- --------------------------------------------------------------------------------
1
Dear Shareholders:
Our commentary for TimesSquare VP Core Plus Bond Fund (the "Fund") covering the
six months ended June 30, 2004 follows.
Market Summary
Rising interest rates, inflation concerns, and ongoing geopolitical tensions
adversely affected fixed income market performance in the second quarter. The
representative Lehman Brothers Aggregate Bond Index returned -2.44%, almost
erasing the 2.66% gains posted in the first quarter.
On June 30, 2004, the Federal Reserve (Fed) increased the federal funds rate 25
basis points for the first time in four years. This widely expected action was
preceded by rising Treasury yields across the maturity spectrum over the second
quarter, with the bellwether 10-year Treasury note rising from a low of 3.65%
in late March to a peak of nearly 5% in June before leveling off.
Steadily improving credit and liquidity profiles of many issuers continued to
benefit investment-grade corporate bond valuations. Nevertheless, the sector,
represented by the Lehman Brothers U.S. Credit Index, returned -3.43% for the
second quarter, surrendering all of the 3.27% gained in the first quarter.
During the first quarter in the Mortgage Backed Securities (MBS) market, banks
and foreign investors were attracted to the high yield from MBS and absorbed
some of the supply, strong technicals helped valuations remain at high levels,
and the recent wave of refinancing slowed to keep volatility low. In this
environment, the Lehman Brothers MBS Index generated returns of 1.92%. MBS
started the second quarter under pressure, as investors faced extending
durations and declining prices. By mid quarter, MBS had recovered modestly, and
then registered strong gains in June to end the second quarter as the best
performer in the Aggregate Bond Index.
High yield sector performance moderated from its strong recovery in 2003, as
the Lehman Brothers U.S. High Yield Index generated a 1.35% return for the six
months ended June 30, 2004. Risk aversion creeping back into the market and
issuer-specific weaknesses contributed to the performance slump.
Emerging debt markets tumbled in the second quarter, with the JP Morgan
Emerging Markets Bond Index Plus registering a return of -5.89%, down from
3.26% in the first quarter.
Performance
Returns for the Fund (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:
Second Quarter Year-to-date
Fund -2.22% 0.10%
Lipper Corporate
Debt Funds -- 'A'
Rated Average -2.71 -0.18
Lehman Brothers
Aggregate Bond
Index -2.44 0.16
The Fund's performance benefited primarily from its modest short-of-Index
duration bias and yield curve positioning as interest rates rose and the yield
curve flattened. In addition, gains from corporate bond and high yield bond
selection helped offset less favorable results from longer-duration prepayment
penalty bonds and structured securities in the MBS sector. To a lesser extent,
performance was also favorably impacted by our allocation to high yield and
investment-grade credits, where we reduced our exposure during the second
quarter.
- --------------------------------------------------------------------------------
2
Outlook
With the economy on track to steadily improve, barring any political or
geopolitical setbacks, Treasury yields should continue to rise. We remain
constructive on investment-grade corporate bonds as valuations and break-even
spreads continue to offer value and positive excess return potential. We will
also remain vigilant in our sector allocation and security selection and
monitor various risk factors that could impede improvement in credit spreads.
Sincerely,
/s/ Richard H. Forde
Richard H. Forde
Chairman of the Board and President
CIGNA Variable Products Group
Note: This commentary is not part of the Semiannual Report to Shareholders.
- --------------------------------------------------------------------------------
TimesSquare VP Core Plus Bond Fund Investments in Securities 3
June 30, 2004 (Unaudited)
Principal Value
(000) (000)
---------------- ------------
LONG-TERM BONDS - 85.4%
BASIC MATERIALS - 0.4%
International Paper Co., 5.50%, 2014 $ 190 $ 186
Stora Enso Oyj, 7.38%, 2011 115 127
Weyerhaeuser Co., 6.75%, 2012 70 76
------
389
------
COMMUNICATIONS & MEDIA - 9.5%
AOL Time Warner, Inc., 6.75%, 2011 495 533
AT&T Corp.,
8.05%, 2011 60 62
8.75%, (coupon change based on rating), 2031 50 49
British Sky Broadcasting PLC, 8.20%, 2009 340 392
British Telecommunications PLC,
8.88% (coupon change based on rating), 2030 60 74
Comcast Cable Communications, 8.38%, 2007 65 73
Comcast Corp., 5.85%, 2010 140 146
Deutsche Telekom International Finance BV,
8.50% (coupon change based on rating), 2010 410 479
8.75% (coupon change based on rating), 2030 185 225
France Telecom SA,
8.20%, (coupon change based on rating), 2006 90 96
8.75%, (coupon change based on rating), 2011 535 620
9.50%, (coupon change based on rating), 2031 150 188
Intelsat Ltd., 6.50%, 2013 325 287
Kyivstar GSM, 12.75%, 2005 (144A security
acquired Nov. 2002 & Jan. 2003 for $279) (b) 275 298
Koninklijke KPN, NV, 8.00%, 2010 445 515
Liberty Media Corp.,
3.50%, 2006 570 569
5.70%, 2013 80 79
News America Holdings, Inc.,
7.75%, 2045 90 103
7.90%, 2095 170 189
8.25%, 2096 75 87
PTC International Finance II SA, 11.25%, 2009 245 266
Qwest Services Corp., 13.50%, 2010 (144A security
acquired Mar. 2004 for $53) (b) 45 52
Shaw Communications, Inc.,
8.25%, 2010 250 272
Principal Value
(000) (000)
---------------- ------------
Sprint Capital Corp.,
6.13%, 2008 $ 100 $ 105
8.38%, 2012 105 121
6.88%, 2028 140 135
8.75%, 2032 220 256
Tele Communications, Inc.,
9.80%, 2012 515 646
7.88%, 2013 140 159
Telecom Italia Capital SA,
5.25%, 2013
(144A security acquired Oct. 2003 for $170) (b) 170 165
6.38%, 2033 (144A security acquired Oct. 2003
for $204) (b) 205 198
TELUS Corp.,
7.50%, 2007 405 441
8.00%, 2011 430 489
Time Warner, Inc.,
8.18%, 2007 640 715
9.13%, 2013 160 195
8.05%, 2016 55 62
TPSA Finance BV, 7.75%, 2008
(144A security acquired July & Aug. 2003 for
$ 148) (b) 130 144
Univision Communications, Inc., 7.85%, 2011 135 156
Verizon Florida, Inc., 6.13%, 2013 125 129
------
9,770
------
CONSUMER & RETAIL - 2.5%
Campbell Soup Co., 5.88%, 2008 115 122
Heinz (H.J.) Co., 6.38%, 2028 70 72
Heinz (H.J.) Finance Co.,
6.75% (coupon change based on rating), 2032 50 54
Kellogg Co., 6.60%, 2011 500 548
Kraft Foods, Inc.,
5.25%, 2007 140 146
5.63%, 2011 370 376
5.25%, 2013 155 151
Kroger Co., 7.50%, 2031 60 66
Miller Brewing Co., 5.50%, 2013
(144A security acquired Aug. 2003 for $184) (b) 185 186
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP Core Plus Bond Fund Investments in Securities 4
June 30, 2004 (Unaudited) (Continued)
Principal Value
(000) (000)
---------------- ------------
CONSUMER & RETAIL (continued)
Safeway, Inc., 7.25%, 2031 $ 40 42
Tyson Foods, Inc., 8.25%, 2011 90 103
VFB LLC, 10.25%, 2009 (a) 2,044 429
Yum! Brands, Inc., 8.88%, 2011 195 235
-----
2,530
-----
DIVERSIFIED - 0.6%
General Electric Co., 5.00%, 2013 450 443
ITT Industries, Inc., 7.40%, 2025 155 172
-----
615
-----
FINANCIAL - 10.4%
BankBoston Corp., 8.25%, 2026 85 95
Bank of America Corp., 7.80%, 2010 100 115
Boeing Capital Corp., 6.10%, 2011 100 106
CIT Group, Inc.,
5.75%, 2007 95 100
6.88%, 2009 70 77
Citigroup, Inc.,
3.50%, 2008 910 898
7.25%, 2010 260 293
Countrywide Home Loans., 5.50%, 2007 110 115
Credit Suisse First Boston Mortgage Securities Corp.,
4.63%, 2008 165 168
5.50%, 2013 45 45
Interest Only 7.50%, 2032 (c) 700 17
Interest Only 8.00%, 2032 (c) 1,179 30
Dresdner Funding Trust I, 8.15%, 2031 (144A security
acquired June & Sep. 2003 for $268) (b) 245 273
Ford Motor Credit Co.,
7.38%, 2009 700 747
7.88%, 2010 315 343
7.38%, 2011 90 95
General Motors Acceptance Corp.,
6.88%, 2011 620 636
7.00%, 2012 145 149
Glencore Funding LLC, 6.00%, 2014
(144A security acquired May 2004 for $86) (b) 95 88
Principal Value
(000) (000)
---------------- ------------
Golden West Financial Corp., 4.13%, 2007 $ 200 $ 202
Goldman Sachs Group, Inc., 6.88%, 2011 355 390
Household Finance Corp.,
4.75%, 2009 250 251
6.38%, 2012 250 265
HVB Funding Trust I, 8.74%, 2031 (144A security
acquired May & June 2003 for $174) (b) 170 196
HVB Funding Trust III, 9.00%, 2031
(144A security acquired June 2003 for $47) (b) 45 53
International Lease Finance Corp., 6.38%, 2009 275 295
Korea Development Bank, 4.25%, 2007 160 159
Lehman Brothers Holdings, Inc., 6.63%, 2012 210 228
Manufacturers & Traders Trust, 8.00%, 2010 140 164
Midland Funding II, 13.25%, 2006 95 109
Mississippi Business Finance Corp., 7.81%, 2024 500 481
Mizuho Financial Group Cayman Ltd., 5.79%, 2014
(144A security acquired Feb. 2004 for $200) (b) 200 197
Morgan (J.P.) Chase & Co., 6.75%, 2011 50 54
Morgan (J.P.) Co., 6.00%, 2009 120 127
Morgan Stanley Group, Inc., 6.75%, 2011 245 268
National Rural Utilities Cooperative Finance Corp.,
5.75%, 2009 120 127
NB Capital Trust IV, 8.25%, 2027 75 83
Old Kent Bank,
Step Coupon (7.75% to 8/15/05), 2010 300 314
Residential Asset Mortgage Products, Inc.,
Interest Only, 5.75%, 2005 (c) 1,024 31
Santander Financial Issuances,
6.80%, 2005 95 99
6.38%, 2011 60 65
Sanwa Finance Aruba AEC, 8.35%, 2009 205 233
Sovereign Bancorp., Inc., 10.50%, 2006 1,205 1,381
Union Planters Corp., 6.75%, 2005 240 253
U.S. West Capital Funding, Inc., 6.50%, 2018 75 56
Wells Fargo & Co., 4.95%, 2013 140 135
-------
10,606
-------
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP Core Plus Bond Fund Investments in Securities 5
June 30, 2004 (Unaudited) (Continued)
Principal Value
(000) (000)
---------------- ------------
FOREIGN GOVERNMENTS - 2.1%
Argentina (Republic of),
11.38%, 2010 $ 320 $ 94
11.38%, 2017 100 29
Brazil (Federal Republic of), 9.25%, 2010 85 81
Export-Import Bank of Korea, 4.13%, 2009
(144A security acquired Feb. 2004 for $139) (b) 140 136
Quebec (Province of Canada),
5.50%, 2006 630 658
7.50%, 2023 210 252
Russian Federation,
Step Coupon (5.00% to 3/31/07), 2030
(144A security acquired Sept. & Oct. 2002,
July & Oct. 2003 & Feb. 2004 for $465) (b) 540 493
United Mexican States, 8.30%, 2031 345 361
------
2,104
------
HEALTH CARE - 0.2%
HCA, Inc.,
5.25%, 2008 155 154
7.50%, 2033 45 44
------
198
------
INDUSTRIAL - 1.9%
Arrow Electronics, Inc., 6.88%, 2013 200 209
BAE Systems Holdings, 6.40%, 2011
(144A security acquired July & Nov. 2002 &
April 2003 for $482) (b) 465 495
Bombardier, Inc., 6.30%, 2014
(144A security acquired May & June 2004
for $113) (b) 125 106
Lockheed Martin Corp., 8.20%, 2009 745 873
Systems 2001 Asset Trust LLC, 7.16%, 2011 (144A
security acquired Mar. 2002 for $284) (b) 277 294
------
1,977
------
Principal Value
(000) (000)
---------------- ------------
INSURANCE - 1.3%
American Re Corp., 7.45%, 2026 335 355
AXA SA, 8.60%, 2030 130 159
Monumental Global Funding II, 3.85%, 2008
(144A security acquired Feb. & Apr. 2003 for
$ 240) (b) 240 239
Travelers Property Casualty Corp., 5.00%, 2013 135 131
Zurich Capital Trust I, 8.38%, 2037
(144A security acquired Jan., June,
& Oct. 2003 for $357) (b) 360 398
------
1,282
------
OIL & GAS - 1.9%
Amerada Hess Corp., 7.30%, 2031 140 142
Conoco Funding Co., 6.35%, 2011 515 560
Devon Financing Corp. ULC, 6.88%, 2011 140 152
Duke Capital Corp., 4.30%, 2006 160 163
Duke Energy Field Services LLC, 5.75%, 2006 60 63
Morgan Stanley Bank AG for OAO Gazprom,
9.63%, 2013 (144A security acquired
Apr. & June 2004 for $213) (b) 200 206
Occidental Petroleum Corp.,
7.65%, 2006 420 450
6.75%, 2012 115 127
Petroleos Mexicanos, 9.50%, 2027 55 62
Salomon Bros. for OAO Gazprom, 10.50%, 2009 55 63
------
1,988
------
PHARMACEUTICALS - 0.6%
Lilly (Eli) & Co., 6.77%, 2036 350 384
Wyeth,
5.50% (coupon change based on rating), 2013 80 77
5.50%, 2014 195 186
------
647
------
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP Core Plus Bond Fund Investments in Securities 6
June 30, 2004 (Unaudited) (Continued)
Principal Value
(000) (000)
---------------- ------------
TRANSPORTATION - 1.0%
American Airlines, 7.86%, 2011 $ 225 $ 224
Burlington Northern Santa Fe, 6.75%, 2029 60 63
Federal Express Corp., 7.60%, 2097 105 115
Norfolk Southern Corp.,
7.70%, 2017 115 133
7.90%, 2097 235 269
Union Pacific Corp., 6.13%, 2012 220 232
-------
1,036
-------
U.S. GOVERNMENT & AGENCIES (d) - 50.0%
Fannie Mae,
2.50%, 2008 3,480 3,306
4.38%, 2013 1,155 1,102
5.50%, 2017 1,596 1,637
4.00%, 2018 630 601
6.50%, 2032 965 1,006
7.00%, 2032 1,811 1,912
5.50%, 2033 4,079 4,071
6.50%, 2033 1,020 1,063
5.00%, 2034 1,304 1,261
5.50%, 2034 790 787
Interest Only 5.85%, 2042 (c) 8,178 148
Federal Home Loan Banks,
4.13%, 2005 1,375 1,393
Financing Corp.,
Principal Strips from
8.60%, 2019 830 344
9.70%, 2019 840 359
Freddie Mac,
2.75%, 2008 1,080 1,042
6.50%, 2013 140 148
6.50%, 2016 676 715
6.00%, 2017 751 784
6.50%, 2017 100 106
4.50%, 2018 3,547 3,475
5.00%, 2018 3,213 3,223
6.00%, 2032 1,769 1,812
7.50%, 2032 728 784
5.00%, 2033 3,764 3,645
Principal Value
(000) (000)
---------------- ------------
5.50%, 2033 $ 1,861 $ 1,858
6.00%, 2033 796 814
6.50%, 2034 536 559
Interest Only 7.60%, 2043 (c) 7,000 158
Ginnie Mae,
6.50%, 2031 418 437
6.50%, 2032 379 396
5.50%, 2033 1,161 1,161
6.00%, 2033 2,184 2,242
U.S. Treasury Bonds,
8.75%, 2017 185 251
6.00%, 2026 1,240 1,336
U.S. Treasury Notes,
4.63%. 2006 2,770 2,868
4.38%, 2007 700 724
3.38%, 2008 710 701
6.00%, 2009 540 593
5.00%. 2011 75 79
4.25%. 2013 2,285 2,231
4.75%. 2014 135 136
-------
51,268
-------
UTILITIES - 3.0%
American Electric Power, Inc., 5.38%, 2010 90 92
Carolina Power & Light Co., 6.50%, 2012 95 102
CenterPoint Energy,
5.70%, 2013 140 143
7.88%, 2013 245 274
Cleveland Electric Illuminating Co., 7.88%, 2017 200 231
Columbus Southern Power Co., 5.50%, 2013 25 25
Detroit Edison Co.,
6.13%, 2010 185 197
6.35%, 2032 60 60
Dominion Resources Inc., 6.25%, 2012 70 73
DPL, Inc., 8.25%, 2007 180 191
First Energy Corp.,
5.50%, 2006 50 52
6.45%, 2011 300 311
Korea Electric Power Corp., 5.13%, 2034
(144A security acquired Apr. 2004 for $89) (b) 90 86
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP Core Plus Bond Fund Investments in Securities 7
June 30, 2004 (Unaudited) (Continued)
Principal Value
(000) (000)
---------- ---------
UTILITIES (continued)
Nisource Finance Corp., 7.88%, 2010 $ 275 $ 315
Ohio Power Co., 5.50%, 2013 45 45
Oncor Electric Delivery Co., 7.25%, 2033 140 155
Pacific Gas & Electric Co.,
3.60%, 2009 120 116
4.20%, 2011 110 105
6.05%, 2034 145 136
Progress Energy, Inc.,
7.10%, 2011 110 121
7.00%, 2031 100 103
Tenaska Alabama II Partners LP, 6.13%, 2023
(144A security acquired Oct. 2003 for $175) (b) 175 175
------
3,108
------
TOTAL LONG-TERM BONDS
(Cost - $87,153) 87,518
------
Number of
Shares
----------
PREFERRED STOCK - 2.3%
COMMUNICATIONS & MEDIA - 0.3%
Centaur Funding Corp., 9.08% (144A security
acquired Aug. & Nov. 2001 for $261) (b) 235 $ 293
------
FINANCIAL - 1.8%
BCI US Funding Trust,
Step Coupon (8.01% to 7/15/08)
(144A security acquired Jan., Mar. & Apr. 2003
for $462) (b) 420 470
DBS Capital Funding Corp.,
Step Coupon (7.66% to 3/21/2011)
(144A security acquired Oct. 2003 for $231) (b) 205 229
IBJ Preferred Capital Co. LLC,
Step Coupon (8.79% to 6/30/08)
(144A security acquired Aug., Oct. &
Dec. 2003 & Jan. 2004 for $517) (b) 480 526
Number of Value
Shares (000)
----------- ---------
Natexis AMBS Co. LLC.,
Step Coupon (8.44% to 6/30/08)
(144A security acquired May 2002 for
$ 228) (b) 210 $ 240
RBS Capital Trust I,
Step Coupon (4.71% to 7/01/13) 360 332
------
1,797
------
INDUSTRIAL - 0.2%
RC Trust I, 7.00% 4,100 217
------
TOTAL PREFERRED STOCK
(Cost - $2,273) 2,307
------
SHORT-TERM OBLIGATIONS - 6.5%
MONEY MARKET FUND - 6.3%
TimesSquare VP Money Market Fund (e) 6,443,816 6,444
------
Principal
(000)
-------------
U.S. GOVERNMENT - 0.2%
U.S. Treasury Bills,
1.00%, 9/2/04 (f) $ 50 50
0.98%, 9/30/04 (f) 200 199
---
249
---
TOTAL SHORT-TERM OBLIGATIONS
(Cost - $6,693) 6,693
-----
TOTAL INVESTMENTS IN SECURITIES - 94.2%
(Total Cost - $96,119) (h) 96,518
Cash and Other Assets Less Liabilities - 5.8% 5,916
------
NET ASSETS - 100.0% $ 102,434
=========
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP Core Plus Bond Fund Investments in Securities 8
June 30, 2004 (Unaudited) (Continued)
- --------------------------------------------------------------------------------
NOTES TO INVESTMENTS IN SECURITIES
(a) 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.
(b) Indicates restricted security; the aggregate value of restricted
securities is $6,235,674 (aggregate cost $6,070,387), which is
approximately 6.1% of net assets. Valuations have been furnished
by brokers trading in the securities or a pricing service for all
restricted securities.
(c) Illiquid security.
(d) Agency obligations are not guaranteed by the U.S. Government.
(e) TimesSquare Capital Management, Inc., the fund's Investment
Adviser,
is also the Adviser to the TimesSquare VP Money Market Fund.
(f) Pledged as collateral for financial futures contracts. At June 30,
2004, the Fund was long 83, 2-year U.S. Treasury Notes, 19,
30-year U.S. Treasury Bonds and 12, 10-year U.S. Treasury Notes,
and was short 92, 5-year U.S. Treasury Notes futures contracts, all
expiring in September 2004. Net unrealized gain amounted to
$9,562. Underlying face values of the long and short positions were
$20,731,694 and ($9,932,053), respectively, and underlying market
values were $20,808,453 and ($9,999,250), respectively.
(g) A summary of outstanding forward currency contracts, as of June 30,
2004, is as follows:
Net Unrealized
Settlement Forward Foreign Contract Appreciation
Date Contract Currency Value (Depreciation)
- ------------ ---------- ----------- ----------- ---------------
Buys
7/26/04 Euro 2,670,000 3,235,264 17,062
12/10/04 Euro 850,000 1,028,832 6,860
Sells
7/26/04 Euro 2,670,000 3,161,013 (89,597)
- --------------------------------------------------------------------------------
Tax Information
(h) At June 30, 2004, the net unrealized depreciation of investments,
based on cost for federal income tax purposes of $96,667,520, was
as follows:
Aggregate gross unrealized appreciation for all
investments in which there was an excess of value
over tax cost $ 976,666
Aggregate gross unrealized depreciation for all
investments in which there was an excess of tax cost
over value (1,126,034)
------------
Unrealized depreciation-net $ (149,368)
============
Quality Ratings* of Long-Term Bonds
(Unaudited)
June 30, 2004
Value % of
(000) Value
----------- ----------
Aaa/AAA $ 51,788 59.2%
Aa/AA 3,722 4.3
A/A 9,824 11.2
Baa/BBB 20,038 22.9
Ba/BB 1,044 1.2
B/B 549 0.6
Below B 124 0.1
Not Rated 429 0.5
-------- -----
$ 87,518 100.0%
======== =====
* 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 9
Statement of Assets and Liabilities
June 30, 2004 (Unaudited)
(In Thousands)
Assets:
Investments in securities at value $ 96,518
Cash 21
Receivable for investments sold 5,907
Interest and dividends receivable 939
Receivable for forward currency contracts 24
Futures variation margin receivable 19
Investments for Trustees' deferred compensation plan 3
Swap contracts receivable 1
---------
Total assets 103,432
---------
Liabilities:
Payable for investments purchased 812
Payable for forward currency contracts 90
Advisory fees payable 37
Audit and legal fees payable 16
Administrative fees payable 15
Insurance expenses payable 12
Custody fees payable 7
Shareholder reports payable 5
Deferred Trustees' fees payable 3
Other 1
---------
Total liabilities 998
---------
Net Assets $ 102,434
=========
Components of Net Assets:
Paid in capital $ 98,972
Undistributed net investment income 2,225
Accumulated net realized gain 894
Net unrealized appreciation of investments, futures,
forward contracts and swaps 343
---------
Net Assets $ 102,434
=========
Shares Outstanding 10,092
=========
Net Asset Value and Redemption
Price per Share $ 10.15
=========
Cost of Investments $ 96,119
=========
Statement of Operations
For the Six Months Ended June 30, 2004 (Unaudited)
(In Thousands)
Investment Income:
Income:
Interest income $ 3,118
Dividends 44
-------
3,162
Expenses:
Investment advisory fees $ 322
Custodian fees 66
Administrative services fees 34
Audit and legal fees 16
Shareholder reports 3
Transfer agent fees 3
Trustees' fees 2
Insurance expenses 1
Other 1
------
Total expenses 448
Less expenses waived by Adviser (110)
------
Net expenses $ 338
------
Net Investment Income 2,824
-------
Realized and Unrealized Gain (Loss)
on Investments:
Net realized gain (loss) from:
Forward currency contracts 246
Futures contracts (622)
Swap contracts 20
Investments 2,523
-------
2,167
-------
Net change in unrealized appreciation:
Forward currency contracts (221)
Futures contracts (26)
Swap contracts --
Investments (4,023)
-------
(4,270)
-------
Net Realized and Unrealized Loss
on Investments (2,103)
-------
Net Increase in Net Assets Resulting
from Operations $ 721
=======
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP Core Plus Bond Fund 10
Statements of Changes in Net Assets
(In Thousands)
For the Six For the
Months Ended Year Ended
June 30, 2004 December 31,
(Unaudited) 2003
----------------- ----------------
Operations:
Net investment income $ 2,824 $ 6,119
Net realized gain on investments 2,167 3,852
Net unrealized appreciation (depreciation)
on investments (4,270) 467
---------- ----------
Net increase in net assets from operations 721 10,438
---------- ----------
Dividends and Distributions:
From net investment income -- (9,988)
---------- ----------
Total dividends and distributions -- (9,988)
---------- ----------
Capital Share Transactions:
Net proceeds from shares sold 848 63,896
Net asset value of shares issued to
shareholders in reinvestment of dividends
and distributions -- 9,988
---------- ----------
848 73,884
Cost of shares redeemed (61,596) (61,600)
---------- ----------
Net increase (decrease) from Fund share
transactions (60,748) 12,284
---------- ----------
Net Increase (Decrease) in Net Assets (60,027) 12,734
Net Assets:
Beginning of period 162,461 149,727
---------- ----------
End of period * $ 102,434 $ 162,461
========== ==========
* includes (overdistributed) & undistributed
net investment income of: $ 2,225 $ (599)
========== ==========
For the Six For the
Months Ended Year Ended
June 30, 2004 December 31,
(Unaudited) 2003
----------------- ----------------
Transactions in Capital Stock:
Shares sold 83 6,103
Shares issued in reinvestment of
dividends and distributions -- 988
---------- ----------
83 7,091
Shares redeemed (6,019) (5,838)
---------- ----------
Net increase (decrease) in shares
outstanding (5,936) 1,253
========== ==========
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
TimesSquare VP Core Plus Bond Fund 11
Financial Highlights
For the Six
Months Ended For the Year Ended December 31,
June 30, 2004 -------------------------------------------------------
(Unaudited) 2003 2002 2001(e) 2000
----------------- ------------ ------------- ---------------- -----------
Per Share Operating Performance:
Net asset value, beginning of period $ 10.14 $ 10.13 $ 9.70 $ 9.87 $ 9.53
---------- -------- -------- -------- -------
Income from investment operations
Net investment income (a) 0.26 0.45 0.42 0.45 0.54
Net realized and unrealized gain (loss) ( 0.25) 0.25 0.42 0.44 0.35
---------- -------- -------- -------- -------
Total from investment operations 0.01 0.70 0.84 0.89 0.89
---------- -------- -------- -------- -------
Less dividends and distributions:
Dividends from net investment income -- ( 0.69) ( 0.41) ( 0.94) ( 0.55)
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)
---------- --------- --------- -------- --------
Net asset value, end of period $ 10.15 $ 10.14 $ 10.13 $ 9.70 $ 9.87
========== ========= ========= ======== ========
Total Investment Return (b) 0.10%(c) 6.98% 8.66% 9.06% 9.34%
Ratios to Average Net Assets:
Gross expenses 0.66%(d) 0.65% 0.62% 0.60% 0.70%
Fees and expenses waived or borne by the Adviser 0.16%(d) 0.15% 0.12% 0.10% 0.20%
Net expenses 0.50%(d) 0.50% 0.50% 0.50% 0.50%
Net investment income 4.17%(d) 3.91% 4.24% 5.39%(e) 6.66%
Portfolio Turnover 34%(c) 182% 518% 396% 320%
Net assets, End of Period (000 omitted) $ 102,434 $ 162,461 $ 149,727 $ 151,090 $ 84,014
From May 3,
1999* to
December 31,
1999
-------------------
Per Share Operating Performance:
Net asset value, beginning of period $ 10.00
-----------
Income from investment operations
Net investment income (a) 0.33
Net realized and unrealized gain (loss) ( 0.48)
-----------
Total from investment operations ( 0.15)
-----------
Less dividends and distributions:
Dividends from net investment income ( 0.32)
Distributions from net realized capital gains --
Return of capital dividends --
-----------
Total dividends and distributions ( 0.32)
-----------
Net asset value, end of period $ 9.53
===========
Total Investment Return (b) ( 1.48)%(c)
Ratios to Average Net Assets:
Gross expenses 0.79%(d)
Fees and expenses waived or borne by the Adviser 0.29%(d)
Net expenses 0.50%(d)
Net investment income 6.09%(d)
Portfolio Turnover 303%(c)
Net assets, End of Period (000 omitted) $ 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 12
(Unaudited)
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 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
- --------------------------------------------------------------------------------
TimesSquare VP Core Plus Bond Fund Notes to Financial Statements 13
(Unaudited) (Continued)
settlement period, there may be an increased risk of failure of the other party
to honor the transaction. The Fund records changes in market value of the
securities underlying unsettled commitments in unrealized gains and losses.
Gains and losses are realized upon sale of the commitment.
C. Foreign Currency Translations -- Foreign currency transactions from foreign
investment activity are translated into U.S. dollars on the following basis:
(i) market value of investment securities, other assets and liabilities at the
daily rates of exchange, and
(ii) purchases and sales of investment securities, dividend and interest
income and certain expenses at the rates of exchange prevailing on the
respective dates of such transactions.
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,
- --------------------------------------------------------------------------------
TimesSquare VP Core Plus Bond Fund Notes to Financial Statements 14
(Unaudited) (Continued)
depending on whether there were unrealized gains or losses. When a contract is
closed, the Fund records a realized gain or loss equal to the difference
between the value of the contract at the time it was opened and the value at
the time it was closed. Futures contracts include the risk that a change in the
value of the contract may not correlate with the value of the underlying
securities and the possibility of an illiquid market.
G. High Yield Bonds -- The Fund may invest in high yield bonds; i.e., fixed
income securities rated below investment grade. While the market values of
these securities tend to react less to fluctuations in interest rate levels
than do those of investment-grade securities, the market values of certain of
these securities also tend to be more sensitive to individual corporate
developments and changes in economic conditions than investment-grade
securities. In addition, 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 June 30, 2004, 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 $60,000 (30) 12/01/04 $0
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 15
(Unaudited) (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 Expires
Liability during 2004 during 2005 during 2006 during 2007
(000's) (000's) (000's) (000's) (000's)
- ------------ ------------- ------------- ------------- ------------
$ 619 $127 $154 $228 $110
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 six months ended June 30, 2004, TimesSquare waived
$15,783 of its advisory fee payable by the Fund. Income distributions from
TSVPMM, which amounted to $29,149 for the six months ended June 30, 2004, 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 six months ended June 30, 2004, the Fund paid or accrued
$34,332.
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 16
(Unaudited) (Continued)
4. Purchases and Sales of Securities.
Purchases and sales of securities, excluding short-term obligations, for the
six months ended June 30, 2004, were $28,748,350 and $61,738,990, respectively,
for U.S. Government and Agency Obligations and $14,868,245 and $39,954,241
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 June 30, 2004,
were held by Connecticut General Life Insurance Company ("CG Life"). CG Life is
an indirect, wholly-owned subsidiary of CIGNA Corporation.
- --------------------------------------------------------------------------------
TimesSquare VP Core Plus Bond Fund 17
(Unaudited)
Trustees Officers
Russell H. Jones Marnie Wagstaff Mueller Richard H. Forde
Senior Vice President, Diocesan Consultant, Episcopal Chairman of the Board
Chief Investment Officer, and Diocese of Connecticut and President
Treasurer, Kaman Corporation
Paul J. McDonald Carol Ann Hayes Alfred A. Bingham III
Special Advisor to the Board of Director and Chair of Audit Vice President and
Directors, Friendly Ice Cream Committee, Reed and Barton Treasurer
Corporation Corporation
Richard H. Forde Jeffrey S. Winer
Chief Investment Officer, CIGNA Vice President and
Investment Management Secretary
- --------------------------------------------------------------------------------
* 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.
- --------------------------------------------------------------------------------