EX-17(h)
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Xxxxxxxx
High-Yield Fund
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Annual Report
December 31, 2008
Seeking a High Level of
Current Income and the
Potential for Capital
Appreciation by Investing
in a Diversified Portfolio
of High-Yield Securities
[XXXXXXXX INVESTMENTS LOGO]
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Table of Contents
Interview With Your Portfolio Managers 2
Performance and Portfolio Overview 4
Understanding and Comparing Your Fund's Expenses 9
Portfolio of Investments 10
Statement of Assets and Liabilities 16
Statement of Operations 17
Statements of Changes in Net Assets 18
Notes to Financial Statements 19
Financial Highlights 27
Report of Independent Registered Public Accounting Firm 31
Matters Relating to the Trustees' Consideration of the Approval of the
Investment Management Services Agreement 32
Proxy Results 36
Trustees and Officers 37
Required Federal Income Tax Information 41
Additional Fund Information 42
1
Interview With Your Portfolio Managers
NOTE: IN CONJUNCTION WITH THE ACQUISITION OF THE FUND'S PREVIOUS INVESTMENT
MANAGER BY RIVERSOURCE INVESTMENTS, LLC, THE XXXXXXXX HIGH YIELD TEAM IS NO
LONGER RESPONSIBLE FOR THE PORTFOLIO MANAGEMENT OF THE FUND. THE FUND IS NOW
MANAGED BY RIVERSOURCE INVESTMENTS.
Q: HOW DID XXXXXXXX HIGH-YIELD FUND PERFORM DURING THE YEAR ENDED DECEMBER
31, 2008?
A: For the year ended December 31, 2008, Xxxxxxxx High-Yield Fund posted a
total return of -32.2%, based on the net asset value of Class A shares. In
comparison, the Fund's peers, as measured by the Lipper High Current Yield
Funds Average returned -26.0%. The Barclays Capital U.S. Corporate High
Yield 2% Issuer Capped Index returned -25.9%. The JPMorgan Global High
Yield Index returned -26.8%.
Q: HOW DID MARKET CONDITIONS AND ECONOMIC EVENTS IMPACT THE PERFORMANCE OF
THE FUND DURING THE YEAR?
A: High-yield bonds lost ground as 2008 began to unfold amid continued
market-wide risk aversion. Treasury prices continued their rally, with the
10-year note leading all major indices. As equities enjoyed a short-lived
rally during the second quarter, treasuries sold off and spreads began to
narrow. The end of June brought a reversal of course as equities began to
sell off and spreads began to widen once again.
An ongoing litany of bad news, beginning in mid-September with the
bankruptcy of Xxxxxx Brothers, drove credit markets, in general, and the
high yield corporate bond market, in particular, to decline sharply. High
yield corporate bond spreads, or the yield differential between these
securities and Treasuries, widened significantly, as a succession of
financial institutions went out of business, were forced to merge or were
taken over by the US government. The effect of the near-collapse of the
financial system on the high yield corporate bond market was compounded
during the period by poor technical and fundamental factors. On the
technicals side, there was tremendous forced selling, as hedge funds and
others liquidated portfolios.
This hit the high yield bank loan sector particularly hard, but dragged
down high yield corporate bonds as well. At the same time, growing
concerns about a consumer-led recession led to weak fundamentals for many
companies issuing debt. The toxic combination of these factors led to
extremely high levels of investor risk aversion and thus the significant
market decline in the high yield corporate bond market. At the end of the
November, high yield corporate bond spreads stood at the widest levels
seen in recent history.
December saw relief as the US government stepped in with a bailout of
GMAC. This injection of capital into the auto industry fueled a rally
that, considering the scarcity of available issues, caused levels to trade
up sharply.
Q: WHAT INVESTMENT STRATEGIES AND TECHNIQUES MATERIALLY IMPACTED THE FUND'S
PERFORMANCE DURING THE YEAR?
A: The Fund lagged its benchmark early in the year, due primarily to its
long-term strategic allocation to select equities and equity-linked notes.
A broad-based decline across all sectors of the benchmark generated
disappointing per-
2
Interview With Your Portfolio Managers
formance for the Fund. The Fund's positioning in the health care, wireline
telecommunications and cable TV industries were increased as these
defensive, comparatively stable sectors proved to be less volatile than
others in the high yield bond market. The automotive industry and
technology sector fared poorly during the year, and though the Fund's
positions in these areas were decreased in the second half, the Fund's
exposure weighed negatively on relative investment results.
The Fund's positioning in the gaming industry also detracted from
investment results. The Fund's exposure to this area was increased during
the year based on a long-held and widespread view that gaming was a rather
recession-resistant industry. However, the gaming industry surprised many
when it was hit hard during the period by the downturn in the economy,
especially casinos in Las Vegas. Within gaming, we focused on what are
considered new jurisdictions, such as Native American casinos, which we
still consider to be compelling opportunities, and steered away from
established locations, such as Las Vegas and Atlantic City.
An overweight exposure to the energy sector further detracted from the
Fund's results, which was hurt by declining oil and gas prices during the
period. We reduced the Fund's position as energy prices declined, but not
fast enough to completely avoid feeling the impact of the sector's
downturn. A modest position in chemicals also hurt, as many companies in
this area proved to be sensitive to economic pressures.
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THE VIEWS AND OPINIONS EXPRESSED ARE THOSE OF THE PORTFOLIO MANAGERS, ARE
PROVIDED FOR GENERAL INFORMATION ONLY, AND DO NOT CONSTITUTE SPECIFIC TAX,
LEGAL, OR INVESTMENT ADVICE TO, OR RECOMMENDATION FOR, AND PERSON. THERE CAN BE
NO GUARANTEE AS TO THE ACCURACY OF MARKET FORECASTS. OPINIONS, ESTIMATES, AND
FORECASTS MAY BE CHANGED WITHOUT NOTICE.
3
Performance and Portfolio Overview
This section of the report is intended to help you understand the performance of
Xxxxxxxx High-Yield Fund and to provide a summary of the Fund's portfolio
characteristics.
PERFORMANCE DATA QUOTED IN THIS REPORT REPRESENTS PAST PERFORMANCE AND DOES NOT
GUARANTEE OR INDICATE FUTURE INVESTMENT RESULTS. THE RATES OF RETURN WILL VARY
AND THE PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE. SHARES, IF REDEEMED,
MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE
LOWER OR HIGHER THAN THE PERFORMANCE DATA QUOTED. TOTAL RETURNS OF THE FUND
(EXCEPT FOR CLASS I SHARES) AS OF THE MOST RECENT MONTH-END WILL BE AVAILABLE AT
XXX.XXXXXXXX.XXX(1) BY THE SEVENTH BUSINESS DAY FOLLOWING THAT MONTH-END.
CALCULATIONS ASSUME REINVESTMENT OF DISTRIBUTIONS, IF ANY. PERFORMANCE DATA
QUOTED DOES NOT REFLECT THE DEDUCTION OF TAXES THAT AN INVESTOR MAY PAY ON
DISTRIBUTIONS OR THE REDEMPTION OF SHARES.
The chart on page 5 compares $10,000 hypothetical investments made in Class A
shares, with and without the initial 4.5% maximum sales charge, and in Class B
shares, without contingent deferred sales charge ("CDSC"), to a $10,000
investment made in the XX Xxxxxx Global High Yield Index for the ten-year period
ended December 31, 2008. The ten-year return for Class B shares reflects
automatic conversion to Class A shares approximately eight years after their
date of purchase. The performance of Class C, Class I and Class R shares, which
commenced on later dates, and of Class A and Class B shares for other periods,
with and without applicable sales charges and CDSCs, is not shown in the chart
but is included in the total returns table that follows the chart. The
performance of Class C, Class I and Class R shares will differ from the
performance shown for Class A and Class B shares, based on the differences in
sales charges and fees paid by shareholders.
RETURNS FOR CLASS A SHARES ARE CALCULATED WITH AND WITHOUT THE EFFECT OF THE
INITIAL 4.5% MAXIMUM SALES CHARGE THAT BECAME EFFECTIVE ON JANUARY 7, 2008.
ALTHOUGH FOR ALL PERIODS PRESENTED THE FUND'S CLASS A SHARES REFLECT THE 4.5%
MAXIMUM SALES CHARGE, THE ACTUAL RETURNS FOR PERIODS PRIOR TO JANUARY 7, 2008
WOULD HAVE BEEN LOWER IF THE 4.75% MAXIMUM SALES CHARGE THEN IN EFFECT WAS
INCURRED. RETURNS FOR CLASS B SHARES ARE CALCULATED WITH AND WITHOUT THE EFFECT
OF THE MAXIMUM 5% CDSC, CHARGED ON REDEMPTIONS MADE WITHIN ONE YEAR OF THE DATE
OF PURCHASE, DECLINING TO 1% IN THE SIXTH YEAR AND 0% THEREAFTER. RETURNS FOR
CLASS C AND CLASS R SHARES ARE CALCULATED WITH AND WITHOUT THE EFFECT OF THE 1%
CDSC, CHARGED ON REDEMPTIONS MADE WITHIN ONE YEAR OF PURCHASE. RETURNS FOR CLASS
C SHARES WOULD HAVE BEEN LOWER FOR PERIODS PRIOR TO JUNE 4, 2007 IF THE 1%
INITIAL SALES CHARGE THEN IN EFFECT WAS INCURRED. ON MAY 16, 2008, CLASS D
SHARES OF THE FUND WERE CONVERTED TO CLASS C SHARES AT THEIR RESPECTIVE NET
ASSET VALUES. EFFECTIVE AT THE CLOSE OF BUSINESS ON MAY 16, 2008, CLASS D SHARES
ARE NO LONGER OFFERED BY THE FUND. CLASS I SHARES DO NOT HAVE SALES CHARGES, AND
RETURNS ARE CALCULATED ACCORDINGLY.
An investment in the Fund is not a deposit in a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
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(1) The website reference is an inactive textual reference and information
contained in or otherwise accessible through the website does not form a
part of this report or the Fund's prospectuses or statement of additional
information.
4
Performance and Portfolio Overview
[THE DATA BELOW REPRESENTS A GRAPH IN THE PRINTED PIECE.]
Class A With Class A Without Class B XX Xxxxxx Global
Date Sales Charge Sales Charge Without CDSC High Yield Index
12/31/1998 $ 9,546.7 $ 10,000 $ 10,000 $10,000
$9,649.26 $10,107.4 $10,091.9 $10,192
$9,569.68 $10,024.1 $9,989.64 $10,302
$9,302.63 $9,744.33 $ 9,691.2 $10,129
12/31/1999 $9,518.67 $9,970.63 $9,895.91 $10,338
$ 9,288.7 $9,729.75 $9,636.81 $10,164
$9,310.08 $9,752.14 $9,637.69 $10,214
$9,231.18 $ 9,669.5 $9,551.45 $10,248
12/31/2000 $8,564.58 $8,971.25 $8,841.28 $ 9,736
$8,508.79 $8,912.81 $8,766.67 $10,241
$7,925.86 $ 8,302.2 $8,130.74 $10,154
$7,179.12 $7,520.01 $7,368.16 $ 9,703
12/31/2001 $7,198.75 $7,540.57 $7,372.45 $10,270
$7,163.68 $7,503.84 $ 7,321.1 $10,499
$ 6,695.9 $7,013.85 $6,830.37 $10,241
$6,560.53 $6,872.05 $6,680.08 $ 9,930
12/31/2002 $6,826.76 $7,150.91 $6,937.74 $10,489
$ 7,150.5 $7,490.02 $7,252.72 $11,182
$7,639.48 $8,002.22 $7,733.51 $12,246
$7,841.94 $8,214.29 $7,923.54 $12,628
12/31/2003 $8,322.57 $8,717.73 $8,369.96 $13,375
$8,323.85 $8,719.08 $8,355.56 $13,737
$ 8,280.8 $8,673.99 $8,296.03 $13,680
$8,569.28 $8,976.17 $8,594.29 $14,286
12/31/2004 $8,909.07 $ 9,332.1 $8,918.48 $14,919
$8,792.48 $9,209.97 $8,761.05 $14,748
$8,959.97 $9,385.41 $8,937.26 $15,087
$9,040.71 $9,469.98 $9,001.76 $15,251
12/31/2005 $9,044.54 $9,473.99 $8,989.31 $15,378
$9,267.03 $9,707.05 $9,193.41 $15,807
$9,210.83 $9,648.18 $9,121.48 $15,852
$9,515.56 $9,967.39 $9,376.94 $16,420
12/31/2006 $9,929.33 $10,400.8 $9,799.89 $17,138
$10,143.2 $10,624.8 $ 10,011 $17,659
$10,227.1 $10,712.7 $10,093.8 $17,760
$ 10,222 $10,707.3 $10,088.7 $17,787
12/31/2007 $10,002.1 $10,477.1 $9,871.75 $17,633
$9,561.28 $10,015.3 $9,436.64 $17,118
$9,642.14 $ 10,100 $9,516.44 $17,441
$8,718.81 $ 9,132.8 $8,605.15 $16,027
12/31/2008 $6,800.88 $7,123.81 $6,712.23 $12,902
Investment Results
TOTAL RETURNS
For Periods Ended December 31, 2008
--------------------------------------------------------------------------------
AVERAGE ANNUAL
---------------------------------------------------------------
CLASS C CLASS I CLASS R
SINCE SINCE SINCE
SIX ONE FIVE TEN INCEPTION INCEPTION INCEPTION
MONTHS* YEAR YEARS YEARS 5/27/99 11/30/01 4/30/03
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CLASS A
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With Sales Charge (32.91)% (35.30)% (4.91)% (3.78)% n/a n/a n/a
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Without Sales Charge (29.70) (32.24) (4.01) (3.33) n/a n/a n/a
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CLASS B
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With CDSC+ (33.32) (35.84) (4.99) n/a n/a n/a n/a
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Without CDSC (30.00) (32.78) (4.73) (3.91)++ n/a n/a n/a
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CLASS C
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With 1% CDSC (30.91) (33.63) n/a n/a n/a n/a n/a
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Without CDSC (30.25) (33.02) (4.80) n/a (4.35)% n/a n/a
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CLASS I (29.80) (31.99) (3.62) n/a n/a (0.62)% n/a
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CLASS R
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With 1% CDSC (30.69) (33.03) n/a n/a n/a n/a n/a
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Without CDSC (30.03) (32.42) (4.25) n/a n/a n/a (1.97)%
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BENCHMARKS**
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Barclays Capital U.S. Corporate High-Yield
2% Issuer Capped Index (25.07) (25.88) (0.84) 2.28 2.12# 2.93 1.44
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XX Xxxxxx Global High Yield Index (26.02) (26.83) (0.72) 2.58 2.36 3.25 1.68
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Lipper High Current Yield Funds Average (24.71) (26.01) (1.53) 1.19 0.89 1.81 0.73
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See footnotes on page 6.
5
Performance and Portfolio Overview
Investment Results
NET ASSET VALUE PER SHARE
12/31/08 6/30/08 12/31/07
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CLASS A $ 1.94 $ 2.92 $ 3.17
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CLASS B 1.94 2.92 3.17
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CLASS C 1.94 2.93 3.18
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CLASS I 1.94 2.93 3.17
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CLASS R 1.94 2.93 3.17
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DIVIDEND PER SHARE AND YIELD INFORMATION
For Periods Ended December 31, 2008
--------------------------------------------------------------------------------
DIVIDENDSo SEC 30-DAY YIELDSoo
---------------------------------------------------------------
$ 0.2671 8.60%
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0.2456 8.01
---------------------------------------------------------------
0.2456 8.00
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0.2775 11.90
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0.2600 8.44
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* Returns for periods of less than one year are not annualized.
** Effective November 7, 2008, to better align the primary benchmark index
with the investment strategy of the Fund, the Barclays Capital U.S.
High-Yield 2% Issuer Capped Index (Barclays Capital Index) is replaced
with the XX Xxxxxx Global High Yield Index ("XX Xxxxxx Index"), which will
be used as the primary benchmark for the Fund going forward. Information
on both indices will be included for a one year transition period.
Thereafter, only the XX Xxxxxx Index will be included. The Barclays
Capital Index, the XX Xxxxxx Index and the Lipper High Current Yield Funds
Average ("Lipper Average") are unmanaged benchmarks that assume
reinvestment of all distributions. The Lipper Average excludes the effect
of fees, taxes and sales charges. The Barclays Capital Index and XX Xxxxxx
Index also exclude the effect of expenses. The Lipper Average is an
average of funds that aim at high (relative) current yield from fixed
income securities, have no quality or maturity restrictions, and tend to
invest in lower-grade debt instruments. The Barclays Capital Index covers
the US corporate bond market of high-yield bonds denominated in US
dollars, and is included for comparison with Fund performance. The XX
Xxxxxx Index is used to mirror the investable universe of the U.S. dollar
global high yield corporate debt market of both developed and emerging
markets. Investors cannot invest directly in an average or an index.
o Represents per share amount paid or declared for the year ended December
31, 2008.
oo Current yield, representing the annualized yield for the 30-day period
ended December 31, 2008, has been computed in accordance with SEC
regulations and will vary.
+ The CDSC is 5% if you sell your shares within one year of purchase and 2%
for the five-year period.
++ Ten-year return of Class B shares reflects automatic conversion to Class A
shares approximately eight years after their date of purchase.
# From May 28, 1999.
6
Performance and Portfolio Overview
Largest Industries
December 31, 2008
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PERCENT OF
NET ASSETS
[THE DATA BELOW REPRESENTS A GRAPH IN THE PRINTED PIECE.]
Media Non-Cable $ 12,898,567
Electric $ 12,841,136
Health Care $ 11,034,800
Independent Energy $ 8,976,550
Wirelines $ 7,006,151
Largest Portfolio Changes
July 1 to December 31, 2008
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LARGEST PURCHASES
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Invista 9.25%, 5/1/2012*
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Xxxxx Media 6.625%, 8/15/2015*
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Echostar 6.625%, 10/1/2014*
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Liberty Media 5.7%, 5/15/2013*
--------------------------------------------------------------------------------
Qwest 7.625%, 6/15/2015*
--------------------------------------------------------------------------------
Shingle Springs Tribal Gaming Authority 9.375%, 6/15/2015*
--------------------------------------------------------------------------------
Nielsen Finance 10%, 8/1/2014*
--------------------------------------------------------------------------------
Flextronics International 6.25%, 11/15/2014*
--------------------------------------------------------------------------------
IASIS Healthcare/IASIS Capital 8.75%, 6/15/2014*
--------------------------------------------------------------------------------
DirecTV Holdings/DirecTV Financing 6.375%, 6/15/2015*
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LARGEST SALES
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CDX HY 10 TR 8.875%, 6/29/2013**
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Ikon Office Solutions 7.75%, 9/15/2015**
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Mandalay Resort Group 9.375%, 2/15/2010**
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Reddy Ice Holdings 0% (10.5%), 11/1/2012**
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Aquila 14.875%, 7/1/2012**
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KI Holdings 0% (9.875%), 11/15/2014**
--------------------------------------------------------------------------------
AES 9.375%, 9/15/2010
--------------------------------------------------------------------------------
Gerdau Ameristeel 10.375%, 7/15/2011**
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Seagate Technology 6.375%, 10/1/2011**
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Omega Healthcare Investors 7%, 1/15/2016**
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Largest portfolio changes from the previous period to the current period are
based on cost of purchases and proceeds from sales of securities, listed in
descending order.
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* Position added during the period.
** Position eliminated during the period.
7
Performance and Portfolio Overview
Top Ten Companies+
December 31, 2008
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PERCENT
OF NET
SECURITY VALUE ASSETS
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HCA $ 3,754,425 2.8
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Dynegy Holdings 2,672,500 2.0
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Qwest 2,546,000 1.9
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Liberty Media 2,388,292 1.8
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Georgia-Pacific 2,372,300 1.8
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Chesapeake Energy 2,348,500 1.7
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Windstream 2,176,751 1.6
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AES 2,148,750 1.6
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Echostar 2,135,625 1.6
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El Paso 2,081,811 1.5
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The amounts shown for the top ten companies represent the aggregate value of the
Fund's investments in securities issued by the companies or their affiliates.
There can be no assurance that the securities presented have remained or will
remain in the Fund's portfolio. Information regarding the Fund's portfolio
holdings should not be construed as a recommendation to buy or sell any security
or as an indication that any security is suitable for a particular investor.
RATINGSss.
December 31, 2008
--------------------------------------------------------------------------------
MOODY'S
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Baa 2.6%
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Ba 32.4
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B 44.5
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Caa 18.5
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Below Caa 2.0
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DURATION*
December 31, 2008 4.0 years
--------------------------------------------------------------------------------
---------
+ Excludes short-term holdings.
ss. Credit ratings are those issued by Xxxxx'x Investors Services, Inc.
Percentages are based on the market values of long-term corporate bond
holdings.
* Duration is the average amount of time that it takes to receive the
interest and principal of a bond or portfolio of bonds. The duration
formula is based on a formula that calculates the weighted average of the
cash flows (interest and principal payments) of the bond, discounted to
present time.
8
Understanding and Comparing
Your Fund's Expenses
As a shareholder of the Fund, you incur ongoing expenses, such as management
fees, distribution and/or service (12b-1) fees (as applicable), and other Fund
expenses. The information below is intended to help you understand your ongoing
expenses (in dollars) of investing in the Fund and to compare them with the
ongoing expenses of investing in other mutual funds. Please note that the
expenses shown in the table are meant to highlight your ongoing expenses only
and do not reflect any transactional costs, such as sales charges (also known as
loads) on certain purchases or redemptions. Therefore, the table is useful in
comparing ongoing expenses only, and will not help you to determine the relative
total expenses of owning different funds. In addition, if transactional costs
were included, your total expenses would have been higher.
The table is based on an investment of $1,000 invested at the beginning of July
1, 2008 and held for the entire six-month period ended December 31, 2008.
ACTUAL EXPENSES
The table below provides information about actual expenses and actual account
values. You may use the information, together with the amount you invested, to
estimate the expenses that you paid over the period. Simply divide your account
value at the beginning of the period by $1,000 (for example, an $8,600 account
value divided by $1,000 = 8.6), then multiply the result by the number under the
heading entitled "Expenses Paid During Period" for the Fund's share class that
you own to estimate the expenses that you paid on your account during the
period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The table below also provides information about hypothetical expenses and
hypothetical account values based on the actual expense ratio of each class and
an assumed rate of return of 5% per year before expenses, which is not the
actual return of any class of the Fund. The hypothetical expenses and account
values may not be used to estimate the ending account value or the actual
expenses you paid for the period. You may use this information to compare the
ongoing expenses of investing in the Fund and other mutual funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other mutual funds.
ACTUAL HYPOTHETICAL
-------------------------- ---------------------------
BEGINNING ENDING EXPENSES PAID ENDING EXPENSES PAID
ACCOUNT ANNUALIZED ACCOUNT DURING PERIOD ACCOUNT DURING PERIOD
VALUE EXPENSE VALUE 7/1/08 TO VALUE 7/1/08 TO
7/1/08 RATIO* 12/31/08 12/31/08** 12/31/08 12/31/08**
---------------------------------------------------------------------------------------------
Class A $ 1,000.00 1.53% $ 703.00 $ 6.55 $ 1,017.45 $ 7.76
---------------------------------------------------------------------------------------------
Class B 1,000.00 2.36 700.00 10.09 1,013.27 11.95
---------------------------------------------------------------------------------------------
Class C 1,000.00 2.19 697.50 9.35 1,014.12 11.10
---------------------------------------------------------------------------------------------
Class I 1,000.00 0.90 702.00 3.84 1,020.62 4.56
---------------------------------------------------------------------------------------------
Class R 1,000.00 1.76 699.70 7.51 1,016.30 8.90
---------------------------------------------------------------------------------------------
----------
* Expenses of Class B, Class C, Class I and Class R shares differ from the
expenses of Class A shares due to the differences in 12b-1 fees and other
class-specific expenses paid by each share class. See the Fund's
prospectuses for a description of each share class and its fees, expenses
and sales charges.
** Expenses are equal to the annualized expense ratio based on actual
expenses for the period July 1, 2008 to December 31, 2008, multiplied by
the average account value over the period, multiplied by 184/366 (number
of days in the period).
9
Portfolio of Investments
December 31, 2008
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS 92.6%
---------------------------------------------------------------------------------
AEROSPACE & DEFENSE 1.8%
---------------------------------------------------------------------------------
Alion Science and Technology 10.25%, 2/1/2015 $ 1,300,000 $ 593,125
---------------------------------------------------------------------------------
L3 Communications 5.875%, 1/15/2015 2,000,000 1,810,000
---------------------------------------------------------------------------------
2,403,125
---------------------------------------------------------------------------------
AUTOMOTIVE 0.9%
---------------------------------------------------------------------------------
Ford Motor 7.45%, 7/16/2031 4,250,000 1,211,250
---------------------------------------------------------------------------------
BUILDING MATERIALS 0.7%
---------------------------------------------------------------------------------
Gibraltar Industries 8%, 12/1/2015 1,590,000 898,350
---------------------------------------------------------------------------------
CHEMICALS 3.9%
---------------------------------------------------------------------------------
Chemtura 6.875%, 6/1/2016 2,285,000 1,176,775
---------------------------------------------------------------------------------
Invista 9.25%, 5/1/2012* 2,685,000 1,892,925
---------------------------------------------------------------------------------
MacDermid 9.5%, 4/15/2017 1,000,000 525,000
---------------------------------------------------------------------------------
Momentive Performance Materials 10.125%, 12/1/2014 3,000,000 945,000
---------------------------------------------------------------------------------
Nalco 8.875%, 11/15/2013 825,000 701,250
---------------------------------------------------------------------------------
5,240,950
---------------------------------------------------------------------------------
CONSUMER CYCLICAL SERVICES 1.7%
---------------------------------------------------------------------------------
Service Corporation 7%, 6/15/2017 1,725,000 1,302,375
---------------------------------------------------------------------------------
West 11%, 10/15/2016 2,000,000 940,000
---------------------------------------------------------------------------------
2,242,375
---------------------------------------------------------------------------------
CONSUMER PRODUCTS 2.4%
---------------------------------------------------------------------------------
Jarden 7.5%, 5/1/2017 1,905,000 1,309,688
---------------------------------------------------------------------------------
Visant 0% (10.25%+), 12/1/2013 2,525,000 1,881,125
---------------------------------------------------------------------------------
3,190,813
---------------------------------------------------------------------------------
ELECTRIC 9.5%
---------------------------------------------------------------------------------
AES 9.375%, 9/15/2010 2,250,000 2,148,750
---------------------------------------------------------------------------------
Allegheny Energy Supply 7.8%, 3/15/2011 2,000,000 1,980,000
---------------------------------------------------------------------------------
Dynegy Holdings:
---------------------------------------------------------------------------------
8.75%, 2/15/2012 1,000,000 885,000
---------------------------------------------------------------------------------
8.375%, 5/1/2016 2,500,000 1,787,500
---------------------------------------------------------------------------------
Edison Mission Energy 7%, 5/15/2017 1,950,000 1,706,250
---------------------------------------------------------------------------------
Energy Future Holdings 10.875%, 11/1/2017* 955,000 682,825
---------------------------------------------------------------------------------
Mirant Americas Generation 8.5%, 10/1/2021 500,000 382,500
---------------------------------------------------------------------------------
NRG Energy 7.375%, 2/1/2016 1,900,000 1,771,750
---------------------------------------------------------------------------------
Sierra Pacific Resources 8.625%, 3/15/2014 609,000 552,105
---------------------------------------------------------------------------------
TXU 5.55%, 11/15/2014 2,000,000 944,456
---------------------------------------------------------------------------------
12,841,136
---------------------------------------------------------------------------------
----------
See footnotes on page 15.
10
Portfolio of Investments
December 31, 2008
PRINCIPAL
AMOUNT VALUE
ENTERTAINMENT 0.6%
-----------------------------------------------------------------------------------------
AMC Entertainment 11%, 2/1/2016 $ 1,000,000 $ 703,750
-----------------------------------------------------------------------------------------
HRP Myrtle Beach Operations 7.382%, 4/1/2012##++ 1,000,000 55,000
-----------------------------------------------------------------------------------------
758,750
-----------------------------------------------------------------------------------------
ENVIRONMENTAL 1.8%
-----------------------------------------------------------------------------------------
Xxxxxxxx-Xxxxxx Industries 7.4%, 9/15/2035 1,500,000 1,240,632
-----------------------------------------------------------------------------------------
Crown Cork & Seal 8%, 4/15/2023 1,500,000 1,185,000
-----------------------------------------------------------------------------------------
2,425,632
-----------------------------------------------------------------------------------------
FOOD AND BEVERAGE 4.8%
-----------------------------------------------------------------------------------------
ASG Consolidated/ASG Finance 11.5%, 11/1/2011 1,500,000 1,282,500
-----------------------------------------------------------------------------------------
Constellation Brands 8.375%, 12/1/2011 500,000 477,500
-----------------------------------------------------------------------------------------
Cott Beverages USA 8%, 12/15/2011 2,200,000 1,353,000
-----------------------------------------------------------------------------------------
Del Monte:
-----------------------------------------------------------------------------------------
8.625%, 12/15/2012 975,000 950,625
-----------------------------------------------------------------------------------------
6.75%, 2/15/2015 375,000 324,375
-----------------------------------------------------------------------------------------
Pinnacle Foods Finance 9.25%, 4/1/2015 1,515,000 984,750
-----------------------------------------------------------------------------------------
Smithfield Foods:
-----------------------------------------------------------------------------------------
7%, 8/1/2011 650,000 464,750
-----------------------------------------------------------------------------------------
7.75%, 7/1/2017 1,000,000 575,000
-----------------------------------------------------------------------------------------
6,412,500
-----------------------------------------------------------------------------------------
GAMING 4.7%
-----------------------------------------------------------------------------------------
Xxxx Xxxxxx 7.125%, 2/1/2016 2,175,000 1,294,125
-----------------------------------------------------------------------------------------
FireKeepers Development Authority 13.875%, 5/1/2015# 1,000,000 625,000
-----------------------------------------------------------------------------------------
Indianapolis Downs LLC & Capital 11%, 11/1/2012* 1,495,000 822,250
-----------------------------------------------------------------------------------------
MGM Mirage 13%, 11/15/2013* 525,000 502,688
-----------------------------------------------------------------------------------------
Pokagon Gaming Authority 10.375%, 6/15/2014* 1,000,000 865,000
-----------------------------------------------------------------------------------------
San Xxxxxxx 8%, 9/15/2013 1,000,000 730,000
-----------------------------------------------------------------------------------------
Seneca Gaming 7.25%, 5/1/2012 150,000 121,500
-----------------------------------------------------------------------------------------
Shingle Springs Tribal Gaming Authority 9.375%, 6/15/2015* 2,700,000 1,363,500
-----------------------------------------------------------------------------------------
6,324,063
-----------------------------------------------------------------------------------------
GAS DISTRIBUTORS 0.5%
-----------------------------------------------------------------------------------------
Southwestern Energy 7.5%, 2/1/2018* 855,000 752,400
-----------------------------------------------------------------------------------------
GAS PIPELINES 1.5%
-----------------------------------------------------------------------------------------
El Paso:
-----------------------------------------------------------------------------------------
12%, 12/12/2013 400,000 401,000
-----------------------------------------------------------------------------------------
6.875%, 6/15/2014 130,000 105,601
-----------------------------------------------------------------------------------------
7%, 6/15/2017 2,000,000 1,575,210
-----------------------------------------------------------------------------------------
2,081,811
-----------------------------------------------------------------------------------------
----------
See footnotes on page 15.
11
Portfolio of Investments
December 31, 2008
PRINCIPAL
AMOUNT VALUE
HEALTH CARE 8.2%
-----------------------------------------------------------------------------------------
CHS Community Health System 8.875%, 7/15/2015 $ 1,415,000 $ 1,308,875
-----------------------------------------------------------------------------------------
DaVita 7.25%, 3/15/2015 1,500,000 1,432,500
-----------------------------------------------------------------------------------------
HCA:
-----------------------------------------------------------------------------------------
9.125%, 11/15/2014* 500,000 465,000
-----------------------------------------------------------------------------------------
6.5%, 2/15/2016 2,000,000 1,240,000
-----------------------------------------------------------------------------------------
9.25%, 11/15/2016 500,000 460,000
-----------------------------------------------------------------------------------------
9.625%, 11/15/2016 890,000 696,425
-----------------------------------------------------------------------------------------
7.5%, 11/6/2033 1,900,000 893,000
-----------------------------------------------------------------------------------------
IASIS Healthcare/IASIS Capital 8.75%, 6/15/2014 1,800,000 1,404,000
-----------------------------------------------------------------------------------------
Omnicare 6.875%, 12/15/2015 1,350,000 1,113,750
-----------------------------------------------------------------------------------------
Select Medical 8.834%, 9/15/2015# 2,250,000 1,181,250
-----------------------------------------------------------------------------------------
Vanguard Health Holding 9%, 10/1/2014 1,000,000 840,000
-----------------------------------------------------------------------------------------
11,034,800
-----------------------------------------------------------------------------------------
HOME CONSTRUCTION 0.7%
-----------------------------------------------------------------------------------------
K Hovnanian Enterprises 11.5%, 5/1/2013 875,000 669,375
-----------------------------------------------------------------------------------------
Toll 8.25%, 12/1/2011 250,000 228,750
-----------------------------------------------------------------------------------------
898,125
-----------------------------------------------------------------------------------------
INDEPENDENT ENERGY 6.7%
-----------------------------------------------------------------------------------------
Chesapeake Energy 7.625%, 7/15/2013 3,050,000 2,348,500
-----------------------------------------------------------------------------------------
Connacher Oil and Gas 10.25%, 12/15/2015* 1,485,000 601,425
-----------------------------------------------------------------------------------------
EXCO Resources 7.25%, 1/15/2011 1,300,000 1,020,500
-----------------------------------------------------------------------------------------
Forest Oil 7.25%, 6/15/2019 2,000,000 1,470,000
-----------------------------------------------------------------------------------------
Petrohawk Energy 9.125%, 7/15/2013 1,125,000 916,875
-----------------------------------------------------------------------------------------
Quicksilver Resources 7.125%, 4/1/2016 1,700,000 918,000
-----------------------------------------------------------------------------------------
Range Resources 7.25%, 5/1/2018 1,000,000 840,000
-----------------------------------------------------------------------------------------
XxxxXxxxx Energy 8.625%, 4/1/2015## 1,625,000 861,250
-----------------------------------------------------------------------------------------
8,976,550
-----------------------------------------------------------------------------------------
LODGING 2.6%
-----------------------------------------------------------------------------------------
Felcor Lodging 9%, 6/1/2011 2,750,000 2,048,750
-----------------------------------------------------------------------------------------
Host Marriott 6.75%, 6/1/2016 2,000,000 1,470,000
-----------------------------------------------------------------------------------------
3,518,750
-----------------------------------------------------------------------------------------
MEDIA CABLE 4.3%
-----------------------------------------------------------------------------------------
CCH II Capital 10.25%, 10/1/2013* 415,000 143,175
-----------------------------------------------------------------------------------------
CCO Holdings 8.75%, 11/15/2013 1,500,000 952,500
-----------------------------------------------------------------------------------------
Charter Communications Operating Capital 8.375%, 4/30/2014* 2,000,000 1,540,000
-----------------------------------------------------------------------------------------
CSC Holdings:
-----------------------------------------------------------------------------------------
6.75%, 4/15/2012 1,000,000 920,000
-----------------------------------------------------------------------------------------
8.5%, 6/15/2015* 1,100,000 973,500
-----------------------------------------------------------------------------------------
Mediacom Broadband 8.5%, 10/15/2015 1,000,000 656,250
-----------------------------------------------------------------------------------------
Virgin Media Finance 8.75%, 4/15/2014 800,000 604,000
-----------------------------------------------------------------------------------------
5,789,425
-----------------------------------------------------------------------------------------
----------
See footnotes on page 15.
12
Portfolio of Investments
December 31, 2008
PRINCIPAL
AMOUNT VALUE
MEDIA NON-CABLE 9.6%
-----------------------------------------------------------------------------------------
Dex Media 0% (9%+), 11/15/2013 $ 3,225,000 $ 612,750
-----------------------------------------------------------------------------------------
Dex Media West 9.875%, 8/15/2013 500,000 120,000
-----------------------------------------------------------------------------------------
DirecTV Holdings/DirecTV Financing 6.375%, 6/15/2015 1,675,000 1,553,563
-----------------------------------------------------------------------------------------
Echostar 6.625%, 10/1/2014 2,550,000 2,135,625
-----------------------------------------------------------------------------------------
Intelsat Xxxxxxx Holdings 11.25%, 6/15/2016 1,725,000 1,578,375
-----------------------------------------------------------------------------------------
Xxxxx Media 6.625%, 8/15/2015 2,835,000 2,062,462
-----------------------------------------------------------------------------------------
LBI Media 8.5%,8/1/2017 1,000,000 355,000
-----------------------------------------------------------------------------------------
Liberty Media:
-----------------------------------------------------------------------------------------
5.7%, 5/15/2013 2,740,000 1,809,981
-----------------------------------------------------------------------------------------
8.5%, 7/15/2029 1,000,000 578,311
-----------------------------------------------------------------------------------------
LIN Television 6.5%, 5/15/2013 1,000,000 482,500
-----------------------------------------------------------------------------------------
Nielsen Finance 10%, 8/1/2014 2,000,000 1,610,000
-----------------------------------------------------------------------------------------
12,898,567
-----------------------------------------------------------------------------------------
METALS 2.2%
-----------------------------------------------------------------------------------------
Freeport-McMoRan Copper & Gold 8.375%, 4/1/2017 2,000,000 1,642,272
-----------------------------------------------------------------------------------------
Noranda Aluminium Acquisition 6.595%, 5/15/2015# 2,310,000 796,950
-----------------------------------------------------------------------------------------
Peabody Energy 6.875%, 3/15/2013 500,000 476,250
-----------------------------------------------------------------------------------------
2,915,472
-----------------------------------------------------------------------------------------
NON-CAPTIVE DIVERSIFIED 1.2%
-----------------------------------------------------------------------------------------
Ford Motor Credit 10.25%, 9/15/2010 1,500,000 1,200,417
-----------------------------------------------------------------------------------------
GMAC 6.75%, 12/1/2014* 614,000 421,830
-----------------------------------------------------------------------------------------
1,622,247
-----------------------------------------------------------------------------------------
OIL FIELD SERVICES 0.9%
-----------------------------------------------------------------------------------------
Xxxxxxx Group 7.5%, 9/15/2017 1,000,000 675,000
-----------------------------------------------------------------------------------------
Helix Energy Solutions 9.5%, 1/15/2016* 950,000 508,250
-----------------------------------------------------------------------------------------
1,183,250
-----------------------------------------------------------------------------------------
OTHER FINANCIAL INSTITUTIONS 0.7%
-----------------------------------------------------------------------------------------
Cardtronics 9.25%, 8/15/2013 1,400,000 945,000
-----------------------------------------------------------------------------------------
PACKAGING 1.5%
-----------------------------------------------------------------------------------------
Xxxxx-Xxxxxxxx Glass Container 8.25%, 5/15/2013 2,000,000 1,980,000
-----------------------------------------------------------------------------------------
PAPER 3.5%
-----------------------------------------------------------------------------------------
Cascades 7.25%, 2/15/2013 500,000 257,500
-----------------------------------------------------------------------------------------
Domtar 7.875%, 10/15/2011 1,000,000 855,000
-----------------------------------------------------------------------------------------
Georgia-Pacific:
-----------------------------------------------------------------------------------------
7.125%, 1/15/2017# 340,000 287,300
-----------------------------------------------------------------------------------------
8.875%, 5/15/2031 3,000,000 2,085,000
-----------------------------------------------------------------------------------------
Xxxxxx Packaging 9.5%, 8/15/2013 500,000 347,500
-----------------------------------------------------------------------------------------
Newpage 10%, 5/1/2012 1,565,000 696,425
-----------------------------------------------------------------------------------------
Smurfit-Stone Container 8%, 3/15/2017 1,000,000 195,000
-----------------------------------------------------------------------------------------
4,723,725
-----------------------------------------------------------------------------------------
----------
See footnotes on page 15.
13
Portfolio of Investments
December 31, 2008
PRINCIPAL
AMOUNT VALUE
PHARMACEUTICALS 0.7%
-----------------------------------------------------------------------------------------
Xxxxxx Xxxxxxxx 8.75%, 2/1/2015 $ 1,000,000 $ 895,000
-----------------------------------------------------------------------------------------
RETAILERS 0.6%
-----------------------------------------------------------------------------------------
Xxxxxx Xxxxxx 9%, 10/15/2015 1,000,000 445,000
-----------------------------------------------------------------------------------------
Toys R Us 7.375%, 10/15/2018 1,000,000 365,000
-----------------------------------------------------------------------------------------
810,000
-----------------------------------------------------------------------------------------
TECHNOLOGY 3.6%
-----------------------------------------------------------------------------------------
Communications & Power Industries 8%, 2/1/2012 1,700,000 1,447,125
-----------------------------------------------------------------------------------------
Flextronics International 6.25%, 11/15/2014 2,000,000 1,500,000
-----------------------------------------------------------------------------------------
SS&C Technologies 11.75%, 12/1/2013 690,000 609,787
-----------------------------------------------------------------------------------------
Sunguard Data System 9.125%, 8/15/2013 1,500,000 1,305,000
-----------------------------------------------------------------------------------------
4,861,912
-----------------------------------------------------------------------------------------
TRANSPORTATION SERVICES 0.7%
-----------------------------------------------------------------------------------------
Hertz 8.875%, 1/1/2014 1,635,000 1,013,700
-----------------------------------------------------------------------------------------
WIRELESS 4.9%
-----------------------------------------------------------------------------------------
Centennial Communications 9.6325%, 1/1/2013# 675,000 658,125
-----------------------------------------------------------------------------------------
Cricket Communications 9.375%, 11/1/2014 1,000,000 905,000
-----------------------------------------------------------------------------------------
MetroPCS Wireless 9.25%, 11/1/2014 1,590,000 1,431,000
-----------------------------------------------------------------------------------------
Nextel Communications 7.375%, 8/1/2015 1,930,000 810,969
-----------------------------------------------------------------------------------------
Sprint Capital:
-----------------------------------------------------------------------------------------
7.625%, 1/30/2011 1,510,000 1,261,413
-----------------------------------------------------------------------------------------
8.375%, 3/15/2012 610,000 488,318
-----------------------------------------------------------------------------------------
Sprint Nextel 6%, 12/1/2016 1,500,000 1,059,015
-----------------------------------------------------------------------------------------
6,613,840
-----------------------------------------------------------------------------------------
WIRELINES 5.2%
-----------------------------------------------------------------------------------------
Citizens Communications 6.625%, 3/15/2015 650,000 477,750
-----------------------------------------------------------------------------------------
Fairpoint Communications 13.125%, 4/1/2018* 1,000,000 485,000
-----------------------------------------------------------------------------------------
Level 3 Financing 12.25%, 3/15/2013 2,165,000 1,320,650
-----------------------------------------------------------------------------------------
Qwest:
-----------------------------------------------------------------------------------------
7.625%, 6/15/2015 2,000,000 1,650,000
-----------------------------------------------------------------------------------------
6.5%, 6/1/2017 800,000 596,000
-----------------------------------------------------------------------------------------
6.875%, 9/15/2033 500,000 300,000
-----------------------------------------------------------------------------------------
Windstream:
-----------------------------------------------------------------------------------------
8.625%, 8/1/2016 1,575,000 1,401,751
-----------------------------------------------------------------------------------------
7%, 3/15/2019 1,000,000 775,000
-----------------------------------------------------------------------------------------
7,006,151
-----------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS (Cost $152,114,929) 124,469,669
-----------------------------------------------------------------------------------------
See footnotes on page 15.
14
Portfolio of Investments
December 31, 2008
SHARES OR
PRINCIPAL
AMOUNT VALUE
PREFERRED STOCK 0.1%
----------------------------------------------------------------------------------------------
GMAC 9%*(Cost $125,408) 153 shs. $ 125,408
----------------------------------------------------------------------------------------------
SHORT-TERM HOLDINGS 5.5%
----------------------------------------------------------------------------------------------
MONEY MARKET FUND 3.5%
----------------------------------------------------------------------------------------------
SSgA U.S. Treasury Money Market Fund (Cost $4,761,918) 4,761,918 4,761,918
----------------------------------------------------------------------------------------------
CORPORATE BONDS 2.0%
----------------------------------------------------------------------------------------------
Ford Motor 5.8%, 1/12/2009 $ 1,600,000 1,595,473
----------------------------------------------------------------------------------------------
Midwest Generation 8.3%, 7/2/2009 697,732 694,243
----------------------------------------------------------------------------------------------
Qwest Communications 5.649%, 2/15/2009# 333,000 333,000
----------------------------------------------------------------------------------------------
Total Corporate Bonds (Cost $2,606,692) 2,622,716
----------------------------------------------------------------------------------------------
TOTAL SHORT-TERM HOLDINGS (Cost $7,368,610) 7,384,634
----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $159,608,947) 98.2% 131,979,711
----------------------------------------------------------------------------------------------
OTHER ASSETS LESS LIABILITIES 1.8% 2,436,694
----------------------------------------------------------------------------------------------
NET ASSETS 100.0% $ 134,416,405
==============================================================================================
----------
* The security may be offered and sold only to "qualified institutional
buyers" under Rule 144A of the Security Act of 1933.
# Floating rate security, the interest rate is reset periodically. The
interest rate disclosed reflects the rate in effect at December 31, 2008.
## Pay-in-kind bond.
+ Deferred-interest debentures pay no interest for a stipulated number of
years, after which they pay the indicated coupon rate.
++ Security in default and non-income producing.
Industry classifications have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
15
Statement of Assets and Liabilities
December 31, 2008
ASSETS:
-----------------------------------------------------------------------------------------------------------------------------------
Investments, at value:
-----------------------------------------------------------------------------------------------------------------------------------
Corporate bonds (cost $152,114,929) $ 124,469,669
-----------------------------------------------------------------------------------------------------------------------------------
Preferred stocks (cost $125,408) 125,408
-----------------------------------------------------------------------------------------------------------------------------------
Money market fund (cost $4,761,918) 4,761,918
-----------------------------------------------------------------------------------------------------------------------------------
Other short-term holdings (cost $2,606,692) 2,622,716
-----------------------------------------------------------------------------------------------------------------------------------
Total investments (cost $159,608,947) 131,979,711
-----------------------------------------------------------------------------------------------------------------------------------
Cash 142,786
-----------------------------------------------------------------------------------------------------------------------------------
Restricted cash 4,000
-----------------------------------------------------------------------------------------------------------------------------------
Interest receivable 3,331,127
-----------------------------------------------------------------------------------------------------------------------------------
Receivable for shares of Beneficial Interest sold 717,375
-----------------------------------------------------------------------------------------------------------------------------------
Expenses prepaid to shareholder service agent 10,675
-----------------------------------------------------------------------------------------------------------------------------------
Other 9,178
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS: 136,194,852
-----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
-----------------------------------------------------------------------------------------------------------------------------------
Payable for shares of Beneficial Interest repurchased 969,647
-----------------------------------------------------------------------------------------------------------------------------------
Dividends payable 596,019
-----------------------------------------------------------------------------------------------------------------------------------
Management fee payable 70,385
-----------------------------------------------------------------------------------------------------------------------------------
Distribution and service (12b-1) fees payable 51,561
-----------------------------------------------------------------------------------------------------------------------------------
Accrued expenses and other 90,835
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,778,447
-----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $ 134,416,405
===================================================================================================================================
COMPOSITION OF NET ASSETS:
-----------------------------------------------------------------------------------------------------------------------------------
Shares of Beneficial Interest, at par (unlimited shares authorized; $0.001 par value; 69,337,153
shares outstanding):
-----------------------------------------------------------------------------------------------------------------------------------
Class A $ 43,798
-----------------------------------------------------------------------------------------------------------------------------------
Class B 3,766
-----------------------------------------------------------------------------------------------------------------------------------
Class C 17,008
-----------------------------------------------------------------------------------------------------------------------------------
Class I 2,868
-----------------------------------------------------------------------------------------------------------------------------------
Class R 1,897
-----------------------------------------------------------------------------------------------------------------------------------
Additional paid-in capital 1,351,608,169
-----------------------------------------------------------------------------------------------------------------------------------
Dividends in excess of net investment income (Note 7) (485,137)
-----------------------------------------------------------------------------------------------------------------------------------
Accumulated net realized loss (Note 7) (1,189,146,728)
-----------------------------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (27,629,236)
-----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $ 134,416,405
===================================================================================================================================
NET ASSET VALUE PER SHARE:
-----------------------------------------------------------------------------------------------------------------------------------
CLASS A ($84,811,826 / 43,798,359 shares) $ 1.94
-----------------------------------------------------------------------------------------------------------------------------------
CLASS B ($7,296,400 / 3,765,759 shares) $ 1.94
-----------------------------------------------------------------------------------------------------------------------------------
CLASS C ($33,068,990 / 17,008,315 shares) $ 1.94
-----------------------------------------------------------------------------------------------------------------------------------
CLASS I ($5,561,768 / 2,868,183 shares) $ 1.94
-----------------------------------------------------------------------------------------------------------------------------------
CLASS R ($3,677,421 / 1,896,537 shares) $ 1.94
-----------------------------------------------------------------------------------------------------------------------------------
----------
See Notes to Financial Statements.
16
Statement of Operations
For the Year Ended December 31, 2008
INVESTMENT INCOME:
--------------------------------------------------------------------------------
Interest $ 19,195,286
--------------------------------------------------------------------------------
Dividends 225,442
--------------------------------------------------------------------------------
Other income 217,738
--------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 19,638,466
--------------------------------------------------------------------------------
EXPENSES:
--------------------------------------------------------------------------------
Management fee 1,353,866
--------------------------------------------------------------------------------
Distribution and service (12b-1) fees 1,004,938
--------------------------------------------------------------------------------
Shareholder account services 834,096
--------------------------------------------------------------------------------
Custody and related services 97,335
--------------------------------------------------------------------------------
Registration 86,441
--------------------------------------------------------------------------------
Auditing and legal fees 68,876
--------------------------------------------------------------------------------
Shareholder reports and communications 45,087
--------------------------------------------------------------------------------
Directors' fees and expenses 16,262
--------------------------------------------------------------------------------
Miscellaneous 24,860
--------------------------------------------------------------------------------
TOTAL EXPENSES 3,531,761
--------------------------------------------------------------------------------
NET INVESTMENT INCOME 16,106,705
--------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
--------------------------------------------------------------------------------
Net realized loss on investments (70,475,177)
--------------------------------------------------------------------------------
Net change in unrealized depreciation of investments (16,697,310)
--------------------------------------------------------------------------------
NET LOSS ON INVESTMENTS (87,172,487)
--------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM OPERATIONS $ (71,065,782)
================================================================================
----------
See Notes to Financial Statements.
17
Statements of Changes In Net Assets
YEAR ENDED DECEMBER 31,
---------------------------------
2008 2007
---------------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
----------------------------------------------------------------------------------------------------------------------------------
Net investment income $ 16,106,705 $ 21,245,777
----------------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (70,475,177) 2,476,980
----------------------------------------------------------------------------------------------------------------------------------
Net change in unrealized depreciation of investments (16,697,310) (20,609,207)
----------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS (71,065,782) 3,113,550
----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
----------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income:
----------------------------------------------------------------------------------------------------------------------------------
Class A (10,333,616) (13,071,745)
----------------------------------------------------------------------------------------------------------------------------------
Class B (1,121,649) (2,389,457)
----------------------------------------------------------------------------------------------------------------------------------
Class C (2,600,952) (1,484,108)
----------------------------------------------------------------------------------------------------------------------------------
Class D (1,111,332) (3,523,423)
----------------------------------------------------------------------------------------------------------------------------------
Class I (590,596) (596,414)
----------------------------------------------------------------------------------------------------------------------------------
Class R (348,560) (180,630)
----------------------------------------------------------------------------------------------------------------------------------
Total (16,106,705) (21,245,777)
----------------------------------------------------------------------------------------------------------------------------------
Dividends in excess of net investment income:
----------------------------------------------------------------------------------------------------------------------------------
Class A (2,259,499) (60,184)
----------------------------------------------------------------------------------------------------------------------------------
Class B (245,255) (11,001)
----------------------------------------------------------------------------------------------------------------------------------
Class C (568,712) (6,833)
----------------------------------------------------------------------------------------------------------------------------------
Class D (242,998) (16,222)
----------------------------------------------------------------------------------------------------------------------------------
Class I (129,137) (2,746)
----------------------------------------------------------------------------------------------------------------------------------
Class R (76,214) (832)
----------------------------------------------------------------------------------------------------------------------------------
Total (3,521,815) (97,818)
----------------------------------------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM DISTRIBUTIONS (19,628,520) (21,343,595)
----------------------------------------------------------------------------------------------------------------------------------
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST:
----------------------------------------------------------------------------------------------------------------------------------
Net proceeds from sales of shares 15,054,643 18,867,364
----------------------------------------------------------------------------------------------------------------------------------
Investment of dividends 11,836,659 12,135,001
----------------------------------------------------------------------------------------------------------------------------------
Exchanged from associated funds 6,671,692 8,317,206
----------------------------------------------------------------------------------------------------------------------------------
Total 33,562,994 39,319,571
----------------------------------------------------------------------------------------------------------------------------------
Cost of shares repurchased (56,761,719) (88,936,830)
----------------------------------------------------------------------------------------------------------------------------------
Exchanged into associated funds (8,444,420) (8,945,482)
----------------------------------------------------------------------------------------------------------------------------------
Total (65,206,139) (97,882,312)
----------------------------------------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST (31,643,145) (58,562,741)
----------------------------------------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS (122,337,447) (76,792,786)
----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
----------------------------------------------------------------------------------------------------------------------------------
Beginning of year 256,753,852 333,546,638
----------------------------------------------------------------------------------------------------------------------------------
END OF YEAR (includes undistributed (dividends in excess of) net investment
income of $(485,137) and $801,910, respectively) $ 134,416,405 $ 256,753,852
==================================================================================================================================
----------
See Notes to Financial Statements.
18
Notes to Financial Statements
1. ORGANIZATION AND MULTIPLE CLASSES OF SHARES -- Xxxxxxxx High-Yield Fund
(the "Fund") is a series of Xxxxxxxx High Income Fund Series (the
"Series") which is registered with the Securities and Exchange Commission
(the "SEC") under the Investment Company Act of 1940, as amended (the
"1940 Act"), as an open-end diversified management investment company
(Note 11). The Fund offers the following five classes of shares:
Class A shares are sold with an initial sales charge of up to 4.5% (4.75%
prior to January 7, 2008) and are subject to a continuing service fee of
up to 0.25% on an annual basis. Class A shares purchased in an amount of
$1,000,000 or more are sold without an initial sales charge but are
subject to a contingent deferred sales charge ("CDSC") of 1% on
redemptions within 18 months of purchase. Effective January 7, 2008,
eligible employee benefit plans that have at least $2,000,000 in Plan
assets may purchase Class A shares at net asset value, but in the event of
a plan termination, will be subject to a CDSC of 1% on redemption of
shares purchased within 18 months prior to plan termination.
Class B shares are sold without an initial sales charge but are subject to
a distribution fee of 0.75% and a service fee of up to 0.25% on an annual
basis, and a CDSC, if applicable, of 5% on redemptions in the first year
of purchase, declining to 1% in the sixth year and 0% thereafter. Class B
shares will automatically convert to Class A shares approximately eight
years after their date of purchase. If Class B shares of the Fund are
exchanged for Class B shares of another Xxxxxxxx mutual fund, the holding
period of the shares exchanged will be added to the holding period of the
shares acquired, both for determining the applicable CDSC and the
conversion of Class B shares to Class A shares.
Class C shares are sold without an initial sales charge but are subject to
a distribution fee of up to 0.75% and a service fee of up to 0.25% on an
annual basis, and a CDSC, if applicable, of 1% imposed on redemptions made
within one year of purchase.
The Board of Trustees of the Series (the "Board") approved the automatic
conversion of all of the Fund's outstanding Class D shares to Class C
shares at their relative net asset values. The conversion was implemented
on May 16, 2008. Effective at the close of business on May 16, 2008, the
Fund no longer offers Class D shares. The conversion did not affect
individual shareholder account values.
Class I shares are offered to certain institutional clients and other
investors, as described in the Fund's Class I shares prospectus. Class I
shares are sold without any sales charges and are not subject to
distribution or service fees.
Class R shares are offered to certain employee benefit plans and are not
available to all investors. They are sold without an initial sales charge,
but are subject to a distribution fee of up to 0.25% and a service fee of
up to 0.25% on an annual basis, and a CDSC, if applicable, of 1% on
redemptions made within one year of a plan's initial purchase of Class R
shares.
All classes of shares represent interests in the same portfolio of
investments, have the same rights and are generally identical in all
respects except that each class bears its own class-specific expenses, and
has exclusive voting rights with respect to any matter on which a separate
vote of any class is required.
2. SIGNIFICANT ACCOUNTING POLICIES -- The financial statements have been
prepared in conformity with accounting principles generally accepted in
the United States of America which require management to make certain
estimates and assumptions at the date of the financial statements. Actual
results may differ from these estimates. The following summarizes the
significant accounting policies of the Fund:
A. SECURITY VALUATION AND RISK -- Securities traded on an exchange are
valued at the last sales price on the primary exchange or market on
which they are traded. Fixed income securities not listed on an
exchange or security market are valued by independent pricing
services based on bid prices, which consider such factors as
coupons, maturities, credit ratings, liquidity, specific terms and
features, and the US Treasury yield curve, or are valued by
RiverSource Investments, LLC ("RiverSource" or the "Manager") based
on quotations provided by primary market makers in such securities.
Equity securities not listed on an exchange or security market, or
equity securities for which there is no last
19
Notes to Financial Statements
sales price, are valued at the mean of the most recent bid and asked
prices or valued by the Manager based on quotations provided by
primary market makers in such securities. Securities for which
market quotations are not readily available (or are otherwise no
longer valid or reliable) are valued at fair value determined in
accordance with procedures approved by the Trustees. This can occur
in the event of, among other things, natural disasters, acts of
terrorism, market disruptions, intra-day trading halts, and extreme
market volatility in the US markets. The determination of fair value
involves subjective judgments. As a result, using fair value to
price a security may result in a price materially different from the
prices used by other mutual funds to determine net asset value or
the price that may be realized upon the actual sale of the security.
Short-term holdings maturing in 60 days or less are valued at
current market quotations or amortized cost if the Manager believes
it approximates fair value. Short-term holdings that mature in more
than 60 days are valued at current market quotations until the 60th
day prior to maturity and are then valued as described above for
securities maturing in 60 days or less. Investments in money market
funds are valued at net asset value.
On January 1, 2008, the Fund adopted Statement of Financial
Accounting Standards No. 157 ("SFAS 157"), "Fair Value
Measurements." SFAS 157 establishes a three-tier hierarchy to
classify the assumptions, referred to as inputs, used in valuation
techniques (as described above) to measure fair value of the Fund's
investments. These inputs are summarized in three broad levels:
Level 1 - quoted prices in active markets for identical investments;
Level 2 - other significant observable inputs (including quoted
prices in inactive markets or for similar investments, interest
rates, prepayment speeds, credit risk, etc.); and Level 3 -
significant unobservable inputs (including the Fund's own
assumptions in determining fair value) (Note 3). Observable inputs
are those based on market data obtained from sources independent of
the Fund, and unobservable inputs reflect the Fund's own assumptions
based on the best information available. The inputs or methodology
used for valuing securities may not be an indication of the risk
associated with investing in those securities.
Fixed income securities are subject to interest rate risk, credit
risk, prepayment risk and market risk. High-yield securities are
subject to higher volatility in yield and market value and a greater
risk of loss of principal and interest than higher-rated, investment
grade fixed income securities.
B. EQUITY-LINKED NOTES -- The Fund may purchase notes created by a
counterparty, typically an investment bank. The notes bear interest
at a fixed or floating rate. At maturity, the notes must be
exchanged for an amount based on the value of one or more equity
securities ("Underlying Stocks") of third party issuers. The
exchange value may be limited to an amount less than the actual
value of the Underlying Stocks at the maturity date. Any difference
between the exchange amount and the original cost of the notes will
be a gain or loss.
C. RESTRICTED CASH -- Restricted cash represents deposits that are
being held by banks as collateral for letters of credit issued in
connection with the Fund's insurance policies.
D. MULTIPLE CLASS ALLOCATIONS -- All income, expenses (other than
class-specific expenses), and realized and unrealized gains or
losses are allocated daily to each class of shares based upon the
relative value of shares of each class. Class-specific expenses,
which include distribution and service (12b-1) fees and any other
items that are specifically attributable to a particular class, are
charged directly to such class. For the year ended December 31,
2008, distribution and service (12b-1) fees, shareholder account
services and registration expenses were class-specific expenses.
E. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME -- Investment
transactions are recorded on trade dates. Identified cost of
investments sold is used for both financial reporting and federal
income tax purposes. Dividends receivable are recorded on
ex-dividend dates. Interest income is recorded on an accrual basis.
The Fund amortizes discount and premium on portfolio securities for
financial reporting purposes.
F. DISTRIBUTIONS TO SHAREHOLDERS -- Dividends are declared daily and
paid monthly. Other distributions paid by the Fund are recorded on
ex-dividend dates.
20
Notes to Financial Statements
G. TAXES -- There is no provision for federal income tax. The Fund has
elected to be taxed as a regulated investment company and intends to
distribute substantially all taxable net income and net gain
realized.
Financial Accounting Standards Board ("FASB") Interpretation No. 48
("FIN 48"), "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109," requires the Fund to
measure and recognize in its financial statements the benefit of a
tax position taken (or expected to be taken) on an income tax return
if such position will more likely than not be sustained upon
examination based on the technical merits of the position. The Fund
files income tax returns in the US Federal jurisdiction, as well as
New York State and New York City jurisdictions. Based upon its
review of tax positions for the Fund's open tax years of 2005 - 2008
in these jurisdictions, the Fund has determined that FIN 48 did not
have a material impact on the Fund's financial statements for the
year ended December 31, 2008.
3. FAIR VALUE MEASUREMENTS -- A summary of the value of the Fund's
investments as of December 31, 2008, based on the level of inputs used in
accordance with SFAS 157 (Note 2a), is as follows:
VALUATION INPUTS VALUE
------------------------------------------------------------------------------------------
Level 1 - Quoted Prices in Active Markets for Identical Investments $ 4,887,326
------------------------------------------------------------------------------------------
Level 2 - Other Significant Observable Inputs 127,092,385
------------------------------------------------------------------------------------------
Level 3 - Significant Unobservable Inputs --
------------------------------------------------------------------------------------------
Total $ 131,979,711
==========================================================================================
4. MANAGEMENT AND DISTRIBUTION SERVICES, AND OTHER RELATED PARTY TRANSACTIONS
A. MANAGEMENT AND ADMINISTRATIVE SERVICES -- On November 7, 2008,
RiverSource, investment manager to the RiverSource complex of funds,
and a wholly owned subsidiary of Ameriprise Financial, Inc.
("Ameriprise"), announced the closing of its acquisition (the
"Acquisition") of J. & X. Xxxxxxxx & Co. Incorporated ("JWS"). With
the Acquisition completed and shareholders of the Fund having
previously approved (at a Special Meeting held earlier in November
2008) a new Investment Management Services Agreement between
RiverSource and the Fund, RiverSource is the new investment manager
of the Fund effective November 7, 2008.
The Manager receives a fee (and, prior to November 7, 2008, JWS
received a fee), calculated daily and payable monthly, equal to
0.65% per annum of the first $1 billion of the Fund's average daily
net assets and 0.55% per annum of the Fund's average daily net
assets in excess of $1 billion. The management fee reflected in the
Statement of Operations represents 0.65% per annum of the Fund's
average daily net assets. For the year ended December 31, 2008,
RiverSource received $129,155 of such fee and the balance was paid
to JWS.
Under an Administrative Services Agreement, effective November 7,
2008, Ameriprise administers certain aspects of the Fund's business
and other affairs at no cost. Ameriprise provides the Fund with
office space, and certain administrative and other services and
executive and other personnel as are necessary for Fund operations.
Ameriprise pays all of the compensation of Board members of the Fund
who are employees or consultants of RiverSource and of the officers
and other personnel of the Fund. Ameriprise reserves the right to
seek Board approval to increase the fees payable by the Fund under
the Administrative Services Agreement. However, Ameriprise
anticipates that any such increase in fees would be offset by
corresponding decreases in advisory fees under the Investment and
Management Services Agreement. If an increase in fees under the
Administrative Services Agreement would not be offset by
corresponding decreases in advisory fees, the Fund will inform
shareholders prior to the effectiveness of such increase. Prior to
November 7, 2008, administrative services were provided to the Fund
by JWS as part of its former management agreement with the Series.
B. DISTRIBUTION SERVICES -- For the year ended December 31, 2008,
RiverSource Fund Distributors, Inc. (formerly Xxxxxxxx Advisors,
Inc.) (the "Distributor"), agent for the distribution of the Fund's
shares and an affiliate of the Manager, received commissions and
concessions of $16,018 from sales of Class A shares. Commissions of
$132,592 were also paid to dealers for sales of Class A shares.
21
Notes to Financial Statements
The Fund has an Administration, Shareholder Services and
Distribution Plan (the "Plan") with respect to distribution of its
shares. Under the Plan, with respect to Class A shares, service
organizations can enter into agreements with the Distributor and
receive a continuing fee of up to 0.25% on an annual basis, payable
monthly, of the average daily net assets of the Class A shares
attributable to the particular service organizations for providing
personal services and/or the maintenance of shareholder accounts.
The Distributor charges such fees to the Fund pursuant to the Plan.
For the year ended December 31, 2008, fees incurred under the Plan
aggregated $318,343 or 0.25% per annum of the average daily net
assets of Class A shares.
Under the Plan, with respect to Class B shares, Class C shares,
Class D shares (only through May 16, 2008), and Class R shares,
service organizations can enter into agreements with the Distributor
and receive a continuing fee for providing personal services and/or
the maintenance of shareholder accounts of up to 0.25% on an annual
basis of the average daily net assets of the Class B, Class C, Class
D, and Class R shares for which the organizations are responsible;
and, for Class C, Class D, and Class R shares, fees for providing
other distribution assistance of up to 0.75% (0.25%, in the case of
Class R shares) on an annual basis of such average daily net assets.
Such fees are paid monthly by the Fund to the Distributor pursuant
to the Plan.
For the year ended December 31, 2008, fees incurred under the Plan,
equivalent to 1% per annum of the average daily net assets of Class
B, Class C, and Class D shares, and 0.50% per annum of average daily
net assets of Class R shares, amounted to $155,269, $347,617,
$161,423, and $22,286, respectively.
The Distributor and RiverSource Services, Inc. (formerly Xxxxxxxx
Services, Inc.), also an affiliate of the Manager, are eligible to
receive distribution and service (12b-1) fees pursuant to the Plan.
For the year ended December 31, 2008, the Distributor and
RiverSource Services, Inc. received distribution and service (12b-1)
fees of $14,143.
The Distributor is entitled to retain any CDSC imposed on certain
redemptions of Class A, Class C, Class D, and Class R shares. For
the year ended December 31, 2008, such charges amounted to $8,012.
The Distributor has sold its rights to third parties to collect any
CDSC imposed on redemptions of Class B shares.
C. TRANSFER AGENT AND SHAREHOLDER SERVICES -- For the year ended
December 31, 2008, Xxxxxxxx Data Corp., which is owned by certain
associated investment companies, charged the Fund at cost $834,096
for shareholder account services in accordance with a methodology
approved by the Fund's trustees. Class I shares receive more limited
shareholder services than the Fund's other classes of shares (the
"Retail Classes"). Xxxxxxxx Data Corp. does not allocate to Class I
the costs of any of its departments that do not provide services to
the Class I shareholders.
Costs of Xxxxxxxx Data Corp. directly attributable to the Retail
Classes of the Fund were charged to those classes in proportion to
their relative net asset values. Costs directly attributable to
Class I shares were charged to Class I. The remaining charges were
allocated to the Retail Classes and Class I by Xxxxxxxx Data Corp.
pursuant to a formula based on their net assets, shareholder
transaction volumes and number of shareholder accounts.
The Series and certain other associated investment companies
(together, the "Guarantors") have severally but not jointly
guaranteed the performance and observance of all the terms and
conditions of a lease entered into by Xxxxxxxx Data Corp., including
the payment of rent by Xxxxxxxx Data Corp. (the "Guaranty"). The
lease and the related Guaranty expire in January 2019. The
obligation of the Series to pay any amount due under the Guaranty is
limited to a specified percentage of the full amount, which
generally is based on the Series' percentage of the expenses billed
by Xxxxxxxx Data Corp. to all Guarantors in the most recent calendar
quarter. As of December 31, 2008, the Series' potential obligation
under the Guaranty is $527,500. As of December 31, 2008, no event
has occurred which would result in the Series becoming liable to
make any payment under the Guaranty. The Fund would bear a portion
of any payments made by the Series under the Guaranty. A portion of
the rent paid by Xxxxxxxx Data Corp. is charged to the Fund as part
of Xxxxxxxx Data Corp.'s shareholder account services cost.
22
Notes to Financial Statements
The Series' Board has approved RiverSource Service Corporation
("RSC") as the Fund's new transfer and shareholder service agent,
and the termination of the Fund's relationship with Xxxxxxxx Data
Corp., effective on or about May 9, 2009. RSC is an affiliate of
RiverSource. The fees and expenses expected to be charged to the
Fund by RSC are generally lower than the fees and expenses charged
by Xxxxxxxx Data Corp. Nevertheless, as a result of the termination
of the relationship with Xxxxxxxx Data Corp., the Fund will incur
certain non-recurring charges, including charges relating to
Xxxxxxxx Data Corp.'s leases, that would in the aggregate
approximate 0.16% of the Fund's net assets as of January 23, 2009
(the "Non-Recurring Charges"). These Non-Recurring Charges will be
incurred over a period of several months beginning January 28, 2009.
Fund shareholders would bear their proportionate share of the Fund's
expenses, including the Non-Recurring Charges.
D. DIRECTORS' FEES AND EXPENSES -- Directors' fees and expenses
includes the compensation of Board members who are not employees of
RiverSource and the Fund's proportionate share of certain expenses
of a company providing limited administrative services to the Fund
and the other Xxxxxxxx and RiverSource Funds. These expenses include
boardroom and office expense, employee compensation, employee health
and retirement benefits and certain other expenses. For the period
from November 7, 2008 through December 31, 2008, the Fund paid $78
to this company for such services.
The Series has a compensation arrangement under which trustees who
receive fees may elect to defer receiving such fees. Trustees may
elect to have their deferred fees accrue interest or earn a return
based on the performance of the Fund or other funds in the Xxxxxxxx
and RiverSource Groups of Investment Companies. The cost of such
fees and earnings/losses accrued thereon is included in directors'
fees and expenses, and the accumulated balance thereof at December
31, 2008, of $2,005 is included in accrued expenses and other
liabilities. Deferred fees and related accrued earnings are not
deductible by the Fund for federal income tax purposes until such
amounts are paid.
Certain officers and trustees of the Series are officers or directors of
the Manager, Ameriprise, the Distributor, RiverSource Services, Inc., RSC,
and/or Xxxxxxxx Data Corp.
5. COMMITTED LINE OF CREDIT -- The Fund is a participant in a joint $200
million committed line of credit that is shared by substantially all
open-end funds in the Xxxxxxxx Group of Investment Companies. The trustees
have currently limited the Fund's borrowings to 10% of its net assets.
Borrowings pursuant to the credit facility are subject to interest at a
rate equal to the overnight federal funds rate plus 0.50%. The Fund incurs
a commitment fee of 0.12% per annum on its share of the unused portion of
the credit facility. The credit facility may be drawn upon only for
temporary purposes and is subject to certain other customary restrictions.
The credit facility commitment expires in June 2009, but is renewable
annually with the consent of the participating banks. For the year ended
December 31, 2008, the Fund did not borrow from the credit facility.
6. PURCHASES AND SALES OF SECURITIES -- Purchases and sales of portfolio
securities, excluding short-term investments, for the year ended December
31, 2008, amounted to $122,099,207 and $161,128,970, respectively.
7. FEDERAL TAX INFORMATION -- Certain components of income, expense and
realized capital gain and loss are recognized at different times or have a
different character for federal income tax purposes and for financial
reporting purposes. Where such differences are permanent in nature, they
are reclassified in the components of net assets based on their
characterization for federal income tax purposes. Any such
reclassifications will have no effect on net assets, results of operations
or net asset value per share of the Fund. As a result of the differences
described above, the treatment for financial reporting purposes of
distributions made during the year from net investment income or net
realized gains may differ from their treatment for federal income tax
purposes. Further, the cost of investments also can differ for federal
income tax purposes.
At December 31, 2008, the cost of investments for federal income tax
purposes was $160,313,857. The tax basis cost was greater than the cost
for financial reporting purposes primarily due to the amortization of
premium for financial reporting purposes of $712,150.
23
Notes to Financial Statements
At December 31, 2008, the tax basis components of accumulated losses were
as follows:
Gross unrealized appreciation of portfolio securities $ 1,813,048
-------------------------------------------------------------------------------------------
Gross unrealized depreciation of portfolio securities (30,147,194)
-------------------------------------------------------------------------------------------
Net unrealized depreciation of portfolio securities (28,334,146)
-------------------------------------------------------------------------------------------
Undistributed ordinary income 229,018
-------------------------------------------------------------------------------------------
Capital loss carryforwards (1,128,589,445)
-------------------------------------------------------------------------------------------
Timing differences (post-October losses) (60,572,379)
-------------------------------------------------------------------------------------------
Total accumulated losses $ (1,217,266,952)
===========================================================================================
At December 31, 2008, the Fund had net capital loss carryforwards for
federal income tax purposes of $1,128,589,445, which are available for
offset against future taxable net capital gains, with $668,622,539
expiring in 2009, $444,283,739 expiring in 2010, $1,544,248 expiring in
2012, and $14,138,919 expiring in 2016. The amount was determined after
adjustments for certain differences between financial reporting and tax
purposes, such as wash sale losses. Accordingly, no capital gain
distributions are expected to be paid to shareholders until net capital
gains have been realized in excess of the available capital loss
carryforwards. There can be no assurance that the Fund will be able to
utilize all of these capital loss carryforwards before they expire. During
the year ended December 31, 2008, prior year's capital loss carryforwards
of $255,659,981 expired unused, and this amount was reclassified to
additional paid-in capital.
In addition, from November 1, 2008 through December 31, 2008, the Fund
incurred $60,572,379 of net realized capital losses. As permitted by tax
regulations, the Fund intends to elect to defer these losses and treat
them as arising in the fiscal year ended December 31, 2009. These losses
will be available to offset future taxable net gains.
For the years ended December 31, 2008 and 2007, all of the distributions
to shareholders were from ordinary income.
8. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST -- Transactions in Shares of
Beneficial Interest were as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------------------------------
Net proceeds from sales of shares 2,598,072 $ 7,081,664 2,729,400 $ 9,144,259
-------------------------------------------------------------------------------------------------
Investment of dividends 2,614,127 6,962,066 2,104,623 7,010,714
-------------------------------------------------------------------------------------------------
Exchanged from associated funds 1,405,326 3,910,060 1,806,733 6,038,741
-------------------------------------------------------------------------------------------------
Converted from Class B* 2,334,550 6,261,029 6,015,436 20,295,266
-------------------------------------------------------------------------------------------------
Total 8,952,075 24,214,819 12,656,192 42,488,980
-------------------------------------------------------------------------------------------------
Cost of shares repurchased (13,178,439) (35,739,150) (14,534,335) (48,718,477)
-------------------------------------------------------------------------------------------------
Exchanged into associated funds (2,342,718) (6,569,787) (1,795,032) (6,016,925)
-------------------------------------------------------------------------------------------------
Total (15,521,157) (42,308,937) (16,329,367) (54,735,402)
-------------------------------------------------------------------------------------------------
Decrease (6,569,082) $(18,094,118) (3,673,175) $(12,246,422)
=================================================================================================
CLASS B SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------------------------------
Net proceeds from sales of shares 89,318 $ 259,245 112,758 $ 383,117
-------------------------------------------------------------------------------------------------
Investment of dividends 283,116 765,070 357,206 1,194,988
-------------------------------------------------------------------------------------------------
Exchanged from associated funds 367,731 1,024,093 246,892 827,688
-------------------------------------------------------------------------------------------------
Total 740,165 2,048,408 716,856 2,405,793
-------------------------------------------------------------------------------------------------
Cost of shares repurchased (1,586,525) (4,308,046) (3,947,963) (13,295,661)
-------------------------------------------------------------------------------------------------
Exchanged into associated funds (242,065) (661,063) (292,681) (972,233)
-------------------------------------------------------------------------------------------------
Converted to Class A* (2,329,669) (6,250,589) (6,000,823) (20,269,764)
-------------------------------------------------------------------------------------------------
Total (4,158,259) (11,219,698) (10,241,467) (34,537,658)
-------------------------------------------------------------------------------------------------
Decrease (3,418,094) $ (9,171,290) (9,524,611) $(32,131,865)
=================================================================================================
----------
See footnotes on page 25.
24
Notes to Financial Statements
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
2008+ 2007
-------------------------------------------------------------------------------------------------
CLASS C SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------------------------------
Net proceeds from sales of shares 853,117 $ 2,276,708 304,932 $ 1,037,817
-------------------------------------------------------------------------------------------------
Investment of dividends 775,776 1,944,109 250,119 838,384
-------------------------------------------------------------------------------------------------
Exchanged from associated funds 247,617 616,429 98,412 329,611
-------------------------------------------------------------------------------------------------
Converted from Class D** 13,656,923 42,336,450 -- --
-------------------------------------------------------------------------------------------------
Total 15,533,433 47,173,696 653,463 2,205,812
-------------------------------------------------------------------------------------------------
Cost of shares repurchased (3,711,628) (9,634,042) (2,777,948) (9,409,915)
-------------------------------------------------------------------------------------------------
Exchanged into associated funds (409,708) (1,057,951) (147,236) (492,795)
-------------------------------------------------------------------------------------------------
Total (4,121,336) (10,691,993) (2,925,184) (9,902,710)
-------------------------------------------------------------------------------------------------
Increase (decrease) 11,412,097 $ 36,481,703 (2,271,721) $ (7,696,898)
=================================================================================================
CLASS D SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------------------------------
Net proceeds from sales of shares 643,675 $ 1,972,315 1,116,139 $ 3,760,170
-------------------------------------------------------------------------------------------------
Investment of dividends 338,561 1,022,653 696,691 2,330,079
-------------------------------------------------------------------------------------------------
Exchanged from associated funds 351,599 1,081,841 330,693 1,117,653
-------------------------------------------------------------------------------------------------
Total 1,333,835 4,076,809 2,143,523 7,207,902
-------------------------------------------------------------------------------------------------
Cost of shares repurchased (1,739,790) (5,284,392) (4,882,575) (16,394,820)
-------------------------------------------------------------------------------------------------
Exchanged into associated funds (48,292) (146,503) (435,188) (1,463,413)
-------------------------------------------------------------------------------------------------
Converted to Class C** (13,656,923) (42,336,461) -- --
-------------------------------------------------------------------------------------------------
Total (15,445,005) (47,767,356) (5,317,763) (17,858,233)
-------------------------------------------------------------------------------------------------
Decrease (14,111,170) $(43,690,547) (3,174,240) $(10,650,331)
=================================================================================================
CLASS I SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------------------------------
Net proceeds from sales of shares 449,920 $ 1,034,577 532,585 $ 1,785,760
-------------------------------------------------------------------------------------------------
Investment of dividends 274,394 722,240 176,969 588,755
-------------------------------------------------------------------------------------------------
Total 724,314 1,756,817 709,554 2,374,515
-------------------------------------------------------------------------------------------------
Cost of shares repurchased (356,940) (873,467) (240,107) (806,581)
-------------------------------------------------------------------------------------------------
Increase 367,374 $ 883,350 469,447 $ 1,567,934
=================================================================================================
CLASS R SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------------------------------
Net proceeds from sales of shares 872,415 $ 2,419,705 823,413 $ 2,730,739
-------------------------------------------------------------------------------------------------
Investment of dividends 161,502 420,521 52,006 172,081
-------------------------------------------------------------------------------------------------
Exchanged from associated funds 15,509 39,269 1,037 3,513
-------------------------------------------------------------------------------------------------
Total 1,049,426 2,879,495 876,456 2,906,333
-------------------------------------------------------------------------------------------------
Cost of shares repurchased (364,641) (922,622) (93,796) (311,376)
-------------------------------------------------------------------------------------------------
Exchanged into associated funds (3,885) (9,116) (34) (116)
-------------------------------------------------------------------------------------------------
Total (368,526) (931,738) (93,830) (311,492)
-------------------------------------------------------------------------------------------------
Increase 680,900 $ 1,947,757 782,626 $ 2,594,841
=================================================================================================
----------
+ January 1, 2008 to May 16, 2008, in the case of Class D shares.
* Automatic conversion of Class B shares to Class A shares approximately
eight years after the initial purchase date. The amount of dividends
accrued on Class B shares between the last dividend payment date and the
conversion date is invested in Class A shares and is included in the
conversion from Class B amount.
** Effective May 16, 2008, Class D shares were converted to Class C shares.
9. OTHER MATTERS -- In late 2003, JWS conducted an extensive internal review
concerning mutual fund trading practices. JWS's review, which covered the
period 2001-2003, noted one arrangement that permitted frequent trading in
certain open-end registered investment companies then managed by JWS (the
"Xxxxxxxx Funds"); this arrangement was in the process of being closed
down by JWS before September 2003. XXX identified three other arrangements
that permitted frequent trading, all of which had been terminated by
September 2002. In January 2004, JWS, on a voluntary basis, publicly
disclosed these
25
Notes to Financial Statements
four arrangements to its clients and to shareholders of the Xxxxxxxx
Funds. XXX also provided information concerning mutual fund trading
practices to the SEC and the Office of the Attorney General of the State
of New York ("NYAG").
In September 2005, the New York staff of the SEC indicated that it was
considering recommending to the Commissioners of the SEC the instituting
of a formal action against JWS and the Distributor relating to frequent
trading in the Xxxxxxxx Funds. XXX responded to the staff in October 2005
that it believed that any action would be both inappropriate and
unnecessary, especially in light of the fact that JWS had previously
resolved the underlying issue with the Independent Directors of the
Xxxxxxxx Funds and made recompense to the affected Xxxxxxxx Funds.
In September 2006, the NYAG commenced a civil action in New York State
Supreme Court against JWS, the Distributor, Xxxxxxxx Data Corp. and Xxxxx
X. Xxxx (collectively, the "Xxxxxxxx Parties"), alleging, in substance,
that, in addition to the four arrangements noted above, the Xxxxxxxx
Parties permitted other persons to engage in frequent trading and, as a
result, the prospectus disclosure used by the registered investment
companies then managed by JWS is and has been misleading. The NYAG
included other related claims and also claimed that the fees charged by
JWS to the Xxxxxxxx Funds were excessive. The NYAG is seeking damages of
at least $80 million and restitution, disgorgement, penalties and costs
and injunctive relief. The Xxxxxxxx Parties answered the complaint in
December 2006 and believe that the claims are without merit.
Any resolution of these matters may include the relief noted above or
other sanctions or changes in procedures. Any damages would be paid by JWS
and not by the Xxxxxxxx Funds. If the NYAG obtains injunctive relief, each
of JWS, RiverSource and their affiliates could, in the absence of the SEC
in its discretion granting exemptive relief, be enjoined from providing
advisory and underwriting services to the Xxxxxxxx Funds and other
registered investment companies, including those funds in the RiverSource
complex.
Neither JWS nor RiverSource believes that the foregoing legal action or
other possible actions will have a material adverse impact on JWS,
RiverSource or their current and former clients, including the Xxxxxxxx
Funds and other investment companies managed by RiverSource; however,
there can be no assurance of this or that these matters and any related
publicity will not affect demand for shares of the Xxxxxxxx Funds and such
other investment companies or have other adverse consequences.
10. RECENT ACCOUNTING PRONOUNCEMENT -- In March 2008, the FASB issued
Statement of Financial Accounting Standards No. 161 ("SFAS 161"),
"Disclosures about Derivative Instruments and Hedging Activities -- an
amendment of FASB Statement No. 133," which requires enhanced disclosures
about a fund's derivative and hedging activities. Funds are required to
provide enhanced disclosures about (a) how and why a fund uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under SFAS 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect a fund's financial
position, financial performance, and cash flows. SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning
after November 15, 2008. As of December 31, 2008, management does not
believe the adoption of SFAS 161 will impact the financial statement
amounts; however, additional footnote disclosures may be required about
the use of derivative instruments and hedging items.
11. SUBSEQUENT EVENTS -- On January 8, 2009, the Series' Board approved in
principle the merger of the Fund into RiverSource High Yield Bond Fund.
The completion of the merger is subject to approval by shareholders of the
Fund. It is currently anticipated that proxy materials regarding the
merger will be distributed to shareholders of the Fund during the first or
second quarter of 2009, and that a special meeting of shareholders to
consider such merger will be scheduled for the second quarter of 2009.
26
Financial Highlights
The tables below are intended to help you understand each Class's financial
performance for the periods presented. Certain information reflects financial
results for a single share of Beneficial Interest of a Class that was held
throughout the periods shown. Per share amounts are calculated using average
shares outstanding during the period. Total return shows the rate that you would
have earned (or lost) on an investment in each Class, assuming you reinvested
all your dividends and capital gain distributions, if any. Total returns do not
reflect any sales charges or transaction costs on your investment or taxes
investors may incur on distributions or on the redemption of shares, and are not
annualized for periods of less than one year.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
CLASS A 2008 2007 2006 2005 2004
-----------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA:
-----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $ 3.17 $ 3.39 $ 3.31 $ 3.51 $ 3.55
-----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
-----------------------------------------------------------------------------------------------------------------------------
Net investment income 0.22 0.25 0.21 0.24 0.27
-----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (1.18) (0.22) 0.10 (0.19) (0.04)
-----------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS (0.96) 0.03 0.31 0.05 0.23
-----------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
-----------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.22) (0.25) (0.21) (0.24) (0.27)
-----------------------------------------------------------------------------------------------------------------------------
Dividends in excess of net investment income (0.05) -- (0.02) (0.01) --o
-----------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.27) (0.25) (0.23) (0.25) (0.27)
-----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 1.94 $ 3.17 $ 3.39 $ 3.31 $ 3.51
=============================================================================================================================
TOTAL RETURN (32.24)% 0.81% 9.74% 1.57% 7.03%
-----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
-----------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000s omitted) $ 84,812 $ 159,566 $ 183,042 $ 186,311 $ 222,827
-----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets 1.47% 1.38% 1.34% 1.36% 1.28%
-----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets 7.92% 7.41% 6.42% 7.05% 7.78%
-----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 64.19% 77.94% 99.04% 79.90% 53.38%
-----------------------------------------------------------------------------------------------------------------------------
----------
See footnotes on page 30.
27
Financial Highlights
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
CLASS B 2008 2007 2006 2005 2004
-----------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA:
-----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $ 3.17 $ 3.39 $ 3.32 $ 3.52 $ 3.55
-----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
-----------------------------------------------------------------------------------------------------------------------------
Net investment income 0.19 0.22 0.19 0.21 0.24
-----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (1.17) (0.21) 0.09 (0.18) (0.02)
-----------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS (0.98) 0.01 0.28 0.03 0.22
-----------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
-----------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.19) (0.22) (0.19) (0.21) (0.24)
-----------------------------------------------------------------------------------------------------------------------------
Dividends in excess of net investment income (0.06) (0.01) (0.02) (0.02) (0.01)
-----------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.25) (0.23) (0.21) (0.23) (0.25)
-----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 1.94 $ 3.17 $ 3.39 $ 3.32 $ 3.52
=============================================================================================================================
TOTAL RETURN (32.78)% 0.07% 8.62% 0.84% 6.53%
-----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
-----------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000s omitted) $ 7,296 $ 22,760 $ 56,664 $ 122,052 $ 228,229
-----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets 2.25% 2.13% 2.09% 2.11% 2.03%
-----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets 7.14% 6.66% 5.67% 6.30% 7.03%
-----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 64.19% 77.94% 99.04% 79.90% 53.38%
-----------------------------------------------------------------------------------------------------------------------------
CLASS C
-----------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA:
-----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $ 3.18 $ 3.40 $ 3.33 $ 3.52 $ 3.56
-----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
-----------------------------------------------------------------------------------------------------------------------------
Net investment income 0.20 0.22 0.19 0.21 0.24
-----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (1.19) (0.21) 0.09 (0.17) (0.03)
-----------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS (0.99) 0.01 0.28 0.04 0.21
-----------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
-----------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.20) (0.22) (0.19) (0.21) (0.24)
-----------------------------------------------------------------------------------------------------------------------------
Dividends in excess of net investment income (0.05) (0.01) (0.02) (0.02) (0.01)
-----------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.25) (0.23) (0.21) (0.23) (0.25)
-----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 1.94 $ 3.18 $ 3.40 $ 3.33 $ 3.52
=============================================================================================================================
TOTAL RETURN (33.02)% 0.07% 8.60% 1.13% 6.22%
-----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
-----------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000s omitted) $ 33,069 $ 17,788 $ 26,742 $ 33,833 $ 48,012
-----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets 2.19% 2.13% 2.09% 2.11% 2.03%
-----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets 7.20% 6.66% 5.67% 6.30% 7.03%
-----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 64.19% 77.94% 99.04% 79.90% 53.38%
-----------------------------------------------------------------------------------------------------------------------------
----------
See footnotes on page 30.
28
Financial Highlights
1/1/08 YEAR ENDED DECEMBER 31,
TO ------------------------------------------------------
CLASS D 5/16/08* 2007 2006 2005 2004
-----------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA:
-----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 3.18 $ 3.40 $ 3.33 $ 3.52 $ 3.56
-----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
-----------------------------------------------------------------------------------------------------------------------------
Net investment income 0.09 0.22 0.19 0.21 0.24
-----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.06) (0.21) 0.09 (0.17) (0.03)
-----------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.03 0.01 0.28 0.04 0.21
-----------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
-----------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.09) (0.22) (0.19) (0.21) (0.24)
-----------------------------------------------------------------------------------------------------------------------------
Dividends in excess of net investment income (0.02) (0.01) (0.02) (0.02) (0.01)
-----------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.11) (0.23) (0.21) (0.23) (0.25)
-----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 3.10 $ 3.18 $ 3.40 $ 3.33 $ 3.52
=============================================================================================================================
TOTAL RETURN 0.65% 0.07% 8.60% 1.13% 6.22%
-----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
-----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) -- $ 44,860 $ 58,752 $ 70,959 $ 100,125
-----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets 2.19%+ 2.13% 2.10% 2.11% 2.03%
-----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets 7.56%+ 6.66% 5.67% 6.30% 7.03%
-----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 64.19%# 77.94% 99.04% 79.90% 53.38%
-----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
CLASS I 2008 2007 2006 2005 2004
-----------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA:
-----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $ 3.17 $ 3.39 $ 3.31 $ 3.51 $ 3.55
-----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS: 0.23 0.26 0.23 0.25 0.29
-----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (1.18) (0.22) 0.10 (0.18) (0.04)
-----------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS (0.95) 0.04 0.33 0.07 0.25
-----------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
-----------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.23) (0.26) (0.23) (0.25) (0.29)
-----------------------------------------------------------------------------------------------------------------------------
Dividends in excess of net investment income (0.05) -- (0.02) (0.02) --o
-----------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.28) (0.26) (0.25) (0.27) (0.29)
-----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 1.94 $ 3.17 $ 3.39 $ 3.31 $ 3.51
=============================================================================================================================
TOTAL RETURN (31.99)% 1.18% 10.23% 2.01% 7.46%
-----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
-----------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000s omitted) $ 5,562 $ 7,924 $ 6,879 $ 7,299 $ 6,500
-----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets 0.89% 0.88% 0.85% 0.91% 0.85%
-----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets 8.50% 7.91% 6.92% 7.50% 8.21%
-----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 64.19% 77.94% 99.04% 79.90% 53.38%
-----------------------------------------------------------------------------------------------------------------------------
----------
See footnotes on page 30.
29
Financial Highlights
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
CLASS R 2008 2007 2006 2005 2004
------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA:
------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $ 3.17 $ 3.39 $ 3.31 $ 3.51 $ 3.55
------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.21 0.24 0.20 0.23 0.25
------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (1.18) (0.22) 0.10 (0.19) (0.02)
------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS (0.97) 0.02 0.30 0.04 0.23
------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (0.21) (0.24) (0.20) (0.23) (0.25)
------------------------------------------------------------------------------------------------------------------------------
Dividends in excess of net investment income (0.05) -- (0.02) (0.01) (0.02)
------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.26) (0.24) (0.22) (0.24) (0.27)
------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 1.94 $ 3.17 $ 3.39 $ 3.31 $ 3.51
==============================================================================================================================
TOTAL RETURN (32.42)% 0.56% 9.48% 1.32% 6.76%
------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000s omitted) $ 3,677 $ 3,856 $ 1,468 $ 689 $ 720
------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets 1.72% 1.62% 1.59% 1.61% 1.53%
------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets 7.67% 7.17% 6.17% 6.80% 7.53%
------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 64.19% 77.94% 99.04% 79.90% 53.38%
------------------------------------------------------------------------------------------------------------------------------
----------
+ Annualized.
* Date of conversion to Class C shares.
# Computed at the Fund level for the year ended December 31, 2008.
o Less than + or - $0.005.
See Notes to Financial Statements.
30
Report of Independent Registered
Public Accounting Firm
THE TRUSTEES AND SHAREHOLDERS OF
XXXXXXXX HIGH-YIELD FUND OF
XXXXXXXX HIGH INCOME FUND SERIES:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Xxxxxxxx High-Yield Fund, one of the funds
constituting Xxxxxxxx High Income Fund Series, (the "Fund") as of December 31,
2008, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the periods presented. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of December 31, 2008, by correspondence with the
custodian and brokers; where replies were not received from brokers, we
performed other auditing procedures. 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
Xxxxxxxx High-Yield Fund of Xxxxxxxx High Income Fund Series as of December 31,
2008, the results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the financial
highlights for the respective stated periods, in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
New York, New York
February 27, 2009
31
Matters Relating to the Trustees'
Consideration of the Approval of the
Investment Management Services Agreement
BACKGROUND
On July 7, 2008, RiverSource Investments, LLC ("RiverSource"), a wholly owned
subsidiary of Ameriprise Financial, Inc. ("Ameriprise"), entered into a stock
purchase agreement with the shareholders of J. & X. Xxxxxxxx & Co. Incorporated
("Xxxxxxxx") under which RiverSource would acquire all of the outstanding
capital stock of Xxxxxxxx (the "Transaction"). The consummation of the
Transaction resulted in the automatic termination of the Fund's management
agreement with Xxxxxxxx (the "Xxxxxxxx Management Agreement"). In anticipation
of the termination of the Xxxxxxxx Management Agreement, at a meeting held on
July 29, 2008, the trustees of Xxxxxxxx High Income Fund Series then serving, of
which the Fund is a separate series, unanimously approved an investment
management agreement between the Fund and RiverSource (the "Proposed Advisory
Agreement"). At the special meeting of shareholders of the Fund held on November
3, 2008, the shareholders approved the Proposed Advisory Agreement. The
Transaction closed on November 7, 2008, and upon the closing, RiverSource became
the investment advisor to the Fund.
BOARD CONSIDERATIONS
Prior to their approval of the Proposed Advisory Agreement, the trustees
requested and evaluated extensive materials from, and were provided materials
and information about the Transaction and matters related to the proposed
approval by, Xxxxxxxx, RiverSource and Ameriprise.
In consultation with experienced counsel, who advised on the legal standards for
consideration by the trustees, the trustees reviewed the Proposed Advisory
Agreement with RiverSource. The independent trustees also discussed the proposed
approval with counsel in private sessions.
At their meetings on June 12, 2008, July 17, 2008 and July 29, 2008, the
trustees discussed the Transaction with Xxxxxxxx, and the Transaction and
RiverSource's plans and intentions regarding the Fund with representatives of
Ameriprise and RiverSource.
The trustees considered all factors they believed relevant, including the
specific matters discussed below. In their deliberations, the trustees did not
identify any particular information that was all-important or controlling, and
trustees may have attributed different weights to the various factors. The
trustees determined that the selection of RiverSource to advise the Fund, and
the overall arrangements between the Fund and RiverSource as provided in the
Proposed Advisory Agreement, including the proposed advisory fee and the related
administration arrangements between the Fund and Ameriprise, were fair and
reasonable in light of the services to be performed, expenses incurred and such
other matters as the trustees considered relevant. The material factors and
conclusions that formed the basis for the trustees' determination included, in
addition, the factors discussed in further detail below:
(i) the reputation, financial strength and resources of RiverSource, and its
parent, Ameriprise;
(ii) the capabilities of RiverSource with respect to compliance and its
regulatory histories;
(iii) an assessment of RiverSource's compliance system by the Fund's Chief
Compliance Officer;
(iv) that RiverSource and Ameriprise assured the trustees that following the
Transaction there will not be any diminution in the nature, quality and
extent of services provided to the Fund or its shareholders;
(v) that within the past year the trustees had performed a full annual review
of the Xxxxxxxx Management Agreement, as required by the Investment
Company Act of 1940 ("1940 Act"), for the Fund and had determined that
they were satisfied with the nature, extent and quality of services
provided thereunder and that the management fee rate for the Fund was
satisfactory;
(vi) the potential benefits to the Fund of the combination of RiverSource and
Xxxxxxxx to the Fund, including: greater resources to attract and retain
high quality investment personnel; greater depth and breadth of investment
management capabilities, including a new team of portfolio managers for
the Fund; a continued high level of service to the Fund; and the potential
for realization of economies of scale over time since the Fund will be
part of a much larger fund complex;
32
Matters Relating to the Trustees'
Consideration of the Approval of the
Investment Management Services Agreement
(vii) the fact that the Fund's total advisory and administrative fees would not
increase by virtue of the Proposed Advisory Agreement, but would remain
the same;
(viii) that RiverSource, and not the Fund, would bear the costs of obtaining all
approvals of the Proposed Advisory Agreement;
(ix) the qualifications of the personnel of RiverSource and Ameriprise that
would provide advisory and administrative services to the Fund;
(x) the terms and conditions of the Proposed Advisory Agreement, including
the trustees' review of differences from the Xxxxxxxx Management
Agreement;
(xi) that RiverSource and Ameriprise have agreed to refrain from imposing or
seeking to impose, for a period of two years after the closing of the
Transaction, any "unfair burden" (within the meaning of Section 15(f) of
1940 Act) on the Fund; and
(xii) that certain members of RiverSource's management have a significant
amount of experience integrating other fund families.
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED
In considering the nature, extent and quality of the services to be provided
under the Proposed Advisory Agreement, the trustees of the Fund considered,
among other things, the expected impact of the Transaction on the operations of
the Fund, the information provided by RiverSource with respect to the nature,
extent and quality of services to be provided by it, RiverSource's compliance
programs and compliance records, and presentations provided on the quality of
RiverSource's investment research capabilities and the other resources it and
Ameriprise have indicated that they would dedicate to performing services for
the Fund.
The trustees noted the professional experience and qualifications of the new
portfolio management team proposed for the Fund and other senior personnel of
RiverSource. The trustees considered a report by, the Fund's Chief Compliance
Officer, assessing RiverSource's compliance system, which was followed by a
private session with the Fund's Chief Compliance Officer. They also discussed
RiverSource's compliance system with the Chief Compliance Officer for the funds
managed by RiverSource. The trustees also considered RiverSource's presentation
on the selection of brokers and dealers for portfolio transactions. As
administrative services (provided under the Xxxxxxxx Management Agreement) would
be provided to the Fund by Ameriprise at no additional cost under a new
administrative services agreement rather than pursuant to the Proposed Advisory
Agreement, the trustees considered Ameriprise's capability to provide such
administrative services as well as RiverSource's and Ameriprise's roles in
coordinating the activities of the Fund's other service providers. The trustees
noted that Ameriprise intended to continue Xxxxxxxx'x practice of
sub-contracting administrative services provided by Xxxxxxxx for the Fund to
State Street Bank and Trust Company for the foreseeable future. The trustees
concluded that, overall, they were satisfied with assurances from RiverSource
and Ameriprise as to the expected nature, extent and quality of the services to
be provided to the Fund under the Proposed Advisory Agreement and the new
administrative services agreement.
COSTS OF SERVICES PROVIDED AND PROFITABILITY
In considering the costs of services to be provided by RiverSource under the
Proposed Advisory Agreement, the trustees considered, among other things, the
projected pre-tax, pre-distribution expense profitability of RiverSource's
proposed relationship with the Fund and discussed the assumptions of RiverSource
and the limitations of the information provided. The trustees noted that
RiverSource had undertaken to provide profitability information in connection
with future contract continuances. The trustees also considered RiverSource's
financial condition based on information provided by it.
The trustees noted that the proposed fee under the Proposed Advisory Agreement
was the same as provided under the Xxxxxxxx Management Agreement. The trustees
recognized that it is difficult to make comparisons of profitability from fund
advisory contracts because comparative information is not generally publicly
available
33
Matters Relating to the Trustees'
Consideration of the Approval of the
Investment Management Services Agreement
and is affected by numerous factors. In reviewing the projected profitability
information, the trustees considered the effect of fall-out benefits on
RiverSource's expenses. The trustees concluded that they were satisfied that
RiverSource's estimated future profitability from its relationship with the Fund
was not excessive.
FALL-OUT BENEFITS
The trustees reviewed information about RiverSource's practices with respect to
allocating portfolio brokerage for brokerage and research services. The trustees
also considered that broker-dealer affiliates of RiverSource, including a
broker-dealer affiliate of Xxxxxxxx (which became an affiliate of RiverSource
following the closing of the Transaction) will receive 12b-1 fees from the Fund
in respect of shares held in certain accounts, and that the Fund's distributor
(which also became a subsidiary of RiverSource following the closing of the
Transaction) retains a portion of the 12b-1 fees from the Fund and receives a
portion of the sales charges on sales or redemptions of certain classes of
shares of the Fund. The trustees recognized that RiverSource's profitability
would be somewhat lower without these benefits. The trustees noted that
RiverSource may derive reputational and other benefits from its association with
the Fund.
INVESTMENT RESULTS
The trustees received and reviewed detailed performance information on the Fund
at each regular Board meeting during the year in addition to the information
received for the meeting regarding approval of the Proposed Advisory Agreement.
The trustees noted that a new portfolio manager was being proposed by
RiverSource for the Fund and that such manager would use an investment process
derived from that used by RiverSource High Yield Bond Fund, modified to comply
with the Fund's investment strategies as disclosed in its prospectus. The
trustees discussed the portfolio management team, its investment strategy and
process and historical performance record with representatives of RiverSource.
The trustees reviewed performance information of the Fund covering a wide range
of periods, including the first six months of the calendar year, the preceding
seven calendar years and annualized one-, three- and five-year rolling periods
ending June 30, 2008. The trustees reviewed information comparing the Fund to
the Xxxxxx Brothers US Corporate High-Yield Index 2% Cap and the Lipper High
Current Yield Fund Average, as well as performance relative to the other funds
in the Lipper High Current Yield Fund Average and to a group of competitor funds
selected by Xxxxxxxx. The trustees noted that the results of RiverSource High
Yield Bond Fund were generally better than that of the Fund for the comparable
periods presented, although they lagged its XX Xxxxxx Global High Yield Index
benchmark in most periods.
The trustees recognized that it is not possible to predict what effect, if any,
consummation of the Transaction would have on the future performance of the
Fund.
MANAGEMENT FEE AND OTHER EXPENSES
The trustees considered the proposed advisory fee rate to be paid by the Fund to
RiverSource, which is the same as the management fee rate paid by the Fund under
the Xxxxxxxx Management Agreement. In addition to the materials provided by
Xxxxxxxx, RiverSource provided information regarding the fees for each of the
RiverSource funds and managed accounts. The trustees noted that the effective
advisory fee rates for the RiverSource funds in the same Lipper category as the
Fund were lower than the proposed advisory fee rate for the Fund. The trustees
recognized that it is difficult to make comparisons of advisory and management
fees because there are variations in the services that are included in the fees
paid by other funds.
In considering the proposed advisory fee rate, the trustees noted that the
management fee rate under the Xxxxxxxx Management Agreement covers
administrative services provided by Xxxxxxxx, whereas the Proposed Advisory
Agreement does not include such services, but that Ameriprise will provide such
services to the Fund pursuant to a separate administrative services agreement
initially without a fee. The trustees further considered that the administrative
fees, since they are not included in an advisory agreement, could be increased
without stockholder approval, although RiverSource noted that, at that time, it
did not have an intention to seek an
34
Matters Relating to the Trustees'
Consideration of the Approval of the
Investment Management Services Agreement
increase, and that any such administrative fee increase would require board
approval. The trustees also noted RiverSource's and Ameriprise's covenants in
the Transaction's stock purchase agreement regarding compliance with Section
15(f) of the 1940 Act.
The trustees compared the Fund's proposed advisory fee rate to the rate paid by
other funds in the Fund's Lipper category. The Fund's peer group consisted of
the funds in the Lipper High Current Yield Funds Average category having net
assets in a range that more closely corresponds to the net assets of the Fund
(the "peer group"). The information showed that the Fund's current effective
management fee rate was somewhat higher than the average and the median for the
funds in the peer group. The trustees noted that the Fund's fee rate schedule
includes breakpoints although, at the Fund's current asset levels, it was
unlikely to benefit from them in the next year.
The trustees also reviewed the Fund's total expense ratio as compared to the
fees and expenses of funds within its peer group. In considering the expense
ratios of the Fund, the trustees noted that the Fund has elected to have
shareholder services provided at cost by Xxxxxxxx Data Corp. ("SDC"). SDC
provides services exclusively to the Xxxxxxxx Group of Funds, and the trustees
believed that the arrangement with SDC has provided the Fund and its
shareholders with a consistently high level of service. The trustees noted that
RiverSource had previously indicated that no changes to the arrangements with
SDC were being proposed at the time by RiverSource.
The trustees noted that the Fund's expense ratio was nearly the highest in its
peer group and considerably higher than the median and the average for the peer
group. Xxxxxxxx explained that the Fund's relatively high expenses were
attributable in part to the Fund's small size relative to the funds in its peer
group and high shareholder purchase and redemption activity levels, all of which
adversely affected its expense ratio. The trustees concluded that the Fund's
expense ratio was acceptable in the Fund's particular circumstances.
ECONOMIES OF SCALE
The trustees noted that the management fee schedule for the Fund contains
breakpoints that reduce the fee rate on assets above specified levels. The
trustees recognized that there is no direct relationship between the economies
of scale realized by funds and those realized by their investment advisers as
assets increase. The trustees do not believe that there is a uniform methodology
for establishing breakpoints that give effect to fund-specific economies of
scale with respect to services provided by fund advisers. The trustees also
observed that in the investment company industry as a whole, as well as among
funds similar to the Fund, there is no uniformity or pattern in the fees and
asset levels at which breakpoints (if any) apply, and that the advisory
agreements for many competitor funds do not have breakpoints at all. The
trustees noted that RiverSource had indicated that no changes to the Fund's
breakpoint arrangements were proposed to be made at the time. Having taken these
factors into account, the trustees concluded that the Fund's breakpoint
arrangements were acceptable under the Fund's circumstances. The trustees also
recognized that the Fund may benefit from certain economies of scale over time
from becoming a part of the larger RiverSource fund complex, based on potential
future synergies of operations.
35
Proxy Results
Shareholders of Xxxxxxxx High-Yield Fund voted on two proposals at a Special
Meeting of Shareholders held on November 3, 2008. Shareholders voted in favor of
each of the proposals. The description of each proposal and number of shares
voted are as follows:
PROPOSAL 1
To consider and vote upon the proposed Investment Management Services Agreement
with RiverSource Investments, LLC:
FOR AGAINST ABSTAIN
--------------------------------------------------------------------------------
35,151,212.467 1,628,616.196 1,480,787.304
--------------------------------------------------------------------------------
PROPOSAL 2 (combined votes of both Funds in the Series)
To elect ten trustees to the Board:
FOR WITHHELD
--------------------------------------------------------------------------------
Xxxxxxxx Xxxxx 51,198,749.236 2,437,544.928
--------------------------------------------------------------------------------
Xxxx X. Xxxxxxx 51,131,650.856 2,504,643.308
--------------------------------------------------------------------------------
Xxxxxx X. Xxxxxxx 51,203,587.404 2,432,706.760
--------------------------------------------------------------------------------
Xxxxxxxx X. Xxxxx 51,212,005.780 2,424,288.384
--------------------------------------------------------------------------------
Xxxx X. Xxxxx 51,129,788.135 2,506,506.029
--------------------------------------------------------------------------------
Xxxxxxx Xxxxxxx 51,183,153.004 2,453,141.160
--------------------------------------------------------------------------------
Xxxxxxx X. Xxxxx, Xx. 51,247,061.722 2,389,232.442
--------------------------------------------------------------------------------
Xxxxxxxxx Xxxxx Xxxxxx 51,200,482.648 2,435,811.516
--------------------------------------------------------------------------------
Xxxxxx Xxxxxxx-Xxxxx 51,166,054.471 2,470,239.693
--------------------------------------------------------------------------------
Xxxxxxx X. Xxxxxxxx 51,230,947.413 2,405,346.751
--------------------------------------------------------------------------------
36
Trustees and Officers
Shareholders elect a Board of Trustees that oversees the Fund's operations. In
connection with the acquisition of the Fund's prior investment manager, X. & X.
Xxxxxxxx & Co. Incorporated, by RiverSource Investments, LLC, shareholders of
the Fund voted at a Special Meeting of Shareholders held on November 3, 2008 to
elect 10 members to the Fund's Board. Messrs. Xxxxx and Xxxxxx served on the
Fund's Board prior to the acquisition and will continue to do so.
Each member of the Board oversees 163 portfolios in the fund complex managed by
RiverSource Investments, which includes 59 Xxxxxxxx Funds and 104 RiverSource
Funds. The address of each Director is 000 X. Xxxxxxxxx Xxx., Xxxxxxxxxxx, XX
00000.
Independent Trustees
NAME, (AGE), POSITION(S) PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS, DIRECTORSHIPS
HELD WITH FUND AND OTHER INFORMATION
-----------------------------------------------------------------------------------------------------------------------------------
XXXXXXXX XXXXX (54)1,2,6,7 Attorney. Formerly, Chief Justice, Minnesota Supreme Court, 1998-2006.
o Trustee: From
November 7, 2008
-----------------------------------------------------------------------------------------------------------------------------------
XXXX X. XXXXXXX (74)1,2,3,5,6 Formerly, Chairman, RiverSource Funds, 1999-2006; Governor of Minnesota.
o Trustee: From
November 7, 2008
-----------------------------------------------------------------------------------------------------------------------------------
XXXXXX X. XXXXXXX (54)4,6,7 President, Springboard -- Partners in Cross Cultural Leadership (consulting company).
o Trustee: From
November 7, 2008
-----------------------------------------------------------------------------------------------------------------------------------
XXXXXXXX X. XXXXX (58)1,3,6 Trustee Professor of Economics and Management, Bentley College. Formerly, Xxxx,
o Trustee: From XxXxxxxx Graduate School of Business, Bentley College.
November 7, 2008
-----------------------------------------------------------------------------------------------------------------------------------
XXXX X. XXXXX (73)1,2,6,7 Attorney and Consultant.
o Trustee: From
November 7, 2008
-----------------------------------------------------------------------------------------------------------------------------------
XXXXXXX XXXXXXX, CFA (73)4,6,7 Director, American Progressive Insurance. Formerly, Managing Director, Xxxxxxx Xxxxx
o Trustee: From Management.
November 7, 2008
-----------------------------------------------------------------------------------------------------------------------------------
XXXXXXX X. XXXXX, XX. (69)1,2,3,4,6 President Emeritus and Professor of Economics, Carleton College; Director, Valmont
o Trustee and Chairman Industries, Inc. (manufactures irrigation systems).
of the Board: From
November 7, 2008
-----------------------------------------------------------------------------------------------------------------------------------
XXXX X. XXXXX (64)4,6,7 Retired President and Chief Executive Officer, and former Director, Great Western
o Trustee: December 2006 Financial Corporation (bank holding company) and its principal subsidiary, Great
to Date Western Bank (a federal savings bank).
-----------------------------------------------------------------------------------------------------------------------------------
----------
See footnotes on page 38.
37
Trustees and Officers
Independent Trustees (continued)
NAME, (AGE), POSITION(S) PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS, DIRECTORSHIPS
HELD WITH FUND AND OTHER INFORMATION
-----------------------------------------------------------------------------------------------------------------------------------
XXXXXXXXX XXXXX XXXXXX (56)2,3,4,5,6 Director, Enterprise Asset Management, Inc. (private real estate and asset management
o Trustee: From company).
November 7, 2008
-----------------------------------------------------------------------------------------------------------------------------------
XXXXX X. XXXXXX (66)3,4,6 Counsel, Xxxxx & Xxxxxx, P.C. (law firm); Director, Vibration Control Technologies, LLC
o Trustee: 2000 to Date (auto vibration technology); Lead Outside Director, Digital Ally Inc. (digital imaging) and
Infinity, Inc. (oil and gas exploration and production); Director and Chairman, Highland
Park Michigan Economic Development Corp.; and Chairman, Detroit Public Schools Foundation;
Director, OGE Energy Corp. (energy and energy services provider). Formerly, Chairman and
Chief Executive Officer, Q Standards Worldwide, Inc. (library of technical standards);
Director, Xxxx-XxXxx Corporation (diversified energy and chemical company); Trustee, New
York University Law Center Foundation; and Vice Chairman, Detroit Medical Center and
Detroit Economic Growth Corp.
-----------------------------------------------------------------------------------------------------------------------------------
XXXXXX XXXXXXX-XXXXX (64)3,4,5,6 Chief Executive Officer and Director, XxxxXxxxx, Inc. since 2003 (biotechnology); Director,
o Trustee: From Idera Pharmaceutical, Inc. (biotechnology); Healthways, Inc. (health management programs).
November 7, 2008 Formerly, President, Forester Biotech.
-----------------------------------------------------------------------------------------------------------------------------------
Interested Trustee*
-----------------------------------------------------------------------------------------------------------------------------------
XXXXXXX X. XXXXXXXX (48)*6 President - US Asset Management and Chief Investment Officer, Ameriprise Financial, Inc.
o Trustee and Vice and President, Chairman of the Board, and Chief Investment Officer, RiverSource
President: Investments, LLC; Director, President and Chief Executive Officer, Ameriprise Certificate
From November 7, 2008 Company; and Chairman of the Board, Chief Executive Officer, and President, RiverSource
Distributors, Inc. Formerly, Senior Vice President -- Chief Investment Officer, Ameriprise
Financial, Inc.; and Chairman of the Board and Chief Investment Officer, RiverSource
Investments, LLC, 2001-2005.
-----------------------------------------------------------------------------------------------------------------------------------
----------
* Xx. Xxxxxxxx is considered an "interested person" of the Fund, as defined
in the Investment Company Act of 1940, as amended, by virtue of his
position with Ameriprise Financial, Inc. and its affiliates.
Member: 1 Board Governance Committee
2 Compliance Committee
3 Contracts Committee
4 Distribution Committee
5 Executive Committee
6 Investment Review Committee
7 Joint Audit Committee
38
Trustees and Officers
Fund Officers
The Board appoints 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 Xx. Xxxxxxxx, who is a Trustee and Vice
President of the Fund, the Fund's other officers are:
NAME, (AGE), POSITION(S)
HELD WITH FUND, ADDRESS PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------------------------------------
XXXXXXX X. XXXXXXXX (43) Director and Senior Vice President -- Asset Management, Products and Marketing,
o President: From RiverSource Investments, LLC; Director and Vice President -- Asset Management, Products
November 7, 2008 and Marketing, RiverSource Distributors, Inc. Formerly, Managing Director and Global Head
o 172 Ameriprise Financial of Product, Xxxxxx Xxxxxxx Investment Management, 2004-2006; President, Touchstone
Center Investments, 2002-2004.
Minneapolis, MN 55474
-----------------------------------------------------------------------------------------------------------------------------------
XXXXXXXX X. XXXXXX (44) Executive Vice President -- Equity and Fixed Income, Ameriprise Financial, Inc. and
o Vice President: From RiverSource Investments, LLC; Vice President -- Investments, Ameriprise Certificate
November 7, 2008 Company. Formerly, Senior Vice President -- Fixed Income, Ameriprise Financial, Inc.,
o 172 Ameriprise Financial 2002-2006 and RiverSource Investments, LLC, 2004-2006.
Center
Minneapolis, MN 55474
-----------------------------------------------------------------------------------------------------------------------------------
XXX X. XXXXXXX (43) Vice President -- Asset Management and Trust Company Services, RiverSource
o Vice President: From Investments, LLC. Formerly, Vice President -- Operations and Compliance, RiverSource
November 7, 2008 Investments, LLC, 2004-2006; Director of Product Development -- Mutual Funds, Ameriprise
o 5228 Ameriprise Financial, Inc., 2001-2004.
Financial Center
Minneapolis, MN 55474
-----------------------------------------------------------------------------------------------------------------------------------
XXXXX X. XXXXXXX (49) Vice President and Chief Counsel -- Asset Management, Ameriprise Financial, Inc.; Chief
o Vice President, General Counsel, RiverSource Distributors, Inc. and Chief Legal Officer and Assistant Secretary,
Counsel and Secretary: RiverSource Investments, LLC; Vice President, General Counsel, and Secretary, Ameriprise
From November 7, 2008 Certificate Company. Formerly, Vice President -- Asset Management Compliance,
o 5228 Ameriprise Ameriprise Financial, Inc., 2004-2005; Senior Vice President and Chief Compliance Officer,
Financial Center USBancorp Asset Management, 2002-2004.
Minneapolis, MN 55474
-----------------------------------------------------------------------------------------------------------------------------------
XXXXXXXX X. XXXXX (52) Treasurer of each of the investment companies of the Xxxxxxxx Group of Funds since 2000;
o Treasurer: 2000 to Date and Treasurer, Xxxxxxxx Data Corp. since 2000. Formerly, Senior Vice President, J. & W.
o 000 Xxxx Xxxxxx Xxxxxxxx & Co. Incorporated and Vice President of each of the investment companies of the
New York, NY 10017 Xxxxxxxx Group of Funds, 1992-2008.
-----------------------------------------------------------------------------------------------------------------------------------
39
Trustees and Officers
Fund Officers (continued)
NAME, (AGE), POSITION(S)
HELD WITH FUND, ADDRESS PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
-----------------------------------------------------------------------------------------------------------------------------------
XXXXXXX X.X. XXXXXXXX (56) Chief Compliance Officer, RiverSource Investments, LLC (J. & X. Xxxxxxxx & Co.
o Chief Compliance Incorporated prior to November 7, 2008), of each of the investment companies of the
Officer: 2004 to Date Xxxxxxxx Group of Funds since 2004; Money Laundering Prevention Officer and Identity
o Money Laundering Theft Prevention Officer, RiverSource Investments, LLC for each of the investment
Prevention Officer companies of the Xxxxxxxx Group of Funds since November 7, 2008. Formerly, Managing
and Identity Theft Director, J. & X. Xxxxxxxx & Co. Incorporated and Vice President of each of the investment
Prevention Officer: From companies of the Xxxxxxxx Group of Funds, 2004-2008.
November 7, 2008
o 000 Xxxx Xxxxxx
Xxx Xxxx, XX 00000
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The Fund's Statement of Additional Information (SAI) includes additional
information about Fund trustees and is available, without charge, upon request.
You may call toll-free (000) 000-0000 in the US or call collect (000) 000-0000
outside the US to request a copy of the SAI, to request other information about
the Fund, or to make shareholder inquiries.
40
Required Federal Income Tax Information
(UNAUDITED)
Dividends paid for the year ended December 31, 2008, other than qualified
dividend income, are subject to federal income tax as "ordinary income." In
order to claim the dividends received deduction for these distributions,
corporate shareholders must have held their shares for 46 days or more during
the 90-day period beginning 45 days before each ex-dividend date. Under the
Internal Revenue Code, the dividends paid to corporate shareholders that qualify
for the dividends received deduction were as follows:
DIVIDENDS RECEIVED
DEDUCTION PERCENT
-------------------------------------------------------------------------------
Class A 1.26%
-------------------------------------------------------------------------------
Class B 1.44
-------------------------------------------------------------------------------
Class C 1.15
-------------------------------------------------------------------------------
Class D 1.90
-------------------------------------------------------------------------------
Class I 1.18
-------------------------------------------------------------------------------
Class R 1.23
-------------------------------------------------------------------------------
For the year ended December 31, 2008, the Fund designates the following as
qualified dividends to individual shareholders:
QUALIFIED DIVIDENDS
PERCENT
-------------------------------------------------------------------------------
Class A 0.97%
-------------------------------------------------------------------------------
Class B 1.11
-------------------------------------------------------------------------------
Class C 0.89
-------------------------------------------------------------------------------
Class D 1.46
-------------------------------------------------------------------------------
Class I 0.91
-------------------------------------------------------------------------------
Class R 0.94
-------------------------------------------------------------------------------
In order for an individual to claim dividends received as qualified dividends,
individual shareholders must have held their shares for more than 60 days during
the 121-day period beginning 60 days before each ex-dividend date.
41
Additional Fund Information
FUND SYMBOLS
CLASS A: SHYBX
CLASS B: SBBHX
CLASS C: SHCCX
CLASS R: SHYRX
MANAGER
FROM NOVEMBER 7, 2008
RiverSource Investments, LLC
000 Xxxxxxxxxx Xxxxxxxxx Xxxxxx
Xxxxxxxxxxx, XX 00000
UNTIL NOVEMBER 6, 2008
J. & X. Xxxxxxxx & Co.
Incorporated
000 Xxxx Xxxxxx
Xxx Xxxx, XX 00000
GENERAL DISTRIBUTOR
RiverSource Fund Distributors, Inc.
(formerly Xxxxxxxx Advisors, Inc.)
000 Xxxx Xxxxxx
Xxx Xxxx, XX 00000
SHAREHOLDER SERVICE AGENT
Xxxxxxxx Data Corp.
000 Xxxx Xxxxxx
Xxx Xxxx, XX 00000
MAIL INQUIRIES TO:
P.O. Box 9759
Providence, RI o2940-9759
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
IMPORTANT TELEPHONE NUMBERS
(000) 000-0000 Shareholder Services
(000) 000-0000 Retirement Plan
Services
(000) 000-0000 Outside the
United States
(000) 000-0000 24-Hour Automated
Telephone Access
Service
-------------------------------------------------------------------------------
QUARTERLY SCHEDULE OF INVESTMENTS
A complete schedule of portfolio holdings owned by the Fund will be filed with
the SEC for the first and third quarter of each fiscal year on Form N-Q, and
will be available to shareholders (i) without charge, upon request, by calling
toll-free (000) 000-0000 in the US or collect (000) 000-0000 outside the US or
(ii) on the SEC's website at XXX.XXX.XXX.(1) In addition, the Form N-Q may be
reviewed and copied at the SEC's Public Reference Room in Washington, D.C.
Information on the operation of the Public Reference Room may be obtained by
calling (800) SEC-0330. Certain of the information contained in the Fund's Form
N-Q is also made available to shareholders on Xxxxxxxx'x website at
XXX.XXXXXXXX.XXX.(1)
PROXY VOTING
A description of the policies and procedures used by the Fund to determine how
to vote proxies relating to portfolio securities as well as information
regarding how the Fund voted proxies relating to portfolio securities during the
12-month period ended June 30 of each year will be available (i) without charge,
upon request, by calling toll-free (000) 000-0000 in the US or collect (212)
682-7600 outside the US and (ii) on the SEC's website at XXX.XXX.XXX.(1)
Information for each new 12-month period ending June 30 will be available no
later than August 31 of that year.
----------
(1) These website references are inactive textual references and information
contained in or otherwise accessible through these websites does not form
a part of this report or the Fund's prospectuses or statement of
additional information.
42
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This report is intended only for the information of shareholders or those who
have received the offering prospectus covering shares of Beneficial Interest of
Xxxxxxxx High-Yield Fund, which contains information about the investment
objectives, risks, charges, and expenses of the Fund, each of which should be
considered carefully before investing or sending money.
--------------------------------------------------------------------------------
TXHY2 12/08
