<PAGE> 1
CNA Income Shares, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Report for the Period
Ended June 30, 1996
- --------------------------------------------------------------------------------
<PAGE> 2
<TABLE>
<CAPTION>
CONTENTS
<C> <S>
3 Letter to Shareholders
4 Statement of Assets and Liabilities
5 Statement of Operations
6 Statement of Changes in Net Assets
7 Statement of Cash Flows
8 Notes to Financial Statements
11 Schedule of Investments
18 Financial Highlights
19 Investment Objectives and Policies
25 Automatic Dividend Reinvestment Plan
Other Information
</TABLE>
This report has been prepared for the information of shareholders of CNA Income
Shares, Inc.
<PAGE> 3
DEAR SHAREHOLDER:
CNA Income Shares reported net income of $0.50 per share during the six months
ending June 30, 1996 and declared dividends totaling $0.50. Dividends are paid
on a quarterly schedule, with the next dividend anticipated to be paid on
October 11, 1996.
Bond prices dropped and yields rose during the first half of 1996. The 30-year
Treasury, for example, went from a 5.95% basis at year end 1995 to 6.89% at June
30 and the 10-year Treasury rose in yield from 5.57% to 6.71%. In terms of total
return performance consisting of income return and change in market value, the
30-year Treasury had a negative return of 9.57% and the 10-year Treasury had a
negative return of 4.96%. Corporate bonds held up somewhat better as reflected
in a negative 2.11% total return for the Salomon Brothers Corporate Bond Index.
In comparison, CNA Income Shares had a positive total return of 5.25%. Although
interest rates did increase by approximately one percentage point, the average
yield on your Company's portfolio of bonds is higher than the current market
level of investment grade bonds. This difference means that it is hard to
re-invest funds on called or matured investment grade bonds without either
diminishing income flow or taking additional credit risks.
As management has stressed in the past, your Company has a particular problem of
replacing the income from the segment of the portfolio invested in Principal
Exchange Rate Linked Securities (PERLS). At the date of this writing, the three
remaining securities in this group have a face value of $7.25 million and a cost
of $5.31 million. PERLS pay interest and principal in dollars, but the principal
paid at maturity is linked to a relationship between two or more currencies. The
scheduled maturities are in October and December of 1996 and May of 1997. Based
on current currency values, we anticipate that the PERLS will not pay face value
at maturity and that, therefore, future income generating capability will be
negatively affected. Because these securities are priced weekly with the rest of
the portfolio securities, the current market value is already reflected in CNA
Income Shares net asset value.
The dividend payout ultimately reflects the portfolio's ability to generate a
stream of income consistent with opportunities in the marketplace and the
willingness to absorb risk. Shareholders voted in 1995 to increase the
investment basket from 25% to 50%. The basket permits us to invest in other than
investment grade bonds. Although we are not fully utilizing the revised basket
leeway, this measure has given management additional flexibility in managing the
portfolio and has provided the Company additional return to partially offset
some of the previously mentioned negatives.
Sincerely,
Rycroft sig
Donald C. Rycroft
Chairman of the Board and President
August 27, 1996
3
<PAGE> 4
CNA INCOME SHARES, INC.
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1996 (UNAUDITED)
<TABLE>
<S> <C>
ASSETS
In custody of The Chase Manhattan Bank, N.A.:
Investments (See Schedule of Investments) (Notes A and C):
Debt securities, preferred stock, common stock and
warrants at market value (cost $109,446,364).......... $109,487,339
Short-term notes at amortized cost (cost $1,629,245).... 1,629,245
Cash...................................................... 3,455
Receivables:
Interest.................................................. 3,186,762
Dividend.................................................. 24,831
Prepaid expenses............................................ 13,107
------------
TOTAL ASSETS........................................ 114,344,739
LIABILITIES
Dividend payable............................... $ 2,145,221
Accounts payable and
accrued expenses............................. 120,284
Interest payable............................... 188,870
Five Year Convertible Extendible
Notes (Note B)............................... 28,050,000 30,504,375
----------- ------------
NET ASSETS, equivalent to $9.77* per share on
8,580,885 shares outstanding........................ $ 83,840,364
============
*Conversion of the $28,050,000 Notes would be anti-dilutive.
NET ASSETS REPRESENTED BY:
Capital stock $1 par value
Authorized: 15,000,000 shares
Issued and outstanding: 8,580,885 shares................ $ 8,580,885
Paid-in surplus........................................... 98,321,550
------------
106,902,435
Earned surplus (deficit)
Accumulated net realized (loss) on investments.......... (23,703,024)
Undistributed net investment income..................... 599,978
Net unrealized depreciation............................... 40,975
------------
NET ASSETS APPLICABLE TO CAPITAL STOCK OUTSTANDING.... $ 83,840,364
============
</TABLE>
See Accompanying Notes to Financial Statements
4
<PAGE> 5
CNA INCOME SHARES, INC.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
INCOME:
Interest income........................................... $5,710,828
Dividend income........................................... 78,265
Discount earned on short-term notes....................... 32,355
----------
TOTAL INVESTMENT INCOME...................... 5,821,448
EXPENSES:
Investment advisory fee (Note F)............. $ 210,691
Registrar, proxy solicitation and dividend
disbursing services........................ 42,500
State and local taxes........................ 32,475
Insurance.................................... 25,551
Accounting services and expenses............. 22,500
Directors' fees and expenses (Note F)........ 21,250
Auditing and consulting fees................. 15,000
Shareholder reports and meeting.............. 13,200
Registration and filing fees................. 9,516
Transfer agent fee........................... 8,700
Custodian fees............................... 4,500
Legal fees and expenses...................... 1,500
Other........................................ 502
----------
Total Operating Expenses........ 407,885
Interest expense including amortization of
deferred finance expense (Note B).......... 1,133,220 1,541,105
---------- ----------
NET INVESTMENT INCOME........................ 4,280,343
----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
(excluding short-term notes) (Notes A and D):
NET REALIZED (LOSS) FROM SECURITY TRANSACTIONS............ (33,129)
----------
UNREALIZED DEPRECIATION OF INVESTMENTS:
Beginning of period.......................... (169,662)
End of period................................ 40,975
----------
NET DECREASE IN UNREALIZED DEPRECIATION................... 210,637
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS........... 177,508
----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................. $4,457,851
==========
</TABLE>
See Accompanying Notes to Financial Statements
5
<PAGE> 6
CNA INCOME SHARES, INC.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
AND THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
6/30/96 12/31/95
----------- -----------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Net investment income..................... $ 4,280,343 $ 9,048,477
Net realized (loss) from security
transactions............................ (33,129) (2,550,586)
Net change in unrealized appreciation
(depreciation).......................... 210,637 8,757,913
----------- -----------
Net increase (decrease) in net assets
resulting from operations............... 4,457,851 15,255,804
Dividends to shareholders from net
investment income ($0.50 and $1.07 per
share, respectively).................... (4,278,734) (8,745,856)
FROM CAPITAL SHARE
TRANSACTIONS (Notes B and E):
Increase in net assets due to shares
issued
to shareholders on reinvestment
of net investment income................ 909,323 1,929,875
----------- -----------
Net increase (decrease) in net assets... 1,088,440 8,439,823
NET ASSETS:
BEGINNING OF YEAR......................... 82,751,924 74,312,101
----------- -----------
END OF PERIOD (INCLUDING UNDISTRIBUTED
NET INVESTMENT INCOME OF $599,978
AND $598,369, RESPECTIVELY)............. $83,840,364 $82,751,924
=========== ===========
</TABLE>
See Accompanying Notes to Financial Statements
6
<PAGE> 7
CNA INCOME SHARES, INC.
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
<TABLE>
<S> <C>
INCREASE (DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES:
Proceeds from sales of securities........................ $ 38,055,196
Purchases of securities.................................. (38,338,445)
Net sales of short-term investments...................... (337,315)
Interest received........................................ 5,341,963
Dividend received........................................ 75,684
Interest paid in cash.................................... (1,133,220)
Expenses paid............................................ (378,563)
------------
NET CASH PROVIDED BY OPERATING ACTIVITIES....... 3,285,300
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends reinvested..................................... 909,323
Dividends paid in cash................................... (4,255,358)
------------
NET CASH USED FOR FINANCING ACTIVITIES.......... (3,346,035)
------------
Net decrease in cash....................................... (60,735)
Cash at beginning of year.................................. 64,190
------------
Cash at end of period...................................... $ 3,455
==============
RECONCILIATION OF INCREASE IN NET ASSETS FROM OPERATIONS TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net increase in net assets resulting from operations..... $ 4,457,851
Net decrease in investments.............................. 32,227
Increase in interest receivable.......................... (231,519)
Increase in dividend receivable.......................... (2,581)
Decrease in prepaid expenses and other................... 12,444
Decrease in payable for securities purchased............. (1,000,000)
Increase in accounts payable and accrued expenses........ 16,878
------------
NET CASH PROVIDED BY OPERATING ACTIVITIES....... $ 3,285,300
==============
</TABLE>
See Accompanying Notes to Financial Statements
7
<PAGE> 8
CNA INCOME SHARES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED 6/30/96 (UNAUDITED) AND FOR THE YEAR ENDED 12/31/95
A. Significant Accounting Policies:
The Company is registered under the Investment Company Act of 1940, as
amended, as a closed-end, diversified management investment company. The
following is a summary of significant accounting policies consistently
followed by the Company. The policies are in conformity with generally
accepted accounting principles.
(1) Investments in debt securities are valued at the average of
representative closing bid prices on the last business day of the year.
Equity securities traded on a national securities exchange are valued at
the last reported sales price on the last business day of the year;
equity securities traded in the over-the-counter market and listed
securities for which no sale was reported on that date are valued at the
closing bid price on that date. Short-term notes are valued at cost plus
accrued discount earned. Securities for which market quotations are not
readily available (which include all restricted securities) are valued
at fair value as determined in good faith by the Company's Board of
Directors; such values require the use of estimates.
Premiums on debt securities are not being amortized and discounts are
not being accrued except for original issue discounts which are being
accrued for tax purposes as the Company engages in portfolio trading
from time to time. Such portfolio trading makes it unlikely that most
investments would be held to maturity.
(2) Securities transactions are accounted for on the date the securities are
purchased or sold. Dividend income and distributions to shareholders are
recorded on the ex-dividend date. Interest income is recorded as earned.
(3) It is the Company's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and
to distribute all of its taxable income to its shareholders. Therefore,
no Federal income tax provision is required. Gain or loss on sales of
securities is determined on the basis of average cost for financial
statement purposes and identified cost for Federal income tax purposes.
The identified cost of investments owned at December 31, 1995 was
$111,317,752; based upon Federal tax cost of investments, gross
unrealized appreciation and gross unrealized depreciation were
$7,370,029 and $7,538,970, respectively. At December 31, 1995, there was
a capital loss carry-over of approximately $8,561,460, of which
$2,717,709 expires in 1998, $3,290,187 in 1999, $2,203,423 in 2002 and
$350,141 in 2003. This carry-over will be used to offset future net
capital gains, if any.
8
<PAGE> 9
CNA INCOME SHARES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
B. Convertible Extendible Notes:
During 1987, the Company issued $30,000,000 in principal amount of five year
convertible extendible notes (Notes) repayable May 31, 1992, at the option
of the holder. These Notes bore interest at the rate of 9.125% per annum
from May 28, 1987 through May 31, 1992. On May 1, 1992, a reset rate of
interest of 8.08% per annum from June 1, 1992 through May 31, 1997 was
announced. $28,050,000 in principal of Notes were outstanding. No holder
elected repayment.
The Notes are convertible at any time prior to maturity, unless previously
redeemed, into shares of common stock of the Company at a conversion price
of $11.73 per share.
The Company may redeem all of the Notes after June 1, 1994 at 100% of
principal amount, if the closing price of the Company's common stock is at
least 120% of the conversion price on any twenty of thirty consecutive
trading days, and at any time to the extent necessary to maintain asset
coverage (as defined) of at least 300%, as required under the Note
Indenture.
The fair market value of the Notes is estimated at $28,481,861 based on the
quoted market prices for the same or similar issues.
C. Securities Loaned:
During the six months ended June 30, 1996 no investment securities owned by
the Company were loaned to brokers under loan agreements.
D. Purchases and Sales of Investments other than Short-term Notes:
<TABLE>
<CAPTION>
PROCEEDS
FROM
COST OF SALES OR
PURCHASES MATURITIES
----------- -----------
<S> <C> <C>
Corporate Bonds.................... $33,954,347 $36,946,958
Preferred Stock.................... 2,300,000 --
Common Stock....................... 398,856 285,650
</TABLE>
E. Capital Stock:
At June 30, 1996, the authorized capital stock of the Company consists of
15,000,000 shares of $1 par value. 9,523,676 shares have been registered for
sale, 265 are treasury shares, 8,580,885 shares are issued and outstanding,
after giving effect to an increase of 93,504 shares issued in connection
with the automatic dividend investment plan (the "Plan"). 357,773 shares
have been reserved for the Plan, and up to 2,391,306 shares have been
reserved for conversion of the Notes.
9
<PAGE> 10
CNA INCOME SHARES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
F. Transactions with Affiliated Companies:
Continental Assurance Company (CAC), a wholly-owned subsidiary of CNA
Financial Corporation, provides various services as investment advisor to
the Company. The Company pays a fee at an annual rate of 1/2 of 1% (.5%) of
the average weekly net assets of the Company for these services. The Company
also pays its other costs and expenses of operating the Company directly.
The agreement between the Company and CAC, however, provides for a ceiling
on certain of these costs and expenses. If this ceiling is exceeded, CAC is
required to reimburse the Company. No such reimbursement was required in the
six month period ending June 30, 1996.
All officers of the Company are officers or employees of CAC or its
affiliates. Only unaffiliated directors receive directors' fees.
G. Unaudited Quarterly Results of Operations:
The following is a summary of 1996 and 1995 March and June unaudited
quarterly results of operations:
<TABLE>
<CAPTION>
NET REALIZED AND
UNREALIZED GAINS
NET INVESTMENT (LOSSES) ON
INCOME INVESTMENTS
THREE MONTHS INVESTMENT ------------------------ -------------------------
ENDED: INCOME AMOUNT PER SHARE AMOUNT PER SHARE
-------------- ---------- ------------------------ -------------------------
<S> <C> <C> <C> <C> <C>
Mar. 31, 1996 $2,914,330 $2,157,221 $ .25 ($ 488,862) $ .06
June 30, 1996 2,907,118 2,123,122 .25 666,370 .08
---------------------------------------------------------------------------------------
Mar. 31, 1995 3,034,022 2,278,061 .27 599,808 .07
June 30, 1995 3,068,881 2,289,440 .27 2,449,385 .30
</TABLE>
H. In 1991, the Company was a defendant in a lawsuit brought by the Depository
Trust Company and its nominee, CEDE & Co. (collectively "DTC"). DTC's
complaint alleged that one or more of the Company's present or former
transfer agents failed to issue stock certificates representing
approximately 9,300 shares of the Company's common stock. In April 1992, the
parties reached a settlement of the action, pursuant to which the Company,
without admitting liability, issued 4,500 shares of common stock to DTC and
made no cash settlement. Concurrently, the Company's present transfer agent
and two of its former transfer agents paid the Company an aggregate of
$54,000 in cash. At the start of the litigation, the Company reserved
$75,000 for anticipated legal and settlement expenses. When the lawsuit was
settled, actual legal and settlement expenses were less than the reserved
amount. This difference was credited towards 1992 legal expenses resulting
in a net credit of $46,666.
10
<PAGE> 11
CNA INCOME SHARES, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)
JUNE 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT COST VALUE(1)
- ---------- ------------ ------------
<C> <S> <C> <C>
DEBT SECURITIES--126.8%
AEROSPACE--1.1%
$ 857,000 K & F Industries, Inc.
13.75% Deb, Due 8/1/01......... $ 886,950 $ 916,990
---------- ----------
AUTOMOTIVE--4.9%
2,000,000 Auburn Hills Trust
12.00% Deb, Due 5/1/20......... 2,000,000 2,853,370
1,500,000 Venture Holdings Trust
9.75% Sr Sub Nts, Due 4/1/04... 1,291,050 1,282,500
---------- ----------
3,291,050 4,135,870
---------- ----------
BANKS--2.5%
907,000 Citicorp
10.50% Sub Nt, Due 2/1/16...... 887,700 951,135
1,000,000 Midland American Capital
Corporation 12.75%, Gtd Nt,
Due 11/15/03................... 1,008,060 1,121,800
---------- ----------
1,895,760 2,072,935
---------- ----------
CABLE--11.0%
1,500,000 Adelphia Communications
Corporation
12.50% Sr. Deb, Due 5/15/02.... 1,461,250 1,522,500
1,500,000 CF Cable TV, Inc.
9.125%, Sec. Nts, Due
7/15/07........................ 1,560,000 1,511,250
1,000,000 Continental Cablevision
9.500%, Deb, Due 8/1/13........ 1,085,625 1,082,500
1,000,000 Rifkin Acquisition Capital Corp.
11.125%, Sr. Sub Nts, Due
1/15/06........................ 1,032,500 978,750
1,000,000 Tele-Communications, Inc.
9.80%, Deb, Due 2/1/12......... 1,081,400 1,075,405
2,750,000 Tele-Communications, Inc.
10.125% Deb, Due 4/15/22....... 2,798,360 3,007,428
---------- ----------
9,042,052 9,177,833
---------- ----------
COMMUNICATIONS--1.4%
1,250,000 Turner Broadcasting Sys., Inc.
8.375% Sr Nts, Due 7/1/13...... 1,028,125 1,196,294
---------- ----------
COMMUNICATION EQUIPMENT--3.4%
1,400,000 Alpine Group, Inc.
12.25%, Sr. Nts, Due 7/15/35... 1,386,000 1,407,000
</TABLE>
See Accompanying Notes to Financial Statements
11
<PAGE> 12
CNA INCOME SHARES, INC.
SCHEDULE OF INVESTMENTS--(Continued)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT COST VALUE(1)
- --------- ---------- ----------
<C> <S> <C> <C>
DEBT SECURITIES--(Cont'd)
$1,500,000 Dictaphone Corporation
11.75% Sr Sub Nts,
Due 8/1/05..................... $ 1,471,563 $ 1,443,750
---------- ----------
2,857,563 2,850,750
---------- ----------
COMPUTER TECHNOLOGY--1.9%
1,500,000 Unisys Corporation
15.00% Nts, Due 7/1/97......... 1,582,714 1,588,125
---------- ----------
CONSUMER PRODUCTS--2.4%
2,000,000 R. J. R. Nabisco, Inc.
9.25% Nts, Due 8/15/13......... 1,968,830 1,986,870
---------- ----------
DEFENSE--0.4%
250,000 Diagnostic/Retrieval Systems
9.00% Sr Sub Deb,
Due 10/1/03.................... 250,000 327,500
---------- ----------
ENERGY--2.9%
1,500,000 Ashland Oil, Inc.
6.75% Cv Deb, Due 7/1/14....... 1,442,500 1,488,750
1,000,000 PVD America, Inc.
7.875% Sr Nts, Due 8/1/03...... 935,710 945,325
---------- ----------
5,554,460 2,434,075
---------- ----------
ENTERTAINMENT--2.1%
1,500,000 Time Warner Entertainment Company
L.P.
10.15% Nts, Due 5/1/12......... 1,607,530 1,735,995
---------- ----------
FINANCIAL--6.3%
3,000,000 Ford Motor Credit Corp.
9.03%, Nts, Due 12/30/09....... 3,199,800 3,240,000
1,250,000 General Electric Capital Corp.
10.90% Multi-currency PERLS,
Due 10/15/96................... 1,093,750 934,375
3,000,000 General Electric Capital Corp.
10.80% Multi-currency PERLS,
Due 12/5/96.................... 2,712,500 866,250
3,000,000 General Electric Capital Corp.
10.15% Multi-currency PERLS,
Due 5/21/97.................... 1,500,000 243,750
---------- ----------
8,506,050 5,284,375
---------- ----------
</TABLE>
See Accompanying Notes to Financial Statements
12
<PAGE> 13
CNA INCOME SHARES, INC.
SCHEDULE OF INVESTMENTS--(Continued)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT COST VALUE(1)
- --------- ---------- ----------
<C> <S> <C> <C>
DEBT SECURITIES--(Cont'd)
FOREST PRODUCTS--5.5%
$2,000,000 Boise Cascade Corporation
9.85% Nts, Due 6/15/02......... $ 2,183,820 $ 2,231,490
2,200,000 Georgia Pacific Corporation
9.50% Deb, Due 5/15/22......... 2,161,500 2,344,078
---------- ----------
4,345,320 4,575,568
---------- ----------
GOVERNMENT DEBT--13.5%
Canadian--3.3%
2,300,000 Province of Quebec, Canada
13.25% Deb, Due 9/15/14...... 2,753,160 2,785,622
---------- ----------
United States--4.2%
255,000 U.S. Treasury Bonds
11.625%, Due 11/15/04........ 258,825 332,257
1,513,000 U.S. Treasury Bonds
15.75%, Due 11/15/01......... 2,469,420 2,133,088
1,000,000 U.S. Treasury Notes
6.875%, Due 5/15/06.......... 1,016,250 1,006,560
---------- ----------
3,744,495 3,471,905
---------- ----------
Government Agencies--
Other--1.5%
1,179,000 Kingdom of Sweden
12.75% Deb, Due 10/15/97..... 1,505,300 1,268,592
---------- ----------
International Agencies--4.5%
3,000,000 International Bank for
Reconstruction & Development
12.375% Bd, Due 10/15/02..... 3,552,750 3,797,910
---------- ----------
HEALTHCARE--4.1%
1,000,000 Phoenix Shannon PLC
9.50% Cv Sr Sub Nts,
Due 11/1/00.................... 1,000,000 970,000
1,000,000 Theratx, Inc.
8.00% Cv Sub Nts, Due 2/1/02... 955,313 985,000
1,000,000 U.S. Diagnostic Labs. Inc.
9.00%, Cv Sub Deb, Due
3/31/03........................ 1,000,000 1,510,000
---------- ----------
2,955,313 3,465,000
---------- ----------
</TABLE>
See Accompanying Notes to Financial Statements
13
<PAGE> 14
CNA INCOME SHARES, INC.
SCHEDULE OF INVESTMENTS--(Continued)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT COST VALUE(1)
- ---------- ---------- ----------
<C> <S> <C> <C>
DEBT SECURITIES--(Cont'd)
HOME BUILDERS/FURNISHINGS--2.8%
$1,000,000 Engle Homes, Inc.
11.75% Sr Nts, Due 12/15/00.... $ 1,000,000 $ 960,000
1,500,000 J. M. Peters Co., Inc.
12.75% Sr Nts, Due 5/1/02...... 1,500,000 1,410,000
---------- ----------
2,500,000 2,370,000
---------- ----------
INSTRUMENTATION--1.0%
750,000 Thermo Optek Inc.
5.00%, Cv Co. Gtd Nts, Due
10/15/00....................... 750,000 810,000
---------- ----------
INSURANCE--6.4%
2,000,000 Conseco, Inc.
10.50%, Sr. Nts,
Due 12/15/04................... 2,313,120 2,260,000
1,000,000 MTN-Kemper Corp.
9.00% Med Trm Nts, Due
3/2/98......................... 1,020,690 1,037,400
2,000,000 Phoenix Re Corp.
9.75% Sr Nts, Due 8/15/03...... 2,041,563 2,090,000
---------- ----------
5,375,373 5,387,400
---------- ----------
LEISURE--4.1%
1,000,000 Argosy Gaming Company
12.00% Cv Sub Nts,
Due 6/1/01..................... 1,009,167 925,000
1,000,000 GNF, Corp.
10.625% 1st Mtg Nts,
Due 4/1/03..................... 827,500 1,085,000
500,000 Motels of America, Inc.--Units
12.00% Sr Sub Nts,
Due 4/15/04.................... 493,745 478,750
1,000,000 Red Roof Inns
9.625%, Sr Nts, Due 12/15/03... 955,000 946,250
---------- ----------
3,285,412 3,435,000
---------- ----------
METALS--3.6%
2,000,000 Inco Ltd
9.875%, Deb, Due 6/15/19....... 1,997,500 1,995,000
1,000,000 Inco Ltd
9.60%, Deb, Due 6/15/22........ 1,062,970 1,047,330
---------- ----------
3,060,470 3,042,330
---------- ----------
</TABLE>
See Accompanying Notes to Financial Statements
14
<PAGE> 15
CNA INCOME SHARES, INC.
SCHEDULE OF INVESTMENTS--(Continued)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT COST VALUE(1)
- --------- ---------- ----------
<C> <S> <C> <C>
DEBT SECURITIES--(Cont'd)
MULTI-INDUSTRY--3.1%
$1,500,000 J. B. Pointdexter & Co., Inc.
12.50% Sr Nts, Due 5/15/04..... $ 1,388,750 $ 1,367,813
1,000,000 Thermo-Electron Corp.
4.25% Cv Sub, Due 1/3/02....... 1,000,000 1,230,000
---------- ----------
2,388,750 2,597,813
---------- ----------
PAPER--4.6%
1,000,000 APP International Finance
11.75%, Gtd Sec Nts Due
10/1/05........................ 990,000 1,022,500
1,750,000 Grupo Industrial Durango S.A.
12.00% Sr Nts, Due 7/15/01..... 1,680,625 1,750,000
1,000,000 Indah Kiat International Finance
Co.
12.50% Co. Gtd,
Due 6/15/06.................... 1,000,000 1,066,250
---------- ----------
3,670,625 3,828,750
---------- ----------
REITS--1.1%
1,000,000 First Union Real Estate
Eqt. & Mtg
8.875% Sr Nts, Due 10/1/03..... 991,870 925,000
---------- ----------
RETAIL - FOOD--7.2%
1,000,000 Big V Supermarkets
11.00%, Sr Sub Nts, Due
2/15/04........................ 950,000 920,000
1,000,000 Grand Union Company
12.00%, Sr Nts, Due 9/1/04..... 844,167 920,000
2,000,000 Penn Traffic Co.
9.625% Sr Sub Nts,
Due 4/15/05.................... 1,659,375 1,450,000
2,000,000 The Pantry, Inc.
12.00% Sr Nts, Due 11/15/00.... 2,000,000 1,800,000
1,000,000 Venture Stores
8.89%, Nts, Due 12/14/98....... 889,890 901,600
---------- ----------
6,343,432 5,991,600
---------- ----------
STEEL--3.0%
1,000,000 ACME Metals, Inc.
12.50% Sr Nts, Due 8/1/02...... 1,012,500 1,020,000
1,500,000 Algoma Steel Inc.
12.375% 1st Mtg, Due 7/15/05... 1,417,500 1,466,250
---------- ----------
2,430,000 2,486,250
---------- ----------
</TABLE>
See Accompanying Notes to Financial Statements
15
<PAGE> 16
CNA INCOME SHARES, INC.
SCHEDULE OF INVESTMENTS--(Continued)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT COST VALUE(1)
- ---------- ------------ ------------
<C> <S> <C> <C>
DEBT SECURITIES--(Cont'd)
STUDENT LOAN--1.0%
$ 800,000 University Support Services,
Inc. Educat Loan Notes Series
1991 B Var. Rate Min. 12.50%,
Due 5/10/06.................. $ 797,000 $ 800,000
------------ ------------
TRANSPORTATION--14.0%
Airlines--12.0%
1,000,000 Airplane Pass Through Trust
10.875%, Due 3/15/19......... 1,000,000 1,040,000
1,000,000 Airplane Pass Through Trust
8.15%, Due 3/15/19........... 1,003,650 986,000
2,250,000 American Airlines, Inc.
10.180% Col Tr,
Due 1/2/13................... 2,208,730 2,528,550
2,243,000 Delta Air Lines, Inc.
10.79%, Equip Tr Cert
Ser F, Due 3/26/14........... 2,288,385 2,702,815
500,000 Delta Air Lines, Inc.
10.50%, Pass Thru Cert
Due 4/30/16.................. 513,750 593,750
1,000,000 United Airlines, Inc.
10.85%, 1991 Equip Tr Cert
Ser A, Due 7/5/14............ 1,000,000 1,192,180
1,000,000 United Airlines, Inc.
10.85%, 1991 Equip Tr Cert
Ser B, Due 2/19/15........... 1,000,000 1,191,800
------------ ------------
9,014,515 10,235,095
------------ ------------
Trucking--2.0%
1,750,000 Petro PSC Properties LP
12.50% Sr Nts, Due 6/1/02.... 1,716,518 1,706,250
------------ ------------
UTILITIES--11.5%
Electric--7.7%
1,160,000 Connecticut Yankee Atomic
Power Company, Gen Ref Mtg
Ser A 12.00%, Due 6/1/00..... 1,189,000 1,160,731
1,000,000 Long Island Lighting Co.
9.75% Gen Ref Mtg,
Due 5/1/21................... 964,020 983,060
2,000,000 Louisiana Power & Light Company
10.67% Sec Lease Oblig Bd,
Due 1/2/17................... 2,099,000 2,132,850
</TABLE>
See Accompanying Notes to Financial Statements
16
<PAGE> 17
CNA INCOME SHARES, INC.
SCHEDULE OF INVESTMENTS--(Continued)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT COST VALUE(1)
- ---------- ------------ ------------
<C> <S> <C> <C>
DEBT SECURITIES--(Cont'd)
$2,000,000 Midland Funding Corp.
Lease Oblig Bds Ser B 13.25%,
Due 7/23/06.................. $ 2,346,500 $ 2,150,000
------------ ------------
6,598,520 6,426,641
------------ ------------
Gas--1.9%
1,575,000 Transgas de Occidente S.A.
9.79%, Sr. Nts Due 11/1/10... 1,663,842 1,585,238
------------ ------------
Telephone--1.9%
1,500,000 GTE Corporation
10.75% Deb, Due 9/15/17...... 1,535,745 1,639,140
------------ ------------
TOTAL DEBT SECURITIES........ 106,243,243 106,338,714
------------ ------------
PREFERRED STOCK--2.5%
<CAPTION>
NUMBER OF
SHARES
- ----------
<C> <S> <C> <C>
25,000 Globalstar Telecommunications
Limited Convertible............ 1,250,000 1,100,000
100,000 Triathlon Broadcasting Company
Convertible.................... 1,050,000 1,000,000
------------ ------------
2,300,000 2,100,000
------------ ------------
COMMON STOCK--1.1%
<CAPTION>
NUMBER OF
SHARES
- ----------
<C> <S> <C> <C>
55,800 Long Island Lighting Company..... 903,106 941,625
1,000 Motels of America, Inc. ......... 15 57,500
------------ ------------
903,121 999,125
------------ ------------
WARRANTS--0.1%
<CAPTION>
NUMBER OF
WARRANTS
- ----------
<C> <S> <C> <C>
1,500 Petro PSC Properties L.P. ....... -- 49,500
11,850 J. M. Peters Company, Inc. ...... -- --
------------ ------------
TOTAL........................ 109,446,364 109,487,339
------------ ------------
SHORT-TERM NOTES--2.0%
<CAPTION>
PRINCIPAL
AMOUNT
- ----------
<C> <S> <C> <C>
$1,630,000 G.E. Credit Corp.
5.40%, Due 7/1/96.............. 1,629,245 1,629,245
------------ ------------
TOTAL INVESTMENTS--
132.5%(2).................. $111,075,609 $111,116,584
=========== ===========
</TABLE>
(1) For determination of Market Value see Note A to Financial Statements.
(2) The Total Market Value represents 132.5% of the Net Assets at
June 30, 1996.
See Accompanying Notes to Financial Statements
17
<PAGE> 18
CNA INCOME SHARES, INC.
FINANCIAL HIGHLIGHTS
Increase (Decrease) in Net Asset Value:
<TABLE>
<CAPTION>
SIX MONTHS* FOR THE YEAR ENDED DECEMBER 31,
ENDED ---------------------------------------------
6/30/96 1995 1994 1993 1992 1991
----------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net Asset Value, beginning
of year................. $ 9.75 $ 8.98 $10.53 $10.32 $10.560 $ 9.16
======= ======= ======= ======= ======= =======
Investment income--net.... $ 0.50 $ 1.07 $ 1.10 $ 1.16 $ 1.200 $ 1.15
Realized and unrealized
(loss) gain on
investments--net........ $ 0.02 $ 0.74 ($ 1.57) $ 0.21 ($ 0.250) $ 1.41
------- ------- ------- ------- ------- -------
Total from investment
operations.............. $ 0.52 $ 1.81 ($ 0.47) $ 1.37 $ 0.95 $ 2.56
------- ------- ------- ------- ------- -------
Total distributions to
shareholders............ ($ 0.50) ($ 1.04) ($ 1.08) ($ 1.16) ($ 1.195) ($ 1.16)
------- ------- ------- ------- ------- -------
Net asset value, end of
year.................... $ 9.77 $ 9.75 $ 8.98 $10.53 $10.320 $10.56
======= ======= ======= ======= ======= =======
Market price per share,
end of year............. $10.13 $10.25 $ 9.50 $12.63 $11.625 $11.13
======= ======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN**
Based on market price per
share................... 3.66% 18.84% (16.20%) 18.58% 15.24% 40.40%
Based on net asset value
per share............... 5.13% 15.70% (4.46%) 13.28% 9.04% 27.95%
RATIO TO AVERAGE
NET ASSETS
Expenses.................. 0.48%+ 0.95% 0.99% 0.88% 0.84% 1.05%
Investment income--net.... 0.51%+ 11.40% 11.33% 10.82% 11.18% 11.58%
------- ------- ------- ------- ------- -------
SUPPLEMENTAL DATA
Net assets--end of year
(in thousands).......... $83,840 $82,752 $74,312 $85,097 $81,637 $81,151
Portfolio turnover........ 33.38% 38.82% 37.91% 55.43% 54.06% 39.77%
</TABLE>
* Unaudited.
** Total investment return based on market value, which can be significantly
greater or lesser than the net asset value, results in substantially
different returns.
+ Not annualized.
See Accompanying Notes to Financial Statements
18
<PAGE> 19
INVESTMENT OBJECTIVES AND POLICIES
The primary investment objective of the Company is to provide a high level of
current income, with capital appreciation as a secondary objective. In seeking
to achieve its objectives, the Company must invest its assets in the following
manner:
A. At least 50% of the value of the Company's total assets must be invested in:
(1) Straight debt securities or debt securities which are convertible into
or exchangeable for, or which carry warrants to purchase common stock or
other interests, which are rated at the time of purchase within the four
highest classifications assigned by Moody's Investors Service, Inc.
(Aaa, Aa, A or Baa), Standard & Poor's Corporation (AAA, AA, A or BBB),
or Duff & Phelps Inc. (AAA, AA, A or BBB). Any subclassifications of the
ratings indicated shall not be deemed to be separate classifications for
purposes of the Company's investment objectives and policies and
investment restrictions (e.g., Moody's Aa1, Aa2 and Aa3
subclassifications shall be included within its Aa classification);
(2) Securities issued or guaranteed by the United States Government, its
agencies or instrumentalities;
(3) Securities (payable in U.S. dollars) of, or guaranteed by, the
Government of Canada or a Province of Canada or any instrumentality or
political subdivision thereof;
(4) Obligations of, or guaranteed by, national or state banks or bank
holding companies whose primary assets are banks, and which obligations,
although not rated as a matter of policy by either Moody's Investors
Service, Inc., Standard & Poor's Corporation or Duff & Phelps Inc. are
considered by management to have investment quality comparable to
securities which may be purchased under item 1 above;
(5) Commercial paper; and
(6) Cash or cash equivalents, such as U.S. Treasury Bills.
B. Up to 25% of the value of the Company's total assets may consist of:
(1) Debt securities not included in item A above;
(2) Securities not included in item A above which may be convertible into or
exchangeable for, or carry warrants to purchase, common stock or other
interests;
(3) Preferred stocks; and
(4) Common stocks.
C. Up to 25% of the value of the Company's total assets may consist of straight
debt securities not included in item A or item B above.
19
<PAGE> 20
In seeking to achieve its objectives, the Company invests and has invested
primarily in debt securities rated in the four highest rating categories
assigned by nationally recognized rating agencies but, as set forth above, may
also invest in other securities such as United States and Canadian Government
securities, obligations of or guaranteed by banks, commercial paper and cash
equivalents or in debt securities rated below the four highest rating
categories, including the lowest rating category, which is reserved for
securities in default. The lower the rating category of a debt security, the
higher the degree of speculation of an investment in such security, with
increased risk of loss of principal and interest and, generally, a volatility of
market price which is greater than the average for higher rated securities. The
Company's operating policy, however, is generally not to purchase rated debt
securities which, at the time of purchase, are rated lower than B- by Standard &
Poor's Corporation or Duff & Phelps Inc., or B3 by Moody's Investors Services,
Inc. These debt securities are regarded as predominantly speculative with
respect to capacity to pay interest and repay principal in accordance with their
terms. If the rating of a debt security in the Company's portfolio is reduced
below B- or B3, as the case may be, after purchase, the Company may either sell
the debt security or continue to hold it, depending upon market characteristics.
The Company is permitted to buy debt securities which have not been rated by a
nationally recognized rating agency if, in the opinion of the Adviser, such
unrated debt securities are of comparable quality to the rated debt securities
in which the Company may invest.
In making purchases within the policies listed above, the Company will not
invest more than 25% of the value of its total assets in restricted securities,
which are securities acquired in private placement transactions. Also, the
Company will invest at least 80% of the value of its total assets in income
producing securities. No assurance can be given that the Company will achieve
its investment objectives.
By virtue of items A.(1) or A.(2), the Company is permitted to buy certain debt
securities, known as "interest only" mortgage-backed securities, in which the
issuer is only obligated to pay a fixed rate of interest based on a stated
principal amount, but does not make any principal payments. Each month the
stated principal amount is adjusted to reflect both scheduled payments and
prepayments of principal on the underlying mortgages. For example, the Company
may buy certain debt securities issued by the Federal National Mortgage
Association (FNMA), a United States government agency, which carry an additional
risk not associated with other FNMA issues. The holder purchases the security at
a price which is lower than the holder's expectations of payments of interest
from the issuer. If payments of principal on the underlying mortgages are
different than the holder's expectation of principal paydowns, then the actual
payments of interest by the issuer could be more or less than the holder's
expectation of interest payments.
By virtue of items A.(1) or A.(2), the Company is also permitted to buy certain
debt securities, known as inverse interest rate floaters. These securities do
not carry a fixed rate of interest, but instead pay interest based on a formula
which varies inversely with the then current market interest rate (the "formula
20
<PAGE> 21
interest rate"), as reflected by a referenced interest rate on a specific date
near the interest payment date (the "interest calculation date"). For example,
if the referenced interest rate decreases on an interest calculation date from
the referenced interest rate on the prior interest calculation date, then the
formula interest rate will increase on that interest calculation date versus the
prior interest calculation date. If the referenced rate of interest on the
current interest calculation date is different than such rate was on the
interest calculation date prior to purchase, then the interest payments received
by the holder may be more or less than the holder expected to receive based on
the referenced rate in effect on the date of purchase.
The foregoing percentage limitations apply at the time of purchase of
securities. The Company may exercise conversion rights, warrants or other
similar rights, and securities thereby received or remaining upon the breakup of
units or detachment of warrants may be retained to permit advantageous
disposition, in each case without regard to the foregoing limitations.
INVESTMENT RESTRICTIONS
The following investment restrictions are deemed fundamental policies and may be
changed only by the vote of a "majority" of the Company's outstanding voting
securities, which means the lesser of (1) 67% of the Company's outstanding
voting securities present in person or by proxy at a meeting of the security
holders if more than 50% of the outstanding voting securities are present in
person or by proxy or (2) more than 50% of the Company's outstanding voting
securities.
The Company will not:
(1) Issue any senior securities as defined in the Investment Company Act of
1940 (the "1940 Act"), except in connection with borrowing permitted in
item 2 below or to the extent investments in interest rate futures
contracts or fixed income options permitted in item 20 below are considered
to result in the issuance of senior securities.
(2) Borrow money, except for investment leverage.
(3) Mortgage, pledge or hypothecate its assets, except in connection with
borrowing money as mentioned in item 2 above. This provision shall not
apply to deposits, or similar arrangements, made in connection with the
entering into or holding of interest rate futures contracts or purchasing,
selling, holding or writing fixed income options.
(4) Act as underwriter, except to the extent that, in connection with the
disposition of restricted portfolio securities, the Company may be deemed
to be an underwriter under applicable laws.
(5) Purchase or sell real estate or interests in real estate, except that the
Company may invest in securities secured by real estate or interests
therein or issued by companies, including real estate investment trusts,
which deal in real estate or interests therein.
21
<PAGE> 22
(6) Purchase or sell commodities or commodity contracts, except that the
Company may enter into interest rate futures contracts or fixed income
options and make deposits or have similar arrangements in connection
therewith.
(7) Invest more than 5% of the value of its total assets to the securities of
any one issuer (other than cash items and securities of the United States
Government or its agencies or instrumentalities), or purchase more than 10%
of any class of the outstanding voting securities of any one issuer.
(8) Invest more than 25% of the value of its total assets in restricted
securities, which are securities acquired in private placement
transactions.
(9) Invest more than 25% of the value of its total assets in securities of
issuers in any one industry (gas, electric and telephone companies will be
considered to be in separate industries, as will banks, finance companies,
savings and loan associations, insurance companies and other credit
institutions) except that at times when a significant portion of the market
for corporate debt securities is composed of issues in the electric utility
industry or the telephone utility industry, as the case may be, the Company
may invest up to 35% of its assets in the issues of such industry if the
Company has cash for such investment and if, in the judgment of management,
the return available from such securities and the marketability, quality
and availability thereof justify such concentration in light of the
Company's investment objectives. The market for corporate debt securities
will be considered to be composed of a significant portion of debt
securities of either, the electric utility industry or the telephone
utility industry, as the case may be, at any time that, to the best of the
Company's knowledge, 10% or more of the principal amounts of all new issue
offerings of corporate debt securities in principal amounts of $25,000,000
or more and within the four highest grades assigned by Moody's Investors
Service, Inc., Standard & Poor's Corporation, or Duff & Phelps Inc.,
offered within the prior 60-day period or scheduled to be offered during
the subsequent 30-day period consists of such issues in such industry.
(10) Purchase or retain the securities of any issuer, if, to the Company's
knowledge, those officers or directors of the Company or of the Adviser who
individually own beneficially more than 0.5% of the outstanding securities
of such issuer, together own beneficially more than 5% of such outstanding
securities.
(11) Make loans to other persons, except for the purchase of debt securities in
private placement transactions or public offerings in accordance with the
Company's investment objectives and policies and for loans of portfolio
securities as described above.
(12) Purchase securities on margin, except that the Company may obtain such
short-term credits as may be necessary for the clearance of purchases or
sales of securities, and except that the Company may enter into and hold
22
<PAGE> 23
interest rate futures contracts and purchase, sell, hold or write fixed
income options and may make deposits or make similar arrangements in
connection therewith.
(13) Participate on a joint or joint and several basis in any securities trading
account. The "bunching" of orders for the sale or purchase of marketable
portfolio securities and other accounts under the management of the Adviser
or affiliates to save commissions or to average prices among them is not
deemed to result in a securities trading account.
(14) Purchase interests in oil, gas, or other mineral exploration programs;
however, this limitation will not prohibit the acquisition of securities of
companies engaged in the production of or transmission of oil, gas or other
materials.
(15) Invest in puts, calls or combinations thereof except fixed income options.
(16) Make short sales, except sales "against the box."
(17) Purchase the securities of other investment companies.
(18) Invest for the purposes of exercising control or management.
(19) Purchase securities issued by CNA Financial Corporation or its
subsidiaries.
(20) Enter into any interest rate futures contract or write any fixed income
option if, immediately thereafter, the sum of (a) the then aggregate
futures and option market prices of financial instruments and fixed income
options required to be delivered under open futures contract sales of the
Company and open fixed income call options written by the Company and (b)
the aggregate purchase price under open futures contract purchases of the
Company and open fixed income put options written by the Company, would
exceed, in the aggregate, an amount equal to the lesser of (i) five percent
of the Company's net asset value or (ii) one-third of the total assets of
the Company less all liabilities not related to fixed income options
written by the Company and interest rate futures contracts.
Notwithstanding item 6, the Company is permitted to buy certain debt securities,
known as Principal Exchange Rate Linked Securities (PERLS), in which the
interest or principal component is determined by calculating with reference to a
formula based on one or more commodities, including currencies, so long as the
security does not constitute a commodity or commodity contract. For example, the
Company may buy certain debt securities issued by the Federal National Mortgage
Association ("FNMA"), a United States government agency, which carry an
additional risk not associated with other FNMA issues. They pay interest based
upon a specified interest rate and a principal amount denominated in United
States dollars. At maturity, the principal is paid in United States dollars, but
the amount of principal that will be paid is calculated according to a
predetermined formula involving the value of one or more foreign currencies on a
particular date near the maturity date (the "principal payment formula"). This
kind of security is
23
<PAGE> 24
subject to the risk that the currency that is part of the principal payment
formula may be valued at an amount which could cause the principal paid at
maturity to be greater or less than the amount of principal upon which the
interest rate is calculated.
By virtue of item 8, it would be possible for the Company to invest up to 25% of
its assets in restricted securities, which are securities acquired in private
placement transactions. Such securities generally may not be resold without
registration under the Securities Act of 1933 except in transactions exempt from
the registration requirements of such Act. This limitation on resale can have an
adverse effect on the price obtainable for such securities. Also, if in order to
permit resale, the securities are registered under the Securities Act of 1933 at
the Company's expense, the Company's expenses would be increased.
By virtue of item 9, it would be possible for the Company to invest up to 70% of
its assets in securities of the electric utility and telephone utility
industries (up to 35% in each of such industries) if the Company had cash for
such investment and if, in the Company's judgment, the return available from
such industry, and the marketability, quality and availability of the debt
securities of such industry, justified such concentration in light of the
Company's investment objectives. However, if sufficient cash was not available
or if the securities available did not meet the above-mentioned tests of return,
marketability, quality and availability, such concentration would not occur.
Also, the Company would not be required to sell portfolio securities in order to
make cash available for such concentration, although the Company would not be
prohibited from doing so. Furthermore, the Company's ability to so concentrate
its assets would always be contingent upon compliance with other applicable
investment restrictions. Concentration of the Company's assets in either the
electric utility or the telephone utility industries could result in increased
risks. Risks of investments in either industry may arise from difficulties in
obtaining an adequate return on capital because of financing costs and
construction programs and the fact that regulatory authorities might not approve
rate increases sufficient to offset increases in operating expenses. In
addition, risks of investments in the electric utility industry may arise from
environmental conditions, fuel shortages and government-mandated energy
conservation programs.
By virtue of item 20, the Company has a limited ability to enter into interest
rate futures contracts and to write fixed income options. Interest rate futures
contracts and fixed income options create an obligation by the Company to
purchase or to sell a specific financial instrument at a specified future time
at a specified price. The principal risk of interest rate futures contracts and
fixed income options is that unexpected changes in the general level of interest
rates could adversely affect the value of the investment. The Company has not
written fixed income options for several years and has never entered into
interest rate futures contracts.
24
<PAGE> 25
AUTOMATIC DIVIDEND REINVESTMENT PLAN
All persons who become registered holders of Common Stock (other than brokers
and nominees of banks or other financial institutions) become participants
("Participants") in the Company's Dividend Reinvestment Plan (the "Plan") 15
days thereafter unless they file a written election to terminate participation
with the Company's Transfer Agent.
The Plan is administered by William O'Neill & Co., Inc., the Company's
Purchasing Agent (the "Purchasing Agent"). Under the Plan, dividends and other
distributions are automatically invested in additional full and fractional
shares of Common Stock. Whenever the Company declares a dividend or other
distribution payable in cash or shares of Common Stock, the Purchasing Agent, on
behalf of Participants, will elect to take the dividend in shares at net asset
value whenever the net asset value as of the close of business on the record
date of such dividend is lower than the market price plus brokerage commission
as of the close of business on such day. If the net asset value of the share is
higher than the market price plus applicable commissions, the Purchasing Agent
consistent with seeking the best price and execution, will buy shares of Common
Stock in the over-the-counter market or on a national securities exchange, as
the case may be, for Participants' accounts. There can, of course, be no
assurance that shares of Common Stock will be available in sufficient supply in
the market at a price lower than net asset value to satisfy any requirements of
the Plan. If shares are not available in sufficient supply at such price, the
Purchasing Agent will invest the balance of its cash on hand in shares of Common
Stock whose cost plus brokerage commission will equal or exceed the net asset
value per share on the record date. The number of shares of Common Stock
received by each Participant will be based on the average cost of shares
purchased by the Purchasing Agent. Purchases for the Plan on the open market
usually constitute a significant percentage of all shares of Common Stock traded
on the New York Stock Exchange on the dates that such purchases are made.
Participants may make voluntary payments into the Plan of not less than $25.00.
Such voluntary payments will be accumulated until the end of the month in which
they are received and then invested by BNY Brokerage Inc. in shares of Common
Stock purchased in the over-the-counter market or on a national securities
exchange. The Participant is responsible for paying any brokerage commissions
charged by the BNY Brokerage Inc. for the purchase of such shares. Voluntary
payments may not be used to purchase shares from the Company.
Brokers and nominees of banks or other financial institutions may elect to be
included in the Plan. Participants may terminate their participation in the Plan
at any time and elect to receive declared dividends and other distributions in
cash by notifying the Transfer Agent in writing. There is no penalty for
termination of participation in the Plan. Participants withdrawing from the Plan
may rejoin at any time.
Under certain circumstances, Participants may receive benefits through the Plan
not available to shareholders who do not participate in the Plan. In many
25
<PAGE> 26
cases, the shares of closed-end investment companies trade at a discount from
their net asset value, although in some cases shares of such companies trade at
a premium over net asset value. If dividends and other distributions are
received in shares at net asset value when the market price is higher than net
asset value, the Participant will receive shares having a market value in excess
of the cash value of the dividends or distribution.
All costs of administering the Plan are borne by the Company, and thus,
indirectly by its shareholders, including those not participating in the Plan.
Brokers' commissions are not treated as costs of administering the Plan.
The Company reserves the right to amend or terminate the Plan as applied to any
dividend or distribution paid subsequent to notice thereof sent to Participants
at least 30 days before the record date for such distribution.
26
<PAGE> 27
DIRECTORS
Franklin A. Cole
Sidney Davidson
Richard W. Dubberke
David G. Taylor
Donald C. Rycroft
A. Dean Swift
OFFICERS
Donald C. Rycroft, Chairman and President
Richard W. Dubberke, Vice President and Treasurer
Rachelle B. Hendele, Vice President
Marilou R. McGirr, Vice President
Lynne Gugenheim, Secretary
Mitchell T. Butowski, Assistant Secretary
Timothy S. Scott, Assistant Secretary
PRINCIPAL OFFICE
CNA Income Shares, Inc.
CNA Plaza
Chicago, Illinois 60685
(312) 822-4181
SHAREHOLDER RELATIONS DEPARTMENT--11E
CNA Income Shares, Inc.
The Bank of New York
P.O. Box 11258
Church Street Station
New York, New York 10286
Toll Free (800) 432-8224
ADVISER
Continental Assurance Company
(a subsidiary of CNA Financial Corporation)
CUSTODIAN
The Chase Manhattan Bank, N.A.
One Chase Manhattan Plaza
New York, New York 10081
TRANSFER AGENT, REGISTRAR & TRUSTEE
(Certificates for Transfer and Address Changes)
The Bank of New York
Rec. & Del. Dept. 11W
P.O. Box 11002
Church Street Station
New York, New York 10286
AUDITORS
Deloitte & Touche LLP
Two Hilton Court Internet e-mail =
Parsippany, New Jersey 07054-0319 [email protected]
