UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
811-05480
(Investment Company Act file number)
CIGNA VARIABLE PRODUCTS GROUP
-----------------------------
(Exact name of registrant as specified in charter)
2223 Washington Street
3 Newton Executive Park
Suite 200
Newton, MA 02462
(Address of principal executive offices)
Mark Butler, 2223 Washington Street, 3 Newton Executive Park
Suite 200, Newton, MA 02462
(Name and address of agent for service)
(860) 534-4700
--------------
Registrants' telephone number, including area code
Date of fiscal year end: December 31, 2003
Date of reporting period: December 31, 2003
Item 1. Reports to Stockholders.
[graphic of leaves]
TIMESSQUARE
VP CORE PLUS
BOND FUND
- -----------------------------------------------
Annual Report
December 31, 2003
[Cigna logo]
- --------------------------------------------------------------------------------
1
Dear Shareholders:
Our commentary for TimesSquare VP Core Plus Bond Fund (the "Fund") covering the
year ended December 31, 2003 follows.
Management's Discussion of Fund Performance
Market Summary
During the first six months of 2003, the total return on the S&P 500[RegTM]
Index was 11.77%, compared with a total return of 3.93% for the Lehman Brothers
Aggregate Bond Index (the "Index") and a 7.32% total return on investment-grade
corporate bonds (Lehman Brothers U.S. Credit Index). The Fund returned 5.43%
during this period. Within the global fixed income markets, 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 for the first six months, with total returns from each market in excess
of 18%.
At the beginning of May, the Federal Reserve (Fed) and Chairman Greenspan
announced that any necessary action would be taken to combat deflationary
pressures. Bond holders 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 second quarter at 3.53%.
In the third quarter, fixed income markets notched their first quarterly
decline since the fourth quarter of 1999, returning -0.15%, as represented by
the Index. The Fund returned 0.56% for the same period. A combination of
concerns about the impact of an economic recovery on interest rates, the lack
of demand for relatively low-yielding Treasuries, and the strength of the
equity markets resulted in a sharp rise in yields at the beginning of the
quarter, before they drifted lower in August and September.
In the fourth quarter, fixed income markets edged back into positive territory,
posting a 0.32% total return for the Index, as spread narrowing offset a modest
overall rise in bond yields. This compared with a 0.90% return for the Fund
during the same period. For the full year, the Index returned 4.10% to lag the
S&P 500 Index (+28.68%), the first time in three years.
Performance
Returns for the year ended December 31, 2003 (which do not reflect expenses
associated with variable products through which the Fund may be offered and
which would have been lower if such expenses were reflected), were:
Fund 6.98%
Lipper Corporate Debt Funds -
"A" Rated Average 5.03
The Fund's performance throughout the year benefited from strong security
selection in investment-grade corporate bonds and mortgage backed securities
(MBS). In addition, our overweight allocation to investment-grade corporate
bonds, where spreads tightened approximately 80 basis points for the year and
our allocation decisions relative to high yield and MBS also contributed to the
Fund's positive results.
Outlook
With economic fundamentals gradually improving and signs for a sustainable
recovery encouraging, Treasury yields are likely to trend upward. We also
expect the supply of Treasuries to increase substantially as we embark on an
era of increased government cost vis-a-vis areas such as defense and security
enforcement, corporate regulations, and immigration. Thus, we believe the
credit quality of U.S. Government securities will be slightly diminished
relative to corporate bonds.
Improving corporate profitability and balance sheet repair, along with a better
economic environment and investors' increasingly positive
- --------------------------------------------------------------------------------
2
appetite for risk, is the backdrop in the investment-grade credit market. Our
current outlook calls for additional positive excess returns, but at a more
moderate pace than the record set in 2003. Prudent industry and security
selection will remain paramount.
High yield continued its strong recovery during the year and the default rate
has trended downward. We currently believe the relative value of this sector
has diminished. High yield performance in 2004 will be more dependent on
individual security selection.
In the MBS sector, it appears the prepayment wave has crested, volatility is
stabilizing, and the supply of government-sponsored entity securities is
expected to be reduced. With short-term interest rates still very low, the
positive carry of mortgages (borrowing at low-term rates to buy longer-term
instruments with higher yields) is still appealing, especially to banks.
Sincerely,
/s/ Richard H. Forde
Richard H. Forde
Chairman of the Board and President
CIGNA Variable Products Group
- --------------------------------------------------------------------------------
3
[the following information was represented as a line chart in the printed
material.]
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT (Unaudited)
5/3/99 - 12/31/03
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURN
1 Year Life of Fund Inception Date
Fund 6.98% 6.91% 5/3/99
Lehman Brothers 4.10% 6.84%
Aggregate Bond Index
- --------------------------------------------------------------------------------
Lehman Brothers
Fund Aggregate Bond Index
05/03/1999 $10,000 $10,000
12/31/1999 $ 9,852 $ 9,797
12/31/2000 $10,772 $10,936
12/31/2001 $11,748 $11,860
12/31/2002 $12,765 $13,076
12/31/2003 $13,655 $13,613
TimesSquare VP Core Plus Bond Fund (the "Fund") performance figures are
historical and reflect reinvestment of all dividends. The Fund's investment
return and principal value will fluctuate so that an investor's shares, when
sold may be worth more or less than their original cost. Past performance does
not predict future performance. The Fund's return has been compared to the total
return performance of Lehman Brothers Aggregate Bond Index. This index is a
group of unmanaged securities widely regarded by investors to be representative
of the bond market in general. An investment cannot be made in the index. Index
results do not reflect brokerage changes or other investment expenses.
*Commencement of operations
- --------------------------------------------------------------------------------
TimesSquare VP Core Plus Bond Fund Investments in Securities 4
December 31, 2003
PRINCIPAL VALUE
(000) (000)
------------ -----------
LONG-TERM BONDS - 89.5%
BASIC MATERIALS - 0.4%
International Paper Co., 5.50%, 2014 $ 305 $ 306
Stora Enso Oyj, 7.38%, 2011 205 237
Weyerhaeuser Co., 5.25%, 2009 165 171
--------
714
--------
COMMUNICATIONS & MEDIA - 10.4%
AOL Time Warner, Inc., 6.75%, 2011 495 553
AT&T Corp.,
7.30%, 2011 60 69
8.75% (coupon change based on rating), 2031 80 94
AT&T Wireless Services, Inc., 8.13%, 2012 275 323
British Sky Broadcasting PLC, 8.20%, 2009 490 583
British Telecommunications PLC,
8.88% (coupon change based on rating), 2030 175 229
Comcast Cable Communications, 8.38%, 2007 65 75
Comcast Corp., 5.85%, 2010 140 150
Deutsche Telekom International Finance BV,
8.50%, (coupon change based on rating), 2010 410 496
8.75%, (coupon change based on rating), 2030 370 473
France Telecom SA,
8.45%, (coupon change based on rating), 2006 90 101
9.00%, (coupon change based on rating), 2011 1,360 1,633
9.75%, (coupon change based on rating), 2031 135 179
Kyivstar GSM, 12.75%, 2005 (144A security
acquired Nov. 2002 & Jan. 2003 for $279) (a) 275 303
Koninklijke KPN, NV, 8.00%, 2010 670 801
Liberty Media Corp.,
3.50%, 2006 1,105 1,111
5.70%, 2013 80 81
News America Holdings,
7.75%, 2045 245 290
7.90%, 2095 185 211
8.25%, 2096 75 89
PTC International Finance II SA, 11.25%, 2009 600 660
Shaw Communications, Inc.,
8.25%, 2010 320 362
7.20%, 2011 105 114
PRINCIPAL VALUE
(000) (000)
------------ -----------
COMMUNICATIONS & MEDIA (continued)
Sprint Capital Corp.,
6.13%, 2008 $ 100 $ 107
8.38%, 2012 165 193
6.88%, 2028 425 415
8.75%, 2032 220 260
Tele Communications, Inc.,
9.80%, 2012 890 1,161
7.88%, 2013 220 260
Telecom Italia Capital SA,
5.25%, 2013
(144A security acquired Oct. 2003 for $499) (a) 500 501
6.38%, 2033
(144A security acquired Oct. 2003 for $274) (a) 275 277
TELUS Corp.,
7.50%, 2007 405 453
8.00%, 2011 990 1,158
Time Warner, Inc.,
8.18%, 2007 640 741
9.13%, 2013 215 273
8.05%, 2016 590 700
TPSA Finance BV, 7.75%, 2008 (144A security
acquired Aug. & Oct. 2002, Mar., June,
July & Aug. 2003 for $591) (a) 560 594
Univision Communications, Inc., 7.85%, 2011 525 624
Verizon Florida, Inc., 6.13%, 2013 185 198
--------
16,895
--------
CONSUMER & RETAIL - 2.9%
Bunge Ltd. Finance Corp., 4.38%, 2008 (144A
security acquired Dec. 2003 for $330) (a) 330 332
Campbell Soup Co., 5.88%, 2008 195 214
Heinz (H.J.) Co., 6.38%, 2028 70 74
Heinz (H.J.) Finance Co., 6.75%, 2032 130 145
Kellogg Co., 6.60%, 2011 810 908
Kraft Foods, Inc.,
5.25%, 2007 140 149
5.63%, 2011 370 390
5.25%, 2013 455 459
Kroger Co., 7.50%, 2031 60 69
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP Core Plus Bond Fund Investments in Securities 5
December 31, 2003 (Continued)
PRINCIPAL VALUE
(000) (000)
------------ -----------
CONSUMER & RETAIL (continued)
Michaels Stores, Inc., 9.25%, 2009 $ 370 $ 408
Miller Brewing Co., 5.50%, 2013 (144A security
acquired Aug. 2003 for $283) (a) 285 291
Safeway, Inc., 7.25%, 2031 55 60
Schuler Homes, Inc., 9.38%, 2009 470 529
Toll Corp., 8.25%, 2011 185 204
VFB LLC, 10.25%, 2009 (b) 2,044 463
--------
4,695
--------
DIVERSIFIED - 0.6%
General Electric Co., 5.00%, 2013 755 764
ITT Industries, Inc., 7.40%, 2025 235 269
--------
1,033
--------
FINANCIAL - 11.5%
American Express Credit, Ser. 1999-1A, 5.60%, 2006 1,200 1,215
BankBoston Corp., 8.25%, 2026 170 196
Bank of America Corp., 7.80%, 2010 100 119
Boeing Capital Corp., 6.10%, 2011 150 162
CIT Group, Inc.,
6.50%, 2006 265 287
6.88%, 2009 125 140
Citigroup, Inc.,
3.50%, 2008 1,510 1,516
7.25%, 2010 260 303
Countrywide Home Loans., 5.50%, 2007 110 118
Credit Suisse First Boston Mortgage Securities Corp.,
4.63%, 2008 165 172
5.50%, 2013 100 103
Interest Only 7.50%, 2032 700 42
Interest Only 8.00%, 2032 1,200 75
Dresdner Funding Trust I, 8.15%, 2031
(144A (security acquired Apr., June &
Sep. 2003 for $795) (a) 750 856
First Union Capital One, 7.94%, 2027 105 120
Ford Motor Credit Co.,
6.88%, 2006 300 320
7.38%, 2009 700 769
7.38%, 2011 615 670
PRINCIPAL VALUE
(000) (000)
------------ -----------
FINANCIAL (continued)
General Motors Acceptance Corp.,
6.88%, 2011 $ 1,060 $ 1,142
7.00%, 2012 145 156
Golden West Financial Corp., 4.13%, 2007 200 208
Goldman Sachs Group, Inc., 6.88%, 2011 580 659
Household Finance Corp.,
4.13%, 2008 640 646
6.38%, 2012 250 274
HVB Funding Trust I, 8.74%, 2031 (144A security
acquired May & June 2003 for $459) (a) 465 548
HVB Funding Trust III, 9.00%, 2031 (144A security
acquired June 2003 for $191) (a) 185 223
International Lease Finance Corp., 6.38%, 2009 275 303
Korea Development Bank, 4.25%, 2007 160 163
Lehman Brothers Holdings, Inc., 6.63%, 2012 325 367
Manufacturers & Traders Trust, 8.00%, 2010 150 180
Midland Funding II, 13.25%, 2006 95 111
Mississippi Business Finance Corp., 7.81%, 2024 500 478
Morgan (J.P.) Chase & Co., 6.75%, 2011 50 56
Morgan (J.P.) Co., 6.00%, 2009 205 224
Morgan Stanley Group, Inc., 6.75%, 2011 405 458
National Rural Utilities Cooperative Finance Corp.,
5.75%, 2009 120 130
NB Capital Trust IV, 8.25%, 2027 155 179
Old Kent Bank, Step Coupon
(7.75% to 8/15/05), 2010 300 324
Prudential Funding LLC, 6.60%, 2008 (144A security
acquired Aug. 2002 & Apr. 2003 for $204) (a) 190 212
Residential Asset Mortgage Products, Inc., Interest
Only, 5.75%, 2005 (c) 1,467 62
Santander Central Hispano Issuance, 7.63%, 2010 225 267
Santander Financial Issuances,
6.80%, 2005 95 102
6.38%, 2011 100 111
Sanwa Finance Aruba AEC, 8.35%, 2009 295 346
Sovereign Bancorp., Inc., 10.50%, 2006 1,875 2,217
Standard Chartered Bank, 8.00%, 2031
(144A security acquired Aug. 2002,
Jan. & Apr. 2003 for $239) (a) 215 260
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP Core Plus Bond Fund Investments in Securities 6
December 31, 2003 (Continued)
PRINCIPAL VALUE
(000) (000)
------------ ------------
FINANCIAL (continued)
Takefuji Corp., 9.20%, 2011 (144A security
acquired Dec. 2003 for $134) (a) $ 120 $ 133
UFJ Finance Aruba AEC, 6.75%, 2013 420 448
Union Planters Corp., 6.75%, 2005 240 260
U.S. West Capital Funding, Inc., 6.50%, 2018 75 66
Wells Fargo & Co., 4.95%, 2013 225 225
--------
18,721
--------
FOREIGN GOVERNMENT - 2.3%
Argentina (Republic of), 11.38%, 2017 610 171
Brazil (Federal Republic of), 9.25%, 2010 120 129
Bulgaria (Republic of), Floating Rate, 1.94%, 2024 380 375
Quebec (Province of Canada),
5.50%, 2006 630 677
5.00%, 2009 680 719
7.50%, 2023 490 601
Russian Federation, Step Coupon (5.00% to
3/31/07), 2030 (144A security acquired Sep. &
Oct. 2002, July & Oct. 2003 for $667) (a) 805 775
United Mexican States, 8.30%, 2031 340 383
--------
3,830
--------
HEALTH CARE - 0.2%
HCA, Inc.,
5.25%, 2008 155 158
7.50%, 2033 85 89
Tenet Healthcare Corp., 7.38%, 2013 120 121
--------
368
--------
INDUSTRIAL - 2.2%
Arrow Electronics, Inc., 6.88%, 2013 95 101
Avnet, Inc., 9.75%, 2008 85 99
BAE Systems Holdings, 6.40%, 2011 (144A security
acquired Dec. 2001, July & Nov. 2002 & Apr.
2003 for $904) (a) 890 957
Inco Limited, 5.70%, 2015 195 197
Lockheed Martin Corp.,
8.20%, 2009 1,110 1,348
8.50%, 2029 255 334
PRINCIPAL VALUE
(000) (000)
------------ ------------
INDUSTRIAL (continued)
Noranda, Inc., 6.00%, 2015 $ 165 $ 168
Systems 2001 Asset Trust LLC, 7.16%, 2011
(144A security acquired Mar. 2002 for $291) (a) 283 309
--------
3,513
--------
INSURANCE - 1.4%
American Re Corp., 7.45%, 2026 545 607
AXA SA, 8.60%, 2030 195 246
Monumental Global Funding II, 3.85%, 2008
(144A security acquired Feb. & Apr. 2003
for $345) (a) 345 348
Travelers Property Casualty Corp., 5.00%, 2013 190 190
Zurich Capital Trust I, 8.38%, 2037
(144A security acquired Jan., June, & Oct. 2003
for $718) (a) 745 855
--------
2,246
--------
OIL & GAS - 1.7%
Amerada Hess Corp., 7.30%, 2031 355 367
Conoco Funding Co., 6.35%, 2011 830 931
Devon Financing Corp. ULC, 6.88%, 2011 230 261
Duke Capital Corp., 6.25%, 2013 80 84
Duke Energy Field Services LLC,
5.75%, 2006 60 64
6.88%, 2011 40 45
Occidental Petroleum Corp.,
7.65%, 2006 420 460
6.75%, 2012 175 197
Petroleos Mexicanos, 9.50%, 2027 240 283
--------
2,692
--------
PHARMACEUTICALS - 0.7%
Lilly (Eli) & Co., 6.77%, 2036 555 633
Wyeth,
5.25%, 2013 80 81
5.50%, 2014 340 344
--------
1,058
--------
TRANSPORTATION - 1.6%
American Airlines, 7.38%, 2016 580 413
Burlington Northern Santa Fe, 6.75%, 2029 85 92
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP Core Plus Bond Fund Investments in Securities 7
December 31, 2003 (Continued)
PRINCIPAL VALUE
(000) (000)
------------ -----------
TRANSPORTATION (continued)
Continental Airlines, Inc., 6.90%, 2017 $ 723 $ 605
Federal Express Corp., 7.60%, 2097 165 185
Norfolk Southern Corp.,
7.70%, 2017 115 139
7.90%, 2097 385 455
Union Pacific Corp., 6.13%, 2012 620 672
--------
2,561
--------
U.S. GOVERNMENT & AGENCIES (g) - 50.9%
Fannie Mae,
2.50%, 2008 6,755 6,527
4.38%, 2013 1,155 1,134
5.50%, 2017 1,945 2,017
7.00%, 2031 588 626
8.00%, 2031 237 256
6.50%, 2032 3,198 3,345
7.00%, 2032 4,247 4,520
5.50%, 2033 4,305 4,363
6.00%, 2033 1,175 1,215
6.50%, 2033 2,022 2,115
Interest Only 7.30%, 2042 (c) 10,577 269
Federal Home Loan Banks,
4.13%, 2005 1,375 1,414
Financing Corp.,
Principal Strips from
8.60%, 2019 830 342
9.70%, 2019 1,260 537
Freddie Mac,
2.75%, 2008 1,080 1,063
6.00%, 2017 949 996
4.50%, 2018 4,723 4,728
5.00%, 2018 5,283 5,389
6.00%, 2032 4,631 4,788
7.50%, 2032 1,075 1,154
5.00%, 2033 6,802 6,718
5.50%, 2033 5,493 5,562
Interest Only 9.75%, 2043 (c) 8,874 233
PRINCIPAL VALUE
(000) (000)
------------ -----------
U.S. GOVERNMENT & AGENCIES (continued)
Ginnie Mae,
6.50%, 2031 $ 596 $ 629
6.50%, 2032 524 552
5.50%, 2033 1,315 1,339
6.00%, 2033 1,345 1,399
U.S. Treasury Bonds,
8.75%, 2017 2,180 3,055
6.00%, 2026 5,225 5,794
U.S. Treasury Inflation Indexed Note,
3.00%, 2012 1,389 1,514
U.S. Treasury Notes,
7.88%, 2004 910 962
4.63%, 2006 3,635 3,853
4.38%, 2007 1,950 2,065
6.00%, 2009 600 680
5.00%, 2011 1,485 1,595
--------
82,748
--------
UTILITIES - 2.7%
American Electric Power, Inc., 5.38%, 2010 90 94
Carolina Power & Light Co., 6.50%, 2012 95 105
CenterPoint Energy,
5.70%, 2013
(144A security acquired Mar. & June 2003
for $228) (a) 225 235
7.88%, 2013
(144A security acquired June, July &
Dec. 2003 for $283) (a) 245 277
Cleveland Electric Illuminating Co., 7.88%, 2017 200 234
Columbus Southern Power Co., 5.50%, 2013 75 78
Detroit Edison Co.,
6.13%, 2010 270 296
6.35%, 2032 60 64
Dominion Resources Inc., 6.25%, 2012 100 108
DPL, Inc., 8.25%, 2007 270 294
First Energy Corp.,
5.50%, 2006 50 52
6.45%, 2011 670 694
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP Core Plus Bond Fund Investments in Securities 8
December 31, 2003 (Continued)
PRINCIPAL VALUE
(000) (000)
------------ -----------
UTILITIES (continued)
Nisource Finance Corp., 7.88%, 2010 $ 425 $ 505
Ohio Power Co., 5.50%, 2013 45 46
Oncor Electric Delivery Co., 7.25%, 2033 260 296
Pinnacle Partners LP, 8.83%, 2004 (144A security
(acquired Mar. 2002 for $200) (a) 200 207
Progress Energy, Inc.,
7.10%, 2011 110 124
7.00%, 2031 205 219
Tenaska Alabama II Partners LP, 6.13%, 2023
(144A security acquired Oct. 2003 for $270) (a) 270 279
TXU Australia Holdings LP, 6.15%, 2013 (144A
security acquired Dec. 2003 for $140) (a) 140 143
--------
4,350
--------
TOTAL LONG-TERM BONDS
(Cost - $141,226) 145,424
--------
NUMBER OF
SHARES
PREFERRED STOCK - 2.7%
COMMUNICATIONS & MEDIA - 0.3%
Centaur Funding Corp., 9.08%
(144A security acquired Jan., Aug. & Nov. 2001
for $453) (a) 410 503
--------
FINANCIAL - 2.4%
BCI US Funding Trust,
Step Coupon (8.01% to 7/15/08)
(144A security acquired Jan., Mar. & Apr. 2003
for $714) (a) 650 747
DBS Capital Funding Corp.,
Step Coupon (7.66% to 3/21/2011)
(144A security acquired Oct. 2003 for $671) (a) 595 685
IBJ Preferred Capital Co. LLC,
Step Coupon (8.79% to 6/30/08)
(144A security acquired Jan., July, Aug., Oct. &
Dec. 2003 for $1,365) (a) 1,375 1,499
NUMBER OF VALUE
SHARES (000)
------------------ -----------
FINANCIAL (continued)
Natexis AMBS Co. LLC.,
Step Coupon (8.44% to 6/30/08)
(144A security acquired May 2002 for $228) (a) 210 $ 247
RBS Capital Trust I,
Step Coupon (4.71% to 7/01/13) 735 703
---------
3,881
---------
TOTAL PREFERRED STOCK
(Cost - $4,159) 4,384
---------
SHORT-TERM OBLIGATIONS - 6.6%
MONEY MARKET FUND - 6.4%
TimesSquare VP Money Market Fund (d) 10,364,000 10,364
---------
PRINCIPAL
(000)
----------
U.S. GOVERNMENT - 0.2%
U.S. Treasury Bills,
0.99%, 3/4/04 (e) $ 100 100
0.97%, 4/1/04 (e) 200 200
---------
300
---------
TOTAL SHORT-TERM OBLIGATIONS
(Cost - $10,664) 10,664
---------
TOTAL INVESTMENTS IN SECURITIES - 98.8%
(Total Cost - $156,049) (h) 160,472
Cash and Other Assets Less Liabilities - 1.2% 1,989
---------
NET ASSETS - 100.0% $ 162,461
=========
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP Core Plus Bond Fund Investments in Securities 9
December 31, 2003 (Continued)
- --------------------------------------------------------------------------------
NOTES TO INVESTMENTS IN SECURITIES
(a) Indicates restricted security; the aggregate value of restricted
securities is $12,596,084 (aggregate cost $11,752,933), which is
approximately 7.8% of net assets. Valuations have been furnished
by brokers trading in the securities or a pricing service for all
restricted securities. These are liquid securities.
(b) This is a fair valued security which is in default due to bankruptcy. The
principal amount represents beneficial ownership interest for future cash
receipts under the bankruptcy filings.
(c) Illiquid security.
(d) TimesSquare Capital Management, Inc., the fund's Investment Adviser, is also
the Adviser to the TimesSquare VP Money Market Fund.
(e) Pledged as collateral for financial futures contracts. At December 31, 2003,
the Fund was long 57, 2-year U.S. Treasury Notes and was short 22, 30-year
U.S. Treasury Bonds and 124, 5-year and 46, 10-year U.S. Treasury Notes,
futures contracts, all expiring in March 2004. Net unrealized gain amounted
to $36,180. Underlying face values of the long and short positions were
$12,170,391 and ($21,416,492), respectively, and underlying market values
were $12,200,673 and ($21,410,594), respectively.
(f) A summary of outstanding forward currency contracts, as of December 31,
2003, is as follows:
Net Unrealized
Settlement Forward Foreign Contract Appreciation
Date Contract Currency Value (Depreciation)
- ------------- ---------- ----------- ------------- ---------------
Buys
3/12/04 Euro 2,070,000 $2,279,865 $ 323,099
Sells
3/12/04 Euro 2,070,000 $2,434,816 $(168,148)
(g) Agency obligations are not guaranteed by the U.S. Government.
Tax Information
(h) At December 31, 2003, the net unrealized appreciation of
investments, based on cost for federal income tax purposes of
$156,719,068, was as follows:
Aggregate gross unrealized appreciation for all
investments in which there was an excess of value
over tax cost $4,496,681
Aggregate gross unrealized depreciation for all
investments in which there was an excess of tax cost
over value (744,138)
----------
Unrealized appreciation-net $3,752,543
==========
- --------------------------------------------------------------------------------
(i) As of December 31, 2003, the components of distributable earnings (excluding
unrealized appreciation/(depreciation) disclosed above) on a tax basis
consisted of the following:
Undistributed ordinary income $ 69,858
Capital loss carryforward
Expiring 2010 $567,501
- ------------------------------------------------------
Quality Ratings* of Long-Term Bonds (Unaudited)
12/31/2003
Value % of
(000) Value
----------- ----------
Aaa/AAA $ 84,906 58.4%
Aa/AA 5,341 3.7
A/A 15,986 11.0
Baa/BBB 33,655 23.1
Ba/BB 3,991 2.7
B/B 845 0.6
Below B 237 0.2
Not Rated 463 0.3
--------- -----
$ 145,424 100.0%
========= =====
*The higher of Moody's or Standard & Poor's Ratings.
- ------------------------------------------------------
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP Core Plus Bond Fund 10
Statement of Assets and Liabilities
December 31, 2003
(In Thousands)
Assets:
Investments in securities at value $ 160,472
Cash 1
Receivable for fund shares sold 8,317
Interest and dividend receivable 1,575
Receivable for forward currency contracts 323
Swap contracts receivable 60
Investments for Trustees' deferred compensation plan 3
---------
Total assets 170,751
---------
Liabilities:
Payable for investments purchased 6,381
Payable for fund shares repurchased 1,564
Payable for forward currency contracts 168
Custody fees payable 45
Advisory fees payable 44
Futures variation margin payable 25
Audit and legal fees payable 21
Insurance expenses payable 18
Administrative fees payable 15
Deferred Trustees' fees payable 3
Other 6
---------
Total liabilities 8,290
---------
Net Assets $ 162,461
=========
Components of Net Assets:
Paid in capital $ 159,720
Overdistributed net investment income (599)
Accumulated net realized loss (1,273)
Net unrealized appreciation of investments, futures,
forward contracts and swaps 4,613
---------
Net Assets $ 162,461
=========
Shares Outstanding 16,028
=========
Net Asset Value and Redemption Price per Share $ 10.14
=========
Cost of Investments $ 156,049
=========
Statement of Operations
For the Year Ended December 31, 2003
(In Thousands)
Investment Income:
Income:
Interest income $ 6,733
Dividends 168
-------
6,901
Expenses:
Investment advisory fees $ 732
Custodian fees 137
Administrative services fees 74
Audit and legal fees 33
Insurance expenses 19
Transfer agent fees 6
Trustees' fees 4
Shareholder reports 4
Other 1
-----
Total expenses 1,010
Less expenses waived by Adviser (228)
-----
Net expenses $782
-----
Net Investment Income 6,119
-------
Realized and Unrealized Gain (Loss)
on Investments:
Net realized gain (loss) from:
Forward currency contracts 91
Futures contracts (596)
Swap contracts 1,037
Investments 3,320
--------
3,852
--------
Net change in unrealized appreciation:
Forward currency contracts 152
Futures contracts 141
Swap contracts (1)
Investments 175
--------
467
--------
Net Realized and Unrealized Gain
on Investments 4,319
--------
Net Increase in Net Assets Resulting
from Operations $10,438
========
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP Core Plus Bond Fund 11
Statements of Changes in Net Assets
(In Thousands)
For the Year Ended
December 31,
-----------------------------
2003 2002
------------- -------------
Operations:
Net investment income $ 6,119 $ 5,673
Net realized gain (loss) on investments 3,852 (412)
Net unrealized appreciation on investments 467 5,418
--------- ----------
Net increase in net assets from operations 10,438 10,679
--------- ----------
Dividends and Distributions:
From net investment income (9,988) (5,821)
--------- ----------
Total dividends and distributions (9,988) (5,821)
--------- ----------
Capital Share Transactions:
Net proceeds from shares sold 63,896 108,118
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions 9,988 5,821
--------- ----------
73,884 113,939
Cost of shares redeemed (61,600) (120,160)
--------- ----------
Net increase (decrease) from Fund share
transactions 12,284 (6,221)
--------- ----------
Net Increase (Decrease) in Net
Assets 12,734 (1,363)
Net Assets:
Beginning of period 149,727 151,090
--------- ----------
End of period * $ 162,461 $ 149,727
========= ==========
* includes (overdistributed) & undistributed
net investment income of: $ (599) $ 716
========= ==========
For the Year Ended
December 31,
-----------------------------
2003 2002
------------- -------------
Transactions in Capital Stock:
Shares sold 6,103 10,641
Shares issued in reinvestment of dividends
and distributions 988 575
--------- ----------
7,091 11,216
Shares redeemed (5,838) (12,020)
--------- ----------
Net increase (decrease) in shares
outstanding 1,253 (804)
========= ==========
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP Core Plus Bond Fund 12
Financial Highlights
From May 3,
For the Year Ended December 31, 1999* to
------------------------------------------------------- December 31,
2003 2002 2001(e) 2000 1999
------------ ------------- ---------------- ----------- -------------------
Per Share Operating Performance:
Net asset value, beginning of period $ 10.13 $ 9.70 $ 9.87 $ 9.53 $ 10.00
--------- -------- -------- ------- ----------
Income from investment operations
Net investment income (a) 0.45 0.42 0.45 0.54 0.33
Net realized and unrealized gain (loss) 0.25 0.42 0.44 0.35 (0.48)
--------- -------- -------- ------- ----------
Total from investment operations 0.70 0.84 0.89 0.89 (0.15)
--------- -------- -------- ------- ----------
Less dividends and distributions:
Dividends from net investment income (0.69) (0.41) (0.94) (0.55) (0.32)
Distributions from net realized capital gains -- -- (0.04) -- --
Return of capital dividends -- -- (0.08) -- --
--------- --------- -------- -------- ----------
Total dividends and distributions (0.69) (0.41) (1.06) (0.55) (0.32)
--------- --------- -------- -------- ----------
Net asset value, end of period $ 10.14 $ 10.13 $ 9.70 $ 9.87 $ 9.53
========= ========= ======== ======== ==========
Total Investment Return (b) 6.98% 8.66% 9.06% 9.34% (1.48)%(c)
Ratios to Average Net Assets:
Gross expenses 0.65% 0.62% 0.60% 0.70% 0.79%(d)
Fees and expenses waived or borne by the Adviser 0.15% 0.12% 0.10% 0.20% 0.29%(d)
Net expenses 0.50% 0.50% 0.50% 0.50% 0.50%(d)
Net investment income 3.91% 4.24% 5.39%(e) 6.66% 6.09%(d)
Portfolio Turnover 182% 518% 396% 320% 303%(c)
Net assets, End of Period (000 omitted) $ 162,461 $ 149,727 $ 151,090 $ 84,014 $ 39,261
(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) Had the Adviser not waived or reimbursed a portion of expenses, total
return would have been reduced.
(c) Not annualized.
(d) Annualized.
(e) 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 $0.02 per share. The
effect to the ratio of net investment income to average net assets was a
decrease of 0.19%. Per share, ratios, and supplemental data for periods
prior to January 1, 2001, have not been restated to reflect this change in
accounting principle.
* Commencement of operations
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP Core Plus Bond Fund Notes to Financial Statements 13
1. Significant Accounting Policies.
TimesSquare VP Core Plus Bond Fund (the "Fund") is a separate series of CIGNA
Variable Products Group, a Massachusetts business trust (the "Trust"). The
Trust is registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Fund seeks to provide
the highest current income attainable, consistent with reasonable risk, as
determined by the Fund's investment adviser, through investment in a
professionally managed, diversified portfolio of fixed income securities. 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. The
Funds' Board of Trustees has designated the Pricing Committee of TimesSquare
Capital Management, Inc. to make, pursuant to procedures approved by the Board
and under the Board's supervision, all necessary determinations of fair value
for the portfolio securities for which market quotations are not readily
available. When fair valuing securities, the Pricing Committee takes into
account factors such as fundamental and analytical information about the
security, the nature and duration of any restrictions on disposition of the
security, market information (including, for example, factors such as
historical price relationships and valuations for securities with similar
characteristics), and evaluation of significant market events. 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 due 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
- --------------------------------------------------------------------------------
TimesSquare VP Core Plus Bond Fund Notes to Financial Statements 14
(Continued)
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.
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 maintains, in a segregated
account with its custodian, 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.
The 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
- --------------------------------------------------------------------------------
TimesSquare VP Core Plus Bond Fund Notes to Financial Statements 15
(Continued)
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, the issuers of 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
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 December 31, 2003, the Fund had the following outstanding swap
agreements:
Spread Unrealized
Notional (Basis Termination Appreciation/
Counterparty Index Amount Points) Date (Depreciation)
- -------------- ------------------ ------------- --------- ------------- ---------------
Lehman Lehman US High
Brothers Yield Index $ 300,000 (40) 03/01/04 $ 204
Bear Stearns Bear Stearns High
Yield Index $ 390,000 0 04/01/04 $ 0
Bear Stearns Bear Stearns High
Yield Index $ 830,000 0 05/01/04 $ 0
Bear Stearns Bear Stearns High
Yield Index $1,160,000 10 06/01/04 $ (487)
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 realized gain/loss.
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 an 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 and capital gains to its
shareholders. Therefore, no federal income or excise taxes on realized income
or net capital gains have been accrued. Distributions reported in the Statement
of Changes in Net Assets from net investment income, including short-term
gains, and capital gains are treated as ordinary income and long-term capital
gains, respectively, for federal income tax purposes.
- --------------------------------------------------------------------------------
TimesSquare VP Core Plus Bond Fund Notes to Financial Statements 16
(Continued)
At December 31, 2003 the Fund had a Post-October loss of $1,327 and a
Post-October currency loss of $51,181. 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 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 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. 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, 2003, the Fund
decreased its accumulated net realized gain by $2,622,808 and decreased
overdistributed net investment income by the same amount.
2. Investment Advisory Fees and Other Transactions with Affiliates. Investment
advisory fees are 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 0.50% of the Fund's
average daily net assets. TimesSquare has contractually agreed to reimburse the
Fund for any amount by which its expenses (including the advisory fee, but
excluding interest, taxes, transaction costs incurred in acquiring and
disposing of portfolio securities, and extraordinary expenses) exceed, on an
annual basis, 0.50% of average daily net assets until April 30, 2004, and
thereafter to the extent described in the Fund's then current prospectus.
TimesSquare retains the right to be repaid by the Fund if the Fund's expenses
fall below the percentage specified above prior to the end of the fiscal year
or within three years after TimesSquare waives advisory fees or reimburses a
Fund's operating expenses. The Fund's remaining contingent liability and
expiration dates are as shown below:
Remaining
Contingent Expires Expires Expires
Liability during 2004 during 2005 during 2006
(000's) (000's) (000's) (000's)
- ------------ ------------- ------------- ------------
$509 $127 $154 $228
Pursuant to an Exemptive Order issued by the Securities and Exchange
Commission, the Fund may invest its excess cash, up to 25% of the Fund's total
assets, in the affiliated TimesSquare VP Money Market Fund ("TSVPMM") 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
affiliated Fund. For the year ended December 31, 2003, TimesSquare waived
$50,027 of its advisory fee payable by the Fund. Income distributions from
TSVPMM, which amounted to $112,894 for the year ended December 31, 2003, are
recorded as dividend income in the Statement of Operations.
TimesSquare is an indirect, wholly-owned subsidiary of CIGNA Corporation.
For administrative services, the Fund reimburses TimesSquare for a portion of
the compensation and related expenses of the Fund's Treasurer and Secretary and
certain persons who assist in carrying out the responsibilities of those
offices. For the year ended December 31, 2003, the Fund paid or accrued
$73,487.
3. Trustees' Fees. Trustees' fees represent remuneration paid or accrued to
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.
- --------------------------------------------------------------------------------
TimesSquare VP Core Plus Bond Fund Notes to Financial Statements 17
(Continued)
4. Purchases and Sales of Securities. Purchases and sales of securities,
excluding short-term obligations, for the year ended December 31, 2003, were
$212,857,320 and $210,012,515, respectively, for U.S. Government and Agency
Obligations and $66,429,588 and $42,856,720, respectively, for all other
securities.
5. Capital Stock. The Fund offers an unlimited number of shares of beneficial
interest without par value. All of the shares outstanding at December 31, 2003,
were held by Connecticut General Life Insurance Company ("CG Life") life
insurance contracts issued by that company. CG Life is an indirect,
wholly-owned subsidiary of CIGNA Corporation.
- --------------------------------------------------------------------------------
TimesSquare VP Core Plus Bond Fund 18
Report of Independent Auditors
To the Trustees and Shareholders of TimesSquare VP Core Plus Bond Fund
In our opinion, the accompanying statement of assets and liabilities, including
the investments in securities, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of TimesSquare VP Core Plus Bond Fund
(the "Fund") at December 31, 2003, the results of its operations, and the
changes in its net assets and the financial highlights for the periods
indicated, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted
in the United States of America, which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit 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, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at December
31, 2003 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 16, 2004
- --------------------------------------------------------------------------------
TimesSquare VP Core Plus Bond Fund 19
Trustees and Officers
Shareholders elect a Board that oversees the Fund's operations. The Board
appoints officers who are responsible for day-to-day business decisions based
on policies set by the Board.
The following is a list of the Fund's Board of Trustees and officers. Each
Trustee's term of office will be until the next annual meeting of shareholders
or until the election of the Trustee's successor.
Number of
Name, Position Length Portfolios in Other
Address* Held with of Time Principal Occupation(s) During Fund Complex Directorships
and Age Fund Served Past 5 Years Overseen Held by Trustee
- ------------------------------------------------------------------------------------------------------------------------------------
Independent Trustees
Russell H. Trustee Trustee Vice President (Investor Relations, 14 --
Jones since 1995 Public Relations) and Treasurer,
59 Kaman Corporation (helicopters
and aircraft components, industrial
distribution)
Paul J. Trustee Trustee Special Advisor to Board of 14 Western
McDonald since 1995 Directors, Friendly Ice Cream Massachusetts
60 Corporation (family restaurants Electric Company
and dairy products)
Marnie Trustee Trustee Diocesan Consultant, Episcopal 14 Boston Mutual Life
Wagstaff since 2003 Diocese of Connecticut; Previously, Insurance Company
Mueller Visiting Professor of Health
64 Economics, Wesleyan University
Carol Ann Trustee Trustee Director and Chair of Audit 14 Reed & Barton
Hayes since 2003 Committee, Reed and Barton Corporation
59 Corporation
Affiliated Trustees and Fund Officers
Richard H. Trustee, Trustee and Managing Director, CIGNA 14 Director of
Forde Chairman of Chairman Retirement & Investment Services various
50 the Board and since 2002, and TimesSquare Capital subsidiaries of
President President Management, Inc. CIGNA Corporation
since 1998
David P. Trustee Trustee Chief Investment Officer, CIGNA 14 Director of
Marks since 2003 Retirement & Investment Services various
57 subsidiaries of
CIGNA Corporation
Alfred A. Vice President Officer CIGNA Funds Treasurer; Assistant 14 --
Bingham III and Treasurer Since 1982 Vice President, TimesSquare Capital
59 Management, Inc.
Jeffrey S. Vice President Officer Senior Counsel, 14 --
Winer and Secretary Since 1993 CIGNA Corporation
46
- --------------------------------------------------------------------------------
* All Trustees and officers have an address c/o TimesSquare Capital Management,
Inc., 280 Trumbull Street, H16C, Hartford, CT 06103
- --------------------------------------------------------------------------------
TimesSquare VP Core Plus Bond Fund is an open-end, diversified management
investment company that invests primarily in fixed income securities. The
investment adviser is TimesSquare Capital Management, Inc., 280 Trumbull
Street, Hartford, Connecticut 06103.
- --------------------------------------------------------------------------------
TIMESSQUARE
VP MONEY MARKET
FUND
- --------------------------------------------------------------------------------
Annual Report
December 31, 2003
[LOGO] CIGNA
- --------------------------------------------------------------------------------
1
Dear Shareholders:
We are pleased to provide this report for TimesSquare VP Money Market Fund (the
"Fund") covering the year ended December 31, 2003.
Management's Discussion of Fund Performance
Market Environment
The Federal Reserve (Fed) met four times during the first half of 2003, but
waited until the fourth meeting to cut interest rates. At the June 25 Open
Market Committee meeting, the Fed cut the federal funds rate by 25 basis points
to a 45-year low of 1%. This was the thirteenth interest rate cut since the
easing cycle began in January 2001. The Fed statement noted recent firming in
spending as well as stabilization in labor and "markedly improved financial
conditions." During the second half of 2003, the Fed met four times without
changing interest rates, but at the fourth meeting decided to adjust their bias
from "balanced/disinflation" to "balanced." The market interpreted this as
setting the stage for possible rate increases later on in 2004.
As the year came to a close, the general tone of the markets appeared to be
improving, the consumer remained strong and corporate profits were exceeding
expectations. Economists continued to search for signs of inflation and
strengthening of employment. The Fed was openly signaling its willingness to
support growth, and the markets were focused on trying to find strength in the
economy.
Portfolio Composition and Performance
On December 31, 2003, the portfolio contained: top-tier asset-backed securities,
2.7%; top-tier domestic commercial paper, 42.8%; top-tier foreign commercial
paper, 9.6%; and U.S. Government and Agencies, 44.9%. The Fund is well
diversified.
Total returns for the year ended December 31, 2003 (which do not reflect
expenses associated with variable products through which the Fund may be offered
and which would have been lower if such expenses were reflected), were:
Fund 0.77%
Lipper Money Market Funds Average 0.44
3-month U.S. Treasury Bill 1.07
As of December 31, 2003, the Fund's weighted average portfolio maturity was 40
days, and the annualized 7-day yield was 0.59%.
Outlook
Economic data continues to show signs of improvement. Fourth quarter Gross
Domestic Product (GDP) is estimated to be 4%. However, we expect Fed policy and
interest rates to remain on hold for the first half of 2004. Expectations are
that the Fed will be extremely patient, looking for signs of inflation. Since
inflation is currently below the desired level, consensus speculation is that
monetary policy no longer needs to be preemptive and that the Fed will need to
see improvement in the labor sector and pricing power before tightening. With
this in mind, we will continue to focus on the developing trends in both the
U.S. and global economies as keys to further Fed action, and adjust our
portfolio strategy accordingly.
Sincerely,
/s/ Richard H. Forde
Richard H. Forde
Chairman of the Board and President
CIGNA Variable Products Group
- --------------------------------------------------------------------------------
2
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT (Unaudited)
3/1/96 - 12/31/03
AVERAGE ANNUAL RETURN
1 Year 5 Year Life of Fund Inception Date
Fund 0.77% 3.33% 3.98% 3/1/96
3 Month U.S. 1.07% 3.50% 4.10%
Treasury Bill
[The following data was represented as a line chart in the printed material.]
Fund 3 Month U.S. Treasury Bill
03/01/1996 $10,000 $10,000
12/31/1996 $10,418 $10,435
12/31/1997 $10,959 $10,983
12/31/1998 $11,523 $11,537
12/31/1999 $12,079 $12,084
12/31/2000 $12,809 $12,804
12/31/2001 $13,286 $13,327
12/31/2002 $13,473 $13,554
12/31/2003 $13,576 $13,700
TimesSquare VP Money Market Fund (the "Fund") performance figures are historical
and reflect reinvestment of all dividends. The annualized yield for the seven
days ended December 31, 2003 was 0.59%, and the Fund's average maturity was 40
days. An investment in the Fund is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. Although the Fund
seeks to preserve the value of your investment at $1.00 per share, it is
possible to lose money by investing in the Fund. Past performance does not
predict future performance. The Fund's return has been compared with the total
return performance of the three month U. S. Treasury Bill, which does not
reflect brokerage charges or other investment expenses. The principal value of
the U. S. Treasury Bill is guaranteed by the full faith and credit of the United
States.
- --------------------------------------------------------------------------------
TimesSquare VP Money Market Fund Investments in Securities 3
December 31, 2003
Principal Value
(000) (000)
- -----------------------------------------------------------------------------------
ASSET BACKED SECURITY - 2.7%
Chase Manhattan Auto Owner Trust, 1.14%,
4/10/04 $ 5,000 $ 5,000
Honda Auto Receivables, 1.11%, 9/13/04 5,378 5,378
--------
10,378
--------
COMMERCIAL PAPER - 52.4%
Domestic - 42.8%
Abbott Laboratories, 1.00%, 1/6/04 14,300 14,298
Bear Stearns Co., Inc., 1.04%, 1/12/04 14,000 13,996
BellSouth Corp., 1.01%, 1/9/04 12,624 12,621
Citicorp, 1.04%, 1/20/04 3,748 3,746
Gannett, Inc., 1.03%, 1/5/04 14,523 14,521
General Electric Capital Corp., 1.14%, 1/28/04 (a) 7,500 7,500
Gillette Co., 0.83%, 1/2/04 7,442 7,442
Goldman Sachs Group, Inc., 1.07%, 1/8/04 11,513 11,511
International Business Machines Corp.,
1.02%, 1/6/04 7,373 7,372
Merrill, Lynch & Co., Inc.,
1.05%, 1/5/04 5,286 5,285
1.05%, 1/7/04 8,925 8,923
Minnesota Mining & Mfg. Co., 1.05%, 1/12/04 10,204 10,201
New York Times (The) Co., 1.05%, 1/2/04 9,100 9,100
Morgan Stanley, Dean Witter, Discover & Co.,
1.08%, 1/7/04 14,590 14,587
State Street Corp., 1.03%, 1/13/04 14,433 14,428
Wells Fargo & Co., 1.10%, 1/14/04 (a) 5,000 5,000
Windmill Funding Corp., 1.08%, 1/12/04 4,355 4,354
--------
164,885
--------
Foreign - 9.6%
Novartis Finance Corp., 1.05%, 1/2/04 14,550 14,550
Shell Finance, 0.95%, 1/2/04 10,000 10,000
Toyota Motor Credit Corp., 1.07%, 12/23/04 (a) 12,500 12,509
--------
37,059
--------
Total Commercial Paper 201,944
--------
Principal Value
(000) (000)
- -----------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCIES (b) - 44.9%
Fannie Mae,
1.32%, 1/9/04 $ 2,500 $ 2,499
1.08%, 3/5/04 2,500 2,495
1.08%, 4/2/04 4,000 3,989
1.10%, 4/2/04 3,955 3,944
1.01%, 5/27/04 (a) 12,500 12,497
1.36%, 9/10/04 7,500 7,500
1.29%, 10/18/04 7,500 7,500
1.06%, 1/28/05 (a) 11,500 11,497
1.05%, 10/7/05 (a) 20,000 19,996
Federal Farm Credit Bank,
1.25%, 8/18/04 4,588 4,551
1.05%, 3/24/05 (a) 15,000 14,998
1.09%, 6/23/05 (a) 2,500 2,500
Federal Home Loan Bank,
1.10%, 2/20/04 (a) 5,000 5,001
1.07%, 3/24/04 5,104 5,091
1.25%, 4/15/04 2,500 2,500
1.08%, 4/19/04 3,114 3,104
1.00%, 10/6/04 (a) 10,000 10,000
Freddie Mac,
1.02%, 1/5/04 4,000 3,999
1.02%, 1/8/04 7,937 7,935
1.02%, 1/14/04 10,102 10,098
1.08%, 1/15/04 5,334 5,332
5.00%, 1/15/04 4,000 4,005
1.29%, 1/29/04 2,000 1,998
5.25%, 2/15/04 2,350 2,361
1.28%, 3/25/04 2,500 2,492
1.11%, 10/7/05 (a) 7,500 7,500
Sallie Mae,
0.99%, 1/15/04 (a) 1,750 1,750
4.75%, 4/23/04 5,500 5,558
--------
172,690
--------
TOTAL INVESTMENTS IN SECURITIES - 100.0%
(Total Cost - $385,012) (c) 385,012
Cash and Other Assets, Less Liabilities - 0.0% 104
--------
NET ASSETS - 100.0% $385,116
========
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP Money Market Fund Investments in Securities 4
December 31, 2003 (Continued)
- --------------------------------------------------------------------------------
NOTES TO INVESTMENTS IN SECURITIES
(a) Variable rate security. Rate is as of December 31, 2003.
(b) Agency obligations are not guaranteed by the U.S. Government.
Tax Information
(c) As of December 31, 2003, the cost for federal tax purposes on a tax basis
is the same as on a book basis.
- --------------------------------------------------------------------------------
TimesSquare VP Money Market Fund
Value % of
Ten Largest Positions (Unaudited) (000) Net Assets
- -----------------------------------------------------------
Fannie Mae $71,917 18.7%
Freddie Mac 45,720 11.9
Federal Home Loan Bank 25,696 6.7
Federal Farm Credit Bank 22,049 5.7
Morgan Stanley, Dean Witter,
Discover & Co. 14,587 3.8
Novartis Finance Corp. 14,550 3.8
Gannett, Inc. 14,521 3.8
State Street Corp. 14,428 3.7
Abbott Laboratories 14,298 3.7
Merrill, Lynch & Co., Inc. 14,208 3.7
- --------------------------------------------------------------------------------
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP Money Market Fund 5
Statement of Assets and Liabilities
December 31, 2003
(In Thousands)
Assets:
Investments in securities at value $ 385,012
Interest receivable 387
Investment for Trustees' deferred compensation plan 1
---------
Total assets 385,400
---------
Liabilities:
Investment advisory fees payable 122
Cash overdraft 47
Custodian fees payable 35
Administrative services fees payable 32
Audit and legal fees payable 25
Insurance payable 12
Shareholder reports 5
Deferred Trustees' fees payable 1
Other accrued expenses 5
---------
Total liabilities 284
---------
Net Assets $ 385,116
=========
Components of Net Assets:
Paid in capital $ 385,116
---------
Net Assets $ 385,116
=========
Shares Outstanding 385,114
=========
Net Asset Value and Redemption Price per Share $ 1.00
=========
Cost of Investments $ 385,012
=========
Statement of Operations
For the Year Ended December 31, 2003
(In Thousands)
Investment Income:
Income:
Interest $4,597
------
Expenses:
Investment advisory fees $1,320
Administrative services fees 155
Custodian fees and expenses 102
Auditing and legal fees 42
Insurance expense 13
Trustees' fees 9
Shareholder reports 8
Transfer agent fees 6
Other 3
------
Total expenses $1,658
------
Net Investment Income 2,939
------
Realized and Unrealized Gain on
Investments:
Net realized gain from investments --
------
Net Realized and Unrealized Gain on
Investments --
------
Net Increase in Net Assets Resulting From
Operations $2,939
======
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP Money Market Fund 6
Statements of Changes in Net Assets
(In Thousands)
For the Year Ended
December 31,
------------------------
2003 2002
-------- --------
Operations:
Net investment income $ 2,939 $ 4,356
Net realized gain on investments -- 2
-------- --------
Net increase in net assets from operations 2,939 4,358
-------- --------
Dividends and Distributions:
From net investment income (2,872) (4,423)
-------- --------
Total dividends and distributions (2,872) (4,423)
-------- --------
Capital Share Transactions:
Net proceeds from sales of shares 546,426 612,437
Net asset value of shares issued to
shareholders in reinvestment of dividends
and distributions 2,883 4,420
-------- --------
549,309 616,857
Cost of shares redeemed (529,819) (468,538)
-------- --------
Net increase (decrease) in net assets from
Fund share transactions 19,490 148,319
-------- --------
Net Increase (Decrease) in Net Assets 19,557 148,254
Net Assets:
Beginning of period 365,559 217,305
-------- --------
End of period $385,116 $365,559
======== ========
For the Year Ended
December 31,
------------------------
2003 2002
-------- --------
Transactions in Capital Stock
Shares sold 546,426 612,437
Shares issued in reinvestment of dividends
and distributions 2,883 4,420
-------- --------
549,309 616,857
Shares redeemed (529,819) (468,538)
-------- --------
Net increase (decrease) in shares
outstanding 19,490 148,319
======== ========
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP Money Market Fund 7
Financial Highlights
- -------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31,
-------------------------------------------------------------------------
2003 2002 2001 2000 1999
-------------------------------------------------------------------------
Per Share Operating Performance:
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from investment operations:
Net investment income (a) 0.01 0.01 0.04 0.06 0.05
-------- -------- -------- -------- -------
Total from investment operations 0.01 0.01 0.04 0.06 0.05
-------- -------- -------- -------- -------
Less dividends and distributions:
Dividends from net investment income (0.01) (0.01) (0.04) (0.06) (0.05)
-------- -------- -------- -------- -------
Total dividends and distributions (0.01) (0.01) (0.04) (0.06) (0.05)
-------- -------- -------- -------- -------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Return 0.77% 1.41% 3.73% 6.06%(b) 4.83%(b)
Ratios to Average Net Assets:
Gross expenses 0.44% 0.43% 0.48% 0.54% 0.64%
Fees and expenses waived by the Adviser 0.00% 0.00% 0.00% 0.04% 0.14%
Net expenses 0.44% 0.43% 0.48% 0.50% 0.50%
Net investment income 0.78% 1.37% 3.53% 6.01% 4.72%
Net Assets, End of Period (000 omitted) $385,116 $365,559 $217,305 $160,905 $31,345
(a) Net investment income per share has been calculated in accordance with SEC
requirements, with the exception that end of year accumulated
undistributed/(overdistributed) net investment income has not been adjusted
to reflect current year permanent differences between financial and tax
accounting.
(b) Had the Adviser not waived or reimbursed a portion of expenses, total
return would have been reduced.
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP Money Market Fund Notes To Financial Statements 8
1. Significant Accounting Policies. TimesSquare VP Money Market Fund (the
"Fund") is a separate series of CIGNA Variable Products Group, a Massachusetts
business trust (the "Trust"). The Trust is registered under the Investment
Company Act of 1940, as amended, as a diversified, open-end management
investment company. The objective of the Fund is to provide as high a level of
current income as is consistent with the preservation of capital and liquidity
and the maintenance of a stable $1.00 per share net asset value by investing in
short-term money market instruments. 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 -- The Fund's investments are valued at amortized cost,
which the Board of Trustees has determined constitutes fair value, and which, at
December 31, 2003, approximated cost for federal income tax purposes.
B. Security Transactions and Related Investment Income -- Security transactions
are accounted for on the trade date (date the order to buy or sell is executed).
Interest income, which includes amortization of premium and accretion of
discount, is recorded on the accrual basis. Securities gains and losses are
recognized on the basis of identified cost.
C. 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 and capital gains, if any,
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.
D. Dividends and Distributions to Shareholders -- Dividends from net investment
income are declared and reinvested daily. Dividends and distributions are
recorded by the 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. To the extent that such differences are permanent, a
reclassification to paid-in capital may be required. For the year ended December
31, 2003 the total tax distributions were $2,882,607.
2. Investment Advisory Fees and Other Transactions with Affiliates. Investment
advisory fees are 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 0.35% applied to the
average daily net assets of the Fund. TimesSquare has contractually agreed to
reimburse the Fund for any amount by which its expenses (including the advisory
fee, but excluding interest, taxes, transaction costs incurred in acquiring and
disposing of portfolio securities, and extraordinary expenses) exceed, on an
annual basis, 0.50% of average daily net assets until April 30, 2004, and
thereafter, to the extent described in the Fund's then current prospectus.
Effective May 1, 2002, TimesSquare retains the right to be repaid by the Fund if
the Fund's expenses fall below the
- --------------------------------------------------------------------------------
TimesSquare VP Money Market Fund Notes To Financial Statements 9
(Continued)
percentage specified above prior to the end of the fiscal year or within three
years after TimesSquare waives advisory fees or reimburses the Fund's operating
expenses. As of December 31, 2003, the Fund has no such liability.
Pursuant to an Exemptive Order issued by the Securities and Exchange Commission,
other affiliated CIGNA Variable Products Group Funds may invest in the Fund.
TimesSquare will waive the amount of its advisory fee for the affiliated Funds
in an amount that offsets the amount of the advisory fees incurred in the
TimesSquare VP Money Market Fund.
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 year ended December 31, 2003, the Fund paid or accrued
$155,055.
TimesSquare is an indirect, wholly-owned subsidiary of CIGNA Corporation.
3. Trustees' Fees. Trustees' fees represent remuneration paid or accrued to
Trustees who are not employees of CIGNA Corporation or any of its affiliates.
Trustees may elect to defer all or a portion of their fees, which are invested
in mutual fund shares in accordance with a deferred compensation plan.
4. Capital Stock. The Fund offers an unlimited number of shares of beneficial
interest, without par value. Connecticut General Life Insurance Company, an
indirect, wholly-owned subsidiary of CIGNA Corporation, TimesSquare VP Core
Plus Bond Fund and TimesSquare VP S&P 500[RegTM] Index Fund are the
shareholders of the Fund, with ownership of 90.6%, 2.7%, and 6.7%,
respectively.
- --------------------------------------------------------------------------------
TimesSquare VP Money Market Fund 10
Report of Independent Auditors
To the Trustees and Shareholders of TimesSquare VP Money Market Fund
In our opinion, the accompanying statement of assets and liabilities, including
the investments in securities, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of TimesSquare VP Money Market Fund
(the "Fund") at December 31, 2003, the results of its operations, and the
changes in its net assets and the financial highlights for the periods
indicated, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit 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, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 2003 by
correspondence with the custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 16, 2004
- --------------------------------------------------------------------------------
TimesSquare VP Money Market Fund 11
(Unaudited)
Trustees and Officers
Shareholders elect a Board that oversees the Fund's operations. The Board
appoints officers who are responsible for day-to-day business decisions based on
policies set by the Board.
The following is a list of the Fund's Board of Trustees and officers. Each
Trustee's term of office will be until the next annual meeting of shareholders
or until the election of the Trustee's successor.
Number of
Name, Position Length Portfolios in Other
Address* Held with of Time Principal Occupation(s) During Fund Complex Directorships
and Age Fund Served Past 5 Years Overseen Held by Trustee
- -----------------------------------------------------------------------------------------------------------------------------
Independent Trustees
Russell H. Trustee Trustee since Vice President (Investor Relations, 14 --
Jones 1995 Public Relations) and Treasurer,
59 Kaman Corporation (helicopters and
aircraft components, industrial
distribution)
Paul J. Trustee Trustee since Special Advisor to Board of Directors, 14 Western
McDonald 1995 Friendly Ice Cream Corporation Massachusetts
60 (family restaurants and dairy products) Electric Company
Marnie Trustee Trustee since Diocesan Consultant, Episcopal 14 Boston Mutual
Wagstaff 2003 Diocese of Connecticut; Previously, Life Insurance
Mueller Visiting Professor of Health Company
64 Economics, Wesleyan University
Carol Ann Trustee Trustee since Director and Chair of Audit 14 Reed & Barton
Hayes 2003 Committee, Reed and Barton Corporation
59 Corporation
Affiliated Trustees and Fund Officers
Richard H. Trustee, Trustee and Managing Director, CIGNA Retirement 14 Director of
Forde Chairman of Chairman & Investment Services and various
50 the Board and since 2002, TimesSquare Capital Management, subsidiaries of
President President Inc. CIGNA
since 1998 Corporation
David P. Marks Trustee Trustee since Chief Investment Officer, CIGNA 14 Director of
57 2003 Retirement & Investment Services various
subsidiaries of
CIGNA
Corporation
Alfred A. Vice President Officer CIGNA Funds Treasurer; Assistant Vice 14 --
Bingham III and Treasurer Since 1982 President, TimesSquare Capital
59 Management, Inc.
Jeffrey S. Vice President Officer Senior Counsel, 14 --
Winer and Secretary Since 1993 CIGNA Corporation
46
- -----------------------------------------------------------------------------------------------------------------------------
* All Trustees and officers have an address c/o TimesSquare Capital
Management, Inc., 280 Trumbull Street, H16C, Hartford, CT 06103
- --------------------------------------------------------------------------------
TimesSquare VP Money Market Fund is an open-end, diversified management
investment company that invests in short-term money market instruments. The
investment adviser is TimesSquare Capital Management, Inc., 280 Trumbull Street,
Hartford, Connecticut 06103.
- --------------------------------------------------------------------------------
TIMESSQUARE
VP S&P 500(R) INDEX
FUND
- --------------------------------------------------------------------------------
Annual Report
December 31, 2003
[Logo] CIGNA
- --------------------------------------------------------------------------------
1
Dear Shareholders:
Our commentary for TimesSquare VP S&P 500[RegTM] Index Fund (the "Fund")
covering the year ended December 31, 2003 follows.
Management's Discussion of Fund Performance
Economy
Economic touchstones which had provided hope of an improving recovery at the end
of 2002 grew decidedly weaker over the first three months of the year. Financial
markets closely followed the course of Operation Iraqi Freedom. Uncertainties
were compounded by the deterioration of the western alliance and the realization
that the U.S./U.K. "coalition of the willing" would have to act in defiance of
France, Germany, Russia and the U.N. The promotion of a shock and awe campaign
by coalition forces promising early resolution to the conflict left investors
relieved when war finally commenced in mid-March. However, by the quarter's end,
Turkey's broken promise to provide a northern access route to Iraq and the
inflammatory nature of real-time network war coverage had instead generated
expectations for a messy and prolonged engagement.
Financial markets received psychological boosts from a number of directions in
the second quarter. U.S. and coalition forces achieved a decisive victory in
Iraq and turned their attention to instituting a provisional civil authority to
oversee the transition. President Bush declared an end to "major" hostilities,
although a clean end to the conflict has been elusive. Congress passed the
president's 2003 tax cut initiative. The SARS epidemic, which had been perceived
as a world threat earlier in the year, received unprecedented international
coordinated attention and was brought under control. In an unusual step, Federal
Reserve (Fed) chairman Alan Greenspan acknowledged the threat of deflation,
declared formal steps to guard against it, and suggested that the Fed would
tolerate and even welcome moderate inflation.
The financial markets were subjected to mixed influences during the third
quarter. The Fed on two separate occasions renewed its commitment to low
interest rates in response to nine-year record unemployment levels. Investor
confidence was rocked by both the de facto forced retirement of NYSE CEO Richard
Grasso on compensation issues, and evidence of mutual fund industry
improprieties regarding late trading, market timing and use of brokerage
commissions. Increased estimated costs of the Iraqi reconstruction and the
consequent domestic economic implications eroded presidential support despite
news of the deaths of Saddam Hussein's sons. The Northeast economic region
experienced an energy blackout of historic scope. Second quarter Gross Domestic
Product (GDP) was determined to be 3.3%, surpassing expectations.
Economic growth accelerated in the fourth quarter, capping a year that
confounded consensus views at the end of the previous year. Forecasts of double-
dip recession, deflation, and a protracted period of uninspiring returns were
laid waste by revised third quarter GDP figures of 8.2% and expectations of 4%
full-year growth. Also influencing markets were record construction spending and
a 20-year high in the ISM Purchasing Managers Index. Saddam Hussein finally was
captured, the U.S. dollar hit record lows against the Euro and the country
experienced fear of an outbreak of Mad Cow disease.
Equity Markets
Equity markets retreated, intermediate rates fell and the dollar weakened
through mid-March, as the lack of U.N. resolve left questionable the U.S. course
of action related to Iraq. These trends reversed dramatically during the first
two weeks of engagement in anticipation of an early success,
- --------------------------------------------------------------------------------
2
and then reversed again during the final week of March on concerns of a longer
U.S. presence in Iraq. By quarter's end, total return for the S&P 500[RegTM]
Index was -3.15% (the Fund returned -3.22%).
In the second quarter, equity market participants, buoyed by improving
confidence indicators and better-than-expected reported earnings announcements,
drove stock indexes to their best quarterly return in three and a half years.
AMG Data Services (an independent provider of mutual fund data) reported that
investors, anticipating a second-half acceleration in earnings, poured nearly
$33 billion into stock mutual funds in the second quarter. The S&P 500[RegTM]
Index returned 15.40% for the period (the Fund returned 15.35%).
The average diversified U.S. stock fund returned 16.8% during the second quarter
according to Lipper Analytics. Among large capitalization companies, value
(+18.8%) outperformed growth (+12.17%), as measured by representative S&P/Barra
indexes. The best-performing industries for the three months included employment
services, computer & electronics, tobacco and utilities, which all returned more
than 48%. Health care facilities, the principal loser, gave back 19%.
Equity markets traded in a range throughout most of July and August. An
increase in jobless claims and low retail sales figures counteracted the impact
of evidence of increased M&A (merger and acquisition) activity and a growing
list of companies reporting earnings meeting optimistic expectations. The major
indexes rose somewhat in late August and the first half of September as a
result of strong sales reports from major retailers and an uneventful
anniversary of the 9/11 tragedy, but retreated thereafter on concerns that
excessive dollar weakness might cause foreign liquidation of U.S. stocks as
well as Treasuries. Announced OPEC output cuts and a six-month low in consumer
confidence posed additional setbacks to further growth. By September 30,
returns to the S&P 500[RegTM] Index for the quarter had fallen to 2.65% (the
Fund returned 2.54%). Continuing a trend, small cap (S&P SmallCap Index, 7.08%)
and mid cap (S&P MidCap Index, 6.59%) stocks dominated their large
capitalization counterparts. Among large cap companies, value (+2.54%) and
growth (+2.75) produced somewhat comparable results, as measured by their
respective S&P/Barra Indexes.
Equity markets had a strong start in October. Improvements in business capital
spending, consumer confidence and payrolls, in addition to increased merger
activity and better than expected reported operating earnings, produced a 5.6%
return for the month. The market paused in November with renewed domestic
terrorist threats, attacks on our forces in Iraq and fears of trade wars
prompted by new U.S. quotas on Chinese textiles. A renewed pledge by the Fed to
keep rates low until inflation, employment and capacity utilization rates rose,
combined with Hussein's capture, lifted the S&P 500[RegTM] Index through the
holidays to finish the quarter up 12.18% (the Fund returned 12.06% for the
fourth quarter). Continuing a year-long trend, smaller capitalization segments
outperformed the larger segments. The S&P Mid Cap Index was up 13.19% for the
quarter and 35.62% for the year, while the S&P Small Cap Index generated returns
of 14.78% and 38.79% for the corresponding periods. Among large capitalization
companies, value (14.45% for the quarter, 31.79% for the year) beat growth
(9.93% for the quarter, 25.66% for the year), based on S&P/Barra indexes. All
ten S&P sectors were positive for the year, as were 90% of all companies in the
Index -- a new record. Technology performed best (+47.2%) while
Telecommunications was worst (+7.1%). As might be expected, the equal weighted
Index beat the cap-weighted Index by 13% for the year.
- --------------------------------------------------------------------------------
3
Performance Summary
Returns for the year ended December 31, 2003 (which do not reflect expenses
associated with variable products through which the Fund may be offered and
which would have been lower if such expenses were reflected), were:
Fund 28.27%
Lipper S&P 500 Funds Average 27.78
S&P 500[RegTM] Index 28.68
Outlook
Near term, we expect that the Fed's pledge to remain accommodative and the
benefits of improved productivity will support additional, though less robust,
increases in corporate earnings, allowing the market to move higher. We continue
to believe that, as the year progresses, sustainability of market advances will
be dependent on both the orderly retracing of the dollar (sufficient to produce
improvements in the trade deficit) as well as continued improvement in business
investment to generate job growth. World central banks probably will ensure the
first, but evidence of pending job growth has thus far been lacking.
Sincerely,
/s/ Richard H. Forde
Richard H. Forde
Chairman of the Board and President
CIGNA Variable Products Group
- --------------------------------------------------------------------------------
4
- --------------------------------------------------------------------------------
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT (Unaudited)
12/31/93 - 12/31/03
AVERAGE ANNUAL RETURN
1 Year 5 Year 10 Year
Fund 28.27% -0.91% 10.70%
S&P 500 Index 28.68% -0.57% 11.06%
[The following data was represented as a line chart in the printed material]
Fund S&P 500(R)Index
12/31/1993 $10,000 $10,000
12/31/1994 $10,067 $10,132
12/31/1995 $13,773 $13,940
12/31/1996 $16,869 $17,140
12/31/1997 $22,495 $22,859
12/31/1998 $28,930 $29,390
12/31/1999 $34,937 $35,574
12/31/2000 $31,663 $32,335
12/31/2001 $27,806 $28,493
12/31/2002 $21,547 $22,194
12/31/2003 $27,640 $28,561
TimesSquare VP S&P 500(R) Index Fund (the "Fund") performance figures are
historical and reflect reinvestment of all dividends. The Fund's investment
return and principal value will fluctuate so that an investor's shares, when
sold may be worth more or less than their original cost. Past performance does
not predict future performance. The Fund's return has been compared with the
total return performance of S&P 500(R) Index. This index is a group of unmanaged
securities widely regarded by investors to be representative of the stock market
in general. An investment cannot be made in the index. Index results do not
reflect brokerage changes or other investment expenses.
- --------------------------------------------------------------------------------
TimesSquare VP S&P 500[RegTM] Index Fund Investments in Securities 5
December 31, 2003
Number of Value
Shares (000)
- -------------------------------------------------------------------------
COMMON STOCKS - 87.1%
General Electric Co. 198,800 $ 6,159
Microsoft Corp. 214,100 5,896
Exxon Mobil Corp. 130,824 5,364
Pfizer, Inc. 151,032 5,336
Citigroup, Inc. 102,072 4,955
Wal-Mart Stores, Inc. 85,700 4,546
Intel Corp. 129,300 4,163
American International Group 51,684 3,426
Cisco Systems, Inc. (a) 136,600 3,318
International Business Machine Corp. 34,100 3,160
Johnson & Johnson 58,784 3,037
Procter & Gamble Co. 25,700 2,567
Coca-Cola (The) Co. 48,500 2,461
Bank of America Corp. 29,418 2,366
Altria Group, Inc. 40,200 2,188
Merck & Co., Inc. 44,000 2,033
Wells Fargo & Co. 33,460 1,970
Verizon Communications, Inc. 54,626 1,916
ChevronTexaco Corp. 21,134 1,826
Dell, Inc. (a) 50,700 1,722
SBC Communications, Inc. 65,494 1,707
United Parcel Service, Inc., Class B 22,300 1,662
Time Warner, Inc. (a) 89,400 1,608
Home Depot, Inc. 45,050 1,599
PepsiCo., Inc. 33,960 1,583
Amgen, Inc. (a) 25,568 1,580
Eli Lilly & Co. 22,200 1,561
Viacom, Inc., Class B 34,633 1,537
Morgan (J.P.) Chase & Co. 40,306 1,480
Comcast Corp., Class A (a) 44,662 1,468
Fannie Mae 19,200 1,441
Abbott Laboratories 30,900 1,440
Hewlett-Packard Co. 60,424 1,388
Oracle Corp. (a) 103,672 1,368
3M Co. 15,500 1,318
Morgan Stanley Dean Witter & Co. 21,440 1,241
American Express Co. 25,500 1,230
Wachovia Corp. 26,228 1,222
Number of Value
Shares (000)
- -------------------------------------------------------------------------
Medtronic, Inc. 24,000 $ 1,167
US Bancorp 38,151 1,136
Wyeth 26,400 1,121
Bristol-Myers Squibb Co. 38,400 1,098
Merrill Lynch & Co., Inc. 18,700 1,097
Tyco International Ltd. 39,565 1,048
BellSouth Corp. 36,600 1,036
Bank One Corp. 22,119 1,008
Texas Instruments, Inc. 34,200 1,005
Disney (Walt) Co. 40,400 943
Goldman Sachs Group, Inc. 9,400 928
Fleet Boston Financial Corp. 20,887 912
du Pont (E.I.) de Nemours & Co. 19,678 903
ConocoPhillips 13,468 883
United Technologies Corp. 9,300 881
Lowe's Companies, Inc. 15,500 859
Qualcomm, Inc. 15,800 852
Anheuser-Busch Cos., Inc. 16,100 848
eBay, Inc. (a) 12,800 827
Freddie Mac 13,800 805
Dow (The) Chemical Co. 18,210 757
Applied Materials, Inc. (a) 32,900 739
Walgreen Co. 20,300 739
Gillette (The), Co. 20,000 735
Washington Mutual, Inc. 17,807 714
Boeing (The) Co. 16,576 699
Target Corp. 18,000 691
UnitedHealth Group, Inc. 11,600 675
Fifth Third Bancorp 11,258 665
Alcoa, Inc. 17,168 652
Motorola, Inc. 46,091 649
Schlumberger Ltd. 11,600 635
MBNA Corp. 25,252 628
McDonald's Corp. 25,200 626
EMC Corp. (a) 47,524 614
Nextel Communications, Inc., Class A (a) 21,800 612
Allstate (The) Corp. 13,896 598
Boston Scientific Corp. (a) 16,200 596
Kimberly-Clark Corp. 10,032 593
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP S&P 500[RegTM] Index Fund Investments in Securities 6
December 31, 2003 (Continued)
Number of Value
Shares (000)
- -------------------------------------------------------------------------
General Motors Corp. 11,100 $ 593
First Data Corp. 14,400 592
Yahoo, Inc. (a) 13,000 587
Ford Motor Co. 36,297 581
Caterpillar, Inc. 6,900 573
Honeywell International, Inc. 16,987 568
Clear Channel Communications, Inc. 12,100 567
Exelon Corp. 8,325 552
Emerson Electric Co. 8,300 537
Colgate-Palmolive Co. 10,700 536
Cardinal Health, Inc. 8,575 524
Illinois Tool Works, Inc. 6,100 512
MetLife, Inc. 15,100 508
Schering-Plough Corp. 29,000 504
Bank (The) of New York Co., Inc. 15,200 503
Marsh & McLennan Cos., Inc. 10,500 503
Carnival Corp. 12,500 497
Gannett Co., Inc. 5,400 481
Sysco Corp. 12,900 480
Automatic Data Processing 11,800 467
Lockheed Martin Corp. 8,960 461
Cendant Corp. (a) 20,104 448
Prudential Financial, Inc. 10,700 447
Forest Laboratories, Inc. (a) 7,200 445
Southern (The) Co. 14,400 436
AT&T Wireless Services, Inc. (a) 53,439 427
HCA, Inc. 9,900 425
BB&T Corp. 10,800 417
Lehman Brothers Holdings, Inc. 5,380 415
Newmont Mining Corp. 8,535 415
National City Corp. 12,100 411
Gap (The), Inc. 17,662 410
Dominion Resources, Inc. 6,399 408
International Paper Co. 9,451 407
SunTrust Banks, Inc. 5,600 400
FedEx Corp. 5,900 398
Baxter International, Inc. 12,100 369
Aflac, Inc. 10,200 369
Guidant Corp. 6,100 367
Number of Value
Shares (000)
- -------------------------------------------------------------------------
Duke Energy Corp. 17,924 $ 367
Progressive (The) Corp. 4,300 359
Nike, Inc., Class B 5,200 356
General Dynamics Corp. 3,900 353
Northrop Grumman Corp. 3,639 348
Union Pacific Corp. 5,000 347
State Street Corp. 6,600 344
Waste Management, Inc. 11,532 341
SLM Corp. 9,000 339
Zimmer Holdings, Inc. (a) 4,780 337
Sara Lee Corp. 15,500 337
Travelers Property Casualty Co., Class B 19,796 336
General Mills, Inc. 7,400 335
Costco Wholesale Corp. (a) 9,000 335
Best Buy Co., Inc. 6,400 334
Omnicom Group 3,800 332
Stryker Corp. 3,900 332
Hartford Financial Services Group 5,600 331
Analog Devices, Inc. 7,200 329
Maxim Integrated Products 6,500 324
Occidental Petroleum Corp. 7,600 321
Tribune Co. 6,200 320
Avon Products, Inc. 4,700 317
AT&T Corp. 15,585 316
Schwab, (The) Charles Corp. 26,625 315
Veritas Software Corp. (a) 8,400 312
Computer Associates International, Inc. 11,412 312
Golden West Financial Corp. 3,000 310
Kellogg Co. 8,100 308
Deere & Co. 4,700 306
Kohl's Corp. (a) 6,700 301
PNC Financial Services Group, Inc. 5,500 301
Entergy Corp. 5,200 297
Sprint Corp. (FON Group) 17,900 294
WellPoint Health Networks (a) 3,000 291
Sun Microsystems, Inc. (a) 64,700 291
Alltel Corp. 6,200 289
Harley-Davidson, Inc. 6,000 285
Capital One Financial Corp. 4,600 282
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP S&P 500[RegTM] Index Fund Investments in Securities 7
December 31, 2003 (Continued)
Number of Value
Shares (000)
- ----------------------------------------------------------------------------
Electronic Arts, Inc. (a) 5,900 $ 282
CVS Corp. 7,800 282
ConAgra Foods, Inc. 10,600 280
Mellon Financial Corp. 8,600 276
Kroger Co. (a) 14,900 276
Paychex, Inc. 7,400 275
Danaher Corp. 3,000 275
Weyerhaeuser Co. 4,300 275
Corning, Inc. (a) 26,300 274
Countrywide Financial Corp. 3,600 273
Agilent Technologies, Inc. (a) 9,328 273
Staples, Inc. (a) 9,750 266
McGraw-Hill (The) Cos., Inc. 3,800 266
Devon Energy Corp. 4,600 263
Linear Technology Corp. 6,200 261
Franklin Resources, Inc. 5,000 260
Xilinx, Inc. (a) 6,700 260
Apache Corp. 3,161 256
Masco Corp. 9,300 255
Starbucks Corp. (a) 7,700 255
Univision Communications, Inc., Class A (a) 6,400 254
Wrigley (Wm.) Jr. Co. 4,500 253
Chubb Corp. 3,700 252
Anadarko Petroleum Corp. 4,933 252
Bed Bath & Beyond, Inc. (a) 5,800 251
Heinz (H.J) Co. 6,900 251
Southwest Airlines Co. 15,487 250
Keycorp 8,416 247
Raytheon Co. 8,200 246
Praxair, Inc. 6,400 244
International Game Technology 6,800 243
Burlington Northern Santa Fe Corp. 7,467 242
Apollo Group, Inc., Class A (a) 3,500 238
Air Products & Chemicals, Inc. 4,500 238
Biogen Idec, Inc. (a) 6,435 237
FPL Group, Inc. 3,600 236
American Electric Power Co., Inc. 7,700 235
Lucent Technologies, Inc. (a) 82,436 234
Electronic Data Systems Corp. 9,500 233
Number of Value
Shares (000)
- ----------------------------------------------------------------------------
Ingersoll-Rand Co., Class A 3,400 $ 231
FirstEnergy Corp. 6,500 229
ACE Ltd. 5,500 228
Sears Roebuck and Co. 5,000 227
Equity Office Properties Trust 7,900 226
PG&E Corp. (a) 8,100 225
Halliburton Co. 8,600 224
Kla-Tencor Corp. (a) 3,800 223
TJX Cos., Inc. 10,100 223
PPG Industries, Inc. 3,400 218
Progress Energy, Inc. 4,800 217
Genzyme Corp. (General Division) (a) 4,400 217
Campbell Soup Co. 8,100 217
Xerox Corp. (a) 15,700 217
Burlington Resources, Inc. 3,910 217
SouthTrust Corp. 6,600 216
Baker Hughes, Inc. 6,690 215
John Hancock Financial Services 5,700 214
Marriott International, Inc., Class A 4,600 213
Chiron Corp. (a) 3,700 211
Becton Dickinson & Co. 5,100 210
XL Capital Ltd., Class A 2,700 209
Johnson Controls, Inc. 1,800 209
St. Jude Medical, Inc. (a) 3,400 209
Principal Financial Group 6,300 208
Symantec Corp. (a) 6,000 208
Fortune Brands, Inc. 2,900 207
Intuit, Inc. (a) 3,900 206
Public Service Enterprise Group 4,700 206
Aetna, Inc. 3,042 206
Northern Trust Corp. 4,400 204
Clorox Co. 4,200 204
Anthem, Inc. (a) 2,700 203
Yum! Brands, Inc. (a) 5,880 202
Marathon Oil Corp. 6,100 202
Broadcom Corp., Class A (a) 5,900 201
Hershey Foods Corp. 2,600 200
Allergan, Inc. 2,600 200
Paccar, Inc. 2,325 197
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP S&P 500[RegTM] Index Fund Investments in Securities 8
December 31, 2003 (Continued)
Number of Value
Shares (000)
- --------------------------------------------------------------------------
Lexmark International, Inc., Class A (a) 2,500 $ 197
Archer-Daniels-Midland Co. 12,887 196
Coca-Cola Enterprises, Inc. 8,900 195
Block (H&R), Inc. 3,500 194
Comerica, Inc. 3,450 193
Pitney Bowes, Inc. 4,700 191
Safeway, Inc. (a) 8,700 191
Consolidated Edison, Inc. 4,400 189
Unocal Corp. 5,100 188
Rohm & Haas Co. 4,385 187
Limited Brands, Inc. 10,300 186
Biomet, Inc. 5,100 186
McKesson Corp. 5,723 184
Loews Corp. 3,700 183
Medco Health Solutions, Inc. (a) 5,366 182
Norfolk Southern Corp. 7,700 182
Moody's Corp. 3,000 182
Adobe Systems, Inc. 4,600 181
Simon Property Group, Inc. 3,800 176
St. Paul Companies 4,432 176
Synovus Financial Corp. 6,050 175
AmSouth Bancorp 7,100 174
Marshall & Ilsley Corp. 4,500 172
MBIA, Inc. 2,900 172
Cintas Corp. 3,400 170
Altera Corp. (a) 7,500 170
Federated Department Stores 3,600 170
PeopleSoft, Inc. (a) 7,430 169
Mattel, Inc. 8,645 167
Albertson's, Inc. 7,313 166
May (The) Department Stores Co. 5,650 164
Regions Financial Corp. 4,400 164
Computer Sciences Corp. (a) 3,700 164
Eaton Corp. 1,500 162
CIGNA Corp. (b) 2,800 161
Micron Technology, Inc. (a) 11,900 160
Equity Residential 5,400 159
Dover Corp. 4,000 159
Charter One Financial, Inc. 4,524 156
Number of Value
Shares (000)
- --------------------------------------------------------------------------
Sungard Data Systems, Inc. (a) 5,600 $ 155
Textron, Inc. 2,700 154
Bear Stearns (The) Cos., Inc. 1,925 154
Quest Diagnostics (a) 2,100 154
Autozone, Inc. (a) 1,800 153
PPL Corp. 3,500 153
TXU Corp. 6,400 152
Apple Computer, Inc. (a) 7,100 152
Freeport-McMoRan Copper & Gold, Class B 3,600 152
Qwest Communications International (a) 35,001 151
CSX Corp. 4,200 151
Georgia-Pacific Corp. 4,916 151
Transocean, Inc. (a) 6,271 151
Fiserv, Inc. (a) 3,800 150
Tenet Healthcare Corp. (a) 9,350 150
AMBAC Financial Group, Inc. 2,150 149
Eastman Kodak Co. 5,800 149
Monsanto Co. 5,135 148
Ameren Corp. 3,200 147
AON Corp. 6,125 147
New York Times Co., Class A 3,000 143
Jefferson-Pilot Corp. 2,812 142
Ecolab, Inc. 5,200 142
National Semiconductor Corp. (a) 3,600 142
Kinder Morgan, Inc. 2,400 142
Lincoln National Corp. 3,500 141
American Standard Cos., Inc. (a) 1,400 141
Edison International 6,400 140
Starwood Hotels & Resorts Worldwide, Inc. 3,900 140
Network Appliance, Inc. (a) 6,800 140
Penney (J.C.) Co., Inc. 5,300 139
Parker Hannifin Corp. 2,325 138
Phelps Dodge Corp. (a) 1,816 138
Dollar General Corp. 6,547 137
Cinergy Corp. 3,520 137
Concord EFS, Inc. (a) 9,200 137
Siebel Systems, Inc. (a) 9,800 136
Cincinnati Financial Corp. 3,200 134
Sempra Energy 4,454 134
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP S&P 500[RegTM] Index Fund Investments in Securities 9
December 31, 2003 (Continued)
Number of Value
Shares (000)
- ----------------------------------------------------------------------
ITT Industries, Inc. 1,800 $ 134
Xcel Energy, Inc. 7,820 133
Rockwell Automation, Inc. 3,700 132
Molex, Inc. 3,775 132
Sanmina-SCI Corp. (a) 10,400 131
Tiffany & Co. 2,900 131
DTE Energy Co. 3,300 130
Constellation Energy Group, Inc. 3,300 129
Centex Corp. 1,200 129
Pepsi Bottling Group, Inc. 5,300 128
Interpublic Group Cos., Inc. (a) 8,200 128
Medimmune, Inc. (a) 5,000 127
Hilton Hotels Corp. 7,400 127
Novellus Systems, Inc. (a) 3,000 126
Knight-Ridder, Inc. 1,600 124
AmerisourceBergen Corp. 2,200 124
Avery Dennison Corp. 2,200 123
Family Dollar Stores 3,400 122
North Fork Bancorporation, Inc. 3,000 121
Newell Rubbermaid, Inc. 5,307 121
Nabors Industries Ltd. (a) 2,900 120
IMS Health, Inc. 4,800 119
MeadWestvaco Corp. 3,976 118
Union Planters Corp. 3,750 118
UST, Inc. 3,300 118
Prologis 3,600 116
Sprint Corp. (PCS Group) (a) 20,500 115
AES (The) Corp. (a) 12,200 115
Genuine Parts Co. 3,450 115
NiSource, Inc. 5,200 114
KeySpan Corp. 3,100 114
MGIC Investment Corp. 2,000 114
T. Price Rowe Group, Inc. 2,400 114
Health Management Associates, Class A 4,700 113
Plum Creek Timber Co., Inc. 3,700 113
Delphi Corp. 11,026 113
Pulte Homes, Inc. 1,200 112
Brown-Forman Corp., Class B 1,200 112
Harrah's Entertainment, Inc. 2,250 112
Number of Value
Shares (000)
- ----------------------------------------------------------------------
BJ Services Co. (a) 3,100 $ 111
Zions Bancorporation 1,800 110
Jabil Circuit, Inc. (a) 3,900 110
First Tennessee National Corp. 2,500 110
Rockwell Collins, Inc. 3,600 108
Express Scripts, Inc. (a) 1,600 106
EOG Resources, Inc. 2,300 106
Safeco Corp. 2,700 105
Torchmark Corp. 2,300 105
Cooper Industries Ltd., Class A 1,800 104
Sherwin-Williams (The) Co. 3,000 104
Avaya, Inc. (a) 8,028 104
Huntington Bancshares, Inc. 4,566 103
JDS Uniphase Corp. (a) 28,000 102
Office Depot, Inc. (a) 6,100 102
Whirlpool Corp. 1,400 102
Advanced Micro Devices, Inc. (a) 6,800 101
Williams Cos., Inc. 10,200 100
Autonation, Inc. (a) 5,400 99
Reynolds (RJ) Tobacco Holdings, Inc. 1,700 99
RadioShack Corp. 3,200 98
Teradyne, Inc. (a) 3,800 97
Noble Corp. (a) 2,700 97
Watson Pharmaceuticals, Inc. (a) 2,100 97
Solectron Corp. (a) 16,300 96
Amerada Hess Corp. 1,800 96
American Power Conversion 3,900 95
Vulcan Materials Co. 2,000 95
VF Corp. 2,200 95
Unisys Corp. (a) 6,400 95
EL Paso Corp. 11,543 95
CenturyTel, Inc. 2,850 93
QLogic Corp. (a) 1,800 93
Nordstrom, Inc. 2,700 93
UnumProvident Corp. 5,725 90
Wendy's International, Inc. 2,300 90
Kerr-McGee Corp. 1,938 90
Sealed Air Corp. (a) 1,661 90
Jones Apparel Group Inc. 2,500 88
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP S&P 500[RegTM] Index Fund Investments in Securities 10
December 31, 2003 (Continued)
Number of Value
Shares (000)
- --------------------------------------------------------------------
Allied Waste Industries, Inc. (a) 6,300 $ 87
Applera Corp. (Applied Biosystem) 4,200 87
BMC Software, Inc. (a) 4,600 86
Grainger (W.W.), Inc. 1,800 85
Leggett & Platt, Inc. 3,900 84
McCormick & Co., Inc. 2,800 84
Nucor Corp. 1,500 84
Thermo Electron Corp. (a) 3,300 83
Mercury Interactive Corp. (a) 1,700 83
Scientific-Atlanta, Inc. 3,000 82
Robert Half International, Inc. (a) 3,500 82
Bard (C.R.), Inc. 1,000 81
Sigma-Aldrich Corp. 1,400 80
Dow Jones & Co., Inc. 1,600 80
Waters Corp. (a) 2,400 80
Black & Decker Corp. 1,600 79
Janus Capital Group, Inc. 4,800 79
Sunoco, Inc. 1,500 77
Engelhard Corp. 2,550 76
Symbol Technologies, Inc. 4,500 76
Novell, Inc. (a) 7,200 76
Alberto-Culver Co., Class B 1,200 76
Humana, Inc. (a) 3,300 75
Liz Claiborne, Inc. 2,100 74
Nvidia Corp. (a) 3,200 74
Supervalu, Inc. 2,600 74
Pactiv Corp. (a) 3,100 74
NCR Corp. (a) 1,900 74
King Pharmaceuticals, Inc. (a) 4,766 73
Pinnacle West Capital Corp. 1,800 72
Hasbro, Inc. 3,375 72
Darden Restaurants, Inc. 3,350 70
United States Steel Corp. 2,000 70
Citrix Systems, Inc. (a) 3,300 70
Citizens Communications Co. (a) 5,600 70
Temple-Inland, Inc. 1,100 69
Equifax, Inc. 2,800 69
Goodrich Corp. 2,300 68
Tellabs, Inc. (a) 8,100 68
Number of Value
Shares (000)
- --------------------------------------------------------------------
Navistar International Corp. (a) 1,400 $ 67
PMC-Sierra, Inc. (a) 3,300 66
International Flavors & Fragrances, Inc. 1,900 66
Providian Financial Corp. (a) 5,700 66
Donnelley (RR) & Sons Co. 2,200 66
Apartment Investment & Mgt. Co., Class A 1,900 66
Ball Corp. 1,100 66
KB Home 900 65
Comverse Technology, Inc. (a) 3,700 65
LSI Logic Corp. (a) 7,300 65
Federated Investors, Inc., Class B 2,200 65
Pall Corp. 2,400 64
Stanley (The) Works 1,700 64
Fluor Corp. 1,600 63
Manor Care, Inc. 1,800 62
CIENA Corp. (a) 9,300 62
Ashland, Inc. 1,400 62
Sabre Holdings Corp., Class A 2,840 61
Eastman Chemical Co. 1,500 59
Centerpoint Energy, Inc. 6,107 59
Brunswick Corp. 1,800 57
Bausch & Lomb, Inc. 1,100 57
Tektronix, Inc. 1,800 57
Autodesk, Inc. 2,300 57
Boise Cascade Corp. 1,700 56
Dana Corp. 2,943 54
Toys R US, Inc. (a) 4,200 53
TECO Energy, Inc. 3,500 50
Bemis Co. 1,000 50
Convergys Corp. (a) 2,800 49
Meredith Corp. 1,000 49
Monster Worldwide, Inc. (a) 2,200 48
Reebok International Ltd. 1,200 47
ADC Telecommunications, Inc. (a) 15,700 47
PerkinElmer, Inc. 2,700 46
Carmax, Inc. (a) 1,475 46
Compuware Corp. (a) 7,400 45
Rowan Cos., Inc. (a) 1,900 44
Millipore Corp. (a) 1,000 43
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP S&P 500[RegTM] Index Fund Investments in Securities 11
December 31, 2003 (Continued)
Number of Value
Shares (000)
- ----------------------------------------------------------------------
Maytag Corp. 1,500 $ 42
Circuit City Stores, Inc. 4,100 42
Deluxe Corp. 1,000 41
Ryder System, Inc. 1,200 41
Coors (Adolph) Co., Class B 700 39
Cummins, Inc. 800 39
Reliant Resources, Inc. (a) 5,210 38
Louisiana-Pacific Corp. (a) 2,100 38
Snap-On, Inc. 1,150 37
Calpine Corp. (a) 7,700 37
Crane Co. 1,200 37
Applied Micro Circuits Corp. (a) 5,900 35
Andrew Corp. (a) 2,993 34
Dynegy, Inc., Class A (a) 7,800 33
Big Lots, Inc. (a) 2,300 33
Cooper Tire & Rubber Co. 1,500 32
Del Monte Foods Co. (a) 3,081 32
Allegheny Energy, Inc. (a) 2,500 32
Worthington Industries 1,700 31
Nicor, Inc. 900 31
Gateway, Inc. (a) 6,400 29
Peoples Energy Corp. 700 29
American Greetings Corp., Class A (a) 1,300 28
Delta Air Lines, Inc. (a) 2,400 28
Dillard's, Inc., Class A 1,700 28
Winn-Dixie Stores, Inc. 2,800 28
Thomas & Betts Corp. (a) 1,200 27
Great Lakes Chemical Corp. 1,000 27
Hercules, Inc. (a) 2,200 27
Visteon Corp. 2,551 27
Smucker (J.M.) Co. 578 26
CMS Energy Corp. (a) 3,000 26
Goodyear (The) Tire & Rubber Co. (a) 3,200 25
Allegheny Technologies, Inc. 1,770 23
Parametric Technology Corp. (a) 5,800 23
Tupperware Corp. 1,200 21
Power-One, Inc. (a) 1,900 21
Advanced Medical Optics, Inc. (a) 644 13
Texas Genco Holdings, Inc. 300 10
Number of Value
Shares (000)
- -----------------------------------------------------------------------
EnPro Industries, Inc. (a) 460 $ 6
Hudson Highland Group, Inc. (a) 165 4
Mirant Corp. (a) 7,960 3
Agere Systems, Inc., Class A (a) 823 2
Cavco Industries, Inc. (a) 60 1
Unilever NV 1 --
Kadant, Inc. (a) 1 --
WorldCom, Inc. (MCI Group) (a) 12 --
WorldCom, Inc. (WorldCom Group) (a) 1 --
-------
Total Common Stocks
(Cost - $191,729) 203,871
--------
SHORT-TERM OBLIGATIONS - 12.2%
Money Market Fund - 11.0%
TimesSquare VP Money Market Fund (c) 25,800,000 25,800
--------
Principal
(000)
----------
U.S. Government - 1.2%
U.S. Treasury Bills,
0.98%, 1/29/04 (d) $ 375 375
0.97%, 4/1/04 (d) 1,500 1,496
0.95%, 5/13/04 (d) 1,000 997
--------
2,868
--------
Total Short-Term Obligations
(Cost - $28,668) 28,668
--------
TOTAL INVESTMENTS IN SECURITIES - 99.3%
(Total Cost - $220,397) (e) 232,539
Cash and Other Assets Less Liabilities - 0.7% 1,550
--------
NET ASSETS - 100.0% $234,089
========
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP S&P 500[RegTM] Index Fund Investments in Securities 12
December 31, 2003 (Continued)
- --------------------------------------------------------------------------------
NOTES TO INVESTMENTS IN SECURITIES
(a) Non-income producing securities.
(b) TimesSquare Capital Management, Inc., the fund's Investment Advisor, is an
indirect wholly owned subsidiary of CIGNA Corp.
(c) TimesSquare Capital Management, Inc., the fund's investment adviser, is
also adviser to the TimesSquare VP Money Market Fund.
(d) This security, or a portion thereof, was pledged as collateral for Stock
Index Futures Contracts. At December 31, 2003, the Fund was long 81 S&P
500[RegTM] Futures Contracts expiring in March 2004. Unrealized gains
amounted to $543,713. Underlying face value was $21,945,937 and underlying
market value was $22,489,650.
Tax Information
(e) At December 31, 2003, the net unrealized appreciation of
investments, based on cost for federal income tax purposes of
$221,280,923, was as follows:
Aggregate gross unrealized appreciation for all
investments in which there was an excess of value
over tax cost $40,962,052
Aggregate gross unrealized depreciation for all
investments in which there was an excess of tax cost
over value (29,704,039)
-----------
Unrealized appreciation - net $11,258,013
===========
(f) As of December 31, 2003, the components of
distributable earnings (excluding unrealized
appreciation/(depreciation) disclosed above) on a tax
basis consisted of the following:
Undistributed ordinary income $ 923,062
Undistributed capital gains $ 1,316,339
- --------------------------------------------------------------------------------
TimesSquare Variable Products S&P 500[RegTM] Index Fund
Market % of
Value Net
Ten Largest Positions (Unaudited) (000) Assets
- -------------------------------------------------------------
General Electric Co. $6,159 2.6%
Microsoft Corp. 5,896 2.5
Exxon Mobil Corp. 5,364 2.3
Pfizer, Inc. 5,336 2.3
Citigroup, Inc. 4,955 2.1
Wal-Mart Stores, Inc. 4,546 1.9
Intel Corp. 4,163 1.8
American International Group 3,426 1.5
Cisco Systems, Inc. 3,318 1.4
International Business Machine Corp. 3,160 1.3
- --------------------------------------------------------------------------------
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP S&P 500[RegTM] Index Fund 13
Statement of Assets and Liabilities
December 31, 2003
(In Thousands)
Assets:
Investments in securities at value $232,539
Cash 1
Receivable for Fund shares sold 1638
Receivable for investments sold 601
Interest and dividends receivable, net of withholding taxes 275
Investment for Trustees' deferred compensation plan 130
Futures variation margin receivable 59
--------
Total assets 235,243
--------
Liabilities:
Payable for investments purchased 687
Payable for Fund shares redeemed 182
Deferred Trustees' fees payable 130
Custodian fees payable 54
Insurance expenses payable 21
Audit and legal fees payable 28
Administrative services fees payable 18
Advisory fees payable 17
Shareholder reports payable 15
Other accrued expenses 2
--------
Total liabilities 1,154
--------
Net Assets $234,089
========
Components of Net Assets:
Paid in capital $220,660
Undistributed net investment income 871
Accumulated net realized loss (128)
Net unrealized appreciation of investments and futures 12,686
--------
Net Assets $234,089
========
Shares Outstanding 14,786
========
Net Asset Value and Redemption Price per Share $ 15.83
========
Cost of Investments $220,397
========
Statement of Operations
For the Year Ended December 31, 2003
(In Thousands)
Investment Income:
Income:
Dividends $ 3,383
Interest 26
-------
3,409
-------
Expenses:
Investment advisory fees $422
Custodian fees and expenses 159
Administrative services fees 88
Auditing and legal fees 43
Insurance expenses 22
Shareholder reports 16
Trustees' fees 5
Other 8
----
Total expenses 763
Less expenses waived by Adviser (252)
----
Net expenses 511
----
Net Investment Income 2,898
-------
Realized and Unrealized Gain on
Investments:
Net realized gain from:
Futures contracts 4,844
Investments 454
-------
5,298
-------
Net change in unrealized appreciation of:
Futures contracts 953
Investments 42,127
-------
43,080
-------
Net Realized and Unrealized Gain on
Investments 48,378
-------
Net Increase in Net Assets Resulting from
Operations $51,276
=======
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP S&P 500[RegTM] Index Fund 14
Statements of Changes in Net Assets
(In Thousands)
For the Year Ended
December 31,
---------------------
2003 2002
---------------------
Operations:
Net investment income $ 2,898 $ 3,172
Net realized gain on investments 5,298 14,399
Net unrealized appreciation (depreciation)
on investments 43,080 (76,909)
-------- --------
Net increase (decrease) in net assets from
operations 51,276 (59,338)
-------- --------
Dividends and Distributions:
From net investment income (4,276) (3,122)
From net realized gain (2,574) (6,528)
-------- --------
Total dividends and distributions (6,850) (9,650)
-------- --------
Capital Share Transactions:
Net proceeds from shares sold 66,928 70,188
Net asset value of shares issued to
shareholders in reinvestment of dividends
and distributions 6,850 9,650
-------- --------
73,778 79,838
Cost of shares redeemed (71,408) (126,359)
-------- --------
Net increase (decrease) in net assets from
Fund share transactions 2,370 (46,521)
-------- --------
Net Increase (Decrease) in Net Assets 46,796 (115,509)
Net Assets:
Beginning of period 187,293 302,802
-------- --------
End of period* $234,089 $187,293
======== ========
* includes undistributed net investment
income of: $ 871 $ 127
======== ========
For the Year Ended
December 31,
---------------------
2003 2002
---------------------
Transactions in Capital Stock:
Shares sold 4,884 4,601
Shares issued in reinvestment of dividends
and distributions 439 763
-------- --------
5,323 5,364
Shares redeemed (5,261) (8,131)
-------- --------
Net increase (decrease) in shares
outstanding 62 (2,767)
======== ========
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP S&P 500[RegTM] Index Fund 15
Financial Highlights
- --------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31,
-----------------------------------------------------------------
2003 2002 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
Net asset value, beginning of period $ 12.72 $ 17.31 $ 19.95 $ 22.83 $ 19.73
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income (a) 0.21 0.23 0.23 0.35 0.32
Net realized and unrealized gain (loss) 3.38 (4.13) (2.66) (2.49) 3.75
-------- -------- -------- -------- --------
Total from investment operations 3.59 (3.90) (2.43) (2.14) 4.07
-------- -------- -------- -------- --------
Less dividends and distributions:
From net investment income (0.30) (0.22) (0.21) (0.44) (0.51)
From capital gains (0.18) (0.47) -- (0.30) (0.46)
-------- -------- -------- -------- --------
Total dividends and distributions (0.48) (0.69) (0.21) (0.74) (0.97)
-------- -------- -------- -------- --------
Net asset value, end of period $ 15.83 $ 12.72 $ 17.31 $ 19.95 $ 22.83
======== ======== ======== ======== ========
Total Return (b) 28.27% (22.51)% (12.18)% (9.37)% 20.77%
Ratios to Average Net Assets:
Gross expenses 0.37% 0.37% 0.35% 0.36% 0.38%
Fees and expenses waived or borne by the Adviser 0.12% 0.12% 0.10% 0.11% 0.13%
Net expenses 0.25% 0.25% 0.25% 0.25% 0.25%
Net investment income 1.42% 1.32% 1.38% 1.64% 1.57%
Portfolio Turnover 2% 7% 2% 4% 3%
Net assets, End of Period (000 omitted) $234,089 $187,293 $302,802 $292,739 $282,781
(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) Had the Adviser not waived or reimbursed a portion of expenses, total
return would have been reduced.
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP S&P 500[RegTM] Index Fund Notes to Financial Statements 16
1. Utilization of Indexation Approach. TimesSquare VP S&P 500[RegTM] Index Fund
(the "Fund") seeks to achieve its long-term growth objective by attempting to
replicate the total return performance, reduced by Fund expenses, of the
Standard & Poor's 500[RegTM] Composite Stock Price Index.
2. Significant Accounting Policies. The Fund is a separate series of CIGNA
Variable Products Group, a Massachusetts business trust (the "Trust"). The Trust
is registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. 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 -- Equity securities, including warrants, that are listed
on a national securities exchange or are part of the NASDAQ National Market
System are valued at the last sale price or, if there has been no sale that day,
at the last bid price. Debt and other equity securities traded in the
over-the-counter market, including listed securities whose primary markets are
believed to be over-the-counter, are valued at the most recent bid price.
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 Trust's Board of Trustees. The
Fund's Board of Trustees has designated the Pricing Committee of TimesSquare
Capital Management, Inc. to make, pursuant to procedures approved by the Board
and under the Board's supervision, all necessary determinations of fair value
for the portfolio securities for which market quotations are not readily
available. When fair valuing securities, the Pricing Committee takes into
account factors such as fundamental and analytical information about the
security, the nature and duration of any restrictions on disposition of the
security, market information (including, for example, factors such as historical
price relationships and valuations for securities with similar characteristics),
and evaluation of significant market events. 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. Futures Contracts -- The Fund is authorized to enter into S&P 500[RegTM]
futures contracts. The Fund may use futures contracts with the objective of
earning returns on its short-term investments equivalent to returns on the S&P
500[RegTM] Composite Stock Index. As a result, the purchase of futures contracts
simulates a fully invested position in the underlying index, while maintaining
liquidity. 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
- --------------------------------------------------------------------------------
TimesSquare VP S&P 500[RegTM] Index Fund Notes to Financial Statements 17
(Continued)
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.
C. 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 is
recorded on the accrual basis. Securities gains and losses are determined on the
basis of identified cost.
D. 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 and capital gains to its
shareholders. Therefore, no federal income or excise taxes on realized income or
net capital gains have been accrued. The tax character of distributions paid to
shareholders is as follows:
For the Year Ended December 31,
-------------------------------
Tax Character 2002 2003
---- ----
Ordinary Dividends $3,368,021 $4,276,828
Long-term Capital Gains 6,281,979 2,573,544
E. Dividends and Distributions to Shareholders -- Dividends from net investment
income 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 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 for wash
sales, real estate investment trusts and capital loss carryforwards. To the
extent that such differences are permanent, a reclassification to Components of
Net Assets may be required. As a result, at December 31, 2003, the Fund
increased its undistributed net investment income by $2,123,183, decreased
accumulated net realized gain by $2,124,450 and increased paid in capital by
$1,267.
3. Investment Advisory Fees and Other Transactions with Affiliates. Investment
advisory fees are 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 0.25% applied to the
daily average net assets of the Fund. TimesSquare has contractually agreed to
reimburse the Fund for any amount by which its expenses (including the advisory
fee, but excluding interest, taxes, amortized organization expenses, transaction
costs incurred in acquiring and disposing of portfolio securities, and
extraordinary expenses) exceed, on an annual basis, 0.25% of average daily net
assets until April 30, 2004, and thereafter to the extent described in the
Fund's then current prospectus. Effective May 1, 2002, TimesSquare retains the
right to be repaid by the Fund if the Fund's expenses fall below the percentage
specified above prior to the end of the fiscal year or within three years after
TimesSquare waives advisory fees or reimburses a Fund's operating expenses. The
Fund's remaining contingent liability and expiration dates are as shown below:
Remaining
Contingent Liability Expires during Expires during
(000's) 2005 (000's) 2006 (000's)
- -------------------- -------------- --------------
$482 $230 $252
Pursuant to an Exemptive Order issued by the Securities and Exchange
Commission, the Fund may invest its excess cash in the affiliated
- --------------------------------------------------------------------------------
TimesSquare VP S&P 500[RegTM] Index Fund Notes to Financial Statements 18
(Continued)
TimesSquare VP Money Market Fund ("TSVPMM") 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 affiliated Fund. For the year
ended December 31, 2003, TimesSquare waived $88,887 of its advisory fees payable
by the Fund. Income distributions from TSVPMM, which amounted to $195,549 for
the year ended December 31, 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 Fund's Treasurer and Secretary and
certain persons who assist in carrying out the responsibilities of those
offices. For the year ended December 31, 2003, the Fund paid or accrued $87,850.
TimesSquare is an indirect, wholly-owned subsidiary of CIGNA Corporation.
4. Trustees' Fees. Trustees' fees represent remuneration paid or accrued to
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,
excluding short-term obligations, for the year ended December 31, 2003, were
$19,109 and $41,732 respectively, for U.S. Government and Agency Obligations and
$3,553,427 and $3,010,621 respectively, for all other securities.
6. Capital Stock. The Fund offers an unlimited number of shares of beneficial
interest without par value. Of the 14,785,675 shares outstanding at December 31,
2003, 14,608,832 shares were held by Connecticut General Life Insurance Company
("CG Life") relating to variable annuity and variable universal life insurance
contracts issued by CG Life. CG Life is an indirect, wholly-owned subsidiary of
CIGNA Corporation. The remainder, representing 1.2% of the shares outstanding,
was held by an employee benefit plan established by CG Life for certain of its
employees.
- --------------------------------------------------------------------------------
TimesSquare VP S&P 500[RegTM] Index Fund 19
Report of Independent Auditors
To the Trustees and Shareholders of TimesSquare VP S&P 500[RegTM] Index Fund
In our opinion, the accompanying statement of assets and liabilities, including
the investments in securities, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of TimesSquare VP S&P 500[RegTM] Index
Fund (the "Fund") at December 31, 2003, the results of its operations, and the
changes in its net assets and the financial highlights for the periods
indicated, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit 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, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 2003 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 16, 2004
- --------------------------------------------------------------------------------
TimesSquare VP S&P 500[RegTM] Index Fund 20
(Unaudited)
Trustees and Officers
Shareholders elect a Board that oversees the Fund's operations. The Board
appoints officers who are responsible for day-to-day business decisions based on
policies set by the Board.
The following is a list of the Trust's Board of Trustees and Officers. Each
Trustee's term of office will be until the next annual meeting of shareholders
or until the election of the Trustee's successor.
Number of
Name, Position Length Portfolios in Other
Address* Held with of Time Principal Occupation(s) During Fund Complex Directorships
and Age Fund Served Past 5 Years Overseen Held by Trustee
- --------------------------------------------------------------------------------------------------------------------------------
Independent Trustees
Russell H. Trustee Trustee since Vice President (Investor Relations, 14 --
Jones 1995 Public Relations) and Treasurer,
59 Kaman Corporation (helicopters
and aircraft components, industrial
distribution)
Paul J. Trustee Trustee since Special Advisor to Board of 14 Western
McDonald 1995 Directors, Friendly Ice Cream Massachusetts
60 Corporation (family restaurants Electric Company
and dairy products)
Marnie Trustee Trustee since Diocesan Consultant, Episcopal 14 Boston Mutual Life
Wagstaff 2003 Diocese of Connecticut; Previously, Insurance Company
Mueller Visiting Professor of Health
64 Economics, Wesleyan University
Carol Ann Trustee Trustee since Director and Chair of Audit 14 Reed & Barton
Hayes 2003 Committee, Reed and Barton Corporation
59 Corporation
Affiliated Trustees and Fund Officers
Richard H. Trustee, Trustee and Managing Director, CIGNA 14 Director of various
Forde Chairman of Chairman Retirement & Investment Services subsidiaries of
50 the Board and since 2002, and TimesSquare Capital CIGNA Corporation
President President since Management, Inc.
David P. Trustee Trustee since Chief Investment Officer, CIGNA 14 Director of various
Marks 2003 Retirement & Investment Services subsidiaries of
57 CIGNA Corporation
Alfred A. Vice President Officer CIGNA Funds Treasurer; Assistant 14 --
Bingham III and Treasurer Since 1982 Vice President, TimesSquare Capital
59 Management, Inc.
Jeffrey S. Vice President Officer Senior Counsel, 14 --
Winer and Secretary Since 1993 CIGNA Corporation
46
- --------------------------------------------------------------------------------------------------------------------------------
* All Trustees and officers have an address c/o TimesSquare Capital
Management, Inc., 280 Trumbull Street, H16C, Hartford, CT 06103
- --------------------------------------------------------------------------------
TimesSquare VP S&P 500[RegTM] Index Fund (Continued) 21
(Unaudited)
- --------------------------------------------------------------------------------
"Standard & Poor's[RegTM]," "S&P[RegTM]," "S&P 500[RegTM]," "Standard & Poor's
500," and "500" are trademarks of the Standard & Poor's Corporation (S&P) and
have been licensed for use by CG Life. The TimesSquare VP S&P 500[RegTM] Index
Fund is not sponsored, endorsed, sold or promoted by S&P, and S&P makes no
representation regarding the advisability of investing in the Fund.
TimesSquare VP S&P 500[RegTM] Index Fund is an open-end, diversified management
investment company that seeks to achieve its long-term growth objective by
attempting to replicate the total return performance, reduced by Fund expenses,
of the Standard & Poor's 500[RegTM] Composite Stock Price Index. The investment
adviser is TimesSquare Capital Management, Inc., 280 Trumbull Street, Hartford,
Connecticut 06103.
- --------------------------------------------------------------------------------
Item 2. Code of Ethics.
The Registrant has adopted a Code of Ethics that applies to its principal
executive officer and principal financial officer. The Registrant undertakes to
provide to any person without charge, upon request, a copy of the Code of
Ethics. Such request can be made to the Secretary of the Registrant, c/o
TimesSquare Capital Management, Inc., 280 Trumbull Street, H16C, Hartford, CT
06103.
Item 3. Audit Committee Financial Expert.
The Registrant's Board of Trustees has determined that Carol Ann Hayes, Russell
H. Jones and Paul J. McDonald are "audit committee financial experts", all of
whom are "independent." Mr. Jones serves as Senior Vice President, Chief
Investment Officer and Treasurer of Kaman Corporation. His responsibilities
include communications with financial analysts concerning Kaman Corporation.
Item 4. Principal Accountant Fees and Services.
(a) Audit Fees
For the audit of the Registrant's annual financial statements for the fiscal
year ended December 31, 2002 and December 31, 2003, included in the Registrant's
annual report to shareholders for those fiscal years, PricewaterhouseCoopers LLP
("PWC") billed the Registrant $52,600 and $59,900, respectively.
(b) Audit-Related Fees
For the fiscal years ended December 31, 2002 and December 31, 2003, PWC did not
bill the Registrant for assurance or related services related to the audit of
the Registrant's financial statements.
(c) Tax Fees
For the fiscal years ended December 31, 2002 and December 31, 2003, PWC billed
the Registrant $13,275 and $14,675, respectively, for reviewing the Registrant's
federal income tax and excise tax returns and reviewing excise distribution
estimate calculations.
(d) All Other Fees
For the fiscal years ended December 31, 2002 and December 31, 2003, PWC did not
bill the Registrant for any other products and services.
(e)(1) The Audit Committee has not developed pre-approval policies and
procedures relating to the provision of services to the Registrant by the
Registrant's independent accountant.
(e)(2) For the fiscal years ended December 31, 2002 and December 31, 2003, 100%
of the PWC fees described above under the captions "Audit Related Fees", "Tax
Fees" and "All Other Fees" were approved by the Registrant's Audit Committee
pursuant to paragraph (c)(7)(i)(C) of Rule 2.01 of Regulation S-X.
For the fiscal years ended December 31, 2002 and December 31, 2003, PWC did not
bill any fees that were required to be approved by the Registrant's Audit
Committee pursuant to paragraph (c)(7)(ii)(C) of Rule 2.01 of Regulation S-X.
(f) Not applicable.
(g) The aggregate non-audit fees billed by PWC for services rendered to
TimesSquare Capital Management, Inc. ("TimesSquare"), the investment adviser to
the Registrant, and other entities controlling, controlled by, under common
control with TimesSquare that provide ongoing services to the Registrant for
fiscal years ending December 31, 2002 and 2003, were $128,250 and $100,148,
respectively.
(h) In considering PWC's independence, the Audit Committee considered whether
the provision of non-audit services rendered by PWC to TimesSquare and other
entities controlling, controlled by, under common control with TimesSquare that
provide ongoing services to the Registrant that were not pre-approved pursuant
to paragraph (c)(7)(ii)(C) of Rule 2.01 of Regulation S-X was compatible with
maintaining PWC's independence.
Item 5. Audit Committee Listed Registrants.
Not applicable.
Item 6. [Reserved]
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable.
Item 8. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers.
Not applicable.
Item 9. Submission of Matters to a Vote of Security Holders.
The Registrant has adopted a nominating committee charter that sets forth
procedures by which shareholders may recommend nominees to the Registrant's
Board of Trustees. The charter is attached as an exhibit hereto.
Item 10. Controls and Procedures.
(a) The officers providing the certifications in this report in accordance with
Rule 30a-2 under the Investment Company Act of 1940 have concluded, based on
their evaluation of the Registrant's disclosure controls and procedures (as such
term is defined in such rule), that such controls and procedures are adequate
and reasonably designed to achieve the purposes described in paragraph (c) of
such rule.
(b) There were no changes in the Registrant's internal controls over financial
reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940)
that occurred during the Registrant's last fiscal half-year (the Registrant's
second fiscal half-year in the case of an annual report) that have materially
affected, or is reasonably likely to materially affect, the Registrant's
internal control over financial reporting.
Item 11. Exhibits.
(a)(1) Code of Ethics referred to in Item 2, filed as an exhibit hereto.
(a)(2) Nominating committee charter referred to in Item 9, filed as an exhibit
hereto.
(a)(3) The certifications required by Rule 30a-2 of the Investment Company Act
of 1940, as amended, and Sections 302 and 906 of the Sarbanes-Oxley Act of 2002,
filed as exhibits hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) CIGNA VARIABLE PRODUCTS GROUP
/s/ Jeffrey S. Winer
By:
---------------------------------------------------
Jeffrey S. Winer, Vice President and Secretary
Date: March 5, 2004.
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
/s/ Richard H. Forde
By (Signature and Title)*
------------------------------------------------------
Richard H. Forde, Chairman of the Board and President
Date: March 5, 2004.
/s/ Alfred A. Bingham III
By (Signature and Title)*
------------------------------------------------------
Alfred A. Bingham III, Vice President and Treasurer
Date: March 5, 2004.