UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
811-2299
(Investment Company Act file number)
CIGNA Investment Securities
(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) 757-7276
Registrants' telephone number, including area code
Date of fiscal year end: December 31, 2004
Date of reporting period: December 31, 2004
Item 1. Reports to Stockholders.
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1
Dear Shareholders:
Our commentary for CIGNA Investment Securities (the "Fund") covering the year
ended December 31, 2004 follows.
Management's Discussion of Fund Performance
Market Summary
Bonds gained ground in the first quarter of 2004 as concerns about the
durability of the U.S. economic recovery pushed low interest rates even lower.
Demand for relatively safe assets such as bonds rose amid renewed fears of
terrorist attacks after the Madrid bombing. Lifted by the tailwind of falling
rates, every fixed income sector was in positive territory for the quarter.
Rising interest rates, inflation concerns, and ongoing geopolitical tensions
adversely affected fixed income market performance in the second quarter. The
representative U.S. Lehman Brothers Aggregate Bond Index, benchmark for the
Fund, returned -2.44%, almost completely erasing the 2.66% gains posted in the
first quarter. For the second and first quarters, the Fund returned, based on
the net asset value, -2.34% and 2.39%, respectively.
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.
In the third quarter with an environment of softer-than-expected economic news,
record crude oil prices and persistent geopolitical concerns, the benchmark
Index rallied, returning 3.20% for the period. The Fund returned, based on the
net asset value, 3.04% for the third quarter.
The rally of the third quarter continued into the last three months of the
year, when all major fixed income sectors posted gains, capping a year in which
bonds showed unexpected strength, despite 125 basis points of Fed funds rate
increases. The Fed raised the federal funds rate five times during the year.
Investors understood that the Fed was lifting rates from unusually low levels
that had been set to ward off deflation. The benchmark Index returned 0.95%
compared with 1.07% for the Fund in the fourth quarter.
New Interim Adviser
The Board of Trustees of the Fund approved an interim investment advisory
agreement with BlackRock Advisors, Inc. (BlackRock Advisors) effective November
24, 2004, pursuant to which BlackRock Advisors now serves as investment adviser
to the Fund, responsible for management of the Fund's portfolio.
There has been no change to the investment objective of the Fund as a result of
the appointment of BlackRock Advisors as adviser to the Fund.
During the term of the interim advisory agreement, CIGNA Investment Advisors,
Inc. will provide administrative services to the Fund.
Proposed Merger of the Fund
The Board of Trustees of the Fund approved, subject to Fund shareholder
approval, a reorganization pursuant to which the Fund would transfer
substantially all of its assets and liabilities to BlackRock Core Bond Total
Return Portfolio, a series of BlackRock Funds, an open-end fund managed by
BlackRock Advisors in exchange for Class A shares of BlackRock Core Bond Total
Return Portfolio having a net asset value equal to the net value of the assets
and liabilities so transferred. The shares would then be distributed pro rata
to shareholders of the Fund. Because BlackRock Core Bond Total Return Portfolio
is an open-end fund, its Class A Shares are generally
- --------------------------------------------------------------------------------
2
redeemable for an amount equal to their net asset value per share next
determined. The Fund has scheduled a special meeting of shareholders on April
19, 2005 to seek shareholder approval of the merger of the Fund into the
BlackRock Core Bond Total Return Portfolio. You will receive a proxy/
prospectus with additional information about the proposed merger prior to the
meeting. Please be sure to vote.
Proxy Voting Information
A description of the Fund's proxy voting policies and procedures is available
without charge, upon request, by calling the Fund at 1-800-528-6718 and on the
Securities and Exchange Commission's website at www.sec.gov. Information
regarding how the Fund voted proxies relating to portfolio securities during
the 12-month period ended June 30, 2004 is available on the SEC website.
Quarterly Portfolio Securities
The Fund files a complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. Forms N-Q will be
available on the SEC's website at www.sec.gov and may be reviewed and copied at
the SEC's Public Reference Room in Washington, D.C. Information on the
operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330.
Performance
The Fund returned 1.07% and 4.13%, respectively, for the fourth quarter and the
year ending December 31, 2004. The benchmark Index returned 0.95% and 4.34%,
respectively for the same periods. Helped by the increase in the Fund's stock
price following the announcement of the proposed merger discussed above, the
Fund's returns, based on the market value of its shares traded on the New York
Stock Exchange, were 11.67% and 14.33%, respectively, for the fourth quarter
and the year-to-date.
In the first half of the year, 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.
The primary drivers of the Fund's performance for the third quarter were sector
allocations to and security selections in corporate bonds and high yield. Even
though the bifurcation of performance among issuers and sectors was not
significant in the third quarter, higher beta and lower quality debt did
perform best. Our allocation to emerging market debt and our international (non
dollar) exposure were also positive contributors to results.
In the fourth quarter, the overall positioning of the portfolio was not
drastically changed. After assuming management of the Fund late in November,
BlackRock Advisors looked to sell positions in the credit sectors lacking
relative value and decreased exposure to mortgage-backed securities. Given
their defensive posture on the fixed income markets, BlackRock Advisors took a
slightly more defensive position. At year-end the portfolio had a lower
duration and less exposure to the high yield market, reflecting this posture.
Information about Your Fund's Expenses
As an investor of the Fund, you incur two types of costs: ongoing expenses and
transaction costs. Ongoing expenses include management fees and other Fund
expenses. Examples of transaction costs
- --------------------------------------------------------------------------------
3
include exchange commissions, which are not shown in this section and which
would result in higher total expenses (although this Fund does not charge
transaction fees). The following table, which you are seeing for the first
time, represents a new SEC requirement and is intended to help you understand
your ongoing expenses of investing in the Fund and to help you compare these
expenses with the ongoing expenses of investing in other mutual funds. The
table is based on an investment of $1,000 made at the beginning of the
six-month period ended December 31, 2004.
The table illustrates your Fund's expenses in two ways:
Actual Expenses. The first line of the table below provides information about
actual account values and actual expenses. This helps you estimate the actual
dollar amount of ongoing expenses paid on a $1,000 investment in the Fund using
the Fund's actual return during the period. To estimate the expenses you paid
over the period, simply divide your account value by $1,000 (for example, an
$8,600 account value divided by $1,000 = 8.6), then multiply the result by the
number in the first line under the heading entitled "Expenses Paid During
Period."
Hypothetical Example for Comparison Purposes. The second line of the table
below provides information about hypothetical account values and hypothetical
expenses based on the Fund's actual expense ratio and an assumed rate of return
of 5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use this
information to compare your Fund's ongoing expenses with those of other mutual
funds. To do so, compare this 5% hypothetical Fund return with the 5%
hypothetical return examples that appear in the shareholder reports of other
mutual funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing expenses only and do not reflect any transaction costs, such as
exchange commissions. If these transaction costs had been included, your costs
would have been higher. The "Expenses Paid During Period" line of the table is
useful in comparing ongoing expenses only and will not help you determine the
relative total expenses of owning different funds.
Expenses and value of a $1,000 investment for the six-month period ended
December 31, 2004
Expenses
Beginning Ending Paid During
Account Account Period*
Value Value 07/01/04 to
07/01/04 12/31/04 12/31/04
Actual $ 1,000.00 $ 1,041.40 $ 5.39
Hypothetical
(5% return
before expenses) $ 1,000.00 $ 1,019.86 $ 5.33
* Expenses are equal to the Fund's annualized expense ratio of 1.05%,
multiplied by the average account value over the period, multiplied by the
number of days in the most recent fiscal half year period, then divided by
366. The "Expenses Paid During Period" and the annualized expense ratio are
based on actual expenses paid by the Fund during the period.
- --------------------------------------------------------------------------------
4
For more information, please refer to the Fund's prospectus.
Outlook
It is our new manager's view that strong faith in the Fed and its gradualism
may yet be threatened by strengthening economic data, particularly evidence
that inflationary pressure is building. The continuing path toward higher, more
normal interest rates is unlikely to be as smooth as last quarter and the
portfolio positioning will reflect this view.
Sincerely,
/s/ Richard H. Forde
Richard H. Forde
Chairman of the Board and President
CIGNA Investment Securities
- --------------------------------------------------------------------------------
5
CIGNA Investment Securities OL
Fund Lehman Brothers Aggregate Bond Index
12/94 10000 10000
12/95 12307 11847
12/96 12342 12278
12/97 14326 13463
12/98 15323 14632
12/99 13574 14512
12/00 16605 16199
12/01 18276 17567
12/02 19775 19369
12/03 21505 20164
12/04 24587 21039
- ----------------------------------------------------------
AVERAGE ANNUAL RETURN
1 Year 5 Year 10 Year
Market Value 14.33% 12.62% 9.41%
Net Asset Value 4.13% 7.25% 7.25%
Lehman Brothers 4.34% 7.71% 7.72%
Aggregate Bond Index
- ----------------------------------------------------------
CIGNA Investment Securities Inc. (the "Fund") performance figures are historical
and reflect reinvestment of all dividends and capital gains distributions and
changes in the market value of its stock, or as shown separately in the box,
changes in its underlying net asset value. The Fund is a closed-end management
investment company which trades over the New York Stock Exchange under the
ticker symbol "IIS." Fund performance does not reflect exchange commissions
payable upon the purchase or sale of the Fund's stock. 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 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 charges or other investment
expenses.
- --------------------------------------------------------------------------------
CIGNA Investment Securities Investments in Securities 6
December 31, 2004
Principal Value
(000) (000)
------------------- -----------
LONG-TERM BONDS - 91.6%
Basic Materials - 0.4%
International Paper Co., 5.50%, 2014 $ 170 $ 176
Stora Enso Oyj, 7.38%, 2011 100 115
Weyerhaeuser Co., 6.75%, 2012 70 79
------
370
------
Communications & Media - 8.7%
AOL Time Warner, 6.75%, 2011 80 90
British Sky Broadcasting PLC, 8.20%, 2009 220 254
British Telecommunications PLC, 8.88%
(coupon change based on rating), 2030 50 67
Comcast Corp., 5.85%, 2010 90 96
Deutsche Telekom International Finance BV,
8.50% (coupon change based on rating), 2010 155 185
8.75% (coupon change based on rating), 2030 205 271
France Telecom SA,
7.95%, (coupon change based on rating), 2006 60 63
8.50%, (coupon change based on rating), 2011 600 716
9.25%, (coupon change based on rating), 2031 75 102
Intelsat Ltd., 6.50%, 2013 245 223
Kyivstar GSM, 10.38%, 2009 (144A security
acquired Nov. 2002 & Jan. 2003 for $208) (b) 198 218
Koninklijke KPN, NV, 8.00%, 2010 355 419
Liberty Media Corp.,
7.88%, 2009 500 557
5.70%, 2013 45 45
News America Holdings, Inc.,
7.75%, 2045 110 134
7.90%, 2095 120 141
8.25%, 2096 45 55
News America, Inc., 6.75%, 2038 30 34
Qwest Capital Funding, Inc., 7.00%, 2009 30 30
Qwest Services Corp., 14.00%, 2010 (144A
security acquired March 2004 for $47) (b) 40 48
SBC Communications, Inc., 6.45%, 2034 50 54
Shaw Communications, Inc.,
8.25%, 2010 145 165
7.20%, 2011 65 72
Principal Value
(000) (000)
------------------- -----------
Communications & Media (continued)
Sprint Capital Corp.,
6.13%, 2008 $ 70 $ 75
8.38%, 2012 55 67
6.88%, 2028 210 230
8.75%, 2032 135 180
Tele Communications, Inc.,
9.80%, 2012 260 335
7.88%, 2013 315 378
Telecom Italia Capital SA,
5.25%, 2013 285 288
6.38%, 2033 100 103
6.00%, 2034 (144A security acquired
Sep. 2004 for $159) (b) 160 156
TELUS Corp.,
7.50%, 2007 240 261
8.00%, 2011 405 480
Time Warner, Inc.,
9.13%, 2013 605 778
8.05%, 2016 70 85
TPSA Finance BV, 7.75%, 2008 (144A security
acquired July & Aug. 2003 for $126) (b) 110 121
Univision Communications, Inc., 7.85%, 2011 110 130
Verizon Florida, Inc., 6.13%, 2013 100 106
------
7,812
------
Consumer & Retail - 2.7%
Campbell Soup Co., 5.88%, 2008 110 118
Heinz (H.J.) Co., 6.38%, 2028 10 11
Heinz (H.J.) Finance Co., 6.75%, 2032 90 105
Kellogg Co., 6.60%, 2011 435 487
Kraft Foods, Inc.,
5.25%, 2007 80 83
5.63%, 2011 500 529
Kroger Co., 7.50%, 2031 35 42
May Department Stores Co.,
4.80%, 2009 50 51
5.75%, 2014 105 108
Miller Brewing Co., 5.50%, 2013 (144A security
acquired Aug. 2003 for $144) (b) 145 152
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
CIGNA Investment Securities Investments in Securities 7
December 31, 2004 (Continued)
Principal Value
(000) (000)
------------------- -----------
Consumer & Retail (continued)
Safeway, Inc., 7.25%, 2031 $ 30 $ 34
Tyson Foods, Inc., 8.25%, 2011 75 89
VFB LLC, 10.25%, 2009 (a) (c) 2,129 490
Yum! Brands, Inc., 8.88%, 2011 135 167
-----
2,466
-----
Diversified - 0.6%
General Electric Co., 5.00%, 2013 380 390
ITT Industries, Inc., 7.40%, 2025 125 145
-----
535
-----
Financial - 9.7%
BankBoston Corp., 8.25%, 2026 75 82
Boeing Capital Corp., 6.10%, 2011 85 93
CIT Group, Inc.,
5.75%, 2007 110 116
6.88%, 2009 55 61
Citigroup, Inc.,
6.38%, 2008 1,010 1,100
5.00%, 2014 (144A security acquired July
2002 for $211) (b) 230 231
Countrywide Home Loans., 5.50%, 2007 60 62
Credit Suisse First Boston Mortgage Securities Corp.,
4.63%, 2008 95 97
5.50%, 2013 35 37
Interest Only 7.50%, 2032 (c) 700 -
Interest Only 8.00%, 2032 (c) 542 -
Dresdner Funding Trust I, 8.15%, 2031 (144A
security acquired June & Sep. 2003 for $226) (b) 205 253
Ford Motor Credit Co.,
7.38%, 2009 310 334
7.88%, 2010 270 297
7.38%, 2011 125 135
General Electric Capital Corp., 4.75%, 2014 90 90
General Motors Acceptance Corp.,
6.88%, 2011 530 543
7.25%, 2011 70 73
7.00%, 2012 55 57
Principal Value
(000) (000)
------------------- -----------
Financial (continued)
Glencore Funding LLC, 6.00%, 2014 (144A
security acquired May 2004 for $68) (b) $ 75 $ 73
Golden West Financial Corp., 4.13%, 2007 160 162
Goldman Sachs Group, Inc., 6.88%, 2011 300 338
GS Mortgage Securities Corp. II, 5.40%, 2038 640 668
Household Finance Corp.,
8.00%, 2010 385 453
6.38%, 2012 165 182
HVB Funding Trust I, 8.74%, 2031 (144A
security acquired May, June 2003 & Feb.
2004 for $191) (b) 185 238
International Lease Finance Corp., 6.38%, 2009 165 179
Korea Development Bank, 4.25%, 2007 70 71
Lehman Brothers Holdings, Inc., 6.63%, 2012 180 201
Manufacturers & Traders Trust, 8.00%, 2010 105 125
Midland Funding II, 13.25%, 2006 105 116
Mizuho Financial Group Cayman Ltd., 5.79%, 2014
(144A security acquired Feb. 2004 for $165) (b) 165 173
Morgan (J.P.) Co., 6.00%, 2009 150 160
Morgan Stanley Group, Inc., 6.75%, 2011 215 241
National Rural Utilities Cooperative Finance Corp.,
5.75%, 2009 90 96
NB Capital Trust IV, 8.25%, 2027 125 139
Old Kent Bank, Step Coupon (7.75% to
8/15/05), 2010 270 277
Residential Asset Mortgage Products, Inc.,
Interest Only, 5.75%, 2005 (c) 520 6
4.45%, 2028 350 354
Santander Financial Issuances,
6.80%, 2005 75 76
6.38%, 2011 145 160
Sanwa Finance Aruba AEC, 8.35%, 2009 175 204
Union Planters Corp., 6.75%, 2005 220 226
U.S. West Capital Funding, Inc., 6.50%, 2018 25 21
Wells Fargo & Co., 4.95%, 2013 120 122
-----
8,722
-----
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
CIGNA Investment Securities Investments in Securities 8
December 31, 2004 (Continued)
Principal Value
(000) (000)
------------------- -----------
Foreign Government - 2.5%
Argentina (Republic of),
11.38%, 2010 (d) $ 95 $ 32
11.38%, 2017 (d) 240 82
Brazil (Federal Republic of),
9.25%, 2010 75 84
11.00%, 2012 70 85
10.50%, 2014 180 213
8.88%, 2024 75 78
Export-Import Bank of Korea,
4.25%, 2007 20 20
4.13%, 2009 (144A security acquired
Feb. 2004 for $134) (b) 135 135
Quebec (Province of Canada),
5.50%, 2006 475 489
7.50%, 2023 180 229
Russian Federation, 12.75%, 2028 (144A
security acquired Aug. 2004 for $408) (b) 275 448
United Mexican States, 8.30%, 2031 295 346
------
2,241
------
Health Care - 0.2%
HCA, Inc.,
5.25%, 2008 90 91
7.50%, 2033 50 51
------
142
------
Industrial - 1.0%
Ametek, Inc., 7.20%, 2008 205 222
BAE Systems Holdings, 6.40%, 2011 (144A
security acquired Dec. 2001 & Nov. 2002
for $439) (b) 435 488
Lockheed Martin Corp., 8.50%, 2029 5 7
Systems 2001 Asset Trust LLC, 7.16%, 2011
(144A security acquired June 2001 for $177) (b) 177 192
------
909
------
Insurance - 1.3%
American Re Corp., 7.45%, 2026 300 333
AXA SA, 8.60%, 2030 115 151
Monumental Global Funding II, 3.85%, 2008
(144A security acquired Feb. 2003 for $210) (b) 210 211
Principal Value
(000) (000)
------------------- -----------
Insurance (continued)
Travelers Property Casualty Corp., 5.00%, 2013 $ 110 $ 108
Zurich Capital Trust I, 8.38%, 2037 (144A
security acquired Jan., June, Aug. &
Oct. 2003 for $300) (b) 310 348
------
1,151
------
Oil & Gas - 1.8%
Amerada Hess Corp., 7.30%, 2031 110 123
ConocoPhilips, 8.75%, 2010 410 500
Devon Financing Corp. ULC, 6.88%, 2011 110 125
Duke Capital Corp., 4.30%, 2006 90 91
Duke Energy Field Services LLC,
5.75%, 2006 40 41
6.88%, 2011 30 34
EnCana Corp. 6.50%, 2034 50 55
Morgan Stanley Bank AG for Gazprom OAO,
9.63%, 2013, (144A security acquired
Sep. 2004 for $110) (b) 100 118
Occidental Petroleum Corp., 7.65%, 2006 480 502
Petroleos Mexicanos, 9.50%, 2027 45 56
------
1,645
------
Pharmaceuticals - 0.6%
Lilly (Eli) & Co., 6.77%, 2036 300 356
Wyeth,
5.50% (coupon change based on rating), 2013 40 42
5.50%, 2014 95 98
------
496
------
Transportation - 1.4%
American Airlines, 7.86%, 2011 180 186
Burlington Northern Santa Fe, 6.75%, 2029 45 51
Federal Express Corp., 7.60%, 2097 85 100
Ford Motor Co., 6.38%, 2029 110 99
Norfolk Southern Corp.,
7.70%, 2017 120 147
7.90%, 2097 170 213
Union Pacific Corp.,
7.60%, 2005 285 289
6.13%, 2012 150 165
------
1,250
------
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
CIGNA Investment Securities Investments in Securities 9
December 31, 2004 (Continued)
Principal Value
(000) (000)
------------------- --------------
U.S. Government & Agencies (e) - 57.3%
Fannie Mae,
5.75%, 2008 $ 580 $ 618
6.00%, 2008 3,900 4,197
5.50%, 2017 796 823
4.00%, 2018 330 323
6.50%, 2032 1,231 1,292
7.00%, 2032 682 722
5.00%, 2033 521 518
5.50%, 2033 2,288 2,325
6.50%, 2033 397 417
5.00%, 2034 654 649
5.50%, 2034 997 1,013
Freddie Mac,
6.50%, 2013 94 99
5.50%, 2017 480 497
6.00%, 2017 572 599
6.50%, 2017 302 320
4.50%, 2018 2,643 2,640
5.00%, 2018 2,532 2,574
6.00%, 2032 754 780
7.50%, 2032 364 390
5.00%, 2033 3,639 3,621
5.50%, 2033 2,466 2,507
6.00%, 2033 361 373
6.00%, 2034 2,551 2,636
6.50%, 2034 212 222
Ginnie Mae,
6.50%, 2031 223 235
6.50%, 2032 150 158
5.50%, 2033 588 601
6.00%, 2033 2,458 2,546
U.S. Treasury Bonds,
8.75%, 2017 1,645 2,305
6.00%, 2026 3,328 3,812
5.38%, 2031 460 497
U.S. Treasury Notes,
4.63%, 2006 405 414
7.00%, 2006 7,370 7,814
6.00%. 2009 2,300 2,537
Principal Value
(000) (000)
------------------- --------------
U.S. Government & Agencies (continued)
5.00%, 2011 $ 320 $ 340
4.25%, 2013 45 45
4.75%, 2014 145 151
-------
51,610
-------
Utilities - 3.4%
American Electric Power, Inc., 5.38%, 2010 40 42
Carolina Power & Light Co., 6.50%, 2012 105 116
CenterPoint Energy,
5.70%, 2013 100 106
7.88%, 2013 205 244
Columbus Southern Power Co., 5.50%, 2013 55 58
Detroit Edison Co.,
6.13%, 2010 210 229
6.35%, 2032 5 5
Dominion Resources, Inc., 6.25%, 2012 60 66
DPL, Inc., 8.25%, 2007 155 168
First Energy Corp.,
5.50%, 2006 415 428
6.45%, 2011 185 201
7.38%, 2031 90 103
Korea Electric Power Corp., 5.13%, 2034 (144A
security acquired April 2004 for $74) (b) 75 75
Niagara Mohawk Power Co., 7.63%, 2005 378 390
Nisource Finance Corp., 7.88%, 2010 180 212
Ohio Power Co., 5.50%, 2013 25 26
Oncor Electric Delivery Co., 7.25%, 2033 115 137
Pacific Gas & Electric Co.,
3.60%, 2009 45 44
4.20%, 2011 60 59
6.05%, 2034 85 88
Progress Energy, Inc.,
7.10%, 2011 90 101
7.00%, 2031 85 94
Tenaska Alabama II Partners LP, 6.13%, 2023
(144A security acquired Oct. 2003 for $139) (b) 139 145
-------
3,137
-------
Total Long-Term Bonds
(Cost - $80,365) 82,486
-------
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
CIGNA Investment Securities Investments in Securities 10
December 31, 2004 (Continued)
Number of Value
Shares (000)
------------------ ------------
PREFERRED STOCK - 1.5%
Communications & Media - 0.3%
Centaur Funding Corp., 9.08% (144A security
acquired Jan., Aug. & Nov. 2001 for $217) (b) 205 $ 270
-------
Financial - 1.0%
IBJ Preferred Capital Co. LLC, Step Coupon
(8.79% to 6/30/08) (144A security acquired
Aug, Oct, & Dec. 2003 for $415) (b) 395 447
Natexis AMBS Co. LLC., Step Coupon (8.44%
to 6/30/08) (b) (144A security acquired
May 2002 for $152) (b) 140 158
RBS Capital Trust III, Step Coupon (5.51%
to 9/30/14) 260 266
-------
871
-------
Industrial - 0.2%
RC Trust I, 7.00%, 2006 3,400 178
-------
Total Preferred Stock
(Cost - $1,226) 1,319
-------
Number of Value
Shares (000)
------------------ ------------
SHORT-TERM OBLIGATIONS - 4.8%
Money Market Fund - 4.7%
CIGNA Funds Group - Money Market Fund (f) 4,269,238 $ 4,269
-------
Principal
(000)
--------------
U.S. GOVERNMENT - 0.1%
U.S. Treasury Bills, 1.94%, 3/31/05 $ 50 50
-------
Total Short-Term Obligations
(Cost - $4,319) 4,319
-------
Total Investments in Securities - 97.9%
(Total Cost - $85,910) (g) 88,124
Cash and Other Assets Less Liabilities - 2.1% 1,932
-------
NET ASSETS - 100.0% $90,056
=======
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
CIGNA Investment Securities Investments in Securities 11
December 31, 2004 (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 $4,698,289 (aggregate cost $4,319,299), which is
approximately 5.2% 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) Defaulted security.
(e) Agency obligations are not guaranteed by the U.S. Government.
(f) CIGNA Investment Advisers, Inc., the Funds' administrator, is also
the Adviser to the CIGNA Funds Group - Money Market Fund.
Tax Information
(g) At December 31, 2004, the net unrealized appreciation of
investments, based on cost for federal income tax purposes of
$86,585,560, was as follows:
Aggregate gross unrealized appreciation for all
investments in which there was an excess of value
over tax cost $2,003,028
Aggregate gross unrealized depreciation for all
investments in which there was an excess of tax cost
over value (464,999)
----------
Unrealized appreciation - net $1,538,029
==========
(h) As of December 31, 2004, the Fund had a capital
loss carryforward of $878,543 which expires in the
year 2010.
- -------------------------------------------------------------------------------
Quality Ratings* of Long-Term Bonds (Unaudited)
December 31, 2004
Value % of
(000) Value
---------- ----------
Aaa/AAA $53,120 64.4%
Aa/AA 5,630 6.8
A/A 12,410 15.1
Baa/BBB 9,544 11.6
Ba/BB 1,178 1.4
B/B 114 0.1
Not Rated 490 0.6
------- -----
$82,486 100.0%
======= =====
*The higher of Moody's or Standard & Poor's Ratings.
- -------------------------------------------------------------------------------
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
CIGNA Investment Securities 12
Statement of Assets and Liabilities
December 31, 2004
(In Thousands)
Assets:
Investments at value $88,124
Interest and dividends receivable 1,104
Receivable for euro currency (cost $896) 1,002
Investments for Trustees' deferred compensation plan 182
Prepaid expenses 4
--------
Total assets 90,416
--------
Liabilities:
Deferred Trustees' fees payable 182
Shareholder reports payable 43
Audit and legal fees payable 40
Advisory fees payable 39
Custodian fees payable 37
Administrative services fees payable 10
Transfer agent fees payable 7
Other 2
--------
Total liabilities 360
--------
Net Assets (equivalent to $18.79 per share based on
4,792,215 shares outstanding; 12,000,000 shares of
$0.10 par value authorized) $90,056
========
Components of Net Assets:
Paid-in capital $89,643
Overdistributed net investment income (699)
Accumulated net realized loss (1,208)
Unrealized appreciation of investments, futures,
forward contracts and swaps 2,320
--------
Net Assets $90,056
========
Cost of Investments $85,910
========
Statement of Operations
For the Year Ended December 31, 2004
(In Thousands)
Investment Income:
Income:
Interest income $4,293
Dividend Income 51
------
4,344
Expenses:
Investment advisory fees 460
Auditing and legal fees 130
Custodian fees 118
Shareholder reports 75
Transfer agent fees 50
Administrative services fees 46
Trustees' fees 41
Stock exchange fees 25
Insurance expense 2
---
Total expenses 947
---
Net Investment Income 3,397
------
Realized and Unrealized Gain (Loss)
on Investments:
Net realized gain from:
Foreign currency transactions 106
Futures contracts (81)
Swap contracts 11
Investments 1,057
------
1,093
------
Net change in unrealized appreciation (depreciation) of:
Foreign currency transactions 14
Futures contracts (14)
Investments (833)
------
(833)
------
Net Realized and Unrealized Gain
on Investments 260
------
Net Increase in Net Assets Resulting
from Operations $3,657
======
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
CIGNA Investment Securities 13
Statements of Changes in Net Assets
(In Thousands)
For the Year Ended
December 31,
-----------------------
2004 2003
----------- -----------
Operations:
Net investment income $ 3,397 $ 3,515
Net realized gain on investments 1,093 2,371
Net unrealized appreciation (depreciation)
on investments (833) 346
-------- --------
Net increase in net assets from operations 3,657 6,232
-------- --------
Dividends and Distributions:
From net investment income (4,313) (5,310)
-------- --------
Total dividends and distributions (4,313) (5,310)
-------- --------
Net Increase in Net Assets (656) 922
Net Assets:
Beginning of period 90,712 89,790
-------- --------
End of period * $90,056 $90,712
======== ========
* includes net of overdistributed net
investment income of: $ (699) $ (587)
======== ========
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
CIGNA Investment Securities 14
Financial Highlights
For the Year Ended December 31,
-------------------------------------------------------------------
2004 2003 2002 2001(c) 2000
- ---------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
Net asset value, beginning of period $ 18.93 $ 18.74 $ 18.26 $ 18.11 $ 17.79
Income from investment operations
Net investment income (a) 0.71 0.73 0.80 1.00 1.15
Net realized and unrealized gain (loss)
on investments 0.05 0.57 0.68 0.39 0.37
------- ------- ------- ------- -------
Total from investment operations 0.76 1.30 1.48 1.39 1.52
------- ------- ------- ------- -------
Less dividends and distributions:
Dividends from net investment income (0.90) (1.11) (1.00) (1.24) (1.20)
Distributions from net realized capital gains -- -- -- -- --
------- ------- ------- ------- -------
Total dividends and distributions (0.90) (1.11) (1.00) (1.24) (1.20)
------- ------- ------- ------- -------
Net asset value, end of period $ 18.79 $ 18.93 $ 18.74 $ 18.26 $ 18.11
======= ======= ======= ======= =======
Market value, end of period $ 18.54 $ 17.09 $ 16.75 $ 16.42 $ 16.06
======= ======= ======= ======= =======
Total Investment Return:
Per share market value 14.33% 8.75% 8.20% 10.10% 22.33%
Per share net asset value (b) 4.13% 7.07% 8.39% 7.81% 8.92%
Ratios to Average Net Assets
Expenses 1.05% 0.94% 1.04% 0.97% 0.94%
Net investment income 3.77% 3.86% 4.35% 5.39% 6.58%
Portfolio Turnover 81% 153% 393% 336% 319%
Net Assets, End of Period (000 omitted) $90,056 $90,712 $89,790 $87,499 $86,789
(a) Net investment income per share has been calculated in accordance with SEC
requirements, with the exception that end of the year accumulated
undistributed/(overdistributed) net investment income has not been adjusted
to reflect current year permanent differences between financial and tax
accounting.
(b) Total investment return based on per share net asset value reflects the
effects of changes in net asset value on the performance of the Fund during
each period, and assumes distributions were reinvested at net asset value.
These percentages may not correspond with the performance of a
shareholder's investment in the Fund based on market value, since the
relationship between the market price of the stock and net asset value
varied during each period.
(c) Effective January 1, 2001, the Fund was required to start amortizing
premium and discount on all debt securities. The effect of this change on
net investment income per share was a decrease of $0.01 per share. The
effect to the ratio of net investment income to average net assets was a
decrease of 0.07%. Per share, ratios, and supplemental data for periods
prior to January 1, 2001 have not been restated to reflect this change in
accounting principle.
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
CIGNA Investment Securities Notes to Financial Statements 15
1. Organization. CIGNA Investment Securities (the "Fund") is registered under
the Investment Company Act of 1940, as amended, as a diversified, closed-end
management investment company. The Fund's objective is to generate income and
obtain capital appreciation by investing, under normal market conditions, at
least 65% of its total assets in investment-grade debt securities and preferred
stocks.
2. Significant Accounting Policies. The preparation of financial statements in
accordance with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates. The following is a summary of
significant accounting policies consistently followed by the Fund in the
preparation of its financial statements.
A. Security Valuation -- Debt securities traded in the over-the-counter market,
including listed securities whose primary markets are believed to be
over-the-counter, are valued on the basis of valuations furnished by brokers
trading in the securities or a pricing service, which determines valuations for
normal, institutional-size trading units of such securities using market
information, transactions for comparable securities and various relationships
between securities which are generally recognized by institutional traders.
Short-term investments with remaining maturities of up to and including 60 days
are valued at amortized cost, which approximates market. Short-term investments
that mature in more than 60 days are valued at current market quotations. Other
securities and assets of the Fund are appraised at fair value, as determined in
good faith by, or under the authority of, the Fund's Board of Trustees. The
Fund's Board of Trustees has designated the Pricing Committee of CIGNA
Investment Advisors, Inc. (formerly, 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 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
- --------------------------------------------------------------------------------
CIGNA Investment Securities Notes to Financial Statements (Continued) 16
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:
(1) market value of investment securities, other assets and liabilities at the
daily rates of exchange, and
(2) 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 segregates assets with a market
value equal to the amount of its purchase commitments. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar.
F. Futures Contracts -- The Fund is authorized to enter into futures contracts.
A Fund may use futures contracts for reasons such as managing its exposure to
the markets or movements in interest rates and currency values. Upon entering
into a futures contract, the Fund is required to pledge to the broker an amount
of cash and/or securities equal to the initial margin requirements. During the
period a futures contract is open, changes in the value of a contract are
recognized as unrealized gains or losses by "marking to market" on a daily
basis to reflect the market value of the contract at the end of each day's
trading. Daily variation margin payments are received or made, depending on
whether there were unrealized gains or losses. When a contract is closed, the
Fund records a realized gain or loss equal to the difference between the value
of the contract at the time it was opened and the value at the time it was
closed. Futures contracts include the risk that a
- --------------------------------------------------------------------------------
CIGNA Investment Securities Notes to Financial Statements (Continued) 17
change in the value of the contract may not correlate with the value of the
underlying securities and the possibility of an illiquid market.
G. High Yield Bonds -- The Fund may invest in high yield bonds i.e., fixed
income securities rated below investment-grade. While the market values of
these securities tend to react less to fluctuations in interest rate levels
than do those of investment-grade securities, the market values of certain of
these securities also tend to be more sensitive to individual corporate
developments and changes in economic conditions than investment-grade
securities. In addition, these securities are often highly leveraged and may
not have more traditional methods of financing available to them so that their
ability to service their debt obligations during an economic 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.
For swaps entered into during the year, the terms of the agreement required the
Fund to pay LIBOR (which is set monthly) plus a spread and to receive the
monthly total return on the Index, both based on the notional amount. The Fund
recorded the net amount receivable/payable on a daily basis. The net
receivable/payable was settled in cash monthly and recorded as realized gain/
loss. As of December 31, 2004, the Fund did not have any outstanding swap
agreements.
I. Security Transactions and Related Investment Income -- Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Dividend income is recorded on the ex-dividend date, and interest
income, which includes amortization of premium and accrual of discount, is
recorded on the accrual basis. Securities gains and losses are determined on
the basis of identified cost.
J. Federal Taxes -- It is the Fund's policy to continue to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income or capital gains to its
shareholders. Therefore, no federal income or excise taxes on realized income
have been accrued. Distributions reported in the Statement of Changes in Net
Assets from net investment income, including short-term capital gains, and
capital gains are treated as ordinary income and long-term capital gains,
respectively, for federal income tax purposes.
At December 31, 2004, the Fund had a post-October loss of $31,233, of which
$47,577 was a post-October currency loss. Under current tax law, capital losses
realized after October 31 may be deferred and treated as if occurring on the
first day of the following year.
K. Dividends and Distributions to Shareholders -- Dividends from net investment
income are declared and distributed quarterly and distributions from net
capital gains, to the extent such gains would otherwise be taxable to the
- --------------------------------------------------------------------------------
CIGNA Investment Securities Notes to Financial Statements (Continued) 18
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 of premium amortization, deferred
compensation, interest on defaulted securities, foreign currency transactions,
capital loss carryforwards, deferred losses due to wash sales, and excise tax
regulations. To the extent that such differences are permanent, a
reclassification to the Components of Net Assets may be required. As a result,
at December 31, 2004, the Fund decreased overdistributed net investment income
by $803,828, increased accumulated net realized loss by $704,953 and decreased
paid in capital by $98,875.
3. Investment Advisory Fees and Other Transactions with Affiliates. Through
November 23, 2004, investment advisory fees, in the amount of $410,624, were
paid or accrued to CIGNA Investment Advisors, Inc. ("CIAI") (formerly,
TimesSquare Capital Management, Inc.), certain officers and directors of which
are affiliated with the Fund.
Effective November 24, 2004, the Board of Trustees approved an interim
investment advisory agreement with BlackRock Advisors, Inc. ("BlackRock"),
pursuant to which BlackRock now serves as investment adviser to the Fund.
Advisory fees, in the amount of $49,007, was paid or accrued to BlackRock. Such
advisory fees for both CIAI and BlackRock were and are, respectively, based on
an annual rate of 0.55% of the first $75 million of average weekly net asset
value and 0.40% thereafter.
CIAI is an indirect, wholly-owned subsidiary of CIGNA Corporation.
Pursuant to an Exemptive Order issued by the Securities and Exchange
Commission, and as approved by the shareholders at the shareholder meeting of
April 30, 2002, the Fund may invest excess cash, up to 25% of the Fund's total
assets, in the affiliated CIGNA Funds Group Money Market Fund (MMF) managed by
CIAI. CIAI will waive the amount of its advisory fee for the Fund in an amount
that offsets the amount of the advisory fees incurred in the Fund as a result
of its investment in MMF. For the year ended December 31, 2004, CIAI waived
$13,504 of its advisory fee payable by the Fund. Income distributions from MMF,
which amounted to $31,344 for the year ended December 31, 2004, are recorded as
dividend income in the Statement of Operations.
For administrative services, the Fund reimburses CIAI 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. Effective November 24, 2004, CIAI entered into an administrative
services agreement with the Fund under which CIAI receives 0.05% of the Fund's
average weekly net assets. For the year ended December 31, 2004, the Fund paid
or accrued $45,889.
4. Trustees' Fees. Trustees' fees represent remuneration incurred for trustees
who are not employees of CIGNA Corporation or any of its affiliates. Trustees
may elect to defer receipt of all or a portion of their fees, which are
invested in mutual fund shares in accordance with a deferred compensation plan.
5. Purchases and Sales of Securities.
Purchases and sales of securities for the year ended December 31, 2004, were as
follows (excluding short-term obligations):
Cost of Proceeds From
Securities Securities
Purchased Sold
-------------- --------------
Bonds $18,017,638 $37,959,645
U.S. Government Obligations 51,541,096 33,525,679
----------- -----------
$69,558,734 $71,485,324
=========== ===========
- --------------------------------------------------------------------------------
CIGNA Investment Securities Notes to Financial Statements (Continued) 19
6. Proposed Merger of the Fund. The Board of Trustees of the Fund approved,
subject to Fund shareholder approval, a reorganization pursuant to which the
Fund would transfer substantially all of its assets and liabilities to
BlackRock Core Bond Total Return Portfoli, a series of BlackRock Funds, an
open-end fund managed by BlackRock Advisors in exchange for Class A shares of
BlackRock Core Bond Total Return Portfolio having a net asset value equal to
the net value of the assets and liabilities so transferred. The shares would
then be distributed pro rata to shareholders of the Fund. Because BlackRock
Core Bond Total Return Portfolio is an open-end fund, its Class A Shares are
generally redeemable for an amount equal to their net asset value per sahre
next determined. The Fund has scheduled a special meeting of shareholder
approval of the merger of the Fund into the BlackRock Core Bond Total Return
Portfolio.
- --------------------------------------------------------------------------------
CIGNA Investment Securities 20
Report of Independent Registered Public Accounting Firm
To the Trustees and Shareholders of CIGNA Investment Securities
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 CIGNA Investment Securities (the
"Fund") at December 31, 2004, and the results of its operations, 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 of the Public Company
Accounting Oversight Board (United States). These standards 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, 2004 by correspondence with the custodian,
provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 22, 2005
- --------------------------------------------------------------------------------
CIGNA Investment Securities 21
(Unaudited)
2004 Tax Information
During 2004, the Fund declared dividends of $0.90 per share. For federal income
tax purposes, all of these dividends were ordinary income dividends. There were
no capital gain distributions. Dividends reported to you as ordinary income
dividends on Form 1099, whether received as stock or cash, must be included in
your federal income tax return and must be reported by the Fund to the Internal
Revenue Service.
The Fund hereby designates 0.45% or the maximum amount allowable of its net
taxable income as qualified dividends as provided in the Jobs and Growth Tax
Relief Reconciliation Tax Act of 2003. The 2004 Form 1099-DIV you receive will
show the tax status of all distributions paid to you during the year.
Approximately 0.45% of ordinary income dividends would be eligible for the
dividend received deduction (available to corporate shareholders only).
Approximately 13.25% of ordinary income dividends for the year was derived from
U.S. Government Treasury Obligations, and 34.96% from U.S. Government Agency
obligations.
At December 31, 2004, 57.4% of the Fund's net assets were invested in U.S.
Government and Agency Obligations.
Automatic Dividend and Distribution Investment Plan
Shareholders may elect to have all distributions of dividends and capital gains
automatically reinvested by EquiServe (the "Dividend Paying Agent") as plan
agent under the Automatic Dividend and Distribution Investment Plan (the
"Plan"). Shareholders who do not elect to participate in the Plan will receive
all distributions from the Fund in cash, paid by check mailed directly to the
shareholder by the Dividend Paying Agent. Shareholders may elect to participate
in the Plan and to have all distributions of dividends and capital gains
automatically reinvested by sending written instructions to the Dividend Paying
Agent at the address set forth below on the following page.
If the Trustees of the Fund declare a dividend or determine to make a capital
gains distribution payable either in shares of the Fund or in cash, as
shareholders may have elected, non-participants in the Plan will receive cash
and participants in the Plan will receive the equivalent in shares. If the
market price of the shares as of the close of business on the payment date for
the dividend or distribution is equal to or exceeds their net asset value as
determined as of the close of business on the payment date, participants will
be issued shares of the Fund at a value, equal to the higher of net asset value
or 95% of the market price. If net asset value exceeds the market price of the
shares at such time, or if the Fund declares a dividend or other distribution
payable only in cash, the Dividend Paying Agent will, as agent for Plan
participants, buy shares in the open market, on the New York Stock Exchange or
elsewhere, for the participants' accounts. If, before the Dividend Paying Agent
has completed its purchases, the market price exceeds the net asset value of
the shares, the average per share purchase price paid by the Dividend Paying
Agent may exceed the net asset value of the shares, resulting in the
acquisition of fewer shares than if the dividend or distribution had been paid
in shares issued by the Fund.
Participants in the Plan may withdraw from the Plan upon written notice to the
Dividend Paying Agent. When a participant withdraws from the Plan or upon
termination of the Plan as provided below, certificates for the whole shares
credited to his or her account under the Plan will be issued and a cash payment
will be made for any fraction of a share credited to such account.
- --------------------------------------------------------------------------------
CIGNA Investment Securities 22
(Unaudited)
The Dividend Paying Agent will maintain all shareholders' accounts in the Plan
and will furnish written confirmation of all transactions in the account,
including information needed by shareholders for tax records. Shares in the
account of each Plan participant (other than participants whose shares are
registered in the name of banks, brokers, nominees or other third parties) will
be held by the Dividend Paying Agent in the non-certificated form in the name
of the participant, and each shareholder's proxy will include those shares
purchased pursuant to the Plan. At no additional cost, shareholders of the Fund
may send to the Dividend Paying Agent for deposit into their Plan account those
share certificates in their possession. Shareholders may also send share
certificates to the Dividend Paying Agent for the Dividend Paying Agent to hold
in a book-entry account outside of the Plan.
Whether or not shareholders participate in the Plan, they may elect by notice
to the Dividend Paying Agent to have the Dividend Paying Agent sell their
noncertificated book-entry shares. The Dividend Paying Agent will deduct from
the sale proceeds $2.50 per transaction plus $0.15 per share and remit the
balance of the sales proceeds to the shareholder. The Dividend Paying Agent
will sell the noncertificated shares on the first trading day of the week
immediately following receipt of written notification by the Dividend Paying
Agent.
In the case of shareholders, such as banks, brokers or nominees which hold
shares for others who are the beneficial owners, the Dividend Paying Agent will
administer the Plan on the basis of number of shares certified, from time to
time, by the record shareholders as representing the total amount registered in
the record shareholder's name and held for the account of beneficial owners who
are to participate in the Plan. Investors whose shares are held in the name of
banks, brokers or nominees should confirm with such entities that participation
in the Plan will be possible, and should be aware that they may be unable to
continue to participate in the Plan if their account is transferred to another
bank, broker or nominee. Those who do participate in the Plan may subsequently
elect not to participate by notifying such entities.
There is no charge to participants for reinvesting dividends or distributions,
except for certain brokerage commissions, as described below. The Dividend
Paying Agent's fees for the handling of the reinvestment of dividends and
distributions will be paid by the Fund. However, each participant will pay a
pro rata share of brokerage commissions incurred with respect to the Dividend
Paying Agent's open market purchases in connection with the reinvestment of
dividends or distributions.
Participants in the Plan should be aware that they will realize capital gains
and income for tax purposes upon dividends and distributions, although they
will not receive any payment of cash.
Experience under the Plan may indicate that changes are desirable. Accordingly,
the Fund reserves the right to amend or terminate the Plan as applied to any
dividend or distribution paid subsequent to written notice of the change sent
to the participants in the Plan at least 90 days before the record date for
such dividend or distribution. The Plan also may be amended or terminated by
the Dividend Paying Agent on at least 90 days' written notice to participants
in the Plan. All correspondence concerning the Plan, including requests for
additional information or an application brochure or general inquiries about
your account, should be directed to EquiServe, P.O. Box 43011, Providence, RI
02940-3011 or you may call toll free 1-800-426-5523.
- --------------------------------------------------------------------------------
CIGNA Investment Securities 23
(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 Senior Vice President (Investor 7 --
Jones 1995 Relations, Public Relations), Chief
60 Investment Officer and Treasurer,
Kaman Corporation (helicopters
and aircraft components, industrial
distribution)
Paul J. Trustee Trustee since Special Advisor to the Board of 7 Western
McDonald 1995 Directors, Friendly Ice Cream Massachusetts
61 Corporation (family restaurants Electric Company
and dairy products)
Marnie Trustee Trustee since Diocesan Consultant, Episcopal 7 Boston Mutual Life
Wagstaff 2001 Diocese of Connecticut; Previously, Insurance Company
Mueller Visiting Professor of Health
65 Economics, Wesleyan University
Carol Ann Trustee Trustee since Director and Chair of Audit 7 Reed & Barton
Hayes 2003 Committee, Reed and Barton Corporation
60 Corporation
Affiliated Trustees and Fund Officers
Richard H. Trustee, Trustee, Chief Investment Officer, CIGNA 7 Director of various
Forde Chairman of Chairman and Investment Management subsidiaries of
51 the Board and President since CIGNA Corporation
President 1998
Alfred A. Vice President Officer CIGNA Funds Treasurer; 7 --
Bingham III and Treasurer Since 1982 Assistant Vice President, CIGNA
60 Investment Management
Jeffrey S. Vice President Officer Senior Counsel, 7 --
Winer and Secretary Since 1993 CIGNA Corporation
47
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* All Trustees and officers have an address c/o CIGNA Investment Advisors,
Inc. (formerly, TimesSquare Capital Management, Inc.), 280 Trumbull Street,
H16C, Hartford, CT 06103.
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CIGNA Investment Securities 24
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CIGNA Investment Securities is a closed-end, diversified management investment
company that invests primarily in debt securities. The investment adviser is
BlackRock Advisors, Inc., 100 Bellevue Parkway, Wilmington, Delaware, 19809.
Shareholders may elect to have dividends automatically invested in additional
shares of CIGNA Investment Securities by participating in the Automatic
Dividend Investment Plan ("the Plan"). For a brochure describing this Plan or
general inquiries about your account, contact EquiServe, P.O. Box 43011,
Providence, RI 02940-3011 or you may call toll free 1-800-426-5523.
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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 CIGNA
Investment Advisors, 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, 2003 and December 31, 2004, included in the Registrant's
annual report to shareholders for those fiscal years, PricewaterhouseCoopers LLP
("PWC") billed the Registrant $34,200 and $45,800, respectively.
(b) Audit-Related Fees
For the fiscal years ended December 31, 2003 and December 31, 2004, 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, 2003 and December 31, 2004, PWC billed
the Registrant $5,900 and $6,400, 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, 2003 and December 31, 2004, 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, 2003 and December 31, 2004, 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, 2003 and December 31, 2004, 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 CIGNA
Investment Advisors, Inc. ("CIGNA Advisors"), the investment adviser to the
Registrant, and other entities controlling, controlled by, under common control
with CIGNA Advisors that provide ongoing services to the Registrant for fiscal
years ending December 31, 2003 and 2004, were $100,148 and $4,200, respectively.
(h) In considering PWC's independence, the Audit Committee considered whether
the provision of non-audit services rendered by PWC to CIGNA Advisors and other
entities controlling, controlled by, under common control with CIGNA Advisors
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 of Listed Registrants.
Registrant has a separately-designated standing audit committee designated in
accordance with section 3(a)(58)(A) of the Securities Exchange Act of 1934. The
committee members are Carol Ann Hayes, Russell H. Jones, Paul J. McDonald and
Marnie Wagstaff Mueller.
Item 6. Schedule of Investments.
See report to shareholders filed under Item 1 of this Form.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
The Registrant's policies and procedures that it uses to determine how to vote
proxies relating to portfolio securities are attached hereto.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers.
None.
Item 10. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 11. Controls and Procedures.
(a) The Registrant's principal executive and principal financial officer have
concluded that the Registrant's disclosure controls and procedures (as
defined in Rule 30a-3(c) under the Investment Company Act of 1940, as
amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date
within 90 days of the filing date of the report that includes the
disclosure required by this paragraph, based on their evaluation of these
controls and procedures required by Rule 30a-3(b) under the 1940 Act (17
CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities
Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There was no change in the Registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act) (17 CFR
270.30a-3(d)) that occurred during the second fiscal quarter of the period
covered by this report that has materially affected, or is reasonably
likely to materially affect, the Registrant's internal control over
financial reporting.
Item 12. Exhibits.
(a)(1) Code of ethics attached hereto.
(a)(2) Separate certifications by the registrant's principal executive officer
and principal financial officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment
Company Act of 1940.
(b) A certification by the registrant's chief executive officer and chief
financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Proxy voting procedures.
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 Investment Securities
By: /s/ Alfred A. Bingham III
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Alfred A. Bingham III, Vice President and Treasurer
Date: March 8, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
By (Signature and Title) /s/ Richard H. Forde
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Richard H. Forde, Chairman of the Board and President
Date: March 8, 2005
By (Signature and Title) /s/ Alfred A. Bingham III
--------------------------------------------------------
Alfred A. Bingham III, Vice President and Treasurer
Date: March 8, 2005
Exhibit A
Persons covered by this Code of Ethics:
Richard H. Forde - Chairman of the Board and President
Alfred A. Bingham III - Vice President and Treasurer
Jeffrey S. Winer - Vice President and Secretary