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CIRCLE INCOME SHARES, INC.
==========================
[LOGO] 1997
ANNUAL REPORT
FISCAL YEAR
ENDED JUNE 30, 1997
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CIRCLE INCOME SHARES, INC.
CORPORATE DESCRIPTION
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Circle Income Shares, Inc. ("the Company") is a closed-end investment company
with $33.1 million in net capital as of June 30, 1997. The primary investment
objective of the Company is to provide as high a level of current income as is
consistent with prudent investment risk through investment principally in debt
securities, with capital appreciation as a secondary investment objective. The
Company primarily invests in Corporate and mortgage-backed fixed income
securities including some high yield, high risk fixed-income securities of
domestic companies. The Company's stock is traded on the over-the-counter market
as a national issue, under the NASDAQ symbol CINS. The Investment Management and
Trust Group of Bank One, Indiana, NA is the Company's investment advisor.
TABLE OF CONTENTS
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<TABLE>
<S> <C>
Report from Management............................................ 1
Five-Year Summary of Distributions................................ 2
Projected Dividend Dates.......................................... 2
Federal Tax Status................................................ 2
Statement of Assets and Liabilities............................... 3
Statements of Changes in Net Assets............................... 4
Statement of Operations........................................... 5
Portfolio of Investments.......................................... 6-7
Financial Highlights.............................................. 8
Notes to Financial Statements..................................... 9-10
Report of Independent Public Accountants.......................... 11
Dividend Reinvestment Plan........................................ 12-13
Board of Directors................................................ 14
Officers.......................................................... 14
</TABLE>
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<PAGE> 3
REPORT FROM MANAGEMENT
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This Annual Report reviews Circle Income Shares' results for the fiscal
year ended June 30, 1997. During this twelve month fiscal period, interest rates
trended lower during the first two quarters, and then rose during the third
quarter before descending again during the fourth fiscal quarter. Compared to
the prior fiscal year, interest rates were generally lower in yield, reducing
your Company's net investment income to $2,464,820 or $0.88 per share compared
with net investment income of $2,519,430 or $0.90 in fiscal year 1996. Given the
inverse relationship between bond prices and interest rates, lower interest
rates gave rise to a higher per share net asset value of $11.82, an increase
from $11.60 per share from the prior fiscal year end. Total net assets at fiscal
year end were $33,061,010.
On January 17, 1997, Mr. Steven R. Hazelbaker was elected as a Director of
your Company to fill the vacancy caused by the resignation of Mr. Gerald Bepko.
Mr. Hazelbaker, who resides in Indianapolis, Indiana, serves as Vice President,
Chief Financial Officer and Treasurer of Meridian Insurance Company in
Indianapolis.
Dividends during the 1997 fiscal year were paid at the monthly rate of
$0.0725. Total annual distributions per share for the fiscal year were $0.87. At
its regular meeting on July 18, 1997, your Company's Board of Directors declared
monthly dividends of $0.0725 per share for the months of August, September,
October, and November, 1997, subject to the realization of anticipated earnings.
It has been your Company's practice to make dividend payments on the first
Friday of each month to shareholders of record two weeks prior to payment date.
A table showing projected dividend record and payment dates for the 1998 fiscal
year is included on page two of the Report.
Interest rates, as measured by the yield on the five-year maturity United
States Treasury, fluctuated approximately within a 1% band during the latest
twelve months. Five year yields started the fiscal year on July 1, 1996 at
6.49%. Interest rates proceeded to fall to the fiscal year's low of 5.83% in
late November, and then climbed to a high of 6.86% in mid-April, 1997. Interest
rates varied with the ebb and flow of investor expectations concerning economic
growth and price inflation. As of the first quarter of calendar 1997,
year-over-year GDP change was 4.1% with inflation, as measured by the Consumer
Price Index, under control at a modest 2.8% level. Given the strong performance
in fixed income market sectors of mortgages and corporate bonds over the latest
twelve months, the Circle Income Shares' portfolio outperformed the general bond
market, as measured by the Lehman Aggregate Index.
At this juncture, the economy has the positives of low unemployment, stable
positive economic growth, a narrowing federal deficit, and low inflation. We
continue to see little likelihood of a recession during the next six months.
Interest rates, due to increased economic growth, are expected to drift modestly
upward during the remainder of the calendar year. We are closely monitoring
economic events signaling changes in future economic growth or inflation rates.
Your Company's management remains committed to fulfilling our primary investment
objective of providing a high level of current income consistent with prudent
investment risk.
<TABLE>
<S> <C>
/s/ Bruce J. Glor /s/ Jeffrey W. Fountain
Bruce J. Glor Jeffrey W. Fountain
President Executive Vice President & Chief Investment Officer
</TABLE>
July 18, 1997
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1
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CIRCLE INCOME SHARES, INC.
FIVE-YEAR SUMMARY OF DISTRIBUTIONS
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<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 PER SHARE DISTRIBUTIONS
----------------------------------------------------------
<S> <C>
1997 $0.870
1996 0.895
1995 0.900
1994 0.945
1993 0.915
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</TABLE>
PROJECTED DIVIDEND DATES-FISCAL 1998
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Listed below are the expected dividend distribution dates for the next twelve
months. These dates are subject to change by the Board of Directors.
<TABLE>
<CAPTION>
RECORD DATE PAYMENT DATE RECORD DATE PAYMENT DATE
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<S> <C> <C> <C>
July 18, 1997 August 1, 1997 January 23, 1998 February 6, 1998
August 22, 1997 September 5, 1997 February 20, 1998 March 6, 1998
September 19, 1997 October 3, 1997 March 20, 1998 April 3, 1998
October 24, 1997 November 7, 1997 April 17, 1998 May 1, 1998
November 21, 1997 December 5, 1997 May 22, 1998 June 5, 1998
December 19, 1997 January 2, 1998 June 19, 1998 July 3, 1998
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</TABLE>
FEDERAL TAX STATUS
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Of the distributions made to corporations during the fiscal year ended June 30,
1997, no portion qualifies for the dividends received deduction under Internal
Revenue Code Section 243. Detailed information on the taxability of dividends is
mailed to shareholders annually.
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2
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CIRCLE INCOME SHARES, INC.
STATEMENT OF ASSETS AND LIABILITIES
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<TABLE>
<CAPTION>
AS OF JUNE 30, 1997 (ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS: 1997
----
<S> <C>
Investments, at market value (identified cost $30,932.4) (Note 1)............ $32,658.9
Receivable from brokers for investments sold................................. 8.8
Accrued interest receivable (Note 1)......................................... 638.3
Other assets................................................................. 10.8
---------
Total Assets................................................................. $33,316.8
---------
LIABILITIES:
Accrued Expenses:
Investment advisory and custody fees......................................... $ 16.0
Transfer and dividend disbursing agent fees.................................. 9.2
Other expenses............................................................... 27.8
Dividend payable (July 7, 1997 -- $0.0725 per share)......................... 202.8
---------
Total Liabilities............................................................ $ 255.8
---------
NET ASSETS:
Common Stock ($1.00 par value; 10,000,000 shares authorized; 2,797,416 shares
outstanding)............................................................... $ 2,797.4
Additional paid-in capital................................................... 30,985.5
Accumulated realized loss on investments..................................... (2,505.5)
Unrealized appreciation of investments....................................... 1,726.5
Undistributed net investment income.......................................... 57.1
---------
Net Assets applicable to outstanding shares.................................. $33,061.0
=========
Net Asset Value (NAV) per share.............................................. $ 11.82
=========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
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3
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CIRCLE INCOME SHARES, INC.
STATEMENTS OF CHANGES IN NET ASSETS
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<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996 (ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
FROM INVESTMENT ACTIVITIES 1997 1996
---- ----
<S> <C> <C>
OPERATIONS:
Net investment income.......................................... $ 2,464.8 $ 2,519.4
Net realized loss from investment transactions (Note 2)........ (32.6) (111.0)
Unrealized appreciation (depreciation) of investments.......... 610.8 (567.5)
--------- ---------
Net increase in Net Assets resulting from operations............. 3,043.0 1,840.9
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends to shareholders from net investment income ($0.87 and
$0.895 per share, respectively -- Note 1)................... (2,433.7) (2,503.7)
--------- ---------
Net increase (decrease) in Net Assets............................ 609.3 (662.8)
--------- ---------
NET ASSETS:
Beginning of Year................................................ 32,451.7 33,114.5
--------- ---------
End of Year (including undistributed net investment income of
$57.1 and $26.0, respectively)................................. $33,061.0 $32,451.7
========= =========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
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4
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CIRCLE INCOME SHARES, INC.
STATEMENT OF OPERATIONS
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<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30, 1997 (ALL AMOUNTS IN THOUSANDS)
INVESTMENT INCOME: 1997
----
<S> <C>
Interest Income............................................................. $2,755.3
--------
Expenses:
Investment advisory fee (Note 4)............................................ 163.6
Transfer and dividend disbursing agent fee.................................. 25.0
Directors' fees and expenses................................................ 22.3
Accounting fees............................................................. 17.0
Mailing expenses............................................................ 14.0
Custodian fee and expenses.................................................. 14.0
Printing.................................................................... 9.6
Legal fees.................................................................. 5.0
Miscellaneous............................................................... 20.0
--------
Total Expenses................................................................ 290.5
--------
Net Investment Income......................................................... $2,464.8
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REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss from investment transactions (Note 2)....................... $ (32.6)
Net unrealized appreciation on investments.................................... 610.8
--------
Net realized and unrealized gain on investments............................... 578.2
--------
Net increase in Net Assets resulting from operations.......................... $3,043.0
========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
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5
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CIRCLE INCOME SHARES, INC.
PORTFOLIO OF INVESTMENTS (NOTE 1)
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JUNE 30, 1997
(All amounts in thousands, except share data)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
<C> <S> <C>
U.S. GOVERNMENT INSTRUMENTALITY OBLIGATIONS (27.2%)*
$ 0.2 Government National Mortgage Association, 14.75% Mobile Home "Series B", due 9/15/97.......... $0.2
61.8 Government National Mortgage Association, 13% Single Family, due 1/15/15...................... 72.8
41.5 Government National Mortgage Association, 9% Single Family, due 11/15/19...................... 44.4
100.0 Government National Mortgage Association, 10% Single Family, due 11/15/20..................... 110.3
142.5 Government National Mortgage Association, 9% Single Family, due 3/15/20....................... 152.4
169.9 Government National Mortgage Association, 9% Single Family, due 9/15/16....................... 182.5
76.1 Government National Mortgage Association, 9% Single Family, due 11/15/21...................... 81.3
246.7 Government National Mortgage Association, 9% Single Family, due 7/15/21....................... 263.6
38.5 Government National Mortgage Association, 9% Single Family, due 6/15/18....................... 41.2
146.3 Government National Mortgage Association, 9% Single Family, due 7/15/18....................... 156.8
84.6 Government National Mortgage Association, 9% Single Family, due 10/15/16...................... 90.8
728.5 Government National Mortgage Association, 9% Single Family, due 1/15/22....................... 776.5
884.4 Government National Mortgage Association, 8.50% Single Family, due 1/15/25.................... 919.5
2,683.1 Government National Mortgage Association, 9% Single Family, due 11/15/25...................... 2,837.3
822.9 Government National Mortgage Association, 8% Series 2, due 9/25/26............................ 838.6
753.2 Government National Mortgage Association, 8% Series 2, due 2/20/27............................ 767.5
194.0 Federal Home Loan Mortgage Corporation, 10.25% Participation Certificates, due 6/1/09......... 210.1
70.7 Federal Home Loan Mortgage Corporation, 12.50% Participation Certificates, due 1/1/14......... 80.4
10.6 Federal Home Loan Mortgage Corporation, 13% Participation Certificates, due 6/1/14............ 12.5
18.3 Federal Home Loan Mortgage Corporation, 13.50% Participation Certificates, due 1/1/11......... 21.6
1.4 Federal Home Loan Mortgage Corporation, 13.50% Participation Certificates, due 10/1/12........ 1.6
13.7 Federal Home Loan Mortgage Corporation, 13.50% Participation Certificates, due 2/1/13......... 15.4
11.5 Federal Home Loan Mortgage Corporation, 14.50% Participation Certificates, due 12/1/10........ 13.7
4.4 Federal Home Loan Mortgage Corporation, 14.50% Participation Certificates, due 3/1/11......... 5.2
28.2 Federal Home Loan Mortgage Corporation, 14.50% Participation Certificates, due 12/1/11........ 33.6
18.8 Federal Home Loan Mortgage Corporation, 14.75% Participation Certificates, due 3/1/10......... 22.4
31.3 Federal Home Loan Mortgage Corporation, 15% Participation Certificates, due 3/1/11............ 37.3
31.1 Federal Home Loan Mortgage Corporation, 10% Participation Certificates, due 9/1/01............ 32.8
13.1 Federal Home Loan Mortgage Corporation, 10% Participation Certificates, due 7/1/02............ 13.9
175.0 Federal Home Loan Mortgage Corporation, 8.50% Participation Certificates, due 1/1/08.......... 180.8
37.9 Federal National Mortgage Association, 10% Mortgage Backed Security, due 10/1/01.............. 39.8
94.9 Federal National Mortgage Association, 10% Mortgage Backed Security, due 12/1/18.............. 103.3
121.9 Federal National Mortgage Association, 9% Mortgage Backed Security, due 1/1/19................ 130.0
123.5 Federal National Mortgage Association, 9% Mortgage Backed Security, due 3/1/17................ 130.6
126.7 Federal National Mortgage Association, 10% Mortgage Backed Security, due 4/1/19............... 136.5
408.4 Federal National Mortgage Association, 9% Mortgage Backed Security, due 3/1/25................ 431.6
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TOTAL U.S. GOVERNMENT INSTRUMENTALITY OBLIGATIONS (COST $8,747.8)............................. $8,988.8
-----------
SHORT-TERM OBLIGATIONS (1.1%)*
362.5 Ford Motor Credit Corporation, 5.52% Commercial Paper, due 7/2/97............................. $362.5
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TOTAL SHORT-TERM OBLIGATIONS (COST $362.5).................................................... $362.5
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CORPORATE OBLIGATIONS (70.5%)*
992.0 American Airlines, Inc., 10.18% Pass-Through Certificates, Series 1991-A2, due 1/2/13......... $1,185.2
750.0 Applied Materials, Inc., 8% Senior Notes, due 9/1/04.......................................... 786.3
750.0 Borden Chemical, 9.50% Notes, due 5/1/05...................................................... 789.4
500.0 Citicorp, 9.75% Subordinated Capital Notes, due 8/1/99........................................ 531.7
750.0 Coca Cola Femsa, 8.95% Notes, due 11/1/06..................................................... 765.0
642.0 Delta Airlines, 10% Equipment Trust Certificates, Series 1991-K, due 12/5/14.................. 751.7
750.0 Digital Equipment, 8.625% Debentures, due 11/1/12............................................. 762.4
1,000.0 Federal Express, 9.65% Notes, due 6/15/12..................................................... 1,177.8
750.0 Federated Department Stores, 8.125% Senior Notes, due 10/15/02................................ 780.0
1,000.0 First Interstate (Wells Fargo), 9.125% Subordinated Notes, due 2/1/04......................... 1,109.8
1,000.0 Fletcher Challenge Industries Finance USA Ltd., 9% Notes, due 9/15/99......................... 1,049.5
1,000.0 Ford Motor Company, 9% Debentures, due 9/15/01................................................ 1,080.4
1,000.0 General Motors Acceptance Corporation, 8.50% Notes, due 1/1/03................................ 1,072.5
1,000.0 Georgia Pacific, 9.50% Debentures, due 5/15/22................................................ 1,079.0
The accompanying notes to financial statements are an integral part of this statement.
</TABLE>
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CIRCLE INCOME SHARES, INC.
PORTFOLIO OF INVESTMENTS (NOTE 1)
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<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
<C> <S> <C>
$ 500.0 Georgia Pacific, 7.375% Debentures, due 12/1/25............................................... $474.6
800.0 News America Holdings, 7.75% Senior Debentures, due 1/20/24................................... 762.1
750.0 Noram Energy Inc., 8.64% Medium Term Notes, due 9/4/98........................................ 768.3
750.0 Owens-Illinois, Inc., 10% Senior Subordinated Notes, due 8/1/02............................... 787.5
750.0 Ryland Group, 9.625% Senior Subordinated Notes, due 6/1/04.................................... 761.3
750.0 Safeway, 10% Senior Subordinated Notes, due 12/1/01........................................... 830.0
1,000.0 Sprint Corporation, 9.50% Debentures, due 4/1/03.............................................. 1,120.5
1,000.0 Tele-Communications, Inc., 9.80% Senior Debentures, due 2/1/12................................ 1,144.6
750.0 Tenet Healthcare, 8.625% Senior Subordinated Notes, due 1/15/07............................... 756.6
1,000.0 Time Warner Entertainment, 8.875% Senior Notes, due 10/1/12 1,103.3
1,000.0 United Airlines, 9.125% Debentures, due 1/15/12............................................... 1,103.0
750.0 Westinghouse Electric, 8.625% Debentures, due 8/1/12.......................................... 775.1
-----------
TOTAL CORPORATE OBLIGATIONS (COST $21,822.1).................................................. $23,307.6
-----------
===========
TOTAL INVESTMENTS MARKET VALUE (COST $30,932.4)............................................... $32,658.9
===========
</TABLE>
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* Percent of Net Asset Value
The accompanying notes to financial statements are an integral part of this
statement.
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7
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CIRCLE INCOME SHARES, INC.
FINANCIAL HIGHLIGHTS
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SELECTED DATA PER SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
year......................... $ 11.60 $ 11.84 $ 11.35 $ 12.35 $ 11.95
--------- --------- --------- --------- ---------
Net investment income.......... 0.88 0.90 0.89 0.91 0.97
Net realized and unrealized
gain (loss) on investments... 0.21 (0.24) 0.50 (0.96) 0.35
--------- --------- --------- --------- ---------
Net increase (decrease) in net
asset value resulting from
operations................... 1.09 0.66 1.39 (0.05) 1.32
--------- --------- --------- --------- ---------
Dividends to shareholders from
net investment income........ (0.87) (0.90) (0.90) (0.95) (0.92)
--------- --------- --------- --------- ---------
Net asset value, end of year... $ 11.82 $ 11.60 $ 11.84 $ 11.35 $ 12.35
========= ========= ========= ========= =========
Market value per share, end of
year......................... $ 10.688 $ 10.500 $ 10.250 $ 11.625 $ 11.375
========= ========= ========= ========= =========
TOTAL INVESTMENT RETURN: (1)
Based on market value per
share........................ 9.56% 11.15% (4.99)% 11.89% 3.59%
Based on net asset value per
share........................ 9.69% 5.62% 11.45% 0.66% 11.44%
RATIOS TO AVERAGE NET ASSETS:
Total expenses................. 0.89% 0.89% 0.93% 0.89% 0.94%
Net investment income.......... 7.53% 8.05% 7.97% 7.61% 8.03%
SUPPLEMENTAL DATA:
Net assets at end of period
($000)....................... $33,061.0 $32,451.7 $33,114.5 $31,736.2 $34,516.8
Average net assets during
period ($000)................ $32,756.4 $32,783.1 $32,425.4 $33,126.5 $33,936.0
Portfolio turnover rate........ 8.52% 17.75% 34.73% 36.60% 26.86%
Number of shares outstanding at
end of period (000).......... 2,797.4 2,797.4 2,797.4 2,797.4 2,794.1
</TABLE>
The accompanying notes to financial statements are an integral part of this
information.
- ---------------
(1) Total investment return is a hypothetical rate of return to the investor
which assumes that an initial investment is made at the appropriate rate
(market value or net asset value) calculated on the last business day before
the first day of each fiscal year. All related dividends during the year are
reinvested at the appropriate rate (market value or net asset value), and
the entire investment is liquidated at the appropriate price last calculated
on the last business day of each fiscal year. The total return is calculated
by dividing the ending value of the investment by the beginning value of the
investment. Total investment return excludes the effects of any commissions.
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8
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CIRCLE INCOME SHARES, INC.
NOTES TO FINANCIAL STATEMENTS
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FOR THE YEAR ENDED JUNE 30, 1997
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
Circle Income Shares ("the Company") is registered under the Investment Company
Act of 1940, as amended, as a diversified, closed-end management company. The
Company's primary investment objective is to seek as high a level of current
income as is consistent with prudent investment risk from a diversified
portfolio principally of debt securities, with capital appreciation being a
secondary investment objective. The Company primarily invests in Corporate and
mortgage-backed fixed income securities, including some high yield, high risk
fixed income securities of domestic companies. The following is a summary of
significant accounting policies consistently followed by the Company in the
preparation of its financial statements.
SECURITIES VALUATION
Investments in securities traded on a national securities exchange are valued at
the closing price on the last business day of the period; securities traded in
the over-the-counter market and listed securities for which no sale was reported
on that date are valued at the last reported bid price; short-term notes are
stated at cost which approximates market value. Restricted securities and other
securities for which market quotations are not readily available are valued at
fair value as determined under procedures established by the Board of Directors.
INCOME TAXES
It is the Company's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
substantially all of its net investment income to the shareholders. Therefore,
no provision for Federal Income taxes is required.
SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME
Securities transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains and losses are determined on the basis
of identified cost. Interest income is recorded on a daily basis and dividend
income is recorded on the ex-dividend date. Distributions to shareholders are
recorded on record date.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
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9
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CIRCLE INCOME SHARES, INC.
NOTES TO FINANCIAL STATEMENTS
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FOR THE YEAR ENDED JUNE 30, 1997 (ALL AMOUNTS IN THOUSANDS, EXCEPT
PER SHARE DATA.)
NOTE 2 -- CAPITAL LOSS CARRYFORWARD
During the fiscal year ended June 30, 1997 the Company realized net capital
losses from security transactions in the amount of $32.6 thousand. The total
capital loss carryforward at June 30, 1997 is $2.5 million. The loss
carryforward expires as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT YEAR AMOUNT
---- ------ ---- ------
<S> <C> <C> <C>
1998 $6.5 2003 $623.6
1999 $848.7 2004 $111.0
2000 $819.6 2005 $32.6
2001 $63.5
</TABLE>
NOTE 3 -- PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities other than United States government
obligations and short-term notes for 1997 and 1996 aggregated $1.5 million and
$1.2 million, respectively. Purchases and sales of U.S. government obligations
for 1997 and 1996 were $1.6 million and $1.5 million, respectively.
The identified cost of investments at June 30, 1997 was $30.9 million. Had the
average cost basis been used for financial statement purposes, net realized loss
and unrealized appreciation would have been unchanged. Cost for Federal tax
purposes differs from value at June 30, 1997 by the net unrealized appreciation
of securities as follows:
<TABLE>
<S> <C>
Unrealized Appreciation $1,876.0
Unrealized Depreciation (149.5)
--------
Net Unrealized Appreciation $1,726.5
========
</TABLE>
NOTE 4 -- INVESTMENT ADVISORY FEE
The Company has an agreement with Bank One, Indiana, NA (formerly known as Bank
One, Indianapolis, NA) to serve as the Company's investment advisor. For the
years ended June 30, 1997 and 1996, the Company paid fees of $163.6 and $165.9
thousand, respectively, or 0.50% of average net assets for investment management
services to the advisor. The fee is based on average weekly net assets at the
annual rate of one-half of one percent on the first $50 million and four-tenths
of one percent on the excess over $50 million.
The advisory fee is subject to reduction in any year in which annual expenses
(including the advisory fee, but excluding interest, taxes, brokerage fees,
expenses of any future public offerings of the Company's shares and, where
permitted, extraordinary expenses) exceed one and one-half percent of the
average weekly net assets of the Company during the year to date. In addition,
the advisor pays certain expenses in connection with the Dividend Reinvestment
Plan of the Company. No other fees were received by the advisor from the
Company.
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10
<PAGE> 13
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND
THE BOARD OF DIRECTORS OF
CIRCLE INCOME SHARES, INC.:
We have audited the accompanying statement of assets and liabilities of CIRCLE
INCOME SHARES, INC. (an Indiana Corporation) including the schedule of portfolio
investments, as of June 30, 1997, the related statements of changes in net
assets for each of the two years in the period then ended, the statement of
operations for the year 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 as of June
30, 1997, by correspondence with the custodian and sub-custodian. 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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Circle
Income Shares, Inc. as of June 30, 1997, the changes in its net assets for each
of the two years in the period then ended, the results of its operations for the
year then ended, and the financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Indianapolis, Indiana
July 18, 1997
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11
<PAGE> 14
DESCRIPTION OF THE DIVIDEND REINVESTMENT PLAN (UNAUDITED)
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Circle Income Shares, Inc. (the "Company") has a Dividend Reinvestment Plan
(the "Plan") which provides that dividends and other distributions be payable,
at the election of the shareholders, in shares of the Company's common stock.
Any registered holder of the Company's common stock may participate in the Plan.
If a shareholder's stock is registered in the name of someone else (such as a
bank, broker or trustee), that registered holder may participate on the
shareholder's behalf. Whether or not a third party bank, broker or trustee
elects to participate in the Plan is totally within the discretion of the third
party.
For shareholders who elect to participate in the Plan, all dividends,
including any distributions of capital gain, are automatically invested in
additional shares of the Common Stock of the Company. The Plan does not include
a provision for the investment of additional cash contributions by participants.
An independent broker acts as the Dividend Reinvestment Plan Agent (the
"Plan Agent") for all shareholders who elect to participate in the Plan. Harris
Trust and Savings Bank acts as the Accounting Agent (the "Accounting Agent") and
keeps the books and records for all shareholders who elect to participate in the
Plan. All inquiries regarding the Plan should be sent to the Accounting Agent at
the following address:
Harris Trust and Savings Bank
Shareholder Services Division
Attn: Circle Income Shares, Inc. Dividend Reinvestment Plan
311 West Monroe, 14th Floor
Chicago, Illinois 60606
Each registered shareholder is assigned an account number. This account
number should be used in all correspondence with either Agent.
Dividends are reinvested by the Plan Agent by either (a) directing the
Company to pay the dividend in cash and using the cash to buy shares in the open
market, or (b) directing the Company to pay the dividend in new shares issued at
net asset value. To determine which method is used, the Plan Agent compares the
net asset value per share to the market price per share of the Company's common
stock at the close of business five trading days before the dividend payment
date. For purposes of this comparison, the Plan Agent uses the closing price
plus estimated brokerage commissions, as the market price per share.
If the net asset value is lower than the market price, the Plan Agent
elects, on behalf of all participating shareholders, to take the dividend in
stock and additional shares are issued by the Company and credited to the
participant's account at net asset value.
If the market price is lower than the net asset value, the Plan Agent
elects, on the participating shareholder's behalf, to take the dividend in cash.
The Plan Agent will aggregate the dividends of all participants and apply the
dividends to the purchase of the Company's stock in the open market. The cost of
the stock credited to each participating shareholder's account, if this method
is used, will include the participant's proportion of any brokerage commissions
and transfer taxes which the Plan Agent pays to purchase the shares in the open
market. The Accounting Agent computes the average price of all shares purchased
(including any brokerage commission and transfer taxes), and credits shares to
each participating shareholder's account on the basis of this average price.
Shares purchased by the Plan Agent in the open market are acquired consistent
with a policy of best price and execution.
Regardless of the method used by the Plan Agent to reinvest dividends, once
a shareholder elects to participate in the Plan, the shares credited to the
shareholder's "open account" will earn dividends, and the "open account" will
also be automatically reinvested. Since dividends will seldom, if ever, be in an
amount sufficient to acquire an exact number of full shares, a participating
shareholder's reinvestment will normally include a fractional share (computed to
three decimal places). These fractional shares will also earn proportional
dividends as full shares do.
After each dividend payment, all participating shareholders will receive
current statements of their accounts. These statements include information for
personal and tax records, and should be permanently retained.
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There are no fees or other direct charges, except as noted in the above, to
participate in the Plan. Certain costs of providing the Plan are paid by the
Company's Investment Advisor, except for costs of registration under applicable
securities laws, if it is determined at a later date that registration is
necessary. The Plan may be amended to provide for direct charge in the future.
To begin participation in the Plan, a shareholder must sign and return, to
the Accounting Agent at the address given above, an authorization card which
appoints the Plan Agent as the shareholder's Agent for participation. An
authorization card may be obtained from the Accounting Agent at the address
given above or by calling the Accounting Agent at (312) 461-7763. Participation
will begin with the next dividend payable after the Accounting Agent actually
receives the authorization card, provided that the authorization card is
received 15 days prior to the record date for that dividend. Otherwise, the
shareholder will receive the dividend in the usual manner, and participation
will begin with the next following dividend. Historically, record dates have
normally preceded payment dates by approximately two weeks.
Once a shareholder begins participation in the Plan, dividends are
automatically reinvested until participation is terminated. Additional shares
which are subsequently registered in a shareholder's identical name, address and
account will also participate in the Plan.
The Accounting Agent maintains an "open account" for each participant in the
Plan and credits shares acquired through the Plan to it. Certificates are not
issued for shareholders whose shares are held in an "open account." A
shareholder may withdraw at any time some or all of the full shares held in the
"open account" by sending a written request to the Accounting Agent at the
address given above. Requesting a certificate for any or all of the full shares
does not terminate participation in the Plan. Certificates for fractional shares
will not be issued.
A shareholder's stock certificates may be surrendered to the Accounting
Agent and shares will be credited to the shareholder's "open account" and held
by the Accounting Agent in uncertified form.
A shareholder may terminate participation in the Plan at any time and
receive future dividends in cash by sending a written notice to the Accounting
Agent. Participation will end and the shareholder will receive future dividends
in cash, provided that the Accounting Agent receives the notice 15 days prior to
the record date for that dividend. Otherwise, that dividend will be reinvested
and cash payments will begin the next following dividend.
When a shareholder terminates participation in the Plan, the shareholder's
"open account" will contain a fractional share balance, and, if the shareholder
has been a participant for a sufficient amount of time, will probably contain a
full share balance. At the time participation in the Plan is terminated, the
Accounting Agent will withdraw the full shares then credited to the
shareholder's "open account." This value will be based on the closing price of
the Company's stock in the open market on the effective date of the termination
of participation. Any fractional shares will be redeemed in cash. There is no
penalty or charge for withdrawal from the Plan. A shareholder may rejoin the
Plan at any time.
The Plan may be amended or terminated at any time only if notice of the
amendment or termination has been sent to participants of the Plan. A notice
would be sent to participants at least thirty days before the record date of the
first dividend affected by the amendment or termination.
The taxability of a shareholder's dividends for Federal income tax purposes
is controlled by Federal tax law and not by the Plan. However, dividends
reinvested through the Plan continue to be taxable for Federal income tax
purposes.
If the Plan Agent reinvests a shareholder's dividend by purchasing shares in
the open market, the dividend is taxable just as if the shareholder received it
in cash. If the Plan Agent reinvests the dividend by taking stock issued by the
Company at net asset value, then, for Federal income tax purposes, the dividend
is considered to be the greater of the net asset value reinvestment price or the
fair market value (the closing price in the open market) on the payment date;
therefore, a participating shareholder's taxable dividend may be greater than if
the shareholder received the dividend in cash.
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<PAGE> 16
CIRCLE INCOME SHARES, INC.
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DIRECTORS
DR. FREDERICK R. FORD, Executive Vice President and Treasurer
Purdue University
BRUCE J. GLOR, Executive Vice President
Bank One, Indiana, NA
STEVEN R. HAZELBAKER, Vice President, CFO and Treasurer
Meridian Mutual Insurance Company
MICHAEL S. HUNT, Retired Vice President
Eli Lilly and Company
JAMES D. KECKLEY, Retired Executive Vice President
Bank One, Indiana, NA
E. LYNN PLASTER, Retired Executive Vice President
Bank One, Indiana, NA
OFFICERS
BRUCE J. GLOR, President
JEFFREY W. FOUNTAIN, CFA, Executive Vice President and Chief Investment Officer
TIMOTHY P. HOLIHEN, CFA, Vice President
JAMES M. NICHOLSON, Treasurer
JACQUELINE A. WEITZ, Secretary
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INVESTMENT ADVISOR
Bank One, Indiana, NA
111 Monument Circle, IN1-0170
P.O. Box 7700
Indianapolis, IN 46277-0117
CUSTODIAN
Bank One Trust Company, NA
100 East Broad Street, OH1-0193
Columbus, OH 43271-0193
TRANSFER & DIVIDEND
DISBURSING AGENT
Harris Trust and Savings Bank
Shareholder Services Division
311 West Monroe Street, 14th Floor
Chicago, IL 60606
SHAREHOLDER INQUIRIES
Harris Trust and Savings Bank
Shareholder Services Division
311 West Monroe Street, 14th Floor
Chicago, IL 60606
Telephone (312) 461-7763
AUDITORS
ARTHUR ANDERSEN LLP
Bank One Center/Tower, Suite 4300
111 Monument Circle
Indianapolis, IN 46204-5143
COMPANY ADDRESS
P.O. Box 77004
Indianapolis, IN 46277-7004
Telephone (317) 321-8180
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