As filed with the Securities and Exchange Commission on October 9, 1997
Securities Act File No. 33-_____
Investment Company Act File No. 811-5495
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
|X| REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
|_| Pre-Effective Amendment No. __
|_| Post-Effective Amendment No. __
and
|X| REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
|X| Amendment No. 7
--------------------
CIGNA HIGH INCOME SHARES
Exact Name of Registrant as Specified in Charter
950 WINTER STREET, SUITE 1200, WALTHAM, MASSACHUSETTS 02154
Address of Principal Executive Offices (Number, Street, City, State, Zip Code)
(860) 726-3700
Registrant's Telephone Number, including Area Code
ALFRED A. BINGHAM III
950 WINTER STREET, SUITE 1200
WALTHAM, MASSACHUSETTS 02154
Name and Address (Number, Street, City, State, Zip Code) of Agent for Service
WITH COPIES TO:
GEOFFREY R.T. KENYON, ESQ.
GOODWIN, PROCTER & HOAR
EXCHANGE PLACE
BOSTON, MASSACHUSETTS 02109
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
effective date of this Registration Statement.
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
================================================================================================================================
Proposed Maximum Proposed Maximum Amount of
Title of Securities Being Amount Being Registered Offering Price Per Aggregate Registration Fee
Registered Share(1) Offering Price (1) (1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Beneficial Interest 12,600,000 $7.99 $100,674,000 $30,508
without par value
============================ ======================== ========================= ========================== =================
</TABLE>
(1) Estimated pursuant to Rule 457(d) under the Securities Act of 1933, as
amended, on the basis of net asset value per share on October 3, 1997.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CIGNA HIGH INCOME SHARES
FORM N-2
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER OF CAPTION LOCATION OR HEADING IN PROSPECTUS
---------------------- ---------------------------------
Parts A and B
- -------------
<S> <C> <C>
1. Outside Front Cover..................... Outside Front Cover Page
2. Inside Front and Outside
Back Cover Page......................... Inside Front Cover Page
3. Fee Table and Synopsis.................. Expense Information; Prospectus Summary
4. Financial Highlights.................... Financial Highlights
5. Plan of Distribution ................... Not applicable
6. Selling Shareholders.................... Not applicable
7. Use of Proceeds......................... The Offer; The Fund; Investment Objectives and
Policies
8. General Description of the Registrant... Cover Page; The Fund; Investment Objectives and
Policies; Risk Factors and Special Considerations;
Management of the Fund
9. Management.............................. The Fund; Management of the Fund; Custodian
Transfer Agent; Dividend and Distributions;
Dividend Reinvestment Plan; Portfolio Trading;
Inside Front Cover Page
10. Capital Stock, Long-Term Debt,
and Other Securities.................. Description of Shares; Dividends and
Distributions; Dividend Reinvestment Plan;
Taxation
11. Defaults and Arrears on Senior
Securities............................ Not applicable
12. Legal Proceedings....................... Not applicable
13. Table of Contents of the Statement
of Additional Information............. Not applicable
14. Cover Page.............................. Not applicable
15. Table of Contents....................... Not applicable
16. General Information and History......... Not applicable
17. Investment Objective and Policies....... Cover Page; The Fund; Investment Objectives and
Policies; Risk Factors and Special Considerations
18. Management.............................. Management of the Fund
(i)
<PAGE>
19. Control Persons and Principal Holders
of Securities......................... Management of the Fund; Certain Owners of
Record
20. Investment Advisory and Other Services The Offer; The Fund; Management of the Fund
21. Brokerage Allocation and Other Practices Management of the Fund
22. Tax Status.............................. Dividends and Distributions; Dividend
Reinvestment Plan; Taxation
23. Financial Statements.................... Financial Statements
</TABLE>
Part C
- ------
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Post-Effective
Amendment to Registration Statement.
(ii)
<PAGE>
PART A
------
PROSPECTUS
<PAGE>
================================================================================
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT
CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY
SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY
PERSON IN ANY STATE OR JURISDICTION OF THE UNITED
STATES OR ANY COUNTRY WHERE SUCH OFFER WOULD BE UNLAWFUL.
____________________
TABLE OF CONTENTS
Page
----
Prospectus Summary
Expense Information
Financial Highlights
Net Asset Value and Market Price
Information
The Offer
Use of Proceeds
The Fund
Investment Objectives and Policies
Investment Restrictions
Risk Factors and Special Consideration
Management of Fund
Portfolio Trading
Determination of Total Asset Value
and Net Asset Value
Dividends and Distributions; Dividends
Reinvestment Plan
Taxation
Certain Owners of Record
Conversion to Open-End Status
Description of Shares
Custodian and Transfer Agent
Reports to Shareholders
Certain Legal Matters
Financial Statements
Available Information
Index to Financial Statements
Financial Statements Included in Prospectus
Appendix
================================================================================
================================================================================
[TREE LOGO OF CIGNA APPEARS HERE]
CIGNA HIGH INCOME SHARES
_____________ COMMON SHARES
ISSUABLE UPON EXERCISE OF
NON-TRANSFERABLE RIGHTS TO
SUBSCRIBE FOR SUCH COMMON SHARES
_________________
PROSPECTUS
_________, 1997
_________________
================================================================================
(iv)
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL NOR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
[THIS LEGEND APPEARS HORIZONATALLY ACROSS THE SPINE OF THIS PAGE]
SUBJECT TO COMPLETION, DATED OCTOBER 9, 1997
CIGNA HIGH INCOME SHARES
______________ COMMON SHARES ISSUABLE UPON EXERCISE OF NON-TRANSFERABLE
RIGHTS TO SUBSCRIBE FOR SUCH COMMON SHARES
CIGNA High Income Shares (the "Fund") is issuing to its shareholders of
record as of the close of business on __________________, 1997 rights ("Rights")
entitling the holders thereof to subscribe for an aggregate of
__________________ shares of beneficial interest of the Fund ("Common Shares")
at the rate of one Common Share for every three Rights held (the "Offer").
Shareholders of record will receive one non-transferable Right for each Common
Share beneficially owned and shareholders who fully exercise their Rights will
be entitled to subscribe for additional Common Shares not subscribed for by
other shareholders. Fractional shares will not be issued upon the exercise of
Rights; accordingly, shareholders who receive, or are left with, fewer than
three Rights will not be able to exercise such Rights. See "The Offer." THE
SUBSCRIPTION PRICE PER SHARE WILL BE THE NET ASSET VALUE PER SHARE OF THE FUND'S
COMMON SHARES AT THE CLOSE OF BUSINESS OF THE NEW YORK STOCK EXCHANGE ON
_____________, 1998. THE OFFER WILL EXPIRE AT 5:00 P.M. EASTERN TIME ON
___________, 1998.
The Fund is a closed-end diversified management investment company. Its
primary investment 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. HIGH-YIELD, HIGH RISK SECURITIES ARE
REGARDED BY RATING AGENCIES AS PREDOMINANTLY SPECULATIVE WITH RESPECT TO
CAPACITY TO PAY INTEREST AND REPAY PRINCIPAL. INVESTMENT IN SUCH SECURITIES AND
IN THE FUND ENTAILS SIGNIFICANT AND SUBSTANTIAL RISKS, WHICH ARE INCREASED BY
THE FUND'S LEVERAGED CAPITAL STRUCTURE, AND NO ASSURANCE CAN BE GIVEN THAT THE
FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVES. SEE "INVESTMENT OBJECTIVES AND
POLICIES" AND "RISK FACTORS AND SPECIAL CONSIDERATIONS--HIGH YIELD, HIGH RISK
INVESTMENTS." Subsequent to this Offer, the Fund expects to incur additional
indebtedness to enable the Fund to maintain approximately its current leverage
ratio after the issuance of the Common Shares upon exercise of the Rights. See
"Risk Factors and Special Considerations--Leverage."
As a result of the terms of the Offer, shareholders who do not fully
exercise their Rights will, upon the completion of the Offer, own a smaller
proportional interest in the Fund than would otherwise be the case. Furthermore,
the securities in which the Fund invests are generally traded in the
over-the-counter market and are valued at the most recent bid price. A bid price
reflects the price at which a security could be sold, and tends to be slightly
lower than the asked price, which reflects the price at which a security could
be purchased. Thus, the Fund's net asset value is generally less than the
aggregate replacement cost of the Fund's portfolio securities and some dilution
may occur as a result of the Offer. Some additional dilution of the aggregate
net asset value of the Common Shares presently owned by the shareholders will
occur as a result of the Offer because of expenses of the Offer. See "The
Offer--Investment Considerations."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==============================================================================================================================
Estimated Estimated Proceeds
Subscription Price (1) Sales Load to Fund (2)(3)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share ............................... $7.99 $ 0 $7.96
- ------------------------------------------------------------------------------------------------------------------------------
Total(4)................................. $100,674,000 $ 0 $100,248,000
===============================================================================================================================
</TABLE>
(1) This is an estimated price. The actual Subscription Price will be the net
asset value per Common Share on ___________, 1998.
(2) Reflects deduction of offering expenses incurred by the Fund, estimated at
$426,000. Based on Estimated Subscription Price.
(3) Funds received by the Subscription Agent will be deposited into a segregated
interest-bearing account (which interest will accrue to the benefit of the Fund)
pending allotment pursuant to the over-subscription privilege described herein
and distribution of Common Shares. Interest on such Funds is not reflected.
(4) Assumes all Rights are exercised at the estimated Subscription Price.
---------------------
THIS PROSPECTUS SETS FORTH CONCISELY INFORMATION ABOUT THE FUND THAT A
PROSPECTIVE INVESTOR OUGHT TO KNOW BEFORE INVESTING AND SHOULD BE READ CAREFULLY
AND RETAINED FOR FUTURE REFERENCE.
The date of this Prospectus is __________,1997.
----------------
<PAGE>
The Fund announced the Offer before the opening of trading on the New
York Stock Exchange on October 9, 1997. The net asset values per Common Share at
the time of such announcement and on _______________, 1998 were $7.99 (based on
net asset value at the close of business on October 3, 1997) and $_____,
respectively, and the closing market prices of a Common Share of the Fund on
such Exchange on October 3, 1997, and ______ were $9.4375 and $_____,
respectively. The Common Shares of the Fund are listed and traded on the New
York Stock Exchange under the symbol "HIS."
----------------
The Fund's address is 950 Winter Street, Suite 1200, Waltham, Massachusetts
02154. For information please call the Fund's Information Agent at (800)
242-4410. The Fund's investment adviser is CIGNA Investments, Inc. (the
"Adviser" or "CII"), an indirect, wholly-owned subsidiary of CIGNA Corporation.
2
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information included elsewhere in this Prospectus.
THE OFFER
The Fund is issuing to its shareholders of record as of the close of
business on ___________, 1997 (the "Record Date") rights (the "Rights")
entitling the holders thereof to subscribe for an aggregate of _____________
common shares of beneficial interest (the "Common Shares") of the Fund (the
"Offer"). Shareholders of record will receive one non-transferable Right for
each Common Share beneficially owned on the Record Date. The Rights entitle the
holder to acquire at the Subscription Price (as hereinafter defined) one
additional Common Share for every three Rights held. Thus, if a shareholder owns
300 Common Shares on the Record Date, such shareholder will receive Rights to
purchase 100 additional Common Shares. Rights may be exercised at any time
during the Subscription Period, which commences on _________, 1997 and ends at
5:00 p.m. Eastern time, on __________, 1998 (the "Expiration Date"). Fractional
shares will not be issued upon the exercise of Rights; accordingly, shareholders
who receive, or are left with, fewer than three Rights will not be able to
exercise such Rights. The Rights are non-transferable. Therefore, only the
underlying Common Shares, and not the Rights, will be admitted for trading on
the New York Stock Exchange (the "NYSE").
Over Subscription Privilege. In addition, any shareholder who fully
exercises all Rights issued to such shareholder (other than those Rights which
cannot be exercised because they represent the right to acquire less than one
Common Share) will be entitled to subscribe for additional Common Shares not
subscribed for by other shareholders (the "Over-Subscription Privilege"). Common
Shares acquired pursuant to the Over-Subscription Privilege are subject to
allotment, which is more fully discussed under "The Offer--Over-Subscription
Privilege." For purposes of determining the number of Shares a holder may
acquire pursuant to the Offer, shareholders whose shares are held of record on
the Record Date by Cede, nominee for DTC, or by any other depository or nominee
will be deemed to be the holders of the Rights that are issued to Cede or such
other depository or nominee.
Subscription Price. The Subscription Price per Common Share will be the
net asset value per Common Share on ___________, 1998, the Expiration Date.
Because the Subscription Price will not be determined until the close of
business on the Expiration Date, shareholders who decide to acquire additional
Common Shares will not know, when they make such decision, the purchase price
for such Common Shares and will be required initially to pay for such additional
Common Shares at the estimated Subscription Price of $__.__
Exercising Rights. Rights may be exercised by completing and executing
the enclosed Exercise Form and mailing it, together with payment, to State
Street Bank and Trust Company, the Subscription Agent. Alternatively, a
shareholder may exercise Rights by completing and executing a Notice of
Guaranteed Delivery [(WHICH MAY BE OBTAINED FROM THE INFORMATION AGENT)] and
delivering it to the Subscription Agent. The Notice of Guaranteed Delivery must
be executed by a commercial bank or trust company having an office, branch or
agency in the United States or a New York Stock Exchange member firm, and must
guarantee delivery of (a) payment of the full Subscription Price and (b) a
properly completed and executed Exercise Form. Shareholders must return the
Exercise Form or Notice of Guaranteed Delivery to the Subscription Agent in a
manner that ensures delivery prior to 5:00 p.m., Eastern Time, on the Expiration
Date. CHECKS MUST ACTUALLY CLEAR BY 5:00 P.M., EASTERN TIME, ON THE EXPIRATION
DATE IN ORDER FOR RIGHTS TO BE EXERCISED. A SHAREHOLDER EXERCISING RIGHTS WILL
HAVE NO RIGHT TO RESCIND A PURCHASE AFTER THE SUBSCRIPTION AGENT HAS RECEIVED
PAYMENT OR A NOTICE OF GUARANTEED DELIVERY. There is no minimum number of Rights
which must be exercised in order for the Offer to close. For further information
regarding the exercise of Rights and the purchase of Shares see "The
Offer--Method of Exercise of Rights" and "The Offer--Payment for Shares."
Purpose of the Offer. The Offer seeks to reward existing shareholders of
the Fund by giving them the opportunity to purchase additional Common Shares at
a price equal to net asset value (which generally has been below market value)
without paying a brokerage commission. The Board of Trustees of the Fund has
determined that it would be in the best interests of the Fund and its
shareholders to increase the assets of the Fund available for investment. In
reaching its decision, the Board of Trustees of the Fund was advised by the
Fund's investment
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
adviser, CIGNA Investments, Inc. (the "Adviser" or "CII"), that an increase in
the assets of the Fund would permit the acquisition of new portfolio securities
while retaining longer-term investments that the Adviser believes should be
held, allow greater diversification of portfolio securities, afford
opportunities for the purchase and sale of portfolios securities in potentially
larger blocks and thus on potentially better terms, and otherwise enable the
Fund to take fuller advantage of investment opportunities. Increasing the size
of the Fund should also result in lowering its total expenses as a percentage of
average net assets and may increase liquidity on the NYSE, although there can be
no assurance that such will be the results. The Board of Trustees also
considered the potential dilutive effect of the Offer. See "Prospectus Summary
- -- Risk Factors and Special Consideration--Dilution." The Board of Trustees also
noted that the Fund's investment adviser, CIGNA Investment, Inc. (the "Adviser"
or "CII") would benefit from the Offer because its fee is a percentage of the
Fund's total assets.
Maintenance of Leverage Ratio. The Adviser presently intends to cause
the Fund to maintain its leverage ratio between approximately ____% (the current
level) and 30% of total Fund assets. In order to do so, the Fund intends to
increase its borrowings under a Revolving Credit Loan Agreement with PNC Bank,
National Association (for itself and as agent for other lenders named therein
"PNC Bank"). In the event that all of the Common Shares offered hereby are not
subscribed for, the amount of additional indebtedness ultimately incurred by the
Fund will be reduced in order to maintain the Fund's leverage ratio between
____% (the current level) and 30% of total Fund assets. See "Prospectus
Summary--Risk Factors and Special Considerations" and "Risk Factors and Special
Considerations--Leverage."
Monthly Dividends. The first regular monthly dividend to be paid on
Common Shares acquired upon the exercise of Rights will be the first monthly
dividend the record date for which occurs after the issuance of such Common
Shares following the Expiration Date. It is expected that the first dividend
received by shareholders with respect to additional Common Shares acquired in
this Offer will be declared on approximately _______, 1998 and paid on
approximately ______________, 1998.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER INQUIRIES SHOULD BE DIRECTED TO THE INFORMATION AGENT:
Corporate Investor Communications, Inc.
111 Commerce Road
Carlstadt, NJ 07072-2586
(800) 242-4410
Shareholders may also contact their brokers or nominees for information
with respect to the Offer.
IMPORTANT TERMS OF THE OFFERING
________, 1997 market price per Common Share........ $_____________
________, 1997 net asset value per Common Share..... $_____________
Estimated Subscription Price........................ $_____________
Common Shares outstanding at ________, 1997......... _____________
Non-Transferable Rights issued...................... _____________
Subscription ratio.................................. 3 Rights to
buy 1 Common Share
Maximum number of Common Shares to be issued........ _____________
HOW TO EXERCISE RIGHTS
o If your Common Shares are held in a brokerage account or
by a custodian bank, contact your broker or financial
adviser to exercise Rights on your behalf.
o If you are the record holder of Common Shares,
(1) Complete, sign and date the Exercise Form.
(2) Make your check or money order for $_________ for
each Common Share subscribed for, including any
Common Shares subscribed for pursuant to
Over-Subscription Privilege. This payment may be
more or less than the actual Subscription Price.
Additional payment may be required when the actual
Subscription Price is determined.
(3) Mail the Exercise Form and your payment in the
enclosed envelope to State Street Bank and Trust
Company in a manner that will ensure receipt and
clearance of payment prior to 5:00 p.m. on _________, 1997.
IMPORTANT DATES TO REMEMBER
Record Date __________, 1997
Subscription Period __________, 1997 - __________, 1998
Expiration Date (Exercise Forms and Payment
or Notices of Guaranteed Delivery Due) and
Determination of actual Subscription Price __________, 1998
Delivery of Exercise Forms pursuant to
Notices of Guaranteed Delivery __________, 1998
Confirmation Date __________, 1998
Delivery of Payment pursuant to Notices
of Guaranteed Delivery Not later than __________, 1998
Final Payment for Common Shares, Not later than __________, 1998
if Applicable
5
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
THE FUND
The Fund is a diversified, closed-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Fund was organized as a Massachusetts business trust on October 27,
1987 and commenced operations on August 10, 1988. The Fund's outstanding Common
Shares are listed and traded on the NYSE under the symbol "HIS." The average
weekly trading volume of the Common Shares on the NYSE during the Fund's three
quarters ended September 30, 1997 was approximately _______ shares. As of
October 3, 1997, the Fund had 37,342,566 Common Shares outstanding and net
assets of the Fund were $298,419,663.
The Adviser has been the investment adviser to the Fund since the Fund's
organization. Pursuant to an Investment Advisory Agreement, the Fund employs the
Adviser to manage the investment and reinvestment of the assets of the Fund,
subject to the control and periodic review of the Fund's Board of Trustees. The
Adviser is also responsible for overall management of the business affairs of
the Fund. For these services provided by the Adviser, pursuant to the Advisory
Agreement, the Fund pays the Adviser a monthly fee in an amount equal to 0.75%
per annum of the Fund's average weekly total asset value not in excess of
$200,000,000 and 0.50% per annum of the Fund's average weekly total asset value
over $200,000,000. As a percentage of average annual net assets, such fee is
presently 0.83% per annum. Although this fee is higher than the investment
advisory fees paid for similar services by most other investment companies, the
Adviser believes it is comparable to fees paid for similar services by other
closed-end investment companies with objectives and policies similar to those of
the Fund. See "Management of the Fund--Advisory Agreement." The Adviser also
serves as investment adviser for other investment companies, including
investment companies sponsored by affiliates of CIGNA Corporation, and for a
number of pension, advisory, corporate and other accounts. As of September 30,
1997, the Adviser and other companies affiliated with CIGNA Corporation had
approximately $70 billion under management.
The Adviser seeks to achieve the Fund's investment objectives by
investing the assets of the Fund primarily in high-yield, high risk fixed-income
securities rated in the medium to lower categories by nationally recognized
rating services (Baa or lower by Moody's Investors Service, Inc. or BBB or lower
by Standard & Poor's Corporation) or non-rated securities which in the Adviser's
opinion are of comparable quality. These securities are commonly referred to as
"junk bonds." Securities purchased by the Fund will be subject to the following
principal speculative factors: interest rate risk, which is the potential for a
decline in the prices of fixed-income securities resulting from rising interest
rates; credit risk, which is the possibility that an issuer will fail to make
timely payments of interest or principal; event risk, which is the possibility
that corporate securities will suffer or decline in credit quality and market
value when the issuer undergoes a corporate restructuring. The special
considerations associated with the Fund's investment in high-yield, high risk
securities and the Fund's ability to leverage its portfolio are discussed below
under "Prospectus Summary--Risk Factors and Special Considerations," "Investment
Objectives and Policies," "Risk Factors and Special Considerations--Leverage"
and "Risk Factors and Special Considerations--High-Yield, High Risk
Investments."
The Fund may also invest in foreign securities, which may involve
greater risks than those associated with investing in domestic securities, such
as foreign currency exchange fluctuations, foreign income taxes, the possibility
of governmental expropriation or confiscatory taxation, limitations on the
removal of assets, less publicly available information, different standards or
practices of auditing and accounting, less governmental supervision and
regulation of foreign markets, and higher transaction and custodian fees. In
addition, the Fund may invest in securities that lack an established secondary
trading market or may otherwise be considered illiquid. Illiquid securities may
trade at a discount from, and may be more difficult to dispose of and more
volatile than, comparable investments with greater liquidity. The Fund may also
from time to time employ certain investment techniques, including financial
futures contracts, lending portfolio securities, "when issued" securities and
repurchase agreements, which may involve additional risks. See "Investment
Objectives and Policies."
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
RISK FACTORS AND SPECIAL CONSIDERATIONS
The following summarizes certain matters that should be considered,
among others, in connection with the Offer.
Dilution. As a result of the terms of the Offer, shareholders who do not
fully exercise their Rights should expect that they will, at the completion of
the Offer, own a smaller proportional interest in the Fund than would otherwise
be the case. Furthermore, the securities in which the Fund invests are generally
traded in the over-the-counter market and are valued at the most recent bid
price. A bid price reflects the price at which a security could be sold, and
tends to be slightly lower than the asked price, which reflects the price at
which a security could be purchased. Thus, the Fund's net asset value is
generally less than the aggregate replacement cost of the Fund's portfolio
securities and some dilution may occur as a result of the Offer. While the
Adviser does not believe that it is possible to quantify this dilution in a
meaningful manner, the Adviser currently believes that the aggregate replacement
cost of the Fund's portfolio securities (based on an estimate of the current
spread between bid and asked prices) does not exceed 1% of the Fund's net asset
value. Some additional dilution of the aggregate net asset value of the Common
Shares presently owned by the shareholders will occur as a result of the Offer
because of expenses of the Offer. For example, if the Subscription Price per
Common Share were the Fund's net asset value per share as of October 3, 1997,
assuming all Rights are exercised and based on estimated offering expenses, the
Fund's net asset value per share would be reduced on October 3, 1997 by less
than $.012 or less than 0.15% as a result of payment of such expenses.
Leverage. Leverage creates the opportunity for greater total returns,
but, at the same time, is a speculative technique involving special risk
considerations for holders of the Fund. These considerations include the
potential for higher volatility of both the market value and net asset value of
the Common Shares and the relatively greater effect on the net asset value of
the Common Shares caused by changes in interest rates. Assuming the Fund
receives net proceeds of $100.3 million pursuant to the Offer (see "The
Offer--Use of Proceeds"), to have its leverage ratio at approximately 25% of
total assets, the Fund would anticipate increasing its outstanding borrowings
under the Revolving Credit Agreement with PNC Bank following the Offer by
approximately $35.5 million. The Fund has requested an amendment to the
Revolving Credit Agreement to increase its borrowings thereunder from the
current level by $50 million to an aggregate of $151.3 million.
In addition to exaggerating increases and decreases in both the market
value and net asset value of the Common Shares, leverage exaggerates increases
or decreases in the yield from the Fund's portfolio. Historically, the leverage
obtained from the Fund's indebtedness to PNC Bank has provided shareholders with
a higher yield than would have been attained without such leverage; however,
there can be no assurance that the Fund will be able to continue to realize such
favorable investment results using leverage. Changes in certain factors could
cause the relationship between the interest paid on the Fund's indebtedness to
increase relative to interest rates on the portfolio securities in which the
Fund may be invested. Under such conditions the benefit of leverage will be
reduced and the Fund's leveraged capital structure could result in a lower rate
of return to shareholders than if the Fund were not leveraged.
The Fund is required, under the 1940 Act, to maintain asset coverage (as
defined in the 1940 Act) of not less than 300% with respect to borrowings when
made and, under the Revolving Credit Agreement with PNC Bank, to repay that
portion of principal borrowings equal to the difference (if positive) between
(i) 300% multiplied by the outstanding principal borrowings and (ii) the current
value of the Fund's Eligible Assets (as defined in such agreement). If the asset
coverage declines below either of these asset coverage levels (as a result of
market fluctuations or otherwise), the Fund may be required to sell a portion of
its investments at a time when it may be disadvantageous to do so. Upon the
liquidation of the Fund, the holders of the Fund's indebtedness, including any
additional indebtedness incurred by the Fund after the Offer, will be entitled
to receive repayment of outstanding principal plus accumulated and unpaid
interest thereon before any distribution is made to holders. See "Risk Factors
and Special Considerations--Leverage."
High-Yield, High Risk Investments. The securities offering the high
current income sought by the Fund are principally those securities that either
are rated below investment grade by recognized rating agencies or are not-
rated, but are, in the Adviser's opinion, of comparable quality. These
securities are generally regarded as
- --------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligations and will generally
involve more credit risk than securities in the higher rating categories. Such
securities tend to be subject to greater market fluctuations and greater
sensitivity to both economic and corporate downturns, and such securities are
frequently subordinated to the prior payment of senior indebtedness. In
addition, the trading market for high-yield, high risk securities is generally
less liquid than the market for higher rated securities. The achievement of the
Fund's objectives may generally depend more on the Adviser's credit analysis and
monitoring and less on that of credit rating agencies than may be the case for
Fund's investments in higher rated securities. See "Risk Factors and Special
Considerations--High Yield, High Risk Investments."
Premium/Discount From Net Asset Value. Shares of closed-end investment
companies trade in the market above, at and below net asset value. This
characteristic of shares of closed-end investment companies is a risk separate
and distinct from the risk that the Fund's net asset value will decline. The
Common Shares of the Fund since its inception have generally traded at a premium
to net asset value. For example, during the period from the Fund's commencement
of operations through September 30, 1997, as of the close of business of the
NYSE on the last day in each week on which the NYSE was open (the time the Fund
calculates its net asset value per share), closing sale price of the Common
Shares on the NYSE exceeded the Fund's net asset value ___% of the time. The
Fund is not able to predict whether its shares will trade above, below or at net
asset value in the future. In the event that the Common Shares are not trading
at a price greater than or equal to net asset value on the Pricing Date, the
Subscription Price will be greater than the market price on the NYSE. See "Net
Asset Value and Market Price Information" for the ranges of the market prices
and the ranges of the net asset values of the Common Shares for each calendar
quarter since March 31, 1995.
INVESTORS SHOULD CAREFULLY CONSIDER THEIR ABILITY TO ASSUME THE
FOREGOING RISKS AND OTHER RISKS DESCRIBED HEREIN BEFORE MAKING AN ADDITIONAL
INVESTMENT IN THE FUND. AN INVESTMENT IN THE FUND IS NOT APPROPRIATE FOR ALL
INVESTORS. SEE "THE OFFER--INVESTMENT CONSIDERATIONS," "INVESTMENT OBJECTIVES
AND POLICIES" AND "RISK FACTORS AND SPECIAL CONSIDERATIONS."
- --------------------------------------------------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
EXPENSE INFORMATION
<TABLE>
<CAPTION>
Shareholder Transaction Expenses
- --------------------------------
<S> <C>
Sales Load (as a percentage of offering price).......................................... None
Dividend Reinvestment Plan Fees......................................................... None(1)
<CAPTION>
Annual Expenses (as a percentage of average net assets attributable to Common Shares)(2)
- ----------------------------------------------------------------------------------------
<S> <C>
Advisory Fee............................................................................ 0.79%
Interest Payments on Borrowed Funds..................................................... 2.26%
Other Operating Expenses................................................................ .15%
<S> <C>
Total Annual Expenses............................................................................ 3.20%
=====
</TABLE>
- -------------------------
(1) Each participant will, however, pay a pro rata share of brokerage
commissions if Common Shares are purchased by the Dividend Paying Agent
in the open market, which occurs only when the net asset value of Common
Shares exceeds the market price.
(2) See "Management of the Fund--Advisory Agreement" for additional
information. "Other Operating Expenses" have been estimated for the
current fiscal year.
Example
- -------
An investor would directly or indirectly pay the following expenses on a
$1,000 investment in the Fund, assuming a 5% annual return:
One Year Three Years Five Years Ten Years
-------- ----------- ---------- ---------
$32 $99 $167 $351
The purpose of the foregoing table is intended to assist potential Fund
investors in understanding the various costs and expenses associated with
investing in the Fund.
This Example assumes that all dividends and other distributions are
reinvested at net asset value and that the percentage amounts under Total Annual
Expenses remain the same in the years shown. For more complete description of
certain of the Fund's costs and expenses, see "Management of the Fund." This
Example should not be considered a representation of past or future expenses,
and the Fund's actual expenses may be more or less than those shown. In
addition, the Fund's actual performance may be higher or lower than the assumed
annual return.
- --------------------------------------------------------------------------------
9
<PAGE>
FINANCIAL HIGHLIGHTS
The following per share data and ratios with respect to a Common Share
of the Fund outstanding throughout each period indicated has been audited by
Price Waterhouse LLP, independent accountants, as indicated in their report
included with the Fund's audited financial statements herein and should be read
in conjunction with the audited financial statements and related notes thereto.
<TABLE>
<CAPTION>
(Unaudited)
9 Mos. Year Ended December 31,
Ended
Sept. 30, 1997 1996 1995 1994 1993
- ----------------------------------- ---------------------------------- ------------ ------------------------- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.19 $ 6.59 $7.54 $ 6.99
INCOME FROM INVESTMENT OPERATIONS
Net investment income (1) 0.85 0.84 0.86 0.97
Net realized and unrealized gains (losses) 0.29 0.60 (0.91) 0.58
------ ------ ------- ------
TOTAL FROM INVESTMENT OPERATIONS 1.14 1.44 (0.05) 1.55
------ ------ ------- ------
LESS DISTRIBUTIONS:
Distributions from net investment income (0.90) (0.84) (0.88) (0.97)
Distributions in excess of net investment income - - (0.02) (0.03)
------- -------- ------- -------
TOTAL DISTRIBUTIONS (0.90) (0.84) (0.90) (1.00)
------- ------- ------- -------
Net asset value, end of period $ 7.43 $ 7.19 $ 6.59 $ 7.54
------ ------ ------ ------
Market value, end of period $ 8.38 $ 7.88 $ 7.00 $ 8.38
------ ------ ------ ------
TOTAL INVESTMENT RETURN:
Per share market value 19.25% 26.24% (5.43)% 19.62%
Per share net asset value (2) 16.70% 22.93% (0.76)% 23.25%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $273,500 $259,773 $233,454 $195,489
Ratio of operating expenses to average net assets 1.07% 1.12% 1.17% 1.21%
Ratio of interest expense to average net assets 2.28% 2.68% 2.10% 1.66%
Ratio of net investment income to average net assets 11.60% 12.03% 12.33% 12.98%
Portfolio turnover 78% 60% 72% 48%
Aug 10,
1988**
to
Dec. 31,
1992 1991 1990 1989 1988
- ----------------------------------- ---------------------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 6.62 $ 4.73 $ 7.41 $ 9.11 $ 9.26
INCOME FROM INVESTMENT OPERATIONS
Net investment income (1) 0.98 0.94 1.04 1.21 0.46
Net realized and unrealized gains (losses) 0.40 1.91 (2.66) (1.69) (0.16)
------ ------ ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS 1.38 2.85 (1.62) (0.48) 0.30
------ ------ ------- ------- ------
LESS DISTRIBUTIONS:
Distributions from net investment income (0.98) (0.94) (1.04) (1.22) (0.45)
Distributions in excess of net investment income (0.03) (0.02) (0.02)+ - -
------- ------- -------- --- --
TOTAL DISTRIBUTIONS (1.01) (0.96) (1.06) (1.22) (0.45)
------ ------ ------ ------ -------
Net asset value, end of period $ 6.99 $ 6.62 $ 4.73 $ 7.41 $ 9.11
------ ------ ------ ------ ------
Market value, end of period $ 7.88 $ 7.25 $ 4.00 $ 7.75 $ 9.38
------ ------ ------ ------ ------
TOTAL INVESTMENT RETURN:
Per share market value 24.36% 111.31% (38.06)% (4.98)% (1.63)%
Per share net asset value (2) 21.65% 64.13% (23.76)% (6.24)% (4.37)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $176,974 $163,173 $127,414 $194,168 $228,473
Ratio of operating expenses to average net assets 1.20% 1.26% 1.34% 1.08% 1.01%*
Ratio of interest expense to average net assets 1.91% 2.79% 4.00% 3.43% 2.08%*
Ratio of net investment income to average net assets 13.81% 15.49% 16.98% 14.06% 12.86%*
Portfolio turnover 45% 35% 14% 32% 9%
</TABLE>
(1) Net investment income per share has been calculated in accordance with SEC
requirements, with the exception that end of year accumulated
undistributed/(overdistributed) net investment income has not been adjusted
to reflect current year permanent differences between financial and tax
accounting.
(2) 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,
except for the 1988 period. The 1988 calculation is based on the initial
offering price of $10.00 per Common Share, rather than using the initial
net asset value of $9.26 (after deducting organizational and offering
expenses of $.74 per Common Share) which would have resulted in 3.27%
return. These percentages do 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 Common Shares and net asset
value varied during each period.
+ Restated for consistency with current accounting standards. Originally
reported as a distribution from paid-in capital.
* Annualized.
** Commencement of operations.
10
<PAGE>
The following table shows certain information regarding the Fund's
outstanding loan from PNC Bank as of the end of each fiscal year of the Fund
since its inception. Such bank loan has been the only class of senior security
of the Fund since the inception of the Fund.
<TABLE>
<CAPTION>
Coverage for
Bank Loan 1940 Act
Total Under Coverage
At Amount Applicable for Bank
December 31 Outstanding Agreement(1) Loan(2)
----------- ----------- ------------ -------
<S> <C> <C> <C>
1988(3) $76,300,000 382.24% 399.44%
1989 72,900,000 343.38 366.35
1990 48,800,000 346.18 361.09
1991 58,100,000 354.44 381.13
1992 72,400,000 322.64 344.64
1993 69,800,000 331.62 380.23
1994 90,700,000 346.54 358.48
1995 91,600,000 371.16 383.93
1996 96,000,660 366.55 385.39
</TABLE>
- ---------------------------
(1) Calculated by dividing the Fund's total Eligible Assets within the
meaning of the Revolving Credit Agreement with PNC Bank by the Fund's
total liabilities, including the principal amount outstanding under the
Revolving Credit Agreement with PNC Bank.
(2) Calculated by dividing the Fund's total assets by the principal amount
outstanding under the Revolving Credit Agreement with PNC Bank.
(3) The Fund commenced investment operations on August 10, 1988.
11
<PAGE>
NET ASSET VALUE AND MARKET PRICE INFORMATION
The Common Shares of the Fund are listed on the NYSE. The following
table shows, for each calendar quarter since the beginning of 1995 (i) the high
and low net asset values per Common Share of the Fund, (ii) the high and low
sale prices per Common Share, as reported in the consolidated transaction
reporting system, and (iii) the high and low percentage by which the Common
Shares traded at a premium over, or discount from, the Fund's net asset values
per Common Share.
<TABLE>
<CAPTION>
Percentage
Premium Over
(Discount Under)
Net Asset Value Market Price Net Asset Value
--------------- ------------ ---------------
Quarter Ended High Low High Low High Low
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1995 6.88 6.61 7.25 6.375 6.46 (0.89)
June 30, 1995 7.13 6.87 7.875 7.125 9.77 3.26
September 30, 1995 7.17 7.07 8.00 7.50 11.89 4.60
December 31, 1995 7.26 7.11 8.125 7.75 12.52 8.39
March 31, 1996 7.41 7.23 8.25 7.75 12.38 8.70
June 30, 1996 7.32 7.23 8.375 7.875 13.79 9.29
September 30, 1996 7.57 7.24 8.375 7.875 12.87 7.29
December 31, 1996 7.61 7.40 8.75 8.25 16.05 8.55
March 31, 1997 7.69 7.36 8.875 8.375 17.19 12.16
June 30, 1997 7.32 7.75 8.9375 8.375 17.83 13.05
September 30, 1997
</TABLE>
The Fund's shares have generally traded at a price greater than net asset value
per share. See "Risk Factors and Special Considerations--Premium/Discount from
Net Asset Value." At the time of the announcement of the Offer (before the
opening of trading on the NYSE on October 9, 1997) and at the close of business
on _____________, 1998 the Fund's net asset value per Common Share was $7.99
(based on net asset value at the close of business on October 3, 1997) and
$________, respectively, while the closing market price of a Common Share on the
NYSE on October 3, 1997 and _______ __, 1998 was $9.4375 and $____________,
respectively.
12
<PAGE>
THE OFFER
TERMS OF THE OFFER
The Fund is issuing to its shareholders of record as of the close of
business on the Record Date Rights entitling the owners thereof to subscribe for
additional Common Shares. Each three Rights will entitle the holder to acquire
one full Common Share at the Subscription Price. Each shareholder of record will
receive one Right for each full Common Share beneficially owned on the Record
Date, and thus will be able to acquire one Common Share for each three Common
Shares beneficially owned on such date.
Rights may be exercised at any time during the Subscription Period,
which commences on ________, 1997 and ends at 5:00 p.m., Eastern time on
_________, 1998, which is the Expiration Date. Fractional shares will not be
issued and shareholders who receive, or are left with, fewer than three Rights
will not be able to exercise such Rights.
In addition, any shareholder who fully exercises all Rights initially
issued to such shareholder (other than those Rights that cannot be exercised
because they represent in the aggregate the right to acquire less than one
Common Share) will be entitled to subscribe for additional Common Shares
pursuant to the Over-Subscription Privilege. Common Shares acquired pursuant to
the Over-Subscription Privilege are subject to allotment, which is more fully
discussed below under "The Offer--Over-Subscription Privilege."
Participants in the Fund's Automatic Dividend Reinvestment Plan (the
"Plan") will be issued Rights for the Common Shares held in their accounts in
the Plan as of the Record Date. Participants wishing to exercise such Rights
must exercise such Rights in accordance with the procedures set forth below in
"The Offer--Method of Exercise of Rights" and "The Offer--Payment for Shares."
Such Rights will not be exercised automatically by the Plan.
For purposes of determining whether a shareholder has fully exercised
such shareholder's Rights and for purposes of allotment, Common Shares and
Rights held of record by Cede & Co, Inc. ("Cede"), nominee for The Depository
Trust Company, or any other depository or nominee will be deemed to be held by
the broker-dealer on whose behalf they are held (or, if there is no
broker-dealer, by the shareholder on whose behalf they are held).
PURPOSE OF THE OFFER
The Offer seeks to reward existing shareholders of the Fund by giving
them the opportunity to purchase additional Common Shares at a price equal to
net asset value (which generally has been below market value) without paying a
brokerage commission. The Board of Trustees of the Fund has determined that it
would be in the best interest of the Fund and its shareholders to increase the
assets of the Fund available for investment. In reaching its decision, the Board
of Trustees was advised by the Adviser that an increase in the assets of the
Fund would permit the acquisition of new portfolio securities while retaining
longer-term investments that the Adviser believes should be held, allow greater
diversification of portfolio securities, afford opportunities for the purchase
and sale of portfolios securities in potentially larger blocks and thus on
potentially better terms, and otherwise enable the Fund to take fuller advantage
of investment opportunities. The Board of Trustees also took into account that a
well-subscribed Offer would tend to reduce the Fund's expense ratio, which would
be of long-term benefit to shareholders. A well-subscribed Rights offering also
could increase liquidity on the NYSE where the Fund's Common Shares are traded.
In connection with its analysis, the Boards of Trustees also considered the
effect of the Fund's previous rights offering, which was completed in June,
1994. This offering permitted shareholders to acquire, at a subscription price
of $7.06 (the net asset value of the Common shares on the expiration date), one
new share for each three rights exercised in such rights offering. All of the
rights issued by the Fund pursuant to the rights offering were exercised and, as
a result, 8,748,477 new Common Shares were issued, with net proceeds to the Fund
of approximately $61.4 million. All of the proceeds from the exercise of rights
in the offering were invested in securities in accordance with the Fund's
investment objective.
The Board of Trustees also considered the potential dilutive effect of
the Offer. The Adviser provided the Trustees with information as to the
estimated expenses of the Offer and noted that some dilution may be deemed
13
<PAGE>
to occur as a result of the use of "bid" prices for portfolio securities which
are traded in the over-the-counter market. See "The Offer--Investment
Considerations." It was noted that the terms of the Offer provide for the
Subscription Price to be equal to net asset value per share on the Expiration
Date and accordingly, that the extent of any dilution is likely to be slight as
compared to rights offerings by closed-end funds pursuant to which participating
shareholders are able to purchase shares at a discount to net asset value.
The Trustees noted that the Adviser would benefit from the Offer because
its fee is based on the magnitude of the Fund's total assets. It is not possible
to state precisely the amount of additional compensation the Adviser will
receive as a result of the Offer because it is not know how many Common Shares
will be subscribed for and because the proceeds of the Offer will be invested in
additional portfolio securities which will fluctuate in value. However, assuming
all Common Shares offered hereby are sold at the estimated Subscription Price of
$7.99 per Common Share, after deducting offering expenses payable by the Fund
estimated at approximately $426,000, and assuming additional leverage of $35.5
million (resulting in a total increase of approximately $135,748,000 in assets
under management) the Adviser would receive additional advisory fees of
approximately $679,000 per annum as a result of the increase in assets under
management.
The Board of Trustees, is composed of five trustees, two of whom are
"interested persons" of the Fund as that term is defined in the 1940 Act. These
two Trustees could benefit indirectly from the Offer because of their
affiliations with the Adviser. The other three Trustees are not "interested
persons" of the Fund. See "Management of the Fund." The Offer was approved
unanimously by those Trustees present and voting at a meeting of the Board of
Trustees at which a quorum was present and acting throughout, and by a majority
of the Trustees who are not "interested persons" of the Fund.
The Fund may, in the future and at its discretion, choose to make
additional rights offerings from time to time for a number of shares and on
terms which may or may not be similar to this Offer. Any such further rights
offering will be made in accordance with the 1940 Act.
NON-TRANSFERABILITY OF RIGHTS
The Rights are not transferable. Therefore, only the underlying Common
Shares, and not the Rights, will be admitted for trading on the NYSE.
OVER-SUBSCRIPTION PRIVILEGE
If some shareholders do not exercise all of the Rights initially issued
to them on Primary Subscription, any Common Shares for which subscriptions have
not been received from shareholders will be offered by means of the
Over-Subscription Privilege to the shareholders who have exercised all the
Rights initially issued to them (other than those Rights representing in the
aggregate the right of each such shareholder to subscribe for less than one full
Common Share) and who wish to acquire more than the number of Common Shares for
which the Rights issued to them are exercisable. Shareholders who exercise on
Primary Subscription all of the Rights initially issued to them (other than
those Rights representing in the aggregate the right of each such shareholder to
subscribe for less than one full Common Share) will be asked to indicate, on
their Exercise Forms how many Common Shares they would desire pursuant to the
Over-Subscription Privilege. If sufficient Common Shares remain as a result of
unexercised Rights, all over-subscriptions will be honored in full. If
sufficient Common Shares are not available to honor all over-subscriptions, the
available Common Shares will be allocated among those who over-subscribe based
on the number of Rights originally issued to them by the Fund, so that, under
such circumstances, the number of Common Shares issued to shareholders who
subscribe pursuant to the Over-Subscription Privilege will generally be in
proportion to the number of Common Shares owned by them in the Fund on the
Record Date. The allocation process may involve a series of allocations in order
to assure that the total number of Common Shares available for
over-subscriptions is distributed on a pro-rata basis. Each shareholder is
required to purchase all Common Shares allocated to such shareholder pursuant to
the Over-Subscription Privilege to the full extent requested by such shareholder
on the Exercise Form. If a shareholder fails to pay for all Common Shares
subscribed for, the Fund may take the actions described under "The
Offer--Payment For Shares."
14
<PAGE>
The Fund will not otherwise offer or sell any Common Shares which are
not subscribed for pursuant to the Primary Subscription or the Over-Subscription
Privilege.
Nominee holders of Rights will be required to certify to the
Subscription Agent, before any Over- Subscription Privilege may be exercised as
to any particular beneficial owner, as to the aggregate number of Rights
exercised pursuant to the Primary Subscription and the number of Common Shares
subscribed for pursuant to the Over-Subscription Privilege by such beneficial
owner and that such beneficial owner's Primary Subscription was exercised in
full.
THE SUBSCRIPTION PRICE
The Subscription Price of the Common Shares to be issued pursuant to the
Rights will be the net asset value per Common Share as computed on
_________________, 1998 (which is the Expiration Date). There can be no
assurance that the Subscription Price will be less than the last reported sales
price of a Common Share on the Expiration Date. In the event that the Fund's
shares are not trading at a price greater than or equal to net asset value on
the Expiration Date, the Subscription Price will be greater than the market
price on the NYSE.
The actual Subscription Price will not be known at the time Rights are
exercised. Shareholders who exercise Rights will be required initially to pay
for the Common Shares at an estimated Subscription Price of $7.99. As described
below under "Payment for Shares," if the actual Subscription Price is lower,
excess payments will be refunded, and if the actual Subscription Price is
higher, shareholders exercising Rights (other than shareholders who have
guaranteed payment by delivering a Notice of Guaranteed Delivery) must make an
additional payment by _________, 1998. Shareholders will have no right to
rescind a purchase after receipt by the Subscription Agent of their payment for
Common Shares or a Notice of Guaranteed Delivery.
The Fund announced the Offer before the opening of trading on the NYSE
on October 9, 1997. The net asset value per Common Share at the time of such
announcement (based on net asset value at the close of business on October 3,
1997) and at the close of business on _______________, 1998 was $7.99 and
$________, respectively, and the closing market price per Common Share on the
NYSE on October 3, 1997 and __________ __, 1998 was $9.4375 and $______,
respectively.
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 p.m., Eastern time, on _______, 1998,
which is the Expiration Date. Rights will expire on the Expiration Date and
thereafter may not be exercised. Because the Subscription Price will be the net
asset value per Common Share at the close of business on the Expiration Date,
shareholders who decide to acquire Common Shares on Primary Subscription or
pursuant to the Over-Subscription Privilege will not know, when they make such
decision, the Subscription Price for such Common Shares.
SUBSCRIPTION AGENT
The Subscription Agent is State Street Bank and Trust Company, Two
Heritage Drive, North Quincy, Massachusetts 02171, which will receive, for its
administrative, processing, invoicing and other services as subscription agent,
a fee estimated to be $______, and reimbursement for all out-of-pocket expenses
related to the Offer. The Subscription Agent is also the Fund's Custodian,
Dividend Paying Agent, Transfer Agent and Registrar with respect to the Common
Shares. Shareholder communications should be directed to State Street Bank and
Trust Company, 2 Heritage Drive, 4th Floor, North Quincy, Massachusetts 02171
(telephone 1 (800) 426-5523). SIGNED EXERCISE FORMS SHOULD BE SENT TO STATE
STREET BANK AND
15
<PAGE>
TRUST COMPANY, by one of the methods described below. The Fund reserves the
right to accept exercise forms actually received on a timely basis at any of the
addresses listed.
(1) BY FIRST CLASS MAIL:
State Street Bank and Trust Company
Corporate Reorganization Department
P.O. Box 9061
Boston, MA 02205-8686
(2) BY EXPRESS MAIL OR OVERNIGHT COURIER:
State Street Bank and Trust Company
Corporate Reorganization Department
2 Heritage Drive, 4th Floor
North Quincy, MA 02171
(3) BY HAND:
State Street Bank and Trust Company
225 Franklin Street - Concourse Level
Boston, MA 02110
or
State Street Bank and Trust Company
61 Broadway - Concourse Level
New York, NY 10006
DELIVERY TO AN ADDRESS OTHER THAN THE ABOVE DOES NOT CONSTITUTE GOOD
DELIVERY.
INFORMATION AGENT
Any questions or requests for assistance may be directed to the
Information Agent at its telephone number and address listed below:
The Information Agent for the Offer is:
Corporate Investor Communications, Inc.
111 Commerce Road
Carlstadt, NJ 07072-2586
(800) 242-4410
The Information Agent will receive a fee estimated to be $______ and
reimbursement for all out-of-pocket expenses related to the Offer.
Shareholders may also contact their brokers or nominees for information
with respect to the Offer.
METHOD OF EXERCISE OF RIGHTS
Rights may be exercised by filling in and signing the Exercise Form and
mailing it in the envelope provided, or otherwise delivering the completed and
signed Exercise Form to the Subscription Agent, together with payment for the
Common Shares as described below under "Payment for Shares." Shareholders may
also exercise Rights by contacting a broker, bank or trust company who can
arrange, on behalf of the shareholder, to guarantee delivery
16
<PAGE>
of payment and of a properly completed and executed Exercise Form by using a
Notice of Guaranteed Delivery. A fee may be charged for this service. Fractional
shares will not be issued, and shareholders who receive, or who are left with
fewer than, three Rights will not be able to exercise such Rights. Completed
Exercise Forms must be received by the Subscription Agent prior to 5:00 p.m.,
Eastern time, on the Expiration Date (unless payment is effected by means of a
Notice of Guaranteed Delivery as described below under "Payment for Shares") at
one of the offices of the Subscription Agent at the addresses set forth above.
Shareholders Who Are Record Owners. Shareholders who are record owners
can choose between either option set forth under "Payment for Shares" below. If
time is of the essence, option (2) will permit delivery of the Exercise Form and
payment after the Expiration Date.
Shareholders Whose Common Shares Are Held By A Nominee. Shareholders
whose Common Shares are held by a nominee such as a broker or trustee, must
contact that nominee to exercise their Rights. In that case, the nominee will
effect the exercise of Rights on behalf of the shareholder and arrange for
proper payment by one of the methods set forth under "Payment for Shares" below.
Such shareholders must nevertheless exercise their respective Primary
Subscriptions in full in order to exercise Rights pursuant to the
Over-Subscription Privilege.
Nominees. Nominees who hold Common Shares for the account of others
should notify the respective beneficial owners of such Common Shares as soon as
possible to ascertain such beneficial owners' intentions and to obtain
instructions with respect to the Rights. If the beneficial owner so instructs,
the nominee should complete the Exercise Form and submit it to the Subscription
Agent with the proper payment described or follow the procedures for guaranteed
delivery described under "Payment for Shares" below. Nominees will be required
to submit a Nominee Over-Subscription Form to the Subscription Agent in order to
exercise Rights pursuant to the Over-Subscription Privilege. Nominees will be
required to certify to the Subscription Agent as to the number of Common Shares
subscribed for on Primary Subscription by each beneficial owner, the number of
Common Shares subscribed for pursuant to the Over-Subscription Privilege by each
beneficial owner and whether each beneficial owner has exercised the Primary
Subscription in full.
PAYMENT FOR SHARES
Shareholders who acquire Common Shares on Primary Subscription or
pursuant to the Over-Subscription Privilege may choose between the following
methods of payment:
(1) A shareholder may send the Exercise Form, together with
payment for the Common Shares acquired on Primary Subscription and for
additional Common Shares subscribed for pursuant to the
Over-Subscription Privilege, to the Subscription Agent, calculating the
total payment on the basis of an estimated Subscription Price of $______
per Common Share. To be accepted, such payment, together with the
executed Exercise Form, must be received by the Subscription Agent at
one of the Subscription Agent's offices at the addresses set forth
above, prior to 5:00 p.m., Eastern time, on the Expiration Date. The
Subscription Agent will deposit all share purchase checks and any orders
received by it into a segregated interest bearing account (which
interest will accrue to the benefit of the Fund) pending allotment
pursuant to the Over-Subscription Privilege and distribution of Common
Shares. A PAYMENT PURSUANT TO THIS METHOD MUST BE IN UNITED STATES
DOLLARS BY MONEY ORDER OR CHECK DRAWN ON A BANK LOCATED IN THE UNITED
STATES, MUST BE PAYABLE TO CIGNA HIGH INCOME SHARES AND MUST ACCOMPANY
AN EXECUTED EXERCISE FORM FOR SUCH EXERCISE FORM TO BE ACCEPTED.
EXERCISE BY THIS METHOD IS SUBJECT TO ACTUAL COLLECTION OF CHECKS BY
5:00 P.M., EASTERN TIME, ON THE EXPIRATION DATE.
(2) Alternatively, a subscription will be accepted by the
Subscription Agent if, prior to 5:00 p.m., Eastern time, on the
Expiration Date, the Subscription Agent has received a Notice of
Guaranteed Delivery by facsimile (telecopy) or otherwise from a bank, a
trust company, or a NYSE member guaranteeing delivery of (i) payment of
the full Subscription Price (as determined on the Expiration Date) for
the Common Shares subscribed for on Primary Subscription and any
additional Common Shares subscribed for pursuant to the
Over-Subscription Privilege, and (ii) a properly completed and executed
Exercise Form. The Subscription Agent will not honor a Notice of
Guaranteed Delivery if a properly completed and
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executed Exercise Form is not received by the Subscription Agent by the
close of business on the fifth business day after the Expiration Date
and full payment for the Common Shares is not received by the
Subscription Agent by the close of business on the fifth business day
after the Confirmation Date (as defined below).
Within five business days following the Expiration Date, i.e.,
___________, 1998 (the "Confirmation Date"), a confirmation will be sent by the
Subscription Agent to each shareholder (or, if the Fund's Common Shares are held
by Cede or any other depository or nominee, to Cede or such depository or
nominee), showing (i) the number of Common Shares acquired pursuant to the
Primary Subscription, (ii) the number of Common Shares, if any, acquired
pursuant to the Over-Subscription Privilege, (iii) the per Common Share and
total purchase price (based on the actual Subscription Price as determined on
the Expiration Date) for the Common Shares, and (iv) any additional amount
payable by such shareholder to the Fund or any excess to be refunded by the Fund
to such shareholder, in each case based on the Subscription Price as determined
on the Expiration Date. If any shareholder exercises the right to acquire Common
Shares pursuant to the Over-Subscription Privilege, any such excess payment
which would otherwise be refunded to such shareholder will be applied by the
Fund toward payment for Common Shares acquired pursuant to exercise of the
Over-Subscription Privilege. Any additional payment required from a shareholder
(other than a shareholder who has guaranteed payment by delivering a Notice of
Guaranteed Delivery) must be received by the Subscription Agent within ten
business days after the Confirmation Date. Any payment due from a shareholder
pursuant to a Notice of Guaranteed Delivery shall be payable as provided in such
Notice of Guaranteed Delivery. Any excess payment to be refunded by the Fund to
a shareholder will be mailed by the Subscription Agent to such shareholder as
promptly as possible. All payments by shareholders must be in United States
dollars by money order or check drawn on a bank located in the United States and
payable to CIGNA High Income Shares.
THE METHOD OF DELIVERY OF EXERCISE FORMS AND PAYMENT OF THE SUBSCRIPTION
PRICE TO THE FUND WILL BE AT THE ELECTION AND RISK OF THE EXERCISING
SHAREHOLDER, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH EXERCISE FORMS AND
PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO ENSURE DELIVERY TO
THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO 5:00 P.M., EASTERN
TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT
LEAST FIVE BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY URGED TO PAY, OR ARRANGE FOR
PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK OR MONEY ORDER.
All questions concerning the timeliness, validity, form and eligibility
of any exercise of Rights will be determined by the Fund, whose determinations
will be final and binding. The Fund in its sole discretion may waive any defect
or irregularity or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of any Right.
Subscriptions will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as the Fund determines
in its sole discretion. The Fund will not be under any duty to give notification
of any defect or irregularity in connection with the submission of Exercise
Forms or incur any liability for failure to give such notification.
Whichever of the two methods described above is used, issuance and
delivery of certificates for the Common Shares purchased are subject to
collection of checks and actual payment pursuant to any Notice of Guaranteed
Delivery.
SHAREHOLDERS WILL HAVE NO RIGHT TO RESCIND THEIR SUBSCRIPTION AFTER
RECEIPT OF THEIR PAYMENT OR RECEIPT OF A NOTICE OF GUARANTEED DELIVERY FOR
(EITHER BY ORIGINAL OR BY FACSIMILE) COMMON SHARES BY THE SUBSCRIPTION AGENT.
If a shareholder who acquires Common Shares pursuant to the Primary
Subscription or Over-Subscription Privilege does not make payment of any
additional amounts due, the Fund reserves the right to take any or all of the
following actions: (i) sell such subscribed and unpaid-for Common Shares to
other shareholders; (ii) apply any payment actually received by it toward the
purchase of the greater whole number of Common Shares which could be acquired by
such holder upon exercise of the Primary Subscription and/or Over-Subscription
Privilege; and/or
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<PAGE>
(iii) exercise any and all other rights or remedies to which it may be entitled,
including, without limitation, the right to set-off against payments actually
received by it with respect to such subscribed Common Shares.
NOTICE OF NET ASSET VALUE DECLINE
The Fund has, as required by the Securities and Exchange Commission's
regulatory requirements, undertaken to suspend the Offer until it amends the
Prospectus if subsequent to __________, 1997, the effective date of the Fund's
Registration Statement, the Fund's net asset value declines more than 10% from
its net asset value as of that date. In such event, the Fund will notify
shareholders of any such decline and thereby permit them to cancel their
exercise of Rights.
PURCHASE AND SALE OF RIGHTS
The Rights are non-transferable and, therefore, may not be purchased or
sold. The Rights will not be admitted for trading on the NYSE or any other
exchange; however, the Common Shares to be issued pursuant to the Rights will be
admitted for trading on the NYSE.
DELIVERY OF SHARE CERTIFICATES
Participants in the Fund's Dividend Reinvestment Plan (the "Plan") will
have any Common Shares acquired with respect to Common Shares held in their
shareholder dividend reinvestment accounts in the Plan on Primary Subscription
and pursuant to the Over-Subscription Privilege credited to such accounts.
Shareholders whose Common Shares are held of record by Cede or by any other
depository or nominee on their behalf or their brokers' behalf will generally
have any Common Shares acquired on Primary Subscription and pursuant to the
Over-Subscription Privilege credited to the account of Cede or such other
depository or nominee. Shareholders who have elected to have State Street Bank
and Trust Company hold their shares in book-entry form will have any Common
Shares acquired with respect to such book-entry shares on Primary Subscription
and pursuant to the Over-Subscription privilege credited to such account. With
respect to all other shareholders, certificates for all Common Shares acquired
on Primary Subscription and pursuant to the Over-Subscription Privilege will be
mailed as soon as practicable after payment for the Shares subscribed for has
cleared, the Offer has expired and the allocation of Common Shares purchased
pursuant to the Over-Subscription Privilege is completed.
MONTHLY DIVIDEND
The first regular monthly dividend to be paid on Common Shares acquired
upon exercise of Rights will be the first monthly dividend, the record date for
which occurs after the issuance of such shares following the Expiration Date. It
is expected that the first dividend received by shareholders acquiring Common
Shares in this Offer will be declared in ___________, 1998 and paid on
approximately _________[__], 1998.
FEDERAL INCOME TAX CONSEQUENCES
For Federal income tax purposes, neither the receipt nor the exercise of
the Rights by shareholders will result in taxable income to holders of Common
Shares, and no loss will be realized if the Rights expire without exercise.
A shareholder's holding period for a Common Share acquired upon exercise
of a Right begins with the date of exercise. In the absence of a special
election by the shareholder, a shareholder's basis for determining gain or loss
upon the sale of a Common Share acquired upon the exercise of a Right will be
equal to the sum of the Subscription Price per Common Share and any servicing
fee charged to the shareholder by the shareholder's broker, bank or trust
company. A shareholder's gain or loss recognized upon a sale of a Common Share
acquired upon the exercise of a Right will be capital gain or loss (assuming the
Common Share was held as a capital asset at the time of sale) and will be
long-term capital gain or loss if the Common Share was held at the time of sale
for more than one year.
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The foregoing is a general summary of the applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), and Treasury regulations
presently in effect, and does not cover state or local taxes. The Code and such
regulations are subject to change by legislative or administrative action.
Shareholders should consult their tax advisers regarding specific questions as
to federal, state or local taxes.
EMPLOYEE PLAN CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), is a broad statutory framework that governs most employer-maintained
retirement plans ("ERISA Plans") and imposes certain fiduciary obligations on
the persons who manage such plans ("Fiduciaries"). In determining whether to
exercise Rights, Fiduciaries of Shareholders that are ERISA Plans must determine
that such actions are consistent with their fiduciary duties under ERISA and do
not result in transactions which are prohibited under Section 406 of ERISA.
Shareholders which are individual retirement accounts, Keogh plans of
self-employed individuals not subject to ERISA, and employee pension benefit
plans not subject to ERISA (collectively, "Non-ERISA Plans) must determine that
the exercise of Rights does not result in transactions that are prohibited under
Section 4975 of the Internal Revenue Code of 1986, as amended, under rules that
generally parallel the prohibited transaction provisions of Section 406 of
ERISA.
Any person contemplating making additional contributions to an ERISA or
Non-ERISA Plan in order to permit such Plan to exercise Rights should be aware
that such contributions may have potentially adverse tax consequences on such
Plan or such person. Such persons should consult with their tax advisers prior
making any such contributions.
The Fund is an investment company registered under the Investment
Company Act of 1940, as amended, and intends to continue to qualify as such.
Therefore, under ERISA and regulations promulgated thereunder by the United
States Department of Labor, the assets of ERISA Plan Shareholders that exercise
Rights will include only the equity interest thereby acquired by such
Shareholder and not the underlying assets of the Fund. The Adviser will
therefore not be a Fiduciary with respect to ERISA Plan Shareholders and the
operation of the Fund will not be subject to ERISA.
Due to the complexity of the foregoing rules and the penalties for
noncompliance, Shareholders that are ERISA Plans and Non-ERISA Plans should
consult with their counsel before their exercise of Rights.
INVESTMENT CONSIDERATIONS
As a result of the terms of the Offer, shareholders who do not fully
exercise their Rights should expect that they will, at the completion of the
Offer, own a smaller proportional interest in the Fund than would otherwise be
the case. Furthermore, the securities in which the Fund invests are generally
traded in the over-the-counter market and are valued at the most recent bid
price. A bid price reflects the price at which a security could be sold, and
tends to be slightly lower than the asked price, which reflects the price at
which a security could be purchased. Thus, the Fund's net asset value is
generally less than the aggregate replacement cost of the Fund's portfolio
securities and some dilution may occur as a result of the Offer. While the
Adviser does not believe that it is possible to quantify this dilution in a
meaningful manner, the Adviser currently believes that the aggregate replacement
cost of the Fund's portfolio securities (based on an estimate of the current
spread between bid and asked prices) does not exceed 1% of the Fund's net asset
value. Some additional dilution of the aggregate net asset value of the Common
Shares presently owned by the shareholders will occur as a result of the Offer
because of expenses of the Offer. For example, if the Subscription Price per
Common Share were the Fund's net asset value per share as of October 3, 1997,
assuming all Rights are exercised and based on estimated offering expenses, the
Fund's net asset value per share would be reduced on October 3, 1997 by less
than $.012, or less than 0.15% as a result of payment of such expenses.
USE OF PROCEEDS
Assuming all Common Shares offered hereby are sold at an assumed
Subscription Price of $7.99 per Common Share, the net proceeds of the Offer are
estimated to be approximately $100.3 million (after deducting
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offering expenses payable by the Fund estimated at approximately $426,000) and
if the Adviser determined to have the Fund's leverage ratio at 25% of total
assets (approximately the current level), the Fund would anticipate increasing
its outstanding borrowings from PNC Bank by approximately $35.5 million. The
Fund will be authorized, upon effectiveness of the proposed amendment to the
Revolving Credit Agreement with PNC Bank, to increase its borrowings thereunder
from the current level by $50 million to an aggregate of $151.3 million. See
"Risk Factors and Special Considerations--Leverage". The Adviser anticipates
that investment of such proceeds, in accordance with the Fund's investment
objectives and policies, will take up to thirty days from their receipt by the
Fund, depending on market conditions and the availability of appropriate
securities but in no event will such investment take longer than six months.
Pending such investment in accordance with the Fund's investment objectives and
policies, the proceeds will be held in U.S. Government securities (which
includes obligations of the United States Government, its agencies and
instrumentalities) and other high-quality short-term money market instruments.
THE FUND
CIGNA High Income Shares is a diversified, closed-end, management
investment company. The Fund was organized as a business trust under the laws of
The Commonwealth of Massachusetts on October 27, 1987 and has registered under
the 1940 Act. The Fund's principal office is located at 950 Winter Street, Suite
1200, Waltham, Massachusetts 02109.
The Fund commenced investment operations on August 10, 1988 after an
initial public offering of 24,725,000 Common Shares. The net proceeds of such
offering were approximately $229,158,000. The Fund completed a tender offer
pursuant to which it repurchased 2,794,859 Common Shares for an aggregate price
(including expenses) of $17,943,316 on August 2, 1991. The Fund completed a
previous rights offering in June 1994. The Fund's outstanding Common Shares are
listed on the New York Stock Exchange under the symbol "HIS." For the nine
months ended September 30, 1997, the average weekly trading volume was _______
shares. As of October 3, 1997 the Fund had 37,342,566 Common Shares outstanding
and the net asset per Common Share of the Fund was $7.99.
THE INVESTMENT ADVISER
The Fund's investment adviser is CIGNA Investments, Inc., an indirect,
wholly-owned subsidiary of CIGNA Corporation. CII also serves as investment
adviser for other investment companies sponsored by affiliates of CIGNA
Corporation and for a number of pension, advisory, corporate and other accounts.
As of September 30, 1997, CII and other companies affiliated with CIGNA
Corporation managed over $70 billion in combined assets, including approximately
$___ million in high yield securities. CIGNA Corporation is one of the largest
financial services companies in the United States, having assets of
approximately $___ billion and shareholder's equity of approximately $___
billion as of September 30, 1997. The Adviser's principal address is 900 Cottage
Grove Road, Bloomfield, Connecticut 06002. Its mailing address is Hartford,
Connecticut 06152. See "Management of the Fund--Investment Advisory Agreement."
INVESTMENT OBJECTIVES AND POLICIES
The Fund's primary investment objective is to provide the highest
current income obtainable 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. As a
secondary objective the Fund seeks capital appreciation, but only when
consistent with its primary objective. No assurance can be given that the Fund's
investment objectives will be realized.
The Fund's investment objectives as stated in the preceding paragraph
are fundamental policies of the Fund and cannot be changed without the approval
of the holders of a majority of the outstanding Common Shares of the Fund,
within the meaning of the 1940 Act (which means the lesser of (i) 67% or more of
the outstanding Common Shares present at a meeting at which holders of more than
50% of the outstanding Common Shares are present or
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represented by proxy or (ii) more than 50% of the outstanding Common Shares).
The other investment policies and the investment practices described herein may
be changed in the discretion of the Board of Trustees without shareholder
approval.
GENERAL
The Adviser seeks to achieve the Fund's objectives by investment
primarily in high-yield, high risk debt instruments rated in the medium to lower
categories by nationally recognized rating services (Baa or lower by Moody's
Investors Service, Inc. ("Moody's") or BBB or lower by Standard & Poor's
Corporation ("S&P")) or non-rated securities which, in the Adviser's opinion,
are of comparable quality. These securities are commonly known as "junk bonds."
See "Risk Factors and Special Consideration--High-Yield, High Risk Investments."
Under normal market conditions, the Fund will have at least 65% of its total
assets invested in such securities, and the average maturity of the Fund's
portfolio is expected to be between eight and twelve years. During the first
three quarters of 1997, an average of __% of the Fund's assets were invested in
bonds rated Baa/BBB by Moody's or S&P, __% in bonds rated Ba/BB, __% in bonds
rated B/B, __% in bonds rated Caa/CCC and __% in bonds rated C/C. Bonds that
were not rated but were determined to be of comparable quality to the foregoing
ratings comprised __% of the Fund's assets on average during the first three
quarters of 1997. In addition, during the first three quarters of 1997, cash and
other assets comprised __% of the Fund's assets. No bonds held during the first
three quarters of 1997 were rated higher than Baa/BBB. As of September 30, 1997,
the average maturity of the Fund's portfolio was approximately ___ years.
Bonds rated Ba by Moody's are judged to have speculative elements and
their future cannot be considered as well assured; bonds rated B by Moody's
generally are deemed to lack characteristics of a desirable investment; and
bonds rated Caa are considered by Moody's to be of poor standing and may be in
default or there may be present elements of danger with respect to the payment
of principal or interest. Bonds rated BB, B and CCC by S&P are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal with CCC indicating a higher degree of speculation than BB
or B. The Fund will not purchase securities rated D by S&P, which are defined as
securities that are in default. See "Appendix" for a more complete description
of the Moody's and S&P bond rating categories.
Included among the high-yield, high risk securities in which the Fund
may invest are securities issued in connection with corporate restructurings
such as takeovers or leveraged buyouts. Securities issued to finance corporate
restructurings may have special credit risks due to the highly leveraged
conditions of the issuer. In addition, such issuers may lose experienced
management as a result of the restructuring. Also, the market price of such
securities may be more volatile to the extent that expected benefits from the
restructuring do not materialize.
Because investors generally perceive that there are greater risks
associated with the medium to lower rated securities of the type constituting
high-yield, high risk securities, the yields and prices of such securities may
tend to fluctuate more than those for higher rated securities. In the lower
quality segments of the fixed income securities market, changes in perceptions
of issuer's creditworthiness tend to occur more frequently and in a more
pronounced manner than do such changes with respect to higher quality segments
of the fixed income securities market, causing greater yield and price
volatility. Commissions and underwriting spreads associated with the purchase of
high-yield, high risk bonds are typically higher than those associated with the
purchase of high grade bonds.
The Fund may also invest in preferred stocks with yields that are
attractive, provided that such investments are otherwise consistent with the
investment objectives and policies of the Fund. A preferred stock is an equity
security that entitles the holders to a priority in liquidation over holders of
the issuer's common stock. In liquidation, the holders of preferred stock are
subordinate to the holders of the issuer's debt obligations. Typically,
preferred stocks include the right to receive regular dividend payments and may
also include conversion rights, put and call obligations and other features. In
determining whether to invest in any particular preferred stock, the Adviser
will consider all relevant factors, including the dividend yield, its conversion
features, if any, its liquidity, and the overall financial condition of the
issuer. Under normal circumstances, the Fund will not invest more than 10% of
its assets in preferred stock.
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The Fund may invest up to 20% of its total assets in "private
placements," i.e. securities that are subject to restrictions on resale because
they have not been registered under the Securities Act of 1933, as amended (the
"1933 Act"). Privately placed securities ordinarily can be sold by the Fund in
privately negotiated transactions to a limited number and/or particular type of
purchasers or in a public offering made pursuant to an effective registration
statement under the 1933 Act. Private or public sales of such securities by the
Fund are likely to involve delays and expenses. Private sales require
negotiation with one or more purchasers and may produce less favorable prices
than the sale of similar unrestricted securities. Public sales generally involve
the time and expense of the preparation and processing of a registration
statement under the 1933 Act (and the possible decline in value of the
securities during such period) and may involve the payment of underwriting
commissions. For these reasons, restricted securities are less liquid than
registered securities and certain restricted securities may be illiquid. The
lack of third party evaluation of the credit quality of these securities and the
possibility of a less liquid secondary market because of restrictions placed by
some investors with respect to the purchase of non-rated securities may also
increase the risk to investors. For purposes of this restriction, securities
eligible for resale under Rule 144A of the 1933 Act with registration rights are
excluded from "private placements".
The Fund will not acquire common stocks, except when (i) attached to or
included in a unit with income-generating securities that otherwise would be
attractive to the Fund; (ii) acquired through the exercise of equity features
accompanying convertible securities held by the Fund, such as conversion or
exchange privileges or warrants for the acquisition of stock or equity interest
of the same or different issuer; or (iii) in the case of an exchange offering
whereby the equity security would be acquired with the intention of exchanging
it for a debt security issued on a "when-issued" basis.
The Fund is authorized to borrow from banks or other lenders to increase
the money available to invest in securities and has maintained significant
levels of outstanding indebtedness during substantially all of the period since
its commencement of operations. Generally, the Fund will maintain borrowings
when the Adviser believes the income from the securities financed will be
greater than the interest expense paid in the borrowings. This is, however, a
speculative technique known as "leverage." See "Risk Factors and Special
Consideration--Leverage."
Ordinarily, the Fund will not purchase securities with the intention of
engaging in short-term trading. However, any particular security will be sold,
and the proceeds reinvested, whenever such action is deemed prudent from the
viewpoint of the Fund's investment objectives, regardless of the holding period
of that security. The Fund expects that its annual portfolio turnover rate will
not exceed 100%. The portfolio turnover rates for the years ended December 31,
1996 and 1995 were 78% and 60%, respectively.
MONEY MARKET AND U.S. GOVERNMENT SECURITIES
Money Market Securities. The Fund may invest without limitation in
short-term high quality money market instruments (including variable and
floating rate instruments and demand instruments) such as certificates of
deposit, commercial paper, bankers' acceptances, short-term U.S. Government
securities and repurchase agreements, pending investment in portfolio
securities, or for temporary defensive purposes or to meet anticipated
short-term cash needs such as dividend payments.
U.S. Treasury Securities. The Fund may invest in U.S. Treasury
securities, including Bills, Notes and Bonds issued by the U.S. Treasury. These
instruments are direct obligations of the U.S. Government and, as such, are
backed by the "full faith and credit" of the United States. They differ
primarily in their interest rates, the lengths of their maturities and the dates
of their issuances.
Obligations Issued or Guaranteed by U.S. Government Agencies and
Instrumentalities. The Fund may invest in obligations issued by agencies of the
U.S. Government or instrumentalities established or sponsored by the U.S.
Government. These obligations, including those that are guaranteed by federal
agencies or instrumentalities, may not be backed by the "full faith and credit"
of the United States Obligations of the Government National Mortgage Association
("GNMA"), the Farmers Home Administration and the Export-Import Bank are backed
by the full faith and credit of the United States include obligations issued by
the Tennessee Valley Authority, The Federal National Mortgage Association
("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") and the United
States Postal Service, each of which has the right to borrow from the United
States
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Treasury to meet its obligations, and obligations of the Federal Farm Credit
Bank and the Federal Home Loan Bank, the obligations of which may be satisfied
only by the individual credit of the issuing agency. FHLMC investments may
include collateralized mortgage obligations. In the case of securities not
backed by the full faith and credit of the U.S., the Fund must look principally
to the agency issuing or guaranteeing the obligation for ultimate repayment and
may not be able to assert claim against the U.S. if the agency or
instrumentality does not meet its commitments.
Additional Considerations. Securities issued by the U.S. Government or
by agencies or instrumentalities established or sponsored by the U.S. Government
("U.S. Government Securities") are considered among the most creditworthy of
fixed income investments. The yields available from U.S. Government Securities
are generally lower than the yields available from corporate debt securities.
The values of U.S. Government Securities (like those of fixed income securities
generally) will change as interest rates fluctuate. During periods of falling
U.S. interest rates, the values of outstanding long-term U.S. Government
Securities generally rise. Conversely, during periods of rising interest rates,
the values of such securities generally decline. The magnitude of these
fluctuations will generally be greater for securities with longer maturities.
Although changes in the value of U.S. Government Securities will not affect
investment income from those securities, they will affect the Fund's net asset
value.
FOREIGN INVESTMENTS
The Fund may invest up to 20% of its total assets in fixed-income
securities issued by foreign governments and other foreign issuers and in
foreign currency issues of domestic issuers, but no more than 5% of its total
assets in such securities, whether issued by a foreign or domestic issuer, which
are denominated in foreign currencies. The Adviser believes that in many
instances such foreign fixed-income securities may provide higher yields than
similar securities of domestic issues. Many of these investments currently enjoy
increased liquidity, although such securities are generally less liquid than the
securities of United States corporations.
Foreign investments involve certain risks, including the political or
economic instability of the issuer or of the country of issue, the difficulty of
predicting international trade patterns and the possibility of imposition of
exchange controls. Such securities may also be subject to greater fluctuations
in price than securities of United States corporations or of the United States
government. In addition, there may be less publicly available information about
a foreign company than about a domestic company. Foreign companies generally are
not subject to uniform accounting, auditing and financial reporting standards
comparable to those applicable to domestic companies. There is generally less
government regulation of stock exchanges, brokers and listed companies abroad
than in the United States and, with respect to certain foreign countries, there
is a possibility of expropriation or confiscatory taxation, or of diplomatic
developments which could affect investment in those countries. Finally, in the
event of a default of any such foreign debt obligations, it may be more
difficult for the Fund to obtain or to enforce a judgment against the issuers of
such securities.
In addition to its authorization to invest in foreign securities, the
Fund may invest up to 5% of its total assets in Eurodollar certificates of
deposit which are the obligations of foreign branches of U.S. banks and may
invest without limitation in Canadian issuers whose securities are payable in
U.S. dollars.
FINANCIAL FUTURES CONTRACTS
The Fund may purchase and sell financial futures contracts or purchase
options thereon to hedge its portfolio of debt securities against changes in
interest rates. A futures contract sale creates an obligation by the Fund, as
seller, to deliver the specific type of instrument called for in the contract at
a specific future time for a specific price. A futures contract purchase creates
an obligation by the Fund, as purchaser, to take delivery of the specific type
of instrument called for in the contract at a specific future time at a specific
price. An option on a futures contract gives the purchaser the right, in return
for a premium paid, to decide on or before a future date whether to enter into a
specific futures contract. The writer of such an option is required to enter
into the contract upon exercise. If the option is not exercised, the holder
loses the premium paid.
The Fund will only enter into financial futures contracts or purchase
options thereon for the purpose of hedging either long-term debt securities in
its portfolio or the value of debt securities which the Fund intends to
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purchase. For example, if the Fund owned long-term debt securities and interest
rates were expected to increase, it might sell financial futures contracts or
purchase put options thereon. If, on the other hand, the Fund held cash reserves
and interest rates were expected to decline, the Fund might purchase financial
futures contracts or call options thereon.
In purchasing and selling futures contracts and purchasing options
thereon the Fund intends to comply with the regulations of the Commodity Futures
Trading Commission ("CFTC"), under which the Fund is exempted from registration
as a commodity pool operator. The CFTC regulations currently provide that the
Fund may use futures contracts and options thereon (i) for bona fide hedging
purposes without regard to the percentage of assets committed to margin and
option premiums, and (ii) for other purposes permitted by the Securities and
Exchange Commission, the Fund's principal regulator, to the extent that the
aggregate initial margin and option premiums required to establish such
non-hedging positions do not exceed 5% of the liquidation value (i.e. net asset
value) of the Fund's portfolio. The Fund does not presently intend to purchase
or sell any futures contracts, other than futures contracts on Treasury Bonds,
Treasury Bills and Treasury Notes. In addition, the Fund does not presently
intend to purchase any options on futures contracts, other than options on
Treasury Bond, Treasury Bill and Treasury Note futures contracts. The Fund will
not enter into futures contracts and options on futures contracts to hedge more
than 50% of its portfolio.
In instances involving the purchase of futures contracts, an amount of
cash and cash equivalents equal to the market value of the futures contracts
(less any related margin deposits) will be deposited in a segregated account
with the Fund's custodian to collateralize the position and ensure that the use
of such futures contracts is unleveraged.
Successful use of futures contracts and related options by the Fund is
also subject to CII's ability to predict correctly movements in the direction of
interest rates. The skills involved in making such predictions are different
from those involved in selecting portfolio securities. If CII's predictions are
incorrect, the Fund may be in a worse position that if a hedging strategy had
not been used. Because of possible price distortions in the futures and options
markets and because of the imperfect correlation between movements in the prices
of futures contracts or options on futures contracts and the Fund's portfolio of
securities being hedged, even a correct forecast by CII of general market trends
may not result in a completely successful hedging transaction.
There are several risks in connection with the use of futures contracts
and related options as hedging devices. One risk arises because of the imperfect
correlation between movements in the price of futures contracts and movements in
the price of the securities in the Fund's portfolio which are the subject of the
hedge. If the price of a futures contract moves less than the price of the
securities which are the subject of the hedge, the hedge will not be fully
effective. If the price of a futures contract moves more than the price of the
securities, the Fund will experience either a loss or a gain on the futures
contract which will not be completely offset by movements in the price of the
securities which are the subject of the hedge. The use of options on futures
contracts involves the additional risk that changes in the value of the
underlying futures contract will not be fully reflected in the value of the
options.
It is also possible that, where the Fund has sold futures contracts to
hedge its portfolio against a decline in the market, the market may advance and
the value of securities held in the Fund's portfolio may decline. If this
occurs, the Fund would lose money on the futures contracts and also experience a
decline in the value of is portfolio securities.
Positions in futures contracts or options thereon may be closed out only
on an exchange on which such contracts are traded. Although the Fund intends to
purchase or sell futures contracts or purchase options thereon only on exchanges
or Boards of Trade where there appears to be an active market, there is no
assurance that a liquid market or an Exchange or Board of Trade will exist for
any particular contract or option at a particular time. If there is not a liquid
market at a particular time, it may not be possible to close a futures position
or purchase an option position at such time. In the event of adverse price
movements under those circumstances, the Fund would continue to be required to
make daily cash payments of maintenance margin on its futures positions.
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<PAGE>
The extent to which the Fund may engage in futures contracts or related
options will be limited by Code requirements for qualification as a regulated
investment company and the Fund's intention to continue to qualify as such.
LENDING PORTFOLIO SECURITIES
Consistent with applicable regulatory requirements, the Fund may lend
its portfolio securities (principally to broker-dealers) to the extent of 20% of
its total assets. In connection with such loans, the Adviser will monitor the
creditworthiness of borrowers. Loans of portfolio securities would be callable
at any time and would be continuously secured by collateral equal to no less
than the market value, determined daily, of the loaned securities. Such
collateral shall be cash or debt securities issued or guaranteed by the U.S.
Government or any of its agencies. The Fund would continue to receive the income
on loaned securities and would, at the same time, earn interest on the loan
collateral or on the investment of the loan collateral if it were cash. Any cash
collateral pursuant to these loans would be invested in short-term money market
instruments. Where voting or consent rights with respect to loaned securities
pass to the borrower, the Fund will follow the policy of calling the loan, in
whole or in part as may be appropriate, to permit the exercise of such voting or
consent rights if the matters involved are expected to have a material effect on
the Fund's investment in the securities loaned. Lending securities entails a
risk of loss to the Fund if and to the extent that the market value of the
securities loaned were to increase and the borrower did not increase the
collateral accordingly.
"WHEN-ISSUED" SECURITIES
Securities may be purchased on a "when-issued" or on a "forward
delivery" basis, which means that the obligations will be delivered at a future
date beyond customary settlement time. The commitment to purchase a security for
which payment will be made on a future date may be deemed a separate security.
The Fund does not pay for the securities until received or start earning
interest on them until the transaction is scheduled to be settled. In order to
invest its assets immediately, while awaiting delivery of securities purchased
on such basis, the Fund will normally invest in short-term securities that offer
same-day settlement and earnings, but that may bear interest at a lower rate
than longer-term securities.
When the Fund commits to purchase a security on a "when-issued" or
"forward delivery" basis, it will set up procedures consistent with the General
Statement of Policy of the SEC. Because that policy currently recommends that an
amount of the Fund's assets equal to the amount of the purchase be held aside or
segregated to be used to pay for the commitment, the Fund will always have cash,
cash equivalents or liquid securities available to cover any commitments under
these contracts or to limit any potential risk. The segregated account will be
marked to market on a daily basis. Moreover, the Fund does not intend to make
such purchases for speculative purposes.
REPURCHASE AGREEMENTS
In order to invest monies for short periods of time the Fund may invest
in repurchase agreements. A repurchase agreement is a contractual agreement
whereby the seller of securities (limited in the case of the Fund to U.S.
Government securities, including securities issued or guaranteed by the U.S.
Treasury or the various agencies and instrumentalities of the U.S. Government)
agrees to repurchase securities at a specified price on a future date determined
by negotiations. The repurchase agreement may be considered a loan by the Fund
to the issuer of the agreement, a bank or broker/dealer, with the U.S.
Government security serving as collateral for the loan. The Fund will require
that sufficient securities be subject to the repurchase agreement so that the
value of the securities at least equals the amount of the repurchase agreement.
Also, the Fund will require that the underlying securities be held on its behalf
by its custodian either physically or under the Federal Book Entry system. The
maturity of a repurchase agreement is frequently one business day. The Fund will
enter into repurchase agreements with banks having $1 billion or more of assets
and with broker/dealers having net capital of $100 million or more. The Fund's
risk under a repurchase agreement is limited to the ability of the vendor to pay
the agreed upon sum upon delivery date. In the event of bankruptcy or other
default by the vendor, there may be delays and expenses in liquidating the
instrument purchased and a decline in its value and loss of interest. CII,
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<PAGE>
in accordance with procedures adopted by the Board of Trustees of the Fund,
monitors and evaluates the creditworthiness of banks and securities dealers with
which the Fund enters into repurchase agreements.
INVESTMENT RESTRICTIONS
The Fund is subject to the investment restrictions described in items 1
through 13, below. The restrictions described in items 1 through 6 may not be
changed without the approval of a majority of outstanding Common Shares, within
the meaning of the 1940 Act, defined as a vote of the holders of the lesser of
(i) 67% or more of the outstanding Common Shares present at a meeting at which
the holders of more than 50% of the outstanding Common Shares are present or
represented by proxy, or (ii) more than 50% of the outstanding Common Shares.
The restrictions in items 7 through 13 may be changed by a majority of the
Trustees, without shareholder approval. Any investment restriction that involves
a maximum or minimum percentage of securities or assets shall not be considered
to be violated unless an excess over or a deficiency under the percentage occurs
immediately after, and is caused by, an acquisition or disposition of
securities.
The Fund may not:
1. Borrow money or mortgage, pledge, or hypothecate its assets, except
that the Fund may enter into financial futures contracts, and borrow from banks
or other lenders in an amount not exceeding one-third of the value of its total
assets (including proceeds of such borrowings) and may mortgage, pledge or
hypothecate its assets to secure permitted borrowings. For the purpose of this
restriction, collateral arrangements with respect to margin for financial
futures contracts are not deemed to be pledges of assets.
2. Purchase or sell real estate or interests therein or oil, gas or
mineral exploration or development programs, but the Fund may purchase and sell
(a) securities which are secured by real estate, and (b) the securities of
companies which invest or deal in real estate or interests therein, including
real estate investment trusts, or in oil, gas or mineral exploration or
development programs.
3. Act as a securities underwriter, except to the extent that the Fund
may invest up to 20% of its assets in restricted securities and, in connection
with the disposition of such securities, the Fund may be deemed to be an
underwriter under the 1933 Act.
4. Purchase or sell commodities or commodity contracts, other than
financial futures contracts and options thereon.
5. Concentrate more than 25% of the value of its total assets in the
securities of issuers which conduct their principal business activities in the
same industry; for purposes of this restriction, gas, electric, water and
telephone companies will be considered to be in separate industries, and banks,
savings and loan institutions, finance companies and insurance companies will be
considered to be in separate industries.
6. Make loans to other persons, except that the Fund may lend its
portfolio securities to the extent of 20% of its total assets and may enter into
repurchase agreements. For the purpose of this restriction, the purchase of debt
instruments in accordance with the Fund's policies and objectives shall not be
deemed to be a "loan."
7. Make short sales of securities or maintain short positions (other
than in connection with futures contracts or options thereon) unless, at all
times when a short position is open, the Fund owns at least an equal amount of
the securities sold short or owns securities convertible into or exchangeable
for at least an equal amount of such securities sold short, without the payment
of further consideration.
8. Invest more than 5% of the market value of its total assets in the
securities of any one issuer, other than obligations of or guaranteed by the
U.S. Government or any of its agencies or instrumentalities. With respect to
repurchase agreements, the Fund shall look to the underlying securities of the
repurchase agreements to determine compliance with this restriction.
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<PAGE>
9. Purchase more than 10% of the outstanding voting securities of any
issuer, or invest for the purpose of exercising control or management.
10. Purchase securities on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and sales
of securities and may make margin payments in connection with transactions in
financial futures contracts and options thereon.
11. Invest in puts, calls or any combinations thereof, except that the
Fund may purchase and sell options on financial futures contracts and may
acquire and hold puts which relate to equity securities acquired by the Fund
when such puts are attached to or included in a unit with such equity
securities.
12. Purchase the securities of any other investment company, except in
connection with a merger, consolidation, reorganization or acquisition of assets
and except for the investment in such securities of funds representing
compensation otherwise payable to Trustees of the Fund pursuant to a deferred
compensation plan existing at any time between the Fund and one or more of its
Trustees.
13. Invest in securities which are subject to legal or contractual
restrictions on resale if, as a result thereof, more than 20% of the total
assets of the Fund taken at market value, would be invested in such securities.
Securities eligible for resale under Rule 144A of the 1933 Act with registration
rights are excluded from this investment restriction
RISK FACTORS AND SPECIAL CONSIDERATIONS
LEVERAGE
The Fund is authorized to obtain investment leverage through borrowings
from banks or other lenders in amounts of up to one-third of the value of its
total assets (including such borrowings). Pursuant to a Revolving Credit
Agreement with PNC Bank, the Fund has a three-year revolving credit, which is
generally extended each year pursuant to an "evergreen" provision (the "Credit
Line") enabling the Fund to borrow up to the lesser of (i) $101.3 million or
(ii) one-third of the market value of the Fund's Eligible Assets (as defined).
The Fund has requested an amendment of the Revolving Credit Agreement which
would enable the Fund to borrow up to the lesser of (i) [$151,300,000] million
or (ii) one-third of the market value of the Fund's Eligible Assets. As of
October 3, 1997 the outstanding principal balance of the Fund's borrowings
thereunder was $97,500,000, which represents approximately 24% of the market
value of the Fund's Eligible Assets (or 25% of Total Assets (net assets plus
leverage)). See "Financial Highlights." All borrowings under the Credit Line
bear interest at a rate determined in accordance with a formula selected by the
Fund from among seven alternatives. In connection with the Credit Line, the Fund
has granted PNC Bank a first lien on all of its investment securities and cash,
which is enforceable in an amount of up to one-third of the aggregate value of
the investment securities and cash owned by the Fund. Upon liquidation of the
Fund, PNC Bank would be entitled to payment in full of all borrowings before any
Fund assets could be distributed to shareholders.
The Fund will be required to repay the portion of the principal of
borrowings equal to the difference (if a positive number) between (i) 300%
multiplied by the then outstanding principal amount of borrowings and (ii) the
then current value of the Fund's Eligible Assets (as defined). Accordingly,
repayment of a portion of the borrowings may be required in connection with
Common Share repurchases by the Fund. In addition, borrowings will be payable
upon demand by PNC Bank at any time which is at least thirty days after a vote
by shareholders approving the conversion of the Fund to open-end status. There
can be no assurance that PNC Bank will not demand repayment in full of all
borrowings in connection with the conversion of the Fund to open-end status.
Consummation of the additional borrowings from PNC Bank described above is
subject to the final negotiation of mutually satisfactory loan documentation.
The Fund reserves the right to modify the above terms from time to time and to
borrow from another lender.
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Subject to the limitation that total borrowings not exceed one-third of
the total value of the Fund's Eligible Assets, the Fund may make additional
borrowings if the management of the Fund determines that the return on the
borrowed funds is likely to exceed the interest costs on the funds to be
borrowed. It will use the borrowed funds to purchase additional securities for
the Fund's portfolio. The Fund may also borrow to repurchase its own shares.
Borrowing by the Fund creates an opportunity for greater total returns
but at the same time is a speculative technique involving special risk
considerations that are not associated with other funds having similar
investment objectives and policies. These include a higher volatility of the net
asset value of the Common Shares, potentially more volatility in the market
value of the Common Shares and the relatively greater effect on the net asset
value of the Common Shares caused by favorable or adverse changes in currency
exchange rates. In addition, fluctuations in the interest rates on the Fund's
indebtedness will affect the investment return to shareholders, with increases
in such rates decreasing such return. So long as the Fund is able to realize a
higher net return on the leveraged portion of its investment portfolio than the
then current interest rate on the indebtedness, the effect of leverage will be
to cause shareholders to realize higher current net investment income than if
the Fund were not leveraged. Currently, the Fund's portfolio must experience
annual return of 2.21% in order to cover the average rate of interest on the
indebtedness effective as of October 3, 1997 of 6.75% (although the interest
rate may vary from time to time as noted above). The following table may assist
the investor in understanding the effects of leverage by illustrating the effect
of leverage on return to a shareholder. The figures appearing in the table are
hypothetical, based on the current interest rate which may increase or decrease
in the future, and actual returns may be greater or less than those appearing in
the table.
<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Return on Portfolio (Net of Expenses) -10% -5% 0% 5% 10%
Corresponding Return to Common Shareholder -15.77% -8.99% -2.21% 4.58 11.36%
</TABLE>
To the extent that the current interest rate on the Fund's indebtedness
approaches the net return on the leveraged portion of the Fund's investment
portfolio, the benefit of leverage to shareholders will be reduced, and if the
current interest rate on the indebtedness were to exceed the net return on such
portion of the Fund's portfolio, the Fund's leveraged capital structure would
result in a lower rate of return to shareholders and in a lower net asset value
than if the Fund were not leveraged. Similarly, the effect of leverage in a
declining market would be a greater decrease in the Fund's net asset value than
if the Fund were not leveraged, which would likely be reflected in a greater
decline in the market price for Common Shares than if the Fund were not
leveraged. In an extreme case, if the Fund's current investment income were not
sufficient to meet interest requirements on the indebtedness or if the Fund
failed to maintain the asset coverage required by the 1940 Act (including as a
result of share repurchases), it could be necessary for the Fund to liquidate
certain of its investments at a time when it may be disadvantageous to do so,
thereby reducing its net asset value. In addition, if the Fund fails to meet
asset coverage requirements, it may be limited in its ability to make
distributions to shareholders, which could under certain circumstances impair
the Fund's ability to maintain its qualification for taxation as a registered
investment company. See "Taxation."
HIGH-YIELD, HIGH RISK INVESTMENTS
The Fund is designed for investors who can accept the risks entailed in
seeking the highest level of current income available from investments in high
yielding, medium and lower quality, fixed-income securities. Investors in the
Fund should not rely on the Fund for their short-term financial needs. The
principal value of the lower quality securities in which the Fund invests will
be affected by interest rate levels, general economic conditions, specific
industry conditions and the creditworthiness of the individual issuer. Although
the Fund seeks to reduce risk by portfolio diversification, extensive credit
analysis and attention to trends in the economy, industries and financial
markets, such efforts will not eliminate risk.
Fixed-income securities offering the high current income sought by the
Fund will ordinarily be in the lower rating categories of recognized rating
agencies or will be non-rated. The Fund will rely, however, on the Adviser's
judgment, analysis and experience in evaluating the creditworthiness of an
issuer. In this evaluation, the Adviser will take into consideration, among
other things, the issuer's financial resources, its sensitivity to
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<PAGE>
economic conditions and trends, its operating history, the quality of the
issuer's management and regulatory matters.
The values of high-yield, high risk securities, commonly known as "junk
bonds," tend to reflect individual corporate developments or adverse economic
changes to a greater extent than higher rated securities, which react primarily
to fluctuations in the general level of interest rates. Periods of economic
uncertainty and changes generally result in increased volatility in the market
prices and yields of high-yield, high risk securities and, thus, in the Fund's
net asset value. Further, these fixed-income securities are considered by the
rating agencies, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of the
obligation and will generally involve more credit risk than securities in the
higher rating categories; the Fund may incur additional expenses to the extent
it is required to seek recovery upon a default in the payment of principal of or
interest on its portfolio holdings. Changes by recognized rating services in
their ratings of any fixed-income security and in the ability of an issuer to
make payments of interest and principal may also affect the value of the Fund's
investments.
The high-yield, high risk securities held by the Fund are frequently
subordinated to the prior payment of senior indebtedness. Moreover, the
securities are traded in markets that may be relatively less liquid than the
market for higher rated securities because the lower rated securities may be
held by relatively few purchasers. Under adverse market or economic conditions
or in the event of adverse changes in the financial condition of the issuer, the
Fund may find it more difficult to sell such securities when the Adviser
believes it advisable to do so or may be able to sell such securities only at
prices lower than if the securities were more widely held. In such
circumstances, the Fund may also find it more difficult to determine the fair
value of such securities for purposes of computing the Fund's net asset value.
The Fund, in most instances, utilizes an independent pricing service to
determine the fair value of its securities for financial statement purposes
since market quotations are not readily ascertainable. Securities for which
market quotations are not readily available will be valued at fair value as
determined in good faith by or under the direction of the Board of Trustees of
the Fund. Changes in the value of portfolio securities will not necessarily
affect cash income derived from such securities, but will affect the Fund's net
asset value.
Some of the lower-rated securities in which the Fund invests were issued
to raise funds in connection with the acquisition of a company, in a so-called
"leveraged buy-out" transaction. The highly leveraged capital structure of such
issuers may make them especially vulnerable to adverse changes in economic
conditions.
Generally, when interest rates rise, the value of fixed rate debt
obligations, including high-yield, high risk securities, tends to decrease; when
interest rates fall, the value of fixed rate debt obligations tends to increase.
If an issuer of a high-yield, high risk security containing redemption or call
provisions exercises either provision in a declining interest rate market, the
Fund would have to replace the security, which could result in a decreased
return for shareholders.
The credit ratings issued by credit rating services may not fully
reflect the true risks of an investment. For example, credit ratings typically
evaluate the safety of principal and interest payments, not market value risk,
of high-yield, high risk securities. Also, credit rating agencies may fail to
change on a timely basis a credit rating to reflect changes in economic or
company conditions that affect a security's market value. Although the Adviser
considers ratings of recognized rating services such as Moody's and S&P, the
Adviser primarily relies on its own credit analysis, which includes a study of
existing debt, capital structure, ability to service debt and to pay dividends,
the issuer's sensitivity to economic conditions, its operating history and the
current trend of earnings. The Adviser continually monitors the investments in
the Fund's portfolio and carefully evaluates whether to dispose of or retain
high-yield, high risk securities whose credit ratings have changed. (See
Appendix for a description of Moody's and S&P's ratings of high-yield
securities).
DIVIDENDS AND DISTRIBUTIONS
The Fund will not be permitted to declare dividends or other
distributions with respect to the Common Shares or purchase Common Shares unless
at the time thereof the Fund meets certain asset coverage requirements,
including those imposed by the 1940 Act and in connection with the Credit Line.
Failure to pay dividends or other
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<PAGE>
distributions could result in the Fund ceasing to qualify as a regulated
investment company under the Code. See "Taxation" and "Dividends of
Distributions; Dividend Reinvestment Plan." In the event the Fund fails to
satisfy certain asset coverage requirements, the Fund may be required to repay
indebtedness, including through the sale of portfolio securities at a time when
such sale may be disadvantageous, which would reduce the Fund's leverage and
could negatively affect potential returns with respect to the Common Shares.
PREMIUM/DISCOUNT FROM NET ASSET VALUE
Shares of closed-end investment companies trade in the NYSE, at and
below net asset value. This characteristic of shares of closed-end investment
companies is a risk separate and distinct from the risk that the Fund's net
asset value will decline. The Common Shares of the Fund since its inception have
generally traded at a premium to net asset value. For example, in the period
from the Fund's commencement of operations through September 30, 1997, as of the
close of business of the NYSE on the last day in each week on which the NYSE was
open (the time the Fund calculates its net asset value per share), closing sale
price of the Common Shares on the NYSE exceeded the Fund's net asset value ___%
of the time. During the remaining ___% of such time, the Common Shares of the
Fund traded at or at a discount to net asset value. The Fund is not able to
predict whether its shares will trade above, below or at net asset value in the
future. In the event that the Common Shares are not trading at a price greater
than or equal to net asset value on the Expiration Date, the Subscription Price
will be greater than the market price on the NYSE. See "Prospectus Summary--Net
Asset Value and Market Price Information" for the ranges of the market prices
and the ranges of the net asset values of the Common Shares for each calendar
quarter since March 31, 1995.
GIVEN THE ABOVE-DESCRIBED INVESTMENT RISKS INHERENT IN THE FUND,
INVESTMENT IN COMMON SHARES OF THE FUND SHOULD NOT BE CONSIDERED A COMPLETE
INVESTMENT PROGRAM AND IS NOT APPROPRIATE FOR ALL INVESTORS. INVESTORS SHOULD
CAREFULLY CONSIDER THEIR ABILITY TO ASSUME THESE RISKS BEFORE MAKING AN
ADDITIONAL INVESTMENT IN THE FUND.
MANAGEMENT OF THE FUND
TRUSTEES AND EXECUTIVE OFFICERS
The Trustees and the executive officers of the Fund are listed below,
together with information as to their principal occupations during the past five
years and other principal business affiliations. Each individual listed as a
Trustee or executive officer (other than Alan C. Petersen) holds the equivalent
position, as a Trustee or executive officer, as the case may be, of CIGNA
Institutional Funds Group (a Massachusetts business trust sponsored by CIGNA
Corporation currently consisting of one series of shares), CIGNA Funds Group (a
Massachusetts business trust sponsored by CIGNA Corporation currently consisting
of multiple series of shares, and CIGNA Variable Products Group (a Massachusetts
business trust sponsored by CIGNA Corporation consisting of multiple series of
shares, which is available solely as the funding vehicle for variable annuity
and variable life products) and each person listed as a Trustee or executive
officer also serves as a Director or executive officer, as the case may be, of
INA Investment Securities, Inc. (a closed-end investment company sponsored by
CIGNA Corporation). Trustees identified below with an asterisk are considered
interested persons within the meaning of the 1940 Act, because of their
affiliation with CIGNA Corporation or its affiliates. Correspondence with any
Trustee or officer may be addressed to the Fund, 950 Winter Street, Suite 1200,
Waltham, MA 02154.
*R. BRUCE ALBRO, 54, CHAIRMAN OF THE BOARD OF TRUSTEES, PRESIDENT AND TRUSTEE
Senior Managing Director and Division Head, CIGNA Portfolio Advisers-CIGNA
Investment Management, a division of CIGNA; Senior Managing Director, CII and
CIGNA Investment Advisory Company, Inc.; Vice President and Investment Officer,
Connecticut General Life Insurance Company and Life Insurance Company of North
America; Mr. Albro is also an officer or director of various other entities
which are subsidiaries or affiliates of CIGNA. Previously Managing Director -
Division Head, CII.
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<PAGE>
HUGH R. BEATH, 66, TRUSTEE
Advisory Director, AdMedia Corporate Advisors, Inc. Previously Managing
Director, AdMedia Corporate Advisors, Inc.; Chairman of the Board of Directors,
Beath Advisors, Inc.
RUSSELL H. JONES, 53, TRUSTEE
Vice President and Treasurer, Kaman Corporation (helicopters and aircraft
components, scientific research); Corporator, Hartford Seminary; Trustee and
Senior Fellow, American Leadership Forum. Previously Vice President, Kaman
Corporation; Trustee, Connecticut Policy and Economic Counsel; Secretary,
Bloomfield Chamber of Commerce; President, Hartford Area Business Economists.
PAUL J. MCDONALD, 53, TRUSTEE
Senior Executive Vice President and Chief Administrative Officer, Friendly Ice
Cream Corporation (family restaurants/dairy products); Chairman, Dean's Advisory
Council, University of Massachusetts School of Management; Chairman, Springfield
YMCA; Trustee, Springfield College; Regional Director-Western Massachusetts,
Bank of Boston; Previously Executive Vice President, Finance and Chief Financial
Officer, Friendly Ice Cream Corporation; Vice President, Finance and Chief
Financial Officer, Friendly Ice Cream Corporation.
*ARTHUR C. REEDS, III, 53, TRUSTEE
President, CIGNA Investment Management, a division of CIGNA; President and
Director, CII and CIGNA Investment Group, Inc.; Director, CIGNA International
Investment Advisors, Ltd.; President, CIGNA Investment Advisory Company, Inc.;
Executive Vice President, Connecticut General Life Insurance Company; Mr. Reeds
is also an officer or director of various other entities which are subsidiaries
or affiliates of CIGNA. Previously Managing Director - Division Head, CII.
ALFRED A. BINGHAM III, 52, VICE PRESIDENT AND TREASURER
Assistant Vice President, CII. Previously Senior Vice President, CII.
ALAN C. PETERSEN, 47, VICE PRESIDENT
Managing Director, CII; Portfolio Manager, CIGNA Investment Management, a
division of CIGNA.
JEFFREY S. WINER, 39, VICE PRESIDENT AND SECRETARY
Counsel, CIGNA. Previously Attorney, CIGNA.
Alan C. Petersen is responsible for management of the Fund's portfolio.
Since the commencement of operations of the Fund, Mr. Petersen has served as a
Portfolio Manager and a Vice President of the Fund and as a Managing Director
and a Portfolio Manager at CII responsible for high yield bond investments. Mr.
Petersen has 22 years of investment advising experience including 18 years with
CII.
The Board has created an audit committee from among its members which
will meet periodically with representatives of Price Waterhouse LLP,
independent accountants for the Fund, a contracts committee which, as part of
its duties, considers the terms and the renewal of the investment advisory
agreement with the Adviser, and a nominating committee which considers the
identification of new members of the Board and the compensation of Trustees.
Each committee consists solely of Trustees who are not affiliated with CIGNA
Corporation or any of its subsidiaries.
Each Trustee who is not employed by CIGNA Corporation or any affiliate
thereof receives for serving as a Trustee of the Fund, as a Trustee of CIGNA
Funds Group, CIGNA Institutional Funds Group and CIGNA Variable Products Group,
and as a Director of INA Investment Securities, Inc., an annual retainer of
$17,200 plus a fee of $200 for each Board or Committee meeting attended. Such
annual retainers, Board Meeting fees and Committee meeting fees are allocated
among the Fund, INA Investment Securities, Inc. and each series of shares
outstanding of CIGNA Funds Group, CIGNA Institutional Funds Group and CIGNA
Variable Products Group.
The Fund pays no compensation to any of its officers, other than the
reimbursement of the costs of the Office of the Treasurer and the Office of the
Secretary (see Management of the Fund--Investment Advisory Agreement), or to any
of its Trustees who are officers or employees of CIGNA Corporation or its
affiliates.
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<PAGE>
Pursuant to the requirements of the NYSE, the Fund is required to hold
annual meetings of shareholders. While the Fund is subject to this requirement,
each Trustee shall be elected on a term expiring on the date of the next annual
meeting or until his successor is elected and qualified. In the event that the
Fund ceases to be subject to any such requirement, it is anticipated that the
Trustees will become a self-perpetuating body and will continue in their
positions until they resign or are removed.
As of __________, 1997, the Trustees and officers of the Fund as a group
owned less than 1% of the outstanding Common Shares of the Fund.
The following table sets forth compensation paid by the Fund and by the
CIGNA fund complex to Trustees in 1996:
<TABLE>
<CAPTION>
Total
Compensation
Pension or Retirement from Fund and
Aggregate Benefits Accrued As Estimated Annual CIGNA Fund
Name of Person, Compensation Part of Fund Expenses Benefits Upon Complex Paid to
Position with Fund from Fund Retirement Trustees (c)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
R. Bruce Albro, Trustee, Chairman and President $ 0 $ - $ - $ 0
Hugh R. Beath, Trustee (a) 10,200 - - 25,600
Russell H. Jones, Trustee 10,200 - - 25,600
Paul J. McDonald, Trustee (b) 10,200 - - 25,600
Arthur C. Reeds, III, Trustee 0 - - 0
-------------- --------- ------- --------
$ 30,600 $ - $ - $ 76,800
------------- -------- --------- ========
</TABLE>
(a) All of Mr. Beath's 1996 compensation was deferred under a plan for all
CIGNA funds in which he had an aggregate balance of $135,139 as of
December 31, 1996.
(b) All of Mr. McDonald's 1996 compensation was deferred under a plan for all
CIGNA funds in which he had an aggregate balance of $43,898 as of
December 31, 1996.
(c) There were four (4) investment companies other than the Fund in the CIGNA
fund complex.
33
<PAGE>
INVESTMENT ADVISORY AGREEMENT
Pursuant to an Investment Advisory Agreement (the "Advisory Agreement"),
the Fund employs CII to manage the investment and reinvestment of the assets of
the Fund. Subject to the control and periodic review of the Board of Trustees,
CII determines what investments shall be purchased, held, or exchanged by the
Fund and what portion, if any, of the assets of the Fund shall be held in cash
and other temporary investments. CII also is responsible for overall management
of the business affairs of the Fund. For the services provided by CII under the
Advisory Agreement, the Fund pays CII a fee computed and paid monthly in an
amount equal to 0.75% per annum of the Fund's average weekly total asset value
for the year not in excess of $200,000,000 and 0.50% per annum of the Fund's
average weekly total asset value for the year over $200,000,000. Although this
fee is higher than the investment advisory fees paid for similar services by
most other investment companies, the Adviser believes it is comparable to fees
paid for similar services by other closed-end investment companies with
objectives and policies similar to those of the Fund. See "Determination of
Total Asset Value and Net Asset Value." The Fund incurred a management fee
payable to CII of $2,317,000, $2,215,000 and $1,962,000 in 1996, 1995 and 1994,
respectively.
The Advisory Agreement provides that the Fund shall reimburse CII for the
cost of maintaining the Office of the Treasurer and the Office of the Secretary.
The Office of the Treasurer prepares, files and distributes shareholder,
regulatory and tax reports; reports on financial and operational matters to
management, the Board of Trustees and its committees; negotiates and monitors
agreements with the transfer agents, custodian and other servicing agencies; and
establishes and maintains financial and operating systems and controls on behalf
of the Fund. The Office of the Secretary oversees the drafting and filing with
the Securities and Exchange Commission of registration statements and certain
quarterly, semi-annual and annual reports; prepares minutes for meeting of the
Board of Trustees and of the committees of the Trustees, proxy statements and
other materials for shareholder meetings; compiles meeting materials and
agendas; serves as liaison with Board members and handles day-to-day
administrative matters for the Fund requiring 1940 Act administrative and
corporate secretarial expertise. The allocation of costs for the Office of the
Treasurer and the Office of the Secretary are determined by a method whereby 25%
of the total cost is allocated equally among the Fund, INA Investment
Securities, Inc., CIGNA Variable Products Group, CIGNA Institutional Funds Group
and CIGNA Funds Group, and 75% of the total cost is allocated based on relative
net assets of each such fund as of the beginning of each calendar year, or as of
a date during a calendar year when a newly created fund commences operations.
For the fiscal years ended December 31, 1996 and 1995, the Fund reimbursed CII
$166,408 and $172,006 respectively, for the costs of maintaining the Office of
the Treasurer and the Office of the Secretary.
CII, at its own expense, furnishes to the Fund office space and
facilities and, except with respect to certain legal, administrative and
regulatory functions referred to herein, all personnel for managing the affairs
of the Fund. The Fund has agreed to reimburse CII for its costs of maintaining
the functions described above as provided in the Advisory Agreement.
The Fund pays all expenses not specifically assumed by CII including
compensation and expense of Trustees who are not Directors, officers or
employees of CII or any other affiliates of CIGNA Corporation; registration,
filing and other fees in connection with filings with regulatory authorities;
the fees and expenses of independent accountants; costs of printing and mailing
registration statements; prospectuses, proxy statements, and annual and periodic
reports to shareholders; custodian and transfer agent fees; brokerage
commissions and securities transactions costs incurred by the Fund; taxes and
corporate fees; legal fees incurred in connection with the affairs of the Fund;
and expenses of meetings of shareholders and Trustees.
The Fund has acknowledged CIGNA Corporation's control over the name
"CIGNA." The Fund would be obliged to change its name to eliminate the word
"CIGNA" (to the extent it could lawfully do so) in the event CIGNA Corporation
were to withdraw its permission for use of such name. CIGNA Corporation has
agreed not to withdraw such permission from the Fund using the name "CIGNA" so
long as an affiliate of CIGNA Corporation shall be the investment adviser for
the Fund.
34
<PAGE>
PORTFOLIO TRADING
It is the policy of CII on behalf of its clients, including the Fund, to
have purchases and sales of portfolio securities executed at the most favorable
overall terms, considering all costs of the transaction, including brokerage
commissions and spreads, and research and other services received, consistent
with obtaining best execution.
In seeking best overall terms, CII selects brokers or dealers on the
basis of their professional capability and the value and quality of their
brokerage services. Brokerage services include the ability to execute most
effectively large orders without adversely affecting markets and the positioning
of securities in order to effect orderly sales for clients.
The officers of CII determine, generally without limitation, the brokers
and dealers through whom, and the commission rates at which, securities
transactions for client accounts are executed. The officers of CII may select a
broker or dealer who may receive a commission for portfolio transactions
exceeding the amount another broker or dealer would have charged for the same
transaction if they determine that such amount of commission is reasonable in
relation to the value of the brokerage or research services performed or
provided by the executing broker or dealer, viewed in terms of either that
particular transaction or CII's overall responsibilities to the client for whose
account such portfolio transaction is executed and other accounts advised by CII
or accounts advised by other investment advisers which are related persons of
CII.
If two or more brokers or dealers are considered able to offer the same
favorable price with the equivalent likelihood of best execution the officers of
CII may prefer the broker or dealer who has furnished research services.
Research services include market information, analysis of specific issues,
presentation of special situations and trading opportunities on a timely basis,
advice concerning industries, economic factors and trends, portfolio strategy
and performance of accounts. Research services are used in advising all
accounts, including accounts advised by related persons of CII, and not all such
services are necessarily used by CII in connection with the specific account
that paid commissions to the broker or dealer providing such services.
The overall reasonableness of brokerage commissions paid is evaluated
continually. Such evaluation includes review of what competing brokers/dealers
are willing to charge for similar types of services and what discounts are being
granted by brokerage firms. The evaluation also considers the timeliness and
accuracy of the research received.
In addition, CII may, if permitted by applicable law, use brokerage
commissions to pay for products or services (other than brokerage and research
services) obtained from broker/dealers and third parties to the extent that such
products and services provide lawful and appropriate assistance to CII's
investment decision-making process. Where the research service product has a
mixed use (i.e., the product may serve a number of functions certain of which
are not related to the making of investment decisions), CII allocates the cost
of the product on a basis which it deems reasonable, according to the various
uses of the product, and maintains records documenting the allocation process
followed. Only that portion of the cost of the product allocable to research
services is paid from the Fund. CII does not acquire research services through
the generation of credits with respect to principal transactions or transactions
in financial futures except in new issue, fixed price underwritings with NASD
members.
CIGNA advises that Sanford C. Bernstein & Co., Inc. ("Sanford
Bernstein"), 767 Fifth Avenue, New York, NY 10153, reported that as of December
31, 1996 it held 6,067,405 shares, or 8.1%, of the outstanding common stock of
CIGNA for the accounts of discretionary clients who have the right to receive
dividends on these shares and any proceeds from the sale of these shares.
Sanford Bernstein also reported sole voting power as to 3,078,935, and sole
dispositive power as to 6,067,405, of these shares. Therefore, Sanford Bernstein
cannot act as a broker in connection with the sale of securities to or by the
Fund unless it complies with Section 17(e) of the 1940 Act and Rule 17e-1
thereunder. During 1996 and through September 30, 1997, the Fund did not use
Sanford Bernstein as a broker.
Most of the Fund's transactions are effected on a principal basis with
dealers, or in the case of new issues, underwriters. Transactions with dealers
on a principal basis do not involve the payment of brokerage
35
<PAGE>
commissions, although the price paid for the security includes a profit margin
for the dealer. Purchases from dealers serving as primary market makers reflect
the spread between the bid and asked prices. The Fund paid no brokerage
commissions during any of the three most recent fiscal years.
DETERMINATION OF TOTAL ASSET VALUE AND NET ASSET VALUE
The total asset value and net asset value of the Common Shares is
computed by the Custodian weekly on the last day of the week on which the NYSE
is open for trading. These determinations are made on each such day at the close
of the NYSE by dividing the number of outstanding Common Shares into the total
assets and net assets of the Fund. Net asset value is the excess of the Fund's
total assets over its liabilities.
Securities actively 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 sixty days are valued at amortized
cost, which approximates market. Other securities and assets of the Fund, with
the exception of futures contracts, are appraised at fair value as determined in
good faith by, or under the authority of, the Board of Trustees of the Fund.
Timely and reliable market quotations may not be generally available to
the Fund for purposes of valuing privately placed securities. Accordingly, the
value of such securities will be determined in accordance with specific
procedures established by the Board of Trustees. Under these procedures, at
intervals established by the Board of Trustees (e.g., once per month), the Fund
will seek a price quotation for each restricted security held in the Fund's
portfolio from a broker-dealer believed by the Adviser to be a reliable source
for such quotations. Concurrently, the Fund will calculate the yield to maturity
of each such restricted security and the yield to maturity of a U.S. Treasury
security of comparable maturity. During the interval between the receipt of
price quotations, the value of each such restricted security will be determined
by reference to fluctuations in the published yield of such a Treasury security
and the spread calculated above, unless the Adviser believes that special
circumstances warrant a more frequent valuation. Such procedures may determine
only the approximate value of such securities.
The initial margin deposit made upon entering into a futures contract is
recognized as an asset due from the broker (the Fund's agent in acquiring the
futures position). During the period the futures contract is open, changes in
the value of the contract are recognized as unrealized gains or losses by
"marking to market" on a daily basis to reflect the market value of the contract
at the end of each day's trading. Variation margin payments are made or
received, depending upon whether unrealized gains or losses are incurred. When
the contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transaction and
the Fund's basis in the contract.
The premium paid by the Fund for the purchase of a call or put option on
futures contracts is recorded as an investment and subsequently
"marked-to-market" to reflect the current market value of the option purchased.
The current market value of a purchased option on futures contracts is the last
bid price. If an option on futures contracts which the Fund purchased expires on
the stipulated expiration date, the Fund realizes a loss in the amount of the
cost of the option. If the Fund exercises a purchased put option on futures
contracts, it realizes a gain or loss from the sale of the underlying security
and the proceeds from such sale will be decreased by the premium originally
paid. If the Fund exercises a purchased call option on futures contracts, the
cost of the security which the Fund purchases upon exercise will be increased by
the premium originally paid.
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
The Fund distributes to shareholders substantially all of its net
investment income in monthly dividends on or about the 10th day of each month.
Capital gains, if any, net of capital losses, are distributed annually, with
such distribution to be declared in December of each year, or otherwise as
required by Treasury regulations then in
36
<PAGE>
effect. Shareholders are informed of the tax consequences of the Fund's
distributions after the end of the Fund's fiscal year. See "Taxation."
Shareholders may elect to have all distributions of dividends and capital
gains automatically reinvested by State Street Bank and Trust Company (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,
which will be paid by check and 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.
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 on the payment date for the dividend or distribution
is equal to or exceeds their net asset value as determined 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 NYSE 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
Common Shares, the average per Common Share purchase price paid by the Dividend
Paying Agent may exceed the asset value of the shares, resulting in the
acquisition of fewer shares than if the dividend or contribution 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 whole Common Shares
credited to his account under the Plan will be issued and a cash payment will be
made for any fraction of a Common Share credited to such account.
The Dividend Paying Agent will maintain all shareholders' accounts in the
Plan and will furnish written confirmation of all transactions in the account,
including information needed by shareholders for tax records. Common Shares in
the account of each Plan participant (other than participants whose Common
Shares are registered in the name of banks, brokers, nominees or other third
parties) will be held by the Dividend Paying Agent in non-certificated form in
the name of the participant, and each shareholder's proxy will include those
Common Shares purchased pursuant to the Plan.
In the case of shareholders such as banks, brokers or nominees which hold
Common Shares for others who are the beneficial owners, the Dividend Paying
Agent administers the Plan on the basis of the number of Common 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 Common
Shares are held in the name of banks, brokers or nominees must confirm with such
entities that participation in the Plan is possible. Those who 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. There will be no brokerage
commissions charged with respect to shares issued directly 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
37
<PAGE>
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 or inquiries concerning the Plan should be directed to State
Street Bank and Trust Company, Stock Transfer Department, P.O. Box 8200, Boston,
Massachusetts 02266-8200 or by telephone call to 1-800-426-5523.
TAXATION
The following discussion offers only a brief outline of the federal income tax
consequences of investing in Common Shares. Investors should consult their own
tax advisors for more detailed information and for information regarding the
impact of state and local taxes upon such an investment.
GENERAL
The Fund intends for each taxable year to qualify as a "regulated
investment company" ("RIC") under the Code. As a RIC, the Fund will not be
liable for federal income taxes on taxable net investment income and capital
gain net income (capital gains in excess of capital losses) that it distributes
to its shareholders, provided that the Fund distributes annually to its
shareholders at least 90% of its investment company taxable income (which
includes, among other items, dividends and interest but excludes net long-term
capital gains in excess of net short-term capital losses) for the taxable year
(the "Distribution Requirement"). To the extent that the Fund retains its
capital gains for investment, it will be subject under current tax rates to
federal income tax at a maximum effective rate of 35% on the amount retained.
For the Fund to qualify as a RIC it must abide by all of the following
requirements: (1) at least 90% of the Fund's gross income each taxable year must
be derived from dividends, interest, payments with respect to securities loans,
gains from the sale or other disposition of stock or securities or foreign
currencies, or other income (including gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "Income Requirement"); (2) through December 31,
1997, less than 30% of the Fund's gross income each taxable year must be derived
from the sale or other disposition of securities and certain options, futures
contracts, forward contracts and foreign currencies held for less than three
months (the "Short-Short Limitation", which is repealed for the Fund's tax years
beginning after December 31, 1997; (3) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. Government securities and other
securities, with such other securities limited, in respect of any one issuer, to
an amount that does not exceed 5% of the total assets of the Fund and that does
not represent more than 10% of the outstanding voting securities of such issuer;
and (4) at the close of each quarter of the Fund's taxable year, not more than
25% of the value of its assets may be invested in securities of any one issuer
(other than U.S. Government securities).
The Fund will be subject to a nondeductible 4% excise tax to the extent
it fails to distribute by the end of any calendar year an amount at least equal
to the sum of: (1) 98% of its ordinary income (not taking into account any
capital gains or losses) for that year; (2) 98% of its capital gains in excess
of capital losses (adjusted for certain ordinary losses) for the twelve-month
period ending on October 31 of that year; and (3) all ordinary income and
capital gains for previous years that were not distributed in such years. For
this and other purposes, dividends declared in October, November or December of
any calendar year and made payable to shareholders of record in such month will
be deemed to have been received on December 31 of such year if the dividends are
paid by the Fund subsequent to December 31 but prior to February 1 of the
following year.
If in any taxable year the Fund fails to qualify as a RIC under the Code,
the Fund will be taxed in the same manner as an ordinary corporation, and
distributions to its stockholders will not be deductible by the Fund in
computing its taxable income. In addition, in the event of failure to qualify,
the Fund's distributions, to the extent derived from the Fund's current or
accumulated earnings and profits, will constitute dividends (eligible for the
corporate dividends-received deduction) which are taxable to shareholders as
ordinary income, even though those distributions might otherwise (at least in
part) have been treated in the shareholder's hands as mid-term or long-term
capital gains.
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<PAGE>
If the Fund does not meet the asset coverage requirements of the 1940
Act, the Fund will be required to suspend distributions to the holders of Common
Shares until the asset coverage is restored. Such a suspension of distributions
might prevent the Fund from distributing 90% of its investment company taxable
income, as is required in order to qualify for taxation as a RIC or cause the
Fund to incur a tax liability or a non-deductible 4% excise tax on its
undistributed taxable income (including gain) or both.
For any period during which the Fund qualifies as a RIC, dividends from
net investment income and distributions of net short-term capital gains are
taxable to shareholders as ordinary income under federal income tax laws whether
paid in cash or in additional Common Shares. Distributions from net mid-term or
long-term capital gains are taxable as mid-term or long-term capital gains
regardless of the length of time a shareholder has held Common Shares.
Distributions not made out of the Fund's earnings and profits will be treated as
a return of capital and taxed as capital gain to the extent the distribution
exceeds the basis of the Common Share with respect to which it is distributed.
Dividends and distributions may also be subject to state or local taxes.
Depending on the state tax rules pertaining to a shareholder, a portion of the
dividends paid by the Fund attributable to direct obligations of the U.S.
Treasury and certain agencies may be exempt from state and local taxes.
The sale of Common Shares by a shareholder is a taxable event and may
result in capital gain or loss. Any loss incurred on sale of Common Shares held
for one year or more will be treated as a mid-term or long-term capital loss to
the extent of capital gain dividends received with respect to those Common
Shares. If a shareholder receives a distribution taxable as mid-term or
long-term capital gain with respect to Common Shares and sells such Common
Shares without having held the shares for more than six months, then any loss on
the redemption or exchange will be treated as mid-term or long-term loss to the
extent of the capital gain distribution.
Shareholders will be notified after each calendar year of the amount of
income dividends and net capital gains distributed and the percentage of the
Fund's income attributable to U.S. Treasury and agency obligations. The Fund is
required to withhold 20% of all taxable dividends, distributions and redemption
proceeds payable to any non-corporate shareholder that does not provide the Fund
with the shareholder's correct taxpayer identification number or certification
that the shareholder is not subject to backup withholding.
Investors should carefully consider the tax implications of buying
shares of Common Stock just prior to a distribution, as the price of shares
purchased at this time may reflect the amount of the forthcoming distribution
which will, except in unusual circumstances, be taxable when received.
ISSUES RELATED TO HEDGING AND OPTION INVESTMENTS
The Fund's ability to make certain investments may be limited by
provisions of the Code that require inclusion of certain unrealized gains or
losses in the Fund's income for purposes of the Income Requirement, the
Short-Short Limitation and the Distribution Requirement, and by provisions of
the Code that characterize certain income or loss as ordinary income or loss
rather than capital gain or loss. Such recognition, characterization and timing
rules will affect investments in certain futures contracts, options, foreign
currency contracts and debt securities denominated in foreign currencies.
FOREIGN INCOME TAXES
Investment income received by the Fund from sources within foreign
countries may be subject to foreign income taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries which
would entitle the Fund to a reduced rate of such taxes or exemption from taxes
on such income. It is impossible to determine the effective rate of foreign tax
for a Fund in advance since the amount of the assets to be invested within
various countries is not known.
If the Fund invests in an entity that is classified as a "passive foreign
investment company" ("PFIC") for federal income tax purposes, the application of
certain provisions of the Code applying to PFICs could result in the imposition
of certain federal income taxes on the Fund. It is anticipated that any taxes on
the Fund with respect to investments in PFICs would be insignificant. Under U.S.
Treasury regulations, the Fund can elect to mark-
39
<PAGE>
to-market its PFIC holdings in lieu of paying taxes on gains or distributions
therefrom. It is anticipated that any taxes on a Fund with respect to
investments in PFICs would be insignificant.
Foreign shareholders should consult with their tax advisers as to if and
how the federal income tax and its withholding requirements applies to them.
STATE AND LOCAL TAXES
Depending upon the extent of the Fund's activities in states and
localities in which its offices are maintained, its agents or independent
contractors are located or it is otherwise deemed to be conducting business, the
Fund may be subject to the tax laws of such states or localities.
BACKUP WITHHOLDING
The Fund may be required to withhold for U.S. federal income tax purposes
31% of all taxable distributions payable to shareholders who fail to provide the
Fund with their current taxpayer identification number or who fail to make
required certificates or if the Fund or a shareholder has been notified by the
Internal Revenue Service that they are subject to backup withholding. Corporate
shareholders and other shareholders specified in the Code are exempt from backup
withholding. Backup withholding is not an additional tax; any amounts withheld
may be credited against the shareholder's U.S. federal income tax liability.
CERTAIN OWNERS OF RECORD
To the knowledge of the Fund, no person owned beneficially five percent
or more of the outstanding Common Shares of the Fund at ___________, 1997. Cede,
as nominee, held of record ______% of the outstanding Common Shares at
___________, 1997.
CONVERSION TO OPEN-END STATUS
The Fund's Board of Trustees may elect at any time to submit to the
shareholders a proposal to convert the Fund to an open-end investment company.
Any such conversion of the Fund to an open-end company, would require the
affirmative vote of the holders of a majority of the outstanding shares of the
Fund, within the meaning of the 1940 Act. Shareholders of an open-end investment
company may require the company to redeem their shares at any time (except in
certain circumstances as authorized by or under the 1940 Act) at their net asset
value, less such redemption charges, if any, as might be in effect at the time
of redemption. If the Fund converted to an open-end company, it could be
required to liquidate portfolio securities to meet requests for redemption and
its Common Shares would no longer be listed on the NYSE. Borrowings made against
the Credit Line will be repayable upon demand by PNC Bank prior to the
conversion of the Fund to open-end status. See "Risk Factors and Special
Considerations - Leverage."
DESCRIPTION OF SHARES
GENERAL
The Fund's Amended and Restated Agreement and Declaration of Trust, as
amended (the "Declaration of Trust"), permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (the "Common
Shares"). Shareholders are entitled to one vote for each Common Share held and
to vote in the election of Trustees and on other matters submitted to meetings
of shareholders. No material amendment may be made to the Fund's Declaration of
Trust without the affirmative vote of a majority of its Common Shares. Under
certain circumstances, shareholders have the right to communicate with other
shareholders and to remove Trustees. Common Shares have no pre-emptive or
conversion rights. Common Shares, when issued, are fully paid and non-
40
<PAGE>
assessable to the Fund except as set forth below under "Description of Shares--
Certain Provisions of the Declaration of Trust."
The Fund's Declaration of Trust permits the Trustees to divide or combine
the Common Shares into a greater or lesser number of Common Shares without
thereby changing the proportionate beneficial interest in the Fund. Each Common
Share represents an equal proportionate interest in the Fund with each other
Common Share. The Fund has no present intention of offering additional Common
Shares, except those being offered pursuant to this Rights Offering, except that
additional Common Shares may be issued under the Fund's dividend reinvestment
plan. Other offerings of its Common Shares, if made, will require approval of
the Fund's Board of Trustees. Any additional offering will be subject to the
requirements of the 1940 Act that Common Shares may not be sold at a price below
the then-current net asset value, exclusive of underwriting discounts and
commissions, except, among other things, in connection with an offering to
existing shareholders or with the consent of the holders of a majority of the
Fund's Common Shares.
The Fund may be terminated by the vote of the holders of two-thirds of
its outstanding Common Shares. If not so terminated, the Fund will continue
indefinitely. Upon liquidation of the Fund, the Fund's shareholders are entitled
to share pro rata in the Fund's net assets available for distribution to its
shareholders.
Set forth below is information with respect to the Common Shares, all of
which are fully paid and nonassessable by the Fund, as of _____________, 1997:
Amount Held by Amount Outstanding
Amount Authorized Fund or for its Account (exclusive of Fund holdings)
- ----------------- ----------------------- ----------------------------
unlimited none __________
CERTAIN PROVISIONS OF THE DECLARATION OF TRUST
The Fund is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the Declaration of Trust of the Fund contains an express
disclaimer of shareholder liability for acts or obligations of the Fund and
provides for indemnification and reimbursement of expenses out of the Fund
property for any shareholder held personally liable for the obligations of the
Fund. The Trustees intend that the Fund shall maintain appropriate insurance
(for example, fidelity bonding and errors and omissions insurance) for the
protection of the Fund, its shareholders, Trustees, officers, employees and
agents covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance exists and the Fund
itself is unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Fund
are not binding upon the Trustees individually, but only upon the property of
the Fund and that the Trustees will not be liable for errors of judgment or
mistakes of fact or law, but nothing in the Declaration of Trust protects a
Trustee against any liability to which he/she would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his/her office.
Under the Declaration of Trust and the Fund's by laws, the Fund is not
generally required to hold any annual meeting of shareholders unless obligated
to do so by stock exchange requirements or applicable law. Although under
current requirements of the New York Stock Exchange the Fund will be obligated
to hold an annual meeting of shareholders, in the event that the Fund is no
longer subject to any such requirement at a future date, there will be no annual
meeting of shareholders unless required by the 1940 Act.
41
<PAGE>
CUSTODIAN, TRANSFER AGENT
The Custodian for the Fund is State Street Bank and Trust Company
("State Street"), P.O. Box 2351, Boston, Massachusetts 02107. Under its
Custodian Agreement with the Fund, State Street maintains the portfolio
securities of the Fund, administers the purchases and sales of portfolio
securities, collects interest and dividends and other distributions made on the
securities held in the portfolio of the Fund, determines the total asset value
and net asset value of shares of the Fund on a weekly basis and performs such
other ministerial duties as are included in the Custodian Agreement, a copy of
which is on file with the Securities and Exchange Commission.
The transfer agent for the Fund is State Street Corporate Stock Transfer
Department, P.O. Box 8200, Boston, Massachusetts 02266-8200. A copy of the
Transfer Agent Agreement is on file with the Securities and Exchange Commission.
As indicated above, State Street will also serve as Subscription Agent in
connection with the Offer.
42
<PAGE>
REPORTS TO SHAREHOLDERS
The Fund will send unaudited semi-annual and audited annual reports to
shareholders, including a list of the portfolio investments held by the Fund.
CERTAIN LEGAL MATTERS
The validity of the Common Shares offered hereby will be passed upon for
the Fund by its counsel, Goodwin, Procter & Hoar LLP, Boston, Massachusetts.
FINANCIAL STATEMENTS
The financial statements as of December 31, 1996 and for each for the
years indicated in the period ended December 31, 1996 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
accounting and auditing. The financial statements for the period ended September
30, 1997 included in this Prospectus are unaudited.
AVAILABLE INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and the 1940 Act and in accordance therewith
is required to file reports, proxy statements and other information with the
Commission. Any such reports, proxy statements and other information can be
inspected without charge at the public reference facilities of the Commission,
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the regional offices of the Commission located at Seven World Trade Center,
New York, New York 10048 and Suite 1400, 500 W. Madison Street, Chicago,
Illinois 60621-2511. Copies of such material may be obtained from the Public
Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W. Washington, D.C. 20549, and its public reference facilities in New
York, New York, and Chicago, Illinois, at prescribed rates. Reports, proxy
statements and other information concerning the Fund can also be inspected at
the offices of the New York Stock Exchange, 20 Broad Street, New York, New York,
10005.
Additional information regarding the Fund is contained in the
Registration Statement on Form N-2 (and any amendments, exhibits and schedules
thereto) relating to Common Shares, as filed by the Fund with the Commission.
This Prospectus does not contain all of the information set forth in the
Registration Statement (and any amendments, exhibits and schedules thereto). For
further information with respect to the Fund and the Common Shares offered
hereby, reference is made to the Registration Statement. Statements contained in
this Prospectus as to the contents of any contract or other document referred to
are not necessarily complete and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement may be inspected without charge
at the Commission's principal office in Washington, D.C., and copies of all or
any part thereof may be obtained from the Commission upon the payment of certain
fees prescribed by the Commission.
43
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
<S> <C>
Investments in Securities, December 31, 1996............................................................ F-2
Statement of Assets and Liabilities, December 31, 1996.................................................. F-5
Statement of Operations, Year Ended December 31, 1996................................................... F-5
Statement of Changes in Net Assets, Years Ended December 31, 1996 and
December 31, 1995.................................................................................. F-6
Statement of Cash Flows, Year Ended December 31, 1996.................................................. F-6
Notes to Financial Statements........................................................................... F-7
Report of Independent Accountants....................................................................... F-11
Financial Statements for period ended September 30, 1997 to be
filed by Amendment to this Registration Statement.................................................. n/a
</TABLE>
F-1
<PAGE>
- -------------------------------------------------------------------------------
CIGNA HIGH INCOME SHARES INVESTMENTS IN SECURITIES December 31, 1996
MARKET
PRINCIPAL VALUE
(000) (000)
- -------------------------------------------------------------------------------
BONDS AND NOTES - 129.9%
AUTO AND TRUCK - 8.6%
A.P.S., Inc., 11.875%, 2006 $3,500 $3,815
Collins & Aikman Products Co., 11.5%, 2006 4,500 4,905
Foamex L.P., 11.25%, 2002 5,000 5,300
Harvard Industries, Inc.,
12%, 2004 2,000 1,730
11.125%, 2005 4,175 3,465
Johnstown American Industries, Inc., 11.75%, 2005 4,500 4,297
--------
23,512
--------
BROADCASTING & MEDIA - 14.0%
All American Communications, Inc., 10.875%, 2001
(144A security acquired Oct & Dec 1996 for
$5,028,750)** 5,000 5,075
American Media Operations, Inc., 11.625%, 2004 5,500 5,913
Garden State Newspapers, Inc., 12%, 2004 5,000 5,450
Grupo Televisa, S.A., 11.875%, 2006 5,000 5,550
Katz Media Corp., 10.5%, 2007 (144A security
acquired Dec 1996 for $3,017,500)** 3,000 3,075
Lodgenet Entertainment Corp., 10.25%, 2006 (144A
security acquired Dec 1996 for $3,000,000)** 3,000 3,008
MDC Communications Corp., 10.5%, 2006 2,500 2,575
Newsquest Capital PLC, 11%, 2006 (144A security
acquired April 1996 for $3,500,625)** 3,500 3,622
Petersen Publishing Co., L.L.C., 11.125%, 2006
(144A security acquired Nov 1996 for
$2,016,250)** 2,000 2,080
Sullivan Broadcasting, Inc., 10.25%, 2005 2,000 2,025
--------
38,373
--------
CABLE TV - 9.2%
Frontiervision Operating Partners, L.P., 11%, 2006 4,000 4,010
Galaxy Telecom, L.P., 12.375%, 2005 5,000 5,325
Marcus Cable Co., L.P., 11.875%, 2005 5,500 5,823
Poland Communications, Inc., 9.875%, 2003 (144A
security acquired Oct 1996 for $2,988,750)** 3,000 2,981
MARKET
PRINCIPAL VALUE
(000) (000)
- --------------------------------------------------------------------------------
Rifkin Acquisition Partners, L.L.L.P., 11.125%, 2006 $4,000 $4,170
Wireless One, Inc., 13%, 2003 3,000 2,910
--------
25,219
--------
CHEMICALS - 5.6%
Harris Chemical North America, Inc., 10.75%, 2003 4,500 4,658
LaRoche Industries, Inc., 13%, 2004 5,000 5,425
Polymer Group, Inc., 12.25%, 2002 3,800 4,151
Tri Polyta Finance B.V., 11.375%, 2003 1,000 1,048
--------
15,282
--------
CONSUMER PRODUCTS & SERVICES - 6.2%
AMF Group, Inc., 10.875%, 2006 3,000 3,180
Hines Horticulture, Inc., 11.75%, 2005 5,000 5,325
Lifestyle Furnishings International Ltd.,
10.875%, 2006 4,000 4,290
Remington Products Co., L.L.C., 11%, 2006 3,000 2,550
Simmons Co., 10.75%, 2006 1,500 1,579
--------
16,924
--------
CONTAINERS AND PAPER - 11.9%
Berry Plastics Corp., 12.25%, 2004 5,500 6,022
Calmar, Inc., 11.5%, 2005 5,000 5,181
Crown Paper Co. 11%, 2005 5,500 5,170
Four M Corp., 12%, 2006 3,000 3,120
Grupo International Durango, S.A. 12.625%, 2003 3,000 3,263
Packaging Resources, Inc., 11.625%, 2003 4,500 4,747
Printpak, Inc., 10.625%, 2006 (144A security
acquired Aug & Dec 1996 for $5,148,750)** 5,000 5,175
--------
32,678
--------
ELECTRONICS AND ELECTRICAL EQUIPMENT - 6.2%
Advanced Micro Devices, Inc. 11%, 2003 3,000 3,255
Dictaphone Corp., 11.75%, 2005 5,000 4,600
Exide Electronics Group, Inc., 11.5%, 2006 4,000 4,170
International Wire Group, Inc., 11.75%, 2005 4,500 4,849
--------
16,874
--------
The Notes to Financial Statements are an integral part of these statements.
F-2
<PAGE>
- -------------------------------------------------------------------------------
CIGNA HIGH INCOME SHARES INVESTMENTS IN SECURITIES December 31, 1996 (Continued)
MARKET
PRINCIPAL VALUE
(000) (000)
- -------------------------------------------------------------------------------
ENERGY - 3.2%
Statia Terminals International, 11.75%, 2003 (144A
security acquired Nov 1996 for $4,905,000)** $4,900 $5,096
Trans Texas Gas Corp., 11.5%, 2002 3,500 3,780
--------
8,876
--------
ENTERTAINMENT - 9.0%
Alliance Gaming Corp., 12.875%, 2003 4,750 4,999
American Skiing Co., 12%, 2006 (144A security
acquired June 1996, for $5,101,163)** 5,250 5,526
Casino America, Inc., 12.5%, 2003 5,500 5,211
Casino Magic of Louisiana Corp., 13%, 2003 4,000 3,950
Trump Atlantic City Funding, Inc., 11.25%, 2006 5,000 4,950
--------
24,636
--------
ENVIRONMENTAL - 0.4%
Mid-American Waste Systems, Inc., 12.25%, 2003~* 3,000 1,050
--------
FINANCIAL - 3.5%
Affinity Group, Inc., 11.5%, 2003 5,000 5,200
Dollar Financial Group, Inc., 10.875%, 2006
(144A security acquired Nov & Dec 1996 for
$4,200,750)** 4,150 4,259
--------
9,459
--------
FOOD AND BEVERAGES - 11.2%
Americold Corp., 12.875%, 2008 5,000 5,175
Grand Union Co., 12%, 2004 5,000 5,275
Pathmark Stores, Inc.,
11.625%, 2002 4,250 4,314
12.625%, 2002 1,300 1,349
Specialty Foods Corp., 10.25%, 2001 4,600 4,255
Star Markets Co., Inc., 13%, 2004 4,000 4,500
Van de Kamps, Inc., 12%, 2005 5,250 5,722
--------
30,590
--------
HEALTH CARE - 2.5%
Dade International Inc., 11.125%, 2006 3,250 3,526
Owens & Minor, Inc., 10.875%, 2006 3,000 3,218
--------
6,744
--------
MARKET
PRINCIPAL VALUE
(000) (000)
- -------------------------------------------------------------------------------
INDUSTRIAL - 7.4%
Alvey Systems, Inc., 11.375%, 2003 $1,000 $1,043
Crain Industries, Inc., 13.5%, 2005 5,500 6,201
Goss Graphic Systems, Inc., 12%, 2006 4,000 4,120
IMO Industries, Inc., 11.75%, 2006 4,000 3,720
Interlake Corp., 12.125%, 2002 5,025 5,201
--------
20,285
--------
METALS - 6.1%
Euramax International PLC 11.25%, 2006 (144A
security acquired Sept. 1996 for $4,022,500)** 4,000 4,120
GS Technologies Operating Co., Inc., 12%, 2004 3,150 3,268
Jorgensen (Earle M.) Co., 10.75%, 2000 3,250 3,315
Kaiser Aluminum & Chemical Corp., 12.75%, 2003 5,500 5,912
--------
16,615
--------
MISCELLANEOUS - 6.2%
Atrium, Inc., 10.5%, 2006 (144A security
acquired Nov 1996 for $1,500,000)** 1,500 1,538
Guitar Center Management Co., Inc., 11%, 2006
(144A security acquired June 1996 for
$3,784,375)** 3,750 3,975
Michaels Stores, Inc., 10.875%, 2006 3,000 2,910
Sullivan Graphics, Inc., 12.75%, 2005 5,500 5,308
United Stationers Supply Co., 12.75%, 2005 3,000 3,315
--------
17,046
--------
TELECOMMUNICATIONS - 12.5%
Comnet Cellular, Inc., 11.25%, 2005 4,000 4,250
Fonorola, Inc., 12.5%, 2002 4,450 4,828
IXC Communications, Inc., 12.5%***, 2006 5,500 6,023
Phonetel Technologies, Inc., 12%, 2006 3,375 3,493
Pricellular Wireless, Inc., 10.75%, 2004 (144A
security acquired Nov 1996 for $2,000,000)** 2,000 2,080
Pronet, Inc., 11.875%, 2005 4,450 4,183
Sprint Spectrum, L.P., 11%, 2006 4,000 4,280
Sygnet Wireless Inc., 11.5%, 2006 5,000 5,125
--------
34,262
--------
The Notes to Financial Statements are an integral part of these statements.
F-3
<PAGE>
- -------------------------------------------------------------------------------
CIGNA HIGH INCOME SHARES INVESTMENTS IN SECURITIES December 31, 1996 (Continued)
MARKET
PRINCIPAL VALUE
(000) (000)
- -------------------------------------------------------------------------------
TEXTILES - 6.2%
Avondale Mills, Inc., 10.25%, 2006 $3,500 $3,622
CMI Industries, Inc., 9.5%, 2003 4,935 4,614
Dan River, Inc., 10.125%, 2003 3,750 3,788
Synthetic Industries, Inc., 12.75%, 2002 4,500 4,961
---------
16,985
---------
TOTAL BONDS AND NOTES (Cost - $343,812,372) 355,410
---------
UNITS - 3.3%
NS Group, Inc., 13.5%, 2003 (each $1,000 unit
includes one warrant for Common Stock) 4,080 4,284
ICF Kaiser International, Inc., 13%, *** 2003
(each $1,000 unit includes 4.8 warrants for
Common Stock) 5,000 4,750
---------
TOTAL UNITS (Cost - $8,706,942) 9,034
---------
NUMBER
OF SHARES
---------
WARRANTS - 0.1%
Exide, Inc., Exp. 2006* 4,000 120
IHF Capital, Inc., Class A & L* 5,000 125
Wireless One, Inc., Exp. 2000* 15,000 15
---------
TOTAL WARRANTS (Cost - $287,316) 260
---------
TOTAL INVESTMENTS IN SECURITIES - 133.3%
(Total Cost - $352,806,630) 364,704
Liabilities, Less Cash and Other Assets - (33.3%) (91,204)
---------
NET ASSETS - 100% (equivalent to $7.43 per
share based on 36,826,611 shares outstanding) $273,500
=========
* Non-income producing securities.
** Indicates restricted security; the aggregate fair value of restricted
securities is $51,609,312 (aggregate cost $50,214,412) which is
approximately 19% of net assets. Valuations have been furnished by brokers
trading in the securities or a pricing service for all restricted
securities.
*** Variable rate security. Rate disclosed is as of December 31, 1996.
+ Defaulted security.
- -------------------------------------------------------------------------------
PORTFOLIO COMPOSITION (UNAUDITED)
December 31, 1996
MARKET % OF
QUALITY RATINGS* OF VALUE MARKET
LONG-TERM BONDS (000) VALUE
- ------------------------------------
Ba/BB $27,736 7.6%
B/B 316,374 86.8%
Below B 20,334 5.6%
-------- -------
$364,444 100.0%
======== =======
* The higher of Moody's or Standard & Poor Ratings.
- -------------------------------------------------------------------------------
The Notes to Financial Statements are an integral part of these statements.
F-4
<PAGE>
- --------------------------------------------------------------------------------
CIGNA HIGH INCOME SHARES
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
(IN THOUSANDS)
--------------
ASSETS:
Investments at market value
(Cost - $352,806,630) $364,704
Cash on deposit with custodian 13
Interest receivable 11,383
Investment for deferred compensation plan
(Cost - $79,030) 94
Other 6
--------------
TOTAL ASSETS 376,200
--------------
LIABILITIES:
Loan payable 96,000
Dividend payable January 10, 1997 at $.1575 per share 5,800
Accrued interest payable 474 Accrued advisory fees payable 198
Deferred trustees' fees payable 94
Other accrued expenses (including $5,458 due to affiliate) 134
--------------
TOTAL LIABILITIES 102,700
--------------
NET ASSETS (Equivalent to $7.43 per share based on
36,826,611 shares of beneficial interest outstanding;
unlimited number of shares authorized) $273,500
==============
COMPONENTS OF NET ASSETS:
Paid in capital $319,700
Undistributed net investment income 61
Unrealized appreciation of investments 11,912
Accumulated net realized loss (58,173)
--------------
NET ASSETS $273,500
==============
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
--------------
INVESTMENT INCOME
INCOME:
Interest $40,254
EXPENSES:
Interest expense $6,141
Investment advisory fees 2,317
Administrative services 166
Custodian fees and expenses 113
Shareholder reports 108
Transfer agent fees and expenses 52
Trustees' fees 44
Auditing and legal fees 35
Other 60 9,036
------ -------
NET INVESTMENT INCOME 31,218
-------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized gain from securities
transactions 9,364
Unrealized appreciation of investments 781
-------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS 10,145
-------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $41,363
=======
The Notes to Financial Statements are an integral part of these statements.
F-5
<PAGE>
- -------------------------------------------------------------------------------
CIGNA HIGH INCOME SHARES
STATEMENT OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31
----------------------
1996 1995
----------- ----------
(IN THOUSANDS)
----------------------
OPERATIONS:
Net investment income $31,218 $30,224
Net realized gain from investments 9,364 1,507
Unrealized appreciation on investments 781 19,516
----------- ----------
Net increase in net assets from
operations 41,363 51,247
----------- ----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ($0.87 per
share and $.84 per share,
respectively) (31,747) (30,104)
In excess of net investment income
($0.03 per share) (1,159)
----------- ----------
Total distributions to shareholders (32,906) (30,104)
----------- ----------
CAPITAL SHARE TRANSACTIONS:
Net increase from 678,552 and
723,005 capital shares issued
shareholders in reinvestment of
distributions, respectively 5,270 5,176
----------- ----------
Net increase from capital share
transactions 5,270 5,176
----------- ----------
Net Increase in Net Assets 13,727 26,319
NET ASSETS:
Beginning of period 259,773 233,454
----------- ----------
End of period (Including undistributed
net investment income of $60,782
and $466,865, respectively) $273,500 $259,773
=========== ==========
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
--------------
CASH FLOWS FROM INVESTING AND OPERATING ACTIVITIES:
Purchases of portfolio securities $(286,023)
Proceeds from sales of portfolio securities 276,471
Investment income received 39,431
Investment and administrative expenses paid (2,946)
Interest paid (5,971)
--------------
Cash flows provided by investing and operating activities 20,962
--------------
CASH FLOWS FROM SHAREHOLDER AND OTHER FINANCING
ACTIVITIES:
Distributions to shareholders (net of reinvestment of
$5,269,805) (25,360)
Net borrowings 4,400
--------------
Cash flows used by shareholder and other financing
activities (20,960)
--------------
Net increase in cash 2
Cash, beginning of period 11
--------------
CASH, END OF PERIOD $13
==============
RECONCILIATION OF NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS TO NET INCREASE IN
CASH PROVIDED BY INVESTING AND OPERATING
ACTIVITIES:
Net increase in net assets resulting from operations $41,363
Increase in value of investments (19,697)
Change in receivables and liabilities exclusive of loan and
dividend payable (704)
--------------
NET CASH PROVIDED BY INVESTING AND OPERATING
ACTIVITIES $20,962
==============
The Notes to Financial Statements are an integral part of these statements.
F-6
<PAGE>
- -------------------------------------------------------------------------------
CIGNA HIGH INCOME SHARES NOTES TO FINANCIAL STATEMENTS
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. The preparation of financial statements
in accordance with generally accepted accounting principles 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.
B. 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 is
recorded on the accrual basis. The Fund does not amortize premiums or discounts
for book purposes, except for original issue discounts which are amortized over
the life of the respective securities. Securities gains and losses are
determined on the basis of identified cost.
C. 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.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - Dividends and distributions are
recorded by the Fund on the ex-dividend date. Payments in excess of financial
accounting income due to differences between financial and tax accounting, to
meet the minimum distribution requirements for tax basis income, are deducted
from paid in capital when such differences are determined to be permanent.
E. CASH FLOW INFORMATION - Cash, as used in the Statement of Cash Flows, is the
amount reported in the Statement of Assets and Liabilities. The Fund issues its
shares, invests in securities, and distributes dividends from net investment
income (which are either paid in cash or reinvested at the discretion of
shareholders). These activities are reported in the Statement of Changes in Net
Assets. Information on cash payments is presented in the Statement of Cash
Flows. Accounting practices that do not affect reporting activities on a cash
basis include unrealized gain or loss on investment securities and accretion
income recognized on investment securities.
2. BANK LOANS. The Fund has a revolving credit agreement with unrelated third
party lend-
F-7
<PAGE>
- -------------------------------------------------------------------------------
CIGNA HIGH INCOME SHARES NOTES TO FINANCIAL STATEMENTS (Continued)
ers which will generally enable the Fund to borrow up to the lesser of (A)
$101,300,000 or (B) one-third of the Fund's Eligible Assets. The agreement ma
tures on May 1, 1999. Prior to maturity, principal is repayable in whole or in
part at the option of the Fund. In connection with the agreement, the Fund has
granted the lenders a first lien on all of its investment securities and cash,
which will be enforceable in an amount of up to one-third of the aggregate value
of the investment securities and cash of the Fund. Borrowings under this
agreement bear interest at a variable rate tied to one of several short-term
rates that the Fund may select from time to time. The average borrowings
outstanding during the year ended December 31, 1996 were $93,049,754 at an
average interest rate of approximately 6.59%. As of December 31, 1996, the Fund
was paying interest at an average annual rate of 6.63% on its outstanding
borrowings.
3. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES. Investment
advisory fees were paid or accrued to CIGNA Investments, Inc. (CII), 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 0.5% thereafter.
The Fund reimburses CII 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, 1996,
the Fund paid or accrued $166,408.
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, 1996 were
$286,022,810 and $276,471,097, respectively.
As of December 31, 1996, the cost of securities for federal income tax purposes
was $352,837,880. At December 31, 1996, unrealized appreciation for Federal
income tax purposes aggregated $11,866,033 of which $16,262,684 related to
appreciated securities and $4,396,651 related to depreciated securities.
6. CAPITAL LOSS CARRYOVER. At December 31, 1996, the Fund had a capital loss
carryover for Federal income tax purposes of $54,834,030 of which $19,305,222,
$30,071,289, $3,704,377 and $1,753,142 expire in 1998, 1999, 2000 and 2003,
respectively. Under current tax law, capital losses realized after October 31
may be deferred and treated as occurring on the first day of the following ye
ar. For the year ended December 31, 1996, the Fund has elected to defer
$3,307,368 of capital losses occurring between November 1, 1996 and December
31, 1996 under these rules. Such deferred losses are being treated as arising on
the first day of the year ended December 31, 1997.
F-8
<PAGE>
- -------------------------------------------------------------------------------
CIGNA HIGH INCOME SHARES NOTES TO FINANCIAL STATEMENTS (Continued)
7. FINANCIAL HIGHLIGHTS. The following table includes data, ratios and
supplemental data for a share outstanding throughout each period and other
performance information:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $7.19 $6.59 $7.54 $6.99 $6.62
--------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (1) 0.85 0.84 0.86 0.97 0.98
Net realized and unrealized gains (losses) 0.29 0.60 (0.91) 0.58 0.40
--------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS 1.14 1.44 (0.05) 1.55 1.38
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
Distributions from net investment income (0.90) (0.84) (0.88) (0.97) (0.98)
Distributions in excess of net investment income - - (0.02) (0.03) (0.03)
--------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (0.90) (0.84) (0.90) (1.00) (1.01)
--------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $7.43 $7.19 $6.59 $7.54 $6.99
========= ========= ========= ========= =========
MARKET VALUE, END OF PERIOD $8.38 $7.88 $7.00 $8.38 $7.88
========= ========= ========= ========= =========
TOTAL INVESTMENT RETURN:
Per share market value 19.25% 26.24% (5.43)% 19.62% 24.36%
Per share net asset value (2) 16.70% 22.93% (0.76)% 23.25% 21.65%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $273,500 $259,773 $233,454 $195,489 $176,974
Ratio of operating expenses to average net assets 1.07% 1.12% 1.17% 1.21% 1.20%
Ratio of interest expense to average net assets 2.28% 2.68% 2.10% 1.66% 1.91%
Ratio of net investment income to average net assets 11.60% 12.03% 12.33% 12.98% 13.81%
Portfolio turnover 78% 60% 72% 48% 45%
</TABLE>
(1) Net investment income per share has been calculated in accordance with SEC
requirements, with the exception that end of year accumulated
undistributed/(overdistributed) net investment income has not been adjusted
to reflect current year permanent differences between financial and tax
accounting.
(2) 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 year, and assumes distributions were reinvested at net asset value.
These percentages do 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.
F-9
<PAGE>
- -------------------------------------------------------------------------------
CIGNA HIGH INCOME SHARES NOTES TO FINANCIAL STATEMENTS (Continued)
8. Quarterly Results (Unaudited). The following is a summary of quarterly
results of operations (in thousands except for per share amounts):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
NET REALIZED AND
UNREALIZED
GAIN (LOSS)
PERIOD INVESTMENT INCOME NET INVESTMENT INCOME ON INVESTMENTS NET ASSETS
ENDED TOTAL PER SHARE TOTAL PER SHARE TOTAL PER SHARE INCREASE (DECREASE) PER SHARE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31, 1995 $9,853 $.28 $7,424 $.21 $8,614 $.24 $10,141 $.25
June 30, 1995 9,807 .28 7,417 .21 6,426 .18 7,902 .18
September 30, 1995 9,871 .27 7,486 .21 2,544 .07 4,046 .08
December 31, 1995 10,232 .28 7,897 .21 3,439 .11 4,230 .09
March 31, 1996 9,964 .27 7,742 .21 1,442 .04 3,315 .05
June 30, 1996 10,057 .28 7,837 .20 1,661 .05 3,406 .06
September 30, 1996 10,375 .28 8,079 .22 9,225 .25 11,144 .27
December 31, 1996 9,858 .27 7,560 .21 (2,183) (.06) (4,138) (.14)
</TABLE>
F-10
<PAGE>
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of CIGNA High Income Shares
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations, of cash
flows and of changes in net assets and the financial highlights present fairly,
in all material respects, the financial position of CIGNA High Income Shares
(the "Fund") at December 31, 1996, the results of its operations and cash flows
for the year then ended, changes in its net assets and the financial highlights
for each of the years indicated, in conformity with generally accepted
accounting principles. 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 generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1996 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 14, 1997
F-11
<PAGE>
- -------------------------------------------------------------------------------
1996 TAX INFORMATION (UNAUDITED)
During 1996, the Fund declared ordinary income dividends of $0.90 per share.
There were no capital gain distributions. The 15.75 cents distribution which was
declared in December 1996 (which includes the regular monthly dividend of 6.75
cents per share plus an extra year end amount of 9 cents) complied with a
provision of the Internal Revenue Code, as amended, that requires an investment
company to distribute substantially all of its accumulated net investment income
by the end of each calendar year. Such distributions must be declared prior to
December 31 and paid prior to the following January 31. PLEASE NOTE THAT THE
DECEMBER 1996 DISTRIBUTION IS CONSIDERED 1996 TAXABLE INCOME, EVEN THOUGH
RECEIVED IN 1997, WHICH IS CONSISTENT WITH THE TREATMENT OF DECEMBER 1995
DISTRIBUTION (PAID ON JANUARY 10, 1996) THAT WAS CONSIDERED 1995 TAXABLE INCOME.
Dividends reported to you 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.
AUTOMATIC DIVIDEND AND DISTRIBUTION INVESTMENT PLAN
Shareholders may elect to have all distributions of dividends and capital gains
automatically reinvested by State Street Bank and Trust Company (the "Dividend
Paying Agent") as plan agent under the Automatic Dividend and Distribution 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.
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 account under the Plan will be issued and a cash payment will be
made for any fraction of a share credited to such account. The Dividend Paying
Agent will maintain all shareholders' accounts in the Plan and will furnish
written confirmation of all transactions in the account, including information
needed by shareholders for tax records. Shares in the account of each Plan
participant (other than participants whose shares are registered in the name of
banks, brokers, nominees
F-12
<PAGE>
- -------------------------------------------------------------------------------
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.
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. There will be no brokerage commissions
charged with respect to shares issued directly 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 inquires about your account should be directed to State Street Bank
and Trust Company, Stock Transfer Department, P.O. Box 8200, Boston, MA
02266-8200 or you may call toll-free 1-800-426-5523.
F-13
<PAGE>
APPENDIX - DESCRIPTION OF BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds that are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment sometime in the future.
Baa: Bonds that are rated Baa are considered as medium grade obligations
(i.e, they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations that are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest-rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies numerical modifiers in each generic rating
classification from Aa through B. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
A-1
<PAGE>
STANDARD & POOR'S CORPORATION
AAA: An obligation rated 'AAA' has the highest rating assigned by
S&P. The obligor's capacity to meet its financial commitment is EXTREMELY
STRONG.
AA: An obligation rated 'AA' differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is VERY STRONG.
A: An obligation rated 'A' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still STRONG.
BBB: An obligation rated 'BBB' exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated 'BB', 'B', 'CCC', 'CC' and 'C' are regarded as having
significantly speculative characteristics. 'BB' indicates the least degree of
speculation and 'C' the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB: An obligation rated 'BB' is LESS VULNERABLE to nonpayment than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to the obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated 'B' is MORE VULNERABLE to nonpayment than
obligations rated 'BB' but the obligor currently has the capacity to meet its
financial commitment on the obligations. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC: An obligation rated 'CCC' is CURRENTLY VULNERABLE to nonpayment
and is dependent upon favorable business, financial and economic conditions for
the obligor to its financial commitment on the obligation. In the event of
adverse business, financial or economic conditions, the obligor is not likely to
have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated 'CC' is CURRENTLY HIGHLY VULNERABLE to
nonpayment.
C: The 'C' rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.
D: An obligation rated 'D' is in payment default. The 'D' rating
category is used when interest payments or principal payments are not made on
the date due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The 'D'
rating also will be used upon the filing of a bankruptcy petition or the taking
of similar action if payments on an obligation are jeopardized.
Plus (+) or Minus (-): The ratings from 'AA' to 'CCC' may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
r: This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to server prepayment risk - such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
A-2
<PAGE>
PART B
NOT APPLICABLE
B-1
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
---------------------------------
(1) Financial Statements included in Prospectus (Part A):
Investments in Securities, December 31, 1996
Statement of Assets and Liabilities, December 31, 1996
Statement of Operations, Year Ended December 31, 1996
Statement of Changes in Net Assets, Years Ended December 31,
1996 and December 31, 1995
Statement of Cash Flows, Year Ended December 31, 1996
Notes to Financial Statements
Report of Independent Accountants
Financial Statements for period ended September 30, 1997 to be
filed by Amendment to this Registration statement
(2) Exhibits:
a. (i) Second Amended and Restated Agreement and Declaration of
Trust dated _____________, 1997, to be filed by amendment
to this Registration Statement.
(ii) Amended and Restated Agreement and Declaration of Trust
dated as of April 5, 1988, incorporated by reference to
Exhibit 1 to Pre-Effective Amendment No. 3 to
Registrant's Registration Statement on Form N-2 filed
July 15, 1988 (1933 Act File No. 33-20368).
(iii) Amendment No. 1 to Amended and Restated Agreement and
Declaration of Trust dated as of July 26, 1988,
incorporated by reference to Exhibit 1(b) to
Pre-Effective Amendment No. 4 to Registrant's
Registration Statement on Form N-2 filed August 10, 1988
(1933 Act File No. 33-20368).
b. (i) First Amended and Restated By-Laws of Registrant dated
_________________, 1997, to be filed by amendment to this
Registration Statement.
(ii) By-laws as amended through August 15, 1988 dated as of
October 27, 1992, incorporated by reference to Exhibit 2
to Amendment No. 2 to Registrant's Registration Statement
on Form N-2 filed March 8, 1988 (1933 Act File No.
33-20368).
(iii) Amendment No. 1 to By-laws as amended through August 15,
1988 dated as of October 27, 1992, incorporated by
reference to Exhibit b(ii) to Registrant's Registration
Statement on Form N-2 filed January 21, 1994 (1933 Act
File No. 33-74180).
c. Not Applicable.
d. (i) Relative to the rights of shareholders, Article IV
and Article V of Registrant's Amended and Restated
Declaration of Trust dated as of April 5, 1988,
incorporated by reference to Exhibit 1 to Pre-Effective
Amendment No. 3 to Registrant's Registration Statement on
Form N-2 filed July 15, 1988 (1933 Act File No.
33-20368).
(ii) Relative to the rights of shareholders, Section 7.4 of
Article 7 of Amendment No. 1 to Amended and Restated
Agreement and Declaration of Trust dated as of July 26,
1988, incorporated by reference to Exhibit 1(b) to
Pre-Effective Amendment No. 4 to Registrant's
Registration Statement on Form N-2 filed August 10, 1988
(1933 Act File No. 33-20368).
(iii) Form of Exercise Form, to be filed by amendment to this
Registration Statement. (iv) Form of Notice of Guaranteed
Delivery, to be filed by amendment to this Registration
Statement.
(v) Form of Nominee Over-Subscription Form, to be filed by
amendment to this Registration Statement.
C-1
<PAGE>
(vi) Subscription Rights Agency Agreement dated as of , 1997
between Registrant and State Street Bank and Trust
Company, to be filed by amendment to this Registration
Statement.
(vii) Information Agent Agreement dated as of , 1997 between
Registrant and Corporate Investor Communications, Inc.,
to be filed by amendment to this Registration Statement.
e. (i) Form of Dividend Reinvestment Plan Brochure,
effective December 1, 1997, to be filed by amendment to
this Registration Statement.
(ii) Dividend Reinvestment Plan Brochure, incorporated by
reference to Exhibit e to Registrant's Registration
Statement on Form N-2 filed January 21, 1994 (1933 Act
File No. 33-74180).
f. (i) Amended and Restated Revolving Credit Agreement dated
as of August 20, 1993, by and among Registrant, PNC Bank
National Association and PNC Bank, National Association,
incorporated by reference to Exhibit f(i) to Registrant's
Registration Statement on Form N-2 filed January 21, 1994
(1933 Act File No. 33-74180).
(ii) Commitment Letter dated as of , 1997 from PNC Bank,
National Association with respect to a $ , , Revolving
Credit Facility, to be filed by amendment to this
Registration Statement.
(iii) Modification Agreement to Amended and Restated Revolving
Credit Agreement dated as of March 11, 1994, by and among
Registrant and PNC Bank, National Association, to be
filed by amendment to this Registration Statement.
(iv) Modification Agreement to Amended and Restated Revolving
Credit Agreement dated as of June 28, 1994, by and among
Registrant, Societe Generale and PNC Bank, National
Association, to be filed by amendment to this
Registration Statement.
(v) Modification Agreement to Amended and Restated Revolving
Credit Agreement dated as of June 30, 1994, by and among
Registrant, Societe Generale and PNC Bank, National
Association, to be filed by amendment to this
Registration Statement.
(vi) Modification Agreement to Amended and Restated Revolving
Credit Agreement dated as of December 1, 1994, by and
among Registrant, Societe Generale and PNC Bank, National
Association, to be filed by amendment to this
Registration Statement.
(vii) Modification Agreement to Amended and Restated Revolving
Credit Agreement dated as of December 1, 1994, by and
among Registrant and PNC Bank, National Association, to
be filed by amendment to this Registration Statement.
(viii) Second Amended and Restated Revolving Credit Note, dated
as of January 23, 1996, by Registrant to PNC Bank,
National Association to be filed by amendment to this
Registration Statement.
(ix) Modification Agreement to Amended and Restated Revolving
Credit Agreement dated as of January 23, 1996, by and
among Registrant and PNC Bank, National Association, to
be filed by amendment to this Registration Statement.
(x) Modification Agreement to Amended and Restated Revolving
Credit Agreement dated as of September 18, 1996, among
Registrant and PNC Bank, National Association, to be
filed by amendment to this Registration Statement.
(y) Modification Agreement to Amended and Restated Revolving
Credit Agreement dated as of ______________, 1998, among
Registrant and PNC Bank, National Association, to be
filed by amendment to this Registration Statement.
g. Investment Advisory Agreement dated as of April 5, 1988
between Registrant and CIGNA Investments, Inc.,
incorporated by reference to Exhibit 6 to Pre-Effective
Amendment No. 4 to Registrant's Registration Statement on
Form N-2 filed August 10, 1988 (1933 Act File No.
33-20368).
h. Not Applicable.
C-2
<PAGE>
i. Form of Trustees' Deferred Fee Agreement, incorporated by
reference to Exhibit i to Registrant's Registration
Statement on Form N-2 filed January 21, 1994 (1933 Act
File No. 33-74180).
j. Custodian Agreement dated as of March 31, 1988 between
Registrant and State Street Bank and Trust Company,
incorporated by reference to Exhibit 9 to Pre-Effective
Amendment No. 4 to Registrant's Registration Statement on
Form N-2 filed August 10, 1988 (1933 Act File No.
33-20368).
k. (i) Registrar, Transfer Agency and Service Agreement
dated as of April 6, 1990 between Registrant and State
Street Bank and Trust Company, incorporated by reference
to Exhibit k(i) to Registrant's Registration Statement on
Form N-2 filed January 21, 1994 (1933 Act File No.
33-74180).
* (ii) Powers of Attorney.
l. Opinion and Consent of Goodwin, Procter & Hoar LLP,
Counsel, to be filed by amendment to this Registration
Statement.
m. Not Applicable.
* n. Consent of Price Waterhouse LLP, Independent Accountants.
o. Not Applicable.
p. Not Applicable.
q. Not Applicable.
* r. Financial Data Schedule.
Item 25. Marketing Arrangements
----------------------
Not applicable.
Item 26. Other Expenses of Issuance and Distribution
-------------------------------------------
The following table sets forth the estimated expenses expected to be
incurred in connection with the offering described in this Registration
Statement:
<TABLE>
<S><C> <C>
Registration fees.................................................... $30,508
New York Stock Exchange listing fee.................................. 44,100
Printing and engraving............................................... 70,000
Fees and expenses of qualification under state securities laws
(including fees of counsel)........................................ 1,000
Accounting fees and expenses......................................... 15,000
Legal fees and expenses.............................................. 125,000
Subscription agent and mailing expenses.............................. 60,000
Information Agent fees and expenses.................................. 60,000
Miscellaneous........................................................ 20,392
Total............................................................. $426,000
-------
</TABLE>
Item 27. Persons Controlled by or Under Common Control with Registrant
-------------------------------------------------------------
None.
- -------------------
* Filed Herewith
C-3
<PAGE>
Item 28. Number of Holders of Securities
-------------------------------
As of August 31, 1997:
Title of Class Number of Record Holders
-------------- ------------------------
Shares of Beneficial Interest 2,516
Item 29. Indemnification
---------------
The Amended and Restated Agreement and Declaration of Trust, dated as of
April 5, 1988, as amended (the "Trust Agreement"), provides, among other things,
for the indemnification out of Registrant's assets of the Trustees and officers
of Registrant against all liabilities incurred by them in such capacity, except
for liability by reason of wilful misfeasance, bad faith, gross negligence or
reckless disregard of their duties in such capacities. Trustees may consult
counsel or other experts concerning the meaning and operation of the Trust
Agreement, and may rely upon the books and records of Registrant. Trustees are
not liable for errors of judgment, mistakes of fact or law, or for the
negligence of other Trustees or Registrant's officers or agents.
Trustees are not required to give a bond or other security for the
performance of their duties. Payments in compromise of any action brought
against a Trustee or officer may be paid by Registrant if approved by either a
majority of disinterested Trustees or by independent legal counsel. The right of
indemnification under the Trust Agreement is not exclusive of any other rights
to which the Trustees or officers may be entitled.
The Trust Agreement also provides that shareholders, upon proper and
timely request by such shareholders, shall be indemnified and held harmless by
Registrant with respect to actions brought against them in their capacity as
shareholders. Also, the Trust Agreement provides that creditors of Registrant
may look only to the assets of Registrant for payment; and neither shareholders
nor Trustees shall be personally liable therefor. Every note, bond, contract,
instrument, certificate or undertaking and every other act or thing executed on
behalf of Registrant are required to contain a statement to the effect of the
foregoing.
CIGNA Investments, Inc., Registrant and other investment companies
managed by CIGNA Investments, Inc., their officers, trustees, directors and
employees (the "Insured Parties") are insured under an Investment Management
Errors and Omissions Insurance Policy in the amount of $10,000,000 offered by
Lloyd's Insurance Company, an affiliate of Lloyd's of London, on a joint policy
basis with CIGNA Investments, Inc. and CIGNA International Investment Advisors,
Ltd.
In addition, Registrant and other investment companies managed by CIGNA
Investments, Inc. and CIGNA International Investment Advisors, Ltd. are insured
under a Lloyd's Insurance Company Investment Company Blanket Bond with a stated
maximum coverage of $10,000,000. Premiums and policy benefits are allocated
among participating companies pursuant to Rule 17g-1(d) under the Investment
Company Act of 1940, as amended.
Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended (the "Act"), may be permitted to Trustees, officers and
controlling persons of Registrant pursuant to the foregoing provisions, or
otherwise, Registrant has been advised that, in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Act, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
Registrant of expenses incurred or paid by a Trustee, officer or controlling
person of Registrant in the successful defense of any action, suit or
proceeding) is asserted by such Trustee, officer or controlling person in
connection with the securities being registered, Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issues.
C-4
<PAGE>
Item 30. Business and Other Connections of the Investment Adviser
--------------------------------------------------------
CIGNA Investments, Inc. ("CII") serves as investment adviser to CIGNA
Institutional Funds Group and its series of shares and to CIGNA Funds Group and
to CIGNA Variable Products Group and their series of shares and to CIGNA High
Income Shares (CIGNA Institutional Funds Group, CIGNA Funds Group, CIGNA High
Income Shares and CIGNA Variable Products Group known collectively as the
"Trusts") and to INA Investment Securities, Inc. ("IIS"); all of which (except
for IIS and CIGNA High Income Shares) are open-end investment companies, and
certain other companies most of which are affiliated with CIGNA Corporation. For
a description of the business of CII, see its most recent Form ADV (File No.
801-18094) filed with the Securities and Exchange Commission. The principal
address of each of the foregoing companies is as follows:
CII - 900 Cottage Grove Road, Bloomfield, Connecticut 06002
The Trusts and each of their series of shares - 950 Winter
Street, Suite 1200, Waltham, Massachusetts 02154
IIS - 1600 Arch Street, Philadelphia, Pennsylvania 19192
Item 31. Location of Accounts and Records
--------------------------------
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended (15 U.S.C.
80a-30(a)) and the Rules (17 CFR 270.31a-1 through 31a-3) promulgated thereunder
are maintained by State Street Bank and Trust Company, Boston, Massachusetts.
Registrant's corporate records and financial records are maintained at the
Registrant's adviser's offices, CIGNA Investments, Inc., 900 Cottage Grove Road,
Bloomfield, CT 06002.
Substantial business and other connections of the directors and executive
officers of CII during the past two years are listed below:
Names of Officers and Directors Positions with the Adviser and
of the Investment Adviser Other Substantial Business Connections.
- ------------------------- ---------------------------------------
Harold W. Albert Director and Counsel, CII; Director, CIGNA
International Investment Advisors, Ltd.**;
Chief Counsel, CIGNA Investment Management, a
division of CIGNA Corporation*; Counsel, CIGNA
Investment Advisory Company, Inc.*; Director,
Senior Vice President and Chief Counsel, CIGNA
Investment Group, Inc.*; Director, Global
Portfolio Strategies, Inc. (f/k/a Connecticut
General Pension Services, Inc.)*
Robert W. Burgess Director, CII and CIGNA International
Investment Advisors, Ltd.**; Chief Financial
Officer, CIGNA Investment Management, a
division of CIGNA Corporation*; Director and
Senior Vice President, CIGNA Investment Group,
Inc.*; Director, Global Portfolio Strategies,
Inc. (f/k/a Connecticut General Pension
Services, Inc.)*
C-5
<PAGE>
Names of Officers and Directors Positions with the Adviser and
of the Investment Adviser Other Substantial Business Connections.
- ------------------------- ---------------------------------------
Arthur C. Reeds, III President and Chief Investment Officer, CIGNA
Investment Management, a division of CIGNA
Corporation*; President and Director, CII and
CIGNA Investment Group, Inc.*; President, CIGNA
Investment Advisory Company, Inc.*; Director,
CIGNA International Investment Advisors, Ltd.**
and Global Portfolio Strategies, Inc. (f/k/a
Connecticut General Pension Services, Inc.)*;
Trustee, the Trusts; Director, IIS.
R. Bruce Albro Senior Managing Director, CII; Director and
Senior Managing Director, CIGNA Investment
Advisory Company, Inc.*; Director, Global
Portfolio Strategies, Inc. (f/k/a Connecticut
General Pension Services, Inc.)*; Chairman of
the Board, President and Trustee, the Trusts;
Chairman of the Board, President and Director,
IIS.
Mary Louise Casey Senior Managing Director, CII and CIGNA
Investment Advisory Company, Inc.*
Richard H. Forde Senior Managing Director, CII and CIGNA
Investment Advisory Company, Inc.*; President,
Senior Managing Director and Director, CIGNA
International Investment Advisors, Ltd.**; Vice
President, CIGNA Institutional Funds Group.
Edward F. Guay Senior Managing Director and Chief Economist,
CII; Senior Managing Director, CIGNA Investment
Advisory Company, Inc.*
Malcolm S. Smith Senior Managing Director, CII; Director and
Senior Managing Director, CIGNA Investment
Advisory Company, Inc.*
Philip J. Ward Senior Managing Director, CII; Director and
Senior Managing Director, CIGNA Investment
Advisory Company, Inc.*
J. Robert Andrews Managing Director, CII.
Kevin D. Barry Managing Director, CII.
Julia B. Bazenas Managing Director, CII.
Mark E. Benoit Managing Director, CII.
Marguerite A. Boslaugh Managing Director, CII.
Susan B. Bosworth Managing Director, CII.
C-6
<PAGE>
Names of Officers and Directors Positions with the Adviser and
of the Investment Adviser Other Substantial Business Connections.
- ------------------------- ---------------------------------------
Thomas J. Bowen Managing Director, CII and CIGNA Investment
Advisory Company, Inc.*
William C. Carlson Managing Director, CII.
Antonio M. Caxide Managing Director, CII and CIIA**; previously
Vice President, CII and CIIA.**
Richard H. Chase Managing Director, CII.
Rosemary C. Clarke Managing Director, CII and CIGNA Investment
Advisory Company, Inc.*
James F. Coggins, Jr. Managing Director, CII.
Dorothy Cunningham Managing Director, CII; previously Vice
President, CII.
Robert F. DeLucia Managing Director, CII and CIGNA Investment
Advisory Company, Inc.*; Director, Global
Portfolio Strategies, Inc.(f/k/a Connecticut
General Pension Services, Inc.)*
Mark V. DePucchio Managing Director, CII.
Michael Q. Doyle Managing Director, CII.
Lawrence A. Drake Managing Director, CII and CIGNA Investment
Advisory Company, Inc.*
Denise T. Duffee Managing Director, CII.
John G. Eisele Managing Director, CII.
Robert Fair Managing Director, CII.
John P. Feeney Managing Director, CII.
Thomas R. Foley Managing Director, CII; previously Vice
President, CII.
Maurice A. Gordon Managing Director, CII; previously Vice
President, CII.
Debra J. Height Managing Director, CII and CIAC*; previously
Vice President, CII and CIAC.*
Chris W. Jacobs Managing Director, CII.
David R. Johnson Managing Director, CII and CIGNA Investment
Advisory Company, Inc.*
C-7
<PAGE>
Names of Officers and Directors Positions with the Adviser and
of the Investment Adviser Other Substantial Business Connections.
- ------------------------- ---------------------------------------
Richard H. Kupchunos Managing Director, CII and CIGNA Investment
Advisory Company, Inc.*
James R. Kuzemchak Managing Director, CII.
Edward Lewis Managing Director, CII.
Timothy J. Lord Managing Director, CII.
Thomas P. Mahoney Managing Director, CII.
Richard B. McGauley Managing Director, CII and CIGNA Investment
Advisory Company, Inc.*
Bret E. Meck Managing Director, CII.
Stephen J. Olstein Managing Director, CII.
Stephen A. Osborn Managing Director, CII.
Alan C. Petersen Managing Director, CII; Vice President, CIGNA
High Income Shares.
Robert E. Peterson Managing Director, CII and CIGNA Investment
Advisory Company, Inc.*
Anthony J. Pierson Managing Director, CII.
Leon Pouncy Managing Director, CII.
Donald F. Rieger, Jr. Managing Director, CII.
Peter F. Roby Managing Director, CII.
James H. Rogers Managing Director, CII.
Frank Sataline, Jr. Managing Director, CII; previously Vice
President, CII.
James G. Schelling Managing Director, CII.
Linda W. Schumann Managing Director, CII.
John A. Shaw Managing Director, CII; previously Vice
President, CII.
Thomas M. Smith Managing Director, CII.
Joseph W. Springman Managing Director, CII and CIGNA Investment
Advisory Company, Inc.*
C-8
<PAGE>
Names of Officers and Directors Positions with the Adviser and
of the Investment Adviser Other Substantial Business Connections.
- ------------------------- ---------------------------------------
Susan S. Sullivan Managing Director, CII.
William A. Taylor Managing Director, CII.
George Varga Managing Director, CII.
Victor J. Visockis, Jr. Managing Director, CII.
Deborah B. Wiacek Managing Director, CII; previously Vice
President, CII.
Stephen H. Wilson Managing Director, CII.
James A. White Senior Vice President, CII and CIGNA
Investment Advisory Company, Inc.*
Jean M. Anderson Vice President, CII.
Thomas P. Au Vice President, CII.
David M. Cass Vice President, CII; previously Counsel, CIGNA
companies.
Rosemary S. Cleaves Vice President, CII; President and Director,
Global Portfolio Strategies, Inc. (f/k/a
Connecticut General Pension Services, Inc.)*
R. Thomas Clemmenson Vice President, CII.
Lee P. Crockett Vice President, CII.
Michael P. Daly Vice President, CII.
Maryanne P. DePreaux Vice President, CII.
Eric C. DiMiceli Vice President, CII.
Kim L. DiPietro Vice President, CII.
Celia R. Dondes Vice President, CII.
Ronald J. Dupont Vice President, CII and CIGNA Investment
Advisory Company, Inc.*
Mark W. Everette Vice President, CII.
Daniel E. Feder Vice President, CII.
C-9
<PAGE>
Names of Officers and Directors Positions with the Adviser and
of the Investment Adviser Other Substantial Business Connections.
- ------------------------- ---------------------------------------
Richard L. Fletcher Vice President, CII.
Jonathan S. Frankel Vice President, CII.
Ivy B. Freedman Vice President, CII.
Keith A. Gollenberg Vice President, CII.
William J. Grady Vice President, CII.
Dennis P. Hannigan Vice President, CII.
John Hurley Vice President, CII.
Chuel D. Hwang Vice President, CII.
William H. Jefferis Vice president, CII.
Edward B. Johns Vice President, CII.
Thomas W. Johnson Vice President, CII.
Thomas J. Keene Vice President, CII.
Joseph R. Kennedy Vice President, CII.
Peter K. Kofoed Vice President, CII.
Mark S. Korinek Vice President, CII.
James R. Lagasse Vice President, CII.
Mary S. Law Vice President, CII.
Paul T. Martin Vice President, CII.
Daniel McDonough Vice President, CII.
Linda L. Morel Vice President, CII.
Stephen J. Myott Vice President, CII.
Alpha O. Nicholson, III Vice President, CII; Counsel, CIGNA companies.
Ann Marie O'Rourke Vice President, CII.
Pamela S. Peck Vice President, CII.
C-10
<PAGE>
Names of Officers and Directors Positions with the Adviser and
of the Investment Adviser Other Substantial Business Connections.
- ------------------------- ---------------------------------------
Elisabeth A. Perenick Vice President, CII.
Myrna Phillips Vice President, CII.
Scott S. Piccone Vice President, CII.
Elisabeth Piker Vice President, CII.
Thomas J. Podgorski Vice President, CII.
Suresh Raghaven Vice President, CII.
Michael J. Riccio Vice President, CII.
Stephen L. Roberts Vice President, CII.
Timothy F. Roberts Vice President and Compliance Officer, CII;
Vice President, International Finance/Global
Compliance, CIGNA Investment Management, a
division of CIGNA Corporation*; Vice President
- Finance and Compliance Officer, CIGNA
International Investment Advisors, Ltd.**;
Compliance Officer, CIGNA Investment Advisory
Company, Inc.*
Alexander Rybchinsky Vice President, CII.
Annette Sanderson Vice President, CII.
John R. Schumann Vice President, CII.
Thomas P. Shea, III Vice President, CII.
Philip Spak Vice President, CII.
Carlton C. Taylor Vice President, CII.
Patrick H. Thompson Vice President, CII.
Ruth D. VanWinkle Vice President, CII and CIGNA Investment
Advisory Company, Inc.*
Henry C. Wagner, III Vice President, CII and CIGNA Investment
Advisory Company, Inc.*
Carey A. White Vice President, CII.
William S. Woodsome Vice President, CII.
C-11
<PAGE>
Names of Officers and Directors Positions with the Adviser and
of the Investment Adviser Other Substantial Business Connections.
- ------------------------- ---------------------------------------
Alfred A. Bingham III Assistant Vice President, CII; Vice President
and Treasurer, the Trusts and IIS.
David C. Kopp Secretary, CII, CIGNA Investment Advisory
Company, Inc.*, CIGNA International Investment
Advisors, Ltd.**, CIGNA Investment Group,
Inc.*, Global Portfolio Strategies, Inc.
(f/k/a Connecticut General Pension Services,
Inc.)* and CIGNA Financial Advisors, Inc.*;
Assistant General Counsel and Assistant
Corporate Secretary, CIGNA Corporation*;
Corporate Secretary, Connecticut General Life
Insurance Company*; Assistant General Counsel,
CIGNA companies.
Item 32. Management Services
-------------------
Not Applicable.
Item 33. Undertakings
------------
(1) Registrant undertakes to suspend offering of the shares covered
hereby until it amends its Prospectus contained herein if (a) subsequent to the
effective date of this Registration Statement, its net asset value declines more
than 10% from its net asset value as of the effective date of this Registration
Statement, or (b) its net asset value increases to an amount greater than its
net proceeds as stated in the Prospectus contained herein.
(2) Not applicable.
(3) Not applicable.
(4) Not applicable.
(5) Registrant further undertakes that:
(a) For purposes of determining any liability under the
Securities Act of 1933, as amended, the information omitted from the form of
prospectus filed as part of this Registration Statement in reliance upon Rule
430A and contained in the form of prospectus filed by the Registrant pursuant to
Rule 497(h) under such Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the
Securities Act of 1933, as amended, each post-effective amendment that contains
a form of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(6) Not applicable.
_________________________
* 900 Cottage Grove Road, Bloomfield, CT
** Park House, 16 Finsbury Circus, London, England
C-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 as amended,
and the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Registration Statement on Form N-2 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Bloomfield and State of
Connecticut on the 8th day of October, 1997.
CIGNA HIGH INCOME SHARES
By: /s/ Alfred A. Bingham III
------------------------------
Alfred A. Bingham III
Vice President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement on Form N-2 has been signed by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ R. Bruce Albro Chairman of the Board of October 8, 1997
- ------------------------------- Trustees, Prsident and Trustee
R. Bruce Albro* (principal executive officer)
/s/ Alfred A. Bingham III Vice President and Treasurer October 8, 1997
- ------------------------------- (principal financial and
Alfred A. Bingham III accounting officer)
/s/ Hugh R. Beath Trustee October 8, 1997
- -------------------------------
Hugh R. Beath*
/s/ Russell H. Jones Trustee October 8, 1997
- -------------------------------
Russell H. Jones*
/s/ Paul J. McDonald Trustee October 8, 1997
- -------------------------------
Paul J. McDonald*
/s/ Arthur C. Reeds, III Trustee October 8, 1997
- -------------------------------
Arthur C. Reeds, III*
</TABLE>
*By: Alfred A. Bingham III Attorney-In-Fact
C-13
<PAGE>
EXHIBITS
C-14
<PAGE>
EXHIBIT INDEX
(b) Exhibits:
k. (ii) Powers of Attorney
n. Consent of Price Waterhouse LLP, Independent Accountants
f. Financial Data Schedule
C-15
<PAGE>
Exhibit k(ii)
CIGNA HIGH INCOME SHARES
POWER OF ATTORNEY
The undersigned hereby appoints Alfred A. Bingham III and Jeffrey S. Winer, each
of them singly and with full power of substitution, attorney-in-fact and agent
for me and in my name and on my behalf in any and all capacities to sign any
Registration Statement under the Securities Act of 1933, as amended, any
Registration Statement under the Investment Company Act of 1940, as amended or
any filing under the securities laws of any of the states of the United States
of America or of any jurisdiction ("Blue Sky Law") for CIGNA High Income Shares,
and any amendment to any such Registration Statement or any Blue Sky Law filing
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended and under the Investment Company Act of 1940, as amended or with the
appropriate state agency under the applicable Blue Sky Laws, to file such
Registration Statements, amendments and filings and generally to do and perform
all things necessary to be done in that connection, hereby ratifying and
confirming my signature as it may be signed by said attorney-in-fact and agent
to any and all Registration Statements and amendments thereto and to any and all
Blue Sky Law filings and amendments thereto and ratifying and confirming all
other acts that said attorney-in-fact and agent may lawfully do or cause to be
done by virtue of this appointment.
Signed this 23rd day of September, 1997.
/s/ R. Bruce Albro
--------------------------------------
R. Bruce Albro,
Chairman of the Board, President and
Trustee
/s/ Russell H. Jones
--------------------------------------
Russell H. Jones, Trustee
/s/ Arthur C. Reeds, III
--------------------------------------
Arthur C. Reeds, III, Trustee
<PAGE>
CIGNA HIGH INCOME SHARES
POWER OF ATTORNEY
The undersigned hereby appoints Alfred A. Bingham III and Jeffrey S. Winer, each
of them singly and with full power of substitution, attorney-in-fact and agent
for me and in my name and on my behalf in any and all capacities to sign any
Registration Statement under the Securities Act of 1933, as amended, any
Registration Statement under the Investment Company Act of 1940, as amended or
any filing under the securities laws of any of the states of the United States
of America or of any jurisdiction ("Blue Sky Law") for CIGNA High Income Shares,
and any amendment to any such Registration Statement or any Blue Sky Law filing
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended and under the Investment Company Act of 1940, as amended or with the
appropriate state agency under the applicable Blue Sky Laws, to file such
Registration Statements, amendments and filings and generally to do and perform
all things necessary to be done in that connection, hereby ratifying and
confirming my signature as it may be signed by said attorney-in-fact and agent
to any and all Registration Statements and amendments thereto and to any and all
Blue Sky Law filings and amendments thereto and ratifying and confirming all
other acts that said attorney-in-fact and agent may lawfully do or cause to be
done by virtue of this appointment.
Signed this 24th day of September, 1997.
/s/ Hugh R. Beath
--------------------------------------
Hugh R. Beath, Trustee
<PAGE>
CIGNA HIGH INCOME SHARES
POWER OF ATTORNEY
The undersigned hereby appoints Alfred A. Bingham III and Jeffrey S. Winer, each
of them singly and with full power of substitution, attorney-in-fact and agent
for me and in my name and on my behalf in any and all capacities to sign any
Registration Statement under the Securities Act of 1933, as amended, any
Registration Statement under the Investment Company Act of 1940, as amended or
any filing under the securities laws of any of the states of the United States
of America or of any jurisdiction ("Blue Sky Law") for CIGNA High Income Shares,
and any amendment to any such Registration Statement or any Blue Sky Law filing
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended and under the Investment Company Act of 1940, as amended or with the
appropriate state agency under the applicable Blue Sky Laws, to file such
Registration Statements, amendments and filings and generally to do and perform
all things necessary to be done in that connection, hereby ratifying and
confirming my signature as it may be signed by said attorney-in-fact and agent
to any and all Registration Statements and amendments thereto and to any and all
Blue Sky Law filings and amendments thereto and ratifying and confirming all
other acts that said attorney-in-fact and agent may lawfully do or cause to be
done by virtue of this appointment.
Signed this 24th day of September, 1997.
/s/ Paul J. McDonald
--------------------------------------
Paul J. McDonald, Trustee
<PAGE>
Exhibit n
CONESENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 7 to the registration statement on Form N-2 (the "Registration
Statement") of our report dated February 14, 1997, relating to the financial
statements and financial highlights of CIGNA High Income Shares, which appears
in such Prospectus. We also consent to the references to us under the headings
"Financial Highlights," "Management of the Fund" and "Financial Statements" in
such Prospectus.
Price Waterhouse LLP
Boston, Massachusetts 02110
October 6, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 352,807
<INVESTMENTS-AT-VALUE> 364,704
<RECEIVABLES> 11,383
<ASSETS-OTHER> 6
<OTHER-ITEMS-ASSETS> 107
<TOTAL-ASSETS> 376,200
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 96,000
<OTHER-ITEMS-LIABILITIES> 6,700
<TOTAL-LIABILITIES> 102,700
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 319,700
<SHARES-COMMON-STOCK> 36,827
<SHARES-COMMON-PRIOR> 36,148
<ACCUMULATED-NII-CURRENT> 61
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (58,173)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11,912
<NET-ASSETS> 273,500
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 40,254
<OTHER-INCOME> 0
<EXPENSES-NET> 9,036
<NET-INVESTMENT-INCOME> 31,218
<REALIZED-GAINS-CURRENT> 9,364
<APPREC-INCREASE-CURRENT> 781
<NET-CHANGE-FROM-OPS> 41,363
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 32,906
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 679
<NET-CHANGE-IN-ASSETS> 13,727
<ACCUMULATED-NII-PRIOR> 467
<ACCUMULATED-GAINS-PRIOR> (66,245)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,317
<INTEREST-EXPENSE> 6,141
<GROSS-EXPENSE> 9,036
<AVERAGE-NET-ASSETS> 269,211
<PER-SHARE-NAV-BEGIN> 7.19
<PER-SHARE-NII> 0.85
<PER-SHARE-GAIN-APPREC> 0.29
<PER-SHARE-DIVIDEND> 0.90
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 7.43
<EXPENSE-RATIO> 1.07
<AVG-DEBT-OUTSTANDING> 93,050
<AVG-DEBT-PER-SHARE> 2.53
</TABLE>
