SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant |X|
Filed by a Party other than the Registrant | |
Check the appropriate box:
|X| Preliminary Proxy Statement
| | Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
| | Definitive Proxy Statement
| | Definitive Additional Materials
| | Soliciting Material Pursuant to ss. 240.14a-11 (c) or ss. 240.14a-12
EXCELSIOR INCOME SHARES, INC.
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filling Fee (Check appropriate box):
|X| No fee required
|_| $125 per Exchange Act Rules 0-11 (c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22 (a)(2) of Schedule 14A.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
.................................................................
2) Aggregate number of securities to which transaction applies:
.................................................................
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11
(Set forth the amount on which the filing fee is calculated and
state how it was determined):
.................................................................
4) Proposed maximum aggregate value of transaction:
.................................................................
5) Total fee paid:
.................................................................
| | Fee paid previously by written preliminary materials.
| | Check box if any part of the fee is offset as provided by Exchange Act Rule
0- 11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: _________________________________________
2) Form Schedule or Registration Statement No: ____________________
3) Filing Party: ___________________________________________________
4) Date Filed: ________________
EXCELSIOR INCOME SHARES, INC.
D/B/A EIS FUND
114 West 47th Street
New York, New York 10036
-----------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
----------------------------
Notice is hereby given that a Special Meeting of Shareholders (the
"Meeting") of Excelsior Income Shares, Inc., d/b/a EIS Fund (the "Fund"), a New
York corporation, will be held at the offices of Spitzer & Feldman P.C., 405
Park Avenue, 6th Floor, New York, New York 10022 on Thursday, December 27, 2001
at 9:30 a.m. for the following purposes:
1. To amend the Fund's Prospectus and By-laws to effect changes in
its fundamental investment objectives and policies and
fundamental investment restrictions (Proposal No. 1);
2. To approve a new investment management agreement between
Cornerstone Advisors, Inc. and the Fund which will have the
effect of increasing the investment management fee (Proposal No.
2);
3. To amend the Certificate of Incorporation to change the name of
the Fund from "Excelsior Income Shares, Inc." to "EIS Fund, Inc."
(Proposal No. 3); and
4. To transact such other business as may properly come before the
Meeting or any adjournments thereof.
The Board of Directors has fixed the close of business on November
16, 2001 as the record date for the determination of shareholders entitled to
notice of, and to vote at this Meeting or any adjournment thereof. The stock
transfer books will not be closed.
By Order of the Board of Directors
Ralph W. Bradshaw, President
Dated: November 29, 2001
YOUR VOTE IS VERY IMPORTANT!
UNLESS YOU EXPECT TO BE PRESENT AT THE MEETING, PLEASE FILL IN, DATE, SIGN AND
MAIL THE ENCLOSED PROXY CARD IN THE ENCLOSED REPLY ENVELOPE. YOUR PROMPT
RESPONSE WILL ASSURE A QUORUM AT THE MEETING. DELAY MAY CAUSE THE FUND TO INCUR
ADDITIONAL EXPENSES TO SOLICIT SUFFICIENT VOTES FOR THE MEETING.
INSTRUCTIONS FOR SIGNING PROXY CARDS
The following general rules for signing proxy cards may be of
assistance to you and avoid the time and expense to the Fund involved in
validating your vote if you fail to sign your proxy card properly.
1. Individual Accounts: Sign your name exactly as it appears in the
registration on the proxy card.
2. Joint Accounts: Either party may sign, but the name of the party
signing should conform exactly to a name shown in the
registration.
3. Other Accounts: The capacity of the individual signing the proxy
card should be indicated unless it is reflected in the form of
registration. For example:
REGISTRATION
CORPORATE ACCOUNTS VALID SIGNATURE
------------------ ---------------
(1) ABC Corp................................ABC Corp. (by John Doe, Treasurer)
(2) ABC Corp................................John Doe, Treasurer
(3) ABC Corp.
c/o John Doe, Treasurer.................John Doe
(4) ABC Corp. Profit Sharing Plan...........John Doe, Trustee
TRUST ACCOUNTS
--------------
(1) ABC Trust...............................Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee
u/t/d/ 12/28/78.........................Jane B. Doe
CUSTODIAL OR ESTATE ACCOUNTS
----------------------------
(1) John B. Smith, Cust.
f/b/o John B. Smith, Jr. UGMA............John B. Smith
(2) John B. Smith............................John B. Smith, Jr., Executor
EXCELSIOR INCOME SHARES, INC.
D/B/A EIS FUND
114 West 47th Street
New York, New York 10036
-------------------------------
PROXY STATEMENT
for
SPECIAL MEETING OF SHAREHOLDERS
to be held on Thursday, December 27, 2001
-------------------------------
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of Excelsior Income Shares, Inc., d/b/a EIS
Fund (the "Fund"), for use at a Special Meeting of Shareholders (the "Meeting")
to be held at the offices of Spitzer & Feldman P.C., 405 Park Avenue, 6th Floor,
New York, New York 10022 on Thursday, December 27, 2001, at 9:30 a.m., New York
time, and at any and all adjournments thereof. A form of proxy is enclosed
herewith. This Proxy Statement and the accompanying form of proxy are being
first mailed to shareholders on or about November 29, 2001.
This Meeting is necessitated by the decision of the Fund's current
investment manager, U.S. Trust Company of New York ("U.S. Trust"), to surrender
its responsibilities with the Fund. At the 2001 Annual Meeting, shareholders
replaced the entire board, defeated a proposal for liquidation, and rejected the
choice of a traditional fixed-income investment manager. The current Board
believes that this clearly signals the shareholders' desire for change in the
way the Fund has been managed in the past.
The Board sees two ways to materially improve the value of
shareholder investment in this Fund. First, the distributions from the Fund need
to be increased and second, the discount at which the Fund's shares trade in the
market needs to be reduced. Substantially higher distributions, however, are not
supportable with the Fund's current investment focus. As a result, the Board is
offering these proposals for shareholder consideration that, if approved, will
substantially alter the investment management of the Fund.
Shareholders are being asked to approve a fundamental change in
investment objectives and policies and to approve a new investment management
agreement with Cornerstone Advisors, Inc. Currently, the investment focus
concentrates primarily on current income and secondarily on capital
appreciation. Under the proposed changes, capital appreciation would be the
primary objective with current income secondary thereby, potentially providing
shareholders with a higher total return.
If these changes are approved, the Board intends to increase the
monthly distribution level to, and maintain it, at the rate of $0.165 per share.
This represents a yield of approximately 11% based on recent net asset value of
the shares. To the extent that this distribution exceeds the current investment
income of the Fund, the balance will be either short-term capital gain;
long-term capital gain, which is taxed at a reduced rate; or tax-free return of
capital. Subject to shareholder approval of the proposals set forth in this
proxy statement, the Board intends to amend the
1
dividend reinvestment plan so that shareholders will have the option to have all
or part of their distribution reinvested in additional shares of the Fund. In
this way, shareholders will have more choice and flexibility in balancing the
size of their distributions and the amount of their remaining investment in the
Fund.
Any shareholder who executes and delivers a proxy may revoke it by
written communication to the Secretary of the Fund at any time prior to its use
or by voting in person at the Meeting. Unrevoked proxies will be voted in
accordance with the specifications thereon and, unless specified to the
contrary, will be voted FOR the amendment of the Fund's Prospectus and By-laws
to effect changes in its fundamental objectives and policies and fundamental
investment restrictions, FOR the approval of the new investment management
agreement between Cornerstone Advisors, Inc. ("Cornerstone Advisors") and the
Fund which will have the effect of increasing the investment management fee,
subject to a voluntary expense limitation reimbursement by Cornerstone Advisors,
as more fully described further under Proposal 2, and FOR the amendment to the
Fund's Certificate of Incorporation changing the name of the Fund from
"Excelsior Income Shares, Inc." to "EIS Fund, Inc."
In general, abstentions and broker non-votes (reflected by signed but
unvoted proxies), as defined below, count for purposes of obtaining a quorum but
do not count as votes cast with respect to any proposal where the broker does
not have discretion. With respect to a proposal requiring the affirmative vote
of a majority of the Fund's outstanding voting securities, the effect of
abstentions and broker non-votes is the same as a vote against such proposal.
Otherwise, abstentions and broker non-votes have no effect on the outcome of a
proposal. Broker non-votes are shares held in the name of the broker or nominee
for which an executed proxy is received by the Fund, but are not voted on a
proposal because voting instructions have not been received from the beneficial
owners or persons entitled to vote and the broker or nominee does not have
discretionary voting power.
In the event that a quorum is not present at the Meeting, the persons
named as proxies may propose one or more adjournments of the Meeting to a date
not more than sixty days after the original meeting date to permit further
solicitation of proxies. Any such adjournment will require the affirmative vote
of a majority of those shares represented at the Meeting in person or by proxy.
The persons named as proxies will vote those proxies which they are entitled to
vote FOR or AGAINST any such proposal in their discretion. Under the By-Laws of
the Fund, a quorum is constituted by the presence in person or by proxy of the
holders of record of a majority of the outstanding voting securities of the Fund
entitled to vote at the Meeting.
The cost of soliciting the proxies will be borne by the Fund. Proxy
solicitations will be made primarily by mail, but solicitations may also be made
by telephone, telegraph or personal interviews conducted by officers or
employees of the Fund, of Cornerstone Advisors, the proposed investment manager
to the Fund, or Georgeson Shareholder Communication, Inc. ("Georgeson"), a proxy
solicitation firm that has been retained by the Fund.
The agreement between Georgeson and the Fund provides for Georgeson
to provide general solicitation services to the Fund at an estimated cost of
$____________, including expenses. The Fund will, upon request, bear the
reasonable expenses of brokers, banks and their nominees who are holders of
record of the Fund's voting securities on the record date, incurred in mailing
copies of this Notice of Special Meeting and Proxy Statement and the enclosed
form of proxy to the beneficial owners of the Fund's voting securities.
2
Only holders of issued and outstanding shares of the Fund's common
stock of record at the close of business on November 16, 2001 are entitled to
notice of, and to vote at, the Meeting. Each such holder is entitled to one vote
per share of common stock so held. The number of shares of common stock
outstanding on November 16, 2001 was _____________. The Fund is a closed-end,
management investment company.
This Proxy Statement is first being mailed to shareholders on or
about November 29, 2001.
3
PROPOSAL NO. 1
CONSIDERATION OF THE APPROVAL TO AMEND THE FUND'S PROSPECTUS
AND BY-LAWS TO EFFECT CHANGES IN ITS
FUNDAMENTAL INVESTMENT OBJECTIVES AND
POLICIES AND FUNDAMENTAL INVESTMENT RESTRICTIONS
At a special meeting held on November 16, 2001, the Board of
Directors unanimously approved a proposal to change the Fund's current
investment objectives and policies and certain of its fundamental investment
restrictions, subject to shareholder approval at this meeting. The Fund's
fundamental investment objectives and policies and fundamental investment
restrictions as stated in the Fund's Prospectus, which was declared effective by
the Securities and Exchange Commission in 1973, and as set forth in its current
By-laws, can only be changed with shareholder approval. If the shareholders
approve this proposal, the Fund's Prospectus will be deemed amended by the terms
of this proposal and its By-Laws will be amended to eliminate Article XXXII in
its entirety.
As stated in the 1973 Prospectus, the current primary investment
objective for the Fund is to seek as high a level of current income for its
shareholders as is consistent with prudent risk through investments in a
diversified portfolio consisting largely of debt securities which the Fund
considers to be of good quality. Capital appreciation is a secondary objective.
Additionally, to a limited extent, investments may currently have equity
features and may be acquired in private placement transactions. In seeking its
current objectives, the Fund may expand its investments through borrowings and
may engage in short-term portfolio trading.
Subject to shareholder approval, Cornerstone Advisors has proposed
and the Board of Directors has unanimously approved, changing the focus of the
Fund from income to total return by elevating capital appreciation from a
secondary objective to the Fund's primary investment objective, while reducing
current income from a primary investment objective to a secondary investment
objective. Therefore, if the shareholders approve the elimination of the
specific restrictions and limitations of the Fund's current investment policies,
as specifically described below, the Fund's primary investment objective will be
revised to seek capital appreciation through investments in common stocks,
preferred stocks and securities convertible into common stocks that trade on a
U.S. securities exchange or over the counter. Current income will then be a
secondary objective through investment in U.S. debt securities. In seeking these
objectives, the Fund may continue to expand its investments through the use of
leverage and may engage in short-term portfolio trading although, to a much
lesser extent.
In approving this change to the Fund's investment objectives, the
Board of Directors recognized that the Fund's current investment policies and
fundamental investment restrictions would prohibit the Fund from effecting its
revised primary investment objective of capital appreciation. The Fund's current
investment policies were established in 1973 to permit the Fund to provide
shareholders with current income through investments in a diversified portfolio
consisting largely of debt securities. These 1973 investment policies and
investment restrictions, which may not be changed without shareholder approval,
include, but are not limited to, the following:
4
A. The Fund may have no less than 75% of the value of its total assets
invested in the following types of interest-bearing debt securities
(and cash and cash equivalents):
(1) straight debt securities which are rated at the time of purchase
within the four highest grades assigned by Moody's Investors
Service, Inc. ("Moody's")(Aaa, Aa, A or Baa) or Standard & Poor's
Corporation ("S&P")(AAA, AA, A or BBB);
(2) securities of, or guaranteed by, the United States Government,
its agencies and instrumentalities;
(3) securities of, or guaranteed by, the government of Canada or any
instrumentality or political subdivision thereof, acquired under
circumstances that would not subject the Fund to payment of the
U.S. Interest Equalization Tax, such securities not to exceed 25%
of the value of the Fund's total assets;
(4) obligations of, or guaranteed by, national or state banks or U.S.
holding companies, the primary assets of which are U.S. banks,
which are considered by management to have investment quality
comparable to the aforementioned rated debt securities, provided
that investments will not be made in obligations of the United
States Trust Company of New York or any company of which 50% or
more of the voting securities are owned by the United States
Trust Company of New York or an affiliate thereof; and
(5) commercial paper.
B. The Fund may have no more than 25% of the value of its total assets
consisting of:
(1) interest-bearing debt securities which are not described above;
(2) securities which may be convertible into or exchangeable for, or
carry warrants or other rights to purchase, common stock or other
equity securities; and
(3) preferred stocks.
C. If the value of those securities permitted to be held under the
categories referred to in sub-paragraph B above increases above the
25% limitation, the Fund is not required to dispose of any of such
securities, but, so long as such limitation is executed, the Fund may
not acquire any additional securities under any of such categories. In
addition to the foregoing, the Fund may exchange securities, exercise
any conversion rights or exercise warrants or other rights to purchase
common stock or other equity securities and may hold any such
securities so acquired without regard to the foregoing investment
policies, but the value of the securities so acquired shall be
included in any subsequent determination of the Fund's compliance with
the 25% limitation referred to in sub-paragraph B above.
5
D. The Fund may invest from 25% to 80% of its total assets, taken at
market value at time of purchase, in each of the electric utility and
telephone industries.
E. The Fund may not purchase securities issued by the U.S. Trust Company
of New York or any company of which 40% or more of the voting
securities are owned by the U.S. Trust Company of New York or an
affiliate of the U.S. Trust Company of New York, or any investment
company (excluding the Fund) or real estate investment trust managed
or advised by the U.S. Trust Company of New York or any such company.
F. The Company may not:
(1) have less than 75% of the value of its total assets invested in
the types of interest-bearing debt securities (and cash and cash
equivalents) described in Paragraph A above;
(2) have more than 25% of the value of its total assets invested as
described in Paragraph B above;
(3) invest more than 25% of its total assets, taken at market value
at time of purchase, in securities of issuers in any one
industry, provided that the Company may invest up to 80% of its
total assets, taken at market value at time of purchase, in each
of the electric utility and telephone industries;
(4) purchase securities issued by the Trust Company or any company of
which 50% or more of the voting securities are owned by the Trust
Company or an affiliate of the Trust Company, or any investment
company (excluding the Company) or real estate investment trust
managed or advised by the Trust Company or any such company;
(5) invest more than 5% of its total assets, taken at market value at
time of purchase, in securities of any one issuer other than the
United States Government or its instrumentalities; or invest in
the securities of companies which (together with predecessors)
have a record of less than three years continuous operation, or
purchase more than 10% of any class of the outstanding voting
securities of any one issuer; or
(6) invest more than 25% of its total assets, taken at market value
at time of purchase, in securities of, or guaranteed by, the
government of Canada or any of its instrumentalities or political
subdivisions.
Exhibit A to this proxy statement sets forth the language contained
in the 1973 Prospectus concerning the Fund's "Investment Objectives and
Policies" and "Investment Restrictions." Exhibit B to this proxy statement sets
forth Article XXXII of the Fund's current By-laws which is proposed to be
deleted in its entirety from the Fund's By-laws if this Proposal 1 is approved
by shareholders.
6
In order to provide the Fund with the ability to pursue capital
appreciation, as its primary investment objective, capital appreciation, the
Board of Directors unanimously approved and authorized for submission to the
Fund's shareholders, for their consideration and approval, this proposal which
if adopted, would eliminate the investment policies and investment restrictions
described in paragraphs A through F above.
Specifically, Cornerstone Advisors and the Board propose the
following changes:
INVESTMENT OBJECTIVES:
----------------------
The investment objective of the Fund is to seek capital appreciation
with current income as a secondary objective.
INVESTMENT POLICIES:
--------------------
It is the policy of the Fund, under normal market conditions, to
invest substantially all of its assets in the equity and U.S. dollar denominated
debt securities of U.S. issuers whose securities trade on a U.S. securities
exchange or over the counter or as ADRs or other forms of depositary receipts
such as IDRs which trade in the United States.
BASIS FOR RECOMMENDATION OF PROPOSALS
-------------------------------------
In submitting this proposal for approval by the Fund's shareholders,
the Board has determined that the proposed changes to the Fund's fundamental
investment objectives and policies and fundamental investment restrictions would
benefit the Fund's shareholders by providing them with greater potential total
return through investing in a broader basket of portfolio securities than is
currently available to the Fund. The Board believes that a broader selection of
potential investments in U.S. equity and debt securities markets will increase
the Fund's prospects of achieving its investment objectives by structuring a
more diversified investment portfolio.
The recommendation of this Proposal 1 is driven by the Board's desire
to improve Fund performance and its belief that access to U.S. equity and debt
securities is becoming increasingly necessary to exploit investment
opportunities and is, therefore, potentially more beneficial to the Fund's
shareholders than is a policy that concentrates the Fund's investments solely in
debt securities.
The proposed investment manager for the Fund, Cornerstone Advisors,
will pursue a balanced approach, including "value" and "growth" investing, by
seeking out equity securities of companies at reasonable prices that demonstrate
favorable long-term characteristics such as strength of management, competitive
position, new products or services, profit margins and return on investment. In
addition, Fund management may use cash generated from returns on the Fund's
investments to buy back shares in the Fund itself that are trading at a
significant discount, in order to increase the Fund's net asset value per share,
which may, in turn, help reduce the discount at which the Fund's shares trade in
the open market.
7
As stated above, the Board has considered certain factors prior to
recommending this Proposal 1 for approval by the shareholders, including the
long-term prospects of the Fund achieving its investment objectives and
providing shareholders with higher total returns by investing in equity and debt
securities. In view of the Fund's proposed changes to its investment objectives
and the Board's determination that it would be better to focus on capital
appreciation with a secondary focus on current income, the Board believes that
access to equity and debt securities in U.S. capital markets will enable Fund
management to structure a more diversified portfolio of investments. Therefore,
based on these considerations, the Board believes that Proposal 1 is in the best
interests of the Fund and its shareholders.
PROPOSED PRINCIPAL INVESTMENT STRATEGY
--------------------------------------
Set forth below is a description of the investment objectives and
policies of the Fund, as they would be if the proposed changes are approved by
the shareholders:
INVESTMENT OBJECTIVES OF THE FUND
---------------------------------
The investment objective of the Fund is capital appreciation with
current income as a secondary objective. The Fund's investment objectives are
fundamental and may only be changed with shareholder approval. The policies,
however, are not fundamental, and may be changed by the Fund's Board of
Directors.
PRINCIPAL INVESTMENT STRATEGIES AND FUNDAMENTAL INVESTMENT
----------------------------------------------------------
RESTRICTIONS OF THE FUND
------------------------
The Fund seeks to achieve its investment objectives by investing
primarily in equity securities of U.S. companies and U.S. dollar denominated
debt securities which Fund management believes have demonstrated fundamental
investment value and favorable growth and income prospects. In general, the Fund
will invest in such equity securities that are traded in the United States on a
securities exchange or over the counter or by ADRs, IDRs or other forms of
depositary receipts. Depositary receipts are traded like common stocks in the
United States, are typically issued in connection with a U.S. or foreign banks
or trust companies and evidence ownership of underlying securities issued by a
foreign corporation.
The Fund intends its investment portfolio, under normal market
conditions, to consist principally of the equity securities of large, mid and
small-capitalization companies. Equity securities in which the Fund may invest
include common and preferred stocks, convertible securities, warrants and other
securities having the characteristics of common stocks, such as ADRs and IDRs.
The Fund may, however, invest a portion of its assets in U.S. dollar denominated
debt securities when Fund management believes that it is appropriate to do so in
order to achieve the Fund's secondary investment objective for example when
interest rates are high in comparison to anticipated returns on equity
investments. Debt securities in which the Fund may invest include U.S. dollar
denominated bank, corporate or government bonds, notes, and debentures of any
maturity determined by Fund management to be suitable for investment by the
Fund. The Fund may invest in the securities of issuers that it determines to be
suitable for investment by the Fund regardless of their rating. The Fund may
not, however, invest more than 5% of its assets in debt securities that are
determined by Fund management to be rated or comparable to securities rated "B"
or below by S&P or Moody's.
8
Fund management utilizes a balanced approach, including "value" and
"growth" investing by seeking out companies at reasonable prices, without regard
to sector or industry, that demonstrate favorable long-term growth
characteristics. Valuation and growth characteristics may be considered for
purposes of selecting potential investment securities. In general in the
securities industry, valuation analysis is used to determine the inherent value
of the company by analyzing financial information such as a company's price to
book, price to sales, return on equity, and return on assets ratios, and growth
analysis is used to determine a company's potential for long-term dividends and
earnings growth due to market-oriented factors such as growing market share, the
launch of new products or services, the strength of its management and market
demand.
The Fund may also invest up to 10% of its assets in the aggregate in
the securities of other investment companies and up to 5% of its assets in any
one such investment company, provided that such investment does not represent
more than 3% of the voting stock of the acquired investment company of which
such shares are purchased. As a shareholder in any investment company, the Fund
will bear its ratable share of the investment company's expenses and would
remain subject to payment of the Fund's advisory and administrative fees with
respect to the assets so invested.
The Fund may invest up to 20% of its assets in illiquid U.S.
securities. The Fund will invest only in such illiquid securities that, in the
opinion of Fund management, present opportunities for substantial growth over a
period of two to five years.
A complete list of the Fund's proposed fundamental investment
restrictions, if this Proposal 1 approved, is attached as Exhibit C.
PORTFOLIO TURNOVER. The Fund does not expect to trade in securities
for short-term gains. Higher portfolio turnover rates resulting from more
actively traded portfolio securities generally result in higher transaction
costs, including brokerage commissions and related capital gains or losses.
Since the Fund's investment policies emphasize long-term investment in the
securities of companies, the Fund's annual portfolio turnover rate is expected
to be relatively low, generally ranging between 25% and 75%.
PRINCIPAL RISKS OF INVESTING IN THE FUND
----------------------------------------
STOCK MARKET VOLATILITY. Stock markets can be volatile. In other
words, the prices of stocks can rise or fall rapidly in response to developments
affecting a specific company or industry, or to changing economic, political or
market conditions. The Fund is subject to the general risk that the value of the
Fund's investments may decline if the stock markets perform poorly. There is
also a risk that the Fund's investments will underperform either the securities
markets generally or particular segments of the securities markets.
ISSUER SPECIFIC CHANGES. Changes in the financial condition of an
issuer, changes in the specific economic or political conditions that affect a
particular type of security or issuer, and changes in general economic or
political conditions can affect the credit quality or value of an issuer's
securities. Lower-quality debt securities tend to be more sensitive to these
changes than higher-quality debt securities.
9
INTEREST RATE RISK. Debt securities have varying levels of
sensitivity to changes in interest rates. In general, the price of a debt
security can fall when interest rates rise and can rise when interest rates
fall. Securities with longer maturities and mortgage securities can be more
sensitive to interest rate changes although they usually offer higher yields to
compensate investors for the greater risks. The longer the maturity of the
security, the greater the impact a change in interest rates could have on the
security's price. In addition, short-term and long-term interest rates do not
necessarily move in the same amount or the same direction. Short-term securities
tend to react to changes in short-term interest rates and long-term securities
tend to react to changes in long-term interest rates.
CREDIT RISKS. Fixed income securities rated B or below by S&Ps or
Moody's may be purchased by the Fund up to a limit of 5% of the Fund's total
assets. These securities have speculative characteristics and changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity of those issuers to make principal or interest payments, as compared to
issuers of more highly rated securities.
EXTENSION RISK. The Fund is subject to the risk that an issuer will
exercise its right to pay principal on an obligation held by the Fund (such as
mortgage-backed securities) later than expected. This may happen when there is a
rise in interest rates. These events may lengthen the duration (i.e. interest
rate sensitivity) and potentially reduce the value of these securities.
ILLIQUID SECURITIES. The Fund may invest up to 20% of its respective
net assets in illiquid securities. Illiquid securities may offer a higher yield
than securities which are more readily marketable, but they may not always be
marketable on advantageous terms. The sale of illiquid securities often requires
more time and results in higher brokerage charges or dealer discounts than does
the sale of securities eligible for trading on national securities exchanges or
in the over-the-counter markets. A security traded in the U.S. that is not
registered under the Securities Act of 1933 will not be considered illiquid if
Fund management determines that an adequate investment trading market exists for
that security. However, there can be no assurance that a liquid market will
exist for any security at a particular time.
INVESTMENT IN SMALL AND MID-CAPITALIZATION COMPANIES. The Fund may
invest in companies with mid- or small-sized capital structures (generally a
market capitalization of $5 billion or less). Accordingly, the Fund may be
subject to the additional risks associated with investment in these companies.
The market prices of the securities of such companies tend to be more volatile
than those of larger companies. Further, these securities tend to trade at a
lower volume than those of larger more established companies. If the Fund is
heavily invested in these securities and the value of these securities suddenly
declines, the Fund will be susceptible to significant losses.
NON-PRINCIPAL INVESTMENT POLICIES
---------------------------------
TEMPORARY DEFENSIVE POSITIONS. The Fund may, from time to time, take
temporary defensive positions that are inconsistent with its principal
investment strategies in attempting to respond to adverse market, economic,
political or other conditions. Such investments include various short-term
instruments. If the Fund takes a temporary defensive position at the wrong time,
the position would have an adverse impact on the Fund's performance and it may
not achieve its investment objective. The Fund reserves the right to invest all
of its assets in temporary defensive positions.
10
SECURITIES LENDING. The Fund may lend its portfolio securities to
broker-dealers in amounts equal to no more than 33 1/3% of the Fund's net
assets. These transactions will be fully collateralized at all times with cash
and/or high quality, short-term debt obligations. These transactions involve
risk to the Fund if the other party should default on its obligation and the
Fund is delayed or prevented from recovering the securities lent. In the event
the original borrower defaults on its obligation to return lent securities, the
Fund will seek to sell the collateral, which could involve costs or delays. To
the extent proceeds from the sale of collateral are less than the repurchase
price, the Fund would suffer a loss and you could lose money on your investment.
BORROWING. The Fund may borrow money from banks for temporary or
emergency purposes up to a limitation of 33 1/3% of the Fund's total assets
(before indebtedness). To reduce its indebtedness, the Fund may have to sell a
portion of its investments at a time when it may be disadvantageous to do so. In
addition, interest paid by the Fund on borrowed funds would decrease the net
earnings of the Fund
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements
collateralized by the securities in which it may invest. A repurchase agreement
involves the purchase by the Fund of securities with the condition that the
original seller (a bank or broker-dealer) will buy back the same securities
("collateral") at a predetermined price or yield. Repurchase agreements involve
certain risks not associated with direct investments in securities. In the event
the original seller defaults on its obligation to repurchase, the Fund will seek
to sell the collateral, which could involve costs or delays. To the extent
proceeds from the sale of collateral are less than the repurchase price, the
Fund would suffer a loss.
REQUIRED VOTE
-------------
As provided by the 1940 Act and the Fund's By-Laws, approval of
changes in the fundamental investment objectives, policies and investment
restrictions of the Fund will require the affirmative vote of a "majority of the
outstanding voting securities" of the Fund, which means the affirmative vote of
the lesser of (a) sixty-seven (67%) percent or more of the shares of the Fund
entitled to vote thereon present or represented by proxy at the Meeting, if the
holders of more than fifty (50%) percent of the outstanding shares of the Fund
entitled to vote thereon are present or represented by proxy, or (b) more than
fifty (50%) percent of the total outstanding shares of the Fund entitled to vote
thereon. For this purpose, abstentions and broker non-votes will be counted as
shares present at the Meeting for quorum purposes, but not as votes cast and
will have the same effect as votes cast against the Proposal.
THE BOARD OF DIRECTORS, INCLUDING THE DIRECTORS WHO ARE NOT
"INTERESTED PERSONS" OF THE FUND, RECOMMENDS THAT THE SHAREHOLDERS OF THE FUND
VOTE "FOR" THE APPROVAL OF THE AMENDMENT TO THE FUND'S PROSPECTUS AND BY-LAWS
THEREBY EFFECTING CHANGES IN THE FUND'S FUNDAMENTAL INVESTMENT OBJECTIVES AND
POLICIES AND FUNDAMENTAL INVESTMENT RESTRICTIONS.
11
PROPOSAL NO. 2
CONSIDERATION OF THE APPROVAL OF
THE NEW INVESTMENT MANAGEMENT AGREEMENT
BETWEEN THE FUND AND CORNERSTONE ADVISORS, INC.
At a special meeting held on November 16, 2001, the Board of
Directors unanimously approved and authorized for submission to the Fund's
shareholders, for their approval, a new investment management agreement (the
"Cornerstone Agreement") by and between Cornerstone Advisors and the Fund.
As previously disclosed to shareholders, U.S. Trust, the Fund's
current investment adviser, has stated that it has decided not to serve in such
capacity or to provide investment management services to the Fund. The Fund
believes that this decision is not related to any particular Fund activity,
including performance, but represents a business decision on the part of U.S.
Trust to focus on different areas of the financial services industry. The Board
of Directors seeks shareholder approval of the Cornerstone Agreement. If
approved, the current advisory agreement with U.S. Trust will terminate and the
Fund will enter into the Cornerstone Agreement effective January 1, 2002. If the
Cornerstone Agreement is not approved by shareholders, the Board of Directors
will consider other alternatives, including seeking other investment advisers or
internally managing the Fund's investments.
The Board of Directors hereby submits the Cornerstone Agreement to
the shareholders for their consideration and approval.
INFORMATION REGARDING CORNERSTONE ADVISORS
------------------------------------------
Cornerstone Advisors, which has its principal office at One West Pack
Square, Suite 1650, Asheville, North Carolina 28801, was organized in February
of 2001, to provide investment management services to closed-end investment
companies and is registered with the Securities and Exchange Commission under
the Investment Advisers Act of 1940, as amended. Cornerstone Advisors is the
investment adviser to three other closed-end funds, Cornerstone Strategic Return
Fund, Inc., Cornerstone Strategic Value Fund, Inc., and Progressive Return Fund,
Inc. Mr. Ralph W. Bradshaw, a Director and the President of the Fund, will serve
as the Fund's portfolio manager assuming the Cornerstone Agreement is approved
by the Fund's shareholders at the Meeting. A copy of the proposed Cornerstone
Agreement is attached hereto as Appendix A.
Mr. Bradshaw and Mr. Gary A. Bentz, another Director of the Fund, are
the sole stockholders of Cornerstone Advisors. Messrs. Bradshaw and Bentz have
extensive experience with closed-end investment companies. Mr. Bradshaw, also
serves as a Director to The Austria Fund, Inc., Smallcap Fund, Inc., The
Cornerstone Strategic Return Fund, Inc., Cornerstone Strategic Value Fund, Inc.
and Progressive Return Fund, Inc., and served as a Vice President of Deep
Discount Advisors, Inc. ("Deep Discount") from 1993 to 1999. Mr. Bentz, who
currently serves as a Director to The Austria Fund, Inc. and is Treasurer and
Vice President of the three other funds for which Cornerstone Advisors serves as
investment adviser, was also affiliated with Deep Discount as its Chief
Financial Officer from 1993 to 2000. Messrs. Bradshaw and Bentz no longer
possess any ownership interest in Deep Discount nor do they provide any
investment advisory services to Deep Discount or its clients. Deep Discount and
Ron Olin Investment Management Company ("ROIMC"), both of which jointly filed a
12
Schedule 13G with the Securities and Exchange Commission (the "SEC") on February
5, 2001 as beneficial owners of more than five (5%) percent of the outstanding
shares of the Fund, are registered investment advisers which, on behalf of their
respective advisory clients, invest in the common stock of closed-end investment
companies. There exists no arrangements or understandings among Cornerstone
Advisors, Deep Discount, ROIMC or any of their respective stockholders with
respect to the Fund.
THE CURRENT ADVISORY AGREEMENT
------------------------------
The Fund's current investment adviser, U.S. Trust, has provided
investment advisory and administrative services to the Fund since the Fund's
commencement of operations on May 15, 1973. The current advisory agreement was
last approved by the Board of Directors on March 14, 2000 and ratified by the
shareholders of the Fund on May 9, 2000 (the "Current Advisory Agreement") and
by its terms would expire on May 9, 2002.
Under the Current Advisory Agreement, U.S. Trust formulates a
continuing program for the management of the assets and resources of the Fund,
provides a full range of advice and recommendations, including recommendations
regarding specific securities to be purchased or sold by the Fund, and obtains
and evaluates statistical, economic and other research information with respect
to the economy, business, securities markets and types of securities, all in
conformity with the Fund's current investment objectives and policies. In
addition to providing investment advisory services, U.S. Trust, at its own
expense, provides portfolio trading facilities and makes available to the Fund
appropriate executive, investment, clerical and other personnel as well as
computer and other services for the conduct of its investment business and the
administration of its affairs. U.S. Trust compensates all Fund personnel and
officers other than the current President, Mr. Bradshaw. Currently, U.S. Trust
also provides the Fund with office space and facilities and business equipment
and pays the cost of keeping the Fund's books and records.
For the services rendered and the expenses assumed by U.S. Trust
under the Current Advisory Agreement, the Fund pays U.S. Trust an annual fee
calculated at the rate of 0.50% of the Fund's net asset value up to and
including $100,000,000, 0.40% of such net asset value over $100,000,000 up to
and including $200,000,000 and 0.30% of such asset value over $200,000,000. The
investment advisory fee is computed quarterly on the basis of the net asset
value as of last day of each quarter.
The Fund is responsible for the payment of all its expenses that are
not specifically assumed by U.S. Trust under the Current Advisory Agreement.
However, in the event in any year the sum of the Fund's expenses (including U.S.
Trust's investment advisory fee but excluding interest, taxes and brokerage
commissions relating to the purchase or sale of portfolio securities, the Fund's
expenses of future public offerings of its shares and extraordinary expenses
beyond U.S. Trust's control) exceeds 1 1/2% of the average value of the Fund's
net assets during such year up to $30,000,000, plus 1% of the average value of
the Fund's net assets during such year in excess of $30,000,000, U.S. Trust is
13
obligated to reimburse the Fund promptly for such excess expenses. In addition,
under the Current Advisory Agreement, U.S. Trust is not responsible for any
mistake in judgment or in any event whatsoever except for lack of good faith or
for any conduct on U.S. Trust's part constituting a breach of fiduciary duty
involving personal misconduct in respect of the Fund, so long as such judgment
or other event does not constitute willful malfeasance, bad faith, gross
negligence in the performance of U.S. Trust's duties or reckless disregard of
its obligations and duties under the Current Advisory Agreement.
DESCRIPTION OF THE CORNERSTONE AGREEMENT
----------------------------------------
The description of the Cornerstone Agreement that follows is
qualified in its entirety by reference to Exhibit D, attached hereto. If
adopted, the Cornerstone Agreement will continue in effect for two years after
its initial approval by shareholders, and thereafter from year to year, subject
to its annual approval by the non-interested members of the Fund's Board of
Directors.
Messrs. Bradshaw and Bentz have represented to the Fund's Board of
Directors that they do not have any present intention of selling any of their
shares in Cornerstone Advisors. Additionally, the Fund and Cornerstone Advisors
have agreed to certain terms and conditions which would effectively prevent it
from obtaining undue value from Cornerstone Advisors' engagement as the Fund's
investment adviser.
The Board of Directors, including the disinterested Directors as
advised by legal counsel, and Cornerstone Advisors have determined that the
rendering of investment management services to other closed-end investment
companies will not likely constitute or create a conflict of Cornerstone
Advisors' duty of loyalty affecting its fiduciary duty owing to the Fund or its
shareholders.
Pursuant to the Cornerstone Agreement, Cornerstone Advisors shall
conduct investment research and supervision for the Fund and shall be
responsible for the purchase and sale of investment securities for the Fund's
portfolio, subject to the supervision and direction of the Board of Directors.
Cornerstone Advisors shall provide the Fund with investment advice, shall
supervise the Fund's management and investment programs and shall provide
investment advisory facilities and executive and supervisory personnel for
managing the investments and effectuating portfolio transactions. Cornerstone
Advisors shall also furnish necessary administrative services, office space,
equipment and clerical personnel for servicing the investments of the Fund. In
addition, Cornerstone Advisors will pay the salaries and fees of all officers of
the Fund who are affiliated with Cornerstone Advisors.
The Cornerstone Agreement provides that the Fund is responsible for
all of its expenses and liabilities, except that Cornerstone Advisors shall be
responsible for the expenses in connection with maintaining a staff within its
organization to furnish the above services to the Fund. Although Cornerstone
Advisors is a recently organized investment adviser, the Fund is not aware of
any other circumstances that are reasonably likely to impair the financial
ability of Cornerstone Advisors to fulfill its commitment to the Fund under the
Cornerstone Agreement.
Pursuant to the Cornerstone Agreement, it is proposed that the Fund
will pay Cornerstone Advisors monthly an annual fee equal to 1.00% of the Fund's
average weekly net assets for the investment management and research services
provided by Cornerstone Advisors. In addition, Cornerstone Advisors has agreed
that for the initial year of its contract, it will continue the expense
14
limitation reimbursement whereby in the event that for the year ending December
31, 2002, the sum of the Fund's expenses (including Cornerstone Advisor's
investment advisory fee but excluding interest, taxes and brokerage commissions
relating to the purchase or sale of portfolio securities, the Fund's expenses of
future public offerings of its shares and extraordinary expenses beyond
Cornerstone Advisor's control) exceeds 1.5% of the average value of the Fund's
net assets during such year up to $30,000,000, plus 1% of the average value of
the Fund's net assets during such year in excess of $30,000,000, Cornerstone
Advisors is obligated to waive its fees as necessary and/or reimburse the Fund
promptly for such excess expenses.
If Proposals 1 and 2 are both approved then Cornerstone Adviser's
investment advisory annual fee would be increased from the current fee of 0.50%
of the Fund's average annual net asset value computed on a quarterly basis to
1.00% of the Fund's average annual net asset value computed on a weekly basis.
The Board of Directors believes that this increase in the investment advisory
fee proposed to be paid to the new investment manager, Cornerstone Advisors, as
well as the change in the calculation method is appropriate provided that the
proposed changes to the Fund's fundamental investment objectives and policies
and fundamental investment restrictions are approved by shareholders, as set
forth in Proposal 1.
In the event that Proposal 2 is approved but Proposal 1 is not
approved by the shareholders at the Meeting and the Fund continues to be managed
pursuant to its current investment strategies, Cornerstone Advisors will
continue to be paid the fee paid under the Current Advisory Agreement of 0.50%
of the Fund's average annual net asset value, however, such fee will be computed
based on the Fund's average weekly net assets rather than on a quarterly basis
of its net asset value as of the last day of each quarter as is currently
provided under the Current Advisory Agreement.
The net assets of the Fund as of December 31, 2000 were approximately
$39.6 million. The total amount paid to U.S. Trust by the Fund under the Current
Advisory Agreement for the year ended December 31, 2000 was $____________. Under
the terms of the Cornerstone Agreement, the total amount that would have been
payable to Cornerstone Advisors by the Fund had the Cornerstone Agreement been
in effect during the year ending December 31, 2000, would have been
approximately $396,400, based upon such net assets, without giving effect to any
possible expense limitation reimbursement. The approximate net assets of the
Fund as of September 30, 2001 were $39.4 million. Based on such average net
asset, the approximate amount of advisory fees earned by U.S. Trust under the
Current Advisory Agreement would be $141,000. If the Cornerstone Advisors
Agreement had been in effect during the same nine month period of 2001, then the
amount that it would have been paid is approximately $295,000. Please note that
the amounts estimated to be paid under the Current Advisory Agreement and the
Cornerstone Agreement to U.S. Trust or Cornerstone Advisors, respectively, for
the nine month period ended September 30, 2001, do not reflect the expense
limitation, which in all likelihood, given the current level of the Fund's
estimated annual expenses, would have the effect of significantly reducing the
fees payable.
The Cornerstone Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard for its
obligations and duties thereunder ("disabling conduct"), Cornerstone Advisors
shall not be liable to the Fund or its shareholders for any act or omission in
15
the course of or in connection with the rendering of its services thereunder. In
addition, the Cornerstone Agreement provides that the Fund, under certain
circumstances, will indemnify Cornerstone Advisors against any losses or
expenses incurred, including amounts paid in satisfaction of judgments and
reasonable legal costs, not resulting from disabling conduct.
Subject to shareholder approval, the Cornerstone Agreement will have
an initial term beginning January 1, 2002, and ending December 31, 2003, and,
thereafter, will continue in effect for successive annual periods provided such
continuance is specifically approved at least annually by (i) a majority of the
members of the Fund's Board of Directors who are not parties to the Cornerstone
Agreement, and who are not "interested persons" of any such party, and (ii) a
majority of the Fund's Board of Directors or the holders of a "majority of the
outstanding voting securities" of the Fund. The Cornerstone Agreement may be
terminated, without penalty, on sixty (60) days' notice, by the Fund's Board of
Directors, by a vote of the holders of a "majority of the outstanding voting
securities" of the Fund (as set forth under "Required Vote" below) or by
Cornerstone Advisors.
It is proposed by Cornerstone Advisors and accepted by the Board of
Directors that any soft dollars resulting from soft dollar arrangements between
the Fund, Cornerstone Advisors and selected dealers and brokers (to the extent
that such arrangements are in connection with, or for the benefit of, the Fund),
will be used to pay for certain services provided to the Fund which can be
provided by third parties, including but not limited to administration,
accounting and custodial services. Notwithstanding the foregoing, however, the
Cornerstone Agreement authorizes Cornerstone Advisors to direct the execution of
the Fund's portfolio transactions to dealers and brokers furnishing statistical
information or research deemed by Cornerstone Advisors to be useful or valuable
to the performance of its investment advisory functions for the Fund. In such
circumstances, the commissions paid may be higher than those that the Fund might
otherwise have paid to another broker if those services had not been provided.
Such research services provided to Cornerstone Advisors by brokers who effect
securities transactions for the Fund may be used by Cornerstone Advisors in
servicing other investment companies and accounts that it manages. It is
understood that not all of the research services may be used by Cornerstone
Advisors in managing any particular account, including the Fund. Notwithstanding
the foregoing, however, it is the intention of both Cornerstone Advisors and the
Board of Directors to use such soft dollar arrangements to pay for certain of
the Fund's expenses which may be provided by third parties, including but not
limited to administration, accounting and custodial services.
EVALUATION BY THE BOARD OF DIRECTORS
------------------------------------
The Fund's Board of Directors, including the Directors who are not
interested persons of any party to the Cornerstone Agreement or its affiliates,
has approved the Cornerstone Agreement for the Fund and recommends that
shareholders of the Fund approve such agreement. The Board's deliberations and
approval occurred at a special meeting of the Board of Directors held on
November 16, 2001, with legal counsel in attendance. The Cornerstone Agreement
will become effective on January 1, 2002, subject to shareholder approval. If
the shareholders do not approve the Cornerstone Agreement at the Meeting (or at
an adjournment thereof), the Board will either resubmit the Cornerstone
Agreement to the shareholders for their consideration and approval or consider
alternative sources from which to obtain investment management and research
services for the Fund.
16
In approving the Cornerstone Agreement and determining to submit it
to the shareholders of the Fund for their approval, the Board of Directors
considered the best interests of the shareholders and took into account factors
they deemed relevant. The factors considered by the independent Directors
included the nature, quality and scope of the operations and services to be
provided by Cornerstone Advisors, while focusing on the prior experience of
Cornerstone Advisors' principals with respect to: (i) the structure of
closed-end investment companies in general; (ii) management of portfolios of
U.S. equity securities; (iii) implementing strategies to eliminate closed-end
investment companies' discounts; and (iv) implementing policies to cut costs and
expenses of closed-end investment companies. Furthermore, the Board of Directors
of the Fund considered the opportunity to obtain high quality services at costs
that it deemed appropriate and reasonable and at such fees which fall within the
range of the standard industry fees for comparable investment companies. Lastly,
consideration was given to the fact that there exists no arrangement or
understanding in connection with the Cornerstone Agreement with respect to the
composition of the Board of Directors of the Fund or of Cornerstone Advisors or
with respect to the selection or appointment of any person to any office of the
Fund or Cornerstone Advisors.
Based upon its review of the above factors, the Board of Directors of
the Fund determined that the Cornerstone Agreement is in the best interests of
the Fund and its shareholders.
REQUIRED VOTE
-------------
As provided by the 1940 Act, approval of the Cornerstone Agreement
will require the affirmative vote of a "majority of the outstanding voting
securities" of the Fund, which means the affirmative vote of the lesser of (a)
sixty-seven (67%) percent or more of the shares of the Fund entitled to vote
thereon present or represented by proxy at the Meeting, if the holders of more
than fifty (50%) percent of the outstanding shares of the Fund entitled to vote
thereon are present or represented by proxy, or (b) more than fifty (50%)
percent of the total outstanding shares of the Fund entitled to vote thereon.
For this purpose, abstentions and broker non-votes will be counted as shares
present at the Meeting for quorum purposes, but not as votes cast and will have
the same effect as votes cast against the Proposal.
THE BOARD OF DIRECTORS, INCLUDING THE DIRECTORS WHO ARE NOT
"INTERESTED PERSONS" OF THE FUND, CORNERSTONE ADVISORS OR ITS AFFILIATES,
RECOMMENDS THAT THE SHAREHOLDERS OF THE FUND VOTE "FOR" THE APPROVAL OF THE
CORNERSTONE AGREEMENT.
17
PROPOSAL NO. 3
RATIFICATION OF THE CHANGE IN THE NAME OF THE FUND FROM
"EXCELSIOR INCOME SHARES, INC." TO "EIS FUND, INC."
It was previously disclosed to shareholders that the Fund's advisory
agreement with U.S. Trust requires the Fund to cease using the term "Excelsior"
in its name upon the termination of the Current Advisory Agreement between the
Fund and U.S. Trust. The Fund is currently doing business as "EIS Fund." Under
the New York Business Corporation Law, an amendment to a certificate of
incorporation, which changes the name of the corporation, must be authorized by
the Board of Directors and ratified by a majority of the outstanding shares
entitled to vote.
At a special meeting held on November 16, 2001, the Board of Directors
unanimously authorized the amendment to the Certificate of Incorporation to
change the name of the Fund from "Excelsior Income Shares, Inc." to "EIS Fund,
Inc.", as set forth on Exhibit E.
Accordingly, the Board of Directors believes that, subject to
shareholder ratification of Proposal 3, changing the name of the Fund to "EIS
Fund, Inc." is necessary and appropriate and in the best interests of the Fund
and its shareholders.
REQUIRED VOTE
-------------
Ratification of the name change requires the affirmative vote of the
holders of a majority of the Fund's outstanding voting securities. If the name
change is approved by the Fund's shareholders, such change will become effective
immediately following the filing of the Fund's Certificate of Amendment to the
Certificate of Incorporation with the New York State Department of State.
THE BOARD OF DIRECTORS, INCLUDING THE NON-INTERESTED DIRECTORS,
RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE RATIFICATION OF THE AMENDEMENT
TO THE FUND'S CERTIFICATE OF INCORPORATION TO CHANGE THE NAME OF THE FUND FROM
"EXCELSIOR INCOME SHARES, INC." TO "EIS FUND, INC."
18
INFORMATION PERTAINING TO THE FUND'S
INVESTMENT ADVISER AND ADMINISTRATOR
THE PROPOSED INVESTMENT ADVISER
-------------------------------
Cornerstone Advisors, Inc. ("Cornerstone Advisors"), the Fund's
proposed investment adviser, has its principal office at One West Pack Square,
Suite 1650, Asheville, North Carolina 28801. Ralph W. Bradshaw owns fifty (50%)
percent of the total outstanding shares of common stock of Cornerstone Advisors
and is the President, Chairman of the Board and a Director of the Fund. Gary A.
Bentz, who is also a Director of the Fund owns the remaining fifty (50%) percent
of the total outstanding shares of common stock of Cornerstone Advisors.
THE CURRENT INVESTMENT ADVISER
------------------------------
U.S. Trust Company of New York ("U.S. Trust"), the current investment
adviser, has its principal offices at 114 West 47th Street, New York, New York
10036. U.S. Trust is a New York State-chartered bank and trust company and a
member bank of the Federal Reserve System. U.S. Trust is a wholly owned
subsidiary of the U.S. Trust Corporation, a registered bank holding company,
which has its principal offices at 114 West 47th Street, New York, New York
10036.
INFORMATION PERTAINING TO CERTAIN SHAREHOLDERS
The following table sets forth the beneficial ownership of shares of
the Fund by each person known to the Fund to be deemed the beneficial owner of
more than five (5%) percent of the outstanding shares of the Fund:
SHARES OF COMMON STOCK % OF FUND'S OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
------------------------------------ ------------------ -------------------------
Deep Discount Advisors, Inc. (1) 208,800 9.6%
One West Pack Square
Suite 777
Asheville, NC 28801
Ron Olin Investment Management Company (1) 349,900 16.1%
One West Pack Square
Suite 777
Asheville, NC 28801
Ronald G. Olin (2) 191,500 8.8%
One West Pack Square
Suite 777
Asheville, NC 28801
------------------
(1) Based solely upon information presented in a Schedule 13G, dated
February 5, 2001, filed jointly by Deep Discount Advisors, Inc. and
Ron Olin Investment Management Company.
(2) Based solely on information presented in a Schedule 13G, dated
February 5, 2001, filed by Mr. Olin.
19
Additionally, on November 16, 2001, Cede & Co., a nominee for
participants in the Depository Trust Company, held of record _______________
shares of the Fund, equal to approximately ____% of the outstanding shares of
the Fund.
OTHER BUSINESS
The Board of Directors of the Fund does not know of any other matter
which may come before the Meeting, but should any other matter requiring a vote
of shareholders arise, including any questions as to the adjournment of the
Meeting, it is the intention of the persons named in the proxy to vote the
proxies in accordance with their judgment on that matter.
EXCELSIOR INCOME SHARES, Inc.
d/b/a EIS FUND
Ralph W. Bradshaw, President
Dated: November 29, 2001
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS WHO DO
NOT EXPECT TO ATTEND THE MEETING ARE THEREFORE URGED TO COMPLETE, SIGN, DATE AND
RETURN THE PROXY CARD AS SOON AS POSSIBLE IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
20
APPENDIX A
CURRENT INVESTMENT OBJECTIVES AND POLICIES
(AS EXCERPTED FROM 1973 PROSPECTUS)
The primary investment objective of the Company is to seek as high a
level of current income for its shareholders as is consistent with prudent risk
through investments in a diversified portfolio consisting largely of debt
securities which the Company considers to be of good quality. Capital
appreciation is a secondary objective. To a limited extent, investment may have
equity features and may be acquired in private placement transactions. In
seeking these objectives, the Company may expand its investments through
borrowings and may engage in short-term portfolio trading. There can be no
assurance that the Company' investment objective will be attained.
In pursuing its objectives, the Company will conform to the following
investment policies:
A. At least 75% of the value of the Company's total assets will be
invested in the following types of interest-bearing debt securities and in cash
equivalents:
(1) straight debt securities which are rated at the time of
purchase within the four highest grades assigned by Moody's
Investors Service, Inc. (Aaa, Aa, A or Baa) or Standard &
Poor's Corporation (AAA, AA, A or BBB);
(2) securities of, or guaranteed by, the United States
Government, its agencies and instrumentalities;
(3) securities of, or guaranteed by, the government of
Canada or any instrumentality or political subdivision
thereof, acquired under circumstances that would not
subject the Company to payment of the U.S. Interest
Equalization Tax, such securities not to exceed 25% of the
value of the Company's total assets;
(4) obligations of, or guaranteed by, national or state
banks or U.S. holding companies, the primary assets of
which are U.S. banks, which are considered by management to
have investment quality comparable to securities which may
be purchased under item 1 above, provided that investments
will not be made in obligations of the Trust Company or any
company of which 50% or more of the voting securities are
owned by the Trust Company or an affiliate of the Trust
company; and
(5) commercial paper.
B. Up to 25% of the value of the Company's total assets may
consist of:
(1) interest-bearing debt securities not included in
Paragraph A above;
A-1
(2) securities which may be convertible into or
exchangeable for, or carry warrants or other rights to
purchase, common stock or other equity securities; and
(3) preferred stocks.
In making purchases in conformity with the foregoing policies, the
Company will not invest more than 20% of the value of its total assets in
securities which have been acquired through transactions which constitute
private placements as described below. Securities acquired in such private
placement transactions are herein referred to as "restricted securities".
The Company will determine its compliance with the foregoing
investment policies only at the time a security is acquired and on the basis of
value of the securities in the Company's portfolio at that time. See VALUATION
OF PORTFOLIO SECURITIES. If the value of those securities permitted to be held
under the categories referred to in Paragraph B above increases above the 25%
limitation, the Company will not be required to dispose of any of such
securities, but, so long as such limitation is executed, the Company may not
acquire any additional securities under any of such categories. In addition to
the foregoing, the Company may exchange securities, exercise any conversion
rights or exercise warrants or other rights to purchase common stock or other
equity securities and may hold any such securities so acquired without regard to
the foregoing investment policies, but the value of the securities so acquired
shall be included in any subsequent determination of the Company's compliance
with the 25% limitation referred to in Paragraph B above.
PRIVATE PLACEMENTS. The Company may acquire restricted securities in
private placement transactions directly from the issuer or from security
holders. Restricted securities frequently carry higher yields than comparable
publicly traded securities. Privately placed securities are not readily
marketable and ordinarily can be sold by the Company only in privately
negotiated transactions to a limited number of purchasers or in public offerings
made pursuant to an effective registration statement under the Securities Act of
1933. Private or public sales of restricted securities by the Company may
involve significant delays and expense. Private sales require negotiations with
one or more purchasers, and restricted securities generally are sold at less
favorable prices than comparable unrestricted securities. Public sales generally
involve the time and expense of preparing and processing a registration
statement under the Securities Act of 1933, which may be considerable, and may
involve the payment of underwriting commissions. Thus, the proceeds from a
registered public sale may be less than the proceeds from the sale of securities
of the same class which are freely marketable. In each acquisition of restricted
securities in private placement transactions, the Company will endeavor to
secure registration rights from the issuer, but there can be no assurance that
the Company will succeed in obtaining such rights as to each restricted security
in its portfolio and that, if such rights are obtained with respect to a given
restricted security, such rights will enable the Company to dispose of such
security at the time and in the amount desired by it.
PORTFOLIO TRADING. In pursuing its investment objectives, the Company
intends to engage in portfolio trading rather than holding its entire portfolio
to maturity. Such trading may involve the selling of securities held for a short
time, ranging from several months to less than a day. Trading will be used by
the Company primarily in anticipation of or in response to market developments
A-2
or to take advantage of yield disparities. Examples of circumstances in which
the Company may employ trading are:
(a) in anticipation of a rise in interest rates, the Company may
shorten the average maturity of its portfolio so as to minimize
depreciation of principal;
(b) in anticipation of a decline in interest rates, the Company may
lengthen the average maturity of its portfolio so as to maximize
appreciation of principal; and
(c) when disparities appear in the relative values of bonds or other
fixed income securities of the same or differing types of quality,
the Company may sell one type or quality and purchase another.
Trading techniques will be used principally in connection with higher
quality, nonconvertible debt securities (rates Baa or BBB or higher). Such
securities are often better suited for trading because the market in such
securities offers greater liquidity than the market in debt securities of lower
quality. It is anticipated that trading will be less applicable to convertible
securities, since such securities will normally be purchased when the Company
believes that the market value of the underlying equity security is likely to
appreciate over a period of time.
The Company will engage in trading if it believes the transactions,
net of costs (including commission, if any), will result in improving the
appreciation potential or income of its portfolio. Whether any improvement will
be realized by trading will depend upon the ability of the Company to evaluate
particular securities and anticipate relevant market factors, including interest
rate trends and variations from such trends. Trading such as that contemplated
by the Company places a premium upon the ability of the Company to obtain
relevant information, evaluate it promptly and take advantage of its evaluations
by completing transactions on a favorable basis.
The Company cannot accurately predict its annual portfolio turnover
rate, but it anticipates that the rate will not normally exceed 200% (excluding
turnover of securities having a maturity of one year or less) after the initial
investment of the net proceeds of this offering in accordance with the Company's
investment objective and policies. A 200% portfolio turnover rate would occur,
for example, if the value of purchase of portfolio securities for a particular
year were two times the average value (calculated monthly) of the portfolio
securities owned during such year. The turnover rate will depend on a number of
factors, including the continued ability of the Company to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code.
The Company intends to qualify for the resultant "pass-through" federal income
tax treatment under the Code and accordingly intends to limit its short-term
trading so that less 30% of its gross income (including all dividend and
interest income and gross realized capital gains, both short and long term,
without offset for realized capital losses) will be derived from gross gains
realized on the sale or other disposition of securities held for less than three
months. This limitation, which must be met in order to obtain such
"pass-through" tax treatment, may at certain times prevent the Company from
realizing capital gains on securities held for less than three months.
A-3
LEVERAGE AND BORROWING. The Company may borrow funds to purchases
securities, provided that immediately after such borrowing the aggregate amount
of all such borrowings shall not exceed 20% of the Company's total assets, taken
at market value at the time of borrowing. If for any reason the Company's asset
coverage at any time falls below 300% of the amount owed on outstanding
borrowings at the time, the Company, within three business days, will obtained
from banks or others and may in some instances be demand loans. Demand loans
could be called by the lender at a time when it might be disadvantageous for the
Company to sell securities in order to repay the borrowing. The extent to which
the Company borrows will depend upon the availability of funds, as well as the
cost of borrowing as compared with the possible benefit the Company expects to
achieve. If the Company employs borrowings to make additional investments, any
income derived from the additional funds, in excess of the interest which the
Company has to pay for such borrowings, will cause the Company's net income to
rise more rapidly than if borrowing were not used. Conversely, if the income
from the securities purchased with the borrowed funds is not sufficient to cover
the cost of borrowing, the net income of the Company will decline more rapidly
than if borrowing were not used. Current regulations of the Board of Governors
of the Federal Reserve System prohibit the Company from borrowing from the Trust
Company or any of its subsidiaries, so long as the Company's investment adviser
is the Adviser the Trust Company or any other subsidiary of the Trust Company.
Subject to such limitations as may be specified in applicable margin regulations
of the Board of Governors of the Federal Reserve System, amounts borrowed to
purchase securities may be secured by a pledge or mortgage of the Company's
assets but not more than 30% of the Company's total assets, taken at market
value at time of incurrence, may be subject t such pledges and mortgages.
MOODY'S COMPOSITE AVERAGES OF YIELDS. The following table gives the
average annual yield to maturity for public utility and industrial bonds rated
in the four highest classifications (Baa or better) for the periods indicated as
reported by Moody's Investors Service, Inc. and is indicative of historic
variations in interest rates of bonds in these categories.
Since interest rates vary from time to time due to general economic
and market conditions and many other factors, there can be no assurance that the
interest rates for the periods presented above are indicative of rates which may
prevail in the future. There can be no assurance that the Company will achieve a
yield on its investments in debt securities as great as the average yields
described above. The yield to the Company on its investment portfolio will be a
gross amount, which will be subject to expenses and taxes. Based upon assumed
average annual net assets of $30,365,000 and assumed expenses, which information
has been developed by the Adviser, the Company estimates that its normal annual
operating expenses, including advisory fees and state taxes but excluding
expenses incurred as a result of any borrowing, will aggregate approximately
0.9% of such average annual net assets. However, since the foregoing amount is
based on estimates and assumptions which, although considered by the Adviser to
be reasonable, may not prove to be correct, the Company can give no assurance
that its actual operating expenses will in any year equal the foregoing
estimate.
The market value of debt, securities and preferred stocks owned by
the Company, which carry no equity participation should reflect yields generally
available on securities of similar quality and type. When such yields decline,
the market value of a portfolio already invested at higher yields can be
expected to rise, if the securities are protected against early call. Similarly,
when such yields increase, the market value of a portfolio already invested at
A-4
lower yields can be expected to decline. The Company's portfolio may, subject to
economic and market conditions, include debt securities which sell at
substantial discounts from par.
OTHER INVESTMENT POLICIES. The Company is permitted, subject to
certain conditions, to loan its portfolio securities. However, the Board of
Directors of the Company have not yet formulated specific plans to implement
this investment policy and no assurance can be given that such policy will be
implemented or as to the extent or results of such policy if implemented. Any
loans of portfolio securities would be continuously secured by collateral at
least equal to the market value of the securities loaned. The Company would
continue to receive interest or dividends on the securities loaned and would, at
the same time, earn interest on the loans or on the investment of the loan
collateral if it is cash. Any specific plans developed will be intended to
comply with applicable regulatory requirements relating to such loans. At the
present time, the staff of the Securities and Exchange Commission does not
object to permitting the voting rights, or rights to consent, attendant to
securities loaned, to pass to the borrower, although it requires that such loans
be called so that the securities may be voted by the lender if a material event
affecting the investment is to occur. If this policy is implemented, it is
intended that amounts earned on such loans (together with any other income of
the Company other than interest, dividends and gains from the sale or other
disposition of stock or securities) will not exceed 10% of the Company's annual
gross income, without offset for realized capital losses, unless counsel for the
Company determines that such amounts constitute qualifying income under federal
income tax provisions applicable to regulated investment companies. Under these
provisions, at least 90% of annual gross income, without offset for realized
capital losses, must be derived from interest, dividends and grants from the
sale or other disposition of stock or securities. See DISTRIBUTIONS AND FEDERAL
TAX STATUS for information regarding the consequences to the Company and its
shareholders if the Company fails to qualify as a regulated investment company
under such federal income tax provisions in any taxable year.
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 as used in this Prospectus means the lesser of (i) 67%
of the Company's outstanding shares of Common Stock present at a meeting of the
holders if more than 50% of the outstanding shares of Common Stock are present
in person or by proxy or (ii) more than 50% of the Company's outstanding shares
of Common Stock.
The Company will not:
(1) Have less than 75% of the value of its total assets invested in
the types of interest-bearing debt securities (and cash and cash equivalents)
described in Paragraph A of INVESTMENT OBJECTIVES AND POLICIES.
(2) Have more than 25% of the value of its total assets invested as
described in Paragraph B of INVESTMENT OBJECTIVES AND POLICIES.
A-5
(3) Issue any senior securities (as defined in the Investment Company
Act of 1940) except insofar as any borrowing permitted by item 4 below might be
considered the issuance of senior securities.
(4) Borrowing money except (a) as described under INVESTMENT
OBJECTIVES AND POLICIES--LEVERAGE AND BORROWING and (b) from banks for temporary
or emergency purposes in an amount not exceeding 5% of its total assets, taken
at market value at time of borrowing.
(5) Mortgage, pledge or hypothecate its assets in an amount exceeding
30% of its total assets, taken at market value at time of incurrence.
(6) Knowingly invest more than 20% of its total assets, taken at
market value at time of investment in securities, subject to legal or
contractual restrictions on resale, including securities which may be sold
publicly only if registered under the Securities Act of 1933.
(7) Act as an underwriter, except to the extent that, in connection
with the disposition of portfolio securities, the Company may be deemed to be an
underwriter under applicable securities laws.
(8) Purchase 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.
(9) Make loans, except through the purchase of debt securities and
the loaning of its portfolio securities in accordance with the Company's
investment policies.
(10) Investment in companies for the purpose of exercising control or
management.
(11) Purchase securities on margin (except that it may obtain such
short-term credits as may be necessary for the clearance of purchases or sales
of securities) or make short sales of securities (except for sales "against the
box").
(12) Purchase or retain securities of any issuer if, to the Company's
knowledge, those officers and directors of the Company or the Adviser
individually owning beneficially more than 1/2 of 1% of the outstanding
securities of such issuer together own beneficially more than 5% of such
issuer's outstanding securities.
(13) Invest in commodities or commodity contracts, or write or
purchase puts, calls or combinations of both.
(14) Purchase the securities of any other investment company, except
(a) in connection with a merger, consolidation, acquisition of assets or other
reorganization approved by the Company's shareholders, and (b) in the case of
securities of closed-end investment companies only, in the open market where no
commission other than the ordinary broker's commission is paid; provided,
however, that in no event may investments in securities of other investment
companies exceed 10% of the Company's total assets taken at market value at time
of purchase.
A-6
(15) Invest more than 25% of its total assets, taken at market value
at time of purchase, in securities of issuers in any one industry, provided that
the Company may invest up to 40% of its total assets, taken at market value at
time of purchase, in each of the electric utility and telephone industries.
(16) Purchase securities issued by the Trust Company or any company
of which 50% or more of the voting securities are owned by the Trust Company or
an affiliate of the Trust Company, or any investment company (excluding the
Company) or real estate investment trust managed or advised by the Trust Company
or any such company.
(17) Invest more than 5% of its total assets, taken at market value
at time of purchase, in securities of any one issuer other than the United
States Government or its instrumentalities; or invest in the securities of
companies which (together with predecessors) have a record of less than three
years continuous operation, or purchase more than 10% of any class of the
outstanding voting securities of any one issuer.
(18) 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 or transmission of oil, gas or
other minerals.
(19) Invest more than 25% of its total assets, taken at market value
at time of purchase, in securities of, or guaranteed by, the government of
Canada or any of its instrumentalities or political subdivisions.
If a percentage restriction on investment or utilization of assets
set forth in items 1, 2, 4, 5, 6, 14, 15, 17 or 19 above is adhered to at the
time an investment is made, a later change in percentage resulting from, for
example, changing values or a change in the rating of a portfolio security will
not be considered a violation. The Company may exchange securities, exercise any
conversion rights or exercise warrants or other rights to purchase common stock
or other equity securities and may hold any such securities so acquired without
regard to the foregoing investment restrictions, but the value of the securities
so acquired shall be included in any subsequent determination of the Company's
compliance with the 25% limitation referred to in item 2 above.
A-7
EXHIBIT B
ARTICLE XXXII
(OF THE FUND'S CURRENT BY-LAWS)
FUNDAMENTAL INVESTMENT POLICIES
-------------------------------
The authority of the Board of Directors to invest the funds of the
Company shall be subject to the following restrictions and limitations, none of
which may be changed without the approval of the holders of a majority of the
Company's outstanding voting securities (as defined in Article XXXVI hereof).
The Company shall not:
(a) Have less than 75% of its total assets invested in the following
types of interest-bearing debt securities and in cash and cash
equivalents:
(1) straight debt securities which are rated at the time of
purchase within the four highest grades assigned by Moody's Investors
Service, Inc. (Aaa, Aa, A or Baa) or Standard & Poor's Corporation
(AAA, AA, A or BBB);
(2) securities of, or guaranteed by, the United States
Government, its agencies and instrumentalities;
(3) securities of, or guaranteed by, the government of Canada or
any instrumentality or political subdivision thereof, acquired under
circumstances that would not subject the Company to payment of the
United States Interest Equalization Tax, such securities not to
exceed 25% of the Company's total assets;
(4) obligations of, or guaranteed by, national or state banks or
U.S. holding companies, the primary assets of which are U.S. banks,
which are considered by management to have investment quality
comparable to securities which may be purchased under item (1) above,
provided that investments will not be made in obligations of the
United States Trust Company of New York or any company of which 50%
or more of the voting securities are owned by United States Trust
Company of New York or an affiliate thereof; and
(5) commercial paper.
(b) Have more than 25% of its total assets invested in:
(1) interest-bearing debt securities not included in paragraph
(a) above;
(2) securities which may be convertible into or exchangeable
for, or carry warrants or other rights to purchase, common stock or
other equity securities; and
(3) preferred stocks.
B-1
(c) Issue any senior securities (as defined in the Investment Company
Act of 1940) except insofar as any borrowing permitted by item (d) below
might be considered the issuance of senior securities.
(d) Borrow money except (i) to purchase securities, provided that the
aggregate amount of such borrowings may not exceed 20% of its total
assets, taken at market value at time of borrowing, and (ii) from banks
for temporary or emergency purposes in an amount not exceeding 5% of its
total assets, taken at market value at time of borrowing.
(e) Mortgage, pledge or hypothecate its assets in an amount exceeding
30% of its total assets, taken at market value at time of incurrence.
(f) Knowingly invest more than 20% of its total assets, taken at
market value at time of investment, in securities subject to legal or
contractual restrictions on resale, including securities which may be sold
publicly only if registered under the Securities Act of 1933.
(g) Act as an underwriter, except to the extent that, in connection
with the disposition of portfolio securities, the Company may be deemed to
be an underwriter under applicable securities laws.
(h) Purchase 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.
(i) Make loans, except through the purchase of debt securities and
the lending of its portfolio securities in accordance with the Company's
investment policies; to the extent that the purchase of United States
Government securities or debt securities of a federal agency, federal
instrumentality or federally-created corporation with a simultaneous
resale of such securities to the vendor for later delivery may be
considered the making of a loan, the Company may engage in such
transactions; provided, however, that in no event will any such purchase
be made if thereafter more than 25% of the total assets of the Company at
time of purchase would consist of such investments.
(j) Invest in companies for the purpose of exercising control or
management.
(k) Purchase securities on margin (except that it may obtain such
short-term credits as may be necessary for the clearance of purchases or
sales of securities) or make short sales of securities (except for sales
"against the box").
(l) Purchase or retain securities of any issuer if, to the Company's
knowledge, those officers and directors of the Company or its investment
adviser individually owning beneficially more than 1/2 of 1% of the
outstanding securities of such issuer together own beneficially own more
than 5% of such issuer's outstanding securities.
(m) Invest in commodities or commodity contracts, or write or
purchase puts, calls, or combinations of both.
B-2
(n) Purchase the securities of any other investment company, except
(a) in connection with a merger, consolidation, acquisition of assets or
other reorganization approved by the Company's shareholders and (b) in the
case of securities of closed-end investment companies only, in the open
market where no commission other than the ordinary broker's commission is
paid; provided, however, that in no event may investments in securities of
other investment companies exceed 10% of the Company's total assets, taken
at market value at time of purchase.
(o) Invest more than 25% of its total assets, taken at market value
at time of purchase, in securities of issuers in any one industry,
provided that the Company may invest up to an aggregate of 80% of its
total assets, taken at market value at time of purchase, in the electric
utility and telephone industries as a group.
(p) Purchase securities issued by United States Trust Company of New
York or any other company of which 40% or more of the voting securities
are owned by United States Trust Company of New York or an affiliate
thereof, or any investment company (excluding the Company) or real estate
investment trust managed or advised by United States Trust Company of New
York or any such company.
(q) Invest more than 5% of its total assets, taken at market value at
time of purchase, in securities of any one issuer other than securities of
the United States Government or its agencies or instrumentalities, except
that in connection with the purchase and simultaneous resale of securities
permitted by item (i) above invest more than 25% of its total assets taken
at market value at time of purchase, in securities of any one issuer; or
invest in the securities of companies which (together with predecessors)
have a record of less than three years continuous operation; or purchase
more than 10% of any class of the outstanding voting securities of any one
issuer.
(r) 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 or transmission of oil,
gas or other minerals.
(s) Invest more than 25% of its total assets, taken at market value
at time of purchase, in securities of, or guaranteed by, the government of
Canada or any of its instrumentalities or political subdivisions.
If a percentage restriction on investment or utilization of assets
set forth in items (a), (b), (d), (e), (f), (n), (o), (q) or (s) above is
adhered to at the time an investment is made, a later change in percentage
resulting form, for example, changing values or a change in the rating of a
portfolio security will not be considered a violation of these By-laws, The
Company may exchange securities, exercise any conversion rights or exercise
warrants or other rights to purchase common stock or other equity securities and
may hold any such securities so acquired without regard to the foregoing
investment restrictions, but the value of the securities so acquired shall be
included in any subsequent determination of the Company's compliance with the
25% limitation referred to in paragraph (b) above.
B-3
EXHIBIT C
PROPOSED INVESTMENT RESTRICTIONS IF PROPOSAL 1
IS APPROVED BY SHAREHOLDERS
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 as used in this Prospectus means the lesser of (i) 67%
of the Company's outstanding shares of Common Stock present at a meeting of the
holders if more than 50% of the outstanding shares of Common Stock are present
in person or by proxy or (ii) more than 50% of the Company's outstanding shares
of Common Stock.
The Company will not:
(1) Issue any senior securities (as defined in the Investment Company
Act of 1940) except insofar as any borrowing permitted by item 2 below might be
considered the issuance of senior securities.
(2) Borrowing money except (a) as described under INVESTMENT
OBJECTIVES AND POLICIES--LEVERAGE AND BORROWING and (b) from banks for temporary
or emergency purposes in an amount not exceeding 33 1/3% of its total assets,
taken at market value at time of borrowing.
(3) Mortgage, pledge or hypothecate its assets in an amount exceeding
30% of its total assets, taken at market value at time of incurrence.
(4) Knowingly invest more than 20% of its total assets, taken at
market value at time of investment in securities, subject to legal or
contractual restrictions on resale, including securities which may be sold
publicly only if registered under the Securities Act of 1933.
(5) Act as an underwriter, except to the extent that, in connection
with the disposition of portfolio securities, the Company may be deemed to be an
underwriter under applicable securities laws.
(6) Purchase 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.
(7) Make loans, except through the purchase of debt securities and
the loaning of its portfolio securities in accordance with the Company's
investment policies.
(8) Invest in companies for the purpose of exercising control or
management.
(9) Purchase securities on margin (except that it may obtain such
short-term credits as may be necessary for the clearance of purchases or sales
of securities) or make short sales of securities (except for sales "against the
box").
C-1
(10) Purchase or retain securities of any issuer if, to the Company's
knowledge, those officers and directors of the Company or the Adviser
individually owning beneficially more than 1/2 of 1% of the outstanding
securities of such issuer together own beneficially more than 5% of such
issuer's outstanding securities.
(11) Invest in commodities or commodity contracts, or write or
purchase puts, calls or combinations of both.
(12) Purchase the securities of any other investment company, except
(a) in connection with a merger, consolidation, acquisition of assets or other
reorganization approved by the Company's shareholders, and (b) in the case of
securities of closed-end investment companies only, in the open market where no
commission other than the ordinary broker's commission is paid; provided,
however, that in no event may investments in securities of other investment
companies exceed 10% of the Company's total assets taken at market value at time
of purchase.
(13) 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 or transmission of oil, gas or
other minerals.
If a percentage restriction on investment or utilization of assets
set forth in items 2, 3, 4, 10, or 12 above is adhered to at the time an
investment is made, a later change in percentage resulting from, for example,
changing values or a change in the rating of a portfolio security will not be
considered a violation. The Company may exchange securities, exercise any
conversion rights or exercise warrants or other rights to purchase common stock
or other equity securities and may hold any such securities so acquired without
regard to the foregoing investment restrictions, but the value of the securities
so acquired shall be included in any subsequent determination of the Company's
compliance with the 25% limitation referred to in item 2 above.
C-2
EXHIBIT D
INVESTMENT MANAGEMENT AGREEMENT
THIS INVESTMENT MANAGEMENT AGREEMENT dated and effective as of
January 1, 2002 between EIS FUND, INC., a New York corporation (herein referred
to as the "Fund"), and CORNERSTONE ADVISORS, INC., a corporation duly organized
under the laws of North Carolina (herein referred to as the "Investment
Manager").
1. APPOINTMENT OF INVESTMENT MANAGER. The Investment Manager hereby undertakes
and agrees, upon the terms and conditions herein set forth, to provide overall
investment management services for the Fund, and in connection therewith to (i)
supervise the Fund's investment program, including advising and consulting with
the Fund's Board of Directors regarding the Fund's overall investment strategy;
(ii) make, in consultation with the Fund's Board of Directors, investment
strategy decisions for the Fund; (iii) manage the investing and reinvesting of
the Fund's assets; (iv) place purchase and sale orders on behalf of the Fund;
(v) advise the Fund with respect to all matters relating to the Fund's use of
leveraging techniques; (vi) provide or procure the provision of research and
statistical data to the Fund in relation to investing and other matters within
the scope of the investment objective and limitations of the Fund; (vii) monitor
the performance of the Fund's outside service providers, including the Fund's
administrator, transfer agent and custodian; (viii) be responsible for
compliance by the Fund with U.S. federal, state and other applicable laws and
regulations; and (ix) pay the salaries, fees and expenses of such of the Fund's
directors, officers or employees who are directors, officers or employees of the
Investment Manager or any of its affiliates, except that the Fund will bear
travel expenses or an appropriate portion thereof of directors and officers of
the Fund who are directors, officers or employees of the Investment Manager, to
the extent that such expenses relate to attendance at meetings of the Board of
Directors or any committees thereof. The Investment Manager may delegate any of
the foregoing responsibilities to a third party with the consent of the Board of
Directors.
2. EXPENSES. In connection herewith, the Investment Manager agrees to maintain a
staff within its organization to furnish the above services to the Fund. The
Investment Manager shall bear all expenses arising out of its duties hereunder.
Except as provided in Section 1 hereof, the Fund shall be responsible
for all of the Fund's expenses and liabilities, including expenses for legal,
accounting and auditing services; taxes and governmental fees; dues and expenses
incurred in connection with membership in investment company organizations; fees
and expenses incurred in connection with listing the Fund's shares on any stock
exchange; costs of printing and distributing shareholder reports, proxy
materials, prospectuses, stock certificates and distribution of dividends;
charges of the Fund's custodians and sub-custodians, administrators and
sub-administrators, registrars, transfer agents, dividend disbursing agents and
dividend reinvestment plan agents; payment for portfolio pricing services to a
pricing agent, if any; registration and filing fees of the Securities and
Exchange Commission; expenses of registering or qualifying securities of the
Fund for sale in the various states; freight and other charges in connection
with the shipment of the Fund's portfolio securities; fees and expenses of
D-1
non-interested directors or non-interested members of any advisory or investment
board, committee or panel of the Fund; fees and expenses of any officers and
interested directors of the Fund who are not affiliated with the Investment
Manager, the Administrator or their respective affiliates; travel expenses or an
appropriate portion thereof of directors and officers of the Fund, or members of
any advisory or investment board, committee or panel of the Fund, to the extent
that such expenses relate to attendance at meetings of the Board of Directors or
any committee thereof, or of any such advisory or investment board, committee or
panel; salaries of shareholder relations personnel; costs of shareholder
meetings; insurance; interest; brokerage costs; and litigation and other
extraordinary or non-recurring expenses.
3. TRANSACTIONS WITH AFFILIATES. The Investment Manager is authorized on behalf
of the Fund, from time to time when deemed to be in the best interests of the
Fund and to the extent permitted by applicable law, to purchase and/or sell
securities in which the Investment Manager or any of its affiliates underwrites,
deals in and/or makes a market and/or may perform or seek to perform investment
banking services for issuers of such securities. The Investment Manager is
further authorized, to the extent permitted by applicable law, to select brokers
(including any brokers affiliated with the Investment Manager) for the execution
of trades for the Fund.
4. BEST EXECUTION; RESEARCH SERVICES. The Investment Manager is authorized, for
the purchase and sale of the Fund's portfolio services, to employ such dealers
and brokers as may, in the judgment of the Investment Manager, implement the
policy of the Fund to obtain the best results taking into account such factors
as price, including dealer spread, the size, type and difficulty of the
transaction involved, the firm's general execution and operational facilities
and the firm's risk in positioning the securities involved. Consistent with this
policy, the Investment Manager is authorized to direct the execution of the
Fund's portfolio transactions to dealers and brokers furnishing statistical
information or research deemed by the Investment Manager to be useful or
valuable to the performance of its investment advisory functions for the Fund.
It is understood that in these circumstances, as contemplated by Section 28(e)
of the Securities Exchange Act of 1934, the commissions paid may be higher than
those which the Fund might otherwise have paid to another broker if those
services had not been provided. Information so received will be in addition to
and not in lieu of the services required to be performed by the Investment
Manager. It is understood that the expenses of the Investment Manager will not
necessarily be reduced as a result of the receipt of such information or
research. Research services furnished to the Investment Manager by brokers who
effect securities transactions for the Fund may be used by the Investment
Manager in servicing other investment companies and accounts which it manages.
Similarly, research services furnished to the Investment Manager by brokers who
effect securities transactions for other investment companies and accounts which
the Investment Manager manages may be used by the Investment Manager in
servicing the Fund. It is understood that not all of these research services are
used by the Investment Manager in managing any particular account, including the
Fund.
5. REMUNERATION. In consideration of the services to be rendered by the
Investment Manager under this Agreement, the Fund shall pay the Investment
Manager a monthly fee in United States dollars for the previous month at an
annual rate of one (1.00%) percent of the Fund's average weekly net assets. If
the fee payable to the Investment Manager pursuant to this paragraph 5 begins to
accrue before the end of any month or if this Agreement terminates before the
end of any month, the fee for the period from such date to the end of such month
or from the beginning of such month to the date of termination, as the case may
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be, shall be prorated according to the proportion which such period bears to the
full month in which such effectiveness or termination occurs. For purposes of
calculating each such monthly fee, the value of the Fund's net assets shall be
computed at the time and in the manner specified in the Registration Statement.
6. REPRESENTATIONS AND WARRANTIES. The Investment Manager represents and
warrants that it is duly registered and authorized as an investment adviser
under the Investment Advisers Act of 1940, as amended, and the Investment
Manager agrees to maintain effective all requisite registrations, authorizations
and licenses, as the case may be, until the termination of this Agreement.
7. SERVICES NOT DEEMED EXCLUSIVE. The services provided hereunder by the
Investment Manager are not to be deemed exclusive and the Investment Manager and
any of its affiliates or related persons are free to render similar services to
other and to use the research developed in connection with this Agreement for
other clients or affiliates. Nothing herein shall be construed as constituting
the Investment Manager an agent of the Fund.
8. LIMIT OF LIABILITY. The Investment Manager shall exercise its best judgment
in rendering the services in accordance with the terms of this Agreement. The
Investment Manager shall not be liable for any error of judgment or mistake of
law or for any act or omission or any loss suffered by the Fund in connection
with the matters to which this Agreement relates, provided that nothing herein
shall be deemed to protect or purport to protect the Investment Manager against
any liability to the Fund or its shareholders to which the Investment Manager
would otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under this Agreement ("disabling
conduct"). The Fund will indemnify the Investment Manager against, and hold it
harmless from, any and all losses, claims, damages, liabilities or expenses
(including reasonable counsel fees and expenses), including any amounts paid in
satisfaction of judgments, in compromise or as fines or penalties, not resulting
from disabling conduct by the Investment Manager. Indemnification shall be made
only following: (i) a final decision on the merits by a court or other body
before whom the proceeding was brought that the Investment Manager was not
liable by reason of disabling conduct, or (ii) in the absence of such a
decision, a reasonable determination, based upon a review of the facts, that the
Investment Manager was not liable by reason of disabling conduct by (a) the vote
of a majority of a quorum of directors of the Fund who are neither "interested
persons" of the Fund nor parties to the proceeding ("disinterested non-party
directors"), or (b) an independent legal counsel in a written opinion. The
Investment Manager shall be entitled to advances from the Fund for payment of
the reasonable expenses (including reasonable counsel fees and expenses)
incurred by it in connection with the matter as to which it is seeking
indemnification in the manner and to the fullest extent permissible under law.
Prior to any such advance, the Investment Manager shall provide to the Fund a
written affirmation of its good faith belief that the standard conduct necessary
for indemnification by the Fund has been met and a written undertaking to repay
any such advance if it should ultimately be determined that the standard of
conduct has not been met. In addition, at least one of the following additional
conditions shall be met: (a) the Investment Manager shall provide a security in
form and amount acceptable to the Fund for its undertaking; (b) the Fund is
insured against losses arising by reason of the advance; or (c) a majority of a
quorum of disinterested non-party directors, or independent legal counsel, in a
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written opinion, shall have determined, based on a review of facts readily
available to the Fund at the time the advance is proposed to be made, that there
is reason to believe that the Investment Manager will ultimately be found to be
entitled to indemnification.
9. DURATION AND TERMINATION. This Agreement shall have an initial term beginning
January 1, 2002 and ending December 31, 2003, and then shall continue in effect
thereafter for successive annual periods, but only so long as such continuance
is specifically approved at least annually by the affirmative vote of (i) a
majority of the members of the Fund's Board of Directors who are not parties to
this Agreement or "interested persons" (as defined in the Investment Company Act
of 1940 (the "1940 Act")) of any such party, cast in person at a meeting called
for the purpose of voting on such approval, and (ii) the Fund's Board of
Directors or the holders of a majority of the outstanding voting securities (as
defined in the 1940 Act) of the Fund.
Notwithstanding the above, this Agreement (a) may nevertheless be
terminated at any time, without penalty, by the Fund's Board of Directors, by
vote of holders of a majority of the outstanding voting securities (as defined
in the 1940 Act) of the Fund or by the Investment Manager, upon sixty (60) days'
written notice delivered to each party hereto, and (b) shall automatically be
terminated in the event of its assignment (as defined in the 1940 Act). Any such
notice shall be deemed given when received by the addressee.
10. GOVERNING LAW. This Agreement shall be governed, construed and interpreted
in accordance with the laws of the State of New York, provided, however, that
nothing herein shall be construed as being inconsistent with the 1940 Act.
11. NOTICES. Any notice hereunder shall be in writing and shall be delivered in
person or by telex or facsimile (followed by delivery in person) to the parties
at the addresses set forth below:
IF TO THE FUND:
--------------
EIS FUND, INC.
c/o Cornerstone Advisors, Inc.
One West Pack Square
Suite 1650
Asheville, North Carolina 28801
Attention:Mr. Ralph W. Bradshaw
IF TO THE INVESTMENT MANAGER:
----------------------------
CORNERSTONE ADVISORS, INC.
One West Pack Square
Suite 1650
Asheville, North Carolina 28801
Attention:Mr. Gary A. Bentz
or to such other address as to which the recipient shall have informed the other
party in writing.
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Unless specifically provided elsewhere, notice given as provided
above shall be deemed to have been given, if by personal delivery, on the day of
such delivery, and, if by facsimile and mail, on the date on which such
facsimile or mail is sent.
12. COUNTERPARTS. This Agreement may be executed in two or more counterparts,
each of which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto caused their duly authorized
signatories to execute this Agreement as of the day and year first written
above.
EIS FUND, INC.
By:
--------------------------------------
Name: Ralph W. Bradshaw
Title: President
CORNERSTONE ADVISORS, INC.
By:
---------------------------------------
Name: Gary A. Bentz
Title: Vice President
D-5
EXHIBIT E
CERTIFICATE OF AMENDMENT OF THE
CERTIFICATE OF INCORPORATION
OF
EXCELSIOR INCOME SHARES, INC.
(Under Section 805 of the Business Corporation Law)
---------------------------------------
To the Department of State
State of New York
The undersigned hereby certifies:
FIRST: The name of the corporation is Excelsior Income Shares, Inc.
SECOND: The Certificate of Incorporation was filed with the Department of State
of the State of New York on March 14, 1973.
THIRD: The Certificate of Incorporation is amended by deleting Article First and
substituting the following therefor:
"FIRST: The name of the corporation (hereinafter called the
"Company") is "EIS Fund, Inc."
FOURTH: The foregoing amendment was approved by the vote of a majority of the
outstanding shares entitled to vote thereon.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of Amendment
to the Certificate of Incorporation on behalf of the Company this ____ day of
December, 2001.
EXCELSIOR
INCOME SHARES, INC.
By:
---------------------------------
Name: Ralph Bradshaw
Title: President
E-1