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) 757-7276 Registrants' telephone number, including area code Date of fiscal year end: December 31, 2004 Date of reporting period: December 31, 2004 Item 1. Reports to Stockholders. - -------------------------------------------------------------------------------- 1 Dear Shareholders: Our commentary for CIGNA High Income Shares (the "Fund") covering the year ended December 31, 2004 follows. Management's Discussion of Fund Performance Market Summary The financial markets overcame formidable obstacles in 2004 to post healthy gains! Despite challenges from surging oil prices, a plunging U.S. dollar, rising interest rates and the insurgency in Iraq, the Dow Jones Industrial Average hit a 31/2-year high in 2004. The U.S. economy showed enormous resilience in 2004. Greater optimism among consumers and corporate decision-makers fueled higher levels of spending. Consumer confidence hit a five-month high in December. High yield bonds shrugged off rising interest rates during the fourth quarter, and yield spreads tightened, easily allowing the market to significantly outperform most other major fixed income classes. Fourth Quarter 2004 Performance Various Asset Sectors 4th Quarter 2004 U.S. High Yield* +4.54% U.S. Corporate* +1.38% U.S. Treasuries Master Index* +0.47% 10-Year U.S. Treasury** +0.24% 30-Year U.S. Treasury** +2.18% * Merrill Lynch Indices ** Source: Bloomberg 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 Lehman Brothers High Yield Bond Index (the Fund's benchmark) and the Fund returned 2.34% and 1.72% (based on the net asset value), respectively, for the first quarter. The second quarter was a challenging environment for fixed income investors. As a result of strong economic data and comments from Federal Reserve Chairman Alan Greenspan, interest rates rose considerably during the quarter. On a relative basis, high yield bonds fared reasonably well. The benchmark index and the Fund returned -0.97% and -1.44% (based on the net asset value), respectively, for the second quarter. In the third quarter, despite three interest rate hikes from the Federal Reserve, the 10-Year Treasury yield actually declined, providing good support for all fixed income sectors. The benchmark index and the Fund returned 4.85% and 6.61% (based on the net asset value), respectively, for the third quarter. The hybrid nature of high yield bonds was evident in the fourth quarter as they reacted positively to the favorable fundamental underpinnings of the market. Mirroring the performance of the NASDAQ and Russell 2000 (which rocketed 14.87% and 14.09%, respectively, in the fourth quarter), lower-priced marginal credits performed very strongly. With the strong economy, declining default rates, and rallying equity markets, high yield bonds spread over treasury bonds narrowed a dramatic 84 basis points in the last three months of the year. Similar to the beginning of the year, lower dollar-priced marginal credits outpaced the overall - -------------------------------------------------------------------------------- 2 market in the fourth quarter. Bonds rated triple-C and below rose 9.4% for the quarter. Listed below is a performance by price chart for the past two months. The benchmark index and the Fund returned 4.57% and 4.22% (based on the net asset value), respectively, for the fourth quarter. Performance by Price November December 2004 2004 ---------- ----------- $80 & below +8.71% +6.62% $80-$90 +3.10% +4.31% $90-$100 +1.93% +2.42% $100-$110 +0.63% +1.05% $110 & Above +0.25% +0.85% Source: Merrill Lynch New Advisor and Board of Trustees Proposed CIGNA Investment Advisors, Inc. (CIGNA Advisors) (formerly known as TimesSquare Capital Management, Inc.), the investment adviser to the Fund, has decided to exit the business of managing investment companies. On November 23, 2004, the Board of Trustees of the Fund selected BlackRock Advisors, Inc. (BlackRock Advisors) to replace CIGNA Advisors as the investment adviser to the Fund, and voted to nominate the directors of the BlackRock closed-end funds for election as trustees of the Fund, subject to Fund shareholder approval. The Fund has scheduled a shareholder meeting on March 1, 2005 to seek approval of BlackRock Advisors as the adviser to the Fund. Until shareholders approve BlackRock Advisors as the Fund's investment adviser, CIGNA Advisors will continue to serve as the Fund's adviser and Shenkman Capital Management, Inc. will continue to serve as the Fund's sub-adviser with responsibility for management of the Fund's portfolio. Fund Performance By not deviating from investing in better quality, primarily single-B credits, the Fund underperformed early in the first quarter. However performance turned around and moved ahead of the index as technical conditions became more mixed. Throughout the second quarter, our sub-advisor, Shenkman Capital Management, proactively pruned long-duration positions in the portfolio. In addition, exposure to the telecommunications sector, which has shown increased volatility this year, was reduced. The portfolio did not experience any defaults for the year and is well positioned from a credit perspective. While most of the biggest gainers for the third quarter were from a cross-section of many different industries, we did see particular strength in health care, gaming and utilities. Since these sectors were among our biggest industry weightings, they were strong contributors to the Fund's outperformance. As a result of our focus on better quality credits, even within the triple-C category, the average price of the CIGNA High Income Shares portfolio is relatively high at $104.20. While the portfolio did well in the fourth quarter, it trailed its benchmark, given our avoidance of lower-priced marginal credits, which have had the best performance recently. The portfolio was well diversified with 198 issuers in 30 separate industries. The Fund's leverage during the quarter remained below 33% of assets and was 31% at December 31, 2004. The Fund returned 11.39% for the year-to-date (based on its net asset value), compared with the Lehman Brothers High Yield Bond Index return of 11.13%. The Fund's return for the year based on the market value of its shares traded on the New York Stock Exchange, was 12.24%. Information about Your Fund's Expenses As an investor of the Fund, you incur two types of costs: ongoing expenses and transaction costs. Ongoing expenses include management fees and - -------------------------------------------------------------------------------- 3 other Fund expenses. Examples of transaction costs include exchange commissions, which are not shown in this section and which would result in higher total expenses (although this Fund does not charge transaction fees). The following table, which you are seeing for the first time, represents a new SEC requirement and is intended to help you understand your ongoing expenses of investing in the Fund and to help you compare these expenses with the ongoing expenses of investing in other mutual funds. The table is based on an investment of $1,000 made at the beginning of the six-month period ended December 31, 2004. The table illustrates your Fund's expenses in two ways: Actual Expenses. The first line of the table below provides information about actual account values and actual expenses. This helps you estimate the actual dollar amount of ongoing expenses paid on a $1,000 investment in the Fund using the Fund's actual return during the period. To estimate the expenses you paid over the period, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period." Hypothetical Example for Comparison Purposes. The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare your Fund's ongoing expenses with those of other mutual funds. To do so, compare this 5% hypothetical Fund return with the 5% hypothetical return examples that appear in the shareholder reports of other mutual funds. Please note that the expenses shown in the table are meant to highlight your ongoing expenses only and do not reflect any transaction costs, such as exchange commissions. If these transaction costs had been included, your costs would have been higher. The "Expenses Paid During Period" line of the table is useful in comparing ongoing expenses only and will not help you determine the relative total expenses of owning different funds. Expenses and value of a $1,000 investment for the six-month period ended December 31, 2004 Expenses Paid During Beginning Ending Period* Account Account 07/01/04 Value Value to 07/01/04 12/31/04 12/31/04 Actual $ 1,000.00 $ 1,111.10 $ 12.50 Hypothetical (5% return before expenses) $ 1,000.00 $ 1,013.30 $ 11.92 * Expenses are equal to the Fund's annualized expense ratio (includes interest expenses) of 2.36%, multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half year period, then divided by 366. The "Expenses Paid During Period" and the annualized expense ratio are based on actual expenses paid by the Fund during the period. Proxy Voting Information A description of the Fund's proxy voting policies and procedures is available without charge, upon request, by calling the Fund at 1-800-528-6718 and on the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio - -------------------------------------------------------------------------------- 4 securities during the 12-month period ended December 31, 2004 is available on the SEC website. Quarterly Portfolio Securities The Fund files a complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. Forms N-Q will be available on the SEC's website at www.sec.gov and may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. Outlook We believe that with a relatively strong economy, default rates should continue to decline from the current level of 2.2% at December 31, 2004. This trend should allow yield spreads to tighten modestly in 2005. However, with the Fed on a mission to hike the Fed funds rate possibly to 3.25% or perhaps higher, we believe longer-term rates will also rise for the year. Given the counter-balancing factors of very strong fundamentals versus a rising interest rate environment, we remain optimistic that high yield bonds can generate a relatively attractive total return in 2005. Sincerely, /s/Richard H. Forde Richard H. Forde Chairman of the Board and President CIGNA High Income Shares - -------------------------------------------------------------------------------- 5 [THE FOLLOWING DATA WAS REPRESENTED AS A MOUNTAIN CHART IN THE PRINTED MATERIAL] GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT (Unaudited) 12/31/94-12/31/04 Fund (Market Value Lehman Brothers Aggregate Bond Index ------------------ ------------------------------------ 12/94 10,000 10,000 12/95 12,624 11,917 12/96 15,055 13,270 12/97 16,808 14,964 12/98 16,246 15,244 12/99 13,616 15,608 12/00 12,248 14,694 12/01 11,409 15,469 12/02 8,987 15,252 12/03 12,332 19,670 12/04 13,841 21,859 AVERAGE ANNUAL RETURN 1 Year 5 Year 10 Year Market Value 12.24% 0.33% 3.30% Net Asset Value 11.39% -1.39% 4.42% Lehman Brothers 11.13% 6.97% 8.13% High Yield Bond Index 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 ticket 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 6 December 31, 2004 Principal Value (000) (000) ---------------- ------------- BONDS AND NOTES - 140.5% Aerospace - 6.0% Aviall, Inc., 7.63%, 2011 $1,750 $1,873 BE Aerospace, Inc., 8.00%, 2008 2,000 1,995 Communications & Power Industries, Inc., 8.00%, 2012 500 530 Hexcel Corp., 9.75%, 2009 1,750 1,820 Sequa Corp., 8.88%, 2008 1,500 1,643 Standard Aero Holdings, Inc., 8.25%, 2014 (144A security acquired Sep. 2004 for $931) (a) 900 972 Titan Corp., 8.00%, 2011 500 536 -------- 9,369 -------- Auto/Trucks - 5.1% Accuride Corp., 9.25%, 2008 1,625 1,649 Cooper Standard Auto, 8.38%, 2014 (144A security acquired Dec. 2004 for $400) (a) 400 399 Delco Remy International, Inc., 11.00%, 2009 500 533 9.38%, 2012 650 669 Dura Operating Corp., 8.63%, 2012 750 780 Goodyear Tire & Rubber Co., 7.88%, 2011 1,750 1,776 Tenneco Automotive, Inc., 8.63%, 2014 (144A security acquired Nov. 2004 for $500) (a) 500 520 TRW Automotive, Inc., 9.38%, 2013 1,106 1,283 11.00%, 2013 273 329 -------- 7,938 -------- Beverages/Food - 4.0% Del Monte Corp., 8.63%, 2012 1,010 1,134 Dole Food, Inc., 7.25%, 2010 500 514 8.88%, 2011 1,000 1,088 Land O' Lakes, Inc., 9.00%, 2010 750 821 Michael Foods, Inc., 8.00%, 2013 600 633 Pinnacle Foods Holding Corp., 8.25%, 2013 (144A security acquired Nov. & Dec. 2003 for $1,015) (a) 1,000 952 Seminis Vegetable Seeds, Inc., 10.25%, 2013 500 563 Swift & Co., 12.50%, 2010 500 565 -------- 6,270 -------- Principal Value (000) (000) ------------- ------------- Broadcasting & Media - 5.2% Allbritton Communications Co., 7.75%, 2012 $1,370 $1,418 Corus Entertainment, Inc., 8.75%, 2012 550 606 Emmis Operating Co., 6.88%, 2012 500 523 Gray Television, Inc., 9.25%, 2011 750 840 PanAmSat Corp., 9.00%, 2014 (144A security acquired July, Aug. & Sep. 2004 for $ 1,687) (a) 1,650 1,842 Sinclair Broadcast Group, 8.75%, 2011 500 544 8.00%, 2012 2,150 2,284 -------- 8,057 -------- Building Materials - 2.1% Goodman Global Holding Co., Inc., 7.88%, 2012 (144A security acquired Dec. 2004 for $998) (a) 1,000 990 Interface, Inc., 7.30%, 2008 800 822 10.38%, 2010 350 402 Jacuzzi Brands, Inc., 9.63%, 2010 500 555 THL Buildco, Inc., 8.50%, 2014 (144A security acquired Sep. 2004 for $476) (a) 450 470 -------- 3,239 -------- Cable TV - 6.5% Charter Communications Holdings LLC, 10.25%, 2010 1,500 1,590 8.38%, 201 (144A security acquired April 2004 for $500) (a) 500 528 CSC Holdings, Inc., 10.50%, 2016 2,550 2,907 DirecTV Holdings LLC, 8.38%, 2013 1,000 1,121 Echostar Communications Corp., 5.75%, 2008 (convertible to 23.10 shares at $31.97 until 5/15/08) 1,000 1,024 Insight Midwest LP, 10.50%, 2010 500 548 Mediacom LLC, 8.50%, 2008 1,750 1,794 Mediacom Broadband LLC, 11.00%, 2013 590 634 -------- 10,146 -------- The Notes to Financial Statements are an integral part of these statements. - -------------------------------------------------------------------------------- CIGNA High Income Shares Investments in Securities 7 December 31, 2004 (Continued) Principal Value (000) (000) ------------ ---------- Chemicals/Plastics - 6.5% Borden US Finance Corp., 9.00%, 2014 (144A security acquired Aug. & Sep. 2004 for $832) (a) $ 800 $ 888 Equistar Chemicals LP, 10.13%, 2008 930 1,072 10.63%, 2011 1,250 1,450 Huntsman ICI Chemicals, Inc., 10.13%, 2009 1,131 1,196 Innophos, Inc., 8.88%, 2014 (144A security acquired Aug. 2004 for $1,000) (a) 1,000 1,080 Koppers Industry, Inc., 9.88%, 2013 500 570 Lyondell Chemical Co., 10.88%, 2009 500 529 10.50%, 2013 1,850 2,211 Resolution Performance Products, Inc., 13.50%, 2010 1,000 1,087 -------- 10,083 -------- Consumer Products - 9.3% Amscan Holdings, Inc., 8.75%, 2014 450 450 American Achievement Corp., 8.25%, 2012 550 571 Elizabeth Arden, Inc., 7.75%, 2014 650 689 FTD, Inc., 7.75%, 2014 500 515 Jafra Cosmetics International, Inc., 10.75%, 2011 2,000 2,270 Jarden Corp., 9.75%, 2012 500 555 Jostens, Inc., 7.63%, 2012 (144A security acquired Sep. & Oct. 2004 for $2,551) (a) 2,500 2,600 K2, Inc., 7.38%, 2014 (144A security acquired Sep. 2004 for $523) (a) 500 548 Playtex Products, Inc., 8.00%, 2011 500 546 9.38%, 2011 1,000 1,068 Prestige Brands, Inc., 9.25%, 2012 (144A security acquired Mar. 2004 for $500) (a) 500 534 Samsonite Corp., 8.88%, 2011 1,000 1,083 Sealy Mattress Co., 8.25%, 2014 1,500 1,590 Simmons Co., 7.88%, 2014 250 259 United Industries Corp., 9.88%, 2009 1,085 1,135 -------- 14,413 -------- Principal Value (000) (000) ---------- --------- Containers & Packaging - 5.2% Crown Euro Holdings S.A., 9.50%, 2011 $ 1,430 $ 1,630 Graphic Packaging International, Inc., 9.50%, 2013 1,000 1,137 Greif Brothers Corp., 8.88%, 2012 940 1,048 Owens-Brockway, 8.75%, 2012 1,850 2,095 8.25%, 2013 1,750 1,921 Owens-Illinois, Inc., 7.35%, 2008 250 262 -------- 8,093 -------- Energy - 0.3% Inergy LP, 6.88%, 2014 (144A security acquired Dec. 2004 for $500) (a) 500 503 -------- Environmental - 1.1% Allied Waste North America, Inc., 7.38%, 2014 1,000 958 Casella Waste Systems, Inc., 9.75%, 2013 400 442 IESI Corp., 10.25%, 2012 250 293 -------- 1,693 -------- Gaming - 9.2% Aztar Corp., 7.88%, 2014 1,750 1,929 Boyd Gaming Corp., 7.75%, 2012 1,000 1,091 Caesars Entertainment, Inc., 7.88%, 2010 500 563 Hard Rock Hotel, Inc., 8.88%, 2013 1,000 1,105 Herbst Gaming, Inc., 7.00%, 2014 (144A security acquired Nov. 2004 for $761) (a) 750 759 Inn of the Mountain Gods Resort & Casino, 12.00%, 2010 650 761 Isle of Capri Casinos, Inc., 7.00%, 2014 1,500 1,530 Jacobs Entertainment, Inc., 11.88%, 2009 900 1,017 Kerzner International Ltd., 8.88%, 2011 1,250 1,366 Pinnacle Entertainment, Inc., 8.25%, 2012 2,000 2,135 Station Casinos, Inc., 6.88%, 2016 1,000 1,041 Wynn Las Vegas LLC, 6.63%, 2014 (144A security acquired Nov. 2004 for $1,000) (a) 1,000 990 -------- 14,287 -------- The Notes to Financial Statements are an integral part of these statements. - -------------------------------------------------------------------------------- CIGNA High Income Shares Investments in Securities 8 December 31, 2004 (Continued) Principal Value (000) (000) ---------- --------- General Industrial - 5.2% Blount, Inc., 8.88%, 2012 $ 1,000 $ 1,085 Dresser Rand Group, Inc., 7.38%, 2014 (144A security acquired Nov. 2004 for $520) (a) 500 510 K&F Acquisition, Inc., 7.75%, 2014 (144A security acquired Dec. 2004 for $1,035) (a) 1,000 1,032 MAAX Corp., 9.75%, 2012 (144A security acquired Aug. 2004 for $554) (a) 525 555 Mueller Group, Inc., 10.00%, 2012 1,550 1,690 Norcross Safety Products LLC, 9.88%, 2011 900 995 Polypore, Inc., 8.75%, 2012 850 888 Trimas Corp., 9.88%, 2012 1,230 1,310 -------- 8,065 -------- Grocery - 1.9% Pathmark Stores, Inc., 8.75%, 2012 500 479 Stater Brothers Holdings, Inc., 8.13%, 2012 2,250 2,379 -------- 2,858 -------- Health Care - 7.7% Alliance Imaging, Inc., 7.25%, 2012 (144A (security acquired Dec. 2004 for $304) (a) 300 305 Beverly Enterprises, Inc., 7.88%, 2014 (144A security acquired Sep. 2004 for $1,053) (a) 1,000 1,073 Extendicare Health Services, Inc., 9.50%, 2010 1,100 1,232 Fisher Scientific International, Inc., 3.25%, 2024 (convertible to 12.4378 shares at $61.96 until 3/1/24) 500 561 Genesis Healthcare Corp., 8.00%, 2013 500 542 Medex, Inc., 8.88%, 2013 1,000 1,165 NeighborCare, Inc., 6.88%, 2013 250 262 Omega Healthcare Investors, Inc., 7.00%, 2014 1,500 1,534 Province Healthcare Co., 7.50%, 2013 1,000 1,120 Select Medical Corp., 7.50%, 2013 250 284 Sybron Dental Specialties, Inc., 8.13%, 2012 250 272 Triad Hospitals, Inc., 7.00%, 2013 2,000 2,045 VWR International, Inc., 8.00%, 2014 (144A security acquired April, Aug. & Sep. 2004 for $1,557) (a) 1,500 1,601 -------- 11,996 -------- Principal Value (000) (000) ----------- -------- Home Construction - 0.7% K. Hovnanian Enterprises, Inc., 7.75%, 2013 $ 1,000 $ 1,085 -------- Leasing - 2.3% H&E Equipment Services LLC, 11.13%, 2012 1,000 1,100 United Rentals, Inc., 7.75%, 2013 1,000 980 Williams Scotsman, Inc., 9.88%, 2007 1,520 1,520 -------- 3,600 -------- Leisure/Entertainment - 5.1% AMC Entertainment, Inc., 9.50%, 2011 1,044 1,079 AMF Bowling Worldwide, Inc., 10.00%, 2010 500 534 Intrawest Corp., 7.50%, 2013 1,000 1,064 7.50%, 2013 (144A security acquired Nov. 2004 for $1,078) (a) 1,000 1,064 Loews Cineplex Entertainment Corp., 9.00%, 2014 (144A security acquired July 2004 for $500) (a) 500 541 NCL Corp., 10.63%, 2014 (144A security acquired Aug. 2004 for $508) (a) 500 502 Royal Caribbean Cruises Ltd., 6.88%, 2013 500 540 7.25%, 2018 1,250 1,362 Town Sports International, Inc., 9.63%, 2011 750 789 Vail Resorts, Inc., 6.75%, 2014 500 509 -------- 7,984 -------- Lodging/Hotels - 4.0% Felcor Lodging LP, 7.63%, 2007 500 528 6.87%, 2011 (b) 250 262 9.00% (Coupon change based on rating), 2011 820 929 Gaylord Entertainment Co., 8.00%, 2013 1,000 1,080 Host Marriott Corp., 9.25%, 2007 780 870 7.88%, 2008 318 328 7.13%, 2013 1,000 1,069 La Quinta Properties, Inc., 8.88%, 2011 1,000 1,115 -------- 6,181 -------- The Notes to Financial Statements are an integral part of these statements. - -------------------------------------------------------------------------------- CIGNA High Income Shares Investments in Securities 9 December 31, 2004 (Continued) Principal Value (000) (000) ---------- ---------- Metals - 0.7% Alpha Natural Resources LLC, 10.00%, 2012 (144A security acquired May 2004 for $900) (a) $ 900 $ 1,030 -------- Oil & Gas - 5.2% Chesapeake Energy Corp., 7.75%, 2015 750 819 Exco Resources, Inc., 7.25%, 2011 1,000 1,070 Ferrellgas Partners LP, 8.75%, 2012 810 883 Harvest Operations Corp., 7.88%, 2011 (144A security acquired Dec. 2004 for $761) (a) 750 756 Premcor Refining Group, Inc., 9.50%, 2013 830 963 Transmontaigne, Inc., 9.13%, 2010 1,250 1,356 Universal Compression, Inc., 7.25%, 2010 2,000 2,145 -------- 7,992 -------- Paper - 5.9% Abitibi-Consolidated, Inc., 6.00%, 2013 1,000 954 Caraustar Industries, Inc., 9.88%, 2011 1,000 1,085 Georgia-Pacific Corp., 8.00%, 2014 1,000 1,143 8.00%, 2024 1,000 1,160 Jefferson Smurfit Corp., 7.50%, 2013 1,000 1,072 MDP Acquisitions PLC, 9.63%, 2012 1,850 2,072 Norske Skog Canada Ltd., 7.38%, 2014 250 261 Smurfit Capital Funding PLC, 7.50%, 2025 500 500 Tembec Industries, Inc., 7.75%, 2012 1,000 967 -------- 9,214 -------- Printing & Publishing - 7.7% American Media Operation, Inc., 10.25%, 2009 500 527 Cenveo Corp., 7.88%, 2013 750 697 Dex Media East/West LLC, 9.88%, 2009 500 569 12.13%, 2012 637 776 8.00%, 2013 750 810 9.88%, 2013 488 562 Goss Holdings, Inc., 12.25%, 2005 (c) (d) (e) 2,764 -- Houghton Mifflin Co., 8.25%, 2011 820 873 9.88%, 2013 410 449 Liberty Group, Inc., 9.38%, 2008 575 584 Principal Value (000) (000) ---------- ------- Printing & Publishing (continued) Primedia, Inc., 7.63%, 2008 $ 500 $ 506 8.88%, 2011 1,310 1,395 Quebecor Media Inc., 11.13%, 2011 1,485 1,697 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 1,085 13.50%, 2009 (144A security acquired Sep. 2004 for $508) (a) 500 527 -------- 11,959 -------- Restaurants - 0.9% Buffets, Inc., 11.25%, 2010 400 430 Carrols Corp., 9.00%, 2013 (144A security acquired Dec. 2004 for $728) (a) 700 725 Dominos, Inc., 8.25%, 2011 182 199 -------- 1,354 -------- Retail - 6.4% Couche-Tard U.S. LP, 7.50%, 2013 750 804 CSK Auto, Inc., 7.00%, 2014 500 491 General Nutrition Centers, Inc., 8.50%, 2010 850 803 Jean Coutu Group, Inc., 7.63%, 2012 (144A security acquired Sep. 2004 for $257) (a) 250 264 Petro Stopping Centers LP, 9.00%, 2012 750 793 Rent-A-Center, Inc., 7.50%, 2010 2,250 2,343 Rite Aid Corp., 4.75%, 2006 250 252 8.13%, 2010 250 264 7.70%, 2027 1,000 827 Saks, Inc., 7.38%, 2019 2,000 1,990 WH Holdings Ltd., 9.50%, 2011 1,000 1,100 -------- 9,931 -------- Service - 8.1% Affinity Group, Inc., 9.00%, 2012 350 379 Alderwoods Group, Inc., 7.75%, 2012 (144A security acquired Aug. & Sep. 2004 for $1,266) (a) 1,250 1,350 Buhrmann US, Inc., 8.25%, 2014 1,000 1,011 The Notes to Financial Statements are an integral part of these statements. - -------------------------------------------------------------------------------- CIGNA High Income Shares Investments in Securities 10 December 31, 2004 (Continued) Principal Value (000) (000) ----------- -------- Service (continued) Corrections Corp. of America, 7.50%, 2011 $ 1,000 $ 1,070 Iron Mountain, Inc., 7.75%, 2015 1,000 1,010 6.63%, 2016 750 701 Johnsondiversey Holdings, Inc., Step Coupon (0% to 5/15/07), 2013 1,000 870 Lodgenet Entertainment Corp., 9.50%, 2013 1,500 1,665 Nebraska Book Co., Inc., 8.63%, 2012 1,200 1,236 Service Corp. International, 7.70%, 2009 1,382 1,493 URS Corp., 11.50%, 2009 670 774 Wesco Distribution, Inc., 9.13%, 2008 1,010 1,040 -------- 12,599 -------- Technology - 1.9% Lucent Technologies, Inc., 5.50%, 2008 550 565 6.45%, 2029 250 229 MagnaChip Semiconductor SA, 6.88%, 2011 (144A security acquired Dec. 2004 for $500) (a) 500 515 UGS Corp., 10.00%, 2012 (144A security acquired Sep. 2004 for $1,105) (a) 1,000 1,137 Xerox Corp., 7.63%, 2013 500 549 -------- 2,995 -------- Telecommunications - 6.8% AirGate PCS, Inc., 5.85%, 2011 (144A security acquired Nov. 2004 for $776) (a) (b) 750 771 American Tower Corp., 7.13%, 2012 (144A security acquired Sep. 2004 for $1,000) (a) 1,000 1,023 Centennial Communications Corp., 10.13%, 2013 1,000 1,128 Cincinnati Bell, Inc., 7.25%, 2013 750 771 Crown Castle International Corp., 7.50%, 2013 1,250 1,344 MCI, Inc., 6.91%, 2007 1,250 1,280 Poland Telecom Finance BV, 14.00%, 2007 (c) (d) (e) 3,000 -- Principal Value (000) (000) ------------ -------- Telecommunications (continued) Qwest Communications International, Inc., 7.00%, 2009 $ 230 $ 229 9.13%, 2012 (144A security acquired Aug. & Oct. 2002 for $1,208) (a) 1,390 1,612 7.50%, 2014 (144A security acquired April 2004 for $954) (a) 1,000 1,010 Rogers Wireless, Inc., 8.00%, 2012 (144A security acquired Nov. 2004 for $352) (a) 350 370 Rural Cellular Corp., 8.25%, 2012 1,000 1,057 -------- 10,595 -------- Textiles - 2.4% Philips-Van Heusen Corp. 8.13%, 2013 2,000 2,170 Warnaco, Inc., 8.88%, 2013 1,350 1,485 -------- 3,655 -------- Utilities - 7.1% AES Corp., 9.50%, 2009 250 284 7.75%, 2014 1,500 1,628 Allegheney Energy Supply Co., 7.80%, 2011 650 709 Dynegy Holdings, Inc., 6.88%, 2011 250 242 7.13%, 2018 250 223 Edison Mission Energy, 7.73%, 2009 1,025 1,107 El Paso Corp., 7.75%, 2010 1,000 1,055 7.88%, 2012 1,270 1,330 Midland Funding II, 11.75%, 2005 929 969 NRG Energy, Inc., 8.00%, 2013 (144A security acquired April 2004 for $510) (a) 500 545 Tennessee Gas Pipeline Co., 7.50%, 2017 1,000 1,107 Williams Cos., Inc., 8.13%, 2012 1,550 1,790 -------- 10,989 -------- Total Bonds and Notes (Cost - $211,729) 218,173 -------- The Notes to Financial Statements are an integral part of these statements. - -------------------------------------------------------------------------------- CIGNA High Income Shares Investments in Securities 11 December 31, 2004 (Continued) Number of Value Shares (000) ---------- ----------- PREFERRED STOCK - 1.5% Broadcasting & Media - 0.3% Emmis Communications Corp., 6.25% (convertible to 1.28 shares at $17.20 until 12/31/49) 10,300 $ 474 -------- Paper - 0.5% Smurfit-Stone Container Co., 7.00% 30,000 765 -------- Telecommunications - 0.3% Crown Castle International Corp., 6.25% 10,000 486 -------- Utilities - 0.4% NRG Energy, Inc., 4.00% (convertible to 25 shares at $34.11 until 12/31/49) 500 548 -------- Total Preferred Stock (Cost - $2,081) 2,273 -------- WARRANTS - 0.0% Pliant Corp., Exp. 2010 (144A security acquired Sep. 2000 for $135) (a) (d) (e) 3,700 -- -------- Total Warrants (Cost - $135) -- -------- Principal (000) ---------- SHORT-TERM OBLIGATION - 0.7% Commercial Paper American Express Credit Corp., 1.90%, 1/3/05 (Cost - $1,125) $1,125 1,125 -------- TOTAL INVESTMENTS IN SECURITIES - 142.7% (Total Cost - $215,070) (f) 221,571 Liabilities in excess of Cash and Other Assets - (42.7%) (66,273) --------- NET ASSETS - 100% $155,298 ========= NOTES TO INVESTMENTS IN SECURITIES (a) Indicates restricted security; the aggregate value of restricted securities is $34,295,900 (aggregate cost $33,002,215), which is approximately 22.1% of net assets. Valuations have been furnished by brokers trading in the securities or a pricing service for all restricted securities. (b) Floating rate security. (c) Defaulted security due to bankruptcy. (d) Fair valued security. (e) Illiquid security. Tax Information (f) At December 31, 2004, the net unrealized appreciation of investments, based on cost for federal income tax purposes of $214,817,327, was as follows: Aggregate gross unrealized appreciation for all investments in which there was an excess of value over tax cost $14,719,951 Aggregate gross unrealized depreciation for all investments in which there was an excess of tax cost over value (7,965,854) ----------- Unrealized appreciation - net $6,754,097 =========== - -------------------------------------------------------------------------------- Quality Ratings* of Long-Term Bonds and Notes (Unaudited) December 31, 2004 Market % of Value Market (000) Value ---------- --------- Baa/BBB $ 261 0.1% Ba/BB 44,630 20.5 B/B 155,843 71.4 Below B 17,439 8.0 -------- ----- $218,173 100.0% ======== ===== *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 12 Statement of Assets and Liabilities December 31, 2004 (In Thousands) Assets: Investments in securities at value $221,571 Cash 823 Receivable for investments sold 808 Interest and dividends receivable 3,960 Investment for Trustees' deferred compensation plan 209 Prepaid Insurance 8 -------- Total assets 227,379 -------- Liabilities: Loan payable 69,000 Dividend payable 2,330 Deferred Trustees' fees payable 209 Accrued interest payable 207 Advisory fees payable 136 Shareholder reports payable 80 Audit and legal fees payable 59 Custodian fees payable 39 Administrative services fees payable 13 Transfer agent fees payable 8 -------- Total liabilities 72,081 -------- Net Assets (Equivalent to $2.87 per share based on 54,191 shares of beneficial interest outstanding; unlimited number of shares authorized) $155,298 ======== Components of Net Assets: Paid in capital $401,988 Undistributed net investment income 186 Accumulated net realized loss (253,377) Net unrealized appreciation of investments 6,501 -------- Net Assets $155,298 ======== Cost of Investments $215,070 ======== Statement of Operations For the Year Ended December 31, 2004 (In Thousands) Investment Income: Income: Interest $ 18,048 Dividends 186 -------- Total income 18,234 Expenses: Investment advisory fees $1,584 Interest expense 1,286 Shareholder reports 131 Custodian fees 115 Audit and legal fees 72 Administrative services fees 66 Stock exchange fees 54 Trustees' fees 50 Transfer agent fees 45 Other 7 ------ Total expenses 3,410 ------ Net Investment Income 14,824 -------- Realized and Unrealized Gain (Loss) on Investments: Net realized gain (loss) from: Currency 1 Investments (1,470) -------- (1,469) -------- Net change in unrealized appreciation: Investments 2,948 -------- Net Realized and Unrealized Gain on Investments 1,479 -------- Net Increase in Net Assets Resulting from Operations $ 16,303 ======== The Notes to Financial Statements are an integral part of these statements. - -------------------------------------------------------------------------------- CIGNA High Income Shares 13 Statements of Changes in Net Assets (In Thousands) For the Year Ended December 31, ------------------------- 2004 2003 ------------ ------------ Operations: Net investment income $ 14,824 $ 17,177 Net realized loss from investments (1,469) (21,529) Net change in unrealized appreciation on investments 2,948 43,218 --------- --------- Net increase from operations 16,303 38,866 --------- --------- Dividends and Distributions: From net investment income (16,002) (15,126) --------- --------- Total dividends and distributions (16,002) (15,126) --------- --------- Capital Share Transactions: Net increase from 243 and 389 capital shares issued to shareholders in reinvestment of distributions, respectively 699 1,020 --------- --------- Net increase from Fund share transactions 699 1,020 --------- --------- Net Increase in Net Assets 1,000 24,760 Net Assets: Beginning of period 154,298 129,538 --------- --------- End of period * $155,298 $154,298 ========= ========= * includes net of undistributed net investment income of: $ 186 $ 630 ========= ========= Statement of Cash Flows For the Year Ended December 31, 2004 (In Thousands) Cash Provided (Used) by Financing Activities: Increase in borrowing $ 1,000 Dividends paid in cash (14,484) -------- Total amount used (13,484) -------- Cash Provided (Used) by Operations: Purchases of portfolio securities (121,910) Proceeds from sales of portfolio securities 118,676 Proceeds from return of capital 42 -------- Total amount used (3,192) -------- Net Investment Income (excludes net amortized discount and premium of $111) 14,713 Net change in receivables/payables related to operations 870 Net maturities of short-term investment securities 1,606 -------- Total other amounts 17,189 -------- Net increase in cash 513 Cash, beginning of period 310 -------- Cash, End of Period $ 823 ======== The Notes to Financial Statements are an integral part of these statements. - -------------------------------------------------------------------------------- CIGNA High Income Shares 14 Financial Highlights - -------------------------------------------------------------------------------- For the Year Ended December 31, ------------------------------------------------------------------ 2004 2003 2002 2001(c) 2000 - -------------------------------------------------------------------------------------------------------------------------------- Per Share Operating Performance: Net asset value, beginning of period $ 2.86 $ 2.42 $ 3.05 $ 3.88 $ 5.92 Income from investment operations Net investment income (a) 0.28 0.32 0.36 0.55 0.68 Net realized and unrealized gain (loss) on investments 0.03 0.40 ( 0.62) (0.81) ( 1.99) ------- ------- -------- ------- -------- Total from investment operations 0.31 0.72 ( 0.26) (0.26) ( 1.31) ------- ------- -------- ------- -------- Less dividends and distributions: Dividends from net investment income (0.30) (0.28) ( 0.29) (0.57) ( 0.73) Distributions from capital -- -- ( 0.08) -- -- -------- -------- -------- ------- -------- Total dividends and distributions (0.30) (0.28) ( 0.37) (0.57) ( 0.73) -------- -------- -------- ------- -------- Net asset value, end of period $ 2.87 $ 2.86 $ 2.42 $ 3.05 $ 3.88 ======== ======== ======== ======= ======== Market value, end of period $ 2.90 $ 2.87 $ 2.32 $ 3.36 $ 4.19 ======== ======== ======== ======= ======== Total Investment Return: Per share market value 12.24% 37.23% (21.23)% (6.85)% (10.05)% Per share net asset value (b) 11.39% 31.25% ( 9.07)% (7.31)% (24.21)% Ratios to Average Net Assets Expenses (includes interest expense) 2.23% 2.21% 2.53% 3.43% 4.16% Expenses (excludes interest expense) 1.39% 1.46% 1.49% 1.26% 1.09% Net investment income 9.70% 11.99% 13.29% 15.56% 13.13% Portfolio Turnover 56% 93% 134% 82% 38% Net Assets, End of Period (000 omitted) $155,298 $154,298 $129,538 $161,693 $202,401 (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 15 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 CIGNA Investment Advisors, Inc. (formerly, 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 16 (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, 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, 2004, the Fund increased undistributed net investment income by $734,467 and increased accumulated net realized loss by the same amount. 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, 2007. 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 - -------------------------------------------------------------------------------- CIGNA High Income Shares Notes To Financial Statements 17 (Continued) 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, 2004, were $64,080,601, at an average annual interest rate of approximately 2.01%. As of December 31, 2004, the Fund was paying interest at an annual rate of 2.78% on its outstanding borrowings. 3. Investment Advisory Fees and Other Transactions with Affiliates. Investment advisory fees were paid or accrued to CIGNA Investment Advisors, Inc. ("CIAI") (formerly, TimesSquare Capital Management, Inc.) 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. CIAI, in turn, pays Shenkman Capital Management, Inc. its sub-advisory fee. For administrative services, the Fund reimburses CIAI 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, 2004, the Fund paid or accrued $66,082. CIAI 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, 2004, were $121,909,770 and $119,525,777, respectively. 6. Tax Information. As of December 31, 2004, 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 $34,375 and a capital loss carryover of $253,310,904, of which $28,686,393, $35,363,213, $55,878,284, $102,576,339, $28,467,396 and $2,339,279 will expire in 2007, 2008, 2009, 2010, 2011 and 2012, respectively. For 2004, the Fund had no post-October loss. Under current tax law, capital losses realized after October 31 may be deferred and treated as if occurring on the first day of the following year. 7. New Advisor and Board of Trustees Proposed. CIGNA Investment Advisors, Inc. (CIGNA Advisors) (formerly known as TimesSquare Capital Management, Inc.), the investment adviser to the Fund, has decided to exit the business of managing investment companies. On November 23, 2004, the Board of Trustees of the Fund selected BlackRock Advisors, Inc. (BlackRock Advisors) to replace CIGNA Advisors as the investment adviser to the Fund, and voted to nominate the directors of the BlackRock closed-end funds for election as trustees of the Fund, subject to Fund shareholder approval. The Fund has scheduled a shareholder meeting on March 1, 2005 to seek approval of BlackRock Advisors as the adviser to the Fund. Until shareholders approve BlackRock Advisors as the Fund's investment adviser, CIGNA Advisors will continue to serve as the Fund's adviser and Shenkman Capital Management, Inc. will continue to serve as the Fund's sub-adviser with responsibility for management of the Fund's portfolio. - -------------------------------------------------------------------------------- CIGNA High Income Shares 18 Report of Independent Registered Public Accounting Firm To the Trustees and Shareholders of CIGNA High Income Shares Fund 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 Fund ("Fund") at December 31, 2004, and 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2004 by correspondence with the custodian, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 22, 2005 - -------------------------------------------------------------------------------- CIGNA High Income Shares 19 (Unaudited) 2004 Tax Information During 2004, the Fund declared dividends of $0.296 per share. For federal income tax purposes, this was an ordinary income dividend. There were no capital gain distributions. A distribution of $0.043, which was declared in December 2004, 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 2004 distribution is still considered a 2004 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 1.16% 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 2004 Form 1099-DIV you receive will show the tax status of all distributions paid to you during the year. Approximately 1.16% 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, 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. - -------------------------------------------------------------------------------- CIGNA High Income Shares 20 (Unaudited) 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 21 (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 Senior Vice President (Investor 7 -- Jones 1995 Relations, Public Relations), Chief 60 Investment Officer and Treasurer, Kaman Corporation (helicopters and aircraft components, industrial distribution) Paul J. Trustee Trustee since Special Advisor to the Board of 7 Western McDonald 1995 Directors, Friendly Ice Cream Massachusetts 61 Corporation (family restaurants Electric Company and dairy products) Marnie Trustee Trustee since Diocesan Consultant, Episcopal 7 Boston Mutual Life Wagstaff 2001 Diocese of Connecticut; Insurance Company Mueller Previously, Visiting Professor of 65 Health Economics, Wesleyan University Carol Ann Trustee Trustee since Director and Chair of Audit 7 Reed & Barton Hayes 2003 Committee, Reed and Barton Corporation 60 Corporation Affiliated Trustees and Fund Officers Richard H. Trustee, Trustee, Chief Investment Officer, CIGNA 7 Director of various Forde Chairman of Chairman and Investment Management subsidiaries of 51 the Board and President since CIGNA Corporation President 1998 Alfred A. Vice President Officer CIGNA Funds Treasurer; 7 -- Bingham III and Treasurer Since 1982 Assistant Vice President, CIGNA 60 Investment Management Jeffrey S. Vice President Officer Senior Counsel, 7 -- Winer and Secretary Since 1993 CIGNA Corporation 7 - -------------------------------------------------------------------------------------------------------------------------- * All Trustees and officers have an address c/o CIGNA Investment Advisors, Inc. (formerly, TimesSquare Capital Management, Inc.), 280 Trumbull Street, H16C, Hartford, CT 06103. - -------------------------------------------------------------------------------- CIGNA High Income Shares 22 (Unaudited) - -------------------------------------------------------------------------------- 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 CIGNA Investment Advisors, Inc. (formerly, 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. 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 CIGNA Investment Advisors, 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, 2003 and December 31, 2004, included in the Registrant's annual report to shareholders for those fiscal years, PricewaterhouseCoopers LLP ("PWC") billed the Registrant $39,000 and $42,600, respectively. (b) Audit-Related Fees For the fiscal years ended December 31, 2003 and December 31, 2004, PWC billed the Registrant $11,300 and $12,300, 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, 2003 and December 31, 2004, PWC billed the Registrant $5,700 and $6,200, 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, 2003 and December 31, 2004, 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, 2003 and December 31, 2004, 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, 2003 and December 31, 2004, 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 CIGNA Investment Advisors, Inc. ("CIGNA Advisors"), the investment adviser to the Registrant, and other entities controlling, controlled by, under common control with CIGNA Advisors that provide ongoing services to the Registrant for fiscal years ending December 31, 2003 and 2004, were $100,148 and $4,200, respectively. (h) In considering PWC's independence, the Audit Committee considered whether the provision of non-audit services rendered by PWC to CIGNA Advisors and other entities controlling, controlled by, under common control with CIGNA Advisors 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 of 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. 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. The Registrant's policies and procedures that it uses to determine how to vote proxies relating to portfolio securities are attached hereto. Item 8. Portfolio Managers of Closed-End Management Investment Companies. Not applicable Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. None. Item 10. Submission of Matters to a Vote of Security Holders. Not applicable. Item 11. Controls and Procedures. (a) The Registrant's principal executive and principal financial officer have concluded that the Registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)). (b) There was no change in the Registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) (17 CFR 270.30a-3(d)) that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting. Item 12. Exhibits. (a)(1) Code of ethics attached hereto. (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. (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. Proxy voting procedures attached hereto