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) 534-5576
Registrants' telephone number, including area code
Date of fiscal year end: December 31, 2004
Date of reporting period: June 30, 2004
Item 1. Reports to Stockholders.
CIGNA HIGH
INCOME SHARES
- --------------------------------------------------------------------------------
Semiannual Report
June 30, 2004
[LOGO](R)
CIGNA
[LOGO](R) ------------------
CIGNA PRESORTED STANDARD
U.S. POSTAGE
CIGNA High Income Shares PAID
3 Newton Executive Park SO. HACKENSACK, NJ
Suite 200 PERMIT 750
Newton, MA 02462 ------------------
Printed on recycled paper CGACM-SAR-04
542776 6/04
- --------------------------------------------------------------------------------
1
Dear Shareholders:
Our commentary for CIGNA High Income Shares (the "Fund") covering the six
months ended June 30, 2004 follows.
Market Summary
The high yield bond market exhibited multiple personalities in the first
quarter. The first three weeks of January were exceptionally strong, a
carryover from last year's robust strength. The combination of the NASDAQ
trading off and a surge in lower quality new issues in late January and early
February caused the high yield bond market to pull back in February. Given the
lack of clear conviction in the market, yield spreads remained virtually
unchanged in March and produced a "coupon clipping" return for the month. While
deeply discounted triple-C and below rated bonds started off the year strongly,
similar to last year, they faded in February and March.
The second quarter was a challenging environment for fixed income investors. As
a result of strong economic data and comments from the Federal Reserve Chairman
Alan Greenspan, interest rates rose considerably during the quarter. On a
relative basis, high yield bonds fared reasonably well.
The high yield market rebounded in June after experiencing declines in the
first two months of the second quarter. Equities and high yield bonds performed
favorably in June, as investors became more comfortable that the U.S. economy
could sustain meaningful growth and that inflation pressures could be contained
with a moderate rise in interest rates. Industrial production posted its
biggest gain in nearly six years, climbing by 1.1% in May. The index of leading
economic indicators rose by 0.5% in May. Employment data in May confirmed the
economy's emergence from the jobless recovery that had caused concern earlier
in the year. Employers hired 235,000 new workers in May, while the unemployment
rate held steady at 5.6%. Though job growth continued in June with payrolls
expanding by 112,000, it was less than expected.
The high yield market performed well in June for several reasons. First, the
fundamentals of high yield issuers continued to strengthen on the heels of a
robust U.S. economy. Default rates continued to decline monthly, dropping to
3.43% at the end of May from 5.24% at December 31, 2003. Second, supply and
demand came better into balance. After approximately $4.0 billion in high yield
mutual fund outflows in May, high yield funds had positive inflows in June.
Lastly, after a meaningful upward movement in interest rates in April and May,
rates stabilized in June.
At June 30, 2004, the average maturity of the Fund was 7.6 years, shorter than
the benchmark maturity of 8.2 years. The Fund's average coupon was 8.79% versus
8.51% for the benchmark. The Fund remains broadly diversified, with holdings in
213 issues in 31 different industries. The Fund's leverage during the quarter
remained below 33% of assets and was 28% at June 30, 2004.
Fund Performance
The Fund returned -1.44% for the quarter and 0.25% for the year-to-date (based
on its net asset value), compared with the Lehman Brothers High Yield Bond
Index returns of -0.97% and 1.35%, respectively. The Fund's return for the
quarter, based on the market value of its shares traded on the New York Stock
Exchange, was -5.48%.
By not deviating from investing in better quality, primarily single-B credits,
the Fund underperformed early in the first quarter. Throughout the second
quarter, our sub-advisor, Shenkman Capital Management, proactively pruned long
duration positions in the portfolio. In addition,
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2
exposure to the telecommunications sector, which has shown increased volatility
this year, was reduced. The portfolio has not experienced any defaults for the
year-to-date and is well positioned from a credit perspective.
Outlook
Our expectation is that rising interest rates should not pose a major
impediment in the second half of the year, as we believe the magnitude of
increases in short-term rates has already been discounted in the bond markets.
A vibrant economy and a declining default rate trend are two key factors that
will likely influence performance in the second half of the year.
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, 2004 (Unaudited)
Principal Value
(000) (000)
- -------------------------------------------------------------------------------------------
BONDS AND NOTES - 140.1%
Aerospace - 5.8%
Aviall, Inc., 7.63%, 2011 $ 1,750 $ 1,829
BE Aerospace, Inc.,
8.00%, 2008 1,500 1,395
9.50%, 2008 1,000 965
Communications & Power Industries, Inc.,
8.00%, 2012 500 500
Hexcel Corp., 9.75%, 2009 1,750 1,835
Sequa Corp., 8.88%, 2008 1,500 1,582
Titan Corp., 8.00%, 2011 (144A security
acquired May 2003 for $506) (a) 500 507
--------
8,613
--------
Auto/Trucks - 6.7%
Accuride Corp., 9.25%, 2008 1,625 1,657
Dana Credit Corp., 8.38%, 2007 (144A security
acquired May, July & Dec. 2002 for $1,770) (a) 1,850 1,998
Delco Remy International, Inc.,
11.00%, 2009 500 527
9.38%, 2012 (144A security acquired April 2004
for $647) (a) 650 632
Dura Operating Corp., 8.63%, 2012 750 765
Tenneco Automotive, Inc., 11.63%, 2009 2,500 2,687
TRW Automotive, Inc.,
9.38%, 2013 1,106 1,247
11.00%, 2013 273 322
--------
9,835
--------
Beverages/Food - 5.9%
American Seafoods Group LLC, 10.13%, 2010 640 765
Del Monte Corp., 8.63%, 2012 610 653
Dole Food, Inc.,
7.25%, 2010 750 741
8.88%, 2011 1,000 1,058
Land O' Lakes, Inc., 8.75%, 2011 650 598
Michael Foods, Inc., 8.00%, 2013 (144A security
acquired Nov. 2003 for $600) (a) 600 620
Pinnacle Foods Holding Corp., 8.25%, 2013 (144A
security acquired Nov. & Dec. 2003 for $1,015) (a) 1,000 965
Premier International Foods PLC, 12.00%, 2009 2,100 2,252
Principal Value
(000) (000)
- -------------------------------------------------------------------------------------------
Beverages/Food (continued)
Seminis Vegetable Seeds, Inc., 10.25%, 2013 $ 500 $ 544
Swift & Co., 12.50%, 2010 500 535
--------
8,731
--------
Broadcasting & Media - 4.2%
Allbritton Communications Co., 7.75%, 2012 1,370 1,349
Corus Entertainment, Inc., 8.75%, 2012 550 591
Emmis Operating Co., 6.88%, 2012 (144A security
acquired June 2004 for $487) (a) 500 487
Gray Television, Inc., 9.25%, 2011 750 822
Panamsat Corp., 8.50%, 2012 420 477
Sinclair Broadcast Group,
8.75%, 2011 500 535
8.00%, 2012 1,400 1,432
Warner Music Group, 7.38%, 2014 (144A security
acquired April 2004 for $509) (a) 500 482
--------
6,175
--------
Building Materials - 2.0%
Interface, Inc.,
7.30%, 2008 800 797
10.38%, 2010 350 390
Jacuzzi Brands, Inc., 9.63%, 2010 500 535
Nortek Holdings, Inc., Step Coupon (0% to 11/15/07),
2011 (144A security acquired Nov. 2003 for
$ 1,031) (a) 1,500 1,200
--------
2,922
--------
Cable TV - 5.9%
Charter Communications Holdings LLC,
10.25%, 2010 (144A security acquired
Nov. 2003 for $1,276) (a) 1,250 1,259
8.38%, 2014 (144A security acquired
April 2004 for $500) (a) 500 484
CSC Holdings, Inc., 10.50%, 2016 2,550 2,888
DirecTV Holdings LLC, 8.38%, 2013 1,000 1,106
Insight Midwest LP, 10.50%, 2010 500 545
Mediacom Broadband LLC, 11.00%, 2013 590 625
Mediacom LLC, 8.50%, 2008 1,750 1,768
--------
8,675
--------
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
CIGNA High Income Shares Investments in Securities 4
June 30, 2004 (Unaudited) (Continued)
Principal Value
(000) (000)
- -------------------------------------------------------------------------------------
Chemicals/Plastics - 4.0%
Equistar Chemicals LP,
10.13%, 2008 $ 930 $ 1,018
10.63%, 2011 250 277
Huntsman ICI Chemicals, Inc., 10.13%, 2009 1,855 1,892
Koppers Industry, Inc., 9.88%, 2013 500 548
Lyondell Chemical Co.,
10.88%, 2009 500 522
10.50%, 2013 1,500 1,631
--------
5,888
--------
Consumer Products - 8.9%
American Achievement Corp., 8.25%, 2012 (144A
security acquired Mar. 2004 for $557) (a) 550 558
Elizabeth Arden, Inc., 7.75%, 2014 (144A security
acquired April 2004 for $678) (a) 650 661
FTD, Inc., 7.75%, 2014 500 473
Jafra Cosmetics International, Inc., 10.75%, 2011 2,000 2,215
Jarden Corp., 9.75%, 2012 500 544
Jostens, Inc., 12.75%, 2010 1,380 1,539
Playtex Products, Inc.,
8.00%, 2011 (144A security acquired June
2004 for $518) (a) 500 521
9.38%, 2011 1,000 973
Prestige Brands, Inc., 9.25%, 2012 (144A security
acquired Mar. 2004 for $500) (a) 500 482
Samsonite Corp.,
10.75%, 2008 2,000 2,073
8.88%, 2011 (144A security acquired May 2004
for $700) (a) 700 725
Sealy Mattress Co., 8.25%, 2014 (144A security
acquired Mar. 2004 for $1,000) (a) 1,000 1,005
Simmons Co., 7.88%, 2014 (144A security acquired
June 2004 for $251) (a) 250 255
United Industries Corp., 9.88%, 2009 1,085 1,128
--------
13,152
--------
Containers & Packaging - 6.6%
Crown Euro Holdings S.A., 9.50%, 2011 1,430 1,569
Graham Packaging Co., Inc., 8.75%, 2008 500 503
Step Coupon (10.75% to 1/15/09), 2009 910 936
Principal Value
(000) (000)
- -------------------------------------------------------------------------------------
Containers & Packaging (continued)
Graphic Packaging International, Inc., 9.50%, 2013 $ 1,000 $ 1,085
Greif Brothers Corp., 8.88%, 2012 940 1,015
Owens-Brockway,
8.75%, 2012 1,850 2,016
8.25%, 2013 1,750 1,803
U.S. Can Corp., 10.88%, 2010 750 769
--------
9,696
--------
Environmental - 1.2%
Allied Waste North America, Inc.,
6.13%, 2014 (144A security acquired
Mar. 2004 for $588) (a) 600 552
7.38%, 2014 (144A security acquired
April 2004 for $1,000) (a) 1,000 973
IESI Corp., 10.25%, 2012 250 273
--------
1,798
--------
Gaming - 7.4%
Aztar Corp., 7.88%, 2014 (144A security acquired
June 2004 for $1,778) (a) 1,750 1,768
Boyd Gaming Corp., 7.75%, 2012 1,000 1,010
Caesars Entertainment, Inc., 7.88%, 2010 1,000 1,055
Hard Rock Hotel, Inc., 8.88%, 2013 1,000 1,010
Inn of the Mountain Gods Resort & Casino,
12.00%, 2010 (144A security acquired
Oct. 2003 for $650) (a) 650 721
Isle of Capri Casinos, Inc., 7.00%, 2014
(144A security acquired Feb. 2004 for $1,500) (a) 1,500 1,391
Jacobs Entertainment, Inc., 11.88%, 2009 900 1,004
Pinnacle Entertainment, Inc.,
9.25%, 2007 133 136
8.25%, 2012 (144A security acquired Feb. 2004
for $1,986) (a) 2,000 1,925
Station Casinos, Inc., 6.88%, 2016 1,000 962
--------
10,982
--------
General Industrial - 3.0%
Blount, Inc., 13.00%, 2009 1,500 1,607
Mueller Group, Inc., 10.00%, 2012 (144A security
acquired April 2004 for $1,080) (a) 1,050 1,092
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, 2004 (Unaudited) (Continued)
Principal Value
(000) (000)
- -------------------------------------------------------------------------------------
General Industrial (continued)
Norcross Safety Products LLC, 9.88%, 2011 $ 900 $ 972
Trimas Corp., 9.88%, 2012 730 777
--------
4,448
--------
Grocery - 2.0%
Pathmark Stores, Inc., 8.75%, 2012 1,500 1,500
Stater Brothers Holdings, Inc., 8.13%, 2012 (144A
security acquired June 2004 for $1,502) (a) 1,500 1,506
--------
3,006
--------
Health Care - 6.0%
Alliance Imaging, Inc., 10.38%, 2011 172 180
Extendicare Health Services, Inc., 9.50%, 2010 1,100 1,221
Medex, Inc., 8.88%, 2013 1,000 1,055
NeighborCare, Inc., 6.88%, 2013 (144A security
acquired Oct. 2003 for $750) (a) 750 795
Omega Healthcare Investors, Inc., 7.00%, 2014
(144A security acquired Mar. 2004 for $1,521) (a) 1,500 1,418
Province Healthcare Co., 7.50%, 2013 1,000 965
Select Medical Corp., 7.50%, 2013 500 492
Sybron Dental Specialties, Inc., 8.13%, 2012 250 267
Triad Hospitals, Inc., 7.00%, 2013 900 855
Vanguard Health Systems, Inc., 9.75%, 2011 1,025 1,110
VWR International, Inc., 8.00%, 2014 (144A
security acquired April 2004 for $468) (a) 450 461
--------
8,819
--------
Home Construction - 1.0%
K. Hovnanian Enterprises, Inc., 7.75%, 2013 1,500 1,504
--------
Leasing - 2.7%
H&E Equipment Services LLC, 11.13%, 2012 650 658
United Rentals, Inc.,
7.75%, 2013 1,000 945
7.00%, 2014 (144A security acquired
Jan. 2004 for $1,000) (a) 1,000 890
Williams Scotsman, Inc., 9.88%, 2007 1,520 1,509
--------
4,002
--------
Principal Value
(000) (000)
- -------------------------------------------------------------------------------------
Leisure/Entertainment - 4.9%
AMC Entertainment, Inc., 9.50%, 2011 $ 1,044 $ 1,086
AMF Bowling Worldwide, Inc., 10.00%, 2010 (144A
security acquired Mar. 2004 for $521) (a) 500 512
Intrawest Corp.,
10.50%, 2010 980 1,060
7.50%, 2013 1,000 977
Royal Caribbean Cruises Ltd.,
6.88%, 2013 500 494
7.25%, 2018 1,250 1,213
Six Flags, Inc., 8.88%, 2010 750 742
Town Sports International, Inc., 9.63%, 2011 1,250 1,203
--------
7,287
--------
Lodging/Hotels - 4.8%
Felcor Lodging LP,
7.63%, 2007 500 510
10.00% (Coupon change based on rating), 2008 287 303
9.00% (Coupon change based on rating), 2011 820 847
Gaylord Entertainment Co., 8.00%, 2013 750 760
Hilton Hotels Corp., 3.38%, 2023 (convertible to
44.4444 shares at $18.55 until 4/15/23) 1,000 1,079
Host Marriott Corp.,
9.25%, 2007 780 860
7.88%, 2008 668 686
7.13%, 2013 1,000 980
La Quinta Properties, Inc., 8.88%, 2011 1,000 1,075
--------
7,100
--------
Manufacturing - 0.6%
Polypore, Inc., 8.75%, 2012 (144A security
acquired May 2004 for $850) (a) 850 886
--------
Metals - 0.6%
Alpha Natural Resources LLC, 10.00%, 2012
(144A security acquired May 2004 for $900) (a) 900 945
--------
Oil & Gas - 5.8%
Chesapeake Energy Corp., 7.75%, 2015 750 786
Continental Resources, Inc., 10.25%, 2008 500 516
Exco Resources, Inc., 7.25%, 2011 1,000 1,015
Ferrellgas Partners LP, 8.75%, 2012 810 865
Hornbeck Offshore Services, Inc., 10.63%, 2008 500 546
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
CIGNA High Income Shares Investments in Securities 6
June 30, 2004 (Unaudited) (Continued)
Principal Value
(000) (000)
- ------------------------------------------------------------------------------------------
Oil & Gas (continued)
Premcor Refining Group, Inc., 9.50%, 2013 $ 830 $ 957
Transmontaigne, Inc., 9.13%, 2010 1,750 1,767
Universal Compression, Inc., 7.25%, 2010 2,000 2,060
--------
8,512
--------
Paper - 4.5%
Abitibi-Consolidated, Inc., 6.00%, 2013 500 443
Ainsworth Lumber Co., Ltd., 6.75%, 2014
(144A security acquired Feb. 2004 for $1,004) (a) 1,000 938
Georgia-Pacific Corp.,
8.00%, 2014 1,000 1,087
8.00%, 2024 (144A security acquired
Dec. 2003 for $1,000) (a) 1,000 1,000
Jefferson Smurfit Corp., 7.50%, 2013 1,000 995
MDP Acquisitions PLC, 9.63%, 2012 1,600 1,776
Smurfit Capital Funding PLC, 7.50%, 2025 500 468
--------
6,707
--------
Printing & Publishing - 8.3%
American Media Operation, Inc., 10.25%, 2009 500 519
Dex Media East/West LLC,
9.88%, 2009 500 561
12.13%, 2012 980 1,144
8.00%, 2013 (144A security acquired
Nov. 2003 for $750) (a) 750 720
9.88%, 2013 500 550
Goss Holdings, Inc., 12.25%, 2005 (b) (c) (d) 2,764 --
Houghton Mifflin Co.,
8.25%, 2011 820 820
9.88%, 2013 410 410
Liberty Group, Inc., 9.38%, 2008 825 821
Mail Well I Corp., 7.88%, 2013 (144A security
acquired Jan. 2004 for $1,000) (a) 1,000 910
Primedia, Inc., 8.88%, 2011 1,595 1,595
Quebecor Media Inc., 11.13%, 2011 1,485 1,695
RH Donnelley Finance Corp., I 10.88%, 2012 (144A
security acquired Nov. 2002 for $760) (a) 760 882
Vertis, Inc., 9.75%, 2009 1,000 1,075
Von Hoffman Corp., 10.25%, 2009 500 514
--------
12,216
--------
Principal Value
(000) (000)
- ------------------------------------------------------------------------------------------
Restaurants - 0.5%
Buffets, Inc., 11.25%, 2010 $ 400 $ 420
Dominos, Inc., 8.25%, 2011 250 265
--------
685
--------
Retail - 7.7%
Couche-Tard U.S. LP, 7.50%, 2013 750 750
CSK Auto, Inc., 7.00%, 2014 (144A security
acquired Feb. 2004 for $501) (a) 500 476
General Nutrition Centers, Inc., 8.50% 2010 (144A
security acquired Nov. 2003 & Feb. 2004 for
$ 1,533) (a) 1,500 1,560
Petro Stopping Centers LP, 9.00%, 2012 (144A
security acquired April 2004 for $580) (a) 550 545
Rent-A-Center, Inc., 7.50%, 2010 2,250 2,317
Rite Aid Corp.,
8.13%, 2010 250 263
7.70%, 2027 2,750 2,448
Saks, Inc., 7.38%, 2019 2,000 1,920
WH Holdings Ltd., 9.50%, 2011 (144A security
acquired Mar. 2004 for $1,004) (a) 1,000 1,040
--------
11,319
--------
Service - 9.1%
Affinity Group, Inc., 9.00%, 2012 (144A security
acquired Mar. 2004 for $374) (a) 350 359
Alderwoods Group, Inc., 12.25%, 2009 2,075 2,293
Buhrmann US, Inc., 8.25%, 2014 (144A security
acquired June 2004 for $997) (a) 1,000 998
Corrections Corp. of America, 7.50%, 2011 1,000 1,007
Iron Mountain, Inc.,
7.75%, 2015 1,000 995
6.63%, 2016 1,000 910
Johnsondiversey Holdings, Inc.,
Step Coupon (0% to 5/15/07), 2013 1,000 775
Lodgenet Entertainment Corp., 9.50%, 2013 1,500 1,646
Nebraska Book Co., Inc., 8.63%, 2012 1,200 1,185
Service Corp. International, 7.70%, 2009 1,382 1,417
URS Corp., 11.50%, 2009 670 772
Wesco Distribution, Inc., 9.13%, 2008 1,010 1,039
--------
13,396
--------
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
CIGNA High Income Shares Investments in Securities 7
June 30, 2004 (Unaudited) (Continued)
Principal Value
(000) (000)
- ------------------------------------------------------------------------------------
Technology - 1.6%
Amkor Technology, Inc.,
10.50%, 2009 $ 500 $ 525
7.13%, 2011 (144A security acquired
Mar. 2004 for $499) (a) 500 469
Lucent Technologies, Inc.,
5.50%, 2008 250 236
6.45%, 2029 250 194
New ASAT Finance Ltd., 9.25%, 2011 (144A
security acquired Jan. 2004 for $500) (a) 500 500
Xerox Corp., 7.63%, 2013 500 511
---------
2,435
---------
Telecommunications - 8.5%
American Tower Corp., 9.38%, 2009 2,250 2,413
Centennial Communications Corp., 10.13%, 2013 1,000 1,033
Cincinnati Bell, Inc., 7.25%, 2013 750 701
Crown Castle International Corp., 7.50%, 2013 1,250 1,244
Nextel Communications, Inc.,
9.38%, 2009 685 732
5.25%, 2010 750 729
Nextel Partners, Inc., 8.13%, 2011 250 255
Poland Telecom Finance BV, 14.00%, 2007 (b) (c) (d) 3,000 --
Qwest Communications International, Inc.,
7.00%, 2009 230 205
9.13%, 2012 (144A security acquired Aug. &
Oct. 2002 for $1,208) (a) 1,390 1,526
7.50%, 2014 (144A security acquired April 2004
for $954) (a) 1,000 903
Rogers Wireless Communications, Inc. 9.63%, 2011 640 718
Rural Cellular Corp., 8.25%, 2012 (144A security
acquired Mar. 2004 for $1,010) (a) 1,000 1,023
SBA Communications Corp., 10.25%, 2009 500 510
Spectrasite, Inc., 8.25%, 2010 500 515
---------
12,507
---------
Textiles - 2.0%
Philips-Van Heusen Corp. 8.13%, 2013 2,000 2,095
Warnaco, Inc., 8.88%, 2013 850 919
---------
3,014
---------
Principal Value
(000) (000)
- ------------------------------------------------------------------------------------
Utilities - 7.9%
AES Corp.,
9.50%, 2009 $ 250 $ 267
7.75%, 2014 1,500 1,442
Allegheney Energy Supply Co., 7.80%, 2011 500 489
Coastal Corp., 7.75%, 2010 1,000 911
Dynegy Holdings, Inc., 6.88%, 2011 250 214
Edison Mission Energy, 7.73%, 2009 500 489
El Paso Corp., 7.88%, 2012 1,270 1,143
Midland Funding II, 11.75%, 2005 2,474 2,573
NRG Energy, Inc., 8.00%, 2013 (144A security
acquired Mar. & April 2004 for $1,031) (a) 1,000 1,010
Tennessee Gas Pipeline Co., 7.50%, 2017 1,500 1,485
Williams Cos., Inc., 8.13%, 2012 1,550 1,654
---------
11,677
---------
Total Bonds and Notes (Cost - $207,076) 206,932
---------
Number
of Shares
---------
PREFERRED STOCK - 1.6%
Broadcasting & Media - 0.3%
Emmis Communications Corp., 6.25% 10,300 456
---------
Paper - 0.7%
Smurfit-Stone Container Co., 7.00% 40,000 980
---------
Telecommunications - 0.3%
Crown Castle International Corp., 6.25% 10,000 455
---------
Utilities - 0.3%
Calpine Capital Trust II, 5.50% 10,000 473
---------
Total Preferred Stock (Cost - $2,315) 2,364
---------
WARRANTS - 0.0%
Pliant Corp., Exp. 2010 (144A security acquired
Sept. 2000 for $135) (a) (c) (d) 3,700 --
---------
Total Warrants (Cost - $135) --
---------
TOTAL INVESTMENTS IN SECURITIES - 141.7%
(Total Cost - $209,526) (e) 209,296
Liabilities in excess of Cash and Other Assets - (41.7%) (61,641)
---------
NET ASSETS - 100% $147,655
=========
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
CIGNA High Income Shares Investments in Securities 8
June 30, 2004 (Unaudited) (Continued)
- ------------------------------------------------------------------------
NOTES TO INVESTMENTS IN SECURITIES
(a) Indicates restricted security; the aggregate value of restricted
securities is $43,532,000 (aggregate cost $43,477,696), which is
approximately 29.5% 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) Illiquid security.
Tax Information
(e) At June 30, 2004, the cost for federal income tax purposes was the
same as for book purposes.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Quality Ratings* of Long-Term Bonds and Notes (Unaudited)
June 30, 2004
Market % of
Value Market
(000) Value
- ---------------------------------
Baa/BBB $ 1,079 0.5%
Ba/BB 44,268 21.4
B/B 135,485 65.5
Below B 26,100 12.6
-------- -----
$206,932 100.0%
======== =====
*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 9
Statement of Assets and Liabilities
June 30, 2004 (Unaudited)
(In Thousands)
Assets:
Investments in securities at value $209,296
Cash 757
Receivable for investments sold 722
Interest and dividends receivable 4,430
Investment for Trustees' deferred compensation plan 235
Other 28
--------
Total assets 215,468
--------
Liabilities:
Loan payable 57,000
Payable for investments purchased 8,939
Dividend payable 1,243
Deferred Trustees' fees payable 235
Advisory fees payable 128
Accrued interest payable 122
Shareholder reports payable 41
Audit and legal fees payable 33
Custodian fees payable 25
Insurance expense payable 21
Administrative services fees payable 14
Transfer agent fees payable 12
--------
Total liabilities 67,813
--------
Net Assets (Equivalent to $2.73 per share based on
54,032 shares of beneficial interest outstanding;
unlimited number of shares authorized) $147,655
========
Components of Net Assets:
Paid in capital $401,531
Undistributed net investment income 968
Accumulated net realized loss (254,614)
Net unrealized depreciation of investments (230)
--------
Net Assets $147,655
========
Cost of Investments $209,526
========
Statement of Operations
For the Six Months Ended June 30, 2004 (Unaudited)
(In Thousands)
Investment Income:
Income:
Interest $9,272
Dividends 112
------
Total income 9,384
Expenses:
Investment advisory fees $ 789
Interest expense 519
Shareholder reports 70
Custodian fees 64
Audit and legal fees 37
Administrative services fees 33
Transfer agent fees 28
Stock exchange fees 27
Trustees' fees 21
Insurance expense 3
Other 1
-----
Total expenses 1,592
-----
Net Investment Income 7,792
------
Realized and Unrealized Gain (Loss)
on Investments:
Net realized loss from investments (3,440)
Net change in unrealized appreciation
of investments (3,783)
------
Net Realized and Unrealized Loss
on Investments (7,223)
------
Net Increase in Net Assets Resulting
from Operations $ 569
======
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
CIGNA High Income Shares 10
Statements of Changes in Net Assets
(In Thousands)
For the Six
Months Ended For the Year
June 30, Ended
2004 December 31,
(Unaudited) 2003
-------------- -------------
Operations:
Net investment income $ 7,792 $ 17,177
Net realized loss from investments (3,440) (21,529)
Net change in unrealized appreciation
(depreciation) on investments (3,783) 43,218
-------- ---------
Net increase from operations 569 38,866
-------- ---------
Dividends and Distributions:
From net investment income (7,454) (15,126)
-------- ---------
Total dividends and distributions (7,454) (15,126)
-------- ---------
Capital Share Transactions:
Net increase from 84 and 389 capital
shares issued to shareholders in
reinvestment of distributions, respectively 242 1,020
-------- ---------
Net increase from Fund share transactions 242 1,020
-------- ---------
Net Increase (Decrease) in Net Assets (6,643) 24,760
Net Assets:
Beginning of period 154,298 129,538
-------- ---------
End of period * $147,655 $154,298
======== =========
* includes undistributed net investment
income of: $ 968 $ 630
======== =========
Statement of Cash Flows
For the Six Months Ended June 30, 2004 (Unaudited)
(In Thousands)
Cash Provided (Used) by Financing Activities:
Decrease in borrowing $(11,000)
Dividends paid in cash (7,479)
--------
Total amount used (18,479)
--------
Cash Provided (Used) by Operations:
Purchases of portfolio securities (57,671)
Proceeds from sales of portfolio securities 66,051
--------
Total amount provided 8,380
--------
Net Investment Income (excludes net
amortized discount and premium
of $210) 7,582
Net change in receivables/payables related
to operations 234
Net maturities of short-term investment
securities 2,730
--------
Total other amounts 10,546
--------
Net increase in cash 447
Cash, beginning of period 310
--------
Cash, End of Period $ 757
========
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
CIGNA High Income Shares 11
Financial Highlights
- --------------------------------------------------------------------------------
For the Six
Months Ended For the Year Ended December 31,
June 30, 2004 ------------------------------------------------------------------
(Unaudited) 2003 2002 2001(c) 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
Net asset value, beginning of period $ 2.86 $ 2.42 $ 3.05 $ 3.88 $ 5.92 $ 6.39
Income from investment operations
Net investment income (a) 0.14 0.32 0.36 0.55 0.68 0.81
Net realized and unrealized gain (loss) on
investments (0.13) 0.40 (0.62) (0.81) (1.99) (0.46)
---------- -------- -------- ------- -------- --------
Total from investment operations 0.01 0.72 (0.26) (0.26) (1.31) 0.35
---------- -------- -------- ------- -------- --------
Less dividends and distributions:
Dividends from net investment income (0.14) (0.28) (0.29) (0.57) (0.73) (0.82)
Distributions from capital - - (0.08) - - -
---------- -------- -------- ------- -------- --------
Total dividends and distributions (0.14) (0.28) (0.37) (0.57) (0.73) (0.82)
---------- -------- -------- ------- -------- --------
Net asset value, end of period $ 2.73 $ 2.86 $ 2.42 $ 3.05 $ 3.88 $ 5.92
========== ======== ======== ======= ======== ========
Market value, end of period $ 2.58 $ 2.87 $ 2.32 $ 3.36 $ 4.19 $ 5.38
========== ======== ======== ======= ======== ========
Total Investment Return:
Per share market value (5.48)%(d) 37.23% (21.23)% (6.85)% (10.05)% (16.18)%
Per share net asset value (b) 0.25%(d) 31.25% ( 9.07)% (7.31)% (24.21)% 5.78%
Ratios to Average Net Assets
Expenses (includes interest expense) 2.11%(e) 2.21% 2.53% 3.43% 4.16% 3.40%
Expenses (excludes interest expense) 1.42%(e) 1.46% 1.49% 1.26% 1.09% 1.02%
Net investment income 10.31%(e) 11.99% 13.29% 15.56% 13.13% 13.05%
Portfolio Turnover 31%(d) 93% 134% 82% 38% 49%
Net Assets, End of Period (000 omitted) $ 147,655 $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.
(d) Not annualized.
(e) Annualized.
The Notes to Financial Statements are an integral part of these statements.
- --------------------------------------------------------------------------------
CIGNA High Income Shares Notes to Financial Statements 12
(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. 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.
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
- --------------------------------------------------------------------------------
CIGNA High Income Shares Notes To Financial Statements 13
(Unaudited) (Continued)
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 and 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 gains or losses 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, 2006.
Prior to expiration of the Agreement, principal is repayable in whole or in
- --------------------------------------------------------------------------------
CIGNA High Income Shares Notes To Financial Statements 14
(Unaudited) (Continued)
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, 2004,
were $63,947,802, at an average annual interest rate of approximately 1.63%. As
of June 30, 2004, the Fund was paying interest at an annual rate of 1.63% 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 six months ended June 30, 2004, the Fund paid or accrued
$33,041.
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, 2004, were
$66,610,203 and $66,773,083, respectively.
6. Tax Information. As of December 31, 2003, the components of distributable
earnings (excluding unrealized appreciation/(depreciation) disclosed in the
Notes to Investments 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 15
(Unaudited)
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
Chief Investment Officer, CIGNA
Investment Management
Marnie Wagstaff Mueller
Diocesan Consultant, Episcopal
Diocese of Connecticut
Carol Ann Hayes
Director and Chair of Audit
Committee, Reed and Barton
Corporation
Officers
Richard H. Forde
Chairman of the Board
and President
Alfred A. Bingham III
Vice President and Treasurer
Jeffrey S. Winer
Vice President and Secretary
- --------------------------------------------------------------------------------
Matters Submitted to a Vote of Shareholders
The Annual Meeting of the Shareholders of CIGNA High Income Shares (the "Trust")
was held on Tuesday, April 27, 2004 at 12:00 p.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 48,727,437 885,482
Carol Ann Hayes 48,708,588 904,332
Russell H. Jones 48,747,845 865,075
David P. Marks 48,732,169 880,750
Paul J. McDonald 48,737,395 875,525
Marnie W. Mueller 49,631,763 981,157
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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
Item 2. Code of Ethics.
Not applicable
Item 3. Audit Committee Financial Expert.
Not applicable
Item 4. Principal Accountant Fees and Services.
Not applicable
Item 5. Audit Committee Listed Registrants.
Not applicable.
Item 6. Schedule of Investments.
See report to shareholders filed under Item 1 of this Form.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable.
Item 8. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers.
Not applicable.
Item 9. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 10. Controls and Procedures.
(a) Based on an evaluation of the registrant's disclosure controls and
procedures as of a date within 90 days of the filing date of this Form
N-CSR, the registrant's principal executive officer and principal financial
officer concluded that the disclosure controls and procedures are reasonably
designed to ensure that the information required in filings on Forms N-CSR
is recorded, processed, summarized, and reported on a timely basis.
(b) There were no significant changes in the registrant's internal control over
financial reporting that occurred during the registrant's last fiscal
half-year that have materially affected, or are reasonably likely to
materially affect, the registrant's internal control over financial
reporting.
Item 11. Exhibits.
(a)(1) Not applicable
(a)(2) Separate certifications by the registrant's principal executive officer
and principal financial officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company
Act of 1940.
(a)(3) Not applicable
(b) A certification by the registrant's chief executive officer and chief
financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) CIGNA High Income Shares
By: /s/ Alfred A. Bingham III
----------------------------------------
Alfred A. Bingham III, Vice President
and Treasurer
Date: August 30, 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.
By (Signature and Title) /s/ Richard H. Forde
-------------------------------------------------------
Richard H. Forde, Chairman of the Board and President
Date: August 30, 2004.
By (Signature and Title) /s/ Alfred A. Bingham III
-------------------------------------------------------
Alfred A. Bingham III, Vice President and Treasurer
Date: August 30, 2004