[Graphic]
CIGNA HIGH
INCOME SHARES
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Semiannual Report
June 30, 2003
[Logo]
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1
Dear Shareholders:
Our commentary for CIGNA High Income Shares (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 High
Yield Bond Index was 18.49%, compared with a total return of 3.93% for the
Lehman Brothers Aggregate Bond Index and a 7.32% total return on
investment-grade corporate bonds (Lehman Brothers U.S. Credit Index). The recent
appeal of high yield bonds translated to inflows into mutual funds for the first
half of 2003 of approximately $22.6 billion, breaking the 1997 full-year record
of $21.9 billion.
While on the surface the high yield market seems sufficiently robust to absorb
substantial new supply, a closer look at the second quarter's rally should raise
at least mild caution. Among the 50 issues registering the highest total
returns, 43 were rated CCC or lower. Fully half of the top performers were rated
CC or C. Furthermore, three industries (airlines, cable television, and
telecommunications) accounted for 42 of the 50 best performers. The dependence
of the high returns on bottom-tier credits in just a few industries should raise
some red flags about the rally's sustainability.
Our new adviser, Shenkman Capital Management, Inc., has actively repositioned
the Fund over the past two months, using a three pronged approach. First,
divesting securities believed to be marginal credits with poor near term
prospects. Second, selling old securities that were either investment grade or
traded at very low yield spreads to Treasuries. Third, attempting to sell most
of the non-income producing securities (i.e., defaults, equities).
At June 30, 2003, the average maturity of the Fund was 7.5 years, shorter than
the benchmark maturity of 8.3 years. The Fund's average coupon was 9.18% versus
8.59% for the benchmark.
The Fund remains broadly diversified, with holdings in 147 issuers. The Fund's
leverage during the quarter remained below 33% of assets and was 29% at June 30,
2003.
Performance
The Fund returned 9.44% and 18.52%, respectively (based on its net asset value),
for the second quarter and the year-to-date. The Fund's returns for the quarter
and year-to-date, based on the market value of its shares traded on the New York
Stock Exchange, were 8.70% and 28.56%, respectively.
Outlook
For portfolio managers focused on fundamentals, the prospects appear favorable
for the balance of the year. Moody's default rate has already fallen to 6.1%
from a cyclical peak of 10.8%. Furthermore, the ratings agency reports that
downgrades of high yield credits are down by 19.6% on a year-over-year basis,
representing a strong indication that the default rate should decline further. A
reduced default rate, combined with continuing low inflation, should facilitate
further narrowing of high yield spreads.
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2
Unfortunately, in the current high yield market, credit analysis and discipline
seem irrelevant compared to indiscriminate momentum investing. The demand for
high yield bonds has been so strong that investors this year have been flocking
to the most beaten up marginal credits. Over longer periods of time strong
credit skills and disciplined underwriting do matter and should be the main
differentiating factors between good and poor performance.
Sincerely,
/s/ Richard H. Forde
Richard H. Forde
Chairman of the Board and President
CIGNA High Income Shares
Note: This commentary is not part of the Semiannual Report to Shareholders.
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CIGNA High Income Shares Investments in Securities 3
June 30, 2003 (Unaudited)
Principal Value
(000) (000)
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BONDS AND NOTES - 137.9%
Aerospace/Defense - 2.8%
Aviall, Inc., 7.63%, 2011 144A $ 1,000 $ 1,014
Hexcel Corp., 9.75%, 2009 1,000 995
Sequa Corp., 8.88%, 2008 144A 1,500 1,568
Titan Corp., 8.00%, 2011 144A 500 530
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4,107
--------
Auto & Truck - 4.1%
Dana Credit Corp., 8.38%, 2007 144A 1,850 1,869
Dura Operating Corp., 9.00%, 2009 1,500 1,380
Mark IV Industries, Inc., 7.50%, 2007 1,240 1,018
TRW Automotive, Inc.,
9.38%, 2013 144A 1,240 1,345
11.00%, 2013 144A 420 458
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6,070
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Beverages/Food & Tobacco - 3.4%
American Seafoods Group LLC, 10.13%, 2010 640 726
Del Monte Corp., 8.63%, 2012 144A 610 647
Dole Food, Inc.,
7.25%, 2010 144A 750 752
8.88%, 2011 144A 500 530
Premier International Foods PLC, 12.00%, 2009 2,100 2,321
--------
4,976
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Broadcasting & Media - 2.8%
Allbritton Communications Co.,
7.75%, 2012 500 516
7.75%, 2012 144A 620 640
Corus Entertainment, Inc., 8.75%, 2012 550 594
Panamsat Corp., 8.50%, 2012 420 455
Sinclair Broadcast Group,
8.75%, 2011 1,200 1,317
8.00%, 2012 500 534
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4,056
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Building Materials - 1.2%
Koppers Industry, Inc., 9.88%, 2007 860 888
Nortek Holdings, Inc., 8.88%, 2008 850 887
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1,775
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Principal Value
(000) (000)
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Cable TV - 8.8%
Charter Communications Holdings LLC, 8.63%, 2009 $ 1,000 $ 720
CSC Holdings, Inc., 10.50%, 2016 2,550 2,792
DirecTV Holdings LLC, 8.38%, 2013 144A 1,210 1,349
Echostar DBS Corp.,
10.38%, 2007 1,080 1,196
9.13%, 2009 1,860 2,079
Insight Midwest LP,
9.75%, 2009 860 909
9.75%, 2009 144A 200 212
Lodgenet Entertainment Corp., 9.50%, 2013 1,250 1,281
Mediacom Broadband LLC, 11.00%, 2013 590 656
Mediacom LLC, 8.50%, 2008 1,750 1,776
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12,970
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Chemicals - 3.3%
Equistar Chemicals LP, 10.13%, 2008 930 958
Huntsman ICI Chemicals, Inc., 10.13%, 2009 1,905 1,829
ISP Holdings, Inc., 10.63%, 2009 770 818
Lyondell Chemical Co., 9.63%, 2007 1,240 1,215
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4,820
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Consumer Products - 5.7%
American Greetings Corp., 11.75%, 2008 300 350
Jafra Cosmetics International, Inc.,
10.75%, 2011 144A 2,000 2,080
Jarden Corp., 9.75%, 2012 500 535
Jostens, Inc., 12.75%, 2010 1,130 1,333
Remington Products Co., LLC, 11.00%, 2006 1,240 1,246
Samsonite Corp., 10.75%, 2008 1,600 1,636
United Industries Corp., 9.88%, 2009 1,085 1,145
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8,325
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Containers & Packaging - 5.7%
Crown Euro Holdings S.A., 9.50%, 2011 144A 1,430 1,537
Graham Packaging Holdings Co., 10.75%, 2009 910 937
Greif Brothers Corp., 8.88%, 2012 940 1,011
Owens-Brockway,
8.75%, 2012 1,850 2,007
8.25%, 2013 144A 1,750 1,829
Pliant Corp., 13.00%, 2010 1,130 1,079
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8,400
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The Notes to Financial Statements are an integral part of these statements.
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CIGNA High Income Shares Investments in Securities 4
June 30, 2003 (Unaudited) (Continued)
Principal Value
(000) (000)
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Diversified Manufacturing - 2.6%
Blount, Inc., 13.00%, 2009 $ 800 $ 680
Dresser, Inc., 9.38%, 2011 560 577
Terex Corp. 8.88%, 2008 800 832
Trimas Corp., 9.88%, 2012 730 748
Wolverine Tube, Inc., 10.50%, 2009 910 978
------
3,815
------
Energy - 4.0%
CMS Energy Corp., 6.75%, 2004 645 651
Midland Funding II, 11.75%, 2005 2,700 2,916
SESI LLC, 8.88%, 2011 840 903
Sierra Pacific Power Co., 8.00%, 2008 1,320 1,379
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5,849
------
Environmental - 2.6%
Allied Waste North America, Inc.,
8.88%, 2008 430 467
7.88%, 2009 2,590 2,710
10.00%, 2009 590 627
------
3,804
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Gaming - 7.1%
Boyd Gaming Corp., 7.75%, 2012 1,000 1,061
Hard Rock Hotel, Inc., 8.88%, 2013 144A 1,000 1,045
Hollywood Casino Shreveport,
13.00%, 2006 (a) (b) 940 639
Isle of Capri Casinos, Inc., 8.75%, 2009 1,570 1,672
Jacobs Entertainment, Inc., 11.88%, 2009 900 957
Mandalay Resort Group, 10.25%, 2007 460 520
MGM Grand, Inc.,
6.95%, 2005 470 491
9.75%, 2007 470 533
Park Place Entertainment Corp., 9.38%, 2007 1,170 1,296
Pinnacle Entertainment, Inc., 9.25%, 2007 2,250 2,216
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10,430
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Grocery - 2.9%
Stater Brothers Holdings, Inc., 10.75%, 2006 1,230 1,298
Winn-Dixie Pass-Thru Trust, 8.18%, 2024 144A 3,640 3,012
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4,310
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Principal Value
(000) (000)
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Health Care - 4.7%
Ameripath, Inc., 10.50%, 2013 144A $ 1,000 $1,072
Apogent Technologies, Inc., 6.50%, 2013 144A 1,000 1,033
Beverly Enterprises, Inc., 9.00%, 2006 500 489
Extendicare Health Services, Inc., 9.50%, 2010 1,100 1,155
Iasis Healthcare Corp., 13.00%, 2009 1,930 2,142
Province Healthcare Co., 7.50%, 2013 1,000 985
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6,876
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Home Construction - 1.1%
K. Hovnanian Enterprises, Inc., 7.75%, 2013 144A 1,500 1,571
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Leasing - 1.9%
United Rentals, Inc.,
9.50%, 2008 250 251
10.75%, 2008 380 415
9.25%, 2009 1,460 1,438
Williams Scotsman, Inc., 9.88%, 2007 770 755
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2,859
------
Leisure Entertainment - 3.7%
AMC Entertainment, Inc., 9.50%, 2011 1,250 1,294
Intrawest Corp., 10.50%, 2010 980 1,053
Royal Caribbean Cruises Ltd., 7.25%, 2018 250 226
Six Flags, Inc., 8.88%, 2010 1,000 960
Town Sports International, Inc., 9.63%, 2011 144A 1,750 1,829
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5,362
------
Lodging/Hotels - 4.9%
Felcor Lodging LP,
9.50%, 2008 620 640
8.50%, 2011 570 574
Hilton Hotels Corp.,
8.25%, 2011 590 661
7.63%, 2012 810 887
Host Marriott Corp.,
9.25%, 2007 780 839
7.88%, 2008 1,250 1,272
La Quinta Properties, Inc., 8.88%, 2011 144A 1,000 1,065
Starwood Hotels & Resorts Worldwide, Inc.,
7.88%, 2012 1,200 1,314
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7,252
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The Notes to Financial Statements are an integral part of these statements.
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CIGNA High Income Shares Investments in Securities 5
June 30, 2003 (Unaudited) (Continued)
Principal Value
(000) (000)
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Oil & Gas - 13.5%
Bluewater Finance Ltd., 10.25%, 2012 $ 1,590 $1,574
Chesapeake Energy Corp., 7.75%, 2015 1,405 1,500
Clark R&M, Inc., 8.63%, 2008 1,530 1,561
El Paso Corp.
6.75%, 2009 800 732
7.88%, 2012 144A 1,270 1,176
Ferrellgas Partners LP, 8.75%, 2012 810 879
Northwest Pipeline Corp., 8.13%, 2010 420 452
Premcor Refining Group, Inc., 9.50%, 2013 830 917
Tennessee Gas Pipeline Co.,
7.50%, 2017 2,000 2,055
8.38%, 2032 790 859
Transmontaigne, Inc., 9.13%, 2010 144A 1,750 1,844
Universal Compression, Inc., 7.25%, 2010 144A 2,000 2,070
Vintage Petroleum, Inc.,
7.88%, 2011 1,220 1,308
8.25%, 2012 1,010 1,111
Western Resources, Inc.
9.75%, 2007 870 974
7.65%, 2023 810 844
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19,856
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Paper - 5.6%
Georgia-Pacific Corp.,
7.50%, 2006 2,475 2,537
8.88%, 2010 144A 615 667
8.00%, 2014 144A 1,000 1,019
Jefferson Smurfit Corp., 7.50%, 2013 144A 1,000 1,020
MDP Acquisitions PLC, 9.63%, 2012 850 939
Norampac, Inc., 6.75%, 2013 144A 1,000 1,050
Smurfit Capital Funding PLC, 7.50%, 2025 1,050 1,003
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8,235
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Printing & Publishing - 8.5%
American Media Operation, Inc.,
10.25%, 2009 500 540
8.88%, 2011 144A 210 227
Principal Value
(000) (000)
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Printing & Publishing (continued)
Dex Media East LLC,
9.88%, 2009 $ 500 $ 557
12.13%, 2012 980 1,159
Garden State Newspapers, Inc., 8.75%, 2009 1,030 1,063
Goss Holdings, Inc., 12.25%, 2005 (a) 2,764 --
Houghton Mifflin Co.,
8.25%, 2011 144A 820 865
9.88%, 2013 144A 410 445
Liberty Group, Inc., 9.38%, 2008 500 505
NBC Acquisition Corp., 10.75%, 2009 1,920 1,920
Primedia, Inc.,
8.88%, 2011 1,595 1,679
8.00%, 2013 144A 750 769
Quebecor Media Inc., 11.13%, 2011 1,485 1,700
Vertis, Inc., 9.75%, 2009 1,000 1,040
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12,469
------
Realty - 0.9%
Ventas, Inc.,
8.75%, 2009 780 842
9.00%, 2012 360 392
------
1,234
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Restaurants - 1.0%
Buffets, Inc., 11.25%, 2010 400 396
Carrols Corp., 9.50%, 2008 990 963
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1,359
------
Retail - 5.8%
Rent-A-Center, Inc., 7.50%, 2010 144A 2,250 2,363
RH Donnelley Finance Corp., I
8.88%, 2010 144A 560 619
10.88%, 2012 144A 760 885
Rite Aid Corp., 7.70%, 2027 2,750 2,283
Saks, Inc., 7.38%, 2019 2,500 2,375
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8,525
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The Notes to Financial Statements are an integral part of these statements.
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CIGNA High Income Shares Investments in Securities 6
June 30, 2003 (Unaudited) (Continued)
Principal Value
(000) (000)
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Services - 4.8%
Alderwoods Group, Inc.,
11.00%, 2007 $ 355 $ 360
12.25%, 2009 1,075 1,123
Corrections Corp of America, 7.50%, 2011 1,000 1,045
Iron Mountain, Inc., 7.75%, 2015 1,000 1,058
Service Corp. International, 7.70%, 2009 1,382 1,410
URS Corp., 11.50%, 2009 1,530 1,629
Wesco Distribution, Inc., 9.13%, 2008 410 382
-------
7,007
-------
Telecommunications - 15.6%
American Tower Corp., 9.38%, 2009 1,750 1,759
Avaya, Inc., 11.13%, 2009 410 449
Centennial Communications Corp.,
10.13%, 2013 144A 1,000 990
Crown Castle International Corp., 10.63%, 2007 1,250 1,353
Dobson/Sygnet Communications Co., 12.25%, 2008 390 417
GCI, Inc., 9.75%, 2007 840 855
Nextel Communications, Inc.,
9.75%, 2007 2,065 2,137
9.38%, 2009 2,185 2,346
Nextel Partners, Inc., 8.13%, 2011 144A 750 748
Poland Telecom Finance BV, 14.00%, 2007 (a) 3,000 --
Qwest Communications International, Inc.,
5.88%, 2004 2,950 2,825
7.50%, 2008 1,920 1,776
7.00%, 2009 730 600
8.88%, 2012 144A 1,390 1,553
Rogers Cantel, Inc., 8.80%, 2007 420 429
Rogers Wireless Communications, Inc. 9.63%, 2011 640 736
Spectrasite, Inc., 8.25%, 2010 144A 1,900 1,976
Triton PCS Corp., 8.75%, 2011 1,970 1,965
-------
22,914
-------
Textiles - 2.4%
Philips-Van Heusen Corp. 8.13%, 2013 144A 2,000 2,053
Supreme International Corp., 12.25%, 2006 1,420 1,502
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3,555
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Principal Value
(000) (000)
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Transportation - 0.4%
American Commercial Lines LLC, 12.00%, 2008 (a) $ 487 $ 10
North American Van Lines, Inc., 13.38%, 2009 500 539
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549
-------
Utilities - 6.1%
Avista Corp., 9.75%, 2008 2,010 2,241
Barrett Resources Corp., 7.55%, 2007 1,000 1,030
Calpine Corp., 8.50%, 2011 1,310 937
Coastal Corp., 7.50%, 2006 800 772
Illinois Power Corp., 11.50%, 2010 144A 400 457
Northwestern Corp., 8.75%, 2012 830 639
Williams Cos., Inc.,
9.25%, 2004 1,310 1,343
8.13%, 2012 1,550 1,589
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9,008
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Total Bonds and Notes (Cost - $194,952) 202,338
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Number
of Shares
---------
COMMON STOCK - 0.0%
Health Care - 0.0%
Mediq, Inc. (c) (d) 11,973 --
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Industrial - 0.0%
Goss Holdings, Inc., Class B (c) (d) 64,467 --
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Total Common Stock (Cost - $6,198) --
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PREFERRED STOCK - 1.1%
Cable TV - 1.1%
CSC Holdings, Inc., 11.13% (Cost - $1,431) 14,963 1,541
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WARRANTS - 0.1%
Convergent Communications, Inc., Exp. 2008 (a) (c) 30,000 --
Doe Run Resources Corp., Exp. 2012 (c) 9 1
Jostens, Inc., Exp. 2010 (c) 4,350 152
Orbital Imaging Corp., Exp. 2005 (a) (c) 4,250 4
Pliant Corp., Exp. 2010 (c) 3,700 2
Poland Telecom Finance BV, Exp. 2007 (a) (c) 2,500 13
Primus Telecommunications, Inc., Exp. 2004 (c) 4,250 --
Versatel Telecom BV, Exp. 2008 (c) (d) 6,550 --
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Total Warrants (Cost - $473) 172
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The Notes to Financial Statements are an integral part of these statements.
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CIGNA High Income Shares Investments in Securities 7
June 30, 2003 (Unaudited) (Continued)
Value
(000)
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TOTAL INVESTMENTS IN SECURITIES - 139.1%
(Total Cost - $203,054) (e) $204,051
Liabilities in excess of Cash and Other Assets - (39.1%) (57,372)
--------
NET ASSETS - 100% $146,679
========
NOTES TO INVESTMENTS IN SECURITIES
(a) Defaulted securities.
(b) Variable rate security. The rate is as of June 30, 2003.
(c) Non-income-producing securities.
(d) Fair valued security.
Tax Information
(e) At June 30, 2003, the net unrealized appreciation of investments, based on
cost for federal income tax purposes of $203,160,499 was as follows:
Aggregate gross unrealized appreciation for all investments in which there
was an excess of value over tax cost $15,718,210
Aggregate gross unrealized depreciation for all investments in which there
was an excess of tax cost over value (14,827,835)
-----------
Unrealized appreciation - net $ 890,375
===========
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Quality Ratings* of Long-Term Bonds and Notes (Unaudited)
June 30, 2003
Market % of
Value Market
(000) Value
- ----------------------------------
Baa/BBB $ 2,883 1.4%
Ba/BB 58,708 29.0
B/B 119,049 58.9
Below B 21,698 10.7
-------- -----
$202,338 100.0%
======== =====
*The higher of Moody's or Standard & Poor's Ratings.
The Notes to Financial Statements are an integral part of these statements.
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CIGNA High Income Shares 8
Statement of Assets and Liabilities
June 30, 2003 (Unaudited)
(In Thousands)
Assets:
Investments in securities at value $204,051
Cash 776
Interest and dividends receivable 4,394
Receivables for investments sold 55
Investment for Trustees' deferred
compensation plan 172
Other 6
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Total assets 209,454
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Liabilities:
Loan payable 61,000
Dividend payable 1,239
Deferred Trustees' fees payable 172
Accrued interest payable 139
Advisory fees payable 126
Shareholder reports payable 28
Custodian fees payable 25
Audit and legal fees payable 24
Administrative services fees payable 17
Transfer agent fees payable 5
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Total liabilities 62,775
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Net Assets (Equivalent to $2.72 per share based on
53,858 shares of beneficial interest outstanding;
unlimited number of shares authorized) $146,679
========
Components of Net Assets:
Paid in capital $402,795
Undistributed net investment income 1,448
Accumulated net realized loss (258,561)
Net unrealized appreciation of investments 997
--------
Net Assets $146,679
========
Cost of Investments $203,054
========
Statement of Operations
For the Six Months Ended June 30, 2003 (Unaudited)
(In Thousands)
Investment Income:
Income:
Interest $10,684
Dividends 83
-------
Total Income 10,767
Expenses:
Investment advisory fees $ 730
Interest expense 557
Shareholder reports 93
Custodian fees 61
Administrative services fees 37
Audit and legal fees 36
Stock exchange fees 28
Transfer agent fees 25
Trustees' fees 15
Other 18
-----
Total expenses 1,600
-----
Net Investment Income 9,167
-------
Realized and Unrealized Gain (Loss)
on Investments:
Net realized loss from investments (26,045)
Net change in unrealized depreciation of
investments 40,662
-------
Net Realized and Unrealized Gain on
Investments 14,617
-------
Net Increase in Net Assets Resulting
from Operations $23,784
=======
The Notes to Financial Statements are an integral part of these statements.
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CIGNA High Income Shares 9
Statement of Changes in Net Assets
(In Thousands)
For the Six
Months Ended For the Year
June 30, Ended
2003 December 31,
(Unaudited) 2002
-------------- -------------
Operations:
Net investment income $ 9,167 $ 19,233
Net realized loss from investments (26,045) (110,705)
Net change in unrealized depreciation
on investments 40,662 77,483
-------- --------
Net increase (decrease) from operations 23,784 (13,989)
-------- --------
Dividends and Distributions:
From net investment income (7,416) (15,130)
From return of capital -- (4,522)
-------- --------
Total dividends and distributions (7,416) (19,652)
-------- --------
Capital Share Transactions:
Net increase from 299 and 466 capital
shares issued to shareholders in
reinvestment of distributions, respectively 773 1,486
-------- --------
Net increase from Fund share transactions 773 1,486
-------- --------
Net Increase (Decrease) in Net Assets 17,141 (32,155)
Net Assets:
Beginning of period 129,538 161,693
-------- --------
End of period * $146,679 $129,538
======== ========
* includes undistributed and
(overdistributed) net investment
income of: $ 1,448 $ (303)
======== ========
Statement of Cash Flows
For the Six Months Ended June 30, 2003 (Unaudited)
(In Thousands)
Cash Provided (Used) by Financing Activities:
Increase in borrowing $ 10,000
Dividends paid in cash (6,636)
--------
Total amount provided 3,364
--------
Cash Provided (Used) by Operations:
Purchases of portfolio securities (119,856)
Proceeds from sales of portfolio securities 109,006
--------
Total amount provided (10,850)
--------
Net Investment Income (excludes net
amortized discount and premium and
taxes paid of $1,534) 7,633
Net change in receivables/payables related
to operations (83)
Net sale of short-term investment securities 701
--------
Total other amounts 8,251
--------
Net increase in cash 765
Cash, beginning of period 11
--------
Cash, End of Period $ 776
========
The Notes to Financial Statements are an integral part of these statements.
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CIGNA High Income Shares 10
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 $ 2.42 $ 3.05 $ 3.88 $ 5.92 $ 6.39 $ 7.88
Income from investment operations
Net investment income (a) 0.19 0.36 0.55 0.68 0.81 0.88
Net realized and unrealized gain (loss) on
investments 0.25 (0.62) (0.81) (1.99) (0.46) (1.49)
--------- -------- ------- -------- -------- -------
Total from investment operations 0.44 (0.26) (0.26) (1.31) 0.35 (0.61)
--------- -------- ------- -------- -------- -------
Less dividends and distributions:
Dividends from net investment income (0.14) (0.29) (0.57) (0.73) (0.82) (0.88)
Distributions from capital -- (0.08) -- -- -- --
--------- -------- ------- -------- -------- -------
Total dividends and distributions (0.14) (0.37) (0.57) (0.73) (0.82) (0.88)
--------- -------- ------- -------- -------- -------
Net asset value, end of period $ 2.72 $ 2.42 $ 3.05 $ 3.88 $ 5.92 $ 6.39
========= ======== ======= ======== ======== =======
Market value, end of period $ 2.83 $ 2.32 $ 3.36 $ 4.19 $ 5.38 $ 7.25
========= ======== ======= ======== ======== =======
Total Investment Return:
Per share market value 28.56%(d) (21.23)% (6.85)% (10.05)% (16.18)% (3.35)%
Per share net asset value (b) 18.52%(d) (9.07)% (7.31)% (24.21)% 5.78% (8.31)%
Ratios to Average Net Assets
Expenses (includes interest expense) 2.33%(e) 2.53% 3.43% 4.16% 3.40% 3.40%
Expenses (excludes interest expense) 1.52%(e) 1.49% 1.26% 1.09% 1.02% 0.97%
Net investment income 13.35%(e) 13.29% 15.56% 13.13% 13.05% 12.05%
Portfolio Turnover 57%(d) 134% 82% 38% 49% 56%
Net Assets, End of Period (000 omitted) $ 146,679 $129,538 $161,693 $202,401 $305,352 $324,289
(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 to 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 an increase of $0.03 per share. The effect
to the ratio of net investment income to average net assets was an increase
of 0.77%. 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.
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CIGNA High Income Shares Notes to Financial Statements 11
(Unaudited)
1. Significant Accounting Policies. CIGNA High Income Shares (the "Fund") is
registered under the Investment Company Act of 1940, as amended, as a
diversified, closed-end management investment company. The Fund's primary
objective is to provide the highest current income attainable, consistent with
reasonable risk as determined by the Fund's investment adviser, through
investment in a professionally managed, diversified portfolio of high yield,
high-risk fixed income securities (commonly referred to as "junk bonds"). As a
secondary objective, the Fund seeks capital appreciation, but only when
consistent with its primary objective. Normally the Fund will invest at least
80% of its assets in high yield, below investment-grade bonds. 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. 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.
C. High Yield Bonds -- The Fund invests in high yield bonds--i.e., fixed income
securities rated below investment grade. While the market values of these
securities tend to react less to fluctuations in interest rate levels than do
those of investment-grade securities, the market values of certain of these
securities also tend to be more sensitive to individual corporate developments
and changes in economic conditions than investment-grade securities. In
addition, the issuers of these securities are often highly leveraged and may not
have more traditional methods of financing available to them so that their
ability to service their debt obligations during an economic downturn or during
sustained periods of rising interest rates may be impaired.
D. 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
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CIGNA High Income Shares Notes To Financial Statements 12
(Unaudited) (Continued)
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.
E. Federal Taxes -- It is the Fund's policy to continue to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income and capital gains to its
shareholders. Therefore, no federal income or excise taxes on realized income
have been accrued. Distributions reported in the Statement of Changes in Net
Assets from net investment income, including short-term gains, and capital gains
are treated as ordinary income and long-term capital gains, respectively, for
federal income tax purposes.
F. Dividends and Distributions to Shareholders -- Dividends from net investment
income are declared and distributed monthly 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 accounting principles generally
accepted in the United States of America. These differences are primarily due to
differing book and tax treatment of capital loss carryforwards, deferral losses
due to wash sales, interest on defaulted securities, 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
$3,913,745, decreased accumulated net realized loss by $608,464, and decreased
paid in capital by $4,522,209.
G. Cash Flow Information -- Cash, as used in the Statement of Cash Flows, is the
amount reported in the Statement of Assets and Liabilities. The Fund issues its
shares, invests in securities, and distributes dividends from net investment
income (which are either paid in cash or reinvested at the discretion of
shareholders). These activities are reported in the Statement of Changes in Net
Assets. Information on cash payments is presented in the Statement of Cash
Flows. Accounting practices that do not affect reporting activities on a cash
basis include unrealized gain or loss on investment securities and amortization
of premium and discount.
2. Loan. The Fund has a revolving credit agreement (the "Agreement") with an
unrelated third party lender (the "Lender"), which will enable the Fund to
borrow up to the lesser of: (A) $80,000,000; or (B) one-third of the Fund's
total assets; or (C) 100% of the borrowing base eligible assets, as determined
under the terms of the Agreement. The Agreement expires on October 31, 2005.
Prior to expiration of the Agreement, principal is repayable in whole or in part
at the option of the Fund. To secure the loan, the Fund has pledged investment
securities in accordance with the terms of the Agreement. Borrowings under this
Agreement bear interest at a variable rate tied to the lender's average daily
cost of funds or at fixed rates, as may be agreed to between the Fund and the
lender.
The average borrowings outstanding during the six months ended June 30, 2003,
were $58,571,271, at an average annual interest rate of approximately 1.92%. As
of June 30, 2003, the Fund was paying interest at an average annual rate of
1.77% on its outstanding borrowings.
3. Investment Advisory Fees and Other Transactions with Affiliates. Investment
advisory fees were paid or accrued to TimesSquare Capital Management, Inc.
("TimesSquare"), certain
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CIGNA High Income Shares Notes To Financial Statements 13
(Unaudited) (Continued)
officers and directors of which are affiliated with the Fund. Such advisory fees
are based on an annual rate of 0.75% of the first $200 million of the Fund's
average weekly total asset value and 0.50% thereafter. TimesSquare in turn pays
Shenkman Capital Management, Inc. its sub-advisory fee.
For administrative services, the Fund reimburses TimesSquare for a portion of
the compensation and related expenses of the Fund's Treasurer and Secretary and
certain persons who assist in carrying out the responsibilities of those
offices. For the six months ended June 30, 2003, the Fund paid or accrued
$37,284.
TimesSquare 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 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
(excluding short-term obligations) for the six months ended June 30, 2003, were
$119,856,157 and $109,060,856 respectively.
6. Tax Information. As of December 31, 2002, the components of distributable
earnings (excluding unrealized appreciation/(depreciation) disclosed in the
Notes to Investment in Securities) on a tax basis consisted of a capital loss
carryover of $224,639,433, of which $1,753,142, $28,686,393, $35,363,213,
$55,878,285 and $102,958,401 will expire in 2003, 2007, 2008, 2009 and 2010,
respectively. For 2002, the Fund had a post-October loss in the amount of
$7,403,220. 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.
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CIGNA High Income Shares 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
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Matters Submitted to a Vote of Shareholders
The Annual Meeting of the Shareholders of CIGNA High Income Shares (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 47,129,951.895 1,097,161.986
Carol Ann Hayes 47,125,491.627 1,101,622.204
Russell H. Jones 47,132,522.535 1,094,591.296
David P. Marks 47,109,262.153 1,117,851.678
Paul J. McDonald 47,125,157.389 1,101,956.442
Marnie W. Mueller 47,084,087.627 1,143,026.204
The consideration of a sub-advisory agreement between TimesSquare Capital
Management, Inc. and Shenkman Capital Management, Inc.
For Against Abstain
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46,614,712.632 1,050,449.106 627,121.093
There were no broker non-votes with respect to the matters submitted to a vote
of shareholders of the Trust.
No other business was transacted at the meeting.
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CIGNA High Income Shares 15
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CIGNA High Income Shares is a closed-end, diversified management investment
company that invests primarily in high yield, fixed income securities. The
investment adviser is TimesSquare Capital Management, Inc., 280 Trumbull
Street, Hartford, Connecticut 06103. Shenkman Capital Management, Inc. is the
Fund's sub-adviser.
Shareholders may elect to have dividends automatically invested in additional
shares of CIGNA High Income Shares by participating in the Automatic Dividend
Investment Plan ("the Plan"). For a brochure describing this Plan or general
inquiries about your account, contact EquiServe, P.O. Box 43011, Providence, RI
02940-3011 or you may call toll free 1-800-426-5523.
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