[Graphic]
CIGNA INVESTMENT
SECURITIES
----------------------------
Semiannual Report
June 30, 2003
[Logo]
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1
Dear Shareholders:
Our commentary for CIGNA Investment Securities (the "Fund") covering the six
months ended June 30, 2003 follows.
Market Summary
On a six-month year-to-date basis, the total return of the Lehman Brothers
Aggregate Bond Index was 3.93%, compared with a total return of 7.32% on
investment-grade corporate bonds (Lehman Brothers U.S. Credit Index). Emerging
market debt (J.P. Morgan Emerging Market Bonds Plus Index) and high-yield
corporate bonds (Lehman Brothers High Yield Bond Index) produced the best total
returns by far on a year-to-date basis, with total returns from each market in
excess of 18%.
At the beginning of May, the Federal Reserve (Fed) Chairman Greenspan announced
that any necessary action would be taken to combat deflationary pressures.
Bondholders took this as a sign that the Fed would keep short-term rates low.
The 10-year Treasury yield plunged to an inter-generational low of 3.13% on
June 13, the lowest level since June 1958, before recovering to end the quarter
at 3.53%.
Performance
Returns for the periods ended June 30, 2003 were:
Quarter Six Months
--------- -----------
Fund 3.88% 5.71%
Lipper Corporate Debt Funds -
'A' Rated Average 3.12 4.73
Lehman Brothers Aggregate
Bond Index 2.50 3.93
The Fund's returns based on the market value of its shares traded on the New
York Stock Exchange were 3.26% and 6.90% for the quarter and six months ended
June 30, 2003, respectively.
In the first quarter, the Fund benefited from its allocation to high yield and
to the overweight allocation to the investment-grade credit sector. The Fund
also was helped by the positive issue selection in investment-grade credits and
mortgage-backed securities (MBS) for the period.
In the second quarter, the overweight allocation and strong selection in
investment-grade corporate bonds were the largest positive contributors to Fund
performance. At June 30, 2003, the Fund was 14% overweight to corporate bonds
on a duration-adjusted basis. Continued positive issue selection in Yankee and
domestic telecommunications companies such as France Telecom, Deutsche Telekom,
and Sprint Capital added value. Other sectors that performed well for us
included Yankee Banks such as Royal Bank of Scotland and cable names, with
Comcast as an example.
In MBS, one of the more consistent and effective strategies that has been
undertaken is to purchase securities with better call protection when rates are
low. Our underweight in Agency bonds and selection within the sector,
especially in Financing Corporation (FICO) bonds (issued to finance the savings
and loan banking system bailout), continued to have a positive impact.
Outlook
We continue to favor investment-grade corporate bonds. Despite the extremely
strong returns in this sector over the past nine months, we still see further
upside, albeit not of the same magnitude. We remain vigilant in our monitoring
of individual credits and potential volatility associated with continued
accounting and corporate governance issues, potential profit disappointments,
and exogenous/geopolitical events. In high yield, we may once again increase
our allocation upon clearer signs of economic growth. In the MBS sector, we
have moved to an underweight allocation due to our cautious outlook.
Sincerely,
/s/ Richard H. Forde
Richard H. Forde
Chairman of the Board and President
CIGNA Investment Securities
Note: This commentary is not part of the Semiannual Report to Shareholders.
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CIGNA Investment Securities Investments in Securities 2
June 30, 2003 (Unaudited)
Principal Value
(000) (000)
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LONG-TERM BONDS - 89.9%
Basic Materials - 0.4%
Abitibi-Consolidated, Inc., 6.00%, 2013 $135 $ 128
Stora Enso Oyj, 7.38%, 2011 115 138
Weyerhaeuser Co., 5.25%, 2009 90 96
------
362
------
Communications & Media - 8.0%
AOL Time Warner, Inc., 6.75%, 2011 135 154
AT&T Corp., 8.50%, 2031 70 79
AT&T Wireless Services, Inc., 8.13%, 2012 100 120
British Telecommunications PLC,
8.88% (coupon change based on rating), 2030 165 225
Comcast Corp., 5.85%, 2010 90 99
Deutsche Telekom International Finance BV,
8.50%, (coupon change based on rating), 2010 200 246
8.75%, (coupon change based on rating), 2030 480 612
France Telecom SA,
8.70%, (coupon change based on rating), 2006 60 68
9.25%, (coupon change based on rating), 2011 820 1,032
10.00%, (coupon change based on rating), 2031 75 104
Kyivstar GSM, 12.75%, 2005 144A 180 198
Koninklijke KPN, NV, 8.00%, 2010 655 811
Liberty Media Corp., 5.70%, 2013 45 46
News America Holdings, 7.75%, 2045 215 256
News America, Inc., 6.75%, 2038 30 33
PTC International Finance II SA, 11.25%, 2009 200 226
Qwest Capital Funding Inc.,
7.00%, 2009 30 25
6.50%, 2018 25 18
Speedway Motorsports, Inc., 6.75%, 2013 144A 80 83
Sprint Capital Corp.,
6.13%, 2008 70 76
8.38%, 2012 15 18
8.75%, 2032 220 263
Tele Communications, Inc.,
9.80%, 2012 260 344
7.88%, 2013 385 466
TELUS Corp., 8.00%, 2011 280 323
Principal Value
(000) (000)
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Communications & Media (continued)
Time Warner, Inc.,
9.13%, 2013 $ 615 $ 788
7.57%, 2024 40 45
TPSA Finance BV, 7.75%, 2008 144A 220 252
Univision Communications, Inc., 7.85%, 2011 240 286
Verizon Florida, Inc., 6.13%, 2013 110 125
------
7,421
------
Consumer & Retail - 2.0%
Ahold Finance USA, Inc., 8.25%, 2010 220 225
Campbell Soup Co., 5.88%, 2008 110 125
Foster's Finance Corp., 6.88%, 2011 144A 120 142
Heinz (H.J.) Co., 6.38%, 2028 10 11
Heinz (H.J.) Finance Co., 6.75%, 2032 165 197
Kellogg Co., 7.45%, 2031 210 266
Kraft Foods, Inc.,
5.25%, 2007 80 87
5.63%, 2011 200 218
Kroger Co., 7.50%, 2031 35 42
Safeway, Inc., 7.25%, 2031 30 34
Sears Roebuck Acceptance Corp., 7.00%, 2032 45 50
VFB LLC, 10.25%, 2009 (a) 2,010 482
------
1,879
------
Diversified - 1.5%
Bombardier, Inc., 6.75%, 2012 144A 155 159
General Electric Co., 5.00%, 2013 420 444
Hutchison Whampoa International Ltd.,
6.50%, 2013 144A 260 273
ITT Industries, Inc., 7.40%, 2025 455 532
------
1,408
------
Financial - 13.0%
American Express Credit, Ser.1999-1A, 5.60%, 2006 900 931
Amvescap PLC, 5.90%, 2007 220 240
Bank of America Corp., 7.80%, 2010 30 37
BankBoston Corp., 8.25%, 2026 130 153
Bayerische Hypo-und Vereinsbank AG,
8.74%, 2031 144A 300 315
The Notes to Financial Statements are an integral part of these statements.
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CIGNA Investment Securities Investments in Securities 3
June 30, 2003 (Unaudited) (Continued)
Principal Value
(000) (000)
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Financial (continued)
Boeing Capital Corp., 6.10%, 2011 $185 $204
CIT Group, Inc.,
6.50%, 2006 175 191
6.88%, 2009 55 62
Citigroup, Inc.,
3.50%, 2008 780 802
7.25%, 2010 195 236
Countrywide Home Loans, Inc., 5.50%, 2007 60 66
Credit Suisse First Boston Mortgage Securities Corp.,
4.63%, 2008 100 107
Interest Only 7.50%, 2032 700 67
Interest Only 8.00%, 2032 850 85
Dresdner Funding Trust I, 8.15%, 2031 144A 335 369
Fifth Third Bank Michigan, 7.75%, 2010 315 350
First Union Capital 1, 7.94%, 2027 85 99
Ford Motor Credit Co.,
6.88%, 2006 460 488
7.38%, 2009 345 362
7.38%, 2011 190 196
General Motors Acceptance Corp.,
5.13%, 2008 110 109
6.88%, 2011 635 637
7.00%, 2012 125 126
Golden West Financial Corp., 4.13%, 2007 160 169
Goldman Sachs Group, Inc., 6.88%, 2011 330 389
Household Finance Corp.,
4.63%, 2008 110 117
6.38%, 2011 175 199
6.38%, 2012 160 182
HVB Funding Trust III, 9.00%, 2031 144A 100 105
International Lease Finance Corp., 6.38%, 2009 165 185
Kazkommerts International BV, 8.50%, 2013 144A 140 139
Korea Development Bank,
4.25%, 2007 70 72
5.50%, 2012 15 16
Lehman Brothers Holdings, Inc., 6.63%, 2012 195 229
Manufacturers & Traders Trust, 8.00%, 2010 105 130
Middletown Trust, 11.75%, 2010 848 850
Principal Value
(000) (000)
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Financial (continued)
Morgan (J.P.) Co., 6.00%, 2009 $ 170 $ 191
Morgan Stanley Group, Inc., 6.75%, 2011 230 269
National Rural Utilities Cooperative Finance Corp.,
5.75%, 2009 90 100
NB Capital Trust IV, 8.25%, 2027 125 152
Prudential Funding LLC, 6.60%, 2008 105 121
Residential Asset Mortgage Products, Inc.,
Interest Only, 5.75%, 2005 1,480 89
Santander Financial Issuances,
6.80%, 2005 75 82
6.38%, 2011 160 183
Sovereign Bancorp., Inc., 10.50%, 2006 975 1,171
Standard Chartered Bank, 8.00%, 2031 144A 120 152
Union Planters Corp., 6.75%, 2005 220 243
Zions Bancorp.,
Step Coupon (6.50%, 10/15/2006), 2011 225 250
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12,017
-------
Foreign Government - 2.1%
Bulgaria (Republic of),
Floating Rate, 2.19%, 2024 220 213
Quebec (Province of Canada),
5.50%, 2006 475 520
7.50%, 2023 430 562
Russian Federation,
Step Coupon (5.00% to 3/31/07), 2030 144A 345 335
Ukraine Government, 7.65%, 2013 144A 110 109
United Mexican States, 8.30%, 2031 190 219
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1,958
-------
Industrial - 1.9%
BAE Systems Holdings, 6.40%, 2011 144A 520 582
Lockheed Martin Corp.,
8.20%, 2009 605 765
8.50%, 2029 180 245
Systems 2001 Asset Trust LLC, 7.16%, 2011 144A 190 213
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1,805
-------
The Notes to Financial Statements are an integral part of these statements.
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CIGNA Investment Securities Investments in Securities 4
June 30, 2003 (Unaudited) (Continued)
Principal Value
(000) (000)
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Insurance - 1.4%
American Re Corp., 7.45%, 2026 $120 $ 133
AXA SA, 8.60%, 2030 95 122
Monumental Global Funding II, 3.85%, 2008 144A 210 217
Progressive Corp., 6.25%, 2032 40 45
Travelers Property Casualty Corp., 5.00%, 2013 110 115
XL Capital Europe PLC, 6.50%, 2012 190 217
Zurich Capital Trust I, 8.38%, 2037 144A 380 417
------
1,266
------
Medical - 0.3%
Tenet Healthcare Corp., 7.38%, 2013 255 246
------
Oil & Gas - 2.0%
Amerada Hess Corp., 7.30%, 2031 140 162
Conoco Funding, Co., 6.35%, 2011 515 602
Devon Financing Corp. ULC, 6.88%, 2011 135 158
Duke Energy Field Services LLC,
5.75%, 2006 40 43
6.88%, 2011 30 34
Gazprom OAO, 9.63%, 2013 144A 120 132
Occidental Petroleum Corp., 7.65%, 2006 480 542
Petroleos Mexicanos, 9.50%, 2027 155 191
------
1,864
------
Pharmaceuticals - 0.5%
Lilly (Eli) & Co., 6.77%, 2036 355 435
Wyeth, 5.25%, 2013 45 48
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483
------
Transportation - 3.0%
American Airlines, 7.38%, 2016 349 164
Burlington Northern Santa Fe, 6.75%, 2029 175 198
Continental Airlines, Inc., 6.90%, 2017 376 283
Delta Air Lines, Inc.,
9.45%, 2006 546 472
7.90%, 2009 160 127
Federal Express Corp., 7.60%, 2097 115 131
Ford Motor Co., 6.38%, 2029 110 89
General Motors Corp., 7.13%, 2013 130 129
Norfolk Southern Corp., 7.70%, 2017 295 377
Principal Value
(000) (000)
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Transportation (continued)
Union Pacific Corp.,
7.60%, 2005 $ 285 $ 314
5.75%, 2007 210 233
6.13%, 2012 200 226
------
2,743
------
U.S. Government & Agencies - 50.6%
Fannie Mae,
5.50%, 2017 1,540 1,600
8.00%, 2030 387 417
7.00%, 2031 1,161 1,230
8.00%, 2031 303 325
6.50%, 2032 4,226 4,408
7.00%, 2032 2,132 2,253
6.50%, 2033 1,250 1,303
Interest Only 7.20%, 2042 6,592 135
Financing Corp.,
Principal Strips from
9.60%, 2018 220 101
9.90%, 2018 815 376
10.00%, 2018 200 96
8.60%, 2019 450 196
9.65%, 2019 375 170
9.70%, 2019 675 304
Freddie Mac,
6.00%, 2017 1,314 1,367
4.50%, 2018 1,561 1,596
5.00%, 2018 2,353 2,433
6.00%, 2032 4,630 4,800
7.50%, 2032 1,437 1,527
5.50%, 2033 3,692 3,814
Interest Only 9.89%, 2043 5,863 163
Ginnie Mae,
6.50%, 2031 669 703
6.50%, 2032 481 506
5.50%, 2033 432 450
6.00%, 2033 955 1,001
The Notes to Financial Statements are an integral part of these statements.
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CIGNA Investment Securities Investments in Securities 5
June 30, 2003 (Unaudited) (Continued)
Principal Value
(000) (000)
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U.S. Government & Agencies (continued)
U.S. Treasury Bonds,
8.75%, 2017 $ 1,095 $ 1,639
6.00%, 2026 2,370 2,833
U.S. Treasury Notes,
4.63%, 2006 5,040 5,463
4.38%, 2007 1,540 1,673
6.00%, 2009 3,290 3,881
5.00%, 2011 100 112
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46,875
-------
Utilities - 3.2%
American Electric Power, Inc., 5.38%, 2010 40 43
Carolina Power & Light Co., 6.50%, 2012 105 121
CenterPoint Energy,
5.70%, 2013 144A 130 141
7.88%, 2013 144A 75 86
Columbus Southern Power Co., 5.50%, 2013 144A 55 59
Detroit Edison Co.,
6.13%, 2010 255 291
6.35%, 2032 5 6
Dominion Resources Inc., 6.25%, 2012 60 68
DPL, Inc., 8.25%, 2007 160 181
Duke Capital Corp., 6.25%, 2013 35 37
First Energy Corp.,
5.50%, 2006 415 445
6.45%, 2011 115 126
7.38%, 2031 90 101
Niagara Mohawk Power Co.,
7.63%, 2005 378 422
Nisource Finance Corp., 7.88%, 2010 225 266
Ohio Power Co., 5.50%, 2013 144A 25 27
Oncor Electric Delivery Co., 7.25%, 2033 144A 150 177
Pinnacle Partners, 8.83%, 2004 144A 145 150
Progress Energy, Inc.,
7.10%, 2011 90 105
7.00%, 2031 90 99
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2,951
-------
Total Long-Term Bonds
(Cost - $79,058) 83,278
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Number of Value
Shares (000)
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PREFERRED STOCK - 2.0%
Communications & Media - 0.3%
Centaur Funding Corp., 9.08% 144A 250 $ 301
-------
Financial - 1.7%
BCI US Funding Trust,
Step Coupon (8.01% to 7/15/08) 144A 340 397
IBJ Preferred Capital Co. LLC,
Step Coupon (8.79% to 6/30/08) 144A 95 95
Natexis AMBS Co. LLC.,
Step Coupon (8.44% to 6/30/08) 144A 200 242
RBS Capital Trust I,
Step Coupon (4.71% to 7/01/13) 880 881
-------
1,615
-------
Total Preferred Stock
(Cost - $1,816) 1,916
-------
SHORT-TERM OBLIGATIONS - 7.9%
Money Market Fund - 7.6%
CIGNA Funds Group - Money Market Fund 7,011,773 $ 7,012
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Principal
(000)
---------
U.S. Government - 0.2%
U.S. Treasury Bill,
1.10%, 10/2/03 (b) $ 125 124
1.17%, 10/2/03 (b) 25 25
-------
149
-------
Utilities - 0.1%
Niagara Mohawk Power Co.,
7.38%, 2003 150 150
-------
Total Short-Term Obligations
(Cost - $7,312) 7,311
-------
TOTAL INVESTMENTS IN SECURITIES - 99.8%
(Total Cost - $88,186) (d) 92,505
Cash and Other Assets Less Liabilities - 0.2% 135
-------
NET ASSETS - 100.0% $92,640
=======
The Notes to Financial Statements are an integral part of these statements.
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CIGNA Investment Securities Investments in Securities 6
June 30, 2003 (Unaudited) (Continued)
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NOTES TO INVESTMENTS IN SECURITIES
(a) Indicates defaulted security.
(b) Pledged as collateral for financial futures contracts. At June 30, 2003, the
Fund was long 30, 2-year U.S. Treasury Notes and was short 12, U.S. Treasury
Bond futures contracts, 46, 10-year and 20, 5-year U.S. Treasury Note
futures contracts, all expiring in September 2003. Net unrealized gain
amounted to $110,685. Underlying face values of the long and short positions
were $6,480,000 and ($9,214,530), respectively, and underlying market values
were $6,488,905 and ($9,112,750), respectively.
(c) A summary of outstanding forward currency contracts, as of June 30, 2003, is
as follows:
Net Unrealized
Settlement Forward Foreign Contract Appreciation
Date Contract Currency Value (Depreciation)
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Sells
07/31/03 EURO 2,100,000 $2,307,590 $(102,590)
Buys
07/31/03 EURO 2,910,000 $3,178,187 $ 161,634
Tax Information
(e) At June 30, 2003, the net unrealized appreciation of investments,
based on cost for federal income tax purposes of $88,501,832, was
as follows:
Aggregate gross unrealized appreciation for all
investments in which there was an excess of value
over tax cost $4,477,022
Aggregate gross unrealized depreciation for all
investments in which there was an excess of tax cost
over value (473,188)
----------
Unrealized appreciation - net $4,003,834
==========
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Quality Ratings* of Long-Term Bonds (Unaudited)
June 30, 2003
Value % of
(000) Value
- -----------------------------------
Aaa/AAA $48,491 58.2%
Aa/AA 2,994 3.6
A/A 10,516 12.6
Baa/BBB 16,079 19.3
Ba/BB 3,718 4.5
B/B 956 1.1
Below B 42 0.1
Not Rated 482 0.6
------- -----
$83,278 100.0%
======= =====
*The higher of Moody's or Standard & Poor's Ratings.
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The Notes to Financial Statements are an integral part of these statements.
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CIGNA Investment Securities 7
Statement of Assets and Liabilities
June 30, 2003 (Unaudited)
(In Thousands)
Assets:
Investments at value $92,505
Cash 1
Interest and dividends receivable 1,050
Receivable for investments sold 598
Investments for Trustees' deferred compensation plan 148
Receivable for forward currency contracts 59
Swap contracts receivable 73
Other 12
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Total assets 94,446
-------
Liabilities:
Payable for investments purchased 1,501
Deferred Trustees' fees payable 148
Advisory fees payable 38
Audit and legal fees payable 34
Futures variation margin payable 29
Custodian fees payable 26
Shareholder reports payable 15
Administrative services fees payable 10
Transfer agent fees payable 5
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Total liabilities 1,806
-------
Net Assets (equivalent to $19.33 per share based on
4,792,215 shares outstanding; 12,000,000 shares of
$0.10 par value authorized) $92,640
=======
Components of Net Assets:
Paid-in capital $89,803
Overdistributed net investment income (253)
Accumulated net realized loss (1,402)
Unrealized appreciation of investments, futures and
forward contracts 4,492
-------
Net Assets $92,640
=======
Cost of Investments $88,186
=======
Statement of Operations
For the Six Months Ended June 30, 2003 (Unaudited)
(In Thousands)
Investment Income:
Income:
Interest income $2,705
Dividend Income 58
------
2,763
Expenses:
Investment advisory fees $225
Custodian fees 66
Shareholder reports 31
Auditing and legal fees 30
Administrative services fees 26
Transfer agent fees 27
Stock exchange fees 15
Trustees' fees 11
Other 16
----
Total expenses 447
----
Net Investment Income 2,316
------
Realized and Unrealized Gain (Loss)
on Investments:
Net realized gain from:
Forward currency contracts 2
Futures contracts (718)
Investments 1,759
------
1,043
------
Net change in unrealized appreciation
(depreciation) of:
Forward currency contracts 57
Futures contracts 282
Swaps 1
Investments 1,403
------
1,743
------
Net Realized and Unrealized Gain
on Investments 2,786
------
Net Increase in Net Assets Resulting
from Operations $5,102
======
The Notes to Financial Statements are an integral part of these statements.
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CIGNA Investment Securities 8
Statements of Changes in Net Assets
(In Thousands)
For the Six For the
Months Ended Year Ended
June 30, 2003 December 31,
(Unaudited) 2002
--------------- -------------
Operations:
Net investment income $ 2,316 $ 3,812
Net realized gain (loss) on investments 1,043 (850)
Net unrealized appreciation (depreciation)
on investments 1,743 4,121
------- -------
Net increase in net assets from operations 5,102 7,083
------- -------
Dividends and Distributions:
From net investment income (2,252) (4,792)
------- -------
Total dividends and distributions (2,252) (4,792)
------- -------
Net Increase in Net Assets 2,850 2,291
Net Assets:
Beginning of period 89,790 87,499
------- -------
End of period* $92,640 $89,790
======= =======
* includes overdistributed net investment
income of: $ (253) $ (317)
======= =======
The Notes to Financial Statements are an integral part of these statements.
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CIGNA Investment Securities 9
Financial Highlights
- --------------------------------------------------------------------------------
For the Six
Months Ended For the Year Ended December 31,
June 30, 2003 --------------------------------------------------------------
(Unaudited) 2002 2001(c) 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
Net asset value, beginning of period $ 18.74 $ 18.26 $ 18.11 $ 17.79 $ 19.24 $ 19.16
Income from investment operations
Net investment income (a) 0.48 0.80 1.00 1.15 1.18 1.18
Net realized and unrealized gain (loss)
on investments 0.58 0.68 0.39 0.37 (1.42) 0.16
-------- ------- ------- ------- -------- -------
Total from investment operations 1.06 1.48 1.39 1.52 (0.24) 1.34
-------- ------- ------- ------- -------- -------
Less dividends and distributions:
Dividends from net investment income (0.47) (1.00) (1.24) (1.20) (1.18) (1.20)
Distributions from net realized capital gains -- -- -- -- (0.03) (0.06)
-------- ------- ------- ------- -------- -------
Total dividends and distributions (0.47) (1.00) (1.24) (1.20) (1.21) (1.26)
-------- ------- ------- ------- -------- -------
Net asset value, end of period $ 19.33 $ 18.74 $ 18.26 $ 18.11 $ 17.79 $ 19.24
======== ======= ======= ======= ======== =======
Market value, end of period $ 17.43 $ 16.75 $ 16.42 $ 16.06 $ 14.19 $ 17.31
======== ======= ======= ======= ======== =======
Total Investment Return:
Per share market value 6.90%(d) 8.20% 10.10% 22.33% (11.41)% 6.95%
Per share net asset value (b) 5.71%(d) 8.39% 7.81% 8.92% (1.23)% 7.22%
Ratios to Average Net Assets
Expenses 0.99%(e) 1.04% 0.97% 0.94% 0.91% 0.92%
Net investment income 5.06%(e) 4.35% 5.39% 6.58% 6.36% 6.14%
Portfolio Turnover 102%(d) 393% 336% 319% 110% 81%
Net Assets, End of Period (000 omitted) $ 92,640 $89,790 $87,499 $86,789 $ 85,230 $92,202
(a) Net investment income per share has been calculated in accordance with SEC
requirements, with the exception that end of the year accumulated
undistributed/(overdistributed) net investment income has not been adjusted
to reflect current year permanent differences between financial and tax
accounting.
(b) Total investment return based on per share net asset value reflects the
effects of changes in net asset value on the performance of the Fund during
each period, and assumes distributions were reinvested at net asset value.
These percentages may not correspond with the performance of a shareholder's
investment in the Fund based on market value, since the relationship between
the market price of the stock and net asset value varied during each period.
(c) Effective January 1, 2001, the Fund was required to start amortizing premium
and discount on all debt securities. The effect of this change on net
investment income per share was a decrease of $0.01 per share. The effect to
the ratio of net investment income to average net assets was a decrease of
0.07%. Per share, ratios, and supplemental data for periods prior to January
1, 2001 have not been restated to reflect this change in accounting
principle.
(d) Not annualized
(e) Annualized
The Notes to Financial Statements are an integral part of these statements.
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CIGNA Investment Securities Notes to Financial Statements 10
(Unaudited)
1. Organization. CIGNA Investment Securities (the "Fund") is registered under
the Investment Company Act of 1940, as amended, as a diversified, closed-end
management investment company. The Fund's objective is to generate income and
obtain capital appreciation by investing, under normal market conditions, at
least 65% of its total assets in investment-grade debt securities and preferred
stocks.
2. Significant Accounting Policies. The preparation of financial statements in
accordance with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates. The following is a summary of
significant accounting policies consistently followed by the Fund in the
preparation of its financial statements.
A. Security Valuation -- Debt securities traded in the over-the-counter market,
including listed securities whose primary markets are believed to be
over-the-counter, are valued on the basis of valuations furnished by brokers
trading in the securities or a pricing service, which determines valuations for
normal, institutional-size trading units of such securities using market
information, transactions for comparable securities and various relationships
between securities which are generally recognized by institutional traders.
Short-term investments with remaining maturities of up to and including 60 days
are valued at amortized cost, which approximates market. Short-term investments
that mature in more than 60 days are valued at current market quotations. Other
securities and assets of the Fund are appraised at fair value, as determined in
good faith by, or under the authority of, the Fund's Board of Trustees. If
events occurring after the close of the principal market in which securities
are traded (but before the close of regular trading on the NYSE) are believed
to materially affect the value of those securities, such securities are valued
at their fair value taking such events into account.
B. Delayed Delivery Commitments -- The Fund may enter into commitment
agreements, i.e. TBA's, for the purchase of securities at an agreed-upon price
on a specified future date. Since the delivery and payment for such securities
can be scheduled to take place up to three months after the transaction date,
they are subject to market fluctuations. The Fund does not begin to earn
interest on such purchase commitments until settlement date. The Fund may sell
a purchase commitment prior to settlement for the purpose of enhancing its
total return. The Fund segregates assets with a market value equal to the
amount of its purchase commitments. To the extent securities are segregated,
they may not be available for new investments or to meet redemptions. Delayed
delivery commitments may increase the Fund's exposure to market fluctuations
and may increase the possibility that the Fund may realize a short-term gain
(subject to taxation) or loss if the Fund must engage in portfolio transactions
in order to honor its commitments. Due to the longer settlement period, there
may be an increased risk of failure of the other party to honor the
transaction. The Fund records changes in market value of the securities
underlying unsettled commitments in unrealized gains and losses. Gains and
losses are realized upon sale of the commitment.
C. Foreign Currency Translations -- Foreign currency transactions from foreign
investment activity are translated into U.S. dollars on the following basis:
(i) market value of investment securities, other assets and liabilities at the
daily rates of exchange, and
(ii) purchases and sales of investment securities, dividend and interest income
and certain expenses at the rates of exchange prevailing on the respective
dates of such transactions.
- --------------------------------------------------------------------------------
CIGNA Investment Securities Notes to Financial Statements 11
(Unaudited) (Continued)
The Fund does not isolate that portion of gains and losses on investments which
is due to changes in foreign exchange rates from that which is due to changes
in market prices of the investments. Such fluctuations are included with the
net realized and unrealized gains and losses from investments.
Net realized and unrealized gains (losses) from foreign currency-related
transactions include gains and losses between trade and settlement dates on
securities transactions, gains and losses arising from the sales of foreign
currency, and gains and losses between the ex-dividend and payment dates on
dividends, interest, and foreign withholding taxes.
D. Foreign Investments -- The Fund may invest in securities of foreign
countries and governments, which involve certain risks in addition to those
inherent in domestic investments. Such risks generally include, among others,
currency risk (fluctuations in currency exchange rates), information risk (key
information may be inaccurate or unavailable) and political risk
(expropriation, nationalization or the imposition of capital or currency
controls or punitive taxes). Other risks of investing in foreign securities
include inadequate accounting controls, liquidity and valuation risks.
E. Forward Currency Transactions -- The Fund is authorized to enter into
forward exchange contracts for the purpose of hedging against foreign exchange
risk arising from the Fund's investment or anticipated investment in securities
denominated in foreign currencies. The Fund may also enter into these contracts
for purposes of increasing exposure to a foreign currency or to shift exposure
to foreign currency fluctuations from one country to another. All commitments
are marked to market daily at the applicable translation rates and any
resulting unrealized gains or losses are recorded. Realized gains or losses are
recorded at the time the forward contract matures or by delivery of the
currency. Due to market fluctuations, the Fund segregates assets with a market
value equal to the amount of its purchase commitments. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar.
F. Futures Contracts -- The Fund is authorized to enter into futures contracts.
A Fund may use futures contracts for reasons such as managing its exposure to
the markets or movements in interest rates and currency values. Upon entering
into a futures contract, the Fund is required to pledge to the broker an amount
of cash and/or securities equal to the initial margin requirements. During the
period a futures contract is open, changes in the value of a contract are
recognized as unrealized gains or losses by "marking to market" on a daily
basis to reflect the market value of the contract at the end of each day's
trading. Daily variation margin payments are received or made, depending on
whether there were unrealized gains or losses. When a contract is closed, the
Fund records a realized gain or loss equal to the difference between the value
of the contract at the time it was opened and the value at the time it was
closed. Futures contracts include the risk that a change in the value of the
contract may not correlate with the value of the underlying securities and the
possibility of an illiquid market.
G. High Yield Bonds -- The Fund may invest in high yield bonds i.e., fixed
income securities rated below investment-grade. While the market values of
these securities tend to react less to fluctuations in interest rate levels
than do those of investment-grade securities, the market values of certain of
these securities also tend to be more sensitive to individual corporate
developments and changes in economic conditions than investment-grade
securities. In addition, these securities are often highly leveraged and may
not have more traditional methods of financing available to them so that their
ability to service their debt obligations during an economic
- --------------------------------------------------------------------------------
CIGNA Investment Securities Notes to Financial Statements 12
(Unaudited) (Continued)
downturn or during sustained periods of rising interest rates may be impaired.
H. Swap Agreements -- The Fund may enter into swap agreements for investment,
liquidity, hedging and risk management purposes. For example, the Fund may
enter into swap agreements to preserve a return on a particular investment or a
portion of its portfolio and as a technique for managing duration (i.e., price
sensitivity to changes in interest rates). Swaps involve the exchange of
commitments to pay or receive, e.g., an exchange of floating rate payments for
fixed rate payments and/or payments of the appreciation or depreciation of a
security or an index. If forecasts of interest rates and other market factors,
including those that may impact the indexes of the total return swaps, are
incorrect, investment performance will differ compared to what performance
would have been if these investment techniques were not used. Even if the
forecasts are correct, there are risks that the positions may correlate
imperfectly with the asset or liability being hedged, a liquid secondary market
may not always exist, or the counterparty to a transaction may default.
As of June 30, 2003, the Fund had the following outstanding swap agreements:
Spread Unrealized
Notional (Basis Termination Appreciation/
Counterparty Index Amount Points) Date (Depreciation)
- ---------------------------------------------------------------------------------------
Bear Stearns Bear Stearns High
Yield Index $ 390,000 75 07/01/03 $ 0
Bear Stearns Bear Stearns High
Yield Index $ 260,000 57.5 09/01/03 $ 77
Bear Stearns Bear Stearns High
Yield Index $ 40,000 10 10/01/03 $ 65
Lehman Lehman US High
Brothers Yield Index $1,220,000 85 11/01/03 $ (402)
Bear Stearns Bear Stearns High
Yield Index $ 690,000 (10) 12/01/03 $2,463
Lehman Lehman US High
Brothers Yield Index $ 20,000 5 12/01/03 $ 59
The terms of the agreement require the Fund to pay LIBOR (which is set monthly)
plus the spread and to receive the monthly total return on the Index, both
based on the notional amount. The Fund records the net amount
receivable/payable on a daily basis. The net receivable/payable is settled in
cash monthly and recorded as net investment income.
I. Security Transactions and Related Investment Income -- Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Dividend income is recorded on the ex-dividend date, and interest
income, which includes amortization of premium and accrual of discount, is
recorded on the accrual basis. Securities gains and losses are determined on
the basis of identified cost.
J. Federal Taxes -- It is the Fund's policy to continue to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income or capital gains to its
shareholders. Therefore, no federal income or excise taxes on realized income
have been accrued. Distributions reported in the Statement of Changes in Net
Assets from net investment income, including short-term capital gains, and
capital gains are treated as ordinary income and long-term capital gains,
respectively, for federal income tax purposes.
At December 31, 2002, the Fund had a post-October loss of $39,921. Under
current tax law, capital losses realized after October 31 may be deferred and
treated as occurring on the first day of the following year.
K. Dividends and Distributions to Shareholders -- Dividends from net investment
income are declared and distributed quarterly and distributions from net
capital gains, to the extent such gains would otherwise be taxable to the Fund,
are declared and distributed at least annually. Dividends and distributions are
recorded by the
- --------------------------------------------------------------------------------
CIGNA Investment Securities Notes to Financial Statements 13
(Unaudited) (Continued)
Fund on the ex-dividend date. The timing and characterization of certain income
and capital gains distributions are determined in accordance with federal tax
regulations, which may differ from generally accepted accounting principles.
These differences are primarily due to differing book and tax treatment of
foreign currency transactions, capital loss carryforwards, deferred losses due
to wash sales, and excise tax regulations. To the extent that such differences
are permanent, a reclassification to the Components of Net Assets may be
required. As a result, at December 31, 2002, the Fund increased undistributed
(overdistributed) net investment income by $941,078, increased accumulated net
realized gain (loss) by $888,049 and decreased paid in capital by $53,029.
3. Investment Advisory Fees and Other Transactions with Affiliates. Investment
advisory fees were paid or accrued to TimesSquare Capital Management, Inc.
("TimesSquare"), certain officers and directors of which are affiliated with
the Fund. Such advisory fees are based on an annual rate of 0.55% of the first
$75 million of average weekly net asset value and 0.40% thereafter. TimesSquare
is an indirect, wholly-owned subsidiary of CIGNA Corporation.
Pursuant to an Exemptive Order issued by the Securities and Exchange
Commission, and as approved by the shareholders at the shareholder meeting of
April 30, 2002, the Fund may invest excess cash, up to 25% of the Fund's total
assets, in the affiliated CIGNA Money Market Fund (MMF) managed by TimesSquare.
TimesSquare will waive the amount of its advisory fee for the Fund in an amount
that offsets the amount of the advisory fees incurred in the Fund as a result
of its investment in MMF. For the six months ended June 30, 2003, TimesSquare
waived $11,102 of its advisory fee payable by the Fund. Income distributions
from MMF, which amounted to $28,249 for the six months ended June 30, 2003 are
recorded as dividend income in the Statement of Operations.
For administrative services, the Fund reimburses TimesSquare for a portion of
the compensation and related expenses of the Trust's Treasurer and Secretary
and certain persons who assist in carrying out the responsibilities of those
offices. For the six months ended June 30, 2003, the Fund paid or accrued
$25,801.
4. Trustees' Fees. Trustees' fees represent remuneration incurred for trustees
who are not employees of CIGNA Corporation or any of its affiliates. Trustees
may elect to defer receipt of all or a portion of their fees, which are
invested in mutual fund shares in accordance with a deferred compensation plan.
5. Purchases and Sales of Securities. Purchases and sales of securities for the
six months ended June 30, 2003, were as follows (excluding short-term
obligations):
Cost of Proceeds From
Securities Securities
Purchased Sold
-------------- --------------
Bonds $19,151,471 $16,386,607
U.S. Government Obligations 67,089,458 68,000,075
----------- -----------
$86,240,929 $84,386,682
=========== ===========
- --------------------------------------------------------------------------------
CIGNA Investment Securities 14
Trustees
Russell H. Jones
Senior Vice President, Chief Investment Officer, and Treasurer, Kaman
Corporation
Paul J. McDonald
Special Advisor to the Board of Directors, Friendly Ice Cream Corporation
Richard H. Forde
Managing Director, CIGNA Retirement & Investment Services and TimesSquare
Capital Management, Inc.
Marnie Wagstaff Mueller
Diocesan Consultant, Episcopal Diocese of Connecticut
Carol Ann Hayes
Director and Chair of Audit Committee, Reed and Barton Corporation
David P. Marks
Chief Investment Officer, CIGNA Retirement & Investment Services
Officers
Richard H. Forde
Chairman of the Board and President
Alfred A. Bingham III
Vice President and Treasurer
Jeffrey S. Winer
Vice President and Secretary
- --------------------------------------------------------------------------------
Matters Submitted to a Vote of Shareholders
The Annual Meeting of the Shareholders of CIGNA Investment Securities (the
"Trust") was held on Tuesday, April 29, 2003 at 11:30 a.m., Eastern Time.
Six Trustees were elected by a vote of shareholders to serve as members of the
Board of the Trust until the next Annual Meeting of Shareholders or until the
election and qualification of their successors. Shareholders of the Trust voted
to elect the following Trustees:
For Vote Withheld
------------------ --------------
Richard H. Forde 3,959,810.824 82,644.006
Carol Ann Hayes 3,953,928.522 88,526.308
Russell H. Jones 3,963,227.088 79,227.742
David P. Marks 3,955,971.522 86,483.308
Paul J. McDonald 3,954,637.522 87,817.308
Marnie W. Mueller 3,956,946.497 85,508.333
There were no broker non-votes with respect to this matter submitted to a vote
of shareholders of the Trust.
No other business was transacted at the meeting.
- --------------------------------------------------------------------------------
CIGNA Investment Securities is a closed-end, diversified management investment
company that invests primarily in debt securities. The investment adviser is
TimesSquare Capital Management, Inc., 280 Trumbull Street, Hartford,
Connecticut 06103.
Shareholders may elect to have dividends automatically invested in additional
shares of CIGNA Investment Securities by participating in the Automatic
Dividend Investment Plan ("the Plan"). For a brochure describing this Plan or
general inquiries about your account, contact EquiServe, P.O. Box 43011,
Providence, RI 02940-3011 or you may call toll free 1-800-426-5523.
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