<PAGE> 1
CNA INCOME SHARES, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REPORT FOR THE PERIOD
ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
Internet e-mail = [email protected]
Web site at www.cna.com/cna/html/income.html
<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
20 Financial Highlights
21 Investment Objectives and Policies
27 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 $0.49 per share during the six months
ending June 30, 1997 and declared dividends totaling $0.48. Dividends are paid
on a quarterly schedule, with the next dividend anticipated to be paid on
October 14, 1997.
Bond prices ended the six months with a slight negative bias, with yields on
10-year Treasuries increasing from 6.42% at year end 1996 to 6.49% at June 30,
1997. That means that the return on bonds came entirely from coupon income. The
Salomon Brothers Broad Index, which includes Treasuries, Corporate Bonds and
Mortgage-backed Securities, had a total return of interest and principal change
of 3.07%. The Salomon Brothers High-Yield Market Index was up 5.87%. In
comparison, CNA Income Shares had a positive total return of 5.47% while having
less than 40% of the portfolio invested in high-yield bonds.
On June 1, 1997, the $28,050,000 CNA Income Shares, 8.08% Five Year Convertible
Extendible Note matured. Because management believes that a fixed rate debt
financing provides positive leverage for the shareholder, a $30,000,000 Five
Year Term Loan was arranged with a major Chicago bank. The rate was fixed by
arranging an interest rate swap. The all-in effective fixed rate for the term
loan is 7.54%, including the costs of the financing. By doing a direct bank
financing rather than a public market issue, we were able to negotiate more
flexible terms, and the overall cost of this financing was considerably less
than our previous public financing.
Management understands that your main concern is to receive a high and steady
dividend payment. That is also the primary objective of CNA Income Shares. The
significant drop in interest rates over the past decade, however, has made it
difficult to maintain the dividend at previous levels and we have reduced the
dividend several times over the past five years. 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.
Sincerely,
[SIG.]
Lew H. Nathan
Chairman of the Board and President
August 29, 1997
3
<PAGE> 4
CNA INCOME SHARES, INC.
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
<TABLE>
<S> <C>
ASSETS
In custody of The Chase Manhattan Bank:
Investments (See Schedule of Investments) (Notes A and C):
Debt securities, preferred stock, common stock and
warrants at market value (cost $114,221,416).......... $118,551,192
Short-term notes at amortized cost (cost $3,191,834).... 3,192,834
Cash...................................................... 82,152
Receivables:
Securites sold--not delivered............................. 264,437
Interest.................................................. 3,072,347
Prepaid expenses............................................ 91,091
------------
TOTAL ASSETS........................................ 125,254,053
LIABILITIES
Dividend payable............................... $ 2,102,166
Payable for securities
purchased--not received...................... 2,493,470
Accounts payable and
accrued expenses............................. 146,950
Interest payable............................... 188,250
Bank Credit Facility Notes (Note B)............ 30,000,000 34,930,836
----------- ------------
NET ASSETS, equivalent to $10.31 per share on
8,759,022 shares outstanding........................ $ 90,323,217
============
NET ASSETS REPRESENTED BY:
Capital stock $1 par value
Authorized: 15,000,000 shares
Issued and outstanding: 8,759,022 shares................ $ 8,759,022
Paid-in surplus........................................... 99,922,322
------------
108,681,344
Earned surplus (deficit)
Accumulated net realized (loss) on investments.......... (23,560,203)
Undistributed net investment income..................... 872,300
Net unrealized appreciation............................... 4,329,776
------------
NET ASSETS APPLICABLE TO CAPITAL STOCK OUTSTANDING.... $ 90,323,217
============
</TABLE>
See Accompanying Notes to Financial Statements
4
<PAGE> 5
CNA INCOME SHARES, INC.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
INCOME:
Interest income............................................ $5,651,690
Dividend income............................................ 149,807
Discount earned............................................ 38,488
----------
TOTAL INVESTMENT INCOME....................... 5,839,985
EXPENSES:
Investment advisory fee (Note F)............. $ 223,933
Accounting service and expenses.............. 24,583
Directors' fees and expenses (Note F)........ 24,641
Mailing expenses............................. 21,935
Transfer agent & registrar................... 18,758
Shareholder reports.......................... 19,026
Insurance.................................... 16,710
Auditing & Consulting fees................... 10,750
Registration and filing fees................. 9,134
State and local taxes........................ 8,010
Legal fees & expenses........................ 4,470
Bank Credit Facility expenses................ 1,542
Dividend disbursing services................. (3,516)
Custodian fees............................... (8,885)
Other........................................ 1,716
----------
Total investment income......... 372,807
Interest expense (Note B).................... 1,132,600 1,505,407
---------- ----------
NET INVESTMENT INCOME......................... 4,334,578
----------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS
(excluding short-term notes) (NOTES A and D):
NET REALIZED GAIN FROM SECURITY TRANSACTIONS............... 332,316
----------
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS:
Beginning of year............................ 4,078,314
End of year.................................. 4,329,776
----------
NET INCREASE IN UNREALIZED APPRECIATION.................... 251,462
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS............ 583,778
----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS.................................. $4,918,356
==========
</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, 1997 (UNAUDITED)
AND THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
6/30/97 12/31/96
----------- -----------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Net investment income..................... $ 4,334,578 $ 8,563,965
Net realized gain (loss) from security
transactions............................ 332,316 (222,629)
Net change in unrealized appreciation..... 251,462 4,247,976
----------- -----------
Net increase in net assets resulting from
operations.............................. 4,918,356 12,589,312
Dividends to shareholders from net
investment income ($0.48 and $0.98 per
share, respectively).................... (4,193,891) (8,430,717)
FROM CAPITAL SHARE
TRANSACTIONS (Notes B and E):
Increase in net assets due to shares
issued to shareholders on reinvestment
of net investment income................ 875,685 1,812,548
----------- -----------
Net increase in net assets.............. 1,600,150 5,971,143
NET ASSETS:
BEGINNING OF YEAR......................... 88,723,067 82,751,924
----------- -----------
END OF YEAR (INCLUDING UNDISTRIBUTED NET
INVESTMENT INCOME OF $872,300 AND
$731,613, RESPECTIVELY)................. $90,323,217 $88,723,067
=========== ===========
</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, 1997 (UNAUDITED)
<TABLE>
<S> <C>
INCREASE (DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES:
Proceeds from sales of securities........................ $ 35,463,890
Purchases of securities.................................. (36,516,238)
Net sales of short-term investments...................... (1,217,062)
Five year convertible extendible notes................... (28,050,000)
Bank credit facility notes............................... 30,000,000
Interest received........................................ 5,037,756
Dividends received....................................... 150,102
Other received........................................... 10,000
Interest paid in cash.................................... (1,133,220)
Expenses paid............................................ (406,439)
------------
NET CASH PROVIDED BY OPERATING ACTIVITIES....... 3,338,789
------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends reinvested..................................... 875,685
Dividends paid in cash................................... (4,173,093)
------------
NET CASH USED FOR FINANCING ACTIVITIES.......... (3,297,408)
------------
Net decrease in cash....................................... 41,381
Cash at beginning of year.................................. 40,771
------------
Cash at end of period...................................... $ 82,152
============
RECONCILIATION OF INCREASE IN NET ASSETS FROM OPERATIONS TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net increase in net assets resulting from operations..... $ 4,918,356
Net increase in investments.............................. (5,506,291)
Interest in receivable for securities sold............... (264,437)
Increase in interest receivable.......................... (218,059)
Increase in prepaid expenses and other................... (61,950)
Increase in payable for securities purchased............. 2,493,470
Increase in accounts payable and accrued expenses........ 28,320
Decrease in interest payable............................. (620)
Increase in cash -- "Credit Facility".................... 1,950,000
------------
$ 3,338,789
============
</TABLE>
See Accompanying Notes to Financial Statements
7
<PAGE> 8
CNA INCOME SHARES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED 6/30/97 (UNAUDITED)
AND FOR THE YEAR ENDED 12/31/96
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
accounting period. Equity securities traded on a national securities
exchange are valued at the last reported sales price on the last
business day of the accounting period; 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, 1996 was
$110,709,969; based upon Federal tax cost of investments, gross
unrealized appreciation and gross unrealized depreciation were
$6,588,638 and $2,510,324, respectively. At December 31, 1996, there was
a capital loss carry-over of approximately $8,129,897, of which
$2,286,146 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. Bank Credit Facility Notes:
On June 1, 1997, the Company's $28,050,000 in principal amount of five year
convertible extendible notes (the "Notes") matured. At the time of
maturation, the fixed interest rate of the Notes was 8.08% per annum. The
Company paid the outstanding balance of the Notes at maturity. On June 2,
1997, the Company entered into a five year bank credit facility (the "Credit
Facility") with the First National Bank of Chicago ("First Chicago") as
administrative agent (the "Agent") in the amount of $30,000,000. The Credit
Facility bears a variable interest rate based on the Company's choice of
either: (i) the spread over First Chicago's prime rate or (ii) the spread
over the London Interbank Offered Rate (LIBOR). The initial interest rate
was 7.48% per annum as of June 2, 1997.
The Company has entered into an interest rate swap transaction to hedge the
variable interest payment obligations of the Credit Facility. The swap
transaction effectively converts the variable interest rate obligation of
the Credit Facility into a fixed interest rate obligation, because the
Company shall select interest periods for the Credit Facility which will
match the payments it will receive under the interest rate swap transaction.
Thus, the interest rate that the Company will pay over the five year term
will remain fixed at 7.48% per annum.
The Company incurred $92,500 of deferred expenses associated with the Credit
Facility and related interest rate swap transaction. The deferred expenses
will be amortized over the five year life of the Credit Facility.
C. Securities Loaned:
During the six months ended June 30, 1997 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.................... $37,847,692 $32,663,595
Preferred Stock.................... 257,500 2,262,466
</TABLE>
E. Capital Stock:
At June 30, 1997, 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, 267 are treasury shares, 8,759,022 shares are issued and outstanding,
after giving effect to an increase of 86,661 shares issued in
9
<PAGE> 10
CNA INCOME SHARES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
connection with the automatic dividend investment plan (the "Plan"). 179,636
shares have been reserved for the Plan.
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, 1997.
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 1997 and 1996 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, 1997 $2,919,659 $2,165,440 $.25 $(2,170,264) $(.25)
June 30, 1997 2,920,326 2,169,138 .24 2,754,042 .32
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
</TABLE>
10
<PAGE> 11
CNA INCOME SHARES, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)
JUNE 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT COST VALUE(1)
- ---------- ------------ ------------
<C> <S> <C> <C>
DEBT SECURITIES--129.0%
AUTOMOTIVE--1.7%
$1,000,000 Auburn Hills Trust
12.00% Deb, Due 5/1/20.......... $ 1,000,000 $ 1,496,010
------------ ------------
BANKS--5.7%
2,000,000 BankAmerica Instit-A
8.07% Co Gtd Nts Due 12/31/26... 2,016,060 2,003,690
1,000,000 FBS Capital I
8.09% Co Gtd Nts Due 11/15/26... 1,000,000 1,005,125
1,000,000 Midland American Capital
Corporation 12.75% Gtd Nt,
Due 11/15/03.................... 1,008,060 1,083,590
1,000,000 Washington Mutual Capital 1
8.375% Co Gtd Nts, Due 6/1/27... 1,007,250 1,018,825
------------ ------------
5,031,370 5,111,230
------------ ------------
CABLE--10.7%
1,000,000 Cablevision Industries, Inc.
9.25% Deb, Due 4/1/08........... 1,050,000 1,054,875
1,500,000 CF Cable TV, Inc.
9.125% Sec. Nts. Due 7/15/07.... 1,560,000 1,620,000
1,055,000 Falcon Holding Group L.P.
11.00% Sr Sub Nts,
Due 9/15/03 (PIK)............... 949,111 1,060,275
1,500,000 Galaxy Telecom, L.P.
12.375% Sr Sub Nts,
Due 10/1/05..................... 1,577,500 1,601,250
1,000,000 Tele-Communications, Inc.
9.80% Deb, Due 2/1/12........... 1,081,400 1,142,055
2,750,000 Tele-Communications, Inc.
10.125% Deb, Due 4/15/22........ 2,798,360 3,211,973
------------ ------------
9,016,371 9,690,428
------------ ------------
CHEMICALS--2.3%
1,000,000 Montell Finance Co--B.V.
8.10% Co Gtd Nts, Due 3/15/27... 1,011,250 1,021,400
1,000,000 NL Industries, Inc.
11.75% Sr Nts, Due 10/15/03..... 1,025,000 1,087,500
------------ ------------
2,036,250 2,108,900
------------ ------------
</TABLE>
See Accompanying Notes to Financial Statements
11
<PAGE> 12
CNA INCOME SHARES, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)--(Continued)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT COST VALUE(1)
- ---------- ------------ ------------
DEBT SECURITIES--(Cont'd)
<S> <C> <C> <C>
COMMUNICATIONS--15.3%
$1,500,000 Econophone Inc.
13.50%, Sr Nts, Due 7/15/07..... $ 1,500,000 $ 1,522,500
1,000,000 Globalstar LP/Capital
11.375%, Sr Nts, Due 2/15/04.... 1,010,000 1,002,500
1,000,000 Globalstar LP/Capital
11.25%, Sr Nts, Due 6/15/04..... 965,000 942,500
1,500,000 IMPSAT Corporation
12.125% Co Gtd Nts, Due
7/15/03......................... 1,500,000 1,620,000
1,500,000 Ionica PLC
13.50% Sr Nts, Due 8/15/06...... 1,515,000 1,605,000
1,500,000 Innova S DE R.L
12.875%, Sr Nts, Due 4/1/07..... 1,489,665 1,575,000
1,000,000 Microcell Telecommunicatios
14.00% Sr Nts, Due 6/1/06....... 550,000 610,000
1,000,000 Orion Network Systems, Inc.
11.25%, Sr Nts, Due 1/15/07..... 1,000,000 1,030,000
1,000,000 Sprint Sectrum L.P./FIN
11.00% Sr Nts, Due 8/15/06...... 1,045,000 1,108,750
1,500,000 TCI Satellite Entertainment, Inc.
10.875%, Sr Nts, Due 2/15/07.... 1,368,750 1,526,250
1,250,000 Turner Broadcasting Sys., Inc.
8.375% Sr. Nts, Due 7/1/13...... 1,028,125 1,301,463
------------ ------------
12,971,540 13,843,963
------------ ------------
COMMUNICATION EQUIPMENT--2.0%
2,000,000 Dictaphone Corporation
11.75% Sr Sub Nts, Due 8/1/05... 1,939,063 1,840,000
------------ ------------
COMPUTER TECHNOLOGY--0.3%
250,000 Unisys Corp.
15.00% Nts, Due 7/1/97.......... 263,787 252,500
------------ ------------
CONSUMER PRODUCTS--2.3%
2,000,000 R.J.R. Nabisco, Inc.
9.25% Nts, Due 8/15/13.......... 1,968,830 2,049,180
------------ ------------
ENERGY--1.1%
1,000,000 Perez Companc S.A.
9.00%, Bds, Due 1/30/04......... 1,026,500 1,036,300
------------ ------------
</TABLE>
See Accompanying Notes to Financial Statements
12
<PAGE> 13
CNA INCOME SHARES, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)--(Continued)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT COST VALUE(1)
- ---------- ------------ ------------
DEBT SECURITIES--(Cont'd)
<S> <C> <C> <C>
ENTERTAINMENT--3.1%
$1,000,000 Lodgenet Entertainment Corporation
10.25%, Sr Nts, Due 12/15/06.... $ 1,010,000 $ 1,010,000
1,500,000 Time Warner Entertainment Company
L.P.
10.15% Nts, Due 5/1/12.......... 1,607,530 1,817,280
------------ ------------
2,617,530 2,827,280
------------ ------------
FINANCIAL--4.8%
1,000,000 Fisher Bros Financial Realty
10.75%, Mtg Bkd, Due 12/17/00... 1,017,920 1,016,250
3,000,000 Ford Motor Credit Corp.
9.03% Nts, Due 12/30/09......... 3,199,800 3,300,000
------------ ------------
4,217,720 4,316,250
------------ ------------
FOOD STORAGE--1.2%
1,000,000 Americold Corporation
12.875%, Sr Sub Nts, Due
5/1/08.......................... 1,055,000 1,066,250
------------ ------------
FOREST PRODUCTS--3.9%
1,000,000 Boise Cascade Corporation
9.85% Nts, Due 6/15/02.......... 1,091,910 1,110,590
2,200,000 Georgia Pacific Corporation
9.50% Deb, Due 5/15/22.......... 2,161,500 2,393,754
------------ ------------
3,253,410 3,504,344
------------ ------------
GOVERNMENT DEBT--11.1%
Canadian--3.0%
2,300,000 Province of Quebec, Canada
13.25%, Deb, Due 9/15/14...... 2,753,160 2,707,167
------------ ------------
United States--2.6%
1,513,000 U.S. Treasury Bonds
15.75%, Due 11/15/01.......... 2,469,420 2,050,932
255,000 U.S. Treasury Bonds
11.625%, Due 11/15/04......... 258,825 331,237
------------ ------------
2,728,245 2,382,169
------------ ------------
Government Agencies
Other--1.3%
1,179,000 Kingdom of Sweden
12.75%, Deb, Due 10/15/97..... 1,505,300 1,200,847
------------ ------------
</TABLE>
See Accompanying Notes to Financial Statements
13
<PAGE> 14
CNA INCOME SHARES, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)--(Continued)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT COST VALUE(1)
- ---------- ------------ ------------
<S> <S> <C> <C>
DEBT SECURITIES--(Cont'd)
INTERNATIONAL AGENCIES--4.2%
$3,000,000 International Bank for
Reconstruction & Development
12.375%, Bd, Due 10/15/02..... $ 3,552,750 $ 3,756,870
------------ ------------
HEALTHCARE--0.6%
1,000,000 Phoenix Shannon PLC
9.50%, Cv. Sr. Nts,
Due 11/1/00..................... 1,000,000 500,000
------------ ------------
HOME BUILDERS--1.1%
1,000,000 J.M. Peters Co. Inc
12.75%, Sr. Nts Due 5/1/02...... 1,000,000 1,000,000
------------ ------------
INSURANCE--6.1%
2,000,000 Conseco, Inc.
10.50%, Sr. Nts. Due 12/15/04... 2,313,120 2,358,660
1,000,000 MTN--Kemper CORP.
9.00%, Med Trm Nts, Due
3/2/98.......................... 1,020,690 1,019,240
2,000,000 Phoenix Re Corp.
9.75%, Sr. Nts, Due 8/15/03..... 2,041,563 2,109,200
------------ ------------
5,375,373 5,487,100
------------ ------------
LEISURE--3.3%
1,000,000 Argosy Gaming Company
13.25%, Cv. Sub Nts, Due
6/1/04.......................... 876,250 971,250
1,000,000 Casino America, Inc.
12.50%, Sr Nts, Due 8/1/03...... 982,500 1,036,250
1,000,000 Trump AC Assoc/FNDG Inc.
11.25%, Co Gtd Nts, Due
5/01/06......................... 945,833 973,750
------------ ------------
2,804,583 2,981,250
------------ ------------
MARKET SERVICES--1.2%
1,000,000 Neodata Services, Inc.
12.00%, Sr Nts, Due 5/1/03...... 1,030,000 1,070,000
------------ ------------
</TABLE>
See Accompanying Notes to Financial Statements
14
<PAGE> 15
CNA INCOME SHARES, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)--(Continued)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT COST VALUE(1)
- ---------- ------------ ------------
DEBT SECURITIES--(Cont'd)
<S> <C> <C> <C>
MATERIALS HANDLING--1.1%
$1,000,000 Alvey Systems Inc.
11.375%, Sr Sub Nts,
Due 1/31/03..................... $ 1,035,000 $ 1,035,000
------------ ------------
METALS--5.4%
2,000,000 Inco Ltd
9.875%, Deb, Due 6/15/19........ 1,997,500 2,151,430
1,000,000 Inco Ltd
9.60%, Deb, Due 6/15/22......... 1,062,970 1,091,360
1,500,000 Haynes International, Inc.
11.625%, Sr. Nts, Due 9/5/04.... 1,520,000 1,642,500
------------ ------------
4,580,470 4,885,290
------------ ------------
MORTGAGE BANKING--1.1%
1,000,000 Countrywide Capital I
8.00%, Co Gtd Nts, Due
12/15/26........................ 991,360 970,640
------------ ------------
MULTI-INDUSTRY--1.8%
500,000 J.B. Poindexter & Co, Inc.
12.50% Sr. Nts, Due 5/15/04..... 462,917 500,000
1,000,000 Thermo-Electron Corp.
4.25%, Cv Sub, Due 1/1/03....... 1,000,000 1,085,000
------------ ------------
1,462,917 1,585,000
------------ ------------
PAPER--2.6%
1,000,000 Indah Klat Fin Mauritius
10.00%, Co Gtd Nts,
Due 7/01/07..................... 993,470 1,000,000
1,250,000 Grupo Industrial Durango S.A.
12.00%, Sr Nts, Due 7/15/01..... 1,200,447 1,370,313
------------ ------------
2,193,917 2,370,313
------------ ------------
PHARMACEUTICALS--2.0%
1,500,000 Hybridon, Inc.
9.00%, Sub Nts,
Due 4/1/04 -- 144A.............. 1,500,000 1,470,000
250,000 Sepracor, Incorporated
7.000%, Sub Deb, Due 10/1/03 --
144A............................ 225,000 349,375
------------ ------------
1,725,000 1,819,375
------------ ------------
</TABLE>
See Accompanying Notes to Financial Statements
15
<PAGE> 16
CNA INCOME SHARES, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)--(Continued)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT COST VALUE(1)
- ---------- ------------ ------------
DEBT SECURITIES--(Cont'd)
<S> <C> <C> <C>
RETAIL - DEPARTMENT STORES--2.6%
$1,500,000 The May Department Stores Company
8.30% Co Gtd Nts Due 7/15/26.... $ 1,558,605 $ 1,556,168
1,000,000 Venture Stores
8.89% Nts. Due 12/14/98......... 889,890 780,000
------------ ------------
2,448,495 2,336,168
------------ ------------
RESTAURANT--1.1%
1,000,000 FM 1993A Corp.
9.75% Sr Nts, Due 11/1/03....... 1,050,000 1,010,000
------------ ------------
RETAIL - FOOD--5.3%
1,000,000 Big V Supermarkets
11.00%, Sr Sub Nts,
Due 2/15/04..................... 938,333 1,023,750
1,000,000 Grand Union Co.
12.00%, Sr Nts, Due 9/1/04...... 1,025,000 752,500
2,000,000 The Pantry, Inc.
12.50% Sr Nts, Due 11/15/00..... 2,000,000 2,030,000
1,000,000 Smith's Food & Drug Centers, Inc.
9.20%, Pass Thru Certs, Due
7/02/18......................... 927,500 1,020,000
------------ ------------
4,890,833 4,826,250
------------ ------------
STEEL--1.8%
1,000,000 ACME Metals, Inc.
12.50% Sr Nts, Due 8/1/02....... 1,012,500 1,100,000
500,000 Algoma Steel Inc.
12.375% 1st Mtg, Due 7/15/05.... 472,500 555,000
------------ ------------
1,485,000 1,655,000
------------ ------------
STUDENT LOAN--0.7%
650,000 University Support Services, Inc.
Sub Educat. Ln Nts Ser 1991 B.
Var Rate Min 12.50%, Due
5/01/06......................... 647,563 650,000
------------ ------------
TOBACCO--1.1%
1,000,000 Sampoerna International Finance
Co.
8.375%, Co Grd Nts, Due
6/15/06......................... 1,019,250 1,010,200
------------ ------------
</TABLE>
See Accompanying Notes to Financial Statements
16
<PAGE> 17
CNA INCOME SHARES, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)--(Continued)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT COST VALUE(1)
- ---------- ------------ ------------
DEBT SECURITIES--(Cont'd)
<S> <C> <C> <C>
TRANSPORTATION--13.8%
Airlines--11.6%
$1,000,000 Airplane Pass Through Trust
8.15%, Due 3/15/19............ $ 1,003,650 $ 1,040,000
2,250,000 American Airlines, Inc.
10.18% Col Ts,
Due 1/2/13.................... 2,208,730 2,697,998
2,243,000 Delta Air Lines, Inc.
10.79% Equip Tr Cert
Ser F, Due 3/26/14............ 2,288,385 2,814,965
500,000 Delta Air Lines, Inc.
10.50%, Pass Thru Cert.
Due 4/30/16................... 513,750 623,150
750,000 Reno Air, Inc.
9.00% Cv St Nts, Due
9/30/02....................... 764,437 787,500
1,000,000 United Airlines, Inc.
10.85%, 1991 Equip Tr Cert
Ser A, Due 7/5/14............. 1,000,000 1,262,500
1,000,000 United Airlines, Inc.
10.85%, 1991 Equip Tr Cert
Ser B, Due 2/19/14............ 1,000,000 1,261,700
------------ ------------
8,778,952 10,487,813
------------ ------------
Leasing--1.1%
1,000,000 Interpool Capital Trust
9.875% Bds, Due 2/15/27....... 1,000,000 1,005,400
------------ ------------
Trucking--1.1%
1,000,000 Trism, Inc.
10.75%, Sr Nts, Due
12/15/00...................... 965,000 980,000
------------ ------------
</TABLE>
See Accompanying Notes to Financial Statements
17
<PAGE> 18
CNA INCOME SHARES, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)--(Continued)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT COST VALUE(1)
- ---------- ------------ ------------
DEBT SECURITIES--(Cont'd)
<S> <C> <C> <C>
UTILITIES--10.8%
Electric--7.2%
$1,000,000 Cleveland Electric Illum.
9.375% 1st Mtg, Due 3/01/17... $ 1,010,000 $ 1,037,540
1,000,000 Long Island Lighting Co.
9.75% Gen Ref Mtg,
Due 5/01/21................... 964,020 1,021,250
2,000,000 Louisiana Power & Light Company
10.67% Sec Lease Oblig Bd,
Due 1/02/17................... 2,099,000 2,133,780
2,000,000 Midland Funding Corp.
Lease Oblig Bds Ser B
13.25%, Due 7/23/06........... 2,346,500 2,320,000
------------ ------------
6,419,520 6,512,570
------------ ------------
Gas--1.8%
1,575,000 Transgas de Occidente S.A.
9.79% Sr Nts, Due 11/1/10..... 1,633,842 1,623,510
------------ ------------
Telephone--1.8%
1,500,000 GTE Corporation
7.90% Deb, Due 2/1/27......... 1,500,000 1,520,625
------------ ------------
TOTAL DEBT SECURITIES......... 111,973,901 116,511,192
------------ ------------
</TABLE>
See Accompanying Notes to Financial Statements
18
<PAGE> 19
CNA INCOME SHARES, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)--(Continued)
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES COST VALUE(1)
- ---------- ------------ ------------
DEBT SECURITIES--(Cont'd)
<S> <C> <C> <C>
PREFERRED STOCK--2.3%
20,000 Loral Space & Communications
Ltd............................. 1,007,500 1,010,000
120,000 Triathlon Broadcasting Company.... 1,240,000 1,020,000
------------ ------------
2,247,500 2,030,000
------------ ------------
COMMON STOCK--0.0%
NUMBER OF
SHARES
- ----------
1,000 Motels of America, Inc. .......... 15 15,000
------------ ------------
WARRANTS--0.0%
NUMBER OF
WARRANTS
- ----------
11,850 J. M. Peters Company, Inc. ....... -- --
------------ ------------
TOTAL......................... 114,221,416 118,551,192
------------ ------------
SHORT-TERM NOTES--3.5%
PRINCIPAL
AMOUNT
- ----------
$2,194,000 First Chicago -- 0.0% Due
7/1/97.......................... 2,194,000 2,194,000
997,834 First Chicago -- 0.0% Due
7/8/97.......................... 997,834 998,834
------------ ------------
TOTAL SHORT-TERM NOTES........ 3,191,834 3,192,834
------------ ------------
TOTAL INVESTMENTS--
134.8%(2)................... $117,413,250 $121,744,026
============ ============
</TABLE>
(1) For determination of Market Value see Note A to Financial Statements.
(2) The Total Market Value represents 134.8% of the Net Assets at June 30, 1997.
See Accompanying Notes to Financial Statements
19
<PAGE> 20
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 1996 1995 1994 1993 1992
----------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net Asset Value,
beginning of year..... $10.23 $ 9.75 $ 8.98 $10.53 $10.32 $10.560
======= ======= ======= ======= ======= ========
Investment
income--net........... $ .49 $ .99 $ 1.07 $ 1.10 $ 1.16 $ 1.200
Realized and unrealized
(loss) gain on
investments--net...... $ .07 $ .47 $ 0.74 ($ 1.57) $ 0.21 ($ 0.250)
------- ------- ------- ------- ------- --------
Total from investment
operations............ $ .56 $ 1.46 $ 1.81 ($ 0.47) $ 1.37 $ 0.95
------- ------- ------- ------- ------- --------
Total distributions to
shareholders.......... ($ .48) ($ .98) ($ 1.04) ($ 1.08) ($ 1.16) ($ 1.195)
------- ------- ------- ------- ------- --------
Net asset value, end of
year.................. $10.31 $10.23 $ 9.75 $ 8.98 $10.53 $10.320
======= ======= ======= ======= ======= ========
Market price per share,
end of year........... $10.69 $10.25 $10.25 $ 9.50 $12.63 $11.625
======= ======= ======= ======= ======= ========
TOTAL INVESTMENT
RETURN**
Based on market price
per share............. 8.95% 9.56% 18.84% (16.20%) 18.58% 15.24%
Based on net asset value
per share............. 5.47% 14.97% 15.70% (4.46%) 13.28% 9.04%
RATIO TO AVERAGE NET
ASSETS
Operating Expenses...... 0.41%+ 0.87% 0.95% 0.99% 0.88% 0.84%
Total Expenses.......... 1.68%+ 3.52% 3.80% 3.84% 3.52% 3.78%
Investment
income--net........... 4.85%+ 10.02% 11.40% 11.33% 10.82% 11.18%
------- ------- ------- ------- ------- --------
SUPPLEMENTAL DATA
Net assets--end of year
(in thousands)........ $90,323 $88,723 $82,752 $74,312 $85,097 $81,637
Portfolio turnover...... 32.95% 65.73% 38.82% 37.91% 55.43% 54.06%
</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
20
<PAGE> 21
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
21
<PAGE> 22
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,
22
<PAGE> 23
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
23
<PAGE> 24
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.
24
<PAGE> 25
(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
25
<PAGE> 26
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.
26
<PAGE> 27
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
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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.
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DIRECTORS
Franklin A. Cole
Sidney Davidson
Richard W. Dubberke
Lew H. Nathan
David G. Taylor
A. Dean Swift
OFFICERS
Lew H. Nathan, Chairman and President
Richard W. Dubberke, Vice President and Treasurer
Megham K. Halloran, Vice President
Marilou R. McGirr, Vice President and Assistant Treasurer
Lynne Gugenheim, Secretary
Mitchell T. Butowski, Assistant Secretary
Brian Lord, 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
3 Chase MetroTech Center, 6th Floor
Brooklyn, New York 11245
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]
