<PAGE>
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1
DEAR SHAREHOLDERS:
We are pleased to provide this report for CIGNA High Income Shares, covering the
year ended December 31, 1996.
HIGH-YIELD MARKET CONTINUES TO DELIVER
ROBUST RETURNS
The high-yield market stayed true to form in the fourth quarter, delivering the
same strong performance that marked the first nine months of 1996. According to
Lehman Brothers High Yield Index, high-yield bonds returned 3.49% in the fourth
quarter and 11.35% for the year. In so doing, they significantly outperformed
the rest of the fixed income markets. (The Lehman Brothers Aggregate Bond Index,
a measure of the investment grade fixed income market, turned in gains of 3.00%
for the quarter and 3.63% for the year.) The high yield market's outstanding
results are largely attributable to strong economic conditions, substantial
market liquidity and a greater immunity to rising interest rates than other
fixed income instruments commonly experience.
FUND PERFORMANCE
Your Fund completed an excellent year. Based on its net asset value, CIGNA High
Income Shares returned 2.05% for the quarter and 16.70% for the year, trailing
its benchmark by 1.44% for the quarter and exceeding it by 5.35% for the year.
Based on the market value of the Fund's shares traded over the New York Stock
Exchange, CIGNA High Income Shares returned 4.46% and 19.25%, respectively, for
the quarter and year. (Returns assume reinvestment of all dividends, and are net
of all expenses.)
FUND ACTIVITY
We continue to focus on selling overvalued issues and concentrating on
attractive B-quality issues with stable or improving credit characteristics. We
are still emphasizing "positive event risk" situations, wherein companies are
likely to announce initial public offerings (IPOs), or become involved in merger
or acquisition activity. The Fund's industry exposures remain well diversified.
No particular group is overweighted at the present time.
Overall, the Fund is currently invested in 89 companies. As of December 31, top
industry holdings consisted of Broadcasting and Media (14.0%),
Telecommunications (12.5%), Containers and Paper (11.9%), Food and Beverages
(11.2%) and Cable TV (9.2%). Average maturity was eight years and average
credit quality was B.
Borrowing under the Fund's line of credit was maintained below the allowed 33%
of assets during this reporting period. On December 31, borrowings stood at
approximately 26% of assets.
For more about the high-yield market and our strategy and outlook, refer to the
Management Discussion and Analysis on page 2.
Sincerely,
/s/ Bruce Albro
R. Bruce Albro,
Chairman of the Board and President
CIGNA High Income Shares
<PAGE>
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CIGNA HIGH INCOME SHARES MANAGEMENT'S DISCUSSION AND ANALYSIS (UNAUDITED) 2
1996 was another excellent year for high-yield investors. The market returned
11.35% according to the Lehman Brothers High Yield Index. This compares very
favorably to the 3.63% return of the Lehman Brothers Aggregate Bond Index, which
measures performance for the rest of the fixed income markets.
During the year, as Treasury rates increased, the market benefited from quality
spread tightening of about 130 basis points, primarily in the B quality sector.
B-rated issues outperformed BB issues, 13.58% to 8.92%, and deferred pay issues
outperformed cash pay issues, 12.00% to 11.25%. Risk premiums declined the most
in middle/upper tier credits and deferred pay sectors, by 163 and 158 basis
points, respectively. Strong cash inflows experienced by the market led to less
differentiation of yields; there was also a tendency to take more risk in
attempting to outperform the market. Thus, higher yielding, lower rated deferred
pay issues all outperformed the market. Finally, relative performance was
selectively influenced by those issues favorably affected by merger and
acquisition (M&A) activity and early debt retirements.
The market benefited from corporate and refinancing events and a low level of
defaults. Over $30 billion in high-yield issues were positively impacted by M&A
activity and calls and tenders. The default loss rate remained low at 0.58%, as
compared to an historic average of about 2.0%.
The strong technical position of the market overcame credit concerns in a
relatively benign credit environment, and helped place a record $78 billion of
new issues. This surpassed 1993's previous record. New issuance was dominated by
the communications, media and cable TV industries, which accounted for 37% of
the total. B-rated issues made up 68% of the calendar, versus only 50% in 1995.
High-yield has grown at 13.5% per year (net of retirements) for the last five
years, and is now a $385 billion market. This growth has been fueled by an
increasingly diverse and stable base of investors, as more pension funds,
insurance companies and collateralized bond obligations have joined traditional
mutual fund buyers in pursuit of high returns.
CIGNA High Income Shares gained 16.70% on underlying net assets and 19.25% based
on the market value of its shares as reported by the New York Stock Exchange.
This compares favorably with returns of 15.24% for closed-end high-yield
leveraged funds and 7.49% for all closed-end bond funds as reported by Lipper.
The market experienced a year-long run of strong technicals, driven by excess
liquidity conditions, a record level of new issuance and a high-yield-friendly
economic backdrop. Our strategy was to overweight B-rated issues and select
credits which could be positively impacted by M&A activity and initial public
offering (IPO) announcements. Our weighting of B credits averaged about 70%
during the year as compared to a 47% market weighting. By overweighting B's and
underweighting BB's we reduced the portfolio's interest rate volatility risk.
(B's do not trade tick for tick with Treasury bonds while many BB bonds do trade
in sync with Treasuries.) This posture helped our relative returns, especially
during the first half of the year, when interest rates were rising.
The second major component of our strategy was to select issues with "positive
event risk," or those credits which were likely candidates for either M&A
activity or IPO announcements. The bonds of companies which are acquired by
larger, better capitalized credits usually appreciate substantially in price.
Examples of portfolio holdings of companies which acquired or received
additional capital investments included Grand Union, Bally's Grand and Park
Broadcasting and Newspapers. Companies which successfully completed IPOs were
Chancellor Broadcasting, Thrifty Payless, Tag Heuer International and Polymer
Group, among others. IPOs usually raise substantial equity capital, which is
used to deleverage a company's balance sheet and to retire a portion of its
public debt at premium prices.
<PAGE>
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CIGNA HIGH INCOME SHARES MANAGEMENT'S DISCUSSION AND ANALYSIS (UNAUDITED)
(CONTINUED) 3
We expect 1997 will be another year of slow economic growth, low inflation,
relatively stable interest rates and limited pricing flexibility for many
industry sectors. Higher risk, higher yielding issues are likely to outperform
again in 1997, as strong market technicals (e.g., strong cash inflows, high
levels of new issuance) are expected to continue. While quality spread
tightening should occur again, it will probably be less than the 130 basis
points experienced in 1996.
Potential credit concerns could develop in some cyclical industries, as capacity
expansions come on line. Also, in the communications sector, many developmental
stage companies may need additional capital. The default loss rate is
anticipated to climb above 1996's level, but is likely to lag behind the
historic average and should have minimal impact on returns. Overall, 1997
projects to be another good year for high-yield, although probably not as strong
as 1996.
- -------------------------------------------------------------------------------
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT (Unaudited)
8/11/88 - 12/31/96
- ----------------------------------------------
AVERAGE ANNUAL RETURN
Since
1 Year 5 Year Inception
Market Value 19.25% 16.34% 12.10%
Net Asset Value 16.70% 16.38% 11.99%
- ----------------------------------------------
Point of CIGNA High Lehman Brothers
Measurement Income Shares High Yield Index
----------- ------------- ----------------
8/11/88 $10,000 $10,000
12/31/88 $9,837 $10,754
12/31/89 $9,347 $10,844
12/31/90 $5,790 $9,912
12/31/91 $12,234 $14,491
12/31/92 $15,214 $16,773
12/31/93 $18,199 $19,643
12/31/94 $17,321 $19,444
12/31/95 $21,866 $23,172
12/31/96 $26,076 $25,802
CIGNA High Income Shares' performance figures are historical and reflect
reinvestment of all dividends and capital gains distributions and changes in the
market value of its stock, or as shown separately in the box, changes in its
underlying net asset value. The Fund is a closed-end management investment
company which trades over the New York Stock Exchange under the ticker symbol
"HIS." Fund performance does not reflect exchange commissions payable upon the
purchase or sale of the Fund's stock, but does reflect the original underwriting
discount included in the Fund's initial offering price at its inception in
August 1988. The Fund's investment return and principal value will fluctuate so
that an investor's shares, when sold, may be worth more or less than their
original cost. Past performance cannot guarantee comparable future results. The
Fund's return has been compared with the total return performance of Lehman
Brothers High Yield Index. This index is a group of unmanaged securities widely
regarded by investors to be representative of the high-yield bond market in
general. An investment cannot be made in the index. Index results do not reflect
brokerage changes or other investment expenses.
<PAGE>
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CIGNA HIGH INCOME SHARES INVESTMENTS IN SECURITIES December 31, 1996 4
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.
<PAGE>
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CIGNA HIGH INCOME SHARES INVESTMENTS IN SECURITIES December 31, 1996 (Continued)
5
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.
<PAGE>
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CIGNA HIGH INCOME SHARES INVESTMENTS IN SECURITIES December 31, 1996 (Continued)
6
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.
<PAGE>
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CIGNA HIGH INCOME SHARES 7
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.
<PAGE>
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CIGNA HIGH INCOME SHARES 8
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.
<PAGE>
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CIGNA HIGH INCOME SHARES NOTES TO FINANCIAL STATEMENTS 9
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 co
mpanies 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-
<PAGE>
- -------------------------------------------------------------------------------
CIGNA HIGH INCOME SHARES NOTES TO FINANCIAL STATEMENTS (Continued) 10
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.
<PAGE>
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CIGNA HIGH INCOME SHARES NOTES TO FINANCIAL STATEMENTS (Continued) 11
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.
- -------------------------------------------------------------------------------
CIGNA HIGH INCOME SHARES NOTES TO FINANCIAL STATEMENTS (Continued) 12
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>
- -------------------------------------------------------------------------------
<PAGE>
13
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
<PAGE>
- -------------------------------------------------------------------------------
14
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
<PAGE>
- -------------------------------------------------------------------------------
15
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.
<PAGE>
- -------------------------------------------------------------------------------
CIGNA HIGH INCOME SHARES
<TABLE>
<CAPTION>
TRUSTEES OFFICERS
<S> <C> <C>
R. Bruce Albro Paul J. McDonald R. Bruce Albro
Senior Managing Director Senior Executive Vice President, Chairman of the Board and
CIGNA Investments, Inc. and Chief Financial Officer, President
Friendly Ice Cream Corporation
Hugh R. Beath Alfred A. Bingham III
Advisory Director, Arthur C. Reeds, III Vice President and Treasurer
AdMedia Corporate Advisors, Inc. President, CIGNA Investment
Management and CIGNA Lawrence S. Harris
Russell H. Jones Investments, Inc. Vice President
Vice President,
Kaman Corporation Alan C. Petersen
Vice President
Jeffrey S. Winer
Vice President and Secretary
</TABLE>
- --------------------------------------------------------------------------------
CIGNA High Income Shares is a closed-end, diversified management investment
company that invests primarily in high yield fixed securities. The investment
adviser is CIGNA Investments, Inc., Hartford, Connecticut 06152.
<PAGE>
[LOGO OF CIGNA APPEARS HERE]
CIGNA High Income Shares
950 Winter Street [LOGO OF CIGNA APPEARS HERE]
Suite 1200
Waltham, MA 02154
CIGNA HIGH INCOME SHARES
- --------------------
BULK RATE
U.S. POSTAGE
PAID
SO. HACKENSACK, NJ Annual Report
PERMIT 750
- --------------------
December 31, 1996
