<PAGE> 1
CNA Income Shares, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Annual Report 1995
- --------------------------------------------------------------------------------
<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 Independent Auditors' Report
20 Investment Objectives and Policies
26 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 investment income of $1.07 per share for the year
ended December 31, 1995 and declared dividends of $1.04. Quarterly dividends
have been paid on a January, April, July and October schedule with the next
dividend anticipated to be paid on April 12, 1996.
Bond prices continued to rally and interest rates declined during the second
half of 1995 following a strong market performance during the first half of the
year. In terms of yield, the 30-year Treasury bond dropped from 6.62% at
mid-year to just under 6.00% at year end. In the shorter end of the market, the
Treasury two-year note moved from 5.79% to 5.15% and the five-year Treasury note
dropped from 5.97% to 5.37%. For the full year, your Company's total return,
consisting of portfolio appreciation and dividends paid, was 20.16%. This
compares with an average gain of 15.62% for taxable bond funds as reported by
the Wall Street Journal in their January quarterly review of mutual funds.
Although the fall in interest rates and consequent rise in bond prices helps
your net asset value and supports the stock price, the job of reinvesting cash
flow at attractive yield levels becomes more difficult. Management's goal
continues to be to pay a dividend which is competitive with other closed-end
bond funds.
1996 will be a challenging year for CNA Income Shares. We anticipate that
several of our high coupon bonds will be called by the issuing companies. In the
current interest rate environment it will be difficult, if not impossible, to be
able to reinvest the proceeds at comparable returns for like credit quality.
Also, three Principal Exchange Rate Linked Securities (PERLS) will mature in
March, October and December respectively. Unless certain currencies recover
significantly, the securities will pay less than par at maturity and income
generation will be negatively affected. The PERLS position represents
approximately 7% of the cost of the invested portfolio.
The portfolio is priced weekly using broker market quotes. Management believes
that by using this method of pricing, your company avoids the problems
associated with sudden asset reevaluations that have hurt other financial
institutions.
Sincerely,
[SIG.]
Donald C. Rycroft
Chairman of the Board and President
February 27, 1996
3
<PAGE> 4
CNA INCOME SHARES, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS
In custody of The Chase Manhattan Bank, N.A.:
Investments (See Schedule of Investments) (Notes A and C):
Debt securities, common stock and warrants at market
value (cost $110,058,898)............................. $109,889,236
Short-term notes at amortized cost (cost $1,258,854).... 1,259,575
Cash...................................................... 64,190
Receivables:
Interest.................................................. 2,955,243
Dividend.................................................. 22,250
Prepaid expenses............................................ 25,551
------------
TOTAL ASSETS........................................ 114,216,045
LIABILITIES
Dividend payable............................... $ 2,121,845
Payable for securities purchased
not received................................. 1,000,000
Accounts payable and
accrued expenses............................. 103,406
Interest payable............................... 188,870
Five Year Convertible Extendible
Notes (Note B)............................... 28,050,000 31,464,121
----------- ------------
NET ASSETS, equivalent to $9.75* per share on
8,487,381 shares outstanding........................ $ 82,751,924
============
*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: 8,487,381 shares................ $ 8,487,381
Paid-in surplus........................................... 97,505,731
------------
105,993,112
Earned surplus (deficit)
Accumulated net realized (loss) on investments.......... (23,669,895)
Undistributed net investment income..................... 598,369
Net unrealized depreciation............................... (169,662)
------------
NET ASSETS APPLICABLE TO CAPITAL STOCK OUTSTANDING.... $ 82,751,924
============
</TABLE>
See Accompanying Notes to Financial Statements
4
<PAGE> 5
CNA INCOME SHARES, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
INCOME:
Interest income........................................... $ 11,818,722
Consent solicitation fee.................................. 100,000
Dividend income........................................... 100,875
Discount earned on short-term notes....................... 50,889
-----------
TOTAL INVESTMENT INCOME...................... 12,070,486
EXPENSES:
Investment advisory fee (Note F)........... $ 397,443
Registrar, proxy solicitation and dividend
disbursing services...................... 94,529
Insurance.................................. 59,707
Accounting services and expenses........... 45,000
Directors' fees and expenses (Note F)...... 42,768
Auditing and consulting fees............... 30,200
Shareholder reports and meeting............ 26,310
Registration and filing fees............... 22,966
Transfer agent fee......................... 16,928
Custodian fees............................. 8,418
State and local taxes...................... 7,458
Legal fees and expenses.................... 2,603
Other...................................... 1,239
----------
Total Operating Expenses...... 755,569
Interest expense (Note B).................. 2,266,440 3,022,009
---------- -----------
NET INVESTMENT INCOME........................ 9,048,477
-----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
(excluding short-term notes) (NOTES A and D):
NET REALIZED (LOSS) FROM SECURITY TRANSACTIONS............ (2,550,586)
-----------
UNREALIZED DEPRECIATION OF INVESTMENTS:
Beginning of year.......................... (8,927,575)
End of year................................ (169,662)
----------
NET DECREASE IN UNREALIZED DEPRECIATION................... 8,757,913
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS........... 6,207,327
-----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................. $ 15,255,804
===========
</TABLE>
See Accompanying Notes to Financial Statements
5
<PAGE> 6
CNA INCOME SHARES, INC.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- ------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Net investment income.................... $ 9,048,477 $ 9,007,287
Net realized (loss) from security
transactions........................... (2,550,586) (1,669,419)
Net change in unrealized appreciation
(depreciation)......................... 8,757,913 (11,165,102)
----------- -----------
Net increase (decrease) in net assets
resulting from operations.............. 15,255,804 (3,827,234)
Dividends to shareholders from net
investment income ($1.07 and $1.08 per
share, respectively)................... (8,745,856) (8,859,279)
FROM CAPITAL SHARE
TRANSACTIONS (Notes B and E):
Increase in net assets due to shares
issued to shareholders on reinvestment
of net investment income............... 1,929,875 1,902,039
----------- -----------
Net increase (decrease) in net
assets............................... 8,439,823 (10,784,474)
NET ASSETS:
BEGINNING OF YEAR........................ 74,312,101 85,096,575
----------- -----------
END OF YEAR (INCLUDING UNDISTRIBUTED NET
INVESTMENT INCOME OF $598,369 AND
$295,747, RESPECTIVELY)................ $82,751,924 $ 74,312,101
=========== ===========
</TABLE>
See Accompanying Notes to Financial Statements
6
<PAGE> 7
CNA INCOME SHARES, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
INCREASE (DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES:
Proceeds from sales of securities........................ $ 41,978,873
Purchases of securities.................................. (43,335,029)
Net sales of short-term investments...................... (609,086)
Interest received........................................ 11,787,590
Dividends received....................................... 78,625
Other received........................................... 113,920
Interest paid in cash.................................... (2,266,440)
Expenses paid............................................ (761,786)
------------
NET CASH PROVIDED BY OPERATING ACTIVITIES....... 6,986,667
------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends reinvested..................................... 1,929,875
Dividends paid in cash................................... (8,859,173)
------------
NET CASH USED FOR FINANCING ACTIVITIES.......... (6,929,298)
------------
Net increase in cash....................................... 57,369
Cash at beginning of year.................................. 6,821
------------
Cash at end of year........................................ $ 64,190
============
RECONCILIATION OF INCREASE IN NET ASSETS FROM OPERATIONS TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net increase in net assets resulting from operations..... 15,255,804
Net increase in investments.............................. (9,464,941)
Decrease in interest receivable.......................... 224,270
Increase in dividend receivable.......................... (22,250)
Decrease in prepaid expenses and other................... 9,774
Increase in payable for securities purchased............. 1,000,000
Decrease in accounts payable and accrued expenses........ (15,990)
------------
NET CASH PROVIDED BY OPERATING ACTIVITIES....... $ 6,986,667
------------
</TABLE>
7
<PAGE> 8
CNA INCOME SHARES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
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 $28,662,051 based on the
quoted market prices for the same or similar issues.
C. Securities Loaned:
During the year ended December 31, 1995 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.................... $41,184,050 $39,316,681
Stock.............................. 1,000,000 1,040,000
Common Stock....................... 1,368,500 598,230
</TABLE>
E. Capital Stock:
At December 31, 1995, 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, 8,487,381 shares are issued and
outstanding, after giving effect to an increase of 209,000 shares issued in
connection with the automatic dividend investment plan (the "Plan"). 451,277
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
1995.
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 1995 unaudited quarterly results of
operations:
<TABLE>
<CAPTION>
NET REALIZED AND
UNREALIZED GAINS
NET INVESTMENT (LOSSES) ON
INCOME INVESTMENTS
THREE MONTHS ------------------------ -------------------------
ENDED: AMOUNT PER SHARE AMOUNT PER SHARE
---------------
INVESTMENT
INCOME
---------- ------------------------ -------------------------
<S> <C> <C> <C> <C> <C>
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
Sept. 30, 1995 2,966,343 2,208,710 .26 2,005,125 .24
Dec. 31, 1995 3,001,240 2,272,266 .27 1,153,009 .13
</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
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT COST VALUE(1)
- ---------- ------------ ------------
<C> <S> <C> <C>
DEBT SECURITIES--131.7%
AEROSPACE--1.2%
$ 857,000 K & F Industries, Inc.
13.75% Deb, Due 8/1/01.......... $ 886,950 $ 901,993
---------- ----------
AUTOMOTIVE--8.0%
2,000,000 Auburn Hills Trust
12.00% Deb, Due 5/1/20.......... 2,000,000 3,029,710
2,000,000 Ford Capital B.V.
10.125% Gtd Nt, Due 11/15/00.... 1,993,600 2,344,600
1,500,000 Venture Holdings Trust
9.75% Sr Sub Nts, Due 4/1/04.... 1,306,400 1,256,250
---------- ----------
5,300,000 6,630,560
---------- ----------
BANKS--5.7%
1,500,000 Citicorp
10.50% Sub Nt, Due 2/1/16....... 1,466,375 1,548,585
1,000,000 Midland American Capital
Corporation 12.75%, Gtd Nt,
Due 11/15/03.................... 1,008,060 1,175,870
2,000,000 NCNB Corporation
10.50% Deb, Due 3/15/99......... 2,263,580 2,019,000
---------- ----------
4,738,015 4,743,455
---------- ----------
CABLE--5.9%
1,500,000 Adelphia Communications
Corporation
12.50% Sr Deb, Due 5/15/02...... 1,461,250 1,466,250
2,750,000 Tele-Communications, Inc.
10.125% Deb, Due 4/15/22........ 2,798,360 3,395,315
---------- ----------
4,259,610 4,861,565
---------- ----------
COMMUNICATIONS--1.5%
1,250,000 Turner Broadcasting Sys., Inc.
8.375% Sr Nts, Due 7/1/13....... 1,028,125 1,278,119
---------- ----------
COMMUNICATION EQUIPMENT--1.2%
1,000,000 Dictaphone Corporation
11.75% Sr Sub Nts, Due 8/1/05... 1,001,563 977,500
---------- ----------
CONSUMER ELECTRONICS--1.3%
2,000,000 International Semi-Tech Corp.
11.5% Sr Disc Nts, Due
8/15/03......................... 1,084,132 1,070,000
---------- ----------
</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)
COMPUTER TECHNOLOGY--1.7%
$1,500,000 Unisys Corporation
13.50% Nts, Due 7/1/97.......... $ 1,582,714 $ 1,423,125
------------ ------------
CONSUMER PRODUCTS--2.5%
2,000,000 R. J. R. Nabisco, Inc.
9.25% Nts, Due 8/15/13.......... 1,968,830 2,047,390
------------ ------------
DEFENSE--1.2%
1,000,000 Diagnostic/Retrieval Systems
9.00% Sr Sub Deb, Due 10/1/03... 1,000,000 1,025,000
------------ ------------
ELECTRONICS--1.1%
1,000,000 Magnetek, Inc.
8.00% Deb, Due 9/1/5/01......... 1,006,250 895,000
------------ ------------
ENERGY--6.8%
1,500,000 Ashland Oil, Inc.
6.75% Cv Deb, Due 7/1/14........ 1,442,500 1,492,500
3,000,000 Occidental Petroleum Corporation
11.75% Sr Deb, Due 3/15/11...... 3,176,250 3,190,980
1,000,000 PVD America, Inc.
7.875% Sr Nts, Due 8/1/03....... 935,710 912,000
------------ ------------
5,554,460 5,595,480
------------ ------------
ENTERTAINMENT--2.2%
1,500,000 Time Warner Entertainment Company
L.P.
10.15% Nts, Due 5/1/12.......... 1,607,530 1,848,608
------------ ------------
FINANCIAL--1.6%
1,250,000 General Electric Capital Corp.
10.90% Multi-currency PERLS, Due
10/15/96........................ 1,093,750 665,625
3,000,000 General Electric Capital Corp.
10.80% Multi-currency PERLS, Due
12/5/96......................... 2,712,500 273,750
3,000,000 General Electric Capital Corp.
10.15% Multi-currency PERLS, Due
5/21/97......................... 1,500,000 382,500
------------ ------------
5,306,250 1,321,875
------------ ------------
FOREST PRODUCTS--7.2%
2,000,000 Boise Cascade Corporation
9.85% Nts, Due 6/15/02.......... 2,183,820 2,346,890
</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)
$1,000,000 Domtar Inc.
11.75% Nts, Due 3/15/99......... $ 989,793 $ 1,111,250
2,200,000 Georgia Pacific Corporation
9.50% Deb, Due 5/15/22.......... 2,161,500 2,525,270
------------ ------------
5,335,113 5,983,410
------------ ------------
GOVERNMENT DEBT--16.9%
Canadian--3.5%
2,300,000 Province of Quebec, Canada
13.25% Deb, Due 9/15/14....... 2,753,160 2,933,834
------------ ------------
United States--3.8%
255,000 U.S. Treasury Bonds
11.625%, Due 11/15/04......... 258,825 360,147
1,850,000 U.S. Treasury Bonds
15.75%, Due 11/15/01.......... 3,019,455 2,794,647
------------ ------------
3,278,280 3,154,794
------------ ------------
Government Agencies--3.0%
3,000,000 Student Loan Marketing
Association 12.05% Multi-
currency PERLS, Due 3/19/96... 2,857,500 2,508,750
------------ ------------
International Agencies--4.9%
3,000,000 International Bank for
Reconstruction & Development
12.375% Bd, Due 10/15/02...... 3,552,750 4,079,910
------------ ------------
Government Agencies--
Other--1.7%
1,179,000 Kingdom of Sweden
12.75% Deb, Due 10/15/97...... 1,505,300 1,321,152
------------ ------------
HEALTHCARE--2.3%
1,000,000 Phoenix Shannon PLC
9.50% Cv Sr Sub Nts,
Due 11/1/00..................... 1,000,000 1,000,000
1,000,000 Theratx, Inc.
8.00% Sub Nts, Due 2/1/02....... 955,313 920,000
------------ ------------
1,955,313 1,920,000
------------ ------------
</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--3.4%
$1,500,000 Engle Homes, Inc.
11.75% Sr Nts, Due 12/15/00..... $ 1,500,000 $ 1,432,500
1,500,000 J. M. Peters Co., Inc.
12.75% Sr Nts, Due 5/1/02....... 1,500,000 1,380,000
------------ ------------
3,000,000 2,812,500
------------ ------------
INSTRUMENTATION--1.2%
750,000 Thermo Optek Inc.
5.00%, Cv Co. Gtd Nts, Due
10/15/00........................ 750,000 772,500
250,000 Thermoquest Corporation
5.00%, Cv Co. Gtd Nts, Due
8/15/00......................... 250,000 257,500
------------ ------------
1,000,000 1,030,000
------------ ------------
INSURANCE--3.9%
1,000,000 MTN-Kemper Corp.
9.00% Med Trm Nts, Due 3/2/98... 1,020,690 1,059,600
2,000,000 Phoenix Re Corp.
9.75% Sr Nts, Due 8/15/03....... 2,041,563 2,122,500
------------ ------------
3,062,253 3,182,100
------------ ------------
LEISURE--3.3%
1,000,000 Argosy Gaming Company
12.00% Cv Sub Nts,
Due 6/1/01...................... 1,009,167 900,000
500,000 Bally's Health & Tennis
Corporation
13.00% Sr Sub Nts,
Due 1/15/03..................... 458,750 420,625
1,000,000 GNF, Corp.
10.625% 1st Mtg Nts,
Due 4/1/03...................... 827,500 926,250
500,000 Motels of America, Inc.--Units
12.00% Sr Sub Nts,
Due 4/15/04..................... 493,745 498,750
------------ ------------
2,789,162 2,745,625
------------ ------------
METALS--2.9%
2,250,000 Inco Ltd.
7.75% Deb, Due 3/15/16.......... 2,294,062 2,387,810
------------ ------------
</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--2.4%
$1,000,000 J. B. Pointdexter & Co., Inc.
12.50% Sr Nts, Due 5/15/04...... $ 963,750 $ 911,875
1,000,000 Thermo-Electron Corp.
4.25% Cv Sub, Due 1/3/02........ 1,000,000 1,082,500
------------ ------------
1,963,750 1,994,375
------------ ------------
PAPER--3.1%
1,750,000 Gruppo Industrial Durango S.A.
12.00% Sr Nts, Due 7/15/01...... 1,680,625 1,540,000
1,000,000 Indah Kiat International Finance
Co.
12.50% Co. Gtd,
Due 6/15/06..................... 1,000,000 1,001,250
------------ ------------
2,680,625 2,541,250
------------ ------------
REITS--1.2%
1,000,000 First Union Real Estate
Eqt. & Mtg
8.875% Sr Nts, Due 10/1/03...... 991,870 960,000
------------ ------------
RESTAURANTS--2.5%
2,885,249 S & A Properties Corp.
10.75%, Due 4/1/00.............. 3,212,205 2,106,196
------------ ------------
RETAIL - FOOD--3.8%
1,500,000 Penn Traffic Co.
9.625% Sr Sub Nts,
Due 4/15/05..................... 1,239,375 1,162,500
2,000,000 The Pantry, Inc.
12.00% Sr Nts, Due 11/15/00..... 2,000,000 1,960,000
------------ ------------
3,239,375 3,122,500
------------ ------------
STEEL--3.5%
1,000,000 ACME Metals, Inc.
12.50% Sr Nts, Due 8/1/02....... 1,012,500 1,010,000
1,000,000 Algoma Steel Inc.
12.375% 1st Mtg, Due 7/15/05.... 952,500 906,250
1,000,000 IVACO, Inc.
11.500% Sr Nts, Due 9/15/05..... 985,600 981,250
------------ ------------
2,950,600 2,897,500
------------ ------------
STUDENT LOAN--1.1%
900,000 University Support Services, Inc.
Sub Educat. Ln Nts Ser 1991 B,
Var Rate Min 12.50%,
Due 5/1/06...................... 896,625 900,000
------------ ------------
</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)
TRANSPORTATION--16.2%
Airlines--13.0%
$2,250,000 American Airlines, Inc.
10.180% Col Tr,
Due 1/2/13.................... $ 2,208,730 $ 2,716,200
2,243,000 Delta Air Lines, Inc.
10.79%, Equip Tr Cert
Ser F, Due 3/26/14............ 2,288,385 2,837,395
500,000 Delta Air Lines, Inc.
10.50%, Pass Thru Cert
Due 4/30/16................... 513,750 622,500
1,000,000 Delta Air Lines, Inc.
10.06%, Due 1/2/16............ 1,105,300 1,185,000
1,000,000 Reno Air, Inc.
9.00% Cv Sr Nts, Due
9/30/02....................... 1,000,000 950,000
1,000,000 United Airlines, Inc.
10.85%, 1991 Equip Tr Cert
Ser A, Due 7/5/14............. 1,000,000 1,228,000
1,000,000 United Airlines, Inc.
10.85%, 1991 Equip Tr Cert
Ser B, Due 2/19/15............ 1,000,000 1,227,300
------------ ------------
9,116,165 10,766,395
------------ ------------
Shipping--1.7%
1,500,000 Moran Transportation Company
11.75% 1st Pfd Ship Mtg Nts,
Due 7/15/04................... 1,445,000 1,417,500
------------ ------------
Trucking--1.5%
1,250,000 Petro PSC Properties LP
12.50% Sr Nts, Due 6/1/02..... 1,241,518 1,226,563
------------ ------------
UTILITIES--14.9%
Electric--8.2%
1,440,000 Connecticut Yankee Atomic
Power Company, Gen Ref Mtg
Ser A 12.00%, Due 6/1/00...... 1,476,000 1,516,882
1,000,000 Long Island Lighting Co.
9.75% Gen Ref Mtg,
Due 5/1/21.................... 964,020 1,028,170
2,000,000 Louisiana Power & Light Company
10.67% Sec Lease Oblig Bd,
Due 1/2/17.................... 2,099,000 2,108,430
</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.
Oblig Bds Ser B 13.25%,
Due 7/23/06................... $ 2,346,500 $ 2,140,000
------------ ------------
6,885,520 6,793,482
------------ ------------
Gas--4.3%
2,500,000 Coastal Corp.
11.75% Sr Deb, Due 6/15/06.... 2,628,750 2,659,775
750,000 Southwest Gas Corporation
9.75% Nts, Due 6/15/02........ 764,063 877,950
------------ ------------
3,392,813 3,537,725
------------ ------------
Telephone--2.4%
1,500,000 GTE Corporation
10.75% Deb, Due 9/15/17....... 1,535,745 1,992,945
------------ ------------
TOTAL DEBT SECURITIES........... 109,259,133 108,935,986
------------ ------------
COMMON STOCK--1.1%
<CAPTION>
NUMBER OF
SHARES
- ----------
<C> <S> <C> <C>
50,000 Long Island Lighting Co. ......... 799,750 818,750
1,000 Motels of America, Inc. .......... 15 85,000
------------ ------------
799,765 903,750
------------ ------------
WARRANTS--0.1%
<CAPTION>
NUMBER OF
WARRANTS
- ----------
<C> <S> <C> <C>
1,500 Petro PSC Properties L.P. ........ -- 49,500
11,850 Peters, J. M. .................... -- --
------------ ------------
TOTAL......................... 110,058,898 109,889,236
------------ ------------
SHORT-TERM NOTES--1.4%
<CAPTION>
PRINCIPAL
AMOUNT
- ----------
<C> <S> <C> <C>
$ 100,000 First Chicago Capital
6.60%, Due 1/2/96............... 100,000 100,034
1,160,000 Philip Morris Capital Corp.
5.93%, Due 1/3/96............... 1,158,854 1,159,541
------------ ------------
1,258,854 1,259,575
------------ ------------
TOTAL INVESTMENTS--
134.2%(2)................... $111,317,752 $111,148,811
=========== ===========
</TABLE>
(1) For determination of Market Value see Note A to Financial Statements.
(2) The Total Market Value represents 134.2% of the Net Assets at
December 31, 1995.
See Accompanying Notes to Financial Statements
17
<PAGE> 18
CNA INCOME SHARES, INC.
FINANCIAL HIGHLIGHTS
Increase (Decrease) in Net Asset Value:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, beginning
of year........................ $ 8.98 $10.53 $10.32 $10.560 $ 9.16
Investment income--net........... $ 1.07 $ 1.10 $ 1.16 $ 1.200 $ 1.15
Realized and unrealized (loss)
gain on investments--net....... $ 0.74 ($ 1.57) $ 0.21 ($ 0.250) $ 1.41
Total from investment
operations..................... $ 1.81 ($ 0.47) $ 1.37 $ 0.95 $ 2.56
Total distributions to
shareholders................... ($ 1.04) ($ 1.08) ($ 1.16) ($ 1.195) ($ 1.16)
Net asset value, end of year..... $ 9.75 $ 8.98 $10.53 $10.320 $10.56
Market price per share, end of
year........................... $10.25 $ 9.50 $12.63 $11.625 $11.13
TOTAL INVESTMENT RETURN*
Based on market price per
share.......................... 18.84% (16.20%) 18.58% 15.24% 40.40%
Based on net asset value per
share.......................... 15.70% (4.46%) 13.28% 9.04% 27.95%
RATIO TO AVERAGE NET ASSETS
Expenses......................... 0.95% 0.99% 0.88% 0.84% 1.05%
Investment income--net........... 11.40% 11.33% 10.82% 11.18% 11.58%
SUPPLEMENTAL DATA
Net assets--end of year (in
thousands)..................... $82,752 $74,312 $85,097 $81,637 $81,151
Portfolio turnover............... 38.82% 37.91% 55.43% 54.06% 39.77%
</TABLE>
*Total investment return based on market value, which can be significantly
greater or lesser than the net asset value, results in substantially different
returns.
See Accompanying Notes to Financial Statements
18
<PAGE> 19
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
of CNA Income Shares, Inc.:
We have audited the accompanying statement of assets and liabilities of CNA
Income Shares, Inc., including the schedule of investments, as of December 31,
1995, and the related statements of operations and cash flows for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1995, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of CNA Income Shares,
Inc. as of December 31, 1995, the results of its operations and its cash flows
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the
five-years in the period then ended in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Parsippany, New Jersey
February 9, 1996
19
<PAGE> 20
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.
In seeking to achieve its objectives, the Company invests and has invested
primarily in debt securities rated in the four highest rating categories
assigned
20
<PAGE> 21
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
interest rate"), as reflected by a referenced interest rate on a specific date
near the interest payment date (the "interest calculation date"). For example,
21
<PAGE> 22
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.
(6) Purchase or sell commodities or commodity contracts, except that the
Company may enter into interest rate futures contracts or fixed income
22
<PAGE> 23
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
interest rate futures contracts and purchase, sell, hold or write fixed
income options and may make deposits or make similar arrangements in
connection therewith.
23
<PAGE> 24
(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 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
24
<PAGE> 25
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.
25
<PAGE> 26
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
26
<PAGE> 27
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.
27
<PAGE> 28
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
Parsippany, New Jersey 07054-0319
