<PAGE>
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1
DEAR SHAREHOLDERS:
We are pleased to provide this report for CIGNA High Income Shares (the "Fund"),
covering the nine months ended September 30, 1998.
THE MARKET ENVIRONMENT
During the quarter that ended September 30, the high yield market experienced
its worst quarterly performance since 1990. High yield (as measured by the
Lehman Brothers High Yield Bond Index) had a -4.55% return, compared to a 4.23%
return for the Lehman Brothers Aggregate Bond Index. Yields on 10-year
Treasuries dropped 100 basis points -- to 4.40% -- while yields on high yield
bonds actually increased 150 basis points on average, to 10.30%. Double B's
return of -0.34% outperformed their counterparts in the single B category, which
returned -5.73%. High yield's poor performance was due to the worldwide "flight
to quality," as investors sought safe havens in the deepening international
economic and financial crisis. Forced selling to meet margin calls or
redemptions, coupled with concerns about the global recession spreading to the
U.S. economy, caused investors to withdraw funds from the market. This served to
further increase risk premiums.
FUND ACTIVITY
The market environment was extremely difficult to deal with in the third
quarter. Increasing illiquidity and declining prices made implementing portfolio
strategy quite a challenge. We continued our over-weighting in single-B issues
due to attractive yield differentials. Because of ongoing volatility in
international markets, however, we reduced the emerging market corporate
holdings from 13% to 9% of the Fund.
Overall, the Fund remains broadly diversified and is invested in the issues of
122 companies at quarter-end. The top three industry categories are:
Telecommunications (23.6%), Entertainment (14.3%), and Containers and Paper
(12.3%). The average maturity of the Fund's holdings is 8 years; its average
credit quality is still B.
Borrowing under the Fund's line of credit has been maintained below 33% of
assets during this reporting period. On September 30, borrowings were at
approximately 30% of assets.
FUND PERFORMANCE
CIGNA High Income Shares had disappointing performance in the third quarter.
Based on net asset value, the Fund returned -17.30% for the three months,
- -13.55% year-to-date and -11.50% for the trailing twelve months ended September
30, 1998. These returns trailed its benchmark index (the Lehman Brothers High
Yield Bond Index), which returned -4.55%, -0.26%, and 1.68% for the same
respective periods. Returns based on the market value of the Fund's shares
traded on the New York Stock Exchange were -11.84%, -9.35% and -14.77%,
respectively, for the quarter, year-to-date and twelve months.
The Fund's quarterly performance was weak due to our overweighting in single-B
issues (which were substantially outperformed by double-B's). Our emerging
market corporate holdings suffered severe price erosion, despite generally
favorable operating results, due to the continued turmoil in international
markets. Our holdings in cyclical industry sectors (such as papers, chemicals,
steels, etc.) experienced below-market performance as the market discounted an
increasing risk of a U.S. recession in coming months. Finally, the Fund's use of
leverage also contributed to the below market results.
OUTLOOK
The outlook for high yield has deteriorated for the near term. The unprecedented
volatility in financial markets caused by various international shocks has
negatively affected the domestic high yield market. The risk of a recession in
the U.S. has certainly increased. Mutual fund redemptions, hedge fund
liquidations and a much more cautious attitude towards risk have caused
liquidity to dry up. Also, concerns have escalated regarding future
international shocks, as countries such as Japan and Brazil struggle with their
own complex financial issues.
While the short-term performance of high yield may continue to lag that of other
financial markets, the opportunities being created as a result of this sell-off
are establishing a base from which very attractive longer-term returns should be
realized.
Sincerely,
/s/ Richard H. Forde
Richard H. Forde,
CHAIRMAN OF THE BOARD AND PRESIDENT
CIGNA HIGH INCOME SHARES
<PAGE>
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CIGNA HIGH INCOME SHARES INVESTMENTS IN SECURITIES September 30, 1998
(Unaudited) 2
MARKET
PRINCIPAL VALUE
(000) (000)
- -------------------------------------------------------------------
BONDS AND NOTES - 133.3%
AUTO AND TRUCK - 1.0%
Advanced Accessory System L.L.C.,
9.75%, 2007 $ 3,500 $ 3,290
-------------
BROADCASTING & MEDIA - 7.5%
American Lawyer Media, Inc.,
9.75%, 2007 3,000 3,008
Grupo Televisa, S.A., 11.875%, 2006 3,000 2,730
Innova S.A., 12.875%, 2007 7,000 3,640
Lodgenet Entertainment Corp.,
10.25%, 2006 3,500 3,430
MDC Communications Corp.,
10.5%, 2006 1,500 1,474
TCI Satellite Entertainment, Inc.,
10.875%, 2007 7,500 6,938
TV Azteca, S.A.,
10.5%, 2007 4,000 2,720
-------------
23,940
-------------
CABLE TV - 6.8%
Classic Cable, Inc., 9.875%, 2008
(144A security acquired July &
Sep 1998 for $2,508,510)** 2,500 2,537
Frontiervision Operating Partners, L.P.,
11%, 2006 3,000 3,330
Galaxy Telecom, L.P., 12.375%, 2005 4,700 5,123
Multicanal, S.A., 10.5%, 2007 4,000 2,480
Rifkin Acquisition Partners, L.P.,
11.125%, 2006 5,000 5,350
Supercanal Holdings S.A., 11.5%, 2005
(144A security acquired May 1998
for $5,515,375)** 5,500 2,915
-------------
21,735
-------------
CHEMICALS - 4.0%
Brunner Mond Group PLC,
11%, 2008 (144A security acquired
July 1998 for $3,000,000)** 3,000 2,655
Climachem, Inc., 10.75%, 2007 2,750 2,640
GEO Specialty Chemicals, Inc.,
10.125%, 2008 (144A security
acquired July 1998 for
$3,000,000)** 3,000 2,880
Great Lakes Carbon Corp.,
10.25%, 2008 (144A security
acquired May 1998 for $2,256,563)** 2,250 2,104
Trans Resource, Inc., 10.75%, 2008 2,500 2,412
-------------
12,691
-------------
CONSUMER PRODUCTS & SERVICES - 10.0%
Anchor Advanced Products, Inc.,
11.75%, 2004 1,250 1,300
Bell Sports, Inc., 11%, 2008
(144A security acquired Aug 1998
for $3,500,000)** 3,500 3,360
Carson, Inc., 10.375%, 2007 3,000 2,430
MARKET
PRINCIPAL VALUE
(000) (000)
- -------------------------------------------------------------------
CONSUMER PRODUCTS & SERVICES - (CONTINUED)
Desa International, Inc., 9.875%, 2007 $ 2,750 $ 2,338
Diamond Brands Operation Corp., 10.125%,
2008 (144A security acquired May 1998
for $2,015,000)** 2,000 1,860
Drypers Corp., 10.25%, 2007 4,000 3,700
Hines Horticulture, Inc., 11.75%, 2005 2,000 2,105
Nortek, Inc., 9.875%, 2004 1,000 975
Moll Industries, Inc., 10.5%, 2008
(144A security acquired June 1998
for $2,262,500)** 2,250 2,070
Samsonite Corp., 10.75%, 2008
(144A security acquired June 1998
for $2,729,210)** 2,700 2,079
Scoville Fasteners, Inc., 11.25%, 2007 5,000 4,500
Sealy Mattress Co., 9.875%, 2007 3,500 3,448
Windmere Durable Holdings, Inc.,
10%, 2008 2,000 1,720
-------------
31,885
-------------
CONTAINERS AND PAPER - 12.3%
Crown Paper Co., 11%, 2005 3,500 2,625
Gaylord Container Corp.,
9.875%, 2008 6,000 4,560
Grupo Industrial Durango, S.A.,
12.625%, 2003 2,000 1,420
Impac Group, Inc., 10.125%, 2008
(144A security acquired Mar 1998
for $2,500,000)** 2,500 2,400
Indah Kiat Finance Mauritius Ltd.,
10%, 2007 3,250 1,414
Indesco International, Inc.,
9.75%, 2008 3,900 3,627
Millar Western Forest Products, Inc.,
9.875%, 2008 (144A security acquired
May 1998 for $5,000,000)** 5,000 3,100
Packaging Resources, Inc.,
11.625%, 2003 2,275 2,275
Pindo Deli Finance Mauritius Ltd.,
10.75%, 2007 4,000 1,680
Printpak, Inc., 10.625%, 2006 5,000 4,951
Riverwood International Corp.,
10.625%, 2007 5,500 5,101
10.875%, 2008 5,000 4,150
Tjiwi Kimia Finance Mauritius Ltd.,
10%, 2004 3,950 1,699
-------------
39,002
-------------
ELECTRONICS AND ELECTRICAL EQUIPMENT - 6.3%
Dictaphone Corp., 11.75%, 2005 4,530 4,032
International Wire Group, Inc.,
11.75%, 2005, Series A 2,500 2,562
The Notes to Financial Statements are an integral part of these statements.
<PAGE>
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CIGNA HIGH INCOME SHARES INVESTMENTS IN SECURITIES September 30, 1998
(Unaudited) (Continued) 3
MARKET
PRINCIPAL VALUE
(000) (000)
- -------------------------------------------------------------------
ELECTRONICS AND ELECTRICAL EQUIPMENT - (CONTINUED)
MCMS, Inc.,
9.75%, 2008 $ 3,000 $ 1,560
Telex Communications, Inc.,
10.5%, 2007 6,000 4,680
Viasystems, Inc., 9.75%, 2007 8,000 7,220
-------------
20,054
-------------
ENERGY - 2.7%
Gothic Productions Corp.,
11.125%, 2005 5,000 3,550
Statia Terminals International,
11.75%, 2003 4,900 4,900
-------------
8,450
-------------
ENTERTAINMENT - 14.3%
Alliance Gaming Corp., 10%, 2007 5,000 4,725
American Skiing Co., 12%, 2006 5,250 5,355
Booth Creek Ski Holdings, Inc.,
12.5%, 2007 4,250 4,165
Casino America, Inc., 12.5%, 2003 5,500 5,940
Casino Magic of Louisiana Corp.,
13%, 2003 4,750 5,225
Majestic Star Casino L.L.C.,
12.75%, 2003 3,750 3,750
SFX Entertainment, Inc.,
9.125%, 2008 2,500 2,325
Trump Atlantic City Funding, Inc.,
11.25%, 2006 7,000 5,845
Venetian Casino Resort L.L.C.,
12.25%, 2004 9,000 8,100
-------------
45,430
-------------
FINANCIAL - 3.3%
Affinity Group Holding, Inc.,
11%, 2007 1,500 1,470
Dollar Financial Group, Inc.,
10.875%, 2006 4,150 4,025
Nationwide Credit, Inc., 10.25%,
2008 (144A security acquired
Jan 1998 for $5,353,125)** 5,250 4,988
-------------
10,483
-------------
FOOD AND BEVERAGES - 9.3%
CFP Holdings, Inc., 11.625%, 2004 1,400 826
Compania de Alimentos Fargo,
13.25%, 2008 (144A security
acquired July 1998 for
$2,750,000)** 2,750 1,512
Del Monte Corp., 12.25%, 2007 5,250 5,722
Di Giorgio Corp., 10%, 2007 3,000 2,790
Favorite Brands International, Inc.,
10.75%, 2006 (144A security acquired
May 1998 for $4,259,375)** 4,250 3,017
Fresh Foods, Inc., 10.75%, 2006
(144A security acquired June 1998
for $2,000,000)** 2,000 1,800
MARKET
PRINCIPAL VALUE
(000) (000)
- -------------------------------------------------------------------
FOOD AND BEVERAGES - (CONTINUED)
Grupo Azucarero Mexico S.A.,
11.5%, 2005 $ 6,500 $ 2,600
Imperial Holly Corp., 9.75%, 2007 5,000 4,737
Mastellone Hermonos S.A.,
11.75%, 2008 3,250 2,113
Star Markets Co., Inc., 13%, 2004 4,000 4,360
-------------
29,477
-------------
HEALTH CARE - 1.8%
Mediq, Inc., 11%, 2008 (144A security
acquired May 1998 for
$6,000,000)** 6,000 5,640
-------------
INDUSTRIAL - 11.5%
Alvey Systems, Inc., 11.375%, 2003 4,270 4,430
Bucyrus International, Inc.,
9.75%, 2007 5,000 3,675
Carpenter W.R. North America, Inc.,
10.625%, 2007 5,500 5,417
Foamex Capital Corp., 13.5%, 2005 5,500 6,490
Goss Graphic Systems, Inc.,
12%, 2006 4,625 4,232
High Voltage Energy Corp.,
10.5%, 2004 4,500 4,275
Morris Material Handling, Inc.,
9.5%, 2008 1,750 1,260
Neenah Corp., 11.125%, 2007 1,750 1,772
Outsourcing Services Group, 10.875%,
2006 (144A security acquired
Feb 1998 for 3,525,000)** 3,500 3,325
Vicap, S.A., 11.375%, 2007
(144A security acquired May 1997
for $4,037,450)** 2,500 1,675
-------------
36,551
-------------
METALS - 4.7%
Doe Run Resource Corp.,
11.25%, 2005 4,000 3,000
Euramax International PLC,
11.25%, 2006 6,000 6,240
Gulf States Steel, Inc., 13.5%, 2003 5,000 1,750
Renco Steel Holdings, Inc.,
10.875%, 2005 4,500 3,915
-------------
14,905
-------------
MISCELLANEOUS - 1.7%
Sullivan Graphics, Inc., 12.75%, 2005 5,500 5,555
-------------
RETAIL - 2.9%
Central Tractor Farm & Country, Inc.,
10.625%, 2007 4,500 4,365
Pantry, Inc., 10.25%, 2007 5,000 4,850
-------------
9,215
-------------
The Notes to Financial Statements are an integral part of these statements.
<PAGE>
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CIGNA HIGH INCOME SHARES INVESTMENTS IN SECURITIES September 30, 1998
(Unaudited) (Continued) 4
MARKET
PRINCIPAL VALUE
(000) (000)
- -------------------------------------------------------------------
TECHNOLOGY - 1.7%
Exodus Communications, Inc., 11.25%,
2008 (144A security acquired
Jun 1998 for $3,500,000)** $ 2,000 $ 1,780
Orbital Imaging Corp., 11.625%, 2005 4,250 3,655
-------------
5,435
-------------
TELECOMMUNICATIONS - 23.6%
American Mobile Satellite Corp.,
12.25%, 2008 3,325 1,995
Dobson Communications Corp.,
11.75%, 2007 5,400 5,400
Facilicom International, Inc.,
10.5%, 2008 6,000 5,220
Grupo Iusacell S.A., 10%, 2004 2,000 1,460
Impsat Corp., 12.125%, 2003 3,500 2,695
Iridium L.L.C., 11.25%, 2005 10,500 8,453
Metrocall, Inc., 9.75%, 2007 5,000 4,700
Price Communications Wireless, Inc.,
11.75%, 2007 8,000 8,240
Primus Telecommunications, Inc.,
11.75%, 2004 5,250 5,040
RCN Corp., 10%, 2007 3,000 2,775
Sygnet Wireless Inc., 11.5%, 2006 3,500 3,885
Teligent, Inc., 11.5%, 2007 9,500 7,315
Transtel Pass-Thru Trust, 12.5%,
2007 (144A security acquired Oct
and Nov 1997 for $4,170,000)** 4,250 1,912
Talton Holdings, Inc., 11%, 2007 4,000 4,000
Time Warner Telecom L.L.C.,
9.75%, 2008 2,150 2,161
Versatel Telecom B.V.,
13.25%, 2008 3,550 3,372
Winstar Communications, Inc.,
10%, 2008 (144A security acquired
Mar 1998 for $5,000,000)** 5,000 3,600
Winstar Equipment Corp.,
12.5%, 2004 3,000 2,700
-------------
74,923
-------------
TEXTILES - 3.6%
Anvil Knitwear, Inc., 10.875%, 2007 4,500 4,005
Cluett American Corp., 10.125%, 2008
(144A security acquired May 1998
for $5,000,000)** 5,000 4,550
Norton McNaughton, Inc.,
12.5%, 2005 (144A security
acquired Jun 1998 for $3,000,000)** 3,000 2,730
-------------
11,285
-------------
MARKET
PRINCIPAL VALUE
(000) (000)
- -------------------------------------------------------------------
TRANSPORTATION - 4.3%
American Commercial Lines L.L.C., 10.25%,
2008 (144A security acquired June
1998 for $4,314,000)** $ 4,300 $ 4,235
Atlas Air, Inc., 10.75%, 2005 5,385 5,439
Kitty Hawk, Inc., 9.95%, 2004 4,000 3,980
-------------
13,654
-------------
TOTAL BONDS AND NOTES
(Cost - $491,469,879) 423,600
-------------
UNITS - 4.2%
Convergent Communications, Inc., 13%,
2008 (each $1,000 unit includes 1
warrant for common stock) (144A
security acquired Mar 1998 for
$7,500,000)** 7,500 6,000
ICF Kaiser International, Inc., 13%, ***
2003 (each $1,000 unit includes
4.8 warrants for Common Stock) 5,000 1,950
Poland Telecom Finance BV, 14%, 2007
(each $1,000 unit includes 1 warrant
for Common Stock)(144A security acquired
Nov 1997
for $4,000,000)** 2,500 2,300
Viatel, Inc., 11.25%, 2008 (each $1,000
unit includes .483 shares of Ser. A
preferred stock) 3,000 2,970
-------------
TOTAL UNITS
(Cost - $17,825,773) 13,220
-------------
NUMBER
OF SHARES
---------
WARRANTS - 0.1%
American Mobile Satellite Corp.,
Exp. 2008* 3,325 13
IHF Capital, Inc., Class A & L,
Exp. 1999* 5,000 --
Metronet Communications Co.,
Class B, Exp. 2007* 4,500 117
NS Group, Inc., Exp. 2003* 4,080 27
Orbital Imaging Corp., Exp. 2005 4,250 170
Primus Telecommunications, Inc.,
Exp. 2004* 4,250 6
Versatel Telecom B.V., Exp 2008* 3,550 36
Wireless One, Inc., Exp. 2000* 15,000 --
-------------
TOTAL WARRANTS
(Cost - $558,258) 369
-------------
The Notes to Financial Statements are an integral part of these statements.
<PAGE>
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CIGNA HIGH INCOME SHARES INVESTMENTS IN SECURITIES September 30, 1998
(Unaudited) (Continued) 5
MARKET
NUMBER VALUE
OF SHARES (000)
- -------------------------------------------------------------------
SHORT-TERM OBLIGATIONS - 0.1%
(Cost - $375,000)
COMMERCIAL PAPER - 0.1%
Chevron USA, Inc.,
5.70%, 10/1/98 $ 375 $ 375
-------------
TOTAL INVESTMENTS IN SECURITIES - 137.7%
(Total Cost - $510,228,910) 437,564
Liabilities, Less Cash and Other Assets - (37.7%) (119,693)
-------------
NET ASSETS - 100%
(equivalent to $6.29 per share based
on 50,512,866 shares outstanding) $ 317,871
=============
* Non-income producing securities.
** Indicates restricted security; the aggregate fair value
of restricted securities is $77,025,750 (aggregate cost
$94,056,477) which is approximately 24% 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 September 30, 1998.
- ------------------------------------------------------------------
PORTFOLIO COMPOSITION (UNAUDITED)
September 30, 1998
MARKET % OF
QUALITY RATINGS* OF VALUE MARKET
LONG-TERM BONDS (000) VALUE
- ------------------------------------------------------------------
Ba/BB $20,145 4.6%
B/B 350,946 80.3%
Below B 65,729 15.1%
------------ -------------
$436,820 100.0%
============ =============
*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 6
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998 (UNAUDITED)
(IN THOUSANDS)
--------------
ASSETS:
Investments at market value
(Cost - $510,228,910) $ 437,564
Cash on deposit with custodian 4
Receivable for investments sold 1,014
Interest receivable 16,209
Investment for Trustees' deferred
compensation plan (Cost - $132,007) 180
------------
TOTAL ASSETS 454,971
------------
LIABILITIES:
Loan payable 131,665
Dividend payable October 9, 1998 at
$.0675 per share 3,410
Accrued interest payable 1,457
Accrued advisory fees payable 230
Deferred Trustees' fees payable 180
Other accrued expenses (including $56,898
due to affiliate) 158
------------
TOTAL LIABILITIES 137,100
------------
NET ASSETS (Equivalent to $6.29 per share
based on 50,512,866 shares of beneficial
interest outstanding; unlimited number of
shares authorized) $ 317,871
============
COMPONENTS OF NET ASSETS:
Paid in capital $ 427,777
Undistributed net investment income 3,306
Unrealized appreciation of investments (72,617)
Accumulated net realized loss (40,595)
------------
NET ASSETS $ 317,871
============
STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
(IN THOUSANDS)
-----------------------
INVESTMENT INCOME
INCOME:
Interest $41,915
EXPENSES:
Interest expense $6,838
Investment advisory fees 2,297
Administrative services 116
Custodian fees and expenses 88
Shareholder reports 79
Transfer agent fees and expenses 47
Auditing and legal fees 35
Trustees' fees 23
Other 36 9,559
-------- ------------
NET INVESTMENT INCOME 32,356
------------
REALIZED AND UNREALIZED GAIN/LOSS ON
INVESTMENTS
Net realized gain from investments 6,424
Unrealized depreciation of investments (89,244)
------------
NET REALIZED AND UNREALIZED LOSS ON
INVESTMENTS (82,820)
------------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ (50,464)
============
The Notes to Financial Statements are an integral part of these statements.
<PAGE>
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CIGNA HIGH INCOME SHARES 7
STATEMENT OF CHANGES IN NET ASSETS
(Unaudited)
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEP 30, 1998 1997
------------ ------------
(IN THOUSANDS)
--------------------------
OPERATIONS:
Net investment income $ 32,356 $ 32,347
Net realized gain from investments 6,424 11,378
Unrealized appreciation
(depreciation) on investments (89,244) 4,714
------------ -----------
Net increase (decrease) in net assets
from operations (50,464) 48,439
------------ -----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ($0.6075
per share and $0.864 per share,
respectively) (29,693) (32,173)
------------ -----------
Total distributions to shareholders (29,693) (32,173)
------------ -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from 12,452,266 capital
shares issued pursuant to
rights offering (net of related
expenses of $237,401) 98,260 -
Net increase from 574,177 and
659,812 capital shares issued
to shareholders in reinvestment of
distributions, respectively 4,512 5,490
------------ -----------
Net increase from capital share
transactions 102,772 5,490
------------ -----------
NET INCREASE IN
NET ASSETS 22,615 21,756
NET ASSETS:
Beginning of period 295,256 273,500
------------ -----------
End of period (including
undistributed net investment
income of $3,305,995 and
$644,127, respectively) $ 317,871 $ 295,256
============ ===========
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
(IN THOUSANDS)
--------------
CASH PROVIDED BY FINANCING ACTIVITIES:
Net proceeds from shares issued pursuant to
rights offering $ 98,260
Cash provided by borrowing 33,465
Dividends paid in cash (26,327)
-----------
105,398
CASH USED BY OPERATIONS:
Purchases of portfolio securities (351,426)
Net purchases of short-term investments (375)
Proceeds from sales of portfolio securities 220,054
-----------
(131,747)
-----------
Net Investment Income 32,356
Net change in receivables/payables
related to operations (6,020)
-----------
26,336
-----------
(105,411)
-----------
NET DECREASE IN CASH (13)
CASH, BEGINNING OF PERIOD 17
--------------
CASH, END OF PERIOD $ 4
==============
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 (Unaudited) 8
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.
<PAGE>
- --------------------------------------------------------------------------------
CIGNA HIGH INCOME SHARES NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued) 9
2. BANK LOANS. The Fund has a revolving credit agreement with unrelated third
party lenders which will generally enable the Fund to borrow up to the lesser of
(A) $151,300,000 or (B) one-third of the Fund's Eligible Assets. The agreement
matures on May 1, 2000. 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 nine months ended September 30, 1998 were $140,600,947 at
an average interest rate of approximately 6.69%. As of September 30, 1998, the
Fund was paying interest at an average annual rate of 6.26% 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 nine months ended September
30, 1998, the Fund paid or accrued $116,372.
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 nine months ended September 30, 1998
were $351,425,702 and $220,054,326, respectively.
As of September 30, 1998, the cost of securities for federal income tax purposes
was $509,853,910. At September 30, 1998, unrealized depreciation for Federal
income tax purposes aggregated $72,665,340 of which $3,894,362 related to
appreciated securities and $76,559,702 related to depreciated securities.
6. CAPITAL LOSS CARRYOVER. At December 31, 1997, the Fund had a capital loss
carryover for Federal income tax purposes of $47,019,138 of which $11,490,330,
$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 year.
7. RIGHTS OFFERING. During the fourth quarter of 1997, the Fund announced a
rights offering, whereby each shareholder on the record date received one
non-transferable right per common share. The terms of the rights offering
allowed shareholders to acquire one common share for each three rights held and
over-subscribe for additional shares (subject to availability and allotment).
The subscription price per share was the net asset value per share at the close
of business on January 23, 1998. The Fund received primary and over-subscription
requests totaling 12,452,266 shares from shareholders during the subscription
period from December 26, 1997 (the record date) to January 23, 1998 (the
expiration date). On the expiration date, the Fund's net asset value per share
was $7.91. Net proceeds to the Fund, received in January 1998, were
approximately $98 million.
<PAGE>
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CIGNA HIGH INCOME SHARES NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
10
8. FINANCIAL HIGHLIGHTS. The following table includes data, ratios and
supplemental data for a share outstanding throughout each period and other
performance information:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
9 MOS.
ENDED YEAR ENDED
SEP. 30, DECEMBER 31,
1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.88 $ 7.43 $ 7.19 $ 6.59 $ 7.54 $ 6.99
INCOME FROM INVESTMENT OPERATIONS
Net investment income (1) 0.66 0.87 0.85 0.84 0.86 0.97
Net realized and unrealized gains (losses) (1.64) 0.44 0.29 0.60 (0.91) 0.58
------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS (0.98) 1.31 1.14 1.44 (0.05) 1.55
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Distributions from net investment income (0.61) (0.86) (0.90) (0.84) (0.88) (0.97)
Distributions in excess of net investment - - - - (0.02) (0.03)
income ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS (0.61) (0.86) (0.90) (0.84) (0.90) (1.00)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 6.29 $ 7.88 $ 7.43 $ 7.19 $ 6.59 $ 7.54
======== ======== ======== ======== ======== ========
MARKET VALUE, END OF PERIOD $ 7.06 $ 8.44 $ 8.38 $ 7.88 $ 7.00 $ 8.38
======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN:
Per share market value (9.35)% 11.65% 19.25% 26.24% (5.43)% 19.62%
Per share net asset value (2) (13.55)% 18.58% 16.70% 22.93% (0.76)% 23.25%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $317,871 $295,256 $ 273,500 $ 259,773 $ 233,454 $195,489
Ratio of expenses to average net assets
(includes interest expense) 2.53% 3.28% 3.35% 3.80% 3.27% 2.87%
Ratio of net expenses to average net assets
(excludes interest expense) 0.72% 1.06% 1.07% 1.12% 1.17% 1.21%
Ratio of net investment income to average net 8.55% 11.28% 11.60% 12.03% 12.33% 12.98%
assets
Portfolio turnover 44% 74% 78% 60% 72% 48%
</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.
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.
<PAGE>
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CIGNA HIGH INCOME SHARES NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
11
9. 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)
INVESTMENT INCOME NET INVESTMENT INCOME ON INVESTMENTS INCR. (DECR.) IN NET ASSETS
PERIOD ENDED TOTAL PER SHARE TOTAL PER SHARE TOTAL PER SHARE TOTAL PER SHARE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31, 1996 $9,964 $0.27 $7,742 $0.21 $1,442 $0.04 $3,315 $0.05
June 30, 1996 10,057 0.28 7,837 0.20 1,661 0.05 3,406 0.06
September 30, 1996 10,375 0.28 8,079 0.22 9,225 0.25 11,144 0.27
December 31, 1996 9,858 0.27 7,560 0.21 (2,183) (0.06) (4,138) (0.14)
March 31, 1997 10,260 0.28 7,970 0.21 (3,094) (0.08) (830) (0.07)
June 30, 1997 10,294 0.28 8,000 0.22 11,995 0.32 13,707 0.34
September 30, 1997 10,467 0.28 8,082 0.22 8,588 0.23 10,349 0.25
December 31, 1997 10,704 0.29 8,295 0.22 (1,397) (0.03) (1,470) (0.07)
March 31, 1998 13,024 0.28 10,126 0.22 8,199 0.16 108,909 0.18
June 30, 1998 14,459 0.29 11,110 0.22 (12,703) (0.25) (10,327) (0.23)
September 30, 1998 14,432 0.29 11,120 0.22 (78,316) (1.55) (75,967) (1.54)
</TABLE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
CIGNA HIGH INCOME SHARES
<S> <C> <C>
TRUSTEES OFFICERS
Hugh R. Beath Thomas C. Jones Richard H. Forde
ADVISORY DIRECTOR, PRESIDENT, CIGNA INVESTMENT CHAIRMAN OF THE BOARD
ADMEDIA CORPORATE ADVISORS, INC. MANAGEMENT AND CIGNA AND PRESIDENT
INVESTMENTS, INC.
Richard H. Forde Alfred A. Bingham III
SENIOR MANAGING DIRECTOR, Paul J. McDonald VICE PRESIDENT AND TREASURER
CIGNA INVESTMENTS, INC. SENIOR EXECUTIVE VICE PRESIDENT
AND CHIEF ADMINISTRATIVE OFFICER, Alan C. Petersen
Russell H. Jones FRIENDLY ICE CREAM CORPORATION VICE PRESIDENT
VICE PRESIDENT AND TREASURER,
KAMAN CORPORATION Jeffrey S. Winer
VICE PRESIDENT AND SECRETARY
</TABLE>
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CIGNA High Income Shares is a closed-end, diversified management investment
company that invests primarily in high yield fixed-income securities. The
investment adviser is CIGNA Investments, Inc., 900 Cottage Grove Road, Hartford,
Connecticut 06152.
Shareholders may elect to have dividends automatically invested in additional
shares of CIGNA High Income Shares by participating in the Automatic Dividend
Investment Plan (the "Plan"). For a brochure describing this Plan or general
inquiries about your account contact State Street Bank and Trust Company, Stock
Transfer Department, P.O. Box 8200, Boston, Massachusetts, 02266-8200, or call
1.800.426.5523.
<PAGE>
[CIGNA TREE LOGO GRAPHIC APPEARS HERE]
CIGNA High Income Shares
950 Winter Street [CIGNA TREE LOGO GRAPHIC APPEARS HERE]
Suite 1200
Waltham, MA 02154
CIGNA HIGH INCOME SHARES
- --------------------
BULK RATE
U.S. POSTAGE
PAID
SO. HACKENSACK, NJ THIRD QUARTER REPORT
PERMIT 750
- --------------------
SEPTEMBER 30, 1998
[CIGNA TREE LEAVES GRAPHIC APPEARS IN BACKGROUND OF COVER]
