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CIRCLE INCOME SHARES, INC.
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LOGO
SEMI-ANNUAL REPORT
SIX MONTHS ENDED
DECEMBER 31, 1998
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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 $33.6 million in net capital as of December 31, 1998. 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 and foreign companies. The Company's stock
is traded on the over-the-counter market as a national issue, under the NASDAQ
symbol CINS. Banc One Investment Advisors Corporation is the Company's
investment advisor.
TABLE OF CONTENTS
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<TABLE>
<S> <C>
Report from Management...................................... 1
Schedule of Portfolio Investments........................... 2-4
Statement of Assets and Liabilities......................... 5
Statements of Changes in Net Assets......................... 6
Statement of Operations..................................... 7
Notes to Financial Statements............................... 8-9
Financial Highlights........................................ 10
Dividend Reinvestment Plan.................................. 11-13
Board of Directors.......................................... 14
Officers.................................................... 14
</TABLE>
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The Company's 1998 Annual Meeting of Shareholders was held on November 13, 1998.
The Directors listed below were all duly elected at that meeting at which, of
the 2,803,476 shares entitled to vote, 2,289,477 shares were represented. The
following votes were recorded in the affirmative for the Directors:
<TABLE>
<S> <C> <C> <C>
Ford 2,276,237 Glor 2,274,431
Hazelbaker 2,274,937 Hunt 2,274,937
Keckley 2,274,796 Plaster 2,276,237
</TABLE>
2,259,474 shares were voted in favor of the appointment of Arthur Anderson LLP,
as the Company's Auditors: 12,653 shares were voted against the proposal and
17,350 shares abstained.
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CIRCLE INCOME SHARES, INC.
REPORT FROM MANAGEMENT
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This Semi-Annual Report reviews the six-month period ended December 31,
1998, and represents the first six months of your Company's 1999 fiscal year.
Net investment income during this period was $1,109,640 or $0.40 per share
compared to net investment income of $1,219,528 or $0.44 per share earned during
the comparable period in fiscal 1998. The net asset value was $11.99 per share
on December 31, 1998 compared with $11.99 a year ago, and $11.96 per share at
the beginning of the fiscal year on June 30, 1998.
International financial events significantly impacted the domestic fixed
income markets during calendar year 1998. Asian economic weakness gave rise to
forecasts for weaker domestic economic growth during the first half of the year.
United States Treasury yields traded within a narrow band during the first seven
months; the five-year maturity Treasury traded between yields of 5.20% and 5.80%
through July 31, 1998. The Russian default and ruble devaluation, concerns about
weakening Latin American economic growth, and Japan's failure to stimulate its
faltering economy sparked fears of a global economic slow-down during the third
quarter. Investors rushed to the safety of U.S. Treasuries, Treasury yields
plummeted to record lows and Treasury prices soared. Five-year Treasury
maturities traded at yields of less than 4.00% during the third quarter of the
calendar year. Five-year Treasury yields finished the year at approximately
4.5%. The Federal Reserve lowered the federal funds rate three times during the
second half of the year. Yield spreads, or the difference in yield between
non-Treasury (mortgage and corporate issues) and Treasuries widened
dramatically. Given the large rally in Treasury prices and increased credit
fears in the fixed income markets, non-Treasury sectors significantly
under-performed the Treasury market for the year 1998.
Strong Treasury performance and declining yields produced respectable fixed
income returns for the calendar year 1998. The Lehman Aggregate Index, a market
indicator of general bond returns, completed the year with a total return of
8.69%. The best performing fixed income area for the year was the lower yielding
Treasury sector. The Circle Income Portfolio's focus on yield and current income
mandates a portfolio consisting of investment grade corporate, mortgage, and
higher yielding below investment-grade corporate issues. Given that each of the
sectors represented in the Circle Portfolio underperformed Treasury sector
returns, the total return of the Circle Income Shares Portfolio lagged the
performance of the Aggregate Index for the calendar year 1998.
The U.S. economy appears poised for another excellent year with modest GDP
growth expected in the 1.5% to 2% area. Inflation as measured by the Consumer
Price Index will likely continue under 2%, with unemployment remaining low at a
current 4.3% level. This business expansion is the second longest in history.
The economic picture bodes well for an outlook of stable to lower interest rates
in the future.
These lower market yields could translate into lower dividend distributions
from the Circle Portfolio. In this continuing lower yield environment, 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>
January 22, 1999
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1
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CIRCLE INCOME SHARES, INC.
SCHEDULE OF PORTFOLIO INVESTMENTS (NOTE 1)
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DECEMBER 31, 1998 (ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
<C> <S> <C>
SHORT-TERM OBLIGATIONS (2.24%)*
$ 751.9 General Electric Capital Corporation 4.70% Commercial Paper,
due 01/04/98.............................................. $751.9
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TOTAL SHORT-TERM OBLIGATIONS (COST $751.9).................. $751.9
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U.S. GOVERNMENT INSTRUMENTALITY OBLIGATIONS (24.02%)*
Government National Mortgage Association, Single Family:
18.4 13.00%, due 1/15/15, Pool # 121789......................... 21.2
127.7 9.00%, due 9/15/16, Pool # 179836.......................... 137.2
77.4 9.00%, due 10/15/16, Pool # 170831......................... 83.2
11.7 9.00%, due 6/15/18, Pool # 234162.......................... 12.6
103.4 9.00%, due 7/15/18, Pool # 216264.......................... 111.2
24.2 9.00%, due 11/15/19, Pool # 275501......................... 26.0
139.5 9.00%, due 3/15/20, Pool # 160559.......................... 149.9
63.8 10.00%, due 11/15/20, Pool # 299559........................ 69.3
5.9 10.00%, due 11/15/20, Pool # 299818........................ 6.4
145.6 9.00%, due 7/15/21, Pool # 313183.......................... 156.4
37.1 9.00%, due 11/15/21, Pool # 218409......................... 39.8
535.6 9.00%, due 1/15/22, Pool # 316247.......................... 572.6
1,399.5 9.00%, due 1/15/25, Pool # 369632.......................... 1,494.0
567.1 8.50%, due 11/15/25, Pool # 405529......................... 601.3
882.9 7.00%, due 12/15/26, Pool #780481.......................... 903.6
826.2 7.00%, due 2/15/28, Pool #408006........................... 845.3
981.3 7.00%, due 4/15/28, Pool #360750........................... 1,004.0
438.6 8.00%, Series 2, due 9/25/26, Pool #2285................... 454.2
446.9 8.00%, Series 2, due 2/20/27, Pool #2379................... 462.8
Federal Home Loan Mortgage Corporation:
15.1 10.00%, due 9/1/01, Pool # 213106.......................... 15.4
9.8 10.00%, due 7/1/02, Pool # 217946.......................... 10.1
105.8 8.50%, due 1/1/08, Gold Pool # 10164....................... 109.7
130.5 10.25%, due 6/1/09, Pool # 160081.......................... 140.9
13.5 14.75%, due 3/1/10, Pool # 170027.......................... 16.1
8.6 14.50%, due 12/1/10, Pool # 170040......................... 10.2
12.2 13.50%, due 1/1/11, Pool # 170042.......................... 14.2
23.7 15.00%, due 3/1/11, Pool # 170045.......................... 28.1
2.1 14.50%, due 3/1/11, Pool # 170046.......................... 2.5
26.6 14.50%, due 12/1/11, Pool # 181072......................... 31.6
0.9 13.50%, due 10/1/12, Pool # 183150......................... 1.1
29.6 12.50%, due 1/1/14, Pool # 304168.......................... 33.7
6.9 13.00%, due 6/1/14, Pool # 170096.......................... 8.0
</TABLE>
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2
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CIRCLE INCOME SHARES, INC.
SCHEDULE OF PORTFOLIO INVESTMENTS (NOTE 1) (CONTINUED)
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DECEMBER 31, 1998 (ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
<C> <S> <C>
U.S. GOVERNMENT INSTRUMENTALITY OBLIGATIONS (CONTINUED):
Federal National Mortgage Association:
$ 26.4 10.00%, due 10/1/01, Pool # 34458.......................... $27.1
76.3 9.00%, due 3/1/17, Pool # 177563........................... 80.8
93.0 10.00%, due 12/1/18, Pool # 68374.......................... 100.3
71.9 9.00%, due 1/1/19, Pool # 70318............................ 76.6
205.6 9.00%, due 3/1/25, Pool #250228............................ 217.5
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TOTAL U.S. GOVERNMENT INSTRUMENTALITY OBLIGATIONS (COST
$7,860.2)................................................. $8,074.9
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CORPORATE BONDS (71.88%)*
Financial (12.81%):
500.0 Citicorp, 9.75% Subordinated Capital Notes, due 8/1/99..... 512.2
1,000.0 First Interstate (Wells Fargo), 9.125% Subordinated Notes,
due 2/1/04............................................... 1,152.1
1,000.0 Fletcher Challenge Industries Finance USA Ltd., 9% Notes,
due 9/15/99.............................................. 1,014.0
1,000.0 General Motors Acceptance Corporation, 8.50% Notes, due
1/1/03................................................... 1,104.7
500.0 Goldman Sachs Company, 6.75% 144A Notes, due 2/15/06....... 522.1
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Total Financial............................................. 4,305.1
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Healthcare (2.30%):
750.0 Tenet Healthcare, 8.625% Senior Subordinated Notes, due
1/15/07.................................................. 772.5
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Total Healthcare............................................ 772.5
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Housing (2.22%):
750.0 Ryland Group, 9.625% Senior Subordinated Notes, due
6/1/04................................................... 746.3
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Total Housing............................................... 746.3
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Industrial (7.10%):
750.0 Ball Corporation, 7.75% Senior Notes, due 8/01/06.......... 787.5
1,000.0 Ford Motor Company, 9% Debentures, due 9/15/01............. 1,090.0
500.0 Owens Illinois Company, 7.35% Senior Notes, due 5/15/08.... 510.1
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Total Industrial............................................ 2,387.6
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Lumber (3.35%):
1,000.0 Georgia Pacific, 9.50% Debentures, due 5/15/22............. 1,127.1
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Total Lumber................................................ 1,127.1
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Real Estate (3.56%):
750.0 Equity Office Properties Operating LP, 7.25% Senior Notes,
due 2/15/18, 144A........................................ 708.4
500.0 Simon DeBartolo Group LP, 7% Notes, due 7/15/09............ 489.1
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Total Real Estate........................................... 1,197.5
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</TABLE>
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3
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CIRCLE INCOME SHARES, INC.
SCHEDULE OF PORTFOLIO INVESTMENTS (NOTE 1) (CONTINUED)
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DECEMBER 31, 1998 (ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS (CONTINUED):
Retail (3.95%):
$ 750.0 Federated Department Stores, 8.125% Senior Notes, due
10/15/02................................................. $787.5
500.0 Fred Meyer Stores Inc., 7.45% Senior Notes, due 3/01/08.... 539.5
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Total Retail................................................ 1,327.0
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Telecommunication and Entertainment (18.65%):
800.0 News America Holdings, 7.75% Senior Debentures, due
1/20/24.................................................. 865.6
1,000.0 Sprint Corporation, 9.50% Debentures, due 4/1/03........... 1,146.6
1,000.0 Tele-Communications, Inc., 9.80% Senior Debentures, due
2/1/12................................................... 1,335.4
1,000.0 Time Warner Entertainment, 8.875% Senior Notes, due
10/1/12.................................................. 1,239.5
750.0 Westinghouse Electric, 8.625% Debentures, due 8/1/12....... 877.3
750.0 WorldCom, Inc., 6.95% Senior Notes, due 8/15/28............ 805.2
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Total Telecommunications and Entertainment.................. 6,269.6
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Technology (2.40%):
750.0 Applied Materials, Inc., 8% Senior Notes, due 9/1/04....... 806.7
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Total Technology............................................ 806.7
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Transportation (13.27%):
992.0 American Airlines, Inc., 10.18% Pass-Through Certificates,
Series 1991-A2, due 1/2/13............................... 1,231.3
642.0 Delta Airlines, 10% Equipment Trust Certificates, Series
1991-K, due 12/5/14, 144A................................ 813.8
1,000.0 Federal Express, 9.65% Notes, due 6/15/12.................. 1,242.1
1,000.0 United Airlines, 9.125% Debentures, due 1/15/12............ 1,175.0
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Total Transportation........................................ 4,462.2
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Utilities (2.27%):
750.0 Calenergy Company, Inc., 7.23% Senior Notes, due 9/15/05... 763.9
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Total Utilities............................................. 763.9
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TOTAL CORPORATE BONDS (COST $21,797.9)...................... $24,165.5
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TOTAL INVESTMENTS AT MARKET VALUE (COST--$30,410.0)......... $32,992.3
============
</TABLE>
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* Percentages indicated are based on net assets of $33,618.8
The accompanying notes to financial statements are an integral part of this
schedule.
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4
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CIRCLE INCOME SHARES, INC.
STATEMENT OF ASSETS AND LIABILITIES
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AS OF DECEMBER 31, 1998 (ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998
ASSETS: ----
<S> <C>
Investments, at market value (Identified cost -- $30,410.0)
(Note 1).................................................. $32,992.3
Receivable from brokers for investments sold................ 4.7
Accrued interest receivable (Note 1)........................ 657.8
Other assets................................................ 3.9
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Total Assets................................................ $33,658.7
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LIABILITIES:
Accrued Expenses:
Investment advisory and custody fees........................ $ 17.6
Transfer and dividend disbursing agent fees................. 3.8
Other expenses.............................................. 18.5
---------
Total Liabilities........................................... $ 39.9
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NET ASSETS:
Common Stock ($1.00 par value; 10,000,000 shares authorized;
2,797,416 shares outstanding)............................. $ 2,803.5
Additional paid-in capital.................................. 31,062.7
Accumulated realized loss on investments.................... (2,828.7)
Unrealized appreciation of investments (Note 2)............. 2,582.2
Distribution in excess of net investment income............. (0.9)
---------
Net assets applicable to outstanding shares................. $33,618.8
=========
Net asset value (NAV) per share............................. $ 11.99
=========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
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5
<PAGE> 8
CIRCLE INCOME SHARES, INC.
STATEMENTS OF CHANGES IN NET ASSETS
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(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS Year
ENDED ended
DECEMBER 31, June 30,
1998 1998
FROM INVESTMENT ACTIVITIES ---- ----
<S> <C> <C>
OPERATIONS:
Net investment income..................................... $ 1,109.7 $ 2,334.9
Net realized gain (loss) from security transactions....... (47.7) (321.6)
Unrealized appreciation of investments.................... 115.5 740.2
--------- ---------
Net increase in Net Assets resulting from operations........ 1,177.5 2,753.5
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends to shareholders from net investment income
($0.39 and $0.84 per share, respectively -- Note 1).... (1,093.3) (2,352.2)
Proceeds from the issuance of shares at net asset value
pursuant to the Dividend Reinvestment Plan (6.1 shares,
1998).................................................. -- 72.3
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Net increase in Net Assets.................................. 84.2 473.6
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NET ASSETS:
Beginning of Period......................................... 33,534.6 33,061.0
--------- ---------
End of Period............................................... $33,618.8 $33,534.6
========= =========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
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6
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CIRCLE INCOME SHARES, INC.
STATEMENT OF OPERATIONS
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FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 (ALL AMOUNTS IN THOUSANDS, EXCEPT
PER SHARE DATA)
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Interest Income........................................... $1,261.6
--------
Expenses:
Investment advisory fee (Note 3).......................... 86.6
Transfer and dividend disbursing agent fee................ 11.5
Directors' fees and expenses.............................. 12.3
Audit fees................................................ 6.0
Mailing expenses.......................................... 7.5
Custodian fee and expenses................................ 8.8
Printing.................................................. 7.7
Legal fees................................................ 2.5
Miscellaneous............................................. 9.0
--------
Total Expenses.............................................. 151.9
--------
Net Investment Income....................................... $1,109.7
--------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss from investment transactions.............. ($ 47.7)
Net unrealized appreciation on investments.................. 115.5
--------
Net realized and unrealized gain on investments............. 67.8
--------
Net increase in Net Assets resulting from operations........ $1,177.5
========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
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7
<PAGE> 10
CIRCLE INCOME SHARES, INC.
NOTES TO FINANCIAL STATEMENTS
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FOR THE SIX MONTHS ENDED DECEMBER 31, 1998
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 ex-dividend 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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8
<PAGE> 11
CIRCLE INCOME SHARES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 (ALL AMOUNTS IN THOUSANDS, EXCEPT
SHARE DATA)
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Distributions from net investment income and from net capital gains are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due to
differing treatments for mortgage-backed securities, expiring capital loss
carryforwards, and deferrals of certain losses. Permanent book and tax basis
differences have been reclassified among the components of net assets.
NOTE 2 -- PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities other than United States government
obligations and short-term notes aggregated $2,756.1 and $1,479.5, respectively.
The identified cost of investments at December 31, 1998 was $30,410.0. Cost for
Federal tax purposes differs from value at December 31, 1998 by the net
unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized Appreciation $2,657.9
Unrealized Depreciation (75.7)
--------
NET UNREALIZED APPRECIATION $2,582.2
========
</TABLE>
NOTE 3 -- INVESTMENT ADVISORY FEE
For the six months ended December 31, 1998, the Company paid fees of $86.6, or
0.50% of average net assets for investment management services. The fee is based
on 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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9
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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>
SIX MONTHS
ENDED PERIOD ENDED JUNE 30,
DECEMBER 31, ---------------------------------------------------------
1998 1998 1997 1996 1995 1994
------------ ---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
year.......................... $ 11.96 $ 11.82 $ 11.60 $ 11.84 $ 11.35 $ 12.35
--------- --------- --------- --------- --------- ---------
Net investment income........... 0.40 0.83 0.88 0.90 0.89 0.91
Net realized and unrealized gain
(loss) on investments......... 0.02 0.15 0.21 (0.24) 0.50 (0.96)
--------- --------- --------- --------- --------- ---------
Net increase (decrease) in net
asset value resulting from
operations.................... 0.42 0.98 1.09 0.65 1.39 (0.05)
--------- --------- --------- --------- --------- ---------
Dividends to shareholders from
net investment income......... (0.39) (0.84) (0.87) (0.90) (0.90) (0.95)
--------- --------- --------- --------- --------- ---------
Net asset value, end of
period........................ $ 11.99 $ 11.96 $ 11.82 $ 11.59 $ 11.84 $ 11.35
========= ========= ========= ========= ========= =========
Market value per share, end of
period........................ $ 11.375 $ 11.375 $ 10.688 $ 10.500 $ 10.250 $ 11.625
========= ========= ========= ========= ========= =========
TOTAL INVESTMENT RETURN: (1)
Based on market value per
share......................... 3.50%** 14.60% 9.56% 11.15% (4.99)% 11.89%
Based on net asset value per
share......................... 3.59%** 8.38% 9.69% 5.62% 11.45% 0.66%
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................. 0.91%* 0.90% 0.89% 0.89% 0.93% 0.89%
Net Investment Income........... 6.65%* 6.97% 7.53% 8.05% 7.97% 7.61%
SUPPLEMENTARY DATA:
Net assets at end of period
($000)........................ $33,618.8 $33,534.6 $33,061.0 $32,451.7 $33,114.5 $31,736.2
Average net assets during period
($000)........................ $33,357.7 $33,478.9 $32,756.4 $32,783.1 $32,425.4 $33,126.5
Portfolio turnover rate......... 8.48% 27.63% 8.52% 17.75% 34.73% 36.60%
Number of shares outstanding at
end of period (000)........... 2,803.5 2,803.5 2,797.4 2,797.4 2,797.4 2,797.4
</TABLE>
* Annualized
** Not Annualized
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.
- --------------------------------------------------------------------------------
10
<PAGE> 13
DESCRIPTION OF THE DIVIDEND REINVESTMENT PLAN (UNAUDITED)
- --------------------------------------------------------------------------------
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
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<PAGE> 14
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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.
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
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<PAGE> 15
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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 Emeritus
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
THOMAS F. WILSON, Ph.D., Vice President
ROBERT L. YOUNG, Treasurer
JACQUELINE A. WEITZ, Secretary
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INVESTMENT ADVISOR
Banc One Investment Advisors Corporation
1111 Polaris Parkway, OH1-0211
P.O. Box 710211
Columbus, OH 43271-0211
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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