------------------------------------------------------------------------------------------------------
Income:
Interest $ 12,915,550
- ------------------------------------------------------------------------------------------------------------------
Expenses (Note 2):
Investment management services fee 1,327,433
Distribution fee
Class A 365,255
Class B 806,733
Class C 86,693
Transfer agency fee 635,648
Incremental transfer agency fee
Class A 24,695
Class B 25,071
Class C 2,534
Service fee -- Class Y 24,131
Administrative services fees and expenses 172,175
Compensation of board members 9,777
Custodian fees 65,995
Printing and postage 102,465
Registration fees 59,690
Audit fees 22,000
Other 10,406
- ------------------------------------------------------------------------------------------------------------------
Total expenses 3,740,701
Expenses waived/reimbursed by the Investment Manager and its affiliates (Note 2) (801,430)
- ------------------------------------------------------------------------------------------------------------------
2,939,271
Earnings credits on cash balances (Note 2) (18,788)
- ------------------------------------------------------------------------------------------------------------------
Total net expenses 2,920,483
- ------------------------------------------------------------------------------------------------------------------
Investment income (loss) -- net 9,995,067
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) -- NET
- ------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on:
Security transactions (Note 3) (1,539,134)
Futures contracts (6,877)
- ------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (1,546,011)
Net change in unrealized appreciation (depreciation) on investments (8,342,100)
- ------------------------------------------------------------------------------------------------------------------
Net gain (loss) on investments (9,888,111)
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ 106,956
==================================================================================================================
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
18 - RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
RiverSource U.S. Government Mortgage Fund
YEAR ENDED MAY 31, 2006 2005
- ------------------------------------------------------------------------------------------------------------------
OPERATIONS AND DISTRIBUTIONS
- ------------------------------------------------------------------------------------------------------------------
Investment income (loss) -- net $ 9,995,067 $ 9,869,268
Net realized gain (loss) on investments (1,546,011) 2,059,479
Net change in unrealized appreciation (depreciation) on investments (8,342,100) 3,221,638
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 106,956 15,150,385
- ------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
Class A (5,735,409) (6,521,365)
Class B (2,557,549) (3,367,254)
Class C (274,662) (379,894)
Class I (22,389) (414)
Class Y (1,002,420) (890)
Net realized gain
Class A (240,137) --
Class B (129,909) --
Class C (13,809) --
Class I (16) --
Class Y (56,235) --
- ------------------------------------------------------------------------------------------------------------------
Total distributions (10,032,535) (10,269,817)
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
- ------------------------------------------------------------------------------------------------------------------
Proceeds from sales
Class A shares (Note 2) 37,325,046 49,147,666
Class B shares 13,027,075 19,159,654
Class C shares 872,372 1,916,466
Class I shares 6,177,343 --
Class Y shares 35,864,407 21,761
Reinvestment of distributions at net asset value
Class A shares 5,347,437 5,863,503
Class B shares 2,476,785 3,139,154
Class C shares 264,470 344,732
Class I shares 17,221 --
Class Y shares 1,032,159 464
Payments for redemptions
Class A shares (70,083,963) (75,829,038)
Class B shares (Note 2) (45,885,010) (54,952,040)
Class C shares (Note 2) (4,632,367) (6,648,471)
Class I shares (621) --
Class Y shares (1,208,975) --
- ------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets from capital share transactions (19,406,621) (57,836,149)
- ------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (29,332,200) (52,955,581)
Net assets at beginning of year 267,689,092 320,644,673
- ------------------------------------------------------------------------------------------------------------------
Net assets at end of year $ 238,356,892 $ 267,689,092
==================================================================================================================
Undistributed net investment income $ 242,172 $ --
- ------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT - 19
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
RiverSource U.S. Government Mortgage Fund
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund is a series of RiverSource Government Income Series, Inc. (formerly AXP
Government Income Series, Inc.) and is registered under the Investment Company
Act of 1940 (as amended) as a diversified, open-end management investment
company. RiverSource Government Income Series, Inc. has 10 billion authorized
shares of capital stock that can be allocated among the separate series as
designated by the Board. The Fund invests primarily in mortgage-backed
securities that either are issued or guaranteed as to principal and interest by
the U.S. government, its agencies, authorities or instrumentalities.
The Fund offers Class A, Class B, Class C 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 May 31, 2006, Ameriprise Financial, Inc.
(Ameriprise Financial) and the affiliated funds-of-funds owned 100% of Class I
shares which represents 2.59% of the Fund's net assets.
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.
- --------------------------------------------------------------------------------
20 - RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT
- --------------------------------------------------------------------------------
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.
SECURITIES PURCHASED ON A FORWARD-COMMITMENT BASIS
Delivery and payment for securities that have been purchased by the Fund on a
forward-commitment basis, including when-issued securities and other
forward-commitments, can take place one month or more after the transaction
date. During this period, such securities are subject to market fluctuations,
and they may affect the Fund's net assets the same as owned securities. The Fund
designates cash or liquid securities at least equal to the amount of its
forward-commitments. At May 31, 2006, the Fund has entered into outstanding
when-issued securities of $23,250,873 and other forward-commitments of
$3,922,713.
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 sell put and call options
and write put and call options. This may include purchasing mortgage-backed
security (MBS) put spread options and writing covered MBS call spread options.
MBS spread options are based upon the changes in the price spread between a
specified mortgage-backed security and a like-duration Treasury security. 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. The Fund also may write over-the-counter
options where completing the obligation depends upon the credit standing of the
other party.
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.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT - 21
- --------------------------------------------------------------------------------
FUTURES TRANSACTIONS
To gain exposure to or protect itself from market changes, the Fund may buy and
sell financial 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.
SHORT SALES
The Fund may engage in short sales. In these transactions, the Fund sells a
security that it does not own. The Fund is obligated to replace the security
that was short by purchasing it at the market price at the time of replacement
or entering into an offsetting transaction with the broker. The price at such
time may be more or less than the price at which the Fund sold the security.
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."
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.
- --------------------------------------------------------------------------------
22 - RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT
- --------------------------------------------------------------------------------
FEDERAL TAXES
The Fund's policy is to comply with Subchapter M of the Internal Revenue Code
that applies to regulated investment companies and to distribute substantially
all of its taxable income to shareholders. No provision for income or excise
taxes is thus required.
Net investment income (loss) and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of deferred losses on
certain futures contracts 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 $25,986
and accumulated net realized loss has been decreased by $25,063 resulting in a
net reclassification adjustment to decrease paid-in capital by $923.
The tax character of distributions paid for the years indicated is as follows:
YEAR ENDED MAY 31, 2006 2005
- --------------------------------------------------------------------------------
CLASS A
Distributions paid from:
Ordinary income ......................... $ 5,975,546 $ 6,521,365
Long-term capital gain .................. -- --
CLASS B
Distributions paid from:
Ordinary income ......................... 2,687,458 3,367,254
Long-term capital gain .................. -- --
CLASS C
Distributions paid from:
Ordinary income ......................... 288,471 379,894
Long-term capital gain .................. -- --
CLASS I
Distributions paid from:
Ordinary income ......................... 22,405 414
Long-term capital gain .................. -- --
CLASS Y
Distributions paid from:
Ordinary income ......................... 1,058,655 890
Long-term capital gain .................. -- --
At May 31, 2006, the components of distributable earnings on a tax basis are as
follows:
Undistributed ordinary income ................................... $ 469,577
Accumulated long-term gain (loss) ............................... $ (1,999,586)
Unrealized appreciation (depreciation) .......................... $ (7,525,234)
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT - 23
- --------------------------------------------------------------------------------
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. 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 0.48% to 0.29% annually as the Fund's assets
increase. Prior to March 1, 2006, the fee percentage of the Fund's average daily
net assets declined from 0.52% to 0.395% annually as the Fund's assets
increased.
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 0.07% to 0.04% annually
as the Fund's assets increase. Prior to Oct. 1, 2005, the fee percentage of the
Fund's average daily net assets declined from 0.05% to 0.025% annually as the
Fund's assets increased. 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 (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.
- --------------------------------------------------------------------------------
24 - RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT
- --------------------------------------------------------------------------------
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 are included in the transfer
agency fees on the statement of operations.
The Fund has agreements with Ameriprise Financial Services, Inc. (the
Distributor) for distribution and shareholder services. Under a Plan and
Agreement of Distribution pursuant to Rule 12b-1, 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
$252,255 for Class A, $187,422 for Class B and $2,961 for Class C for the year
ended May 31, 2006.
For the year ended May 31, 2006, the Investment Manager and its affiliates
waived certain fees and expenses to 0.89% for Class A, 1.64% for Class B, 1.64%
for Class C, 0.54% for Class I and 0.71% 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 $292,379, $171,128, $18,191 and $53,069, respectively, and the
management fees waived at the Fund level were $266,663. Effective as of Oct. 1,
2005, the Investment Manager and its affiliates have agreed to waive certain
fees and expenses until May 31, 2007, such that net expenses will not exceed
0.89% for Class A, 1.64% for Class B, 1.64% for Class C, 0.54% for Class I and
0.71% for Class Y of the Fund's average daily net assets.
During the year ended May 31, 2006, the Fund's custodian and transfer agency
fees were reduced by $18,788 as a result of earnings credits from overnight cash
balances. The Fund also pays custodian fees to Ameriprise Trust Company, an
affiliate of Ameriprise Financial.
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $475,063,097 and $473,790,560, respectively, for the
year ended May 31, 2006. Realized gains and losses are determined on an
identified cost basis.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT - 25
- --------------------------------------------------------------------------------
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the years indicated are as follows:
YEAR ENDED MAY 31, 2006
CLASS A CLASS B CLASS C CLASS I CLASS Y
- -----------------------------------------------------------------------------------------------------------
Sold 7,402,343 2,584,566 172,998 1,249,439 7,065,659
Issued for reinvested distributions 1,063,575 492,215 52,554 3,488 206,582
Redeemed (13,940,058) (9,109,562) (920,171) (124) (241,174)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) (5,474,140) (6,032,781) (694,619) 1,252,803 7,031,067
- -----------------------------------------------------------------------------------------------------------
YEAR ENDED MAY 31, 2005
CLASS A CLASS B CLASS C CLASS I CLASS Y
- -----------------------------------------------------------------------------------------------------------
Sold 9,625,103 3,748,262 374,927 -- 4,240
Issued for reinvested distributions 1,147,161 613,952 67,418 -- 91
Redeemed (14,862,288) (10,774,795) (1,302,715) -- --
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) (4,090,024) (6,412,581) (860,370) -- 4,331
- -----------------------------------------------------------------------------------------------------------
5. INTEREST RATE FUTURES CONTRACTS
At May 31, 2006, investments in securities included securities valued at
$338,377 that were pledged as collateral to cover initial margin deposits on 106
open purchase contracts and 40 open sale contracts. The notional market value of
the open purchase contracts at May 31, 2006 was $11,170,469 with a net
unrealized loss of $57,365. The notional market value of the open sale contracts
at May 31, 2006 was $4,203,125 with a net unrealized gain of $37,396. See
"Summary of significant accounting policies" and "Notes to investments in
securities."
6. BANK BORROWINGS
The Fund has a revolving credit agreement with a syndicate of banks headed by
JPMorgan Chase Bank, N.A. (JPMCB), 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. 20, 2005. 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
0.40% or the JPMCB Prime Commercial 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 0.07%
per annum. Prior to this agreement, the Fund had a revolving credit agreement
that permitted borrowings up to $500 million with The Bank of New York. The Fund
had no borrowings outstanding during the year ended May 31, 2006.
- --------------------------------------------------------------------------------
26 - RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT
- --------------------------------------------------------------------------------
7. CAPITAL LOSS CARRY-OVER
For federal income tax purposes, the Fund had a capital loss carry-over of
$1,999,586 at May 31, 2006, that if not offset by capital gains will expire as
follows:
2014 2015
- --------------------------------------------------------------------------------
$ 545,026 $ 1,454,560
- --------------------------------------------------------------------------------
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.
8. INFORMATION REGARDING PENDING AND SETTLED LEGAL PROCEEDINGS
In December 2005, without admitting or denying the allegations, American Express
Financial Corporation (AEFC, which is now known as Ameriprise Financial, Inc.
(Ameriprise Financial)), the parent company of RiverSource Investments, LLC
(RiverSource Investments), entered into settlement agreements with the
Securities and Exchange Commission (SEC) and Minnesota Department of Commerce
(MDOC) related to market timing activities. In connection with these matters,
the SEC and MDOC issued orders (the Orders) alleging that AEFC violated certain
provisions of the federal and Minnesota securities laws by failing to adequately
disclose market timing activities by allowing certain identified market timers
to continue to market time contrary to disclosures in mutual fund and variable
annuity product prospectuses. The Orders also alleged that AEFC failed to
implement procedures to detect and prevent market timing in 401(k) plans for
employees of AEFC and related companies and failed to adequately disclose that
there were no such procedures. Pursuant to the MDOC Order, the MDOC also alleged
that AEFC allowed inappropriate market timing to occur by failing to have
written policies and procedures and failing to properly supervise its employees.
As a result of the Orders, AEFC was censured and ordered to cease and desist
from committing or causing any violations of certain provisions of the
Investment Advisers Act of 1940, the Investment Company Act of 1940, and various
Minnesota laws. Pursuant to the terms of the Orders, AEFC agreed to pay
disgorgement of $10 million and civil money penalties of $7 million. AEFC also
agreed to make presentations at least annually to its board of directors and the
relevant mutual funds' board that include an overview of policies and procedures
to prevent market timing, material changes to these policies and procedures and
whether disclosures related to market timing are consistent with the SEC order
and federal securities laws. AEFC also agreed to retain an independent
distribution consultant to assist in developing a plan for distribution of all
disgorgement and civil penalties ordered by the SEC in accordance with various
undertakings detailed at http://www.sec.gov/litigation/admin/ia-2451.pdf. In
addition, AEFC agreed to complete and submit to the MDOC a compliance review of
its procedures regarding market timing within one year of the MDOC Order,
including a summary of actions taken to ensure compliance with applicable laws
and regulations and certification by a senior officer regarding compliance and
supervisory procedures.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT - 27
- --------------------------------------------------------------------------------
Ameriprise Financial and its affiliates have cooperated with the SEC and the
MDOC in these legal proceedings, and have made regular reports to the
RiverSource Funds' Boards of Directors/Trustees.
Ameriprise Financial and certain of its affiliates have historically been
involved in a number of legal, arbitration and regulatory proceedings, including
routine litigation, class actions, and governmental actions, concerning matters
arising in connection with the conduct of their business activities. Ameriprise
Financial believes that the Funds are not currently the subject of, and that
neither Ameriprise Financial nor any of its affiliates are the subject of, any
pending legal, arbitration or regulatory proceedings that are likely to have a
material adverse effect on the Funds or the ability of Ameriprise Financial or
its affiliates to perform under their contracts with the Funds. Ameriprise
Financial is required to make 10-Q, 10-K and, as necessary, 8-K filings with the
Securities and Exchange Commission on legal and regulatory matters that relate
to Ameriprise Financial and its affiliates. Copies of these filings may be
obtained by accessing the SEC website at www.sec.gov.
There can be no assurance that these matters, or the adverse publicity
associated with them, will not result in increased fund redemptions, reduced
sale of fund shares or other adverse consequences to the Funds.
- --------------------------------------------------------------------------------
28 - RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT
- --------------------------------------------------------------------------------
9. 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 May 31, 2006 2005 2004 2003 2002(b)
Net asset value, beginning of period $ 5.12 $ 5.03 $ 5.19 $ 5.06 $ 5.01
- -----------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .21 .19 .16 .19 .04
Net gains (losses) (both realized and unrealized) (.20) .10 (.09) .16 .04
- -----------------------------------------------------------------------------------------------------------------------
Total from investment operations .01 .29 .07 .35 .08
- -----------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.20) (.20) (.16) (.20) (.03)
Tax return of capital -- -- (.01) -- --
Distributions from realized gains (.01) -- (.06) (.02) --
- -----------------------------------------------------------------------------------------------------------------------
Total distributions (.21) (.20) (.23) (.22) (.03)
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 4.92 $ 5.12 $ 5.03 $ 5.19 $ 5.06
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in millions) $ 126 $ 159 $ 177 $ 251 $ 58
- -----------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average daily net assets(c),(d) .89% .95% .98% .99% .95%(e)
- -----------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average daily net assets 4.08% 3.67% 3.11% 3.31% 2.98%(e)
- -----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (excluding short-term securities) 178% 137% 163% 227% 200%
- -----------------------------------------------------------------------------------------------------------------------
Total return(f) .12% 5.78% 1.27% 6.93% 1.75%(g)
- -----------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest
cent.
(b) For the period from Feb. 14, 2002 (when shares became publicly available)
to May 31, 2002.
(c) Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
(d) The Investment Manager and its affiliates waived/reimbursed the Fund for
certain expenses. Had they not done so, the annual ratios of expenses for
Class A would have been 1.19%, 1.10%, 1.05%, 1.06% and 1.58% for the
periods ended May 31, 2006, 2005, 2004, 2003 and 2002, respectively.
(e) Adjusted to an annual basis.
(f) Total return does not reflect payment of a sales charge.
(g) Not annualized.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT - 29
- --------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------
PER SHARE INCOME AND CAPITAL CHANGES(a)
- -----------------------------------------------------------------------------------------------------------------------
Fiscal period ended May 31, 2006 2005 2004 2003 2002(b)
Net asset value, beginning of period $ 5.12 $ 5.04 $ 5.20 $ 5.07 $ 5.01
- -----------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .17 .15 .12 .15 .03
Net gains (losses) (both realized and unrealized) (.19) .09 (.09) .16 .05
- -----------------------------------------------------------------------------------------------------------------------
Total from investment operations (.02) .24 .03 .31 .08
- -----------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.16) (.16) (.12) (.16) (.02)
Tax return of capital -- -- (.01) -- --
Distributions from realized gains (.01) -- (.06) (.02) --
- -----------------------------------------------------------------------------------------------------------------------
Total distributions (.17) (.16) (.19) (.18) (.02)
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 4.93 $ 5.12 $ 5.04 $ 5.20 $ 5.07
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in millions) $ 64 $ 98 $ 129 $ 200 $ 28
- -----------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average daily net assets(c),(d) 1.64% 1.69% 1.74% 1.75% 1.74%(e)
- -----------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average daily net assets 3.31% 2.90% 2.35% 2.49% 2.68%(e)
- -----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (excluding short-term securities) 178% 137% 163% 227% 200%
- -----------------------------------------------------------------------------------------------------------------------
Total return(f) (.42%) 4.78% .52% 6.12% 1.76%(g)
- -----------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest
cent.
(b) For the period from Feb. 14, 2002 (when shares became publicly available)
to May 31, 2002.
(c) Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
(d) The Investment Manager and its affiliates waived/reimbursed the Fund for
certain expenses. Had they not done so, the annual ratios of expenses for
Class B would have been 1.95%, 1.86%, 1.80%, 1.82% and 2.34% for the
periods ended May 31, 2006, 2005, 2004, 2003 and 2002, respectively.
(e) Adjusted to an annual basis.
(f) Total return does not reflect payment of a sales charge.
(g) Not annualized.
- --------------------------------------------------------------------------------
30 - RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT
- --------------------------------------------------------------------------------
CLASS C
- -----------------------------------------------------------------------------------------------------------------------
PER SHARE INCOME AND CAPITAL CHANGES(a)
- -----------------------------------------------------------------------------------------------------------------------
Fiscal period ended May 31, 2006 2005 2004 2003 2002(b)
Net asset value, beginning of period $ 5.12 $ 5.04 $ 5.20 $ 5.07 $ 5.01
- -----------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .17 .15 .12 .15 .03
Net gains (losses) (both realized and unrealized) (.19) .09 (.09) .16 .05
- -----------------------------------------------------------------------------------------------------------------------
Total from investment operations (.02) .24 .03 .31 .08
- -----------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.16) (.16) (.12) (.16) (.02)
Tax return of capital -- -- (.01) -- --
Distributions from realized gains (.01) -- (.06) (.02) --
- -----------------------------------------------------------------------------------------------------------------------
Total distributions (.17) (.16) (.19) (.18) (.02)
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 4.93 $ 5.12 $ 5.04 $ 5.20 $ 5.07
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in millions) $ 7 $ 11 $ 15 $ 22 $ 5
- -----------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average daily net assets(c),(d) 1.64% 1.70% 1.74% 1.75% 1.73%(e)
- -----------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average daily net assets 3.31% 2.90% 2.36% 2.50% 2.60%(e)
- -----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (excluding short-term securities) 178% 137% 163% 227% 200%
- -----------------------------------------------------------------------------------------------------------------------
Total return(f) (.43%) 4.79% .52% 6.12% 1.74%(g)
- -----------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest
cent.
(b) For the period from Feb. 14, 2002 (when shares became publicly available)
to May 31, 2002.
(c) Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
(d) The Investment Manager and its affiliates waived/reimbursed the Fund for
certain expenses. Had they not done so, the annual ratios of expenses for
Class C would have been 1.95%, 1.85%, 1.80%, 1.82% and 2.34% for the
periods ended May 31, 2006, 2005, 2004, 2003 and 2002, respectively.
(e) Adjusted to an annual basis.
(f) Total return does not reflect payment of a sales charge.
(g) Not annualized.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT - 31
- --------------------------------------------------------------------------------
CLASS I
- ----------------------------------------------------------------------------------------------------------
PER SHARE INCOME AND CAPITAL CHANGES(a)
- ----------------------------------------------------------------------------------------------------------
Fiscal period ended May 31, 2006 2005 2004(b)
Net asset value, beginning of period $ 5.11 $ 5.03 $ 5.15
- ----------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .22 .20 .05
Net gains (losses) (both realized and unrealized) (.19) .09 (.11)
- ----------------------------------------------------------------------------------------------------------
Total from investment operations .03 .29 (.06)
- ----------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.21) (.21) (.06)
Distributions from realized gains (.01) -- --
- ----------------------------------------------------------------------------------------------------------
Total distributions (.22) (.21) (.06)
- ----------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 4.92 $ 5.11 $ 5.03
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------------------
Net assets, end of period (in millions) $ 6 $ -- $ --
- ----------------------------------------------------------------------------------------------------------
Ratio of expenses to average daily net assets(c) .54%(d) .62%(d) .64%(e)
- ----------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average daily net assets 4.99% 3.99% 3.39%(e)
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover rate (excluding short-term securities) 178% 137% 163%
- ----------------------------------------------------------------------------------------------------------
Total return(f) .59% 5.92% (1.38%)(g)
- ----------------------------------------------------------------------------------------------------------
(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) The Investment Manager and its affiliates waived/reimbursed the Fund for
certain expenses. Had they not done so, the annual ratios of expenses for
Class I would have been 0.73% and 0.66% for the years ended May 31, 2006
and 2005.
(e) Adjusted to an annual basis.
(f) Total return does not reflect payment of a sales charge.
(g) Not annualized.
- --------------------------------------------------------------------------------
32 - RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT
- --------------------------------------------------------------------------------
CLASS Y
- -----------------------------------------------------------------------------------------------------------------------
PER SHARE INCOME AND CAPITAL CHANGES(a)
- -----------------------------------------------------------------------------------------------------------------------
Fiscal period ended May 31, 2006 2005 2004 2003 2002(b)
Net asset value, beginning of period $ 5.11 $ 5.03 $ 5.19 $ 5.06 $ 5.01
- -----------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .21 .20 .17 .19 .04
Net gains (losses) (both realized and unrealized) (.19) .08 (.09) .16 .04
- -----------------------------------------------------------------------------------------------------------------------
Total from investment operations .02 .28 .08 .35 .08
- -----------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.20) (.20) (.17) (.20) (.03)
Tax return of capital -- -- (.01) -- --
Distributions from realized gains (.01) -- (.06) (.02) --
- -----------------------------------------------------------------------------------------------------------------------
Total distributions (.21) (.20) (.24) (.22) (.03)
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 4.92 $ 5.11 $ 5.03 $ 5.19 $ 5.06
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in millions) $ 35 $ -- $ -- $ -- $ --
- -----------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average daily net assets(c),(d) .71% .77% .81% .80% .78%(e)
- -----------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) to average daily net assets 4.40% 3.99% 3.29% 3.68% 2.95%(e)
- -----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (excluding short-term securities) 178% 137% 163% 227% 200%
- -----------------------------------------------------------------------------------------------------------------------
Total return(f) .49% 5.75% 1.45% 7.10% 1.80%(g)
- -----------------------------------------------------------------------------------------------------------------------
(a) For a share outstanding throughout the period. Rounded to the nearest
cent.
(b) For the period from Feb. 14, 2002 (when shares became publicly available)
to May 31, 2002.
(c) Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
(d) The Investment Manager and its affiliates waived/reimbursed the Fund for
certain expenses. Had they not done so, the annual ratios of expenses for
Class Y would have been 1.04%, 0.94%, 0.87%, 0.88% and 1.40% for the
periods ended May 31, 2006, 2005, 2004, 2003 and 2002, respectively.
(e) Adjusted to an annual basis.
(f) Total return does not reflect payment of a sales charge.
(g) Not annualized.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT - 33
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD AND SHAREHOLDERS
RIVERSOURCE GOVERNMENT INCOME SERIES, INC.
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments in securities, of RiverSource U.S. Government
Mortgage Fund (a series of RiverSource Government Income Series, Inc.) as of May
31, 2006, 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 May 31, 2006, and the financial highlights for each of the years in the
four-year period ended May 31, 2006 and for the period from Feb. 14, 2002 (when
shares became publicly available) to May 31, 2002. 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 May 31, 2006, 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 U.S. Government Mortgage Fund as of May 31, 2006, 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
July 20, 2006
- --------------------------------------------------------------------------------
34 - RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 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 U.S. Government Mortgage Fund
Fiscal year ended May 31, 2006
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
June 29, 2005 ....................................................... $ 0.01800
July 28, 2005 ....................................................... 0.01800
Aug. 29, 2005 ....................................................... 0.01600
Sept. 29, 2005 ...................................................... 0.01600
Oct. 27, 2005 ....................................................... 0.01600
Nov. 29, 2005 ....................................................... 0.01500
Dec. 22, 2005 ....................................................... 0.02119
Jan. 26, 2006 ....................................................... 0.01505
Feb. 27, 2006 ....................................................... 0.01708
March 27, 2006 ...................................................... 0.01600
April 26, 2006 ...................................................... 0.01700
May 25, 2006 ........................................................ 0.01800
Total................................................................ $ 0.20332
CAPITAL GAIN DISTRIBUTION -- taxable as long-term capital gain.
PAYABLE DATE PER SHARE
Dec. 22, 2005 ....................................................... $ 0.00216
Total distributions.................................................. $ 0.20548
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT - 35
- --------------------------------------------------------------------------------
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
June 29, 2005 ....................................................... $ 0.01445
July 28, 2005 ....................................................... 0.01497
Aug. 29, 2005 ....................................................... 0.01264
Sept. 29, 2005 ...................................................... 0.01277
Oct. 27, 2005 ....................................................... 0.01321
Nov. 29, 2005 ....................................................... 0.01160
Dec. 22, 2005 ....................................................... 0.01879
Jan. 26, 2006 ....................................................... 0.01142
Feb. 27, 2006 ....................................................... 0.01378
March 27, 2006 ...................................................... 0.01313
April 26, 2006 ...................................................... 0.01394
May 25, 2006 ........................................................ 0.01506
Total ............................................................... $ 0.16576
CAPITAL GAIN DISTRIBUTION - taxable as long-term capital gain.
PAYABLE DATE PER SHARE
Dec. 22, 2005 ....................................................... $ 0.00216
Total distributions ................................................. $ 0.16792
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
June 29, 2005 ....................................................... $ 0.01443
July 28, 2005 ....................................................... 0.01497
Aug. 29, 2005 ....................................................... 0.01266
Sept. 29, 2005 ...................................................... 0.01276
Oct. 27, 2005 ....................................................... 0.01321
Nov. 29, 2005 ....................................................... 0.01160
Dec. 22, 2005 ....................................................... 0.01880
Jan. 26, 2006 ....................................................... 0.01143
Feb. 27, 2006 ....................................................... 0.01379
March 27, 2006 ...................................................... 0.01313
April 26, 2006 ...................................................... 0.01395
May 25, 2006 ........................................................ 0.01506
Total ............................................................... $ 0.16579
CAPITAL GAIN DISTRIBUTION -- taxable as long-term capital gain.
PAYABLE DATE PER SHARE
Dec. 22, 2005 ....................................................... $ 0.00216
Total distributions ................................................. $ 0.16795
- --------------------------------------------------------------------------------
36 - RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT
- --------------------------------------------------------------------------------
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
June 29, 2005 ....................................................... $ 0.01960
July 28, 2005 ....................................................... 0.01911
Aug. 29, 2005 ....................................................... 0.01730
Sept. 29, 2005 ...................................................... 0.01726
Oct. 27, 2005 ....................................................... 0.01715
Nov. 29, 2005 ....................................................... 0.01634
Dec. 22, 2005 ....................................................... 0.02062
Jan. 26, 2006 ....................................................... 0.01596
Feb. 27, 2006 ....................................................... 0.01840
March 27, 2006 ...................................................... 0.01732
April 26, 2006 ...................................................... 0.01841
May 25, 2006 ........................................................ 0.01935
Total ............................................................... $ 0.21682
CAPITAL GAIN DISTRIBUTION -- taxable as long-term capital gain.
PAYABLE DATE PER SHARE
Dec. 22, 2005 ....................................................... $ 0.00216
Total distributions ................................................. $ 0.21898
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
June 29, 2005 ....................................................... $ 0.01886
July 28, 2005 ....................................................... 0.01872
Aug. 29, 2005 ....................................................... 0.01678
Sept. 29, 2005 ...................................................... 0.01679
Oct. 27, 2005 ....................................................... 0.01670
Nov. 29, 2005 ....................................................... 0.01581
Dec. 22, 2005 ....................................................... 0.02171
Jan. 26, 2006 ....................................................... 0.01591
Feb. 27, 2006 ....................................................... 0.01786
March 27, 2006 ...................................................... 0.01668
April 26, 2006 ...................................................... 0.01772
May 25, 2006 ........................................................ 0.01870
Total ............................................................... $ 0.21224
CAPITAL GAIN DISTRIBUTION -- taxable as long-term capital gain.
PAYABLE DATE PER SHARE
Dec. 22, 2005 ....................................................... $ 0.00216
Total distributions ................................................. $ 0.21440
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT - 37
- --------------------------------------------------------------------------------
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 May 31, 2006.
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.
- --------------------------------------------------------------------------------
38 - RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT
- --------------------------------------------------------------------------------
BEGINNING ENDING EXPENSES
ACCOUNT VALUE ACCOUNT VALUE PAID DURING ANNUALIZED
DEC. 1, 2005 MAY 31, 2006 THE PERIOD(a) EXPENSE RATIO
- ------------------------------------------------------------------------------------------------------------
Class A
- ------------------------------------------------------------------------------------------------------------
Actual(b) $1,000 $1,003.80 $4.45(c) .89%
- ------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.49 $4.48(c) .89%
- ------------------------------------------------------------------------------------------------------------
Class B
- ------------------------------------------------------------------------------------------------------------
Actual(b) $1,000 $1,002.00 $8.19(c) 1.64%
- ------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.75 $8.25(c) 1.64%
- ------------------------------------------------------------------------------------------------------------
Class C
- ------------------------------------------------------------------------------------------------------------
Actual(b) $1,000 $1,000.10 $8.18(c) 1.64%
- ------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.75 $8.25(c) 1.64%
- ------------------------------------------------------------------------------------------------------------
Class I
- ------------------------------------------------------------------------------------------------------------
Actual(b) $1,000 $1,005.00 $2.70(c) .54%
- ------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,022.24 $2.72(c) .54%
- ------------------------------------------------------------------------------------------------------------
Class Y
- ------------------------------------------------------------------------------------------------------------
Actual(b) $1,000 $1,004.70 $3.55(c) .71%
- ------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.39 $3.58(c) .71%
- ------------------------------------------------------------------------------------------------------------
(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 182/365 (to reflect the one-half year period).
(b) Based on the actual return for the six months ended May 31, 2006: +0.38%
for Class A, +0.20% for Class B, +0.01% for Class C, +0.50% for Class I
and +0.47% for Class Y.
(c) On Feb. 15, 2006, shareholders approved a change to the Investment
Management Services Agreement. If this change had been in place for the
entire six-month period ended May 31, 2006, the actual and hypothetical
expenses paid would have been the same as those presented in the table
above.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT - 39
- --------------------------------------------------------------------------------
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 99
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 may retire after her 75th
birthday.
INDEPENDENT BOARD MEMBERS
NAME, POSITION HELD
ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION OTHER
AGE LENGTH OF SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS
- -------------------------------------------------------------------------------------------------------------------------------
Kathleen Blatz Board member Chief Justice, Minnesota Supreme
901 S. Marquette Ave. since 2006 Court, 1998-2005
Minneapolis, MN 55402
Age 52
- -------------------------------------------------------------------------------------------------------------------------------
Arne H. Carlson Board member Chair, Board Services Corporation
901 S. Marquette Ave. since 1999 (provides administrative services
Minneapolis, MN 55402 to boards); former Governor
Age 71 of Minnesota
- -------------------------------------------------------------------------------------------------------------------------------
Patricia M. Flynn Board member Trustee Professor of Economics and
901 S. Marquette Ave. since 2004 Management, Bentley College;
Minneapolis, MN 55402 former Dean, McCallum Graduate
Age 55 School of Business, Bentley College
- -------------------------------------------------------------------------------------------------------------------------------
Anne P. Jones Board member Attorney and Consultant
901 S. Marquette Ave. since 1985
Minneapolis, MN 55402
Age 71
- -------------------------------------------------------------------------------------------------------------------------------
Jeffrey Laikind Board member Former Managing Director, American Progressive
901 S. Marquette Ave. since 2005 Shikiar Asset Management Insurance
Minneapolis, MN 55402
Age 70
- -------------------------------------------------------------------------------------------------------------------------------
Stephen R. Lewis, Jr. Board member President Emeritus and Valmont Industries, Inc.
901 S. Marquette Ave. since 2002 Professor of Economics, (manufactures irrigation
Minneapolis, MN 55402 Carleton College systems)
Age 67
- -------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
40 - RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT
- --------------------------------------------------------------------------------
INDEPENDENT BOARD MEMBERS (CONTINUED)
NAME, POSITION HELD
ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION OTHER
AGE LENGTH OF SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS
- -------------------------------------------------------------------------------------------------------------------------------
Catherine James Paglia Board member Director, Enterprise Asset Strategic Distribution, Inc.
901 S. Marquette Ave. since 2004 Management, Inc. (private real (transportation, distribution
Minneapolis, MN 55402 estate and asset management and logistics consultants)
Age 53 company)
- -------------------------------------------------------------------------------------------------------------------------------
Vikki L. Pryor Board member President and Chief Executive
901 S. Marquette Ave. since 2006 Officer, SBLI USA Mutual Life
Minneapolis, MN 55402 Insurance Company, Inc. since 1999
Age 52
- -------------------------------------------------------------------------------------------------------------------------------
Alan K. Simpson Board member Former three-term United States
1201 Sunshine Ave. since 1997 Senator for Wyoming
Cody, WY 82414
Age 74
- -------------------------------------------------------------------------------------------------------------------------------
Alison Taunton-Rigby Board member Chief Executive Officer, RiboNovix, Hybridon, Inc.
901 S. Marquette Ave. since 2002 Inc. since 2003 (biotechnology); (biotechnology); American
Minneapolis, MN 55402 former President, Forester Biotech Healthways, Inc. (health
Age 62 management programs)
- -------------------------------------------------------------------------------------------------------------------------------
BOARD MEMBER AFFILIATED WITH RIVERSOURCE INVESTMENTS*
NAME, POSITION HELD
ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION OTHER
AGE LENGTH OF SERVICE DURING PAST FIVE YEARS DIRECTORSHIPS
- -------------------------------------------------------------------------------------------------------------------------------
William F. Truscott Board member President - U.S. Asset Management
53600 Ameriprise Financial Center since 2001, and Chief Investment Officer,
Minneapolis, MN 55474 Vice President Ameriprise Financial, Inc. and
Age 45 since 2002 President, Chairman of the Board
and Chief Investment Officer,
RiverSource Investments, LLC
since 2005; Senior Vice President -
Chief Investment Officer, Ameriprise
Financial, Inc. and Chairman of the
Board and Chief Investment Officer,
RiverSource Investments, LLC,
2001-2005
- -------------------------------------------------------------------------------------------------------------------------------
* Interested person by reason of being an officer, director, security holder
and/or employee of RiverSource Investments.
- --------------------------------------------------------------------------------
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT - 41
- --------------------------------------------------------------------------------
The Board has appointed officers who are responsible for day-to-day business
decisions based on policies it has established. The officers serve at the
pleasure of the Board. In addition to Mr. Truscott, who is Vice President, the
Fund's other officers are:
FUND OFFICERS
NAME, POSITION HELD
ADDRESS, WITH FUND AND PRINCIPAL OCCUPATION
AGE LENGTH OF SERVICE DURING PAST FIVE YEARS
- -------------------------------------------------------------------------------------------------------------------------------
Jeffrey P. Fox Treasurer Vice President - Investment Accounting, Ameriprise Financial, Inc.,
105 Ameriprise Financial Center since 2002 since 2002; Vice President - Finance, American Express Company,
Minneapolis, MN 55474 2000-2002
Age 51
- -------------------------------------------------------------------------------------------------------------------------------
Michelle M. Keeley Vice President Executive Vice President - Equity and Fixed Income, Ameriprise
172 Ameriprise Financial Center since 2004 Financial, Inc. and RiverSource Investments, LLC since 2006;
Minneapolis, MN 55474 Senior Vice President - Fixed Income, Ameriprise Financial, Inc.,
Age 42 2002-2006 and RiverSource Investments, LLC, 2004-2006;
Managing Director, Zurich Global Assets, 2001-2002
- -------------------------------------------------------------------------------------------------------------------------------
Paula R. Meyer President Senior Vice President - Mutual Funds, Ameriprise Financial, Inc.,
596 Ameriprise Financial Center since 2002 since 2002 and Senior Vice President, RiverSource Investments,
Minneapolis, MN 55474 LLC since 2004; Vice President and Managing Director -
Age 52 American Express Funds, Ameriprise Financial, Inc., 2000-2002
- -------------------------------------------------------------------------------------------------------------------------------
Leslie L. Ogg Vice President, President of Board Services Corporation
901 S. Marquette Ave. General Counsel,
Minneapolis, MN 55402 and Secretary
Age 67 since 1978
- -------------------------------------------------------------------------------------------------------------------------------
Edward S. Dryden Acting Chief Vice President - Asset Management Compliance, RiverSource
1875 Ameriprise Financial Center Compliance Officer Investments, LLC since 2006; Chief Compliance Officer - Mason
Minneapolis, MN 55474 since 2006 Street Advisors, LLC, 2002-2006
Age 40
- -------------------------------------------------------------------------------------------------------------------------------
Neysa M. Alecu Anti-Money Compliance Director and Anti-Money Laundering Officer,
2934 Ameriprise Financial Center Laundering Officer Ameriprise Financial, Inc. since 2004; Manager Anti-Money
Minneapolis, MN 55474 since 2004 Laundering, Ameriprise Financial, Inc., 2003-2004; Compliance
Age 42 Director and Bank Secrecy Act Officer, American Express
Centurion Bank, 2000-2003
- -------------------------------------------------------------------------------------------------------------------------------
The SAI has additional information about the Fund's directors and is available,
without charge, upon request by calling RiverSource Funds at (888) 791-3380;
contacting your financial institution; or visiting www.riversource.com/funds.
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42 - RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT
- --------------------------------------------------------------------------------
APPROVAL OF INVESTMENT MANAGEMENT SERVICES AGREEMENT
During the period covered by this report, RiverSource Investments, LLC
("RiverSource Investments" or the "investment manager"), a wholly-owned
subsidiary of Ameriprise Financial, Inc. ("Ameriprise Financial"), served as the
investment manager to RiverSource funds under an Investment Management Services
Agreement ("IMS Agreement").
The Board of Directors (the "Board") annually determines whether to continue the
IMS Agreement and subadvisory agreements, as applicable, by evaluating the
quality and level of services received and the costs associated with those
services. The Board did not make the specific determination this year as each
fund's IMS Agreement was approved by the vote of a majority of the outstanding
voting securities of the funds at a shareholder meeting held on Feb. 15, 2006.
PROXY VOTING
The policy of the Board is to vote all proxies of the companies in which the
Fund holds investments. The procedures are stated in the Statement of Additional
Information (SAI). You may obtain a copy of the SAI without charge by calling
RiverSource Funds at (888) 791-3380; contacting your financial institution;
visiting www.riversource.com/funds; or searching the website of the Securities
and Exchange Commission (SEC) at http://www.sec.gov. Information regarding how
the Fund voted proxies relating to portfolio securities during the most recent
12-month period ended June 30 is available without charge by visiting
www.riversource.com/funds; or searching the website of the SEC at www.sec.gov.
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RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT - 43
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RESULTS OF MEETING OF SHAREHOLDERS
RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND
REGULAR MEETING OF SHAREHOLDERS HELD ON FEB. 15, 2006
(UNAUDITED)
A brief description of each proposal voted upon at the meeting and the votes
cast for, against or withheld, as well as the number of abstentions and broker
non-votes as to each proposal is set forth below. A vote is based on total
dollar interest in a fund.
ELECTION OF BOARD MEMBERS
AFFIRMATIVE WITHHOLD
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Kathleen Blatz 204,956,838.59 2,802,451.45
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Arne H. Carlson 204,872,143.88 2,887,146.16
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Patricia M. Flynn 205,056,242.35 2,703,047.69
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Anne P. Jones 204,922,700.88 2,836,589.16
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Jeffrey Laikind 204,888,685.88 2,870,604.16
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Stephen R. Lewis, Jr. 204,835,270.14 2,924,019.90
- ------------------------------------------------------------------------
Catherine James Paglia 205,051,493.80 2,707,796.24
- ------------------------------------------------------------------------
Vikki L. Pryor 205,043,853.79 2,715,436.25
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Alan K. Simpson 204,462,842.35 3,296,447.69
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Alison Taunton-Rigby 205,056,298.24 2,702,991.80
- ------------------------------------------------------------------------
William F. Truscott 205,168,302.43 2,590,987.61
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AMEND THE ARTICLES OF INCORPORATION TO PERMIT THE BOARD TO ESTABLISH THE MINIMUM
ACCOUNT VALUE AND TO CHANGE THE NAME OF THE CORPORATION
AFFIRMATIVE AGAINST ABSTAIN BROKER NON-VOTES
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202,439,824.22 2,769,318.60 2,550,132.13 15.09
- --------------------------------------------------------------------------------
APPROVE AN INVESTMENT MANAGEMENT SERVICES AGREEMENT WITH RIVERSOURCE
INVESTMENTS, LLC
AFFIRMATIVE AGAINST ABSTAIN BROKER NON-VOTES
- --------------------------------------------------------------------------------
202,600,797.46 2,600,765.52 2,557,711.97 15.09
- --------------------------------------------------------------------------------
APPROVE CHANGES IN FUNDAMENTAL INVESTMENT POLICIES
DIVERSIFICATION
AFFIRMATIVE AGAINST ABSTAIN BROKER NON-VOTES
- --------------------------------------------------------------------------------
202,133,252.37 2,701,812.37 2,924,210.21 15.09
- --------------------------------------------------------------------------------
LENDING
AFFIRMATIVE AGAINST ABSTAIN BROKER NON-VOTES
- --------------------------------------------------------------------------------
201,515,732.99 3,321,062.39 2,922,479.57 15.09
- --------------------------------------------------------------------------------
BORROWING
AFFIRMATIVE AGAINST ABSTAIN BROKER NON-VOTES
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201,317,875.40 3,648,110.56 2,793,288.99 15.09
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44 - RIVERSOURCE U.S. GOVERNMENT MORTGAGE FUND - 2006 ANNUAL REPORT
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RiverSource SM U.S. GOVERNMENT MORTGAGE FUND
734 Ameriprise Financial Center
Minneapolis, MN 55474
RIVERSOURCE.COM/FUNDS
This report must be accompanied or preceded by the
Fund's current prospectus. RiverSource Funds are managed
by RiverSource Investments, LLC and distributed by
Ameriprise Financial Services, Inc., Member NASD.
RIVERSOURCE [LOGO] (SM) Both companies are part of Ameriprise Financial, Inc.
INVESTMENTS
S-6245 H (7/06)
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 Jeffrey Laikind 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 May 31, to KPMG LLP for
professional services rendered for the audits of the annual financial
statements for RiverSource Government Income Series, Inc. were as
follows:
2006 - $33,575; 2005 - $31,875
(b) Audit - Related Fees. The fees paid for the years ended May 31, to
KPMG LLP for additional professional services rendered in connection
with the registrant's security count pursuant to Rule 17f-2 for
RiverSource Government Income Series, Inc. were as follows:
2006 - $332; 2005 - $454
(c) Tax Fees. The fees paid for the years ended May 31, to KPMG LLP for tax
compliance related services for RiverSource Government Income Series,
Inc. were as follows:
2006 - $6,088; 2005 - $5,278
(d) All Other Fees. The fees paid for the years ended May 31, to KPMG LLP
for additional professional services rendered for RiverSource
Government Income Series, Inc. were as follows:
2006 - $814; 2005 - $949
(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 2006 and 2005 were pre-approved by the audit committee.
(f) Not applicable.
(g) Non-Audit Fees. The fees paid for the years ended May 31, by the
registrant for non-audit services to KPMG LLP were as follows:
2006 - $60,402; 2005 - $145,127
The fees paid for the years ended May 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:
2006 - $53,500; 2005 - $138,900
(h) 100% of the services performed for item (g) above during 2006 and 2005
were pre-approved by the audit committee.
*2005 represents bills paid 6/1/04 - 5/31/05
2006 represents bills paid 6/1/05 - 5/31/06
Item 5. Audit Committee of Listed Registrants. Not applicable.
Item 6. The complete schedule of investments is included in Item 1 of this
Form N-CSR.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies. Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9. Purchase of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers. Not applicable.
Item 10. Submission of matters to a vote of security holders. Not applicable.
Item 11. Controls and Procedures.
(a) Based upon their evaluation of the registrant's disclosure
controls and procedures as conducted within 90 days of the filing
date of this Form N-CSR, the registrant's Principal Financial
Officer and Principal Executive Officer have concluded that those
disclosure controls and procedures provide reasonable assurance
that the material information required to be disclosed by the
registrant on this report is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
(b) There were no changes in the registrant's internal controls over
financial reporting that occurred during the registrant's last fiscal
half-year (the registrant's second fiscal half-year in the case of an
annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over
financial reporting.
Item 12. Exhibits.
(a)(1) Code of ethics as applies to the Registrant's principal
executive officer and principal financial officer, as required to be
disclosed under Item 2 of Form N-CSR, is attached as Ex. 99.CODE ETH.
(a)(2) Separate certification for the Registrant's principal
executive officer and principal financial officer, as required by
Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a)
under the Investment Company Act of 1940, are attached as
EX.99.CERT.
(a)(3) Not applicable.
(b) A certification by the Registrant's principal executive officer
and principal financial officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and Rule 30a-2(b) under the Investment
Company Act of 1940, is attached as EX.99.906 CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) RiverSource Government Income Series, Inc.
By /s/ William F. Truscott
-----------------------
William F. Truscott
President and Principal Executive Officer
Date September 11, 2006
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/ William F. Truscott
-----------------------
William F. Truscott
President and Principal Executive Officer
Date September 11, 2006
By /s/ Jeffrey P. Fox
------------------
Jeffrey P. Fox
Treasurer and Principal Financial Officer
Date September 11, 2006