N-CSRS 1 d13090.txt [Graphic] CIGNA INVESTMENT SECURITIES ---------------------------- Semiannual Report June 30, 2003 [Logo] -------------------------------------------------------------------------------- 1 Dear Shareholders: Our commentary for CIGNA Investment Securities (the "Fund") covering the six months ended June 30, 2003 follows. Market Summary On a six-month year-to-date basis, the total return of the Lehman Brothers Aggregate Bond Index was 3.93%, compared with a total return of 7.32% on investment-grade corporate bonds (Lehman Brothers U.S. Credit Index). Emerging market debt (J.P. Morgan Emerging Market Bonds Plus Index) and high-yield corporate bonds (Lehman Brothers High Yield Bond Index) produced the best total returns by far on a year-to-date basis, with total returns from each market in excess of 18%. At the beginning of May, the Federal Reserve (Fed) Chairman Greenspan announced that any necessary action would be taken to combat deflationary pressures. Bondholders took this as a sign that the Fed would keep short-term rates low. The 10-year Treasury yield plunged to an inter-generational low of 3.13% on June 13, the lowest level since June 1958, before recovering to end the quarter at 3.53%. Performance Returns for the periods ended June 30, 2003 were:
Quarter Six Months --------- ----------- Fund 3.88% 5.71% Lipper Corporate Debt Funds - 'A' Rated Average 3.12 4.73 Lehman Brothers Aggregate Bond Index 2.50 3.93
The Fund's returns based on the market value of its shares traded on the New York Stock Exchange were 3.26% and 6.90% for the quarter and six months ended June 30, 2003, respectively. In the first quarter, the Fund benefited from its allocation to high yield and to the overweight allocation to the investment-grade credit sector. The Fund also was helped by the positive issue selection in investment-grade credits and mortgage-backed securities (MBS) for the period. In the second quarter, the overweight allocation and strong selection in investment-grade corporate bonds were the largest positive contributors to Fund performance. At June 30, 2003, the Fund was 14% overweight to corporate bonds on a duration-adjusted basis. Continued positive issue selection in Yankee and domestic telecommunications companies such as France Telecom, Deutsche Telekom, and Sprint Capital added value. Other sectors that performed well for us included Yankee Banks such as Royal Bank of Scotland and cable names, with Comcast as an example. In MBS, one of the more consistent and effective strategies that has been undertaken is to purchase securities with better call protection when rates are low. Our underweight in Agency bonds and selection within the sector, especially in Financing Corporation (FICO) bonds (issued to finance the savings and loan banking system bailout), continued to have a positive impact. Outlook We continue to favor investment-grade corporate bonds. Despite the extremely strong returns in this sector over the past nine months, we still see further upside, albeit not of the same magnitude. We remain vigilant in our monitoring of individual credits and potential volatility associated with continued accounting and corporate governance issues, potential profit disappointments, and exogenous/geopolitical events. In high yield, we may once again increase our allocation upon clearer signs of economic growth. In the MBS sector, we have moved to an underweight allocation due to our cautious outlook. Sincerely, /s/ Richard H. Forde Richard H. Forde Chairman of the Board and President CIGNA Investment Securities Note: This commentary is not part of the Semiannual Report to Shareholders. -------------------------------------------------------------------------------- CIGNA Investment Securities Investments in Securities 2 June 30, 2003 (Unaudited)
Principal Value (000) (000) --------------------------------------------------------------------------------- LONG-TERM BONDS - 89.9% Basic Materials - 0.4% Abitibi-Consolidated, Inc., 6.00%, 2013 $135 $ 128 Stora Enso Oyj, 7.38%, 2011 115 138 Weyerhaeuser Co., 5.25%, 2009 90 96 ------ 362 ------ Communications & Media - 8.0% AOL Time Warner, Inc., 6.75%, 2011 135 154 AT&T Corp., 8.50%, 2031 70 79 AT&T Wireless Services, Inc., 8.13%, 2012 100 120 British Telecommunications PLC, 8.88% (coupon change based on rating), 2030 165 225 Comcast Corp., 5.85%, 2010 90 99 Deutsche Telekom International Finance BV, 8.50%, (coupon change based on rating), 2010 200 246 8.75%, (coupon change based on rating), 2030 480 612 France Telecom SA, 8.70%, (coupon change based on rating), 2006 60 68 9.25%, (coupon change based on rating), 2011 820 1,032 10.00%, (coupon change based on rating), 2031 75 104 Kyivstar GSM, 12.75%, 2005 144A 180 198 Koninklijke KPN, NV, 8.00%, 2010 655 811 Liberty Media Corp., 5.70%, 2013 45 46 News America Holdings, 7.75%, 2045 215 256 News America, Inc., 6.75%, 2038 30 33 PTC International Finance II SA, 11.25%, 2009 200 226 Qwest Capital Funding Inc., 7.00%, 2009 30 25 6.50%, 2018 25 18 Speedway Motorsports, Inc., 6.75%, 2013 144A 80 83 Sprint Capital Corp., 6.13%, 2008 70 76 8.38%, 2012 15 18 8.75%, 2032 220 263 Tele Communications, Inc., 9.80%, 2012 260 344 7.88%, 2013 385 466 TELUS Corp., 8.00%, 2011 280 323
Principal Value (000) (000) -------------------------------------------------------------------------------- Communications & Media (continued) Time Warner, Inc., 9.13%, 2013 $ 615 $ 788 7.57%, 2024 40 45 TPSA Finance BV, 7.75%, 2008 144A 220 252 Univision Communications, Inc., 7.85%, 2011 240 286 Verizon Florida, Inc., 6.13%, 2013 110 125 ------ 7,421 ------ Consumer & Retail - 2.0% Ahold Finance USA, Inc., 8.25%, 2010 220 225 Campbell Soup Co., 5.88%, 2008 110 125 Foster's Finance Corp., 6.88%, 2011 144A 120 142 Heinz (H.J.) Co., 6.38%, 2028 10 11 Heinz (H.J.) Finance Co., 6.75%, 2032 165 197 Kellogg Co., 7.45%, 2031 210 266 Kraft Foods, Inc., 5.25%, 2007 80 87 5.63%, 2011 200 218 Kroger Co., 7.50%, 2031 35 42 Safeway, Inc., 7.25%, 2031 30 34 Sears Roebuck Acceptance Corp., 7.00%, 2032 45 50 VFB LLC, 10.25%, 2009 (a) 2,010 482 ------ 1,879 ------ Diversified - 1.5% Bombardier, Inc., 6.75%, 2012 144A 155 159 General Electric Co., 5.00%, 2013 420 444 Hutchison Whampoa International Ltd., 6.50%, 2013 144A 260 273 ITT Industries, Inc., 7.40%, 2025 455 532 ------ 1,408 ------ Financial - 13.0% American Express Credit, Ser.1999-1A, 5.60%, 2006 900 931 Amvescap PLC, 5.90%, 2007 220 240 Bank of America Corp., 7.80%, 2010 30 37 BankBoston Corp., 8.25%, 2026 130 153 Bayerische Hypo-und Vereinsbank AG, 8.74%, 2031 144A 300 315
The Notes to Financial Statements are an integral part of these statements. -------------------------------------------------------------------------------- CIGNA Investment Securities Investments in Securities 3 June 30, 2003 (Unaudited) (Continued)
Principal Value (000) (000) -------------------------------------------------------------------------------- Financial (continued) Boeing Capital Corp., 6.10%, 2011 $185 $204 CIT Group, Inc., 6.50%, 2006 175 191 6.88%, 2009 55 62 Citigroup, Inc., 3.50%, 2008 780 802 7.25%, 2010 195 236 Countrywide Home Loans, Inc., 5.50%, 2007 60 66 Credit Suisse First Boston Mortgage Securities Corp., 4.63%, 2008 100 107 Interest Only 7.50%, 2032 700 67 Interest Only 8.00%, 2032 850 85 Dresdner Funding Trust I, 8.15%, 2031 144A 335 369 Fifth Third Bank Michigan, 7.75%, 2010 315 350 First Union Capital 1, 7.94%, 2027 85 99 Ford Motor Credit Co., 6.88%, 2006 460 488 7.38%, 2009 345 362 7.38%, 2011 190 196 General Motors Acceptance Corp., 5.13%, 2008 110 109 6.88%, 2011 635 637 7.00%, 2012 125 126 Golden West Financial Corp., 4.13%, 2007 160 169 Goldman Sachs Group, Inc., 6.88%, 2011 330 389 Household Finance Corp., 4.63%, 2008 110 117 6.38%, 2011 175 199 6.38%, 2012 160 182 HVB Funding Trust III, 9.00%, 2031 144A 100 105 International Lease Finance Corp., 6.38%, 2009 165 185 Kazkommerts International BV, 8.50%, 2013 144A 140 139 Korea Development Bank, 4.25%, 2007 70 72 5.50%, 2012 15 16 Lehman Brothers Holdings, Inc., 6.63%, 2012 195 229 Manufacturers & Traders Trust, 8.00%, 2010 105 130 Middletown Trust, 11.75%, 2010 848 850
Principal Value (000) (000) -------------------------------------------------------------------------------- Financial (continued) Morgan (J.P.) Co., 6.00%, 2009 $ 170 $ 191 Morgan Stanley Group, Inc., 6.75%, 2011 230 269 National Rural Utilities Cooperative Finance Corp., 5.75%, 2009 90 100 NB Capital Trust IV, 8.25%, 2027 125 152 Prudential Funding LLC, 6.60%, 2008 105 121 Residential Asset Mortgage Products, Inc., Interest Only, 5.75%, 2005 1,480 89 Santander Financial Issuances, 6.80%, 2005 75 82 6.38%, 2011 160 183 Sovereign Bancorp., Inc., 10.50%, 2006 975 1,171 Standard Chartered Bank, 8.00%, 2031 144A 120 152 Union Planters Corp., 6.75%, 2005 220 243 Zions Bancorp., Step Coupon (6.50%, 10/15/2006), 2011 225 250 ------- 12,017 ------- Foreign Government - 2.1% Bulgaria (Republic of), Floating Rate, 2.19%, 2024 220 213 Quebec (Province of Canada), 5.50%, 2006 475 520 7.50%, 2023 430 562 Russian Federation, Step Coupon (5.00% to 3/31/07), 2030 144A 345 335 Ukraine Government, 7.65%, 2013 144A 110 109 United Mexican States, 8.30%, 2031 190 219 ------- 1,958 ------- Industrial - 1.9% BAE Systems Holdings, 6.40%, 2011 144A 520 582 Lockheed Martin Corp., 8.20%, 2009 605 765 8.50%, 2029 180 245 Systems 2001 Asset Trust LLC, 7.16%, 2011 144A 190 213 ------- 1,805 -------
The Notes to Financial Statements are an integral part of these statements. -------------------------------------------------------------------------------- CIGNA Investment Securities Investments in Securities 4 June 30, 2003 (Unaudited) (Continued)
Principal Value (000) (000) -------------------------------------------------------------------------------- Insurance - 1.4% American Re Corp., 7.45%, 2026 $120 $ 133 AXA SA, 8.60%, 2030 95 122 Monumental Global Funding II, 3.85%, 2008 144A 210 217 Progressive Corp., 6.25%, 2032 40 45 Travelers Property Casualty Corp., 5.00%, 2013 110 115 XL Capital Europe PLC, 6.50%, 2012 190 217 Zurich Capital Trust I, 8.38%, 2037 144A 380 417 ------ 1,266 ------ Medical - 0.3% Tenet Healthcare Corp., 7.38%, 2013 255 246 ------ Oil & Gas - 2.0% Amerada Hess Corp., 7.30%, 2031 140 162 Conoco Funding, Co., 6.35%, 2011 515 602 Devon Financing Corp. ULC, 6.88%, 2011 135 158 Duke Energy Field Services LLC, 5.75%, 2006 40 43 6.88%, 2011 30 34 Gazprom OAO, 9.63%, 2013 144A 120 132 Occidental Petroleum Corp., 7.65%, 2006 480 542 Petroleos Mexicanos, 9.50%, 2027 155 191 ------ 1,864 ------ Pharmaceuticals - 0.5% Lilly (Eli) & Co., 6.77%, 2036 355 435 Wyeth, 5.25%, 2013 45 48 ------ 483 ------ Transportation - 3.0% American Airlines, 7.38%, 2016 349 164 Burlington Northern Santa Fe, 6.75%, 2029 175 198 Continental Airlines, Inc., 6.90%, 2017 376 283 Delta Air Lines, Inc., 9.45%, 2006 546 472 7.90%, 2009 160 127 Federal Express Corp., 7.60%, 2097 115 131 Ford Motor Co., 6.38%, 2029 110 89 General Motors Corp., 7.13%, 2013 130 129 Norfolk Southern Corp., 7.70%, 2017 295 377
Principal Value (000) (000) -------------------------------------------------------------------------------- Transportation (continued) Union Pacific Corp., 7.60%, 2005 $ 285 $ 314 5.75%, 2007 210 233 6.13%, 2012 200 226 ------ 2,743 ------ U.S. Government & Agencies - 50.6% Fannie Mae, 5.50%, 2017 1,540 1,600 8.00%, 2030 387 417 7.00%, 2031 1,161 1,230 8.00%, 2031 303 325 6.50%, 2032 4,226 4,408 7.00%, 2032 2,132 2,253 6.50%, 2033 1,250 1,303 Interest Only 7.20%, 2042 6,592 135 Financing Corp., Principal Strips from 9.60%, 2018 220 101 9.90%, 2018 815 376 10.00%, 2018 200 96 8.60%, 2019 450 196 9.65%, 2019 375 170 9.70%, 2019 675 304 Freddie Mac, 6.00%, 2017 1,314 1,367 4.50%, 2018 1,561 1,596 5.00%, 2018 2,353 2,433 6.00%, 2032 4,630 4,800 7.50%, 2032 1,437 1,527 5.50%, 2033 3,692 3,814 Interest Only 9.89%, 2043 5,863 163 Ginnie Mae, 6.50%, 2031 669 703 6.50%, 2032 481 506 5.50%, 2033 432 450 6.00%, 2033 955 1,001
The Notes to Financial Statements are an integral part of these statements. -------------------------------------------------------------------------------- CIGNA Investment Securities Investments in Securities 5 June 30, 2003 (Unaudited) (Continued)
Principal Value (000) (000) -------------------------------------------------------------------------------- U.S. Government & Agencies (continued) U.S. Treasury Bonds, 8.75%, 2017 $ 1,095 $ 1,639 6.00%, 2026 2,370 2,833 U.S. Treasury Notes, 4.63%, 2006 5,040 5,463 4.38%, 2007 1,540 1,673 6.00%, 2009 3,290 3,881 5.00%, 2011 100 112 ------- 46,875 ------- Utilities - 3.2% American Electric Power, Inc., 5.38%, 2010 40 43 Carolina Power & Light Co., 6.50%, 2012 105 121 CenterPoint Energy, 5.70%, 2013 144A 130 141 7.88%, 2013 144A 75 86 Columbus Southern Power Co., 5.50%, 2013 144A 55 59 Detroit Edison Co., 6.13%, 2010 255 291 6.35%, 2032 5 6 Dominion Resources Inc., 6.25%, 2012 60 68 DPL, Inc., 8.25%, 2007 160 181 Duke Capital Corp., 6.25%, 2013 35 37 First Energy Corp., 5.50%, 2006 415 445 6.45%, 2011 115 126 7.38%, 2031 90 101 Niagara Mohawk Power Co., 7.63%, 2005 378 422 Nisource Finance Corp., 7.88%, 2010 225 266 Ohio Power Co., 5.50%, 2013 144A 25 27 Oncor Electric Delivery Co., 7.25%, 2033 144A 150 177 Pinnacle Partners, 8.83%, 2004 144A 145 150 Progress Energy, Inc., 7.10%, 2011 90 105 7.00%, 2031 90 99 ------- 2,951 ------- Total Long-Term Bonds (Cost - $79,058) 83,278 -------
Number of Value Shares (000) ------------------------------------------------------------------------------ PREFERRED STOCK - 2.0% Communications & Media - 0.3% Centaur Funding Corp., 9.08% 144A 250 $ 301 ------- Financial - 1.7% BCI US Funding Trust, Step Coupon (8.01% to 7/15/08) 144A 340 397 IBJ Preferred Capital Co. LLC, Step Coupon (8.79% to 6/30/08) 144A 95 95 Natexis AMBS Co. LLC., Step Coupon (8.44% to 6/30/08) 144A 200 242 RBS Capital Trust I, Step Coupon (4.71% to 7/01/13) 880 881 ------- 1,615 ------- Total Preferred Stock (Cost - $1,816) 1,916 ------- SHORT-TERM OBLIGATIONS - 7.9% Money Market Fund - 7.6% CIGNA Funds Group - Money Market Fund 7,011,773 $ 7,012 ------- Principal (000) --------- U.S. Government - 0.2% U.S. Treasury Bill, 1.10%, 10/2/03 (b) $ 125 124 1.17%, 10/2/03 (b) 25 25 ------- 149 ------- Utilities - 0.1% Niagara Mohawk Power Co., 7.38%, 2003 150 150 ------- Total Short-Term Obligations (Cost - $7,312) 7,311 ------- TOTAL INVESTMENTS IN SECURITIES - 99.8% (Total Cost - $88,186) (d) 92,505 Cash and Other Assets Less Liabilities - 0.2% 135 ------- NET ASSETS - 100.0% $92,640 =======
The Notes to Financial Statements are an integral part of these statements. -------------------------------------------------------------------------------- CIGNA Investment Securities Investments in Securities 6 June 30, 2003 (Unaudited) (Continued) ---------------------------------------------------------------------- NOTES TO INVESTMENTS IN SECURITIES (a) Indicates defaulted security. (b) Pledged as collateral for financial futures contracts. At June 30, 2003, the Fund was long 30, 2-year U.S. Treasury Notes and was short 12, U.S. Treasury Bond futures contracts, 46, 10-year and 20, 5-year U.S. Treasury Note futures contracts, all expiring in September 2003. Net unrealized gain amounted to $110,685. Underlying face values of the long and short positions were $6,480,000 and ($9,214,530), respectively, and underlying market values were $6,488,905 and ($9,112,750), respectively. (c) A summary of outstanding forward currency contracts, as of June 30, 2003, is as follows:
Net Unrealized Settlement Forward Foreign Contract Appreciation Date Contract Currency Value (Depreciation) ------------------------------------------------------------------------ Sells 07/31/03 EURO 2,100,000 $2,307,590 $(102,590) Buys 07/31/03 EURO 2,910,000 $3,178,187 $ 161,634
Tax Information (e) At June 30, 2003, the net unrealized appreciation of investments, based on cost for federal income tax purposes of $88,501,832, was as follows: Aggregate gross unrealized appreciation for all investments in which there was an excess of value over tax cost $4,477,022 Aggregate gross unrealized depreciation for all investments in which there was an excess of tax cost over value (473,188) ---------- Unrealized appreciation - net $4,003,834 ========== -------------------------------------------------------------------------------- -------------------------------------------------------------------- Quality Ratings* of Long-Term Bonds (Unaudited) June 30, 2003 Value % of (000) Value ----------------------------------- Aaa/AAA $48,491 58.2% Aa/AA 2,994 3.6 A/A 10,516 12.6 Baa/BBB 16,079 19.3 Ba/BB 3,718 4.5 B/B 956 1.1 Below B 42 0.1 Not Rated 482 0.6 ------- ----- $83,278 100.0% ======= ===== *The higher of Moody's or Standard & Poor's Ratings. -------------------------------------------------------------------- The Notes to Financial Statements are an integral part of these statements. -------------------------------------------------------------------------------- CIGNA Investment Securities 7 Statement of Assets and Liabilities June 30, 2003 (Unaudited) (In Thousands) Assets: Investments at value $92,505 Cash 1 Interest and dividends receivable 1,050 Receivable for investments sold 598 Investments for Trustees' deferred compensation plan 148 Receivable for forward currency contracts 59 Swap contracts receivable 73 Other 12 ------- Total assets 94,446 ------- Liabilities: Payable for investments purchased 1,501 Deferred Trustees' fees payable 148 Advisory fees payable 38 Audit and legal fees payable 34 Futures variation margin payable 29 Custodian fees payable 26 Shareholder reports payable 15 Administrative services fees payable 10 Transfer agent fees payable 5 ------- Total liabilities 1,806 ------- Net Assets (equivalent to $19.33 per share based on 4,792,215 shares outstanding; 12,000,000 shares of $0.10 par value authorized) $92,640 ======= Components of Net Assets: Paid-in capital $89,803 Overdistributed net investment income (253) Accumulated net realized loss (1,402) Unrealized appreciation of investments, futures and forward contracts 4,492 ------- Net Assets $92,640 ======= Cost of Investments $88,186 ======= Statement of Operations For the Six Months Ended June 30, 2003 (Unaudited) (In Thousands) Investment Income: Income: Interest income $2,705 Dividend Income 58 ------ 2,763 Expenses: Investment advisory fees $225 Custodian fees 66 Shareholder reports 31 Auditing and legal fees 30 Administrative services fees 26 Transfer agent fees 27 Stock exchange fees 15 Trustees' fees 11 Other 16 ---- Total expenses 447 ---- Net Investment Income 2,316 ------ Realized and Unrealized Gain (Loss) on Investments: Net realized gain from: Forward currency contracts 2 Futures contracts (718) Investments 1,759 ------ 1,043 ------ Net change in unrealized appreciation (depreciation) of: Forward currency contracts 57 Futures contracts 282 Swaps 1 Investments 1,403 ------ 1,743 ------ Net Realized and Unrealized Gain on Investments 2,786 ------ Net Increase in Net Assets Resulting from Operations $5,102 ====== The Notes to Financial Statements are an integral part of these statements. -------------------------------------------------------------------------------- CIGNA Investment Securities 8 Statements of Changes in Net Assets (In Thousands) For the Six For the Months Ended Year Ended June 30, 2003 December 31, (Unaudited) 2002 --------------- ------------- Operations: Net investment income $ 2,316 $ 3,812 Net realized gain (loss) on investments 1,043 (850) Net unrealized appreciation (depreciation) on investments 1,743 4,121 ------- ------- Net increase in net assets from operations 5,102 7,083 ------- ------- Dividends and Distributions: From net investment income (2,252) (4,792) ------- ------- Total dividends and distributions (2,252) (4,792) ------- ------- Net Increase in Net Assets 2,850 2,291 Net Assets: Beginning of period 89,790 87,499 ------- ------- End of period* $92,640 $89,790 ======= ======= * includes overdistributed net investment income of: $ (253) $ (317) ======= ======= The Notes to Financial Statements are an integral part of these statements. -------------------------------------------------------------------------------- CIGNA Investment Securities 9 Financial Highlights --------------------------------------------------------------------------------
For the Six Months Ended For the Year Ended December 31, June 30, 2003 -------------------------------------------------------------- (Unaudited) 2002 2001(c) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------- Per Share Operating Performance: Net asset value, beginning of period $ 18.74 $ 18.26 $ 18.11 $ 17.79 $ 19.24 $ 19.16 Income from investment operations Net investment income (a) 0.48 0.80 1.00 1.15 1.18 1.18 Net realized and unrealized gain (loss) on investments 0.58 0.68 0.39 0.37 (1.42) 0.16 -------- ------- ------- ------- -------- ------- Total from investment operations 1.06 1.48 1.39 1.52 (0.24) 1.34 -------- ------- ------- ------- -------- ------- Less dividends and distributions: Dividends from net investment income (0.47) (1.00) (1.24) (1.20) (1.18) (1.20) Distributions from net realized capital gains -- -- -- -- (0.03) (0.06) -------- ------- ------- ------- -------- ------- Total dividends and distributions (0.47) (1.00) (1.24) (1.20) (1.21) (1.26) -------- ------- ------- ------- -------- ------- Net asset value, end of period $ 19.33 $ 18.74 $ 18.26 $ 18.11 $ 17.79 $ 19.24 ======== ======= ======= ======= ======== ======= Market value, end of period $ 17.43 $ 16.75 $ 16.42 $ 16.06 $ 14.19 $ 17.31 ======== ======= ======= ======= ======== ======= Total Investment Return: Per share market value 6.90%(d) 8.20% 10.10% 22.33% (11.41)% 6.95% Per share net asset value (b) 5.71%(d) 8.39% 7.81% 8.92% (1.23)% 7.22% Ratios to Average Net Assets Expenses 0.99%(e) 1.04% 0.97% 0.94% 0.91% 0.92% Net investment income 5.06%(e) 4.35% 5.39% 6.58% 6.36% 6.14% Portfolio Turnover 102%(d) 393% 336% 319% 110% 81% Net Assets, End of Period (000 omitted) $ 92,640 $89,790 $87,499 $86,789 $ 85,230 $92,202
(a) Net investment income per share has been calculated in accordance with SEC requirements, with the exception that end of the year accumulated undistributed/(overdistributed) net investment income has not been adjusted to reflect current year permanent differences between financial and tax accounting. (b) Total investment return based on per share net asset value reflects the effects of changes in net asset value on the performance of the Fund during each period, and assumes distributions were reinvested at net asset value. These percentages may not correspond with the performance of a shareholder's investment in the Fund based on market value, since the relationship between the market price of the stock and net asset value varied during each period. (c) Effective January 1, 2001, the Fund was required to start amortizing premium and discount on all debt securities. The effect of this change on net investment income per share was a decrease of $0.01 per share. The effect to the ratio of net investment income to average net assets was a decrease of 0.07%. Per share, ratios, and supplemental data for periods prior to January 1, 2001 have not been restated to reflect this change in accounting principle. (d) Not annualized (e) Annualized The Notes to Financial Statements are an integral part of these statements. -------------------------------------------------------------------------------- CIGNA Investment Securities Notes to Financial Statements 10 (Unaudited) 1. Organization. CIGNA Investment Securities (the "Fund") is registered under the Investment Company Act of 1940, as amended, as a diversified, closed-end management investment company. The Fund's objective is to generate income and obtain capital appreciation by investing, under normal market conditions, at least 65% of its total assets in investment-grade debt securities and preferred stocks. 2. Significant Accounting Policies. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. A. Security Valuation -- Debt securities traded in the over-the-counter market, including listed securities whose primary markets are believed to be over-the-counter, are valued on the basis of valuations furnished by brokers trading in the securities or a pricing service, which determines valuations for normal, institutional-size trading units of such securities using market information, transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. Short-term investments with remaining maturities of up to and including 60 days are valued at amortized cost, which approximates market. Short-term investments that mature in more than 60 days are valued at current market quotations. Other securities and assets of the Fund are appraised at fair value, as determined in good faith by, or under the authority of, the Fund's Board of Trustees. If events occurring after the close of the principal market in which securities are traded (but before the close of regular trading on the NYSE) are believed to materially affect the value of those securities, such securities are valued at their fair value taking such events into account. B. Delayed Delivery Commitments -- The Fund may enter into commitment agreements, i.e. TBA's, for the purchase of securities at an agreed-upon price on a specified future date. Since the delivery and payment for such securities can be scheduled to take place up to three months after the transaction date, they are subject to market fluctuations. The Fund does not begin to earn interest on such purchase commitments until settlement date. The Fund may sell a purchase commitment prior to settlement for the purpose of enhancing its total return. The Fund segregates assets with a market value equal to the amount of its purchase commitments. To the extent securities are segregated, they may not be available for new investments or to meet redemptions. Delayed delivery commitments may increase the Fund's exposure to market fluctuations and may increase the possibility that the Fund may realize a short-term gain (subject to taxation) or loss if the Fund must engage in portfolio transactions in order to honor its commitments. Due to the longer settlement period, there may be an increased risk of failure of the other party to honor the transaction. The Fund records changes in market value of the securities underlying unsettled commitments in unrealized gains and losses. Gains and losses are realized upon sale of the commitment. C. Foreign Currency Translations -- Foreign currency transactions from foreign investment activity are translated into U.S. dollars on the following basis: (i) market value of investment securities, other assets and liabilities at the daily rates of exchange, and (ii) purchases and sales of investment securities, dividend and interest income and certain expenses at the rates of exchange prevailing on the respective dates of such transactions. -------------------------------------------------------------------------------- CIGNA Investment Securities Notes to Financial Statements 11 (Unaudited) (Continued) The Fund does not isolate that portion of gains and losses on investments which is due to changes in foreign exchange rates from that which is due to changes in market prices of the investments. Such fluctuations are included with the net realized and unrealized gains and losses from investments. Net realized and unrealized gains (losses) from foreign currency-related transactions include gains and losses between trade and settlement dates on securities transactions, gains and losses arising from the sales of foreign currency, and gains and losses between the ex-dividend and payment dates on dividends, interest, and foreign withholding taxes. D. Foreign Investments -- The Fund may invest in securities of foreign countries and governments, which involve certain risks in addition to those inherent in domestic investments. Such risks generally include, among others, currency risk (fluctuations in currency exchange rates), information risk (key information may be inaccurate or unavailable) and political risk (expropriation, nationalization or the imposition of capital or currency controls or punitive taxes). Other risks of investing in foreign securities include inadequate accounting controls, liquidity and valuation risks. E. Forward Currency Transactions -- The Fund is authorized to enter into forward exchange contracts for the purpose of hedging against foreign exchange risk arising from the Fund's investment or anticipated investment in securities denominated in foreign currencies. The Fund may also enter into these contracts for purposes of increasing exposure to a foreign currency or to shift exposure to foreign currency fluctuations from one country to another. All commitments are marked to market daily at the applicable translation rates and any resulting unrealized gains or losses are recorded. Realized gains or losses are recorded at the time the forward contract matures or by delivery of the currency. Due to market fluctuations, the Fund segregates assets with a market value equal to the amount of its purchase commitments. Risks may arise upon entering into these contracts from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. F. Futures Contracts -- The Fund is authorized to enter into futures contracts. A Fund may use futures contracts for reasons such as managing its exposure to the markets or movements in interest rates and currency values. Upon entering into a futures contract, the Fund is required to pledge to the broker an amount of cash and/or securities equal to the initial margin requirements. During the period a futures contract is open, changes in the value of a contract are recognized as unrealized gains or losses by "marking to market" on a daily basis to reflect the market value of the contract at the end of each day's trading. Daily variation margin payments are received or made, depending on whether there were unrealized gains or losses. When a contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Futures contracts include the risk that a change in the value of the contract may not correlate with the value of the underlying securities and the possibility of an illiquid market. G. High Yield Bonds -- The Fund may invest in high yield bonds i.e., fixed income securities rated below investment-grade. While the market values of these securities tend to react less to fluctuations in interest rate levels than do those of investment-grade securities, the market values of certain of these securities also tend to be more sensitive to individual corporate developments and changes in economic conditions than investment-grade securities. In addition, these securities are often highly leveraged and may not have more traditional methods of financing available to them so that their ability to service their debt obligations during an economic -------------------------------------------------------------------------------- CIGNA Investment Securities Notes to Financial Statements 12 (Unaudited) (Continued) downturn or during sustained periods of rising interest rates may be impaired. H. Swap Agreements -- The Fund may enter into swap agreements for investment, liquidity, hedging and risk management purposes. For example, the Fund may enter into swap agreements to preserve a return on a particular investment or a portion of its portfolio and as a technique for managing duration (i.e., price sensitivity to changes in interest rates). Swaps involve the exchange of commitments to pay or receive, e.g., an exchange of floating rate payments for fixed rate payments and/or payments of the appreciation or depreciation of a security or an index. If forecasts of interest rates and other market factors, including those that may impact the indexes of the total return swaps, are incorrect, investment performance will differ compared to what performance would have been if these investment techniques were not used. Even if the forecasts are correct, there are risks that the positions may correlate imperfectly with the asset or liability being hedged, a liquid secondary market may not always exist, or the counterparty to a transaction may default. As of June 30, 2003, the Fund had the following outstanding swap agreements:
Spread Unrealized Notional (Basis Termination Appreciation/ Counterparty Index Amount Points) Date (Depreciation) --------------------------------------------------------------------------------------- Bear Stearns Bear Stearns High Yield Index $ 390,000 75 07/01/03 $ 0 Bear Stearns Bear Stearns High Yield Index $ 260,000 57.5 09/01/03 $ 77 Bear Stearns Bear Stearns High Yield Index $ 40,000 10 10/01/03 $ 65 Lehman Lehman US High Brothers Yield Index $1,220,000 85 11/01/03 $ (402) Bear Stearns Bear Stearns High Yield Index $ 690,000 (10) 12/01/03 $2,463 Lehman Lehman US High Brothers Yield Index $ 20,000 5 12/01/03 $ 59
The terms of the agreement require the Fund to pay LIBOR (which is set monthly) plus the spread and to receive the monthly total return on the Index, both based on the notional amount. The Fund records the net amount receivable/payable on a daily basis. The net receivable/payable is settled in cash monthly and recorded as net investment income. I. Security Transactions and Related Investment Income -- Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Dividend income is recorded on the ex-dividend date, and interest income, which includes amortization of premium and accrual of discount, is recorded on the accrual basis. Securities gains and losses are determined on the basis of identified cost. J. Federal Taxes -- It is the Fund's policy to continue to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income or capital gains to its shareholders. Therefore, no federal income or excise taxes on realized income have been accrued. Distributions reported in the Statement of Changes in Net Assets from net investment income, including short-term capital gains, and capital gains are treated as ordinary income and long-term capital gains, respectively, for federal income tax purposes. At December 31, 2002, the Fund had a post-October loss of $39,921. Under current tax law, capital losses realized after October 31 may be deferred and treated as occurring on the first day of the following year. K. Dividends and Distributions to Shareholders -- Dividends from net investment income are declared and distributed quarterly and distributions from net capital gains, to the extent such gains would otherwise be taxable to the Fund, are declared and distributed at least annually. Dividends and distributions are recorded by the -------------------------------------------------------------------------------- CIGNA Investment Securities Notes to Financial Statements 13 (Unaudited) (Continued) Fund on the ex-dividend date. The timing and characterization of certain income and capital gains distributions are determined in accordance with federal tax regulations, which may differ from generally accepted accounting principles. These differences are primarily due to differing book and tax treatment of foreign currency transactions, capital loss carryforwards, deferred losses due to wash sales, and excise tax regulations. To the extent that such differences are permanent, a reclassification to the Components of Net Assets may be required. As a result, at December 31, 2002, the Fund increased undistributed (overdistributed) net investment income by $941,078, increased accumulated net realized gain (loss) by $888,049 and decreased paid in capital by $53,029. 3. Investment Advisory Fees and Other Transactions with Affiliates. Investment advisory fees were paid or accrued to TimesSquare Capital Management, Inc. ("TimesSquare"), certain officers and directors of which are affiliated with the Fund. Such advisory fees are based on an annual rate of 0.55% of the first $75 million of average weekly net asset value and 0.40% thereafter. TimesSquare is an indirect, wholly-owned subsidiary of CIGNA Corporation. Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, and as approved by the shareholders at the shareholder meeting of April 30, 2002, the Fund may invest excess cash, up to 25% of the Fund's total assets, in the affiliated CIGNA Money Market Fund (MMF) managed by TimesSquare. TimesSquare will waive the amount of its advisory fee for the Fund in an amount that offsets the amount of the advisory fees incurred in the Fund as a result of its investment in MMF. For the six months ended June 30, 2003, TimesSquare waived $11,102 of its advisory fee payable by the Fund. Income distributions from MMF, which amounted to $28,249 for the six months ended June 30, 2003 are recorded as dividend income in the Statement of Operations. For administrative services, the Fund reimburses TimesSquare for a portion of the compensation and related expenses of the Trust's Treasurer and Secretary and certain persons who assist in carrying out the responsibilities of those offices. For the six months ended June 30, 2003, the Fund paid or accrued $25,801. 4. Trustees' Fees. Trustees' fees represent remuneration incurred for trustees who are not employees of CIGNA Corporation or any of its affiliates. Trustees may elect to defer receipt of all or a portion of their fees, which are invested in mutual fund shares in accordance with a deferred compensation plan. 5. Purchases and Sales of Securities. Purchases and sales of securities for the six months ended June 30, 2003, were as follows (excluding short-term obligations): Cost of Proceeds From Securities Securities Purchased Sold -------------- -------------- Bonds $19,151,471 $16,386,607 U.S. Government Obligations 67,089,458 68,000,075 ----------- ----------- $86,240,929 $84,386,682 =========== =========== -------------------------------------------------------------------------------- CIGNA Investment Securities 14 Trustees Russell H. Jones Senior Vice President, Chief Investment Officer, and Treasurer, Kaman Corporation Paul J. McDonald Special Advisor to the Board of Directors, Friendly Ice Cream Corporation Richard H. Forde Managing Director, CIGNA Retirement & Investment Services and TimesSquare Capital Management, Inc. Marnie Wagstaff Mueller Diocesan Consultant, Episcopal Diocese of Connecticut Carol Ann Hayes Director and Chair of Audit Committee, Reed and Barton Corporation David P. Marks Chief Investment Officer, CIGNA Retirement & Investment Services Officers Richard H. Forde Chairman of the Board and President Alfred A. Bingham III Vice President and Treasurer Jeffrey S. Winer Vice President and Secretary -------------------------------------------------------------------------------- Matters Submitted to a Vote of Shareholders The Annual Meeting of the Shareholders of CIGNA Investment Securities (the "Trust") was held on Tuesday, April 29, 2003 at 11:30 a.m., Eastern Time. Six Trustees were elected by a vote of shareholders to serve as members of the Board of the Trust until the next Annual Meeting of Shareholders or until the election and qualification of their successors. Shareholders of the Trust voted to elect the following Trustees: For Vote Withheld ------------------ -------------- Richard H. Forde 3,959,810.824 82,644.006 Carol Ann Hayes 3,953,928.522 88,526.308 Russell H. Jones 3,963,227.088 79,227.742 David P. Marks 3,955,971.522 86,483.308 Paul J. McDonald 3,954,637.522 87,817.308 Marnie W. Mueller 3,956,946.497 85,508.333 There were no broker non-votes with respect to this matter submitted to a vote of shareholders of the Trust. No other business was transacted at the meeting. -------------------------------------------------------------------------------- CIGNA Investment Securities is a closed-end, diversified management investment company that invests primarily in debt securities. The investment adviser is TimesSquare Capital Management, Inc., 280 Trumbull Street, Hartford, Connecticut 06103. Shareholders may elect to have dividends automatically invested in additional shares of CIGNA Investment Securities by participating in the Automatic Dividend Investment Plan ("the Plan"). For a brochure describing this Plan or general inquiries about your account, contact EquiServe, P.O. Box 43011, Providence, RI 02940-3011 or you may call toll free 1-800-426-5523. -------------------------------------------------------------------------------- [CIGNA LOGO] CIGNA Investment Securities 3 Newton Executive Park Suite 200 Newton, MA 02462 Printed on recycled paper 542775 6/03 ------------------------ PRESORTED STANDARD U.S. POSTAGE PAID SO. HACKENSACK, NJ PERMIT 750 ------------------------ INACM-SAR-03