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