-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TGCCAuWIaqHFpgYGx5h4lOYhMOOBRyUXPKkAO7FNrxhn3b7kShX0nhBj+QJI+8pf lw8DZxj0mCn6i5WelMMXTA== 0001145443-05-000398.txt : 20050307 0001145443-05-000398.hdr.sgml : 20050307 20050307172453 ACCESSION NUMBER: 0001145443-05-000398 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050307 DATE AS OF CHANGE: 20050307 EFFECTIVENESS DATE: 20050307 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIGNA FUNDS GROUP CENTRAL INDEX KEY: 0000022828 IRS NUMBER: 000000000 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-01646 FILM NUMBER: 05664814 BUSINESS ADDRESS: STREET 1: 2223 WASHINGTON STREET STREET 2: 3 NEWTON EXECUTIVE PARK, SUITE 200 CITY: NEWTON STATE: MA ZIP: 02462 BUSINESS PHONE: 860.534.4700 MAIL ADDRESS: STREET 1: C/O TIMESSQUARE CAPITAL MANAGEMENT, INC. STREET 2: 280 TRUMBULL STREET, H16C CITY: HARTFORD STATE: CT ZIP: 06103 FORMER COMPANY: FORMER CONFORMED NAME: CIGNA ANNUITY FUNDS GROUP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: COMPANION FUND INC DATE OF NAME CHANGE: 19860227 N-CSR 1 d16260.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES 811-1646 (Investment Company Act file number) CIGNA Funds Group (Exact name of registrant as specified in charter) 2223 Washington Street 3 Newton Executive Park Suite 200 Newton, MA 02462 (Address of principal executive offices) Mark Butler, 2223 Washington Street, 3 Newton Executive Park Suite 200, Newton, MA 02462 (Name and address of agent for service) (860) 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. Dear Shareholders: Our report for CIGNA Funds Group Money Market Fund (the "Fund") covering the year ended December 31, 2004 follows. MARKET ENVIRONMENT The Federal Reserve ("Fed") met four times during the first six months of 2004. In the first three meetings, the Fed funds rate was left unchanged at 1%. However, after a year of keeping rates on hold, at the June 30, 2004 meeting the Fed funds rate was raised 25 basis points to 1.25%. The Fed also announced that it was willing to move more aggressively in raising rates in the future if inflation data warranted. The Fed met four more times during the second half of the year, raising the Fed funds rate 25 basis points each time. The Fed has confirmed their plan to continue this trend with further increases at a "measured" pace. Market economists continue to believe the Fed is "staying the course" to keep policy accommodative by moving at a measured pace that will support growth and prevent inflation from accelerating. PORTFOLIO COMPOSITION AND PERFORMANCE On December 31, 2004, the portfolio contained: top-tier domestic commercial paper, 53.4%; top-tier foreign commercial paper, 9.6%; and U.S. Government and Agencies, 37.0%. The Fund is well diversified. Total returns for the year ended December 31, 2004 were: Institutional Class 0.94% Premier Class 0.68 Retail Class 0.43 Lipper Money Market Funds Average 0.60 3-month U.S. Treasury Bill 1.24
As of December 31, 2004, the Fund's weighted average portfolio maturity was 18 days, and the annualized 7-day yield for each class was: Institutional Class 1.78% Premier Class 1.53 Retail Class 1.28
- 1 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, distribution and service (12b-1) fees and other Fund expenses. Examples of transaction costs include sales charges (loads), redemption fees and account maintenance fees, which are not shown in this section and which would result in higher total expenses. The following table 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 part 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 "Expenses Paid During Period" line under the share class you hold. Hypothetical Example for Comparison Purposes. The second part 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 sales charges (loads) or redemption fees. If these transaction costs had been included, your costs would have been higher. The "Expenses Paid During Period" line of the table is useful - - 2 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
Institutional Premier Retail Class Class Class --------------- --------- --------- Actual Beginning Account Value - 07/01/04 $1,000.00 $1,000.00 $1,000.00 Ending Account Value - 12/31/04 $1,006.20 $1,005.00 $1,003.70 Expenses Paid During Period* - 07/01/04 to 12/31/04 $ 2.28 $ 3.54 $ 4.80 Hypothetical (5% return before expenses) Beginning Account Value - 07/01/04 $1,000.00 $1,000.00 $1,000.00 Ending Account Value - 12/31/04 $1,022.87 $1,021.61 $1,020.35 Expenses Paid During Period* - 07/01/04 to 12/31/04 $ 2.29 $ 3.57 $ 4.84 Annualized Expense Ratios* 0.45% 0.70% 0.95%
* Expenses are equal to the Fund's annualized expense ratio for each share class, 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 Ratios" in the tables are based on actual expenses paid by the Fund during the period, net of fee waivers and/or expense reimbursements. If those fee waivers and/or expense reimbursements had not been in effect, the Fund's actual expenses would have been higher. For more information, please refer to the Fund's prospectus. LIQUIDATION OF PREMIER AND RETAIL CLASSES, FOLLOWED BY LIQUIDATION OF THE INSTITUTIONAL CLASS The Fund liquidated the Premier and Retail classes of the Fund on February 7, 2005. Also, although a specific date has not yet been set, it is expected that the Institutional class of the Fund will be liquidated before March 30, 2005, and the Fund will cease operations at that time. - 3 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. OUTLOOK Economic data continues to show signs of strength, and we expect Fed policy makers to maintain their "measured" approach and continue tightening into the first half of 2005. Economic data is expected to reflect an economy which is firmly established and resilient in the face of inflation and rising oil prices. With this in mind, we will continue to focus on the developing trends in both the U.S. and global economies as keys to further Federal Reserve action, and adjust our portfolio strategy accordingly. Sincerely, /s/Richard H. Forde Richard H. Forde Chairman of the Board and President CIGNA Funds Group - - 4
Money Market-Inst_OL Institutional Class 3-Month U.S. Treasury Bill 12/94 10000 1000 12/95 10533 10574 12/96 11050 11129 12/97 11633 11712 12/98 12235 12304 12/99 12830 12887 12/00 13616 13655 12/01 14135 14213 12/02 14328 14455 12/03 14437 14610 12/04 14572 14791
- ------------------------------------------------ AVERAGE ANNUAL RETURNS
1-Year 5-Year 10-Year Institutional 0.94% 2.58% 3.84% - ------------------------------------------------
Money Market-Premier_OL Premier Class 3-Month U.S. Treasury Bill 1/26/00 10000 10000 12/31/00 10550 10596 12/31/01 10924 11029 12/31/02 11046 11217 12/31/03 11103 11337 12/31/04 11179 11478
- ---------------------------------------------------------------- AVERAGE ANNUAL RETURNS
Average Annual Return 1-Year Since Inception Inception Date Premier Class 0.68% 2.28% 1/26/00 - ----------------------------------------------------------------
- 5
Money Market-Retail_OL Retail Class 3-Month U.S. Treasury Bill 4/29/99 10000 10000 12/31/99 10297 10321 12/31/00 10873 10936 12/31/01 11232 11383 12/31/02 11329 11577 12/31/03 11358 11701 12/31/04 11407 11846
- ---------------------------------------------------------------- AVERAGE ANNUAL RETURNS
Average Annual Return 1-Year Since Inception Inception Date Retail Class 0.43% 2.34% 4/29/99 - ----------------------------------------------------------------
- - 6 Money Market Fund INVESTMENTS IN SECURITIES DECEMBER 31, 2004
(IN THOUSANDS) PRINCIPAL VALUE - ------------------------------------------------------------------------ COMMERCIAL PAPER - 63.0% Domestic - 53.4% Abbott Laboratories, 2.24%, 1/11/05 $ 7,321 $ 7,316 Barton Capital Corp., 2.30%, 1/5/05 8,000 7,998 2.35%, 1/5/05 7,921 7,919 CAFCO LLC, 2.27%, 1/4/05 9,449 9,447 ChevronTexaco Funding Co., 2.24%, 1/4/05 11,000 10,998 Gannett Co., Inc., 2.25%, 1/6/05 15,730 15,725 Gillette Co., 2.24%, 1/18/05 8,361 8,352 Hershey Foods Corp., 2.25%, 1/7/05 8,900 8,897 2.18%, 1/18/05 7,500 7,492 International Business Machine Corp., 2.25%, 1/5/05 9,017 9,015 Kimberly Clark Corp., 2.15%, 1/20/05 8,853 8,843 Merrill Lynch & Co., Inc., 2.28%, 1/24/05 15,227 15,205 Minnesota Mining & Manufacturing Co., 2.25%, 1/13/05 10,022 10,015 2.18%, 1/20/05 6,271 6,264 Morgan Stanley, Dean Witter, Discover & Co., 2.34%, 1/7/05 14,234 14,229 Old Line Funding Corp., 2.33%, 1/6/05 15,000 14,995 Paccar Financial Corp., 2.26%, 1/3/05 10,000 9,999 PepsiCo, Inc., 2.25%, 1/12/05 15,255 15,245 Pfizer, Inc., 2.28%, 1/4/05 6,200 6,199 Procter & Gamble Co., 2.27%, 1/12/05 14,650 14,640 Sherwin Williams Co., 2.28%, 1/14/05 4,365 4,361 Windmill Funding Corp., 2.33%, 1/13/05 15,000 14,988 ------- 228,142 -------
The Notes to Financial Statements are an integral part of these statements. - 7 Money Market Fund INVESTMENTS IN SECURITIES continued DECEMBER 31, 2004
(IN THOUSANDS) PRINCIPAL VALUE - ---------------------------------------------------------------------- Foreign - 9.6% BNP Paribas Finance, Inc., 2.32%, 1/13/05 $15,000 $14,988 B P Capital Markets PLC, 2.24%, 1/7/05 10,023 10,019 Caisse D'Amortissement, 2.23%, 1/31/05 3,557 3,550 KfW International Finance, Inc., 2.25%, 1/7/05 4,552 4,550 Novartis Finance Corp., 2.15%, 1/4/05 4,234 4,233 UBS Finance LLC, 2.36%, 1/5/05 3,876 3,875 ------- 41,215 ------- Total Commercial Paper 269,357 ------- U.S. GOVERNMENT AGENCIES (b) - 37.0% Fannie Mae, 2.25%, 1/3/05 28,700 28,696 2.24%, 1/5/05 16,972 16,968 2.33%, 1/28/05 (a) 11,500 11,500 1.65%, 5/16/05 2,500 2,500 2.42%, 10/7/05 (a) 20,000 19,998 Federal Farm Credit Bank, 2.33%, 3/24/05 (a) 15,000 15,000 2.36%, 6/23/05 (a) 2,500 2,500 2.39%, 3/1/06 (a) 15,000 15,000 Federal Home Loan Bank, 4.38%, 2/15/05 2,840 2,851 1.30%, 2/23/05 6,000 6,000 2.48%, 3/30/05 (a) 7,500 7,500 2.02%, 6/8/05 2,500 2,500 1.91%, 10/5/05 (a) 7,500 7,497 Freddie Mac, 1.23%, 1/11/05 2,500 2,499 1.30%, 1/11/05 7,500 7,497
The Notes to Financial Statements are an integral part of these statements. - - 8 Money Market Fund INVESTMENTS IN SECURITIES continued DECEMBER 31, 2004
(IN THOUSANDS) PRINCIPAL VALUE - -------------------------------------------------------------- 1.40%, 1/19/05 $ 2,224 $ 2,222 2.00%, 10/7/05 (a) 7,500 7,500 -------- Total U.S. Government Agencies 158,228 -------- TOTAL INVESTMENTS IN SECURITIES - 100.0% (Total Cost - $427,585) (c) 427,585 Liabilities in excess of Cash and Other Assets - (0.0)% (115) -------- NET ASSETS - 100.0% $427,470 ========
NOTES TO INVESTMENTS IN SECURITIES (a) Variable rate security. Rate is as of December 31, 2004. (b) Agency obligations are not guaranteed by the U.S. Government. Tax Information (c) As of December 31, 2004, the cost for federal tax purposes on a tax basis is the same as on a book basis.
Ten Largest Positions (Unaudited) December 31, 2004 Market % of Value Net (000) Assets - ---------------------------------------------------------------- Fannie Mae $ 79,662 18.6% Federal Farm Credit Bank 32,500 7.6 Federal Home Loan Bank 26,348 6.2 Freddie Mac 19,718 4.6 Hershey Foods Corp. 16,389 3.8 Minnesota Mining & Manufacturing Co. 16,279 3.8 Barton Capital Corp. 15,917 3.7 Gannett Co., Inc. 15,725 3.7 PepsiCo, Inc. 15,245 3.6 Merrill Lynch & Co., Inc. 15,205 3.6
Portfolio by Type of Short Term Security (Unaudited) % of Value Net (000) Assets - ---------------------------------------------------------------- Domestic Commercial Paper $ 228,142 53.4% Foreign Commercial Paper 41,215 9.6 U.S. Government Agencies 158,228 37.0 --------- ---- $ 427,585 100.0% ========= =====
The Notes to Financial Statements are an integral part of these statements. - 9 Money Market Fund STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2004
(IN THOUSANDS) - ---------------------------------------------------------------------- Assets: Investments in securities at value $ 427,585 Interest receivable 311 Investment for Trustees' deferred compensation plan 22 Prepaid registration fees 13 Prepaid insurance 6 --------- Total assets 427,937 --------- Liabilities: Shareholder servicing and distribution fees payable to Distributor 127 Investment advisory fees payable 112 Shareholder reports 64 Administrative services fees payable 40 Custodian fees payable 39 Audit and legal fees payable 32 Other 26 Deferred Trustees' fees payable 22 Transfer agent fees payable 5 --------- Total liabilities 467 --------- Net Assets $ 427,470 ========= Institutional Class $ 118,979 Premier Class 59,367 Retail Class 249,124 --------- $ 427,470 ========= Shares Outstanding Institutional Class ($1.00 net asset value per share) 118,982 ========= Premier Class ($1.00 net asset value per share) 59,367 ========= Retail Class ($1.00 net asset value per share) 249,126 ========= Components of Net Assets: Paid-in capital $ 427,470 ========= Net Assets $ 427,470 =========
The Notes to Financial Statements are an integral part of these statements. - -- 10 Money Market Fund STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2004
(IN THOUSANDS) - ---------------------------------------------------------------- Investment Income: Interest $ 7,191 Expenses: Investment advisory fees 1,855 Distribution fees Retail Class 663 Shareholder servicing fees Premier Class 148 Retail Class 663 Administrative services fees 199 Custodian fees 123 Shareholder reports 72 Registration fees 54 Audit and legal fees 51 License fees 25 Trustees' fees 25 Transfer agent fees 8 Insurance expense 6 Other 3 ------- Total expenses 3,895 Less expenses waived by adviser (30) ------- Net expenses 3,865 ------- Net Investment Income 3,326 ------- Realized and Unrealized Gain on Investments: Net realized gain from security transactions -- ------- Net Realized and Unrealized Gain on Investments -- ------- Net Increase in Net Assets Resulting From Operations $ 3,326 =======
The Notes to Financial Statements are an integral part of these statements. -- 11 Money Market Fund STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS) 2004 2003 - ---------------------------------------------------------------------------------- Operations: Net investment income $ 3,326 $ 2,404 Net realized gain from securities transactions -- -- ---------- ---------- Net increase in net assets from operations 3,326 2,404 ---------- ---------- Dividends from Net Investment Income: Institutional Class (1,816) (1,437) Premier Class (408) (42) Retail Class (1,102) (925) ---------- ---------- Total dividends and distributions to shareholders (3,326) (2,404) ---------- ---------- Capital Share Transactions: Institutional Class Net proceeds from sales of shares 1,753,272 2,468,812 Net asset value of shares issued to shareholders in reinvestment of dividends and distributions 1,816 1,597 ---------- ---------- 1,755,088 2,470,409 Cost of shares redeemed (1,850,269) (2,446,150) ---------- ---------- (95,181) 24,259 ---------- ---------- Premier Class Net proceeds from sales of shares 56,678 69,788 Net asset value of shares issued to shareholders in reinvestment of dividends and distributions 408 42 ---------- ---------- 57,086 69,830 Cost of shares redeemed (57,643) (10,089) ---------- ---------- (557) 59,741 ---------- ---------- Retail Class Net proceeds from sales of shares 88,664 104,937 Net asset value of shares issued to shareholders in reinvestment of dividends and distributions 1,102 1,071 ---------- ---------- 89,766 106,008 Cost of shares redeemed (139,934) (166,605) ---------- ---------- (50,168) (60,597) ---------- ---------- Net increase (decrease) from Fund share transactions (145,906) 23,403 ---------- ---------- Net Increase (Decrease) in Net Assets (145,906) 23,403 ---------- ---------- Net Assets: Beginning of period 573,376 549,973 ---------- ---------- End of period $ 427,470 $ 573,376 ========== ==========
The Notes to Financial Statements are an integral part of these statements. - -- 12 Money Market Fund STATEMENTS OF CHANGES IN NET ASSETS continued FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS) 2004 2003 - ----------------------------------------------------------------------------------- Transactions in Capital Stock Institutional Class Shares sold 1,753,272 2,468,812 Shares issued in reinvestment of dividends and distributions 1,816 1,597 ---------- ---------- 1,755,088 2,470,409 Shares redeemed (1,850,269) (2,446,150) ---------- ---------- Net increase (decrease) in Institutional shares outstanding (95,181) 24,259 ---------- ---------- Premier Class Shares sold 56,678 69,788 Shares issued in reinvestment of dividends and distributions 408 42 ---------- ---------- 57,086 69,830 Shares redeemed (57,643) (10,089) ---------- ---------- Net increase (decrease) in Premier shares outstanding (557) 59,741 ---------- ---------- Retail Class Shares sold 88,664 104,937 Shares issued in reinvestment of dividends and distributions 1,102 1,071 ---------- ---------- 89,766 106,008 Shares redeemed (139,934) (166,605) ---------- ---------- Net decrease in Retail shares outstanding (50,168) (60,597) ---------- ---------- Total net increase (decrease) in Fund shares (145,906) 23,403 ========== ==========
The Notes to Financial Statements are an integral part of these statements. -- 13 Money Market Fund FINANCIAL HIGHLIGHTS
INSTITUTIONAL CLASS - -------------------------------------------------------------------------------------------------------------- For the Year Ended December 31, ---------------------------------------------------------- 2004 2003 2002 2001 2000 - -------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.01 0.01 0.01 0.04 0.06 Net realized and unrealized gain on securities -- -- (a) (a) (a) -------- -------- -------- -------- -------- Total from investment operations 0.01 0.01 0.01 0.04 0.06 -------- -------- -------- -------- -------- LESS DIVIDENDS AND DISTRIBUTIONS: Dividends from net investment income (0.01) (0.01) (0.01) (0.04) (0.06) Distributions from capital gains -- -- -- -- (a) -------- -------- -------- -------- -------- Total dividends and distributions (0.01) (0.01) (0.01) (0.04) (0.06) -------- -------- -------- -------- -------- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ======== ======== ======== ======== ======== Total Return 0.94%(b) 0.76%(b) 1.36% 3.81%(b) 6.12%(b) Ratios to Average Net Assets Gross expenses 0.46% 0.47% 0.45% 0.49% 0.47% Fees and expenses waived or borne by the Adviser 0.01% 0.02% 0.00% 0.04% 0.02% Net expenses 0.45% 0.45% 0.45% 0.45% 0.45% Net investment income 0.88% 0.76% 1.36% 3.62% 5.94% Net assets, end of period (000 omitted) $118,979 $214,160 $189,902 $184,060 $159,446
(a)Amount less than $.01 per share. (b)Had the Adviser not waived or reimbursed a portion of the expenses, total return would have been reduced. - -- -- 14 15 Money Market Fund FINANCIAL HIGHLIGHTS continued
PREMIER CLASS(1) - -------------------------------------------------------------------------------------------------------------- For the Year/Period Ended December 31, ---------------------------------------------------------- 2004 2003 2002 2001 2000 - -------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.01 0.01 0.01 0.03 0.05 Net realized and unrealized gain on securities -- -- (a) (a) (a) -------- -------- -------- -------- -------- Total from investment operations 0.01 0.01 0.01 0.03 0.05 -------- -------- -------- -------- -------- LESS DIVIDENDS AND DISTRIBUTIONS: Dividends from net investment income (0.01) (0.01) (0.01) (0.03) (0.05) Distributions from capital gains -- -- -- -- (a) -------- -------- -------- -------- -------- Total dividends and distributions (0.01) (0.01) (0.01) (0.03) (0.05) -------- -------- -------- -------- -------- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ======== ======== ======== ======== ======== Total Return 0.68%(b) 0.51%(b) 1.12% 3.55%(b) 5.50%(b)(c) Ratios to Average Net Assets Gross expenses 0.71% 0.74% 0.70% 0.73% 0.72%(d) Fees and expenses waived or borne by the Adviser 0.01% 0.04% 0.00% 0.03% 0.02%(d) Net expenses 0.70% 0.70% 0.70% 0.70% 0.70%(d) Net investment income 0.69% 0.39% 1.13% 3.22% 5.69%(d) Net assets, end of period (000 omitted) $ 59,367 $ 59,924 $ 183 $ 207 $ 105
(1)Commenced operations on January 26, 2000. (a)Amount less than $0.01 per share. (b)Had the Adviser not waived or reimbursed a portion of the expenses, total return would have been reduced. (c)Not annualized. (d)Annualized. - -- -- 16 17 Money Market Fund FINANCIAL HIGHLIGHTS continued
RETAIL CLASS - -------------------------------------------------------------------------------------------------------------- For the Year/Period Ended December 31, ---------------------------------------------------------- 2004 2003 2002 2001 2000 - -------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 INCOME FROM INVESTMENT OPERATIONS: Net investment income (a) (a) 0.01 0.03 0.05 Net realized and unrealized gain on securities -- -- (a) (a) (a) -------- -------- -------- -------- -------- Total from investment operations -- -- 0.01 0.03 0.05 -------- -------- -------- -------- -------- LESS DIVIDENDS AND DISTRIBUTIONS: Dividends from net investment income (a) (a) (0.01) (0.03) (0.05) Distributions from capital gains -- -- -- -- (a) -------- -------- -------- -------- -------- Total dividends and distributions -- -- (0.01) (0.03) (0.05) -------- -------- -------- -------- -------- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ======== ======== ======== ======== ======== Total Return 0.43%(b) 0.26%(b) 0.87% 3.29%(b) 5.60%(b) Ratios to Average Net Assets Gross expenses 0.96% 0.97% 0.95% 0.98% 0.97% Fees and expenses waived or borne by the Adviser 0.01% 0.02% 0.00% 0.03% 0.02% Net expenses 0.95% 0.95% 0.95% 0.95% 0.95% Net investment income 0.42% 0.26% 0.86% 3.10% 5.44% Net assets, end of period (000 omitted) $249,124 $299,292 $359,888 $291,380 $199,993
(a)Amount less than $0.01 per share. (b)Had the Adviser not waived or reimbursed a portion of the expenses, total return would have been reduced. - -- -- 18 19 Money Market Fund NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies. Money Market Fund (the "Fund") is a separate series of CIGNA Funds Group, a Massachusetts business trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. The objective of the Fund is to provide as high a level of current income as is consistent with the preservation of capital and liquidity and the maintenance of $1.00 per share net asset value. The Fund invests exclusively in short-term money market instruments. The Trust offers three classes of shares: Institutional Class, Premier Class and Retail Class. Expenses of the Fund are borne pro rata by the holders of each class of shares, except that each class bears expenses unique to that class (including any applicable shareholder servicing fee or 12b-1 distribution fee). Shares of each class would receive their pro rata share of net assets of the Fund if the Fund were liquidated. In addition, the Trustees approve separate dividends on each class of shares. The Institutional Class has a separate transfer agent charge and no 12b-1 distribution fee or shareholder servicing fee. The Premier Class has a shareholder servicing fee. The Retail Class has a 12b-1 distribution fee and a shareholder servicing fee. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. A. Security Valuation -- The Fund's investments are valued at amortized cost, which the Board of Trustees has determined constitutes fair value and which, at December 31, 2004, approximates cost for federal income tax purposes. B. Security Transactions and Related Investment Income -- Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Interest income, which includes amortization of premium and accretion of discount, is recorded on the accrual basis. Securities gains and losses are recognized on the specific cost identification basis. - -- 20 Money Market Fund NOTES TO FINANCIAL STATEMENTS continued C. Federal Taxes -- For federal income tax purposes, the Fund is taxed as a separate entity. Its policy is 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 capital gains, and capital gains are treated as ordinary income and long-term capital gains respectively, for federal income tax purposes. D. Dividends and Distributions -- Dividends from net investment income are declared and reinvested daily. Dividends and distributions are recorded by the Fund on the ex-dividend date. The timing and characterization of certain income and capital gains distributions are determined in accordance with federal tax regulations, which may differ from accounting principles generally accepted in the United States of America. To the extent that such differences are permanent, a reclassification to paid-in capital may be required. 2. Investment Advisory Fees and Other Transactions with Affiliates. Investment advisory fees are 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. Such advisory fees are based on an annual rate of 0.35% applied to the average daily net assets of the Fund. CIAI has voluntarily 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 0.45% of average daily net assets for the Institutional Class, 0.70% of average daily net assets for the Premier Class, and 0.95% for the Retail Class, to the extent described in the Fund's then current prospectus. CIAI retains the ability to be repaid by the Fund if the Fund's expenses fall below the specified limit prior to the end of the fiscal year or within three years after CIAI waives management fees or reimburses Fund operating expenses. The Fund's remaining contingent liability and expiration dates are as shown below: -- 21 Money Market Fund NOTES TO FINANCIAL STATEMENTS continued
Remaining Contingent Expires during Expires during Class Liability (000's) 2006 (000's) 2007 (000's) - ---------------------------------------------------------------------- Institutional $ 46 $33 $13 Premier 7 4 3 Retail 63 49 14 ---- --- --- Total $116 $86 $30 ==== === ===
Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, other affiliated CIGNA Funds may invest their excess cash in the Fund. CIAI will waive the amount of its advisory fee for the affiliated Funds in an amount that offsets the amount of the advisory fees incurred by the Money Market Fund. 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. For the year ended December 31, 2004, the Fund paid or accrued $198,609. With respect to Retail Class shares, the Fund has adopted a Distribution plan pursuant to Rule 12b-1 under the Investment Company Act of 1940, which requires the payment of 0.25% annually of the average daily net assets to Prudential Retirement Brokerage Services ("PRBS") (formerly CIGNA Financial Services, Inc.), the Fund's distributor. The distribution fees received from the 12b-1 plan are used for services provided to the Retail Class and expenses primarily intended to result in the sale of such shares. Premier and Retail Class shares are also subject to a shareholder servicing fee payable to PRBS equal to 0.25% annually of the average daily net assets of the Fund. The distribution and shareholder servicing fees will be waived as necessary to limit Premier and Retail Class expenses, as a percentage of average daily net assets, to the amounts described above. CIAI is an indirect, wholly-owned subsidiary of CIGNA Corporation. 3. Trustees' Fees. Trustees' fees represent remuneration paid or accrued to trustees who are not employees of CIGNA Corporation or any of its affiliates. - -- 22 Money Market Fund NOTES TO FINANCIAL STATEMENTS continued 4. Capital Stock. The Fund is a separate series of the Trust, which offers an unlimited number of shares of beneficial interest, without par value. At December 31, 2004, affiliates of CIGNA Corporation owned 118,980,851 shares of the Institutional Class. 5. Subsequent Event (Unaudited) -- Liquidation of Premier and Retail Classes, followed by Liquidation of the Institutional Class. The Fund liquidated the Premier and Retail Classes of the Fund on February 7, 2005. Also, although a specific date has not yet been set, it is expected that the Institutional Class of the Fund will be liquidated before March 30, 2005, and the Fund will cease operations at that time. -- 23 Report of Independent Registered Public Accounting Firm TO THE TRUSTEES AND SHAREHOLDERS OF CIGNA FUNDS GROUP -- MONEY MARKET FUND In our opinion, the accompanying statement of assets and liabilities, including the investments in securities, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of CIGNA Funds Group -- Money Market Fund ("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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements 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. As more fully explained in Note 5 of Notes to the Financial Statements, it is expected that the Fund will be fully liquidated and cease operations before March 30, 2005. PricewaterhouseCoopers LLC Boston, Massachusetts February 25, 2005 - -- 24 Money Market Fund TRUSTEES AND OFFICERS Shareholders elect a Board that oversees the Fund's operations. The Board The following is a list of the Fund's Board of appoints officers who are responsible for day-to-day business decisions Trustees and officers. Each Trustee's term based on policies set by the Board. of office will be until the next annual meeting of shareholders or until the election of the Trustee's successor.
Number of Portfolios Name, Position Length in Fund Address* Held with of Time Principal Occupation(s) Complex and Age Fund Served During Past 5 Years Overseen - ------------------------------------------------------------------------------ ------------------------------------- ----------- Independent Trustees Russell H. Jones Trustee Trustee Senior Vice President (Investor 7 60 since 1995 Relations, Public Relations), Chief Investment Officer and Treasurer, Kaman Corporation (helicopters and aircraft components, industrial distribution) Paul J. McDonald Trustee Trustee Special Advisor to the Board of 7 61 since 1995 Directors, Friendly Ice Cream Corporation (family restaurants and dairy products) Marnie Wagstaff Mueller Trustee Trustee Diocesan Consultant, Episcopal 7 65 since 2001 Diocese of Connecticut; Previously, Visiting Professor of Health Economics, Wesleyan University Carol Ann Hayes Trustee Trustee Director and Chair of Audit 7 60 since 2003 Committee, Reed and Barton Corporation Affiliated Trustees and Fund Officers Richard H. Forde Trustee, Chairman Trustee, Chairman Chief Investment Officer, CIGNA 7 51 of the Board and and President Investment Management President since 1998 Alfred A. Bingham III Vice President and Officer CIGNA Funds Treasurer; 7 60 Treasurer Since 1982 Assistant Vice President, CIGNA Investment Management Jeffrey S. Winer Vice President and Officer Senior Counsel, 7 47 Secretary Since 1993 CIGNA Corporation Name, Other Address* Directorships and Age Held by Trustee - --------------------------------------------------------------- Independent Trustees Russell H. Jones -- 60 Paul J. McDonald Western 61 Massachusetts Electric Company Marnie Wagstaff Mueller Boston Mutual Life 65 Insurance Company Carol Ann Hayes Reed & Barton 60 Corporation Affiliated Trustees and Fund Officers Richard H. Forde Director of various 51 subsidiaries of CIGNA Corporation Alfred A. Bingham III -- 60 Jeffrey S. Winer -- 47
- -------------------------------------------------------------------------------- * 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. - -------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Money Market Fund is an open-end, diversified management The Fund is distributed by Prudential Retirement investment company that invests in money market Brokerage Services, Inc., P.O. Box 150476, instruments. The investment adviser is CIGNA Investments Hartford, Connecticut 06115-0476 (telephone: Advisors, Inc. (formerly, TimesSquare Capital Management, 1.888.244.6237). Inc.), 280 Trumbull Street, Hartford, Connecticut 06103. - ----------------------------------------------------------------------------------------------------------------------------------
- -- -- 25 26 This page intentionally left blank. -- 27 CIGNA Funds Group Small Cap Growth/ Times Square Fund [CIGNA logo] Annual Report December 31, 2004 - -------------------------------------------------------------------------------- 1 Small Cap Growth/TimesSquare Fund December 31, 2004 FUND SUMMARY OBJECTIVE AND STRATEGY Seeks long-term capital appreciation by investing principally in common and preferred stocks of U.S. companies with market capitalizations between $50 million and $2 billion, with a focus on growing companies involved in new product development and technological breakthroughs. FUND INCEPTION DATE 01/21/2000 TOTAL NET ASSETS $526.1 million NUMBER OF SECURITIES IN THE PORTFOLIO 107
INVESTMENT MANAGER TimesSquare Capital Management, LLC FUND PROFILE December 31, 2004 (Unaudited)
Ten Largest Positions % of Net Assets DaVita, Inc. 3.5% Alliance Data Systems Corp. 3.0 Education Management Corp. 2.6 Investors Financial Services Corp. 2.4 Getty Images, Inc. 2.1 Global Payments, Inc. 2.1 iShares Russell 2000 Index Fund 2.0 Martin Marietta Materials, Inc. 1.9 Corporate Executive Board Co. 1.8 CapitalSource, Inc. 1.8 Ten Largest Sectors % of Net Assets Consumer Discretionary 24.6% Health Care 19.4 Financial Services 19.2 Technology 13.5 Energy 6.2
Ten Largest Sectors (continued) % of Net Assets Producer Durables 4.4% Other 2.0 Auto & Transportation 1.9 Materials and Processing 1.9 Consumer Staples 1.2 Fund Composition % of Net Assets Common stocks 94% Short-term investments 6
Management's Discussion of Fund Performance Market Summary Election Day put to rest one of the major uncertainties troubling the market in 2004. In gratitude, the equity markets proceeded to turn 2004 into a reasonably good year for investors with a solid post-election rally. For 2004, leading up to the election, volatility in the equity market had been at secular lows as the year was characterized by a series of choppy, trendless rallies and sell-offs. Besides election year uncertainties, the market was plagued by rising oil and commodity prices as well as continued worries on terrorism and the events in Iraq. On the positive side corporate profits came in consistently strong and long-term interest rates behaved well despite the tightening Fed. Small cap stocks, "The Incredibles," capped off a sixth year of outperformance. The Russell 2000 Index jumped 14.1% for the fourth quarter and 18.3% for the year while the Russell 1000 was up 9.8% and 11.4% for the fourth quarter and year, respectively. Though growth made a fourth quarter surge, the winner was value by a big margin for 2004. The Russell 2000 Growth Index came to life, up 15.1% in the fourth quarter to close out 2004 up 14.3%. The Russell 2000 Value Index rose 13.2% for the quarter and an impressive 22.3% for the year. The preference for quality and larger caps took a back seat in the final quarter as the highest beta stocks and the equities under $500 million in - -------------------------------------------------------------------------------- 2 market cap did best. Nevertheless for the year the higher quality, larger stocks within the small cap market led the way. Fast growth was not particularly well rewarded in 2004; companies with projected earnings growth of over 20% in our benchmark were up only 2.2% for 2004. Sector selection added good value over the fiscal year. Always a fall-out of the bottom-up stock selection process, an overweight of Financial Services and an underweight of Technology were well rewarded. Favorable sector selection was partially offset by the underweight of the Materials & Processing sector, which was buoyed by rising commodity prices, especially in the metals groups. Proposed Merger of the Fund As you may know, the Fund's previous investment adviser, TimesSquare Capital Management, Inc. (TimesSquare Inc.), now known as CIGNA Investment Advisors, Inc. and its parent company, CIGNA Corporation, have sold TimesSquare Inc.'s growth equity management business to a new company, TimesSquare Capital Management, LLC (TimesSquare LLC). TimesSquare LLC will continue the growth equity management business of TimesSquare Inc. The managing member of TimesSquare LLC is a subsidiary of Affiliated Managers Group, Inc. (AMG). AMG is an asset management holding company with equity investments in a variety of investment management firms. AMG owns a majority equity interest in TimesSquare LLC. The remaining equity interests in TimesSquare LLC are owned by the Small Cap Growth Fund's portfolio managers, Grant Babyak and Yvette Bockstein, and the equity analysts and other personnel who were involved in TimesSquare, Inc.'s growth equity management business. On October 12, 2004, the Board of Trustees of CIGNA Funds Group approved a reorganization, subject to approval by Fund shareholders, pursuant to which the Small Cap Growth/ TimesSquare Fund would transfer substantially all of its assets and liabilities to a new fund, the TimesSquare Small Cap Growth Fund, which is a series of Managers AMG Funds, in exchange for shares of the new fund having a net asset value equal to the net asset value of the assets and liabilities so transferred. The new fund shares would then be distributed pro rata to shareholders of the Fund. The Fund has scheduled a special meeting of shareholders on April 8, 2005 to seek shareholder approval of the merger. You will receive additional information about the proposed merger, along with a proxy soliciting your approval, prior to the meeting. Please be sure to vote. New Interim Adviser The Fund's Board of Trustees has also approved an interim investment advisory agreement with TimesSquare LLC, effective November 18, 2004, pursuant to which TimesSquare LLC now serves as investment adviser to the Fund, responsible for management of the Fund's portfolio. There will be no change to the investment objective of the Fund as a result of the appointment of TimesSquare LLC as adviser to the Fund. In addition, TimesSquare LLC has agreed to waive fees and reimburse expenses if total Fund operating expenses (excluding extraordinary items) exceed the previous expense caps (1.05%, 1.25% and 1.50% for the Institutional, Premier and Retail Classes, respectively, per annum). During the term of the interim advisory agreement CIGNA Investment Advisors, Inc., will provide administrative services to the Fund. - -------------------------------------------------------------------------------- 3 Performance Returns for the year ended December 31, 2004 were: Institutional Class 11.05% Premier Class 10.80 Retail Class 10.62 S&P 500 Index 10.88 Russell 2000 Growth Index 14.31 Russell 2000 Index 18.33 Lipper Small-Cap Growth Funds Average 10.65
For 2004 we lagged the Russell 2000 Growth Index, our benchmark; we mostly attribute the underperformance to a few bad apples in the portfolio whose losses were exacerbated by the proliferation of short sellers in the hedge fund world. These stock selection disappointments, primarily in Telecom, Technology, Producer Durables and Health Care, were concentrated in the first and third quarters. One observation of the year did seem to be that disappointments were far more severely punished than positive developments were rewarded on a short-term basis. Below is a quarterly performance comparison for 2004:
1st 2nd 3rd 4th Quarter Quarter Quarter Quarter Institutional Class 2.80% 0.70% -6.90% 15.22% Premier Class 2.72 0.62 -6.94 15.19 Retail Class 2.74 0.53 -6.99 15.15 Russell 2000 Growth Index 5.58 0.09 -6.01 15.08
The overweighted Financial Services sector made a strong relative contribution to the overall portfolio as our holdings far outperformed the benchmark sector as well as the Russell 2000 Growth Index. The overweighted financial data processors, an industry with good earnings visibility, put in favorable returns thanks mostly to an excellent contribution from Alliance Data Systems, returning 72% for the year. It rose on strong earnings and good growth over the year. The company, the portfolio's top contributor in 2004, is a leading provider of transaction services, credit services and marketing services to retailer, petroleum, utility and financial services clients. Fundamentals remain solid as the private label credit card business has been performing well with high recurring revenues as the company has a strong renewal rate on its business. Most recently J. Crew signed a long-term contract renewal with Alliance Data. Banks also performed well for 2004 and we trimmed a couple of holdings, Wintrust Financial and UCBH Holdings, into the strength towards the end of the year as the stocks approached our near-term price targets. They returned 26% and 16%, respectively. Investors Financial Services, one of our larger positions delivered good earnings growth for most of the year, despite worries about pressures on margins; the position's 32% return made a strong contribution. Specialty insurer Markel delivered another good year despite the effect of the hurricanes and the position returned 44% for the period. CB Richard Ellis, a recent addition to the portfolio, was among the top contributors, up 78%. The firm is a leading commercial real estate services firm with a 5% market share and a good track record of growth through acquisitions. It has an attractive business model with a diversified client base, recurring revenue stream and solid cash flow generation. The highly fragmented real estate industry provides further opportunities for consolidation and industry fundamentals are improving as rental vacancy rates peaked in 2003. The company has grown at twice the industry growth rate in the past and we anticipate that will continue as the company recently reaffirmed its strong earnings guidance for 2004 and anticipates an even stronger 2005. - -------------------------------------------------------------------------------- 4 The Energy sector holdings produced the best returns for the entire period. Good contributions came from oil service holdings including Hydril, returning 90% for the period. The company, which makes premium connections and pressure control products used for oil and gas drilling and production, raised its forward earnings guidance on market share gains. The oil & gas producers also added value. In particular, Tom Brown soared 49% as it received an all cash takeover bid from Encana. In the fourth quarter, Patina Oil & Gas announced it would be acquired by Noble Energy; the position returned 54% for the full year. Denbury Resources, an E&P company in the US Gulf Coast also benefited from higher oil prices and executed well on its business strategy; it returned 75% for the year. Healthcare sector returns were decent on an absolute basis but lagged the benchmark returns. We suffered several setbacks, especially in some of our pharmaceutical holdings. On the positive side, Davita, the provider of kidney dialysis services, one of our largest holdings delivered a year of solid revenues and earnings, surpassing expectations, rising 52%, the portfolio's second largest contributor. Lincare Holdings, one of the largest providers of oxygen and other respiratory services to patients in the home, had been under pressure for much of the year as worries of Medicare reform legislation hampered its progress. In effect, the news on reimbursement for Lincare's products came out late last year and was not as bad as had been feared. The company also reported good earnings; its 42% return made a good contribution for the year. VCA Antech, which provides animal healthcare, consistently reported better than expected earnings and raised guidance; it returned 26%, a good contribution. Molina Healthcare, a Medicaid focused HMO which came public last July, also delivered a good contribution to the portfolio, returning 82% on good earnings growth. Hospital operator, Province Healthcare announced that it would be acquired by Lifepoint Hospitals and we sold the stock, which returned 20%. On the negative side, generic pharmaceuticals company Par Pharmaceuticals pre-announced a sizeable disappointment in earnings earlier in the year due to delays in launching some new products. The stock was one of the worst detractors, returning -36%; we sold the position as it bounced off of its lows toward the end of the year because we feel that overly optimistic projections for 2005 are now being reflected in the stock's price. Generic competition is affecting Bradley Pharmaceuticals, a niche specialty pharmaceutical company with a focus on dermatology and gastroenterology; it sold off 33%. We feel that new products should more than offset that in 2005. We were disappointed in results from Orthofix, which manufactures orthopedic medical equipment and pre-announced a revenue and earnings miss and is losing market share. The stock fell -38%; we sold the position last summer because we lost confidence in the ability of management to execute on its business strategy. We sold our small position in biotech holding Xoma, as one of its products failed a Phase II trial; its -71% loss made a poor contribution. Utility sector holding Primus Telecom was the portfolio's bottom detractor, returning -84% for the year following surprisingly sub-par earnings with increased competition. We were very disappointed by the erosion in the company's core business and we sold the position. Consumer Discretionary holdings rallied towards the end of the year to outperform the Russell 2000 Growth Index. An exceptional performance of our overweighted business services holdings added great value. We traditionally favor business services companies that have a good degree of recurring revenues. The group was helped by good earnings reports from Corporate Executive Board; the position returned 44%, a solid contribution. The - -------------------------------------------------------------------------------- 5 company which provides best practices research to managements at 2100 blue chip companies has highly visible revenues and received an added benefit from the improving economy. Resources Connection, which provides professional services to clients including human resources management services and internal audit services, has been a big beneficiary of the Sarbannes Oxley legislation. The company reported a great September quarter with huge cash flow generation; we trimmed it slightly as its 48% return made a strong contribution. Getty Images, which sells photographs over the internet continued on its upward path, returning 38% as its business environment (ad spending) continued to improve. Other holdings that added value to the portfolio included the distributor of pool supplies, SCP Pool and United Natural Foods, a wholesale distributor to the natural and organic foods industry. Both companies reported good earnings growth, returning 47% and 72%, respectively. On the negative side, entertainment holding, Alliance Gaming performed poorly, losing -44% for the period as it lowered earnings guidance for both fiscal 2004 and 2005. We trimmed the position sizably. The for-profit education industry has been under a cloud for part of 2004 and our holdings suffered. Corinthian Colleges was a poor contributor, down 20%. Education Management also made a sub-par contribution, up only 6%. We feel the negative story was overdone and the attractive valuations are being overlooked. Finally, the radio stocks made a negative contribution in response to decelerating industry fundamentals. In particular Entercom made a poor contribution, down 32%. Underweighting the poorly performing Technology and Producer Durables sectors added good value for the entire period. On the positive side, cell phone tower operator Spectrasite experienced good operating leverage from well positioned cell towers, making a strong contribution, up 66%. In the software industry Netscreen, a leading developer of network security software, received a takeover offer from Juniper Networks earlier this year and returned 39% for the portfolio, a top contributor. We added to some of our technology positions during the weakness in July and August and these moves added value. In particular we added significantly to our holdings in Macromedia, a provider of software development tools for designers and developers of Web sites, applications and content. Growth for this market leader in a growing market is being driven by new products as well as product upgrades. It recently reported great quarterly results, and made a fine contribution to the portfolio, returning 78%. On the negative side Emulex, which makes specialized storage products, was a poor contributor down 56% as its second quarter earnings pre-announcement was disappointing. We sold the position as we worried that the weakness in their business would continue. Also on the disappointing side, Zoran, which develops and markets integrated circuits and embedded software in digital video and audio products, reduced its fourth quarter guidance and was off 28% as we eliminated the position. In the Producer Durables sector companies involved with the manufacture and testing of semiconductors suffered huge corrections as analysts believe industry fundamentals were peaking. Cymer sold off -36% and Advanced Energy Industries, which we sold, dropped 51% over the entire period. 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, distribution and service (12b-1) fees and other Fund expenses. Examples of transaction costs include sales charges (loads), redemption fees and account maintenance fees, which are not shown in this section and which would result in higher total expenses. The following table is intended to help you understand your ongoing expenses of investing in the Fund and to help you compare - -------------------------------------------------------------------------------- 6 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 part 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 "Expenses Paid During Period" line under the share class you hold. Hypothetical Example for Comparison Purposes. The second part 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 sales charges (loads) or redemption fees. 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
Institutional Premier Retail Class Class Class --------------- -------------- -------------- Actual Beginning Account Value -- 07/01/04 $1,000.00 $1,000.00 $1,000.00 Ending Account Value -- 12/31/04 $1,072.70 $1,072.00 $1,071.00 Expenses Paid During Period*-- 07/01/04 to 12/31/04 $ 5.47 $ 6.51 $ 7.81 Hypothetical (5% return before expenses) Beginning Account Value -- 07/01/04 $1,000.00 $1,000.00 $1,000.00 Ending Account Value -- 12/31/04 $1,019.86 $1,018.85 $1,017.60 Expenses Paid During Period*-- 07/01/04 to 12/31/04 $ 5.33 $ 6.34 $ 7.61 Annualized Expense Ratios* 1.05% 1.25% 1.50%
* Expenses are equal to the Fund's annualized expense ratio for each share class, 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 Ratios" in the tables are based on actual expenses paid by the Fund during the period, net of fee waivers and/or expense reimbursements. If those fee waivers and/or expense reimbursements had not been in effect, the Fund's actual expenses would have been higher. For more information, please refer to the Fund's prospectus. - -------------------------------------------------------------------------------- 7 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. Outlook We expect real GDP growth to moderate from the 4.5% seen in 2004 to approximately 3% in 2005. Corporate profit growth should also moderate from the high levels experienced last year. Corporations, with strong balance sheets flush with cash should step up their hiring and capital spending. We also believe 2005 will see a sharp pick-up in M&A activity as companies seek to acquire growth. In fact, the trend seems to have begun as the fourth quarter alone saw a major pick-up in M&A activity. All these factors can support continued gains in the equity markets but the upside will be challenged by the Federal Reserve's actions and oil prices. Rising interest rates historically provide a head wind for the market and if the Fed decides it needs to continue to raise rates, multiples will contract once again. The break in oil prices last August coincided with the onset of the stock market rally and any major resumption in the spike in oil prices will be negatively perceived by the overall stock market. The long-term demand for oil should continue to grow as China's economy grows; thus the risk of higher oil prices remains. The relative outperformance of the small caps vs. the large caps over the last six years has narrowed the valuation gap between the two asset classes. Though there may be short-term periods with the large caps outperforming the small caps, we do not believe the relative performance will meaningfully reverse over the longer term. First of all, the consensus is solidly in favor of large cap outperformance. That alone gives us reason to doubt it. Second, rather than cap size distinguishing performance, we believe the companies that will outperform will be those with strong managements that will be able to execute their strategies as the economic cycle matures. We believe that quality companies with solid and consistent earnings growth will command a premium as overall earnings growth decelerates in 2005. We appreciate the confidence you have placed in us and remain committed to working diligently to generate superior results over the long-term. We wish you a healthy, happy and prosperous 2005. - -------------------------------------------------------------------------------- 8 [THE FOLLOWING INFORMATION IS REPRESENTED BY A MOUNTAIN CHART IN THE PRINTED DOCUMENT]
- -------------------------------------------------------------------------------- Institutional Class GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT (Unaudited) 1/21/00 - 12/31/04 Institutional Russell 2000 Russell 2000 Class Index Growth Index 1/21/00 $10000 $10000 $10000 12/31/00 $11151 $9164 $7297 12/31/01 $10137 $9392 $6623 12/31/02 $8272 $7468 $4619 12/31/03 $11372 $10997 $6861 12/31/04 $12629 $13012 $7843 - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- AVERAGE ANNUAL RETURNS 1-Year Life of Fund Inception Date Institutional Class 11.05% 4.43% 1/21/00 - --------------------------------------------------------------------------------
Small Cap Growth/TimesSquare Fund (the "Fund") performance figures are historical and reflect reinvestment of all dividends. The investment return and principal value for each class 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 and the returns shown in the graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions and the redemption of fund shares. The return for each class has been compared with the total return performance of the Russell 2000 Index and the Russell 2000 Growth Index. These indices are a group of unmanaged securities widely regarded by investors to be representative, in general, of the small company stock market and the growth segment of that market, respectively. An investment cannot be made in either index. Index results do not reflect brokerage charges or other investment expenses. [THE FOLLOWING INFORMATION IS REPRESENTED BY A MOUNTAIN CHART IN THE PRINTED DOCUMENT]
- -------------------------------------------------------------------------------- Premier Class GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT (Unaudited) 1/21/00 - 12/31/04 Premier Russell 2000 Russell 2000 Class Index Growth Index 1/21/00 $10000 $10000 $10000 12/31/00 $11126 $9164 $7297 12/31/01 $10103 $9392 $6623 12/31/02 $8228 $7468 $4619 12/31/03 $11317 $10997 $6861 12/31/04 $12539 $13012 $7843 - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- AVERAGE ANNUAL RETURNS 1-Year Life of Fund Inception Date Premier Class 10.80% 4.68% 1/21/00 - --------------------------------------------------------------------------------
Small Cap Growth/TimesSquare Fund (the "Fund") performance figures are historical and reflect reinvestment of all dividends. The Investment return and principal value for each class 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 and the returns shown in the graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions and the redemptions of fund shares. The return for each class has been compared with the total return performance of the Russell 2000 Index and the Russell 2000 Growth Index. These indices are a group of unmanaged securities widely reguarded by investors to be representative, in general, of the small company stock market and the growth segment of that market, respectively. An investment cannot be made in either index. Index results do not reflect brokerage charges or other investment expenses. - -------------------------------------------------------------------------------- 9 [THE FOLLOWING INFORMATION IS REPRESENTED BY A MOUNTAIN CHART IN THE PRINTED DOCUMENT]
- -------------------------------------------------------------------------------- Retail Class GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT (Unaudited) 1/21/00 - 12/31/04 Retail Russell 2000 Russell 2000 Class Index Growth Index 1/21/00 $10000 $10000 $10000 12/31/00 $11100 $9164 $7297 12/31/01 $10057 $9392 $6623 12/31/02 $8175 $7468 $4619 12/31/03 $11199 $10997 $6861 12/31/04 $12389 $13012 $7843 - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- AVERAGE ANNUAL RETURNS 1-Year Life of Fund Inception Date Retail Class 10.62% 4.43% 1/21/00 - --------------------------------------------------------------------------------
Small Cap Growth/TimesSquare Fund (the "Fund") performance figures are historical and reflect reinvestment of all dividends. The investment return and principal value for each class 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 and the returns shown in the graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions and the redemption of fund shares. The return for each class has been compared with the total return performance of the Russell 2000 Index and the Russell 2000 Growth Index. These indices are a group of unmanaged securities widely regarded by investors to be representative, in general, of the small company stock market and the growth segment of that market, respectively. An investment cannot be made in either index. Index results do not reflect brokerage charges or other investment expenses. - -------------------------------------------------------------------------------- Small Cap Growth/TimesSquare Fund Investments in Securities 10 December 31, 2004
Number of Value Shares (000) - ------------------------------------------------------------------------- COMMON STOCKS - 94.3% AUTO & TRANSPORTATION - 1.9% Gentex Corp. 60,000 $ 2,221 Overnite Corp. 100,000 3,724 P.A.M. Transportation Services, Inc. (a) 57,600 1,080 Pacer International, Inc. (a) 137,900 2,932 ------- 9,957 ------- CONSUMER DISCRETIONARY - 24.6% Advance Auto Parts, Inc. (a) 130,000 5,678 Advisory (The) Board Co. (a) 115,900 4,274 Alliance Gaming Corp. (a) 79,900 1,103 Arbitron, Inc. (a) 90,800 3,558 Beacon Roofing Supply, Inc. (a) 118,300 2,349 CB Richard Ellis Group, Inc. (a) 240,000 8,052 Central Garden and Pet Co. (a) 150,000 6,261 ChoicePoint, Inc. (a) 130,000 5,979 Corinthian Colleges, Inc. (a) 235,000 4,429 Corporate Executive Board Co. 145,000 9,706 Educate, Inc. (a) 100,000 1,324 Education Management Corp. (a) 410,000 13,534 Entercom Communications Corp. (a) 165,000 5,922 Getty Images, Inc. (a) 160,000 11,016 Herbalife Ltd. (a) 174,000 2,828 Hibbett Sporting Goods, Inc. (a) 30,000 798 Kerzner International Ltd. (a) 80,000 4,804 Marvel Enterprises, Inc. (a) 150,000 3,072 Mobile Mini, Inc. (a) 140,400 4,639 NBTY, Inc. (a) 120,300 2,888 Radio One, Inc., Class D (a) 253,400 4,085 Resources Connection, Inc. (a) 145,000 7,875 SCP Pool Corp. 273,212 8,715 West Corp. (a) 193,500 6,407 ------- 129,296 ------- CONSUMER STAPLES - 1.2% United Natural Foods, Inc. (a) 200,000 6,220 ------- ENERGY - 6.2% Denbury Resources, Inc. (a) 190,000 5,216 Houston Exploration Co. 65,100 3,666
Number of Value Shares (000) - ------------------------------------------------------------------------- Hydril Co. (a) 64,800 $ 2,949 Patina Oil & Gas Corp. 175,000 6,563 Patterson-UTI Energy, Inc. 243,500 4,736 Quicksilver Resources, Inc. (a) 46,100 1,696 Todco Class A (a) 157,000 2,892 Universal Compression Holdings, Inc. (a) 150,000 5,237 ------- 32,955 ------- FINANCIAL SERVICES - 19.2% Alliance Data Systems Corp. (a) 335,000 15,906 Assured Guaranty, Ltd. 210,000 4,131 CapitalSource, Inc. (a) 375,000 9,626 City National Corp. 50,000 3,532 Cohen & Steers, Inc. 200,000 3,250 Fair Isaac & Co. 80,000 2,934 Global Payments, Inc. 186,000 10,888 Henry (Jack) & Associates, Inc. 275,000 5,475 Investment Technology Group, Inc. (a) 150,000 3,000 Investors Financial Services Corp. 250,000 12,495 Jackson Hewitt Tax Services, Inc. 124,100 3,134 Jefferies Group, Inc. 125,000 5,035 Markel Corp. (a) 23,000 8,372 Portfolio Recovery Associates, Inc. (a) 41,500 1,711 Primus Guaranty, Ltd (a) 260,000 4,261 UCBH Holdings, Inc. 100,000 4,582 Wintrust Financial Corp. 45,700 2,603 ------- 100,935 ------- HEALTH CARE - 19.4% Bioenvision, Inc. (a) 250,000 2,240 Bio-Rad Laboratories, Inc. Class A (a) 85,000 4,876 Bradley Pharmaceuticals, Inc. (a) 200,000 3,880 DaVita, Inc. (a) 465,774 18,412 DJ Orthopedics, Inc. (a) 210,000 4,498 IMPAC Medical Systems, Inc. (a) 145,400 2,994 Ligand Pharmaceuticals, Inc., Class B (a) 283,000 3,294 Lincare Holdings, Inc. (a) 135,000 5,758 Magellan Health Services, Inc. (a) 170,000 5,807 Mettler-Toledo International, Inc. (a) 100,000 5,131 Molina Healthcare, Inc. (a) 84,000 3,896
The Notes to Financial Statements are an integral part of these statements. - -------------------------------------------------------------------------------- Small Cap Growth/TimesSquare Fund Investments in Securities 11 December 31, 2004 (Continued)
Number of Value Shares (000) - ----------------------------------------------------------------------- NDCHealth Corp. 140,000 $ 2,603 Pediatrix Medical Group, Inc. (a) 125,000 8,006 Radiation Therapy Services, Inc. (a) 280,000 4,760 Respironics, Inc. (a) 120,000 6,523 Rigel Pharmaceuticals, Inc. (a) 105,400 2,574 Stericycle, Inc. (a) 165,000 7,582 Taro Pharmaceuticals Industries (a) 110,000 3,743 VCA Antech, Inc. (a) 288,300 5,651 -------- 102,228 -------- MATERIALS & PROCESSING - 1.9% Martin Marietta Materials, Inc. 185,000 9,927 -------- OTHER - 2.0% iShares Russell 2000 Index Fund 80,000 10,360 -------- PRODUCER DURABLES - 4.4% Cognex Corp. 115,000 3,208 Orbital Sciences Corp. (a) 370,000 4,377 Photon Dynamics, Inc. (a) 132,600 3,220 Premiere Global Services, Inc. (a) 300,000 3,213 Ritchie Bros. Auctioneers, Inc. 60,000 1,984 Spectrasite, Inc. (a) 125,000 7,238 -------- 23,240 -------- TECHNOLOGY - 13.5% Altiris, Inc. (a) 44,000 1,559 Anteon International Corp. (a) 46,700 1,955 aQuantive, Inc. (a) 200,000 1,788 Avocent Corp. (a) 100,000 4,052 Business Objects SA (a) 156,500 3,966 Cymer, Inc. (a) 150,300 4,440 Embarcadero Technologies, Inc. (a) 283,000 2,663 Filenet Corp. (a) 23,500 605
Number of Value Shares (000) - ----------------------------------------------------------------------- Formfactor, Inc. (a) 130,000 $ 3,528 Informatica Corp. (a) 565,400 4,591 Integrated Circuit Systems, Inc. (a) 200,000 4,184 j2 Global Communications, Inc. (a) 80,000 2,760 Lawson Software, Inc. (a) 86,800 596 Lowrance Electronics, Inc. 100,000 3,150 LTX Corp. (a) 60,100 462 Macromedia, Inc. (a) 180,000 5,602 Macrovision Corp. (a) 71,400 1,836 Microsemi Corp. 79,900 1,387 MTC Technologies, Inc. (a) 84,900 2,850 National Instruments Corp. 67,300 1,834 SafeNet, Inc. (a) 80,000 2,939 Semtech Corp. (a) 253,900 5,553 Serena Software, Inc. (a) 100,000 2,164 SI International, Inc. (a) 84,700 2,605 Skyworks Solutions, Inc. (a) 300,000 2,829 Trident Microsystems, Inc. (a) 75,000 1,254 -------- 71,152 -------- TOTAL COMMON STOCKS (Cost $408,157) 496,270 -------- SHORT-TERM OBLIGATION - 5.6% MONEY MARKET FUND CIGNA Funds Group - Money Market Fund (Cost $29,680) (b) 29,680,379 29,680 -------- TOTAL INVESTMENTS IN SECURITIES - 99.9% (Total Cost $437,837) (c) 525,950 Cash and Other Assets, Less Liabilities - 0.1% 190 -------- NET ASSETS - 100.0% $526,140 ========
The Notes to Financial Statements are an integral part of these statements. - -------------------------------------------------------------------------------- Small Cap Growth/TimesSquare Fund Investments in Securities 12 December 31, 2004 (Continued) - -------------------------------------------------------------------------------- NOTES TO INVESTMENTS IN SECURITIES (a) Non-income producing security. (b) CIGNA Investments Advisors, Inc., the fund's Administrator, is also the Investment Adviser to the CIGNA Funds Group - Money Market Fund. Tax Information (c) At December 31, 2004, the net unrealized appreciation of investments, based on cost for federal income tax purposes of $439,195,762, was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an excess of value over tax cost $99,170,057 Aggregate gross unrealized depreciation for all investments in which there was an excess of tax cost over value (12,415,595) ----------- Unrealized appreciation - net $86,754,462 ===========
(d) As of December 31, 2004, the components of distributable earnings (excluding unrealized appreciation/(depreciation) disclosed above on a tax basis consisted of undistributed capital gains of $5,028,390 The Notes to Financial Statements are an integral part of these statements. - -------------------------------------------------------------------------------- Small Cap Growth/TimesSquare Fund 13 Statement of Assets and Liabilities December 31, 2004 (In Thousands) Assets: Investments in securities at value $525,950 Receivable for investments sold 2,100 Receivable for fund shares sold 634 Interest and dividends receivable 33 Prepaid registration fees 29 Prepaid insurance fees 5 Investment for Trustees' deferred compensation plan 4 -------- Total assets 528,755 -------- Liabilities: Payable for investments purchased 1,073 Payable for fund shares purchased 984 Advisory fees payable 380 Custodian fees payable 48 Audit and legal fees payable 35 Administrative services fees payable 34 Shareholder reports payable 27 Shareholder servicing and distribution fees payable to Distributor 26 Other accrued expenses 4 Deferred Trustees' fees payable 4 -------- Total liabilities 2,615 -------- Net Assets $526,140 ======== Cost of Investments $437,837 ========
Components of Net Assets: Paid-in capital $434,360 Overdistributed net investment income (3) Accumulated net realized gain on investments 3,670 Net unrealized appreciation of investments 88,113 -------- Net Assets $526,140 ======== Net Assets Institutional Class $410,171 Premier Class 103,589 Retail Class 12,380 --------- $526,140 ========= Shares Outstanding Institutional Class 34,520 Premier Class 8,757 Retail Class 1,053 Net Asset Value and Redemption Price per Share Institutional Class $ 11.88 Premier Class $ 11.83 Retail Class $ 11.75
The Notes to Financial Statements are an integral part of these statements. - -------------------------------------------------------------------------------- Small Cap Growth/TimesSquare Fund 14 Statement of Operations For the Year Ended December 31, 2004 (In Thousands)
Investment Income: Dividends (net of foreign taxes withheld) $ 1,176 Expenses: Investment advisory fees $4,421 Shareholder servicing fees Premier Class 184 Retail Class 23 Administrative services fees 152 Custodian fees and expenses 137 Audit and legal fees 71 Registration fees 63 Shareholder reports 51 Distribution fees (Retail Class) 29 Trustees' fees 19 Insurance expense 8 Other 7 Transfer agent fees 6 ------ Total expenses 5,171 Less expenses waived and reimbursed by Adviser (179) ------ Net expenses 4,992 ------ Net Investment Income (Loss) (3,816) ------- Realized and Unrealized Gain on investments: Net realized gain from investments 18,427 Net change in unrealized appreciation from investments 35,226 ------- Net Realized and Unrealized Gain on Investments 53,653 ------- Net Increase in Net Assets Resulting from Operations $49,837 =======
Statements of Changes in Net Assets (In Thousands)
For the Year Ended December 31, ------------------------------- 2004 2003 ---- ---- Operations: Net investment income (loss) $ (3,816) $ (1,896) Net realized gain from investments 18,427 15,795 Net unrealized appreciation on investments 35,226 54,524 -------- -------- Net increase from operations 49,837 68,423 -------- -------- Dividends and Distributions: From net investment income Institutional Class (2,296) (3,632) Premier Class (394) (697) Retail Class (19) (81) From net realized capital gains Institutional Class (11,186) (912) Premier Class (2,827) (190) Retail Class (340) (30) -------- -------- Total dividends and distributions (17,062) (5,542) -------- -------- Capital Share Transactions: Institutional Class Net proceeds from sales of shares 80,250 233,127 Net asset value of shares issued to shareholders in reinvestment of dividends and distributions 13,482 4,544 -------- -------- 93,732 237,671 Cost of shares redeemed (34,930) (16,286) -------- -------- Total from Institutional Class 58,802 221,385 -------- -------- Premier Class Net proceeds from sales of shares 64,452 67,121 Net asset value of shares issued to shareholders in reinvestment of dividends and distributions 3,221 887 -------- -------- 67,673 68,008 Cost of shares redeemed (36,843) (14,825) -------- -------- Total from Premier Class 30,830 53,183 -------- --------
The Notes to Financial Statements are an integral part of these statements. - -------------------------------------------------------------------------------- Small Cap Growth/TimesSquare Fund 15 Statements of Changes in Net Assets (In Thousands)
For the Year Ended December 31, ------------------------------- 2004 2003 ---- ---- Retail Class Net proceeds from sales of shares $ 4,231 $ 4,300 Net asset value of shares issued to shareholders in reinvestment of dividends and distributions 359 111 -------- -------- 4,590 4,411 Cost of shares redeemed (3,640) (2,828) -------- -------- Total from Retail Class 950 1,583 -------- -------- Net increase from Fund share transactions 90,582 276,151 -------- -------- Total Net Increase (Decrease) in Net Assets 123,357 339,032 Net Assets: Beginning of period 402,783 63,751 -------- -------- End of period* $526,140 $402,783 ======== ======== * Includes overdistributed net investment income of: $ (3) $ (1) ======== ========
The Notes to Financial Statements are an integral part of these statements. - -------------------------------------------------------------------------------- Small Cap Growth/TimesSquare Fund 16 FINANCIAL HIGHLIGHTS -- INSTITUTIONAL CLASS
- ------------------------------------------------------------------------------------ For the Year/Period Ended December 31, -------------------------------------- 2004 2003 - ------------------------------------------------------------------------------------ Per Share Operating Performance: Net asset value, beginning of period $ 11.06 $ 8.16 Income from investment operations Net investment income (loss) (b) (0.08) (0.09)(c) Net realized and unrealized gain (loss) on investments 1.30 3.15 -------- --------- Total from investment operations 1.22 3.06 -------- --------- Less dividends and distributions: Dividends from net investment income (0.07) (0.13) Distributions from net realized capital gains (0.33) (0.03) Distributions from capital - - -------- --------- Total dividends and distributions (0.40) (0.16) -------- --------- Net asset value, end of period $ 11.88 $ 11.06 ======== ======== Total Return (a) 11.05% 37.48% Ratios to Average Net Assets Gross expenses 1.09% 1.12% Fees and expenses waived or borne by the Adviser or Distributor 0.04% 0.07% Net expenses 1.05% 1.05% Net investment income (loss) (b) (0.79)% (0.86)% Portfolio Turnover 70% 61% Net Assets, End of Period (000 omitted) $410,171 $324,742 For the Year/Period Ended December 31, --------------------------------------------------- 2002 2001 2000(1) - --------------------------------------------------------------------------------------------------- Per Share Operating Performance: Net asset value, beginning of period $ 10.00 $ 11.00 $ 10.00 Income from investment operations Net investment income (loss) (b) (0.07)(c) (0.06) (0.01) Net realized and unrealized gain (loss) on investments (1.77) (0.94) 1.16 ------- ------- -------- Total from investment operations (1.84) (1.00) 1.15 ------- ------- -------- Less dividends and distributions: Dividends from net investment income - - (0.10) Distributions from net realized capital gains - - - Distributions from capital - - (0.05) ------- ------- -------- Total dividends and distributions - - (0.15) ------- ------- -------- Net asset value, end of period $ 8.16 $ 10.00 $ 11.00 ======= ======= ======== Total Return (a) (18.40)% (9.09)% 11.51%(d) Ratios to Average Net Assets Gross expenses 1.45% 1.75% 1.81%(e) Fees and expenses waived or borne by the Adviser or Distributor 0.40% 0.70% 0.76%(e) Net expenses 1.05% 1.05% 1.05%(e) Net investment income (loss) (b) (0.85)% (0.66)% (0.12)%(e) Portfolio Turnover 57% 160% 140%(d) Net Assets, End of Period (000 omitted) $51,762 $ 9,441 $ 16,552
(1) Commenced operations on January 21, 2000. (a) Had the Adviser or Distributor not waived or reimbursed a portion of expenses, total return would have been reduced. (b) Net investment income per share has been calculated in accordance with SEC requirements, unless otherwise noted, 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. (c) Per share numbers have been calculated using average shares. (d) Not annualized. (e) Annualized. The Notes to Financial Statements are an integral part of these statements. - -------------------------------------------------------------------------------- Small Cap Growth/TimesSquare Fund 17 FINANCIAL HIGHLIGHTS -- PREMIER CLASS continued
For the Year/Period Ended December 31, -------------------------------- 2004 2003 ------------- ------------------ Per Share Operating Performance: Net asset value, beginning of period $ 11.02 $ 8.12 Income from investment operations Net investment income (loss) (b) (0.10) (0.11)(c) Net realized and unrealized gain (loss) on investments 1.29 3.16 ------- ---------- Total from investment operations 1.19 3.05 ------- ---------- Less dividends and distributions: Dividends from net investment income (0.05) (0.12) Distributions from net realized capital gains (0.33) (0.03) Distributions from capital - - ------- ---------- Total dividends and distributions (0.38) (0.15) ------- ---------- Net asset value, end of period $ 11.83 $ 11.02 ------- ---------- Total Return (a) 10.80% 37.53% Ratios to Average Net Assets Gross expenses 1.29% 1.32% Fees and expenses waived or borne by the Adviser or Distributor 0.04% 0.07% Net expenses 1.25% 1.25% Net investment income (loss) (b) (0.99)% (1.06)% Portfolio Turnover 70% 61% Net Assets, End of Period (000 omitted) $103,589 $ 67,375 For the Year/Period Ended December 31, --------------------------------------------------- 2002 2001 2000(1) ------------------ ----------- -------------------- Per Share Operating Performance: Net asset value, beginning of period $ 9.97 $ 10.98 $ 10.00 Income from investment operations Net investment income (loss) (b) (0.09)(c) (0.08) (0.02) Net realized and unrealized gain (loss) on investments (1.76) (0.93) 1.15 ---------- -------- ---------- Total from investment operations (1.85) (1.01) 1.13 ---------- -------- ---------- Less dividends and distributions: Dividends from net investment income - - (0.10) Distributions from net realized capital gains - - - Distributions from capital - - (0.05) ---------- -------- ---------- Total dividends and distributions - - (0.15) ---------- -------- ---------- Net asset value, end of period $ 8.12 $ 9.97 $ 10.98 ---------- -------- ---------- Total Return (a) (18.56)% (9.20)% 11.26%(d) Ratios to Average Net Assets Gross expenses 1.65% 1.95% 2.01%(e) Fees and expenses waived or borne by the Adviser or Distributor 0.40% 0.70% 0.76%(e) Net expenses 1.25% 1.25% 1.25%(e) Net investment income (loss) (b) (1.06)% (0.87)% (0.32)%(e) Portfolio Turnover 57% 160% 140%(d) Net Assets, End of Period (000 omitted) $ 5,482 $ 6,370 $ 6,640
(1) Commenced operations on January 21, 2000. (a) Had the Adviser or Distributor not waived or reimbursed a portion of expenses, total return would have been reduced. (b) Net investment income per share has been calculated in accordance with SEC requirements, unless otherwise noted, 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. (c) Per share numbers have been calculated using average shares. (d) Not annualized. (e) Annualized. The Notes to Financial Statements are an integral part of these statements. - -------------------------------------------------------------------------------- Small Cap Growth/TimesSquare Fund 18 FINANCIAL HIGHLIGHTS -- RETAIL CLASS continued
For the Year/Period Ended December 31, ------------------------------- 2004 2003 ------------ ------------------ Per Share Operating Performance: Net asset value, beginning of period $ 10.94 $ 8.07 Income from investment operations Net investment income (loss) (b) (0.13) (0.12)(c) Net realized and unrealized gain (loss) on investments 1.29 3.11 --------- ---------- Total from investment operations 1.16 2.99 --------- ---------- Less dividends and distributions: Dividends from net investment income (0.02) (0.09) Distributions from net realized capital gains (0.33) (0.03) Distributions from capital - - --------- ---------- Total dividends and distributions (0.35) (0.12) --------- ---------- Net asset value, end of period $ 11.75 $ 10.94 --------- ---------- Total Return (a) 10.62% 37.02% Ratios to Average Net Assets Gross expenses 1.54% 1.57% Fees and expenses waived or borne by the Adviser or Distributor 0.04% 0.07% Net expenses 1.50% 1.50% Net investment income (loss) (b) (1.25)% (1.31)% Portfolio Turnover 70% 61% Net Assets, End of Period (000 omitted) $ 12,380 $ 10,666 For the Year/Period Ended December 31, ----------------------------------------------------- 2002 2001 2000(1) ------------------ ------------ --------------------- Per Share Operating Performance: Net asset value, beginning of period $ 9.93 $ 10.96 $ 10.00 Income from investment operations Net investment income (loss) (b) (0.11)(c) (0.07) (0.04) Net realized and unrealized gain (loss) on investments (1.75) (0.96) 1.14 ---------- --------- ----------- Total from investment operations (1.86) (1.03) 1.10 ---------- --------- ----------- Less dividends and distributions: Dividends from net investment income - - (0.09) Distributions from net realized capital gains - - - Distributions from capital - - (0.05) ---------- --------- ----------- Total dividends and distributions - - (0.14) ---------- --------- ----------- Net asset value, end of period $ 8.07 $ 9.93 $ 10.96 ---------- --------- ----------- Total Return (a) (18.73)% (9.40)% 11.00%(d) Ratios to Average Net Assets Gross expenses 1.90% 2.18% 2.26%(e) Fees and expenses waived or borne by the Adviser or Distributor 0.40% 0.68% 0.76%(e) Net expenses 1.50% 1.50% 1.50%(e) Net investment income (loss) (b) (1.30)% (1.14)% (0.57)%(e) Portfolio Turnover 57% 160% 140%(d) Net Assets, End of Period (000 omitted) $ 6,507 $ 4,892 $ 2,905
(1) Commenced operations on January 21, 2000. (a) Had the Adviser or Distributor not waived or reimbursed a portion of expenses, total return would have been reduced. (b) Net investment income per share has been calculated in accordance with SEC requirements, unless otherwise noted, 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. (c) Per share numbers have been calculated using average shares. (d) Not annualized. (e) Annualized. The Notes to Financial Statements are an integral part of these statements. - -------------------------------------------------------------------------------- Small Cap Growth/TimesSquare Fund Notes To Financial Statements 19 1. Organization. CIGNA Funds Group, a Massachusetts business trust (the "Trust") is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. At December 31, 2004, the Trust offered two separate series. Information on the Small Cap Growth/ TimesSquare Fund (the "Fund") is presented in this report. The financial statements of the Money Market Fund are presented in a separate report. The Trust offers three classes of shares in the Fund: Institutional Class, Premier Class and Retail Class. Expenses of the Fund are borne pro rata by the holders of each Class of shares, except that each Class bears expenses unique to that Class (including any applicable shareholder servicing fee or distribution fee). Shares of each Class would receive their pro rata share of net assets of the Fund if the Fund were liquidated. In addition, the Trustees approve separate dividends on each Class of shares. The Premier Class Shares have a shareholder servicing fee. The Retail Class Shares have a shareholder servicing fee and a distribution fee. 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 -- Equity securities, including warrants, that are listed on a national securities exchange or part of the NASDAQ National Market System are valued at the last sale price (NASDAQ Official Closing Price ["NOCP"] for NASDAQ stocks) or, if there has been no sale that day, at the last bid price. Short-term investments with remaining maturities of up to and including 60 days are valued at amortized cost, which approximates market. Short-term investments that mature in more than 60 days are valued at current market quotations. Other securities and assets of the Fund are appraised at fair value as determined in good faith by, or under the authority of, the 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. Repurchase Agreements -- The Fund may engage in repurchase agreements. Under the terms of a typical repurchase agreement, the Fund takes possession of an underlying debt obligation, subject to an obligation of the seller to repurchase, and the Fund to resell, the obligation at an agreed-upon price and time. It is the Funds' policy that the market value of the collateral must be at least equal at all times to the total amount of the repurchase obligations, including interest. - -------------------------------------------------------------------------------- Small Cap Growth/TimesSquare Fund Notes To Financial Statements 20 (Continued) Generally, in the event of counterparty default, the Fund has the right to use the collateral to offset any losses incurred. C. Security Transactions and Related Investment Income -- Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Dividend income is recorded on the ex-date and interest income is recorded on the accrual basis, which includes amortization of premium and accrual of discount, except that certain dividends from foreign securities are recorded as soon as the Fund is informed of the ex-dividend date. Securities gains and losses are determined on the basis of identified cost. D. Federal Taxes -- For federal income tax purposes, each Fund in the Trust is taxed as a separate entity. It is the Fund's policy 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 Statements 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. 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. E. Foreign Taxes on Dividends -- Dividend income on the Statement of Operations is shown net of foreign taxes withheld on dividends from foreign securities. The Fund had $3,359 of foreign taxes withheld. F. Dividends and Distributions to Shareholders -- Dividends from net investment income, if any, and distributions from net capital gains, to the extent such gains would otherwise be taxable to the Fund, are declared and distributed at least annually. Dividends and distributions are recorded by the Fund on the ex-dividend date. The timing and characterization of certain income and capital gains distributions are determined in accordance with federal tax regulations, which may differ from generally accepted accounting principles. These differences are primarily due to differing book and tax treatment for deferred compensation, deferred losses due to wash sales, equalization, distribution reclass, 97-64 bifurcation adjustment, excise tax regulations and net operating losses. To the extent that such differences are permanent, a reclassification of the components of Net Assets may be required. As a result, at December 31, 2004, the Fund decreased overdistributed net investment income by $6,523,488, decreased accumulated net realized gain by $4,220,802 and decreased Paid-in Capital by $2,302,686. G. Multiclass Operations -- Each Class offered by the Trust has equal rights as to net assets. Income, non-specific expenses, and realized and unrealized capital gains and losses are allocated to each Class of shares based on the relative net assets of each Class. 3. Investment Advisory Fees and Other Transactions with Affiliates. Through November 17, 2004, investment advisory fees, in the amount of $3,692,188 (net of waivers), were paid or accrued to CIGNA Investment Advisors, Inc. ("CIAI") (formerly, TimesSquare Capital Management, Inc.), certain officers and directors of which were affiliated with the Fund. Such advisory fees were based on an annual rate of 1.00% of the Fund's average daily net assets. CIAI contractually agreed to reimburse or bear any - -------------------------------------------------------------------------------- Small Cap Growth/TimesSquare Fund Notes To Financial Statements 21 (Continued) other expenses for the Fund for any amount by which expenses (including the advisory fee, but excluding interest, taxes, transaction costs incurred in acquiring and disposing of portfolio securities, and extraordinary expenses) exceeded, on an annual basis, the following percentages of average daily net assets:
Institutional Premier Retail Class Class Class --------------- --------- --------- Maximum Operating Expense Ratio 1.05 1.25 1.50
Effective November 18, 2004, the Board of Trustees approved an interim investment advisory agreement with TimesSquare Capital Management, LLC ("TSCM"), pursuant to which TSCM serves as investment adviser to the Fund. Advisory fees, in the amount of $550,485 (net of waivers), paid or accrued to TSCM are based on an annual rate of 1.00% of the Fund's average daily net assets. According to an expense limitation agreement between TSCM and the Fund, TSCM retains the right to be repaid by the Fund if the Fund's expenses fall below the percentages specified above prior to the end of the fiscal year or within three years after TSCM waives advisory fees or reimburses the Fund's operating expenses. The following is a list of the Fund's remaining liability and date of expiration:
(In Thousands) Expires during Fund 2007 - ----------------------- -------- Small Cap Growth Fund $57 Institutional 45 Premier 11 Retail 1
Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund may invest excess cash, up to 25% of the Fund's total assets, in the affiliated Money Market Fund (MMF) managed by CIAI. CIAI has contractually agreed to waive the amount of its advisory fee for the Fund by an amount that offsets the amount of the advisory fees incurred in the affiliated Fund as a result of its investment in MMF. For the year ended December 31, 2004, the advisory fees waived by CIAI were $108,193. Income distributions of $293,002 from the MMF for the twelve months ended December 31, 2004, are included as dividend income in the Statement of Operations. For administrative services, the Fund reimbursed 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 18, 2004, CIAI continues to provide such administrative services for which it receives a fee at an annual rate of 0.04% of the Fund's average daily net assets. For the year ended December 31, 2004, the Fund paid or accrued $151,725. With respect to Retail Class shares, the Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the Investment Company Act of 1940, which requires the payment of an annual rate of 0.25%, applied to the average daily net assets of that class, to Prudential Retirement Brokerage Services ("PRBS") (formerly CIGNA Financial Services, Inc.), the Funds' distributor. The distribution fees received from the 12b-1 plan are used for services provided to the Retail Class and expenses primarily intended to result in the sale of such shares. Premier and Retail Class shares are also subject to a shareholder servicing fee payable to PRBS equal to 0.20% annually applied to the average daily net assets of each class. The shareholder servicing and distribution fees will be waived as necessary to limit Premier and Retail Class expenses, as a percentage of average daily net assets, to the amounts described above. - -------------------------------------------------------------------------------- Small Cap Growth/TimesSquare Fund Notes To Financial Statements 22 (Continued) CIAI is an indirect, wholly-owned subsidiary of CIGNA Corporation. 4. Trustees' Fees. Trustees' fees represent remuneration paid or accrued to Trustees who are not employees of CIGNA Corporation or any of its affiliates. Trustees may elect to defer all or a portion of their fees, which are invested in mutual fund shares in accordance with a deferred compensation plan. 5. Purchases and Sales of Securities. Purchases and sales of securities, excluding short-term obligations, for the year ended December 31, 2004, were as follows:
(In Thousands) U.S. Government/Agency All Other - ----------------------- -------------------- Purchases Sales Purchases Sales --------- ----- --------- ----- -- -- 356,840 295,464
7. Capital Stock. The Fund is a separate series of the Trust, which offers an unlimited number of shares of beneficial interest, without par value. As of December 31, 2004, there were five shareholders who each held greater than 5% of the outstanding shares of the Fund. Changes in capital shares were as follows: (In thousands)
For the Year Ended December 31, ----------------------- 2004 2003 ----------- ----------- Capital Shares Transacted: Institutional Class Shares sold 7,154 24,196 Shares issued to shareholders in connection with the reinvestment of dividends and distributions 1,134 414 ----- ------ 8,288 24,610 Shares redeemed (3,124) (1,594) ------ ------ Net change 5,164 23,016 ------ ------
For the Year Ended December 31, ----------------------- 2004 2003 ----------- ----------- Premier Class Shares sold 5,713 6,849 Shares issued to shareholders in connection with the reinvestment of dividends and distributions 272 81 ------ ------ 5,985 6,930 Shares redeemed (3,343) (1,490) ------ ------ Net change 2,642 5,440 ------ ------ Retail Class Shares sold 387 464 Shares issued to shareholders in connection with the reinvestment of dividends and distributions 30 10 ------ ------ 417 474 Shares redeemed (338) (306) ------ ------ Net change 79 168 ------ ------ Total net increase in Fund shares 7,885 28,624 ====== ======
8. Proposed Merger of the Fund. The Fund's previous investment adviser, TimesSquare Capital Management, Inc. (TimesSquare Inc.), now known as CIGNA Investment Advisors, Inc. and its parent company, CIGNA Corporation, have sold TimesSquare Inc.'s growth equity management business to a new company, TimesSquare Capital Management, LLC (TimesSquare LLC). The managing member of TimesSquare LLC is a subsidiary of Affiliated Managers Group, Inc. (AMG). - -------------------------------------------------------------------------------- Small Cap Growth/TimesSquare Fund Notes To Financial Statements 23 (Continued) On October 12, 2004, the Board of Trustees of CIGNA Funds Group approved a reorganization, subject to approval by Fund shareholders, pursuant to which the Small Cap Growth/TimesSquare Fund would transfer substantially all of its assets and liabilities to a new fund, the TimesSquare Small Cap Growth Fund, which is a series of Managers AMG Funds, in exchange for shares of the new fund having a net asset value equal to the net asset value of the assets and liabilities so transferred. The new fund shares would then be distributed pro rata to shareholders of the Fund. The Fund has scheduled a special meeting of shareholders on April 8, 2005 to seek shareholder approval of the merger. - -------------------------------------------------------------------------------- CIGNA Funds Group - Small Cap Growth/TimesSquare Fund 24 Report of Independent Registered Public Accounting Firm To the Trustees and Shareholders of CIGNA Funds Group -- Small Cap Growth/TimesSquare Fund In our opinion, the accompanying statement of assets and liabilities, including the investments in securities, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of CIGNA Funds Group--Small Cap Growth/TimesSquare Fund ("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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements 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 and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 25, 2005 - -------------------------------------------------------------------------------- Small Cap Growth/TimesSquare Fund 25 (Unaudited) 2004 TAX INFORMATION The fund hereby designates 31.98% 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 31.16% of ordinary income dividends would be eligible for the dividend received deduction (available to corporate shareholders only). - -------------------------------------------------------------------------------- Small Cap Growth/TimesSquare Fund 26 (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) Fund Complex Directorships And Age Fund Served During Past 5 Years Overseen Held by Trustee - ----------------------------------------------------------------------------------------------------------------------------- Independent Trustees Russell H. Jones Trustee Trustee since Senior Vice President (Investor 7 -- 60 1995 Relations, Public Relations), Chief 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 Electric 61 Corporation (family restaurants and Company dairy products) Marnie Trustee Trustee since Diocesan Consultant, Episcopal 7 Boston Mutual Life Wagstaff 2001 Diocese of Connecticut; Insurance Company Mueller Previously, Visiting Professor of 65 Health 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 CIGNA 51 the Board and President since 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. Winer Vice President Officer Senior Counsel, 7 __ 47 and Secretary Since 1993 CIGNA Corporation - -----------------------------------------------------------------------------------------------------------------------------
* 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. - -------------------------------------------------------------------------------- CIGNA Funds Group Funds are open-end, diversified management investment companies. The investment adviser to the Small Cap Growth/TimesSquare Fund is TimesSquare Capital Management, LLC, Four TimesSquare, 25th Floor, New York, NY 10036, (Telephone: 1.800.541.5156 ext. 7884.) The Funds are distributed by Prudential Retirement Brokerage Services (formerly CIGNA Financial Services, Inc.), P.O. Box 150476, Hartford, Connecticut 06115-0476 (Telephone: 1.888.CIGNA.FS or 1.888.244.6237). - -------------------------------------------------------------------------------- [CIGNA logo] CIGNA 545900 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 $180,400 and $72,850, respectively. (b) Audit-Related Fees For the fiscal years ended December 31, 2003 and December 31, 2004, PWC did not bill the Registrant any amounts 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 $46,975 and $46,850, 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") and TimesSquare Capital Management, LLC, ("TSCM") the investment adviser to the Registrant, and other entities controlling, controlled by, under common control with CIGNA Advisors or TSCM that provide ongoing services to the Registrant for fiscal years ending December 31, 2003 and 2004, were $100,148 and $819,180, 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. Not applicable. 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. Not applicable. 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. Not Applicable. Item 10. Submission of Matters to a Vote of Security Holders. The Registrant has adopted a nominating committee charter that sets forth procedures by which shareholders may recommend nominees to the Registrant's Board of Trustees. The charter is attached as an exhibit hereto. Item 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. Nominating Committee Charter. 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 High Income Shares By: /s/ Alfred A. Bingham III --------------------------------------------------- Alfred A. Bingham III, Vice President and Treasurer Date: March 4, 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 ------------------------------------------------------- Richard H. Forde, Chairman of the Board and President Date: March 4, 2005 By (Signature and Title) /s/ Alfred A. Bingham III -------------------------------------------------------- Alfred A. Bingham III, Vice President and Treasurer Date: March 4, 2005 EX-99.(A)(1) 2 ex99-a1.txt Exhibit 99.a1 CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR CIGNA FUNDS OFFICERS I. Covered Officers/Purpose of the Code CIGNA Funds' code of ethics (this "Code") for the investment companies within the complex (collectively, "Funds" and each, "Fund") applies to the Funds' Principal Executive Officer, Principal Financial Officer and Principal Legal Officer (the "Covered Officers", each of whom are set forth in Exhibit A) for the purpose of promoting: o honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; o full, fair, accurate, timely and understandable disclosure in reports and documents that a Fund files with, or submits to, the Securities and Exchange Commission ("SEC") and in other public communications made by the Fund; o compliance with applicable laws and governmental rules and regulations; o the prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and o accountability for adherence to the Code. Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. II. Covered Officers Should Handle Ethically Actual and Apparent Conflicts of Interest Overview. A "conflict of interest" occurs when a Covered Officer's private interest interferes with the interests of, or his service to, the Fund. For example, a conflict of interest would arise if a Covered Officer, or a member of his family, receives improper personal benefits as a result of his position with the Fund. Certain conflicts of interest arise out of the relationships between Covered Officers and the Fund and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the Fund because of their status as "affiliated persons" of the Fund. The Fund's and the investment adviser's compliance programs 1 Exhibit 99.a1 and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between the Funds and the investment adviser. The Covered Officers are officers or employees of an affiliate of the investment adviser. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the Funds or for the adviser, or for both), be involved in establishing policies and implementing decisions that will have different effects on the adviser and the Funds. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the Funds and the adviser and is consistent with the performance by the Covered Officers of their duties as officers of the Funds. Other conflicts of interest are covered by this Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the Fund. Each Covered Officer must: o not use his personal influence or personal relationships improperly to influence investment decisions or financial reporting by the Company whereby the Covered Officer would benefit personally to the detriment of the Company; o not cause the Fund to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit the Company; o not use material non-public knowledge of portfolio transactions made or contemplated for the Company to trade personally or cause others to trade personally in contemplation of the market effect of such transactions; o report at least annually on affiliations or other relationships related to conflicts of interest that the Fund's Trustees and Officers Questionnaire covers. There are some conflict of interest situations that should always be approved by the Chief Counsel to the investment adviser to the Funds if material. Examples of these include: 2 Exhibit 99.a1 o any .ownership interest in, or any consulting or employment relationship with, any of the Company's service providers, other than its investment adviser, principal underwriter, administrator or any affiliated person thereof; o a direct or indirect financial interest in commissions, transaction charges or spreads paid by the Company for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer's employment, such as compensation or equity ownership. There are some conflicts of interest (e.g. receipt of gifts and entertainment by Covered Officers, and service by Covered Officers as a director of a company) that are covered by the code of ethics of CIGNA Corporation, the adviser's parent. Each Covered Officer is subject to the CIGNA Corporation code of ethics. III. Disclosure and Compliance o Each Covered Officer should familiarize himself with the disclosure requirements generally applicable to the Funds; o each Covered Officer should not knowingly misrepresent, or cause others to misrepresent, facts about the Fund to others, whether within or outside the Fund, including to the Fund trustees and auditors, and to governmental regulators and self-regulatory organizations; o each Covered Officer should, to the extent appropriate within his area of responsibility, consult with other officers and employees of the Funds and the adviser with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the Funds file with, or submit to, the SEC and in other public communications made by the Funds; and o it is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations. IV. Reporting and Accountability Each Covered Officer must: o upon adoption of the Code (or thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Board that he has received, read, and understands the Code; 3 Exhibit 99.a1 o annually thereafter affirm to the Board that he has complied with the requirements of the Code; o not retaliate against any other Covered Officer or any employee of the Funds or their affiliated persons for reports of potential violations that are made in good faith; and o notify Chief Counsel of the investment adviser to the Funds promptly if he knows any violation of this Code. Failure to do so is itself a violation of this Code. The Chief Counsel of the investment adviser or other designated senior legal officer of the Fund's investment adviser is responsible for applying this Code to specific situations in which questions are presented under it and has the authority to interpret this Code in any particular situation. However, any approvals or waivers sought by a Covered Officer will be considered by the Audit Committee (the "Committee"). The Funds will follow these procedures in investigating and enforcing this Code: o the Chief Counsel or other designated senior legal officer will take all appropriate action to investigate any potential violations reported to him; o if, after such investigation, the Chief Counsel believes that no violation has occurred, the Chief Counsel is not required to take any further action; o any matter that could reasonably be deemed to be a violation will be reported to the Committee; o if the Committee concurs that a violation has occurred, it will inform and make a recommendation to the Board, which will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer; o The Committee will be responsible for granting waivers, as appropriate; and o any changes to or waivers of this Code will, to the extent required, be disclosed as provided by SEC rules. V. Other Policies and Procedures This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to 4 Exhibit 99.a1 registered investment companies thereunder. Insofar as other policies or procedures of CIGNA Corporation, the Funds, the Funds' adviser, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. The Funds' and their investment adviser's codes of ethics under Rule 17j-1 under the Investment Company Act contain separate requirements applying to the Covered Officers and others, and are not part of this Code. VI. Amendments Any amendments to this Code, other than amendments to Exhibit A, must be approved or ratified by a majority vote of the Board, including a majority of independent directors. VII. Confidentiality All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the Board and its counsel. The foregoing shall not limit the ability of the Board of Trustees of the Funds or the Committee to respond to matters arising under this Code as they shall deem appropriate. VIII. Internal Use The Code is intended solely for the internal use by the Funds and does not constitute an admission, by or on behalf of any Fund, as to any fact, circumstance, or legal conclusion. Date: December 10, 2003 Exhibit 99.a1 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 EX-99.(A)(2 3 ex99_a2.txt Microsoft Word 11.0.6359; CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER -------------------------------------------- I, Richard H. Forde, certify that: 1. I have reviewed this report on Form N-CSR of CIGNA Funds Group; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the period covered by this report us our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. Date: March 4, 2005 /s/ Richard H. Forde ----------------------------------- Chairman of the Board and President CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER -------------------------------------------- I, Alfred A. Bingham III, certify that: 1. I have reviewed this report on Form N-CSR of CIGNA Funds Group; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the period covered by this report us our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. Date: March 4, 2005 /s/ Alfred A. Bingham III ------------------------------ Vice President and Treasurer EX-99.(B) 4 ex99_b.txt Certification Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code) In connection with the attached Report of CIGNA Funds Group (the "Trust") on Form N-CSR to be filed with the Securities and Exchange Commission (the "Report"), each of the undersigned officers of the Trust does hereby certify that, to the best of such officer's knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respect, the financial condition and results of operations of the Trust as of, and for, the periods presented in the Report. Dated: March 4, 2005 /s/ Richard H. Forde - ------------------------------- Richard H. Forde Chairman of the Board and President Dated: March 4, 2005 /s/ Alfred A. Bingham III - ------------------------------- Alfred A. Bingham III Vice President and Treasurer A signed original of this written statement required by Section 906 has been provided to the Trust and will be retained by the Trust and furnished to the Securities and Exchange Commission or its staff upon request. This certification is being furnished solely pursuant to 18 U.S.C. section 1350 and is not being filed as part of the Report or as a separate disclosure document. EX-99.NOMINATING 5 ex99_nominatingcharter.txt CIGNA FUNDS NOMINATING COMMITTEE CHARTER 1. The Nominating Committee (the "Committee") shall be composed entirely of those Trustees of CIGNA Funds Group, CIGNA Variable Products Group, CIGNA High Income Shares and CIGNA Investment Securities (the "Funds" and individually a "Fund") who are not "interested persons" of the Funds within the meaning of Section 2(a)(19) of the Investment Company Act of 1940, as amended (each an "Independent Trustee"). As long as shares of a Fund are listed on any national securities exchange or national securities association (generally, a "Listing Entity"), the composition of the Committee shall also meet such requirements as may be imposed from time to time by that Listing Entity. No member of the Committee shall receive any compensation from a Fund except compensation for service as a member of the Board of Trustees (the "Board") or a committee thereof. 2. The purpose of the Committee is to foster the effective development and maintenance of the membership and organization of the Board and its committees. 3. The Committee shall have the following duties and powers: (a) to nominate, for consideration by the shareholders or the Board in accordance with Section 16(a) of the Investment Company Act of 1940, as amended (the "1940 Act"), candidates to serve as Trustees of one or more Funds; (b) to supervise the nomination of Trustees of one or more Funds and establish and maintain policies regarding the selection of nominees for election to the Board, the current procedures being set forth in Appendix A; (c) to review periodically the size and composition of the Board and its governance procedures and to recommend any such changes to the full Board as the Committee shall deem appropriate; (d) to review periodically the compensation of Trustees paid by each Fund and to recommend to the Board such adjustments therein as the Committee shall deem appropriate; and (e) to review, as necessary, the responsibilities, size and composition of committees of the Board, to consider whether there is a continuing need for each committee, whether there is a need for additional committees of the Board, and whether committees should be combined or reorganized, and to make such recommendations to the full Board as the Committee shall deem appropriate. The Committee shall have such other duties and powers as it shall deem appropriate in order to represent the interests of each Fund and its respective shareholders in matters in which their interests are different from those of the Fund's investment adviser(s) and principal underwriter(s) and their affiliates. 4. The Committee shall meet at least annually at such times and locations as the Committee may determine and is empowered to hold special meetings as circumstances require. 5. The Committee shall have the resources and authority appropriate to discharge its responsibilities, including the authority to retain special counsel and other experts or consultants at the expense of one or more Funds. The Committee shall have the right of direct access to such officers of and service providers to the Funds as it deems desirable. 6. The Committee shall review this Charter at least annually and recommend any changes to the full Board. Appendix A ------------ POLICY REGARDING SELECTION OF TRUSTEE NOMINEES The Committee will, when a vacancy on the Board exists or is anticipated, consider any Trustee candidate recommended by security holders. The current procedures to be followed by security holders are set forth below: 1. All security holder recommendations for Trustee candidates must be submitted to the Secretary of the applicable Fund who will forward all recommendations to the Committee. 2. All security holder recommendations for Trustee candidates must be submitted to the applicable Fund not less than one hundred twenty (120) calendar days prior to the date on which the Fund's proxy statement was released to shareholders in connection with the previous year's annual meeting. 3. All security holder recommendations for Trustee candidates must include the following information: (a) The name and address of the security holder of record; (b) A representation that the security holder is a record holder of the applicable Fund's securities, or if the security holder is not a record holder, evidence of ownership in accordance with Rule 14a-8(b)(2) of the Securities Exchange Act of 1934, as amended; (c) The name, age, business and residential address, educational background, current principal occupation or employment, and principal occupation or employment for the preceding five (5) full fiscal years of the proposed Trustee candidate; (d) A description of the qualifications and background of the proposed Trustee candidate that addresses the minimum qualifications and other criteria for Board membership approved by the Board from time to time; (e) A description of all arrangements or understandings between the security holder and the proposed Trustee candidate; (f) The consent of the proposed Trustee candidate (i) to be named in the proxy statement relating to the applicable Fund's annual meeting of shareholders and (ii) to serve as a Trustee if elected at such annual meeting; and (g) Any other information regarding the proposed Trustee candidate that is required to be included in a proxy statement filed pursuant to the rules of the Securities and Exchange Commission. The Committee has not established specific, minimum qualifications that must be met by an individual for the Committee to recommend that individual for nomination as a Trustee. In seeking candidates to consider for nomination to fill a vacancy on the Board, the Committee expects to seek referrals from a variety of sources, including current Trustees, management of the Funds and counsel to the Funds. The Committee may also engage a search firm to identify or evaluate or assist in identifying or evaluating candidates. In evaluating Trustee candidates, the Committee considers a variety of factors, including, as appropriate: (i) the candidate's knowledge in matters relating to investment companies; (ii) any experience possessed by the candidate as a director or senior officer of other public companies; (iii) the candidate's educational background; (iv) the candidate's reputation for high ethical standards and personal and professional integrity; (v) any specific financial, technical or other expertise possessed by the candidate, and the extent to which such expertise would complement the Board's existing mix of skills and qualifications; (vi) the candidate's perceived ability to contribute to the ongoing functions of the Board, including the candidate's ability and commitment to attend meetings regularly and work collaboratively with other members of the Board; (vii) the candidate's ability to qualify as an Independent Trustee for purposes of the 1940 Act, the candidate's independence from the Fund's service providers and the existence of any other relationships that might give rise to a conflict of interest or the appearance of a conflict of interest; (viii) the candidate's age relative to the Funds' retirement age for Trustees and (ix) such other factors as the Committee determines to be relevant in light of the existing composition of the Board and any anticipated vacancies or other transitions, e.g., whether or not a candidate is an "audit committee financial expert" under the federal securities laws. Prior to making a final recommendation to the Board, the Committee conducts personal interviews with the candidate(s) it concludes are the most qualified. Any candidates recommended by security holders will be evaluated in the same manner. -----END PRIVACY-ENHANCED MESSAGE-----