UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES 811-05495 (Investment Company Act file number) CIGNA HIGH INCOME SHARES ------------------------ (Exact name of registrant as specified in charter) 2223 Washington Street 3 Newton Executive Park Suite 200 Newton, MA 02462 (Address of principal executive offices) Mark Butler, 2223 Washington Street, 3 Newton Executive Park Suite 200, Newton, MA 02462 (Name and address of agent for service) (860) 534-4700 -------------- Registrants' telephone number, including area code Date of fiscal year end: December 31, 2003 Date of reporting period: December 31, 2003 Item 1. Reports to Stockholders. [GRAPHIC] CIGNA HIGH INCOME SHARES - ------------------------------------------- Annual Report December 31, 2003 [CIGNA LOGO](R) - -------------------------------------------------------------------------------- 1 Dear Shareholders: Our commentary for CIGNA High Income Shares (the "Fund") covering the year ended December 31, 2003 follows. Management's Discussion and Analysis Market Summary The financial markets overcame war, mutual fund and NYSE scandals, a deteriorating dollar, and terrorist alerts to post their first winning year since 1999. Consequently, stocks avoided suffering a four-year losing streak, a phenomenon not witnessed since the Great Depression. Investors began 2003 with trepidation, stung by three years of sharp declines that followed the bursting of the technology bubble in March 2000. Moreover, the prospect of war with Iraq cast a cloud of uncertainty over the economy. By early April, however, the combination of low interest rates and tax cuts had bolstered investor sentiment. At year-end, the economy was operating on nearly all cylinders, the exception being still-sputtering job creation. The high yield bond market posted its best performance since 1991. Total return as measured by the Lehman Brothers High Yield Bond Index ("the Index") was 28.97%. Moreover, the spread versus Treasuries of the Credit Suisse First Boston High Yield Index contracted by 460 basis points (bps), the biggest one-year change since the index's inception in January 1986. The year's extraordinary performance was highly concentrated in the lowest rated issues. Market dynamics showed a departure from 1998-2002, when credit fundamentals drove the market. In 2003, demand drove the rally as technicals overrode credit analysis. High yield mutual funds reported a record $30.2 billion inflow, and pension funds also allocated huge amounts of new capital to this asset class. New issue volume, at $149.1 billion, nearly matched 1998's all-time high of $150.8 billion, but 77.2% of it represented refinancing of existing bonds or bank debt. As a result, demand steadily outstripped supply. As the table below illustrates, the most speculative credits showed excellent returns in 2003. 2003 Market Performance by Rating (1) BB 19.45% B 26.01 CC & Lower 60.99 (1) Source: Merrill Lynch High Yield Index In April 2003, shareholders voted to appoint Shenkman Capital Management, Inc. as the Fund's investment sub-adviser. Our new adviser has actively repositioned the Fund, 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 yields. Third, attempting to sell most of the non-income producing securities (i.e., defaults, equities). The repositioning of the portfolio is now complete with an upgrading of the credit quality without a material reduction in the portfolio's yield. The strategy has been to selectively purchase new names and better quality bonds at a moderate discount to provide both high current income and some capital appreciation potential. At December 31, 2003, the average maturity of the Fund was 7.7 years, shorter than the benchmark maturity of 8.2 years. The Fund's average coupon was 9.05%, versus 8.60% for the benchmark. The Fund remains broadly diversified, with holdings in 160 issuers. The Fund's leverage during the quarter remained below 33% of assets and was 31% at December 31, 2003. Fund Performance The Fund returned 31.25% for the year (based on its net asset value), outperforming the Lehman Brothers High Yield Bond Index, its benchmark, - -------------------------------------------------------------------------------- 2 by 228 bps. On a quarterly basis, the Fund returned 8.30%, 9.44%, 3.34% and 7.16% over the year, compared with the benchmark Index which returned 7.61%, 10.11%, 2.77% and 5.91%, respectively. The Fund outperformed the Index in the first, third and fourth quarters by 69 bps, 57 bps, and 125 bps, respectively. The Fund underperformed the Index by 67 bps during the second quarter. The Fund's return for the year, based on the market value of its shares traded on the New York Stock Exchange, was 37.23%. Outlook The high yield sector should be cushioned to some extent by an improving credit environment. In the first three quarters of 2003, Moody's downgraded 1.86 high yield companies for each one it upgraded, down from a ratio of 4.02-to-1 in 2002. Moody's default rate fell from 8.4% to 5.2% during 2003, and we currently project a 2.0% rate by the end of 2004. In Shenkman Capital Management's opinion, seven of the eight key high yield market drivers are currently in the positive column. The one exception is interest rate trends, which Shenkman ranks as neutral. Accordingly, we currently expect a year of respectable returns. However, unforeseen events could easily change that outcome. Sincerely, /s/ Richard H. Forde - -------------------- Richard H. Forde Chairman of the Board and President CIGNA High Income Shares - -------------------------------------------------------------------------------- 3 GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT (Unaudited) 12/31/93 - 12/31/03 AVERAGE ANNUAL RETURN 1 Year 5 Year 10 Year Market Value 37.23% -5.36% 1.55% Net Asset Value 31.25% -2.37% 3.22% Lehman Brothers 28.97% 5.23% 6.89% High Yield Bond Index [TABULAR REPRESENTATION OF LINE CHART] Lehman Brothers Fund High Yield Bond Index 12/31/1993 $10,000 $10,000 12/31/1994 $ 9,455 $ 9,899 12/31/1995 $11,937 $11,797 12/31/1996 $14,235 $13,136 12/31/1997 $15,893 $14,813 12/31/1998 $15,361 $15,089 12/31/1999 $12,875 $15,450 12/31/2000 $11,581 $14,545 12/31/2001 $10,788 $15,313 12/31/2002 $ 8,497 $15,097 12/31/2003 $11,661 $19,471 CIGNA High Income Shares (the "Fund") performance figures are historical and reflect reinvestment of all dividends and capital gains distributions and changes in the market value of its stock, or as shown separately in the box, changes in its underlying net asset value. The Fund is a closed-end management investment company which trades over the New York Stock Exchange under the ticker symbol "HIS." Fund performance does not reflect exchange commissions payable upon the purchase or sale of the Fund's stock. The Fund's investment return and principal value will fluctuate so that an investor's shares, when sold, may be worth more or less than their original cost. Past performance does not predict future performance. The Fund's return has been compared with the total return performance of Lehman Brothers High Yield Bond Index. This index is a group of unmanaged securities widely regarded by investors to be representative of the high-yield bond market in general. An investment cannot be made in the index. Index results do not reflect brokerage charges or other investment expenses. - -------------------------------------------------------------------------------- CIGNA High Income Shares Investments in Securities 4 December 31, 2003 Principal Value (000) (000) - --------------------------------------------------------------------------------------- BONDS AND NOTES - 138.2% Aerospace - 5.3% Aviall, Inc., 7.63%, 2011 $ 1,750 $ 1,824 BE Aerospace, Inc., 8.00%, 2008 1,500 1,406 9.50%, 2008 1,000 973 Hexcel Corp., 9.75%, 2009 1,750 1,833 Sequa Corp., 8.88%, 2008 1,500 1,627 Titan Corp., 8.00%, 2011 (144A security acquired May 2003 for $506) (a) 500 570 -------- 8,233 -------- Auto/Trucks - 6.5% Accuride Corp., 9.25%, 2008 1,625 1,670 Dana Credit Corp., 8.38%, 2007 (144A security acquired May, July & Dec. 2002 for $1,770) (a) 1,850 1,989 Delco Remy International, Inc., 10.63%, 2006 750 754 11.00%, 2009 500 518 Goodyear Tire & Rubber Co., 7.86%, 2011 500 436 Tenneco Automotive, Inc., 11.63%, 2009 2,500 2,712 TRW Automotive, Inc., 9.38%, 2013 1,240 1,417 11.00%, 2013 420 495 -------- 9,991 -------- Beverages/Food - 5.3% American Seafoods Group LLC, 10.13%, 2010 640 762 Del Monte Corp., 8.63%, 2012 610 674 Dole Food, Inc., 7.25%, 2010 750 773 8.88%, 2011 1,000 1,098 Land O' Lakes, Inc., 8.75%, 2011 500 443 Michael Foods, Inc., 8.00%, 2013 (144A security acquired Nov. 2003 for $600) (a) 600 625 Premier International Foods PLC, 12.00%, 2009 2,100 2,300 Pinnacle Foods Holding Corp., 8.25%, 2013 (144A security acquired Nov. & Dec. 2003 for $1,015) (a) 1,000 1,035 Principal Value (000) (000) - --------------------------------------------------------------------------------------- Beverages/Food (continued) Seminis, Inc., 10.25%, 2013 (144A security acquired Oct. 2003 for $538) (a) $ 500 $ 537 -------- 8,247 -------- Broadcasting & Media - 2.8% Allbritton Communications Co., 7.75%, 2012 1,370 1,421 Corus Entertainment, Inc., 8.75%, 2012 550 608 Panamsat Corp., 8.50%, 2012 420 466 Sinclair Broadcast Group, 8.75%, 2011 1,200 1,332 8.00%, 2012 500 540 -------- 4,367 -------- Building Materials - 2.5% Interface, Inc., 7.30%, 2008 800 764 10.38%, 2010 350 370 Jacuzzi Brands, Inc., 9.63%, 2010 (144A security acquired June 2003 for $253) (a) 250 275 Nortek Holdings, Inc., 8.88%, 2008 1,350 1,404 Step Coupon (0% to 11/15/07), 2011 (144A security acquired Nov. 2003 for $1,049) (a) 1,500 1,084 -------- 3,897 -------- Cable TV - 5.8% Charter Communications Holdings LLC, 8.63%, 2009 1,000 872 10.25%, 2010 (144A security acquired Nov. 2003 for $1,276) (a) 1,250 1,313 CSC Holdings, Inc., 10.50%, 2016 2,550 2,913 DirecTV Holdings LLC, 8.38%, 2013 1,210 1,404 Mediacom Broadband LLC, 11.00%, 2013 590 661 Mediacom LLC, 8.50%, 2008 1,750 1,776 -------- 8,939 -------- Chemicals/Plastics - 4.7% Equistar Chemicals LP, 10.13%, 2008 930 1,018 Huntsman ICI Chemicals, Inc., 10.13%, 2009 2,105 2,168 ISP Holdings, Inc., 10.63%, 2009 770 847 The Notes to Financial Statements are an integral part of these statements. - -------------------------------------------------------------------------------- CIGNA High Income Shares Investments in Securities 5 December 31, 2003 (Continued) Principal Value (000) (000) - ------------------------------------------------------------------------------------- Chemicals/Plastics (continued) Koppers Industry, Inc., 9.88%, 2013 (144A security acquired Oct. 2003 for $525) (a) $ 500 $ 551 Kraton Polymers LLC, 8.13%, 2014 (144A security acquired Dec. 2003 for $506) (a) 500 520 Lyondell Chemical Co., 10.88%, 2009 500 513 10.50%, 2013 1,500 1,635 -------- 7,252 -------- Consumer Products - 5.7% Jafra Cosmetics International, Inc., 10.75%, 2011 2,000 2,195 Jarden Corp., 9.75%, 2012 500 550 Jostens, Inc., 12.75%, 2010 1,130 1,284 Playtex Products, Inc., 9.38%, 2011 1,500 1,515 Samsonite Corp., 10.75%, 2008 2,000 2,070 United Industries Corp., 9.88%, 2009 1,085 1,137 -------- 8,751 -------- Containers & Packaging - 6.7% Crown Euro Holdings S.A., 9.50%, 2011 1,430 1,616 Graham Packaging Co., Inc., 8.75%, 2008 500 511 Step Coupon (10.75% to 1/15/09), 2009 910 940 Graphic Packaging International, Inc., 9.50%, 2013 (144A security acquired Aug. 2003 for $1,000) (a) 1,000 1,105 Greif Brothers Corp., 8.88%, 2012 940 1,034 Owens-Brockway, 8.75%, 2012 1,850 2,058 8.25%, 2013 1,750 1,879 Pliant Corp., 13.00%, 2010 500 462 U.S. Can Corp., 10.88%, 2010 (144A security acquired July 2003 for $751) (a) 750 785 -------- 10,390 -------- Principal Value (000) (000) - ------------------------------------------------------------------------------------- Environmental - 1.3% Allied Waste North America, Inc., 7.88%, 2009 $ 990 $ 1,032 10.00%, 2009 590 637 IESI Corp., 10.25%, 2012 250 278 -------- 1,947 -------- Gaming - 5.7% Boyd Gaming Corp., 7.75%, 2012 1,000 1,070 Hard Rock Hotel, Inc., 8.88%, 2013 (144A security acquired May 2003 for $1,020) (a) 1,000 1,065 Inn of the Mountain Gods Resort & Casino, 12.00%, 2010 (144A security acquired Oct. 2003 for $1,000) (a) 1,000 1,063 Isle of Capri Casinos, Inc., 8.75%, 2009 1,570 1,649 Jacobs Entertainment, Inc., 11.88%, 2009 900 1,008 Pinnacle Entertainment, Inc., 9.25%, 2007 2,250 2,329 Poster Financial Group, Inc., 8.75%, 2011 (144A security acquired Nov. 2003 for $504) (a) 500 529 -------- 8,713 -------- General Industrial - 2.8% Blount, Inc., 13.00%, 2009 1,500 1,616 Norcross Safety Products LLC, 9.88%, 2011 (144A security acquired Aug. 2003 for $896) (a) 900 988 Sensus Metering Systems, Inc., 8.63%, 2013 (144A security acquired Dec. 2003 for $1,012) (a) 1,000 1,026 Trimas Corp., 9.88%, 2012 730 763 -------- 4,393 -------- Grocery - 2.0% Couche-Tard U.S. LP, 7.50%, 2013 (144A security acquired Dec. 2003 for $759) (a) 750 786 Pathmark Stores, Inc., 8.75%, 2012 500 523 8.75%, 2012 (144A security acquired Dec. 2003 for $515) (a) 500 522 Stater Brothers Holdings, Inc., 10.75%, 2006 1,230 1,298 -------- 3,129 -------- The Notes to Financial Statements are an integral part of these statements. - -------------------------------------------------------------------------------- CIGNA High Income Shares Investments in Securities 6 December 31, 2003 (Continued) Principal Value (000) (000) - -------------------------------------------------------------------------------- Health Care - 4.9% Alliance Imaging, Inc., 10.38%, 2011 $ 172 $ 182 Beverly Enterprises, Inc., 9.63%, 2009 375 413 Extendicare Health Services, Inc., 9.50%, 2010 1,100 1,221 Iasis Healthcare Corp., 13.00%, 2009 1,930 2,171 Medex, Inc., 8.88%, 2013 (144A security acquired July 2003 for $1,040) (a) 1,000 1,075 NeighborCare, Inc., 6.88%, 2013 (144A security acquired Oct. 2003 for $750) (a) 750 763 Province Healthcare Co., 7.50%, 2013 1,000 1,000 Select Medical Corp., 7.50%, 2013 500 530 Sybron Dental Specialties, Inc., 8.13%, 2012 250 272 -------- 7,627 -------- Home Construction - 1.0% K. Hovnanian Enterprises, Inc., 7.75%, 2013 1,500 1,584 -------- Leasing - 3.1% United Rentals, Inc., 10.75%, 2008 380 427 9.25%, 2009 1,710 1,795 7.75%, 2013 (144A security acquired Oct. 2003 for $1,000) (a) 1,000 1,021 Williams Scotsman, Inc., 9.88%, 2007 1,520 1,539 -------- 4,782 -------- Leisure/Entertainment - 6.9% AMC Entertainment, Inc., 9.50%, 2011 1,950 2,048 Bally Total Fitness Holding Corp., 9.88%, 2007 500 455 10.50%, 2011 (144A security acquired July 2003 For $505) (a) 500 503 Imax Corp., 9.63%, 2010 (144A security acquired Nov. 2003 for $1,271) (a) 1,250 1,314 Intrawest Corp., 10.50%, 2010 980 1,083 7.50%, 2013 (144A security acquired Oct. 2003 for $999) (a) 1,000 1,040 Royal Caribbean Cruises Ltd., 7.25%, 2018 1,250 1,219 Six Flags, Inc., 8.88%, 2010 1,100 1,129 Principal Value (000) (000) - -------------------------------------------------------------------------------- Leisure/Entertainment (continued) Town Sports International, Inc., 9.63%, 2011 $ 1,750 $ 1,872 -------- 10,663 -------- Lodging/Hotels - 3.6% Felcor Lodging LP, 10.00% (Coupon change based on rating), 2008 620 670 9.00% (Coupon change based on rating), 2011 570 618 Host Marriott Corp., 9.25%, 2007 780 872 7.88%, 2008 1,250 1,298 7.13%, 2013 (144A security acquired Oct. 2003 for $1,000) (a) 1,000 1,020 La Quinta Properties, Inc., 8.88%, 2011 1,000 1,106 -------- 5,584 -------- Oil & Gas - 5.1% Chesapeake Energy Corp., 7.75%, 2015 1,000 1,090 Ferrellgas Partners LP, 8.75%, 2012 810 891 Premcor Refining Group, Inc., 9.50%, 2013 830 946 Transmontaigne, Inc., 9.13%, 2010 (144A security acquired May & June 2003 for $1,780) (a) 1,750 1,872 Universal Compression, Inc., 7.25%, 2010 2,000 2,080 Western Resources, Inc., 9.75%, 2007 870 989 -------- 7,868 -------- Paper - 3.5% Georgia-Pacific Corp., 8.00%, 2014 1,000 1,085 8.00%, 2024 (144A security acquired Dec. 2003 for $1,000) (a) 1,000 1,020 Jefferson Smurfit Corp., 7.50%, 2013 1,000 1,045 MDP Acquisitions PLC, 9.63%, 2012 1,100 1,232 Smurfit Capital Funding PLC, 7.50%, 2025 1,050 1,022 -------- 5,404 -------- Printing & Publishing - 9.3% American Media Operation, Inc., 10.25%, 2009 500 533 8.88%, 2011 210 228 The Notes to Financial Statements are an integral part of these statements. - -------------------------------------------------------------------------------- CIGNA High Income Shares Investments in Securities 7 December 31, 2003 (Continued) Principal Value (000) (000) - ---------------------------------------------------------------------------------------- Printing & Publishing (continued) Dex Media East/West LLC, 9.88%, 2009 $ 500 $ 573 12.13%, 2012 980 1,205 8.00%, 2013 (144A security acquired Nov. 2003 for $750) (a) 750 788 9.88%, 2013 (144A security acquired Aug. 2003 for $500) (a) 500 581 Goss Holdings, Inc., 12.25%, 2005 (b) (c) (e) 2,764 -- Houghton Mifflin Co., 8.25%, 2011 820 877 9.88%, 2013 410 451 Liberty Group, Inc., 9.38%, 2008 825 833 Mail Well I Corp., 8.75%, 2008 500 499 Primedia, Inc., 8.88%, 2011 1,595 1,683 8.00%, 2013 (144A security acquired May 2003 for $746) (a) 750 765 Quebecor Media Inc., 11.13%, 2011 1,485 1,719 RH Donnelley Finance Corp., I 10.88%, 2012 (144A security acquired Nov. 2002 for $760) (a) 760 902 Vertis, Inc., 9.75%, 2009 1,000 1,086 10.88%, 2009 1,000 1,062 Von Hoffman Corp., 10.25%, 2009 (144A security acquired Oct. 2003 for $524) (a) 500 532 -------- 14,317 -------- Restaurants - 0.5% Buffets, Inc., 11.25%, 2010 400 431 Dominos, Inc., 8.25%, 2011 (144A security acquired July 2003 for $261) (a) 250 268 -------- 699 -------- Retail - 5.7% General Nutrition Centers, Inc., 8.50% 2010 (144A security acquired Nov. 2003 for $1,008) (a) 1,000 1,025 Rent-A-Center, Inc., 7.50%, 2010 2,250 2,385 Principal Value (000) (000) - ---------------------------------------------------------------------------------------- Retail (continued) Rite Aid Corp., 8.13%, 2010 $ 250 $ 269 7.70%, 2027 2,750 2,516 Saks, Inc., 7.38%, 2019 2,500 2,550 -------- 8,745 -------- Service - 8.6% Alderwoods Group, Inc., 12.25%, 2009 2,075 2,334 Corrections Corp. of America, 7.50%, 2011 1,000 1,050 Iron Mountain, Inc., 7.75%, 2015 1,000 1,053 6.63%, 2016 1,000 977 Johnsondiversey Holdings, Inc., Step Coupon (0% to 5/15/07), 2013 (144A security acquired Sep. & Nov. 2003 for $1,062) (a) 1,500 1,155 Lodgenet Entertainment Corp., 9.50%, 2013 1,500 1,650 NBC Acquisition Corp., Step Coupon (10.75% to 2/15/09), 2009 (e) 1,920 1,999 Service Corp. International, 7.70%, 2009 1,382 1,475 URS Corp., 11.50%, 2009 1,030 1,170 Wesco Distribution, Inc., 9.13%, 2008 410 424 -------- 13,287 -------- Technology - 0.5% Lucent Technologies, Inc., 5.50%, 2008 250 233 6.45%, 2029 750 590 -------- 823 -------- Telecommunications - 18.3% ACC Escrow Corp., 10.00%, 2011 (144A security acquired July, Aug. & Oct. 2003 for $1,799) (a) 1,750 1,951 American Tower Corp., 9.38%, 2009 2,750 2,929 Centennial Communications Corp., 10.13%, 2013 1,000 1,098 Cincinnati Bell, Inc., 7.25%, 2013 (144A security acquired Sep. 2003 for $981) (a) 1,000 1,050 8.38%, 2014 (144A security Oct. 2003 for $504) (a) 500 538 The Notes to Financial Statements are an integral part of these statements. - -------------------------------------------------------------------------------- CIGNA High Income Shares Investments in Securities 8 December 31, 2003 (Continued) Principal Value (000) (000) - --------------------------------------------------------------------------------- Telecommunications (continued) Crown Castle International Corp., 9.00%, 2011 $ 500 $ 534 7.50%, 2013 (144A security acquired Nov. & Dec. 2003 for $1,218) (a) 1,250 1,256 GCI, Inc., 9.75%, 2007 840 863 Level 3 Communications, Inc., 9.13%, 2008 500 455 10.75%, 2011 (144A security acquired Oct. & Nov. 2003 for $1,816) (a) 1,750 1,851 Nextel Communications, Inc., 9.38%, 2009 685 747 Nextel Partners, Inc., 8.13%, 2011 2,000 2,130 Poland Telecom Finance BV, 14.00%, 2007 (b) (e) 3,000 -- Qwest Communications International, Inc., 7.00%, 2009 2,230 2,213 8.88%, 2012 (144A security acquired Aug. & Oct. 2002 for $1,208) (a) 1,390 1,595 6.50%, 2018 1,450 1,276 Rogers Cantel, Inc., 8.80%, 2007 420 432 Rogers Wireless Communications, Inc. 9.63%, 2011 640 765 Rural Cellular Corp., 9.75%, 2010 250 244 SBA Communications Corp., 10.25%, 2009 2,150 2,112 Spectrasite, Inc., 8.25%, 2010 1,900 2,028 Triton PCS Corp., 8.75%, 2011 2,120 2,099 -------- 28,166 -------- Textiles - 1.4% Philips-Van Heusen Corp. 8.13%, 2013 2,000 2,120 -------- Utilities - 8.7% Calpine Corp., 4.00%, 2006 (convertible to 55.3403 shares at $5.63 until 12/26/06) 1,000 977 Coastal Corp., 7.50%, 2006 800 780 7.75%, 2010 1,500 1,416 El Paso Corp. 6.75%, 2009 800 766 7.88%, 2012 1,270 1,200 Midland Funding II, 11.75%, 2005 2,474 2,672 SESI LLC, 8.88%, 2011 840 916 Principal Value (000) (000) - --------------------------------------------------------------------------------- Utilities (continued) Tennessee Gas Pipeline Co., 7.50%, 2017 $ 2,000 $ 2,065 8.38%, 2032 790 838 Williams Cos., Inc., 8.13%, 2012 1,550 1,728 -------- 13,358 -------- Total Bonds and Notes (Cost - $203,860) 213,276 -------- Number of Shares ------ COMMON STOCK - 0.0% Health Care - 0.0% Mediq, Inc. (Cost - $6,197) (c) (d) (e) 11,973 -- -------- PREFERRED STOCK - 2.1% Broadcasting & Media - 0.5% Emmis Communications Corp., 6.25% 15,000 750 -------- Cable TV - 1.0% CSC Holdings, Inc., 11.13% 14,963 1,571 -------- Telecommunications - 0.6% Crown Castle International Corp., 6.25% 20,000 876 -------- Total Preferred Stock (Cost - $2,728) 3,197 -------- WARRANTS - 0.0% Doe Run Resources Corp., Exp. 2012 (c) 9 -- Pliant Corp., Exp. 2010 (144A security acquired Sep. 2000 for $135) (a) (c) (e) 3,700 -- -------- Total Warrants (Cost - $135) -- -------- SHORT-TERM OBLIGATION - 1.8% Fannie Mae, 0.80%, 1/2/04 (Cost - $2,730) 2,730 2,730 -------- TOTAL INVESTMENTS IN SECURITIES - 142.1% (Total Cost - $215,650) (f) 219,203 Liabilities in excess of Cash and Other Assets - (42.1%) (64,905) -------- NET ASSETS - 100% $154,298 ======== The Notes to Financial Statements are an integral part of these statements. - -------------------------------------------------------------------------------- CIGNA High Income Shares Investments in Securities 9 December 31, 2003 (Continued) - ---------------------------------------------------------------------------------- NOTES TO INVESTMENTS IN SECURITIES (a) Indicates restricted security; the aggregate value of restricted securities is $40,252,013 (aggregate cost $38,110,713), which is approximately 26.1% of net assets. Valuations have been furnished by brokers trading in the securities or a pricing service for all restricted securities. (b) Defaulted security due to bankruptcy. (c) Fair valued security. (d) Non-income-producing security. (e) Illiquid security. Tax Information (f) At December 31, 2003, the net unrealized appreciation of investments, based on cost for federal income tax purposes of $215,349,966, was as follows: Aggregate gross unrealized appreciation for all investments in which there was an excess of value over tax cost $17,516,141 Aggregate gross unrealized depreciation for all investments in which there was an excess of tax cost over value (13,663,038) ----------- Unrealized appreciation - net $ 3,853,103 =========== - -------------------------------------------------------------------------------- - --------------------------------------------------------- Quality Ratings* of Long-Term Bonds and Notes (Unaudited) December 31, 2003 Market % of Value Market (000) Value - --------------------------------------------------------- Ba/BB $ 42,677 20.0% B/B 130,549 61.2 Below B 40,050 18.8 -------- ----- $213,276 100.0% ======== ===== *The higher of Moody's or Standard & Poor's Ratings. - --------------------------------------------------------- The Notes to Financial Statements are an integral part of these statements. - -------------------------------------------------------------------------------- CIGNA High Income Shares 10 Statement of Assets and Liabilities December 31, 2003 (In Thousands) Assets: Investments in securities at value $219,203 Cash 310 Interest and dividends receivable 4,739 Investment for Trustees' deferred compensation plan 231 -------- Total assets 224,483 -------- Liabilities: Loan payable 68,000 Dividend payable 1,511 Deferred Trustees' fees payable 231 Advisory fees payable 135 Accrued interest payable 134 Audit and legal fees payable 49 Shareholder reports payable 43 Custodian fees payable 34 Insurance expense payable 29 Administrative services fees payable 14 Other 5 -------- Total liabilities 70,185 -------- Net Assets (Equivalent to $2.86 per share based on 53,948 shares of beneficial interest outstanding; unlimited number of shares authorized) $154,298 ======== Components of Net Assets: Paid in capital $401,289 Undistributed net investment income 630 Accumulated net realized loss (251,174) Net unrealized appreciation of investments 3,553 -------- Net Assets $154,298 ======== Cost of Investments $215,650 ======== Statement of Operations For the Year Ended December 31, 2003 (In Thousands) Investment Income: Income: Interest $20,258 Dividends 82 ------- Total income 20,340 Expenses: Investment advisory fees $1,519 Interest expense 1,078 Shareholder reports 143 Custodian fees 105 Audit and legal fees 89 Administrative services fees 66 Stock exchange fees 50 Transfer agent fees 46 Trustees' fees 38 Insurance expense 29 ------ Total expenses 3,163 ------ Net Investment Income 17,177 ------- Realized and Unrealized Gain (Loss) on Investments: Net realized loss from investments (21,529) Net change in unrealized depreciation of investments 43,218 ------- Net Realized and Unrealized Gain on Investments 21,689 ------- Net Increase in Net Assets Resulting from Operations $38,866 ======= The Notes to Financial Statements are an integral part of these statements. - -------------------------------------------------------------------------------- CIGNA High Income Shares 11 Statements of Changes in Net Assets (In Thousands) For the Year Ended December 31, ------------------------------- 2003 2002 --------- -------- Operations: Net investment income $ 17,177 $ 19,233 Net realized loss from investments (21,529) (110,705) Net change in unrealized depreciation on investments 43,218 77,483 --------- -------- Net increase (decrease) from operations 38,866 (13,989) --------- -------- Dividends and Distributions: From net investment income (15,126) (15,130) From return of capital - (4,522) --------- -------- Total dividends and distributions (15,126) (19,652) --------- -------- Capital Share Transactions: Net increase from 389 and 466 capital shares issued to shareholders in reinvestment of distributions, respectively 1,020 1,486 --------- -------- Net increase from Fund share transactions 1,020 1,486 --------- -------- Net Increase (Decrease) in Net Assets 24,760 (32,155) Net Assets: Beginning of period 129,538 161,693 --------- -------- End of period * $154,298 $129,538 ========= ======== * includes undistributed and (overdistributed) net investment income of: $ 630 $ (303) ========= ======== Statement of Cash Flows For the Year Ended December 31, 2003 (In Thousands) Cash Provided (Used) by Financing Activities: Increase in borrowing $ 17,000 Dividends paid in cash (13,827) -------- Total amount provided 3,173 -------- Cash Provided (Used) by Operations: Purchases of portfolio securities (202,540) Proceeds from sales of portfolio securities 186,915 -------- Total amount provided (15,625) -------- Net Investment Income (excludes net amortized discount and premium of $2,054) 15,123 Net change in receivables/payables related to operations (342) Net purchase of short-term investment securities (2,030) -------- Total other amounts 12,751 -------- Net increase in cash 299 Cash, beginning of period 11 -------- Cash, End of Period $ 310 ======== The Notes to Financial Statements are an integral part of these statements. - -------------------------------------------------------------------------------- CIGNA High Income Shares 12 Financial Highlights - ------------------------------------------------------------------------------------------------------------------------------------ For the Year Ended December 31, --------------------------------------------------------------------- 2003 2002 2001(c) 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Per Share Operating Performance: Net asset value, beginning of period $ 2.42 $ 3.05 $ 3.88 $ 5.92 $ 6.39 Income from investment operations Net investment income (a) 0.32 0.36 0.55 0.68 0.81 Net realized and unrealized gain (loss) on investments 0.40 (0.62) (0.81) (1.99) (0.46) ------- -------- ------- -------- -------- Total from investment operations 0.72 (0.26) (0.26) (1.31) 0.35 ------- -------- ------- -------- -------- Less dividends and distributions: Dividends from net investment income (0.28) (0.29) (0.57) (0.73) (0.82) Distributions from capital -- (0.08) -- -- -- -------- -------- ------- -------- -------- Total dividends and distributions (0.28) (0.37) (0.57) (0.73) (0.82) -------- -------- ------- -------- -------- Net asset value, end of period $ 2.86 $ 2.42 $ 3.05 $ 3.88 $ 5.92 ======== ======== ======= ======== ======== Market value, end of period $ 2.87 $ 2.32 $ 3.36 $ 4.19 $ 5.38 ======== ======== ======= ======== ======== Total Investment Return: Per share market value 37.23% (21.23)% (6.85)% (10.05)% (16.18)% Per share net asset value (b) 31.25% (9.07)% (7.31)% (24.21)% 5.78% Ratios to Average Net Assets Expenses (includes interest expense) 2.21% 2.53% 3.43% 4.16% 3.40% Expenses (excludes interest expense) 1.46% 1.49% 1.26% 1.09% 1.02% Net investment income 11.99% 13.29% 15.56% 13.13% 13.05% Portfolio Turnover 93% 134% 82% 38% 49% Net Assets, End of Period (000 omitted) $154,298 $129,538 $161,693 $202,401 $305,352 (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 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. The Notes to Financial Statements are an integral part of these statements. - -------------------------------------------------------------------------------- CIGNA High Income Shares Notes To Financial Statements 13 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. The Fund's Board of Trustees has designated the Pricing Committee of TimesSquare Capital Management, Inc. to make, pursuant to procedures approved by the Board and under the Board's supervision, all necessary determinations of fair value for the portfolio securities for which market quotations are not readily available. When fair valuing securities, the Pricing Committee takes into account factors such as fundamental and analytical information about the security, the nature and duration of any restrictions on disposition of the security, market information (including, for example, factors such as historical price relationships and valuations for securities with similar characteristics), and evaluation of significant market events. If events occurring after the close of the principal market in which securities are traded (but before the close of regular trading on the NYSE) are believed to materially affect the value of those securities, such securities are valued at their fair value, taking such events into account. B. 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. - -------------------------------------------------------------------------------- CIGNA High Income Shares Notes To Financial Statements 14 (Continued) 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 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 premium amortization, deferred compensation, 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, 2003, the Fund decreased undistributed net investment income by $1,118,056, decreased accumulated net realized loss by $2,871,198 and decreased paid in capital by $1,753,142. 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 - -------------------------------------------------------------------------------- CIGNA High Income Shares Notes To Financial Statements 15 (Continued) assets; or (C) 100% of the borrowing base eligible assets, as determined under the terms of the Agreement. The Agreement expires on October 31, 2006. 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 year ended December 31, 2003, were $60,603,836, at an average annual interest rate of approximately 1.78%. As of December 31, 2003, the Fund was paying interest at an annual rate of 1.62% 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 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 year ended December 31, 2003, the Fund paid or accrued $66,181. 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 year ended December 31, 2003, were $202,540,053 and $186,915,131 respectively. 6. Tax Information. As of December 31, 2003, the components of distributable earnings (excluding unrealized appreciation/(depreciation) disclosed in the Notes to Investment in Securities) on a tax basis consisted of undistributed ordinary income of $315,596 and a capital loss carryover of $250,975,546, of which $28,686,393, $35,363,213, $55,878,285, $102,576,339 and $28,471,316 will expire in 2007, 2008, 2009, 2010 and 2011, respectively. For 2003, the Fund had no post-October loss. 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. - -------------------------------------------------------------------------------- CIGNA High Income Shares 16 Report of Independent Auditors To the Trustees and Shareholders of CIGNA High Income Shares In our opinion, the accompanying statement of assets and liabilities, including the investments in securities, and the related statements of operations, of changes in net assets, and of cash flows and the financial highlights present fairly, in all material respects, the financial position of CIGNA High Income Shares (the "Fund") at December 31, 2003, the results of its operations, the changes in its net assets, and cash flows and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, 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, 2003 by correspondence with the custodian, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 16, 2004 - -------------------------------------------------------------------------------- CIGNA High Income Shares 17 (Unaudited) 2003 Tax Information During 2003, the Fund declared dividends of $0.281 per share. For federal income tax purposes, this included ordinary income dividends of $0.281 per share. There were no capital gain distributions. A regular monthly distribution of $0.028, which was declared in December 2003, complied with a provision in the Internal Revenue Code which requires the Fund to satisfy certain distribution requirements for a calendar year. Such distributions must be declared prior to December 31 and paid prior to the following January 31. Please note that the December 2003 distribution is still considered a 2003 dividend, even though it was received in January 2004. Dividends reported to you as ordinary income dividends on Form 1099, whether received as stock or cash, must be included in your federal income tax return and must be reported by the Fund to the Internal Revenue Service. The Fund hereby designates 0.54% or the maximum amount allowable of its net taxable income as qualified dividends as provided in the Jobs and Growth Tax Relief Reconciliation Tax Act of 2003. The 2003 Form 1099-DIV you receive will show the tax status of all distributions paid to you during the year. Approximately 1% of ordinary income dividends would be eligible for the dividend received deduction (available to corporate shareholders only). Automatic Dividend and Distribution Investment Plan Shareholders may elect to have all distributions of dividends and capital gains automatically reinvested by EquiServe (the "Dividend Paying Agent") as plan agent under the Automatic Dividend and Distribution Investment Plan (the "Plan"). Shareholders who do not elect to participate in the Plan will receive all distributions from the Fund in cash, paid by check mailed directly to the shareholder by the Dividend Paying Agent. Shareholders may elect to participate in the Plan and to have all distributions of dividends and capital gains automatically reinvested by sending written instructions to the Dividend Paying Agent at the address set forth below on the following page. If the Trustees of the Fund declare a dividend or determine to make a capital gains distribution payable either in shares of the Fund or in cash, as shareholders may have elected, non-participants in the Plan will receive cash and participants in the Plan will receive the equivalent in shares. If the market price of the shares as of the close of business on the payment date for the dividend or distribution is equal to or exceeds their net asset value as determined as of the close of business on the payment date, participants will be issued shares of the Fund at a value, equal to the higher of net asset value or 95% of the market price. If net asset value exceeds the market price of the shares at such time, or if the Fund declares a dividend or other distribution payable only in cash, the Dividend Paying Agent will, as agent for Plan participants, buy shares in the open market, on the New York Stock Exchange or elsewhere, for the participants' accounts. If, before the Dividend Paying Agent has completed its purchases, the market price exceeds the net asset value of the shares, the average per share purchase price paid by the Dividend Paying Agent may exceed the net asset value of the shares, resulting in the acquisition of fewer shares than if the dividend or distribution had been paid in shares issued by the Fund. Participants in the Plan may withdraw from the Plan upon written notice to the Dividend Paying Agent. When a participant withdraws from the Plan or upon termination of the Plan as provided below, - -------------------------------------------------------------------------------- CIGNA High Income Shares 18 (Unaudited) certificates for the whole shares credited to his or her account under the Plan will be issued and a cash payment will be made for any fraction of a share credited to such account. The Dividend Paying Agent will maintain all shareholders' accounts in the Plan and will furnish written confirmation of all transactions in the account, including information needed by shareholders for tax records. Shares in the account of each Plan participant (other than participants whose shares are registered in the name of banks, brokers, nominees or other third parties) will be held by the Dividend Paying Agent in the non-certificated form in the name of the participant, and each shareholder's proxy will include those shares purchased pursuant to the Plan. At no additional cost, shareholders of the Fund may send to the Dividend Paying Agent for deposit into their Plan account those share certificates in their possession. Shareholders may also send share certificates to the Dividend Paying Agent for the Dividend Paying Agent to hold in a book-entry account outside of the Plan. Whether or not shareholders participate in the Plan, they may elect by notice to the Dividend Paying Agent to have the Dividend Paying Agent sell their noncertificated book-entry shares. The Dividend Paying Agent will deduct from the sale proceeds $2.50 per transaction plus $0.15 per share and remit the balance of the sales proceeds to the shareholder. The Dividend Paying Agent will sell the noncertificated shares on the first trading day of the week immediately following receipt of written notification by the Dividend Paying Agent. In the case of shareholders, such as banks, brokers or nominees which hold shares for others who are the beneficial owners, the Dividend Paying Agent will administer the Plan on the basis of number of shares certified, from time to time, by the record shareholders as representing the total amount registered in the record shareholder's name and held for the account of beneficial owners who are to participate in the Plan. Investors whose shares are held in the name of banks, brokers or nominees should confirm with such entities that participation in the Plan will be possible, and should be aware that they may be unable to continue to participate in the Plan if their account is transferred to another bank, broker or nominee. Those who do participate in the Plan may subsequently elect not to participate by notifying such entities. There is no charge to participants for reinvesting dividends or distributions, except for certain brokerage commissions, as described below. The Dividend Paying Agent's fees for the handling of the reinvestment of dividends and distributions will be paid by the Fund. However, each participant will pay a pro rata share of brokerage commissions incurred with respect to the Dividend Paying Agent's open market purchases in connection with the reinvestment of dividends or distributions. Participants in the Plan should be aware that they will realize capital gains and income for tax purposes upon dividends and distributions, although they will not receive any payment of cash. Experience under the Plan may indicate that changes are desirable. Accordingly, the Fund reserves the right to amend or terminate the Plan as applied to any dividend or distribution paid subsequent to written notice of the change sent to the participants in the Plan at least 90 days before the record date for such dividend or distribution. The Plan also may be amended or terminated by the Dividend Paying Agent on at least 90 days' written notice to participants in the Plan. All correspondence concerning the Plan, including requests for additional information or an application brochure or general inquiries about your account, should be directed to EquiServe, P.O. Box 43011, Providence, RI 02940-3011 or you may call toll free 1-800-426-5523. - -------------------------------------------------------------------------------- CIGNA High Income Shares 19 (Unaudited) Trustees and Officers Shareholders elect a Board that oversees the Fund's operations. The Board appoints officers who are responsible for day-to-day business decisions based on policies set by the Board. The following is a list of the Fund's Board of Trustees and officers. Each Trustee's term of office will be until the next annual meeting of shareholders or until the election of the Trustee's successor. Number of Name, Position Length Portfolios in Other Address* Held with of Time Principal Occupation(s) During Fund Complex Directorships And Age Fund Served Past 5 Years Overseen Held by Trustee - ------------------------------------------------------------------------------------------------------------------------------ Independent Trustees Russell H. Trustee Trustee since Vice President (Investor Relations, 14 -- Jones 1995 Public Relations) and Treasurer, 59 Kaman Corporation (helicopters and aircraft components, industrial distribution) Paul J. Trustee Trustee since Special Advisor to Board of 14 Western McDonald 1995 Directors, Friendly Ice Cream Massachusetts 60 Corporation (family restaurants Electric Company and dairy products) Marnie Trustee Trustee since Diocesan Consultant, Episcopal 14 Boston Mutual Life Wagstaff 2001 Diocese of Connecticut; Previously, Insurance Company Mueller Visiting Professor of Health 64 Economics, Wesleyan University Carol Ann Trustee Trustee since Director and Chair of Audit 14 Reed and Barton Hayes 2003 Committee, Reed and Barton Corporation 59 Corporation Affiliated Trustees and Fund Officers Richard H. Trustee, Trustee, Managing Director, CIGNA 14 Director of various Forde Chairman of Chairman and Retirement & Investment Services subsidiaries of 50 the Board and President since and TimesSquare Capital CIGNA Corporation President 1998 Management, Inc. David P. Trustee Trustee since Chief Investment Officer, CIGNA 14 Director of various Marks 2003 Retirement & Investment Services subsidiaries of 57 CIGNA Corporation Alfred A. Vice President Officer Since CIGNA Funds Treasurer; Assistant 14 -- Bingham III and Treasurer 1982 Vice President, TimesSquare Capital 59 Management, Inc. Jeffrey S. Vice President Officer Since Senior Counsel, CIGNA 14 -- Winer and Secretary 1993 Corporation 46 - ------------------------------------------------------------------------------------------------------------------------------ * All Trustees and officers have an address c/o TimesSquare Capital Management, Inc., 280 Trumbull Street, H16C, Hartford, CT 06103. - -------------------------------------------------------------------------------- CIGNA High Income Shares 20 - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- [CIGNA LOGO](R) ------------------ PRESORTED STANDARD CIGNA High Income Shares U.S. POSTAGE 3 Newton Executive Park PAID Suite 200 SO. HACKENSACK, NJ Newton, MA 02462 PERMIT 750 ------------------ Printed on recycled paper 542776 12/03 Item 2. Code of Ethics. The Registrant has adopted a Code of Ethics that applies to its principal executive officer and principal financial officer. The Registrant undertakes to provide to any person without charge, upon request, a copy of the Code of Ethics. Such request can be made to the Secretary of the Registrant, c/o TimesSquare Capital Management, Inc., 280 Trumbull Street, H16C, Hartford, CT 06103. Item 3. Audit Committee Financial Expert. The Registrant's Board of Trustees has determined that Carol Ann Hayes, Russell H. Jones and Paul J. McDonald are "audit committee financial experts", all of whom are "independent." Mr. Jones serves as Senior Vice President, Chief Investment Officer and Treasurer of Kaman Corporation. His responsibilities include communications with financial analysts concerning Kaman Corporation. Item 4. Principal Accountant Fees and Services. (a) Audit Fees For the audit of the Registrant's annual financial statements for the fiscal year ended December 31, 2002 and December 31, 2003, included in the Registrant's annual report to shareholders for those fiscal years, PricewaterhouseCoopers LLP ("PWC") billed the Registrant $35,000 and $39,000, respectively. (b) Audit-Related Fees For the fiscal years ended December 31, 2002 and December 31, 2003, PWC billed the Registrant $9,800 and $11,300, respectively, for assurance or related services related to the audit of the Registrant's financial statements. These services related to performing agreed upon procedures relating to Registrant's revolving line of credit. (c) Tax Fees For the fiscal years ended December 31, 2002 and December 31, 2003, PWC billed the Registrant $5,075 and $5,700, respectively, for reviewing the Registrant's federal income tax and excise tax returns and reviewing excise distribution estimate calculations. (d) All Other Fees For the fiscal years ended December 31, 2002 and December 31, 2003, PWC did not bill the Registrant for any other products and services. (e)(1) The Audit Committee has not developed pre-approval policies and procedures relating to the provision of services to the Registrant by the Registrant's independent accountant. (e)(2) For the fiscal years ended December 31, 2002 and December 31, 2003, 100% of the PWC fees described above under the captions "Audit Related Fees", "Tax Fees" and "All Other Fees" were approved by the Registrant's Audit Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2.01 of Regulation S-X. For the fiscal years ended December 31, 2002 and December 31, 2003, PWC did not bill any fees that were required to be approved by the Registrant's Audit Committee pursuant to paragraph (c)(7)(ii)(C) of Rule 2.01 of Regulation S-X. (f) Not applicable. (g) The aggregate non-audit fees billed by PWC for services rendered to TimesSquare Capital Management, Inc. ("TimesSquare"), the investment adviser to the Registrant, and other entities controlling, controlled by, under common control with TimesSquare that provide ongoing services to the Registrant for fiscal years ending December 31, 2002 and 2003, were $128,250 and $100,148, respectively. (h) In considering PWC's independence, the Audit Committee considered whether the provision of non-audit services rendered by PWC to TimesSquare and other entities controlling, controlled by, under common control with TimesSquare that provide ongoing services to the Registrant that were not pre-approved pursuant to paragraph (c)(7)(ii)(C) of Rule 2.01 of Regulation S-X was compatible with maintaining PWC's independence. Item 5. Audit Committee Listed Registrants. Registrant has a separately-designated standing audit committee designated in accordance with section 3(a)(58)(A) of the Securities Exchange Act of 1934. The committee members are Carol Ann Hayes, Russell H. Jones, Paul J. McDonald and Marnie Wagstaff Mueller. Item 6. [Reserved] Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. The Registrant's policies and procedures that it uses to determine how to vote proxies relating to portfolio securities are attached hereto. Item 8. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. None. Item 9. Submission of Matters to a Vote of Security Holders. The Registrant has adopted a nominating committee charter that sets forth procedures by which shareholders may recommend nominees to the Registrant's Board of Trustees. The charter is attached as an exhibit hereto. Item 10. Controls and Procedures. (a) The officers providing the certifications in this report in accordance with Rule 30a-2 under the Investment Company Act of 1940 have concluded, based on their evaluation of the Registrant's disclosure controls and procedures (as such term is defined in such rule), that such controls and procedures are adequate and reasonably designed to achieve the purposes described in paragraph (c) of such rule. (b) There were no changes in the Registrant's internal controls over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) that occurred during the Registrant's last fiscal half-year (the Registrant's second fiscal half-year in the case of an annual report) that have materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting. Item 11. Exhibits. (a)(1) Code of Ethics referred to in Item 2, filed as an exhibit hereto. (a)(2) Proxy voting policies referred to in Item 7, filed as an exhibit hereto. (a)(3) Nominating committee charter referred to in Item 9, filed as an exhibit hereto. (a)(4) The certifications required by Rule 30a-2 of the Investment Company Act of 1940, as amended, and Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, filed as exhibits hereto. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) CIGNA HIGH INCOME SHARES /s/ Jeffrey S. Winer By: --------------------------------------------------- Jeffrey S. Winer, Vice President and Secretary Date: March 5, 2004. Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Richard H. Forde By (Signature and Title)* ------------------------------------------------------ Richard H. Forde, Chairman of the Board and President Date: March 5, 2004. /s/ Alfred A. Bingham III By (Signature and Title)* ------------------------------------------------------ Alfred A. Bingham III, Vice President and Treasurer Date: March 5, 2004.