<PAGE> 1
CNA Income Shares, Inc.
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- --------------------------------------------------------------------------------
Annual Report 1999
CNN LISTED NYSE LOGO
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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
21 Financial Highlights
22 Independent Auditors' Report
23 Investment Objectives and Policies
29 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 $0.96 per share during the
year ended December 31, 1999 and declared dividends of $0.96 per share for this
period. Dividends are paid quarterly with the next dividend scheduled to be paid
on April 15, 1999.
The bond market had problems throughout 1999 as interest rates rose and bond
prices slumped. Total returns for most categories of investment-grade corporate
bonds were negative for the year. High-yield bonds did somewhat better, although
lack of liquidity tended to hurt this sector overall. Your Company's portfolio
mix as of December 31, 1999 was approximately 59% investment-grade bonds, 35%
high-yield bonds and 5% preferred stock. The balance was in money market
instruments. CNA Income Shares' total return was a disappointing negative 2.48%
compared to a negative 1.71% return for BBB-rated bond funds, as reported in the
Wall Street Journal, and a negative 1.72% for a group of twenty closed-end
funds, CNA Income Shares included, that have similar structures and investment
goals. Dividends were maintained at a quarterly rate of $0.24 per share
throughout the year, but it is important to point out that net income for the
year just met the annual $0.96 per share payout and that fourth quarter net
income was $0.23 per share. Although interest rates did climb in 1999, the
current level of interest rates continues to be below your fund yield of 11.33%
based on net assets as of December 31, 1999.
Management continues to focus on providing a high and steady dividend payout to
our shareholders. The dividend payout reflects the portfolio's ability to
generate a stream of income consistent with general levels of interest rates,
opportunities in the marketplace, as well as willingness to absorb risk.
Although CNA Income Shares has authority to increase its high-yield bond segment
to 50% of assets, given the current lack of liquidity in the high-yield market
we prefer not to increase the fund's credit risk exposure at this time.
Sincerely,
Marilon R McGirr
Marilon R. McGirr
Chairman of the Board and President
February 29, 2000
3
<PAGE> 4
CNA INCOME SHARES, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
<TABLE>
<S> <C>
ASSETS
In custody of The Chase Manhattan Bank, N.A.:
Investments (See Schedule of Investments) (Notes A and C):
Debt securities, preferred stock, common stock and
warrants at market value (cost $113,602,720).......... $105,824,680
Short-term notes at amortized cost (cost $616,000)...... 616,000
Cash...................................................... 911,043
Receivables:
Interest.................................................. 3,070,606
Dividends................................................. 39,058
Prepaid expenses............................................ 6,199
------------
TOTAL ASSETS........................................ 110,467,586
</TABLE>
<TABLE>
<S> <C> <C>
LIABILITIES
Dividend payable............................... $ 2,204,296
Accounts payable and
accrued expenses............................. 102,763
Interest payable............................... 192,643
Bank Credit Facility (Note B).................. 30,000,000 32,499,702
----------- ------------
NET ASSETS, equivalent to $8.49 per share on
9,184,566 shares outstanding..................... $ 77,967,884
============
</TABLE>
<TABLE>
<S> <C>
NET ASSETS REPRESENTED BY:
Capital stock $1 par value
Authorized: 15,000,000 shares
Issued and outstanding: 9,184,566 shares................ $ 9,184,566
Paid-in surplus........................................... 100,457,991
------------
$109,642,557
Earned surplus (deficit)
Accumulated net realized gain (loss) on investments..... (24,971,672)
Undistributed net investment income..................... 1,075,039
Net unrealized appreciation............................... (7,778,040)
------------
NET ASSETS APPLICABLE TO CAPITAL STOCK OUTSTANDING.... $ 77,967,884
============
</TABLE>
See Accompanying Notes to Financial Statements
4
<PAGE> 5
CNA INCOME SHARES, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
INCOME:
Interest Income....................................... $ 11,380,357
Dividend Income....................................... 310,253
Income on Class Action................................ 486
Discount Earned....................................... 129,910
---------------
TOTAL INVESTMENT INCOME.................. 11,821,006
EXPENSES:
Investment advisory fee (Note F)........ $ 420,613
Accounting service and expenses......... 61,846
Insurance............................... 59,937
Directors' fees and expenses (Note F)... 50,541
Shareholder reports..................... 34,616
Auditing and consulting fees............ 31,529
Mailing expenses........................ 27,692
Legal fees and expenses................. 24,962
Registration and filing fees............ 24,256
Transfer agent and registrar............ 22,158
Bank Credit Facility expenses........... 20,266
Dividend disbursing services............ 15,879
State and local taxes................... 8,200
Custodian fees.......................... 5,773
----------
Total Operating Expenses... 808,268
Interest expenses (Note B).............. 2,260,467 3,068,735
---------- ---------------
NET INVESTMENT INCOME.................... 8,752,271
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
(excluding short-term notes) (NOTES A and D):
NET REALIZED GAIN (LOSS) FROM SECURITY TRANSACTIONS... (4,059,530)
---------------
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS:
Beginning of year....................... (821,069)
End of year............................. (7,778,040)
----------
NET INCREASE (DECREASE) IN UNREALIZED APPRECIATION.... (6,956,971)
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS......................................... (11,016,501)
---------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS.............. $ (2,264,230)
===============
</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, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Net investment income..................... 8,752,271 8,657,813
Net realized gain (loss) on investments... (4,059,530) (1,176,664)
Net change in unrealized appreciation..... (6,956,971) (8,329,809)
----------- -----------
Net increase (decrease) in net assets
resulting from operations............... (2,264,230) (848,659)
Dividends to shareholders from net
investment income ($0.96 and $0.96 per
share, respectively).................... (8,749,048) (8,582,927)
FROM CAPITAL SHARE
TRANSACTIONS (Notes B and E):
Increase in net assets due to shares
issued to shareholders on reinvestment
of net investment income................ 1,695,082 1,691,211
----------- -----------
Net change in net assets................ (9,538,116) (7,740,375)
NET ASSETS:
BEGINNING OF YEAR......................... 87,286,080 95,026,455
----------- -----------
END OF YEAR (INCLUDING UNDISTRIBUTED NET
INVESTMENT INCOME OF $1,075,039 AND
$1,071,816, RESPECTIVELY)............... $77,967,884 $87,286,080
=========== ===========
</TABLE>
See Accompanying Notes to Financial Statements
6
<PAGE> 7
CNA INCOME SHARES, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<S> <C>
INCREASE (DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES:
Proceeds from sales of securities........................ $ 39,441,189
Purchases of securities.................................. (40,450,916)
Net sales of short term investments...................... 325,088
Interest received........................................ 11,441,061
Dividends received....................................... 177,654
Other received........................................... (497,077)
Interest paid in cash.................................... (2,252,523)
Expenses paid............................................ (537,611)
------------
NET CASH PROVIDED BY OPERATING ACTIVITIES....... 7,646,865
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends reinvested..................................... 1,695,082
Dividends paid in cash................................... (8,749,048)
------------
NET CASH USED FOR FINANCING ACTIVITIES.......... (7,053,966)
------------
Net increase (decrease) in cash............................ 592,899
Cash at beginning of year.................................. 318,144
------------
Cash at end of year........................................ $ 911,043
============
RECONCILIATION OF INCREASE IN NET ASSETS FROM OPERATIONS TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net increase (decrease) in net assets resulting from
operations............................................. (2,264,230)
Net increase (decrease) in investments................... 9,965,260
Increase (decrease) in interest receivable............... 36,393
Increase (decrease) in prepaid expenses and other........ (75,617)
Increase (decrease) in accounts payable and accrued
expenses............................................... (1,404)
Increase (decrease) in interest payable.................. (13,537)
------------
NET CASH PROVIDED BY OPERATING ACTIVITIES....... $ 7,646,865
============
</TABLE>
See Accompanying Notes to Financial Statements
7
<PAGE> 8
CNA INCOME SHARES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
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, 1999 was
$114,218,720; based upon Federal tax cost of investments, the net
unrealized gains and losses was ($7,997,960). At December 31, 1999,
there was a capital loss carry-over of approximately $7,150,408,
$2,203,423 in 2002, $350,141 in 2003, $1,390,647 in 2006 and $3,206,180
in 2007. 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 Bank One's N.A. 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 year ended December 31, 1999 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
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<S> <C> <C>
Corporate Bonds.................... $37,496,137 $40,738,842
Preferred Stock.................... 857,162 950,002
Common Stock....................... 2,097,617 90,057
</TABLE>
E. Capital Stock:
At December 31, 1998, 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, 9,184,566 shares are issued and
outstanding, after giving effect to an increase of 182,905 shares issued in
connection with the automatic dividend investment plan (the "Plan"). 254,092
shares have been reserved for the Plan.
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
1999.
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 1999 unaudited quarterly results of
operations:
<TABLE>
<CAPTION>
NET REALIZED AND
UNREALIZED GAINS
NET INVESTMENT (LOSSES) ON
INCOME INVESTMENTS
------------------ --------------------
PER PER
THREE MONTHS INVESTMENT AMOUNT SHARE AMOUNT SHARE
-------------- ---------- ------------------ --------------------
<S> <C> <C> <C> <C> <C>
Mar. 31, 1999 $2,863,730 $2,106,730 $0.24 $(1,619,818) $(0.18)
Jun. 30, 1999 3,017,911 2,252,480 0.24 (2,992,171) (0.33)
Sep. 30, 1999 3,051,155 2,275,919 0.25 (6,181,322) (0.68)
Dec. 31, 1999 2,888,210 2,117,142 0.23 (223,190) (0.02)
</TABLE>
10
<PAGE> 11
CNA INCOME SHARES, INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT COST VALUE(1)
- ---------- ------------ ------------
<C> <S> <C> <C>
DEBT SECURITIES--128.9%
AEROSPACE--2.4%
$1,000,000 Norhrop-Grumman Corporation
9.375% Deb, Due 10/15/24........ $ 1,154,340 $ 1,055,270
1,000,000 Sabreliner Corp.
11.000% Sr Nts, Due
6/15/08(2)...................... 885,000 792,500
------------ ------------
2,039,340 1,847,770
------------ ------------
AUTOMOTIVE--1.9%
1,000,000 Auburn Hills Trust
12.000% Deb, Due 5/1/20......... 1,000,000 1,447,251
------------ ------------
APPAREL--3.1%
1,000,000 GFSI, Inc.
9.625% Sr Sub Nts, Due 3/1/07... 800,000 598,750
1,000,000 Norton McNaughton, Inc.
12.500% Co Gtd Nts,
Due 6/1/05...................... 830,000 841,250
1,000,000 Supreme International Corp.
12.250% Co Gtd Nts, Due
4/1/06.......................... 988,520 993,750
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2,618,520 2,433,750
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BANKS--7.3%
2,000,000 BankAmerica Institutional Capital
A
8.070% Co Gtd Nts, Due
12/31/26(2)..................... 2,016,060 1,887,018
1,000,000 FBS Capital I
8.090% Co Gtd Nts, Due
11/15/26........................ 1,000,000 939,578
2,000,000 Washington Mutual Capital 1
8.375% Co Gtd Nts,
Due 6/1/27...................... 2,045,910 1,909,876
1,000,000 Zions Instit Capital Trust A
8.536% Co Gtd Nts, Due
12/15/26........................ 1,092,500 930,211
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6,154,470 5,666,683
------------ ------------
</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)
CABLE--7.5%
$1,500,000 CF Cable TV, Inc.
9.125% Sec. Nts, Due 7/15/07.... $ 1,560,000 $ 1,596,059
1,000,000 Cablevision SA
13.750% Bds, Due 5/1/09(2)...... 882,500 977,500
1,000,000 Tele-Communications, Inc.
9.800% Deb, Due 2/1/12.......... 1,081,400 1,168,088
1,750,000 Tele-Communications, Inc.
10.125% Deb, Due 4/15/22........ 1,780,775 2,141,512
------------ ------------
5,304,675 5,883,158
------------ ------------
CHEMICALS--4.4%
1,000,000 Equistar Chemicals, LP
8.750% Sr Nts, Due 2/15/09...... 1,015,930 985,431
1,000,000 Montell Finance Co-B.V.
8.100% Co Gtd Nts, Due
3/15/27(2)...................... 1,011,250 914,351
1,500,000 Union Carbide Corporation
8.750% Sr Nts, Due 8/1/22....... 1,631,250 1,535,100
------------ ------------
3,658,430 3,434,882
------------ ------------
COMMUNICATIONS--20.2%
1,000,000 Allegiance Telecom, Inc.
12.875% Sr Nts, Due 5/15/08..... 980,090 1,111,250
1,500,000 AMSC Acquisition Company, Inc.
12.250% Co Gtd Nts, Due
4/1/08.......................... 1,259,985 1,171,875
1,000,000 CIA Radiocomunic Moviles
9.250% Nts, Due 5/8/08(2)....... 972,500 865,000
1,500,000 Convergent Communications Inc.
13.000% Sr Nts, Due 4/1/08...... 1,492,500 1,053,750
2,000,000 Globalstar LP/Capital
11.250% Sr Nts, Due 6/15/04..... 1,540,000 1,370,000
1,000,000 IMPSAT Corporation
12.125% Co Gtd Nts, Due
7/15/03......................... 1,000,000 927,500
2,000,000 Orbcomm Global LP/Capital
14.000% Sr Nts, Due 8/15/04..... 1,947,500 1,440,000
1,000,000 Orbital Imaging Corp.
11.625% Sr Nts, Due 3/1/05...... 1,067,500 690,000
1,500,000 Orion Network Systems
11.250% Sr Nts, Due 1/15/07..... 1,455,000 1,125,000
</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)
$2,000,000 Sprint Spectrum L.P.
11.000% Sr Nts, Due 8/15/06..... $ 2,207,500 $ 2,210,464
1,000,000 Telephone & Data Systems
8.400% Med Term Nts, Due
2/24/23......................... 1,048,480 990,674
1,000,000 Telephone & Data Systems
9.550% Med Term Nts, Due
11/15/21........................ 1,088,750 1,036,902
1,000,000 Tricom, S.A.
11.375% Sr Nts, Due 9/1/04...... 865,000 932,500
1,000,000 U.S. Xchange LLC
15.000% Sr Nts, Due 7/1/08...... 1,000,000 840,000
------------ ------------
17,924,805 15,764,915
------------ ------------
COMPUTERS MEMORY DEVICES--1.7%
1,500,000 Seagate Technology Inc.
7.450% Deb, Due 3/1/37.......... 1,323,750 1,302,864
------------ ------------
CONSUMER PRODUCTS--0.1%
500,000 Sunbeam Corporation
0.000% Sr Sub Deb, Due
3/25/18(2)...................... 138,935 74,375
------------ ------------
CONTAINERS--1.2%
1,000,000 Vicap SA
11.375% Co Gtd Nts, Due
5/15/07......................... 883,750 920,000
------------ ------------
ELECTRONICS DISTRIBUTION--1.3%
2,000,000 Reptron Electronics Inc.
6.750% Sub Nts, Due 8/1/04...... 1,425,000 1,050,000
------------ ------------
ENERGY--5.0%
1,000,000 Husky Oil Ltd.
8.900% Bds, Due 8/15/28......... 997,532 998,596
1,500,000 Pennzenergy Company
10.250% Deb, Due 11/1/05........ 1,759,855 1,649,240
1,250,000 Pool Energy Services Co.
8.625% Co Gtd Nts,
Due 4/1/08...................... 1,278,125 1,262,500
------------ ------------
4,035,512 3,910,336
------------ ------------
</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)
ENTERTAINMENT--3.6%
$1,000,000 Liberty Media Group
8.500% Nts, Due 7/15/29(2)...... $ 997,270 $ 1,012,640
1,500,000 Time Warner Entertainment Company
L.P.
10.150% Nts, Due 5/1/12......... 1,607,530 1,764,743
------------ ------------
2,604,800 2,777,383
------------ ------------
FINANCIAL--5.4%
3,000,000 Ford Motor Credit Corp
9.030% Nts, Due 12/30/09........ 3,199,800 3,184,038
1,000,000 Olympic Financial Ltd.
11.500% Sr Nts,
Due 3/15/07..................... 1,005,000 1,040,000
------------ ------------
4,204,800 4,224,038
------------ ------------
FOOD/BAKING--1.0%
1,000,000 Mrs. Fields' Original Cookies,
Inc.
10.125% Co Gtd Nts, Due
12/1/04(2)...................... 925,000 810,000
------------ ------------
FOOD/RETAIL--0.6%
1,300,000 Pathmark Stores, Inc.
11.625% Sub Nts,
Due 6/15/02..................... 1,325,220 429,000
------------ ------------
FOOD/WHOLESALE--0.7%
1,000,000 Ameriserve Food Distribution, Inc.
8.875% Co Gtd Nts, Due
10/15/06........................ 850,000 550,000
------------ ------------
FOREST PRODUCTS--3.0%
1,000,000 Boise Cascade Corporation
9.850% Nts, Due 6/15/02......... 1,091,910 1,033,239
1,200,000 Georgia Pacific Corporation
9.500% Deb, Due 5/15/22......... 1,179,000 1,269,748
------------ ------------
2,270,910 2,302,987
------------ ------------
</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)
GOVERNMENT DEBT--5.6%
United States--1.2%
$ 513,000 U.S. Treasury Bonds
15.750% Due 11/15/01............ $ 837,285 $ 598,126
255,000 U.S. Treasury Bonds
11.625% Due 11/15/04............ 258,825 308,391
------------ ------------
1,096,110 906,517
------------ ------------
International Agencies--4.4%
3,000,000 International Bank for
Reconstruction & Development
12.375% Due 10/15/02............ 3,552,750 3,428,757
------------ ------------
HEALTH CARE PRODUCTS--1.2%
1,500,000 Global Health Sciences, Inc.
11.000% Co Gtd Nts, Due
5/1/08.......................... 1,040,000 930,000
------------ ------------
HOME BUILDERS/FURNISHINGS--1.6%
1,500,000 J.M. Peters Co., Inc.
12.750% Sr Nts, Due 5/1/02...... 1,465,000 1,245,000
------------ ------------
INDUSTRIAL MACHINERY--0.6%
1,500,000 Clark Material Handling Company
10.750% Co Gtd Nts, Due
11/15/06........................ 581,250 495,000
------------ ------------
INFORMATION TECHNOLOGIES--1.2%
1,000,000 Rhythms Netconnections Inc.
12.750% Sr Nts, Due 4/15/09..... 970,000 967,500
------------ ------------
INTERNET--0.6%
500,000 Cybernet Internet Services
14.000% Serv Units,
Due 7/1/09(2)................... 500,000 490,000
------------ ------------
INSURANCE--2.1%
1,500,000 Conseco, Inc.
10.500% Sr Nts, Due 12/15/04.... 1,734,840 1,631,985
------------ ------------
</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)
LEISURE--2.3%
$1,000,000 The Sports Club Company, Inc.
11.375% Co Gtd Nts, Due
3/15/06......................... $ 997,568 $ 992,500
1,000,000 Trump AC Assoc/FNDG Inc.
11.250% Co Gtd Nts, Due
5/1/06.......................... 967,259 810,000
------------ ------------
1,964,827 1,802,500
------------ ------------
LODGING--1.5%
1,500,000 Epic Resorts LLC/CAP
13.000% Sr Nts, Due 6/15/05..... 1,462,500 1,155,000
------------ ------------
METALS--3.7%
1,000,000 Haynes International, Inc.
11.625% Sr Nts,
Due 9/1/04...................... 902,917 867,500
1,000,000 Inco Ltd.
9.875% Deb, Due 6/15/19......... 998,750 1,036,480
1,000,000 Inco Ltd.
9.600% Deb, Due 6/15/22......... 1,062,970 970,379
------------ ------------
2,964,637 2,874,359
------------ ------------
MINING--3.4%
1,500,000 Cyprus Amax Minerals Inc,
8.375% Deb, Due 2/1/23.......... 1,419,735 1,389,843
1,500,000 Grupo Minero Mexico SA
8.250% Co Gtd Nts,
Due 4/1/08...................... 1,425,890 1,230,000
------------ ------------
2,845,625 2,619,843
------------ ------------
MORTGAGE BANKING--1.2%
1,000,000 Countrywide Capital I
8.000% Co Gtd Nts, Due
12/15/26........................ 991,360 899,907
------------ ------------
PAPER--1.0%
600,000 Advance Agro Public Co.
13.000% Bds, Due 11/15/07....... 538,830 384,000
500,000 APP Intl Finance Co.
11.750% Co Gtd Nts, Due
10/1/05......................... 405,000 420,000
------------ ------------
943,830 804,000
------------ ------------
</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)
PHARMACEUTICAL--1.0%
$ 750,000 Sepracor Inc.
7.000% Nts, Due 12/15/05(2)..... $ 788,625 $ 789,375
------------ ------------
RETAIL/DEPARTMENT STORES--1.9%
1,500,000 The May Department Stores Company
8.300% Co Gtd Nts, Due
7/15/26......................... 1,558,605 1,498,116
------------ ------------
SATELLITE TELEVISION--3.0%
1,500,000 Innova S DE R.L.
12.875% Sr Nts, Due 4/1/07...... 1,393,110 1,335,000
1,000,000 Star Choice Communications
13.000% Sr Nts,
Due 12/15/05.................... 1,030,000 997,500
------------ ------------
2,423,110 2,332,500
------------ ------------
STUDENT LOAN--0.1%
99,000 University Support Services, Inc.
Sub Educat. Ln Nts Ser 1991 B.
12.500% Var Rate,
Due 5/1/06...................... 98,629 99,000
------------ ------------
TEXTILE--1.2%
1,000,000 Advanced Glassfiber Yarns LLC
9.875% Sr Sub Nts, Due
1/15/09......................... 980,000 935,000
------------ ------------
TOLL ROAD REVENUE--1.6%
1,000,000 GS Superhighway Holdings
10.250% Sr Nts,
Due 8/15/07..................... 993,490 618,957
722,005 Mc-Cuernavaca Trust
9.250% Nts,
Due 1/25/00..................... 696,745 640,779
------------ ------------
1,690,235 1,259,736
------------ ------------
</TABLE>
See Accompanying Notes to Financial Statements
17
<PAGE> 18
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--18.8%
Airlines--16.5%
$ 950,209 Airplane Pass-Thru Trust
8.150% Co Gtd Nts, Due
3/15/19......................... $ 951,397 $ 883,001
2,250,000 American Airlines, Inc.
10.180% Col Ts,
Due 1/2/13...................... 2,208,730 2,543,693
871,549 Atlantic Coast Airlines, Inc.
8.750% Pass Thru Costs, Due
1/1/07(2)....................... 871,705 854,118
1,000,000 Atlas Air, Inc.
8.770% Pass Thru Costs, Due
1/2/11.......................... 981,190 960,300
2,243,000 Delta Air Lines, Inc.
10.790% Equip Tr Cert, Due
3/26/14(2)...................... 2,288,385 2,620,721
500,000 Delta Air Lines, Inc.
10.500% Pass Thru Costs, Due
4/30/16......................... 513,750 581,065
1,000,000 Midway Airlines
8.140% Pass Thru Costs, Due
1/2/13.......................... 1,000,000 912,810
984,028 Northwest Airlines, Inc.
8.130% Pass Thru Costs, Due
2/1/14.......................... 956,285 919,249
1,000,000 United Airlines, Inc.
10.850% Equip Tr Cert, Due
7/15/14......................... 1,000,000 1,138,850
1,000,000 United Airlines, Inc.
10.850% Equip Tr Cert, Due
2/19/15......................... 1,000,000 1,138,850
1,000,000 World Airways, Inc.
8.000% Sr Sub Debs, Due
8/26/04......................... 760,000 250,000
------------ ------------
12,531,442 12,802,657
------------ ------------
</TABLE>
See Accompanying Notes to Financial Statements
18
<PAGE> 19
CNA INCOME SHARES, INC.
SCHEDULE OF INVESTMENTS--(Continued)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT COST VALUE(1)
- ---------- ------------ ------------
<S> <C> <C> <C>
DEBT SECURITIES--(Cont'd)
Leasing--2.3%
$1,250,000 Interpool Capital Trust
9.875% Co Gtd Nts, Due
2/15/27......................... $ 1,223,125 $ 989,800
1,000,000 SUSA Partnership, L.P.
7.450% Deb, Due 7/1/18.......... 998,820 842,609
------------ ------------
2,221,945 1,832,409
------------ ------------
UTILITIES--4.9%
Electric--1.4%
1,250,000 Espirito Santo Centrais
10.000% Sr Nts, Due 7/15/07..... 1,227,500 1,050,000
------------ ------------
Gas--1.7%
1,534,680 Transgas de Occidente S.A.
9.790% Sr Nts, Due 11/1/10...... 1,584,099 1,331,335
------------ ------------
Telephone--1.8%
1,500,000 GTE Corporation
7.900% Deb, Due 2/1/27.......... 1,500,000 1,440,552
------------ ------------
TOTAL DEBT SECURITIES--128.9%..... 107,404,835 100,450,439
------------ ------------
PREFERRED STOCK--5.0%
NUMBER OF
SHARES
- ----------
<S> <C> <C> <C>
15,000 Bank United Corp. ................ 750,000 588,750
40,000 EOG Resources, Inc................ 758,600 750,000
17,277 Hybridon, Inc..................... 1,648,543 259,155
40,000 Intermedia Commuincation.......... 961,100 1,350,000
15,000 Loral Space &
Communications Ltd.............. 755,625 965,625
------------ ------------
4,873,868 3,913,530
------------ ------------
COMMON STOCK--1.6%
NUMBER OF
SHARES
- ----------
47,900 Lasalle Hotel Properties.......... 635,529 559,831
41,300 Meristar Hospitality
Corporation..................... 668,478 660,800
1,000 Motels of America, Inc............ 15 0
------------ ------------
1,304,022 1,220,631
------------ ------------
</TABLE>
See Accompanying Notes to Financial Statements
19
<PAGE> 20
CNA INCOME SHARES, INC.
SCHEDULE OF INVESTMENTS--(Continued)
<TABLE>
<C> <S> <C> <C>
WARRANTS--0.3%
NUMBER OF MARKET
WARRANTS COST VALUE(1)
- ---------- ------------ ------------
$ 1,500 American Mobile Satellite Corp.... $ 15 $ 15
6,000 Convergent Communications......... 0 60
1,000 Econophone, Inc................... 0 30,000
1,000 Epic Resorts...................... 0 10
1,000 Globalstar Telecommunications
Ltd............................. 0 65,000
92,977 Hybridon, Inc..................... 0 2,789
1,000 Orbital Imaging Corp.............. 0 35,000
23,160 Natwest Star Choice............... 0 38,956
3,000 Wam!net, Inc...................... 19,980 68,250
------------ ------------
19,995 240,080
------------ ------------
SHORT-TERM NOTES--0.8%
PRINCIPAL
AMOUNT
- ----------
616,000 Bank One N.A. Time Deposit - 5.00%
Due 1/5/00...................... 616,000 616,000
------------ ------------
TOTAL INVESTMENTS--
136.5%(3)................... $114,218,720 $106,440,680
============ ============
</TABLE>
(1) For determination of Market Value see Note A to Financial Statements.
(2) Security may be offered and sold to qualified institutional buyers under
Rule 144A of the Securities Act of 1933.
(3) The Total Market Value represents 136.5% of the Net Assets at December 31,
1999.
See Accompanying Notes to Financial Statements
20
<PAGE> 21
CNA INCOME SHARES, INC.
FINANCIAL HIGHLIGHTS
- --------------------------
Increase (Decrease) in Net Asset Value:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------
1999 1998 1997 1996 1995
------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, beginning
of year...................... $ 9.70 $10.75 $10.23 $ 9.75 $ 8.98
======= ======== ======= ======= ========
Investment income--net......... $ .96 $ .97 $ .98 $ .99 $ 1.07
Realized and unrealized (loss)
gain on investments--net..... ($ 1.21) ($ 1.06) $ .50 $ .47 $ 0.74
------- -------- ------- ------- --------
Total from investment
operations................... ($ .25) ($ .09) $ 1.48 $ 1.46 $ 1.81
------- -------- ------- ------- --------
Total distributions to
shareholders................. ($ .96) ($ .96) ($ .96) ($ .98) ($ 1.04)
------- -------- ------- ------- --------
Net asset value, end of year... $ 8.49 $ 9.70 $10.75 $10.23 $ 9.75
======= ======== ======= ======= ========
Market price per share, end of
year......................... $7.125 $10.1875 $12.00 $10.25 $10.25
======= ======== ======= ======= ========
TOTAL INVESTMENT RETURN*
Based on market price per
share........................ (20.63%) (7.10%) 26.43% 9.56% 18.84%
Based on net asset value per
share........................ (2.58%) (0.84%) 14.47% 14.97% 15.70%
RATIO TO AVERAGE NET ASSETS
Operating Expenses............. 0.97% 0.95% 0.82% 0.87% 0.95%
Total Expenses................. 2.70% 3.53% 3.29% 3.52% 3.80%
Investment income--net......... 10.45% 9.92% 9.47% 10.02% 11.40%
------- -------- ------- ------- --------
SUPPLEMENTAL DATA
Net assets--end of year (in
thousands)................... $77,968 $87,286 $95,026 $88,723 $82,752
Portfolio turnover............. 36.16% 26.74% 59.86% 65.73% 38.82%
</TABLE>
*Total investment return based on market value may result in substantially
different returns than investment return based on net asset value, because
market value can be significantly greater or lesser than the net asset value.
See Accompanying Notes to Financial Statements
21
<PAGE> 22
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,
1999, 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, 1999, by correspondence with the custodian and broker. 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, 1999, 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 25, 2000
22
<PAGE> 23
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 by nationally recognized rating agencies but, as set forth above, may
also
23
<PAGE> 24
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,
if the referenced interest rate decreases on an interest calculation date from
24
<PAGE> 25
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
options and make deposits or have similar arrangements in connection
therewith.
25
<PAGE> 26
(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.
26
<PAGE> 27
(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
27
<PAGE> 28
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.
28
<PAGE> 29
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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<PAGE> 30
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.
30
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DIRECTORS
<TABLE>
<S> <C>
Edward S. Bottum Richard W. Dubberke
Franklin A. Cole Marilou R. McGirr
Sidney Davidson David G. Taylor
</TABLE>
OFFICERS
<TABLE>
<S> <C>
Marilou R. McGirr, Chairman & Douglas B. Schaeffer, Vice
President President
Richard W. Dubberke, Vice President Lynne Gugenheim, Secretary
& Treasurer Mitchell T. Butowski, Assistant
Meghan K. Johnson, Vice President Secretary
and Assistant Treasurer
</TABLE>
PRINCIPAL OFFICE
CNA Income Shares, Inc.
CNA Plaza
Chicago, Illinois 60685
(312) 822-4181
E-Mail Address: [email protected]
Web site at www.cna.com/cna/html/income.html
ADVISER
Continental Assurance Company
(a subsidiary of CNA Financial Corporation)
CUSTODIAN
The Chase Manhattan Bank
One Chase Manhattan Plaza
New York, New York 10081
AUDITORS
Deloitte & Touche LLP
Two Hilton Court
Parsippany, New Jersey 07054-0319
TRANSFER AGENT
The Bank of New York
1-800-432-8224
E-Mail Address: [email protected]
<TABLE>
<S> <C>
Address Shareholder Inquiries To: Send Certificates For Transfer and
Shareholder Relations Address Changes To:
Department - 11E Receive and Deliver
P.O. Box 11258 Department - 11W
Church Street Station P.O. Box 11002
New York, NY 10286 Church Street Station
New York, NY 10286
</TABLE>
Answers to many of your shareholder questions and requests for forms are
available by visiting
The Bank of New York's Website at:
http.//stock.bankofny.com
