<PAGE>
- --------------------------------------------------------------------------------
1
DEAR SHAREHOLDER:
We are pleased to provide this report for INA Investment Securities, Inc. (the
"Company") covering the year ended December 31, 1997.
MARKET ACTIVITY
Fourth quarter market activity can be summarized in two words: "Asia" and
"volatility." After some wariness about strength in the economy and possible
Federal Reserve (the "Fed") tightening early in the quarter, the bond market
switched its focus squarely on events unfolding in Asia. What started as
localized problems, such as the devaluation of Thai currency, quickly spread to
other countries in the region. A sharp re-valuation of fixed income and equity
markets followed, affecting both Asian countries and major economies throughout
the world. In the U.S., the crisis resulted in a 554-point sell-off on the Dow
Jones Industrial Average and a "flight to quality" in U.S. Treasuries. Asian
currencies and stock markets traded to new lows almost daily. The U.S. bond
market rallied as yields, as measured by the benchmark 30-year Treasury, fell
from 6.40% at third quarter-end to 5.92%. The yield curve flattened
dramatically. The consensus is that Asian recession and deflation risks, coupled
with the need for direct intervention by countries and international agencies,
such as the International Monetary Fund, will keep the Fed "on hold"
indefinitely.
The "flight to quality" in U.S. Treasuries resulted in a corollary impact - the
widening of corporate bond spreads, especially in emerging markets. Some
sovereign issues were dropped to less-than-investment-grade status by major
rating agencies, resulting in a widening in spreads over Treasuries of 400 to
over 600 basis points in some credits. Residential mortgage paper performed well
in this falling interest rate environment - undoubtedly helped by the "flight to
quality."
The U.S. bond market, as measured by the Lehman Brothers Government/Corporate
Bond Index (the "Index"), returned 3.21% for the fourth quarter, 9.76% for the
full year. Since the Index includes a large percentage of Treasuries,
investment-grade corporates and no private placement issues, it was insulated to
some degree from the Asian melt-down.
FUND ACTIVITY
The portfolio remains fully invested. On December 31, 1997, domestic corporate
bonds were approximately 60.1% of portfolio holdings, foreign bonds 12.4%, U.S.
Government/agency securities 25.1%, and cash and other assets 2.4%. Per share
net asset value was $19.16, up from $18.97 on September 30. A dividend of $.31
was declared during the quarter.
PERFORMANCE
After deducting expenses and allowing for the reinvestment of dividends, based
on the net asset value of its underlying assets, the Company returned 2.65% and
9.16%, respectively, for the fourth quarter and year. Fund performance was
hampered by a modest exposure to far east emerging markets (1 1/2% of assets).
The Company returned 6.38% and 16.08%, respectively, for the fourth quarter and
year-to-date based on the underlying market value of the shares listed on the
New York Stock Exchange.
OUTLOOK
The Company plans to overweight corporate and high yield sectors as long as
economic fundamentals and market technicals remain favorable. It intends to also
opportunistically hold attractive mortgage-backed and asset-backed securities.
As long as the Pacific Rim crisis continues to positively impact U.S. interest
rates, we expect to maintain a portfolio duration modestly longer than the
Index. If the economy shows signs of re-accelerating after the Asian-related
dampening fades, we plan to shorten duration exposure to help preserve asset
values.
Sincerely,
/s/ R. Bruce Albro
R. Bruce Albro
Chairman of the Board and President
INA Investment Securities, Inc.
<PAGE>
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INA INVESTMENT SECURITIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
(Unaudited) 2
1997 once again highlighted the market's ability to completely reverse course,
both in sentiment and return. The bond market started the year on a strong note,
aided by very high levels of liquidity and aggressive buying of both high yield
and investment grade debt. However, during the first quarter, concern over
robust growth and a potential acceleration in inflation caused stocks to
decline, bond yields to rise and prices to fall, and quality spreads to widen,
especially in high yield and emerging markets. The Federal Reserve (the "Fed")
raised rates by 0.25%, increasing the Fed Funds rate to 5.50%. The bond market
slumped, causing yields to rise from 6.64% on the benchmark 30-year Treasury at
year-end to 7.10% at the end of the first quarter. As measured by the Lehman
Brothers Government/Corporate Bond Index (the "Index"), bonds returned -.86% for
the first quarter. The Company performed favorably as compared with the Index
over this period, because corporate and high yield holdings still outperformed
Treasuries.
The second quarter saw a reversal of market psychology, as economic growth
eased and inflation remained benign. Heartened by more modest growth and lower
inflation than normally expected in the later stages of a drawn-out business
cycle, investors returned to the market in force. The benchmark 30-year Treasury
bond rallied as yields fell from 7.10% to 6.78% by the quarter's end. The bond
market, as measured by the Index, returned 3.64% during the second quarter. The
Company again performed favorably, primarily due to the substantial weighting in
non-Treasury holdings, including high yield securities.
Investors in the third quarter reacted to a market environment of continued
robust growth and low inflation by driving bond market yields lower. The
benchmark 30-year Treasury closed the third quarter at a yield of 6.40%. The
Treasury yield curve shifted downward as rates declined and flattened slightly.
Longer-dated Treasury bonds outperformed shorter notes. There was little concern
that the Fed would tighten monetary conditions anytime soon. The Company
modestly underperformed the Index during the third quarter. Performance was
positively impacted by a substantial weighting in non-Treasury assets, including
an allocation to high-yield securities. Performance was somewhat hurt by an
asset duration that was slightly shorter than the Index.
In the fourth quarter, there was a significant decline in interest rates to
5.92% at year-end, prompted by the Asian crisis which reached a flash point in
October. Decimated currency and stock markets in Pacific Rim countries prompted
a "flight to quality," which both bolstered the U.S. Treasury market and widened
corporate spreads - particularly in emerging market debt. Ratings agencies
reacted by lowering the ratings of many issuers, including some previously
investment-grade sovereigns. Bids for less liquid corporate issuers quickly
dried up. Fund performance was hampered by a modest exposure to far east
emerging markets (1 1/2% of assets) and lagged the Index return of 3.21% for the
fourth quarter.
A crisis born of extreme speculation, financial abuses, and "crony capitalism"
will not be quickly resolved. The fallout in the U.S. is just beginning to be
felt. Reduced exports will subtract at least 0.5% from gross domestic product
growth - but should be partially offset by lower inflation and interest rates.
As the focus shifts away from the Pacific Rim, continued tight domestic labor
markets and solid economic momentum could once again prompt concern over Fed
tightening action, resulting in a modest rise in interest rates.
After deducting expenses and allowing for the reinvestment of dividends, based
on the net asset value of its underlying assets, the Company returned 9.16% for
the year, compared with the 9.76% return for the Index. The Company returned
16.08% year-to-date based on the underlying market value of the shares listed on
the New York Stock Exchange.
<PAGE>
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INA INVESTMENT SECURITIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS (Unaudited)
(Continued) 3
The Company plans to continue to overweight corporate and high yield sectors as
long as economic fundamentals and market technical remain favorable. It intends
to also opportunistically hold attractive mortgage-backed and asset-backed
securities. As long as the Pacific Rim crisis continues to positively impact
U.S. interest rates, we expect to maintain a portfolio duration modestly longer
than the Index. If the economy shows signs of re-accelerating after the
Asian-related dampening fades, we plan to shorten duration exposure to help
preserve asset values.
- --------------------------------------------------------------------------------
- ----------------------------------------------------------------------
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT (UNAUDITED)
1/1/88-12/31/97
- ---------------------------------------------
AVERAGE ANNUAL RETURN
1 Year 5 Year 10 Year
Market Value 16.08% 8.44% 9.34%
Net Asset Value 9.16% 7.97% 9.23%
- ---------------------------------------------
Point of *INA Investment **Lehman Brothers
Measurement Securities, Inc. Gov't./Corp.
----------- ---------------- ---------------
12/87 $10,000 $10,000
12/88 $11,050 $10,753
12/89 $12,247 $12,285
12/90 $11,872 $13,304
12/91 $15,458 $15,451
12/92 $16,291 $16,618
12/93 $18,605 $18,452
12/94 $17,054 $17,806
12/95 $20,989 $21,233
12/96 $21,048 $21,847
12/97 $24,432 $23,979
* INA Investment Securities, Inc. - Total return based on market value of
common shares
** Lehman Brothers Gov't/Corp. Bond Index
INA Investment Securities, Inc.'s (the "Company") performance figures are
historical and reflect reinvestment of all dividends and capital gains
distributions and changes in the market value of its stock, or as shown
separately in the box, changes in its underlying net asset value. The Company
is a closed-end management investment company which trades over the New York
Stock Exchange under the ticker symbol "IIS." Company performance does not
reflect exchange commissions payable upon the purchase or sale of the
Company's stock. The Company's investment return and principal value will
fluctuate so that an investor's shares, when sold, may be worth more or less
than their original cost. Past performance cannot guarantee comparable future
results. The Company's return has been compared with the total return
performance of Lehman Brothers Government/Corporate Bond Index. This index is a
group of unmanaged securities widely regarded by investors to be representative
of the bond market in general. An investment cannot be made in the index.
Index results do not reflect brokerage charges or other investment expenses.
<PAGE>
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INA INVESTMENT SECURITIES, INC. INVESTMENTS IN SECURITIES December 31, 1997 4
MARKET
PRINCIPAL VALUE
(000) (000)
- ---------------------------------------------------------------
LONG-TERM BONDS - 97.6%
CONSUMER AND RETAIL - 2.8%
Dayton Hudson Corp., 9.75%, 2002 $ 500 $ 566
Herff Jones, Inc., 11.0%, 2005 ( 144A
security acquired August, 1995 for
$300,000)* 300 327
May Department Stores Co., 10.625%, 2010 435 583
Penney (J.C.) Inc., 7.4%, 2037 1,000 1,096
----------
2,572
----------
CONSUMER NON-CYCLICAL - 2.2%
MedPartners, Inc., 6.875%, 2000 1,000 990
Tenet Healthcare Corp., 7.875%, 2003 1,000 1,013
----------
2,003
----------
ENTERTAINMENT AND COMMUNICATIONS - 13.1%
Bell Cablemedia PLC, 1%, 2005 500 443
Casino America, Inc.,12.5%, 2003 500 543
Century Communications Corp., 9.5%, 2005 500 530
Disney (Walt) Co., 1.5%, 1999 2,000 1,846
Grupo Iusacell, S.A. de C.V., 10%, 2004
(144A security acquired July, 1997 for
$500,000)* 500 503
Mirage Resorts, Inc., 6.75%, 2007 400 399
Price Communications Wireless, Inc.,
11.75%, 2007 500 543
Southwestern Bell Telephone Co.,
7.375%, 2027 1,000 1,037
TKR Cable, Inc., 10.5%, 2007 500 564
Tele-Communications, Inc., 9.25%, 2002 500 549
360 Communications Co., 7.125%, 2003 1,400 1,430
Time Warner Entertainment Co.,
10.15%, 2012 1,750 2,238
Total Access Communications Public Co., Ltd.,
7.625%, 2001 (144A security acquired
Oct., 1996 for $499,855)* 500 411
Vanguard Cellular System, Inc., 9.375%,
2006 500 520
Viacom International, Inc., 9.125%, 1999 500 507
----------
12,063
----------
FINANCIAL - 18.8%
Abbey National PLC, 7.35%, 2049 750 785
Banco Nacional de Comercio Exterior, S.N.C.
7.25%, 2004 500 461
Case Equipment Loan Trust 1996-A,
5.5%, 2003 1,077 1,069
Corporacion Andina De Fome,
7.1%, 2003 200 201
MARKET
PRINCIPAL VALUE
(000) (000)
- -------------------------------------------------------------
First Union National Bank of Florida,
6.18%, 2036 $ 1,000 $ 985
General Motors Acceptance Corp.,
6.75%, 2002 1,000 1,013
Fleet Mortgage Group, Inc., 6.5%, 2000 1,000 1,007
General Electric Capital Mtg. Services, Inc.,
6.5%, 2023 750 748
Heller Financial, Inc.,
6.56%, 1999 1,000 1,007
9.125%, 1999 500 520
Inter-American Development Bank,
8.875%, 2009 4,000 4,879
Merrill Lynch and Co. Inc., 7.26%, 2002 800 808
Middletown Trust, 10.875%, 1998 140 144
The Money Store Home Equity Loan
Trust, 6.65%, 2017 835 828
United Post Office Investments,
7.75%, 1999 1,000 1,019
Western National Corp., 7.125%, 2004 1,000 1,028
World Financial Properties Tower,
6.95%, 2013 (144A security acquired
Nov., 1996 for $750,000)* 750 764
----------
17,266
----------
FOOD AND BEVERAGE - 3.2%
Bass America, Inc., 8.125%, 2002 1,500 1,605
ConAgra, Inc., 9.75%, 2021 1,000 1,309
----------
2,914
----------
FOREIGN GOVERNMENT - .8%
Panama, (Republic of), 7.875%, 2002
(144A security acquired Feb., 1997 for
$754,725)* 750 720
----------
INDUSTRIAL -12.4%
AK Steel Corp., 9.125%, 2006 500 511
Air Products & Chemicals, Inc., 8.5%,
2006 2,000 2,212
Domtar, Inc., 8.75%, 2006 400 431
Fisher Scientific International, Inc.,
7.125%, 2005 500 468
ICF Kaiser International, Inc., 13.0%,
2003 500 510
Laidlaw, Inc., 6.65%, 2004 1,300 1,311
Newport News Shipbuilding and Dry
Dock Co., 8.625%, 2006 500 526
NOVA Chemicals Ltd., 7.0%, 2026 1,000 1,018
Pindo Deli Finance Mauritius Ltd., 10.75%, 2007
(144A security acquired Sept., 1997 for
$498,490)* 500 425
The Notes to Financial Statements are an integral part of these statements.
<PAGE>
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INA INVESTMENT SECURITIES, INC. INVESTMENTS IN SECURITIES December 31, 1997
(Continued) 5
MARKET
PRINCIPAL VALUE
(000) (000)
- ---------------------------------------------------------------
Smurfit Capital Funding PLC, 6.75%, 2005 $ 1,000 $ 1,008
Tjiwi Kimia International Finance,
13.25%, 2001 500 490
Xerox Corp., 5.9%, 2037 1,000 1,024
Waste Management, Inc., Zero Coupon,
(Lyon), 2012 (Annual Put) 2,250 956
West Point Stevens, Inc., 9.375%, 2005 500 525
----------
----------
11,415
----------
OIL & GAS - 4.7%
Gulf Canada Resources Ltd., 8.35%, 2006 1,000 1,093
Imexsa Export Trust, 10.125%, 2003
(144A security acquired May, 1996
for $750,000)* 750 774
Louis Dreyfus National Gas Corp.,
9.25%, 2004 1,000 1,120
Sonat, Inc.,
9.5%, 1999 1,000 1,052
9.0%, 2001 250 269
----------
4,308
----------
TRANSPORTATION - 7.0%
AMR Corp., 9.2%, 2012 505 620
CSX Corp., 7.25%,
2027 800 856
Delta Air Lines, Inc.,
9.45%, 2006 1,000 1,129
10.14%, 2012 1,000 1,240
Hertz Corp., 7.0%, 2003 500 509
Kitty Hawk, Inc., 9.95%, 2004
(144A security acquired Nov., 1997
for $500,000)* 500 519
Oklahoma City Oklahoma Airport
Trust, 6.55%, 2006 1,000 1,008
Norfolk Southern Corp., 7.05%, 2037 500 528
----------
6,409
----------
UTILITIES - 7.5%
Big Rivers Electric Corp., 10.7%, 2017 1,500 1,584
Cajun Electric Power Co-op.,
8.92%, 2019 500 539
9.52%, 2019 1,000 1,055
Chesapeake Energy Corp., 8.5%, 2012 500 495
El Paso Electric Co., 7.25%, 1999 500 502
Endesa-Chile Overseas Co., 7.2%, 2006 1,000 1,006
MARKET
PRINCIPAL VALUE
(000) (000)
- -------------------------------------------------------------
Hyder PLC, 6.75%, 2004 (144A security
acquired Dec., 1997 for $749,205)* $ 750 $ 750
Public Service Company of Colorado,
8.125%, 2004 290 316
Salton Sea Funding Corp., 7.02%, 2000 631 636
----------
6,883
----------
U.S. GOVERNMENT & AGENCIES - 25.1%
Federal Farm Credit Banks, 6.2%, 2008 350 350
Federal National Mortgage Assoc.,
6.56%, 2007 1,500 1,502
6.5%, 2008 929 933
6.5%, 2009 276 277
United States Treasury Bonds,
10.75%, 2005 1,370 1,782
12.0%, 2013 710 1,046
11.25%, 2015 2,565 4,022
7.125%, 2023 2,000 2,283
6.5%, 2026 485 518
6.625%, 2027 2,775 3,013
United States Treasury Notes,
7.125%, 1999 10 10
5.5%, 2000 800 795
6.375%, 2000 1,200 1,218
6.375%, 2001 600 612
6.625%, 2002 4,025 4,155
6.625%, 2007 500 529
----------
23,045
----------
TOTAL LONG-TERM BONDS
(Cost - $86,204,600) 89,598
----------
The Notes to Financial Statements are an integral part of these statements.
<PAGE>
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INA INVESTMENT SECURITIES, INC. INVESTMENTS IN SECURITIES December 31, 1997
(Continued) 6
MARKET
PRINCIPAL VALUE
(000) (000)
- ---------------------------------------------------------------
SHORT-TERM OBLIGATIONS - .7%
COMMERCIAL PAPER - .7%
(Total Cost $670,000)
General Electric Capital Corp.,
5.65%, 1/2/98 $ 670 $ 670
----------
TOTAL INVESTMENTS IN SECURITIES - 98.3%
(Total Cost - $86,874,600) 90,268
Cash and Other Assets Less Liabilities - 1.7% 1,557
----------
NET ASSETS - 100.0%
(equivalent to $19.16 per share based on
4,792,215 shares outstanding) $91,825
==========
* Indicates restricted security; the aggregate value of restricted securities
is $5,192,469 (aggregate cost $5,302,275) which is approximately 5.7% of net
assets. Valuations have been furnished by brokers trading in the securities
or a pricing service for all restricted securities.
- ---------------------------------------------------------------
PORTFOLIO COMPOSITION (UNAUDITED)
December 31, 1997
MARKET % OF
QUALITY RATINGS* OF VALUE MARKET
LONG-TERM BONDS (000) VALUE
-----------------------------------------------------------
Aaa/AAA $33,748 37.7%
Aa/AA 4,973 5.5%
A/A 18,804 21.0%
Baa/BBB 18,018 20.1%
Ba/BB 10,142 11.3%
B/B 3,913 4.4%
--------- ----------
$89,598 100.0%
========= ==========
*The higher of Moody's or Standard & Poor Ratings.
- ---------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
(IN THOUSANDS)
--------------
ASSETS:
Investments at market value
(Cost $86,874,600) $ 90,268
Cash 1
Interest receivable 1,712
Investment for Directors' deferred compensation plan
(Cost - $98,173) 140
Other 2
------------
TOTAL ASSETS 92,123
------------
LIABILITIES:
Deferred Directors' fees payable 140
Accrued advisory fees payable 44
Other accrued expenses (including $13,948
due to affiliate) 114
------------
TOTAL LIABILITIES 298
------------
NET ASSETS (equivalent to $19.16 per share
based on 4,792,215 shares outstanding;
12,000,000 shares of $.10 par value
authorized) $ 91,825
============
COMPONENTS OF NET ASSETS:
Paid-in capital $ 89,845
Overdistributed net investment income (35)
Unrealized appreciation of investments 3,435
Accumulated net realized loss (1,420)
------------
NET ASSETS $ 91,825
============
The Notes to Financial Statements are an integral part of these statements.
<PAGE>
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INA INVESTMENT SECURITIES, INC. 7
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
--------------
INVESTMENT INCOME
INCOME:
Interest $ 6,738
EXPENSES:
Investment advisory fees $ 472
Custodian fees 77
Shareholder reports 67
Administrative services 64
Directors' fees 62
Transfer agent fees 54
Auditing and legal fees 42
State taxes 26
Other 24 888
-------- -----------
NET INVESTMENT INCOME 5,850
-----------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS
Net realized gain from investments 692
Unrealized appreciation of investments 1,360
-----------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS 2,052
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 7,902
===========
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED
DECEMBER 31,
-----------------------------
1997 1996
------------- --------------
(IN THOUSANDS)
-----------------------------
OPERATIONS:
Net investment income $ 5,850 $ 6,099
Net realized gain (loss) from
investments 692 (1,378)
Unrealized appreciation (depreciation)
on investments 1,360 (2,118)
------------- --------------
Net increase in net assets
from operations 7,902 2,603
------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ($1.24
and $1.29 per share, respectively) (5,942) (6,182)
------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS 1,960 (3,579)
NET ASSETS:
Beginning of period 89,865 93,444
------------- --------------
End of period (including overdistributed
net investment income of $35,191
and $48,985, respectively) $ 91,825 $ 89,865
============= ==============
The Notes to Financial Statements are an integral part of these statements.
<PAGE>
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INA INVESTMENT SECURITIES, INC. NOTES TO FINANCIAL STATEMENTS 8
1. SIGNIFICANT ACCOUNTING POLICIES. INA Investment Securities, Inc. (the
"Company") is registered under the Investment Company Act of 1940, as amended,
as a diversified, closed-end management investment company. The Company's
objective is to generate income and obtain capital appreciation by investing at
least 85% of its total assets in investment grade debt securities and preferred
stocks. The preparation of financial statements in accordance with generally
accepted accounting principles 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 Company
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 Company are appraised at fair value as determined
in good faith by, or under the authority of, the Company's Board of Directors.
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).
Dividend income is recorded on the ex-dividend date, and interest income is
recorded on the accrual basis. The Company does not amortize premiums or
discounts for book purposes, except for original issue discounts which are
amortized over the life of the respective securities. Securities gains or losses
are determined on the basis of identified cost.
C. FEDERAL TAXES - It is the Company'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, if any,
to its shareholders. Therefore, no Federal income or excise taxes on realized
income have been accrued.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - Dividends and distributions are
recorded by the Company on the ex-dividend date. Payments in excess of financial
accounting income due to differences between financial and tax accounting, to
meet the distribution requirements for tax basis income, are deducted from
paid-in capital when such differences are determined to be permanent.
2. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES. Investment
advisory fees were paid or accrued to CIGNA Investments, Inc. ("CII"), certain
officers and directors of which are affiliated with the Company. Such advisory
fees are based on an annual rate of 0.55% of the first $75 million of average
weekly net asset value and 0.4% thereafter.
The Company reimburses CII for a portion of the compensation and related
expenses of the Company's Treasurer and Secretary and certain persons who assist
in carrying out the responsibilities of those offices. For the year ended
December 31, 1997, the Company paid or accrued $63,971.
CII is an indirect, wholly-owned subsidiary of CIGNA Corporation.
3. DIRECTORS' FEES. Directors' fees represent remuneration paid or accrued to
directors who are
<PAGE>
- --------------------------------------------------------------------------------
INA INVESTMENT SECURITIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) 9
not employees of CIGNA Corporation or any of its affiliates. Directors 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.
4. PURCHASES AND SALES OF SECURITIES. Purchases and sales of securities for the
year ended December 31, 1997 were as follows (excluding short-term obligations):
PROCEEDS
COST OF FROM
SECURITIES SECURITIES
PURCHASED SOLD
--------------------- ---------------------
Bonds $ 32,566,836 $ 24,807,405
U.S. Government Obligations 39,276,619 42,794,230
Preferred Stock - 718,042
--------------------- ---------------------
$ 71,843,455 $ 68,319,677
===================== =====================
As of December 31, 1997, the cost of securities for Federal Income tax purposes
was $86,874,600. At December 31, 1997, unrealized appreciation for Federal
income tax purposes aggregated $3,393,865 of which $3,865,604 related to
appreciated securities and $471,739 related to depreciated securities.
5. CAPITAL LOSS CARRYOVER. At December 31, 1997, the Company had a capital loss
carryover for Federal income tax purposes of $1,420,190, which expires in 2004.
<PAGE>
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INA INVESTMENT SECURITIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) 10
6. FINANCIAL HIGHLIGHTS. The following table includes data, ratios and
supplemental data for a share outstanding throughout each period and other
performance information:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 18.75 $ 19.50 $ 17.56 $ 19.72 $ 18.75
INCOME FROM INVESTMENT OPERATIONS
Net investment income (1) 1.22 1.27 1.32 1.39 1.39
Net realized and unrealized gain (loss) 0.43 (0.73) 1.94 (2.00) 1.01
----- ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS 1.65 0.54 3.26 (0.61) 2.40
----- ------ ------ ------ ------
LESS DISTRIBUTIONS:
From net investment income (1.24) (1.29) (1.32) (1.35) (1.43)
From capital gains - - - (0.20) -
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS (1.24) (1.29) (1.32) (1.55) (1.43)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 19.16 $ 18.75 $ 19.50 $ 17.56 $ 19.72
====== ====== ====== ====== ======
MARKET VALUE, END OF PERIOD $ 17.38 $ 16.13 $ 17.38 $ 15.25 $ 18.25
====== ====== ====== ====== ======
TOTAL INVESTMENT RETURN:
Per share market value 16.08% 0.28% 23.07% (8.34)% 14.21%
Per share net asset value (2) 9.16% 3.01% 19.17% (3.13)% 13.03%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $ 91,825 $ 89,865 $ 93,444 $ 84,131 $ 94,482
Ratio of operating expenses to average net assets 0.99% 0.91% 1.00% 0.96% 0.96%
Ratio of net investment income to average net assets 6.49% 6.80% 7.10% 7.42% 7.03%
Portfolio turnover 80% 89% 158% 86% 159%
</TABLE>
(1) Net investment income per share has been calculated in accordance with SEC
requirements, with the exception that end of year accumulated
undistributed/(overdistributed) net investment income has not been adjusted
to reflect current year permanent differences between financial and tax
accounting.
(2) Total investment return based on per share net asset value reflects the
effects of changes in net asset value on the performance of the Company
during each period, and assumes distributions were reinvested at net asset
value. These percentages do not correspond with the performance of a
shareholder's investment in the Company based on market value since the
relationship between the market price of the stock and net asset value
varied during each period.
<PAGE>
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INA INVESTMENT SECURITIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) 11
7. QUARTERLY RESULTS (UNAUDITED). The following is a summary of quarterly
results of operations (in thousands except for per share amounts):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND
UNREALIZED GAIN (LOSS)
INVESTMENT INCOME NET INVESTMENT INCOME ON INVESTMENTS INCR. (DECR.) IN NET ASSETS
PERIOD ENDED TOTAL PER SHARE TOTAL PER SHARE TOTAL PER SHARE TOTAL PER SHARE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31, 1996 $1,798 $.38 $1,581 $.33 ($3,706) $(.77) ($3,706) $(.77)
June 30, 1996 1,718 .36 1,510 .32 (1,300) (.27) (1,372) (.29)
September 30, 1996 1,695 .35 1,490 .31 422 .09 378 .08
December 31, 1996 1,703 .35 1,518 .31 1,088 .22 1,121 .23
March 31, 1997 1,718 .36 1,507 .32 (2,188) (.46) (2,166) (.45)
June 30, 1997 1,666 .35 1,461 .30 1,811 .38 1,786 .37
September 30, 1997 1,689 .35 1,482 .31 1,435 .30 1,432 .30
December 31, 1997 1,665 .35 1,400 .29 994 .21 908 .19
</TABLE>
<PAGE>
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12
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of INA Investment Securities, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, 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 INA Investment Securities, Inc.
(the "Fund") at December 31, 1997, the results of its operations for the year
then ended, the changes in its net assets and the financial highlights for each
of the years indicated, in conformity with generally accepted accounting
principles. 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 generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1997 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE, LLP
Boston, Massachusetts
February 20, 1998
<PAGE>
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13
1997 TAX INFORMATION (UNAUDITED)
During 1997, the Company declared ordinary income dividends of $1.24 per share.
There were no capital gain distributions. Dividends reported to you on Form
1099, whether received as stock or cash, must be included in your Federal income
tax return and must be reported by the Company to the Internal Revenue Service.
Approximately 21.0% of income for the year was derived from U.S. Government
Treasury obligations, and 1.6% from U.S. Government Agency obligations.
AUTOMATIC DIVIDEND AND DISTRIBUTION INVESTMENT PLAN
Shareholders may elect to have all distributions of dividends and capital gains
automatically reinvested by State Street Bank and Trust Company (the "Dividend
Paying Agent") as plan agent under the Automatic Dividend and Distribution
Investment Plan (the "Plan"). Shareholders who do not elect to participate in
the Plan will receive all distributions from the Company in cash paid by check
mailed directly to the shareholder by the Dividend Paying Agent. Shareholders
may elect to participate in the Plan and to have all distributions of dividends
and capital gains automatically reinvested by sending written instructions to
the Dividend Paying Agent at the address set forth below.
If the Directors of the Company declare a dividend or determine to make a
capital gains distribution payable either in shares of the Company or in cash,
as shareholders may have elected, non-participants in the Plan will receive cash
and participants in the Plan will receive the equivalent in shares. If the
market price of the shares as of the close of business on the payment date for
the dividend or distribution is equal to or exceeds their net asset value as
determined as of the close of business on the payment date, participants will be
issued shares of the Company at a value equal to the higher of net asset value
or 95% of the market price. If net asset value exceeds the market price of the
shares at such time, or if the Company declares a dividend or other distribution
payable only in cash, the Dividend Paying Agent will, as agent for Plan
participants, buy shares in the open market, on the New York Stock Exchange or
elsewhere, for the participants' accounts. If, before the Dividend Paying Agent
has completed its purchases, the market price exceeds the net asset value of the
shares, the average per share purchase price paid by the Dividend Paying Agent
may exceed the net asset value of the shares, resulting in the acquisition of
fewer shares than if the dividend or distribution had been paid in shares issued
by the Company.
Participants in the Plan may withdraw from the Plan upon written notice to the
Dividend Paying Agent. When a participant withdraws from the Plan or upon
termination of the Plan as provided below, certificates for the whole shares
credited to his account under the Plan will be issued and a cash payment will be
made for any fraction of a share credited to such account.
The Dividend Paying Agent will maintain all shareholders' accounts in the Plan
and will furnish written confirmation of all transactions in the account,
including information needed by shareholders for tax records. Shares in the
account of each Plan participant (other than participants whose shares are
registered in the name of banks, brokers, nominees or other third parties) will
be held by the Dividend Paying Agent in the non-certificated form in the name of
the participant, and each shareholder's proxy will include those shares
purchased pursuant to the Plan. At no additional cost, shareholders of the
Company may send to the Dividend Paying Agent for deposit into their Plan
account those share certificates in
<PAGE>
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14
their possession. Shareholders may also send share certificates to the Dividend
Paying Agent for the Dividend Paying Agent to hold in a book-entry account
outside of the Plan.
Whether or not shareholders participate in the Plan, they may elect by notice to
the Dividend Paying Agent to have the Dividend Paying Agent sell their
noncertificated book-entry shares. The Dividend Paying Agent will deduct from
the sale proceeds $2.50 per transaction plus $0.15 per share and remit the
balance of the sales proceeds to the shareholder. The Dividend Paying Agent will
sell the noncertificated shares on the first trading day of the week immediately
following receipt of written notification by the Dividend Paying Agent.
In the case of shareholders such as banks, brokers or nominees which hold shares
for others who are the beneficial owners, the Dividend Paying Agent will
administer the Plan on the basis of number of shares certified from time to time
by the record shareholders as representing the total amount registered in the
record shareholder's name and held for the account of beneficial owners who are
to participate in the Plan. Investors whose shares are held in the name of
banks, brokers or nominees should confirm with such entities that participation
in the Plan will be possible, and should be aware that they may be unable to
continue to participate in the Plan if their account is transferred to another
bank, broker or nominee. Those who do participate in the Plan may subsequently
elect not to participate by notifying such entities.
There is no charge to participants for reinvesting dividends or distributions,
except for certain brokerage commissions, as described below. The Dividend
Paying Agent's fees for the handling of the reinvestment of dividends and
distributions will be paid by the Company. However, each participant will pay a
pro rata share of brokerage commissions incurred with respect to the Dividend
Paying Agent's open market purchases in connection with the reinvestment of
dividends or distributions.
Participants in the Plan should be aware that they will realize capital gains
and income for tax purposes upon dividends and distributions although they will
not receive any payment of cash.
Experience under the Plan may indicate that changes are desirable. Accordingly,
the Company reserves the right to amend or terminate the Plan as applied to any
dividend or distribution paid subsequent to written notice of the change sent to
the participants in the Plan at least 90 days before the record date for such
dividend or distribution. The Plan also may be amended or terminated by the
Dividend Paying Agent on at least 90 days' written notice to participants in the
Plan. All correspondence concerning the Plan including requests for additional
information or an application brochure or general inquires about your account
should be directed to State Street Bank and Trust Company, Stock Transfer
Department, P.O. Box 8200, Boston, MA 02266-8200 or you may call toll-free
1-800-426-5523.
<PAGE>
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INA INVESTMENT SECURITIES, INC.
<TABLE>
<CAPTION>
DIRECTORS OFFICERS
<S> <C> <C>
R. Bruce Albro Thomas C. Jones R. Bruce Albro
Senior Managing Director President, CIGNA Investment Chairman of the Board and
CIGNA Investments, Inc. Management and CIGNA President
Investments, Inc.
Hugh R. Beath Alfred A. Bingham III
Advisory Director, Paul J. McDonald Vice President and Treasurer
AdMedia Corporate Advisors, Inc. Senior Executive Vice President
and Chief Administrative Officer, Jeffrey S. Winer
Russell H. Jones Friendly Ice Cream Corporation Vice President and Secretary
Vice President and Treasurer
Kaman Corporation
</TABLE>
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INA Investment Securities is a closed-end, diversified management investment
company that invests primarily in debt securities. The investment adviser is
CIGNA Investments, Inc., 900 Cottage Grove Road, Hartford, Connecticut 06152.
<PAGE>
[LOGO OF CIGNA APPEARS HERE]
CIGNA Investment Securities, Inc.
P.O. Box 13856 [LOGO OF CIGNA APPEARS HERE]
Philadelphia, PA 19101
INA INVESTMENT SECURITIES, INC.
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BULK RATE
U.S. POSTAGE
PAID
SO. HACKENSACK, NJ Annual Report
PERMIT 750
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December 31, 1997
