<PAGE>
Excelsior
Income Shares,
Inc.
Quarterly Report
September 30, 1997
<PAGE>
DEAR FELLOW SHAREHOLDERS:
Net investment income for the third quarter and first nine months was
$596,867 and $1,782,911, respectively. Per share, the results were $.27 and
$.81. A dividend of $.26 will be paid on October 31 to shareholders of record
October 24, 1997.
About the only reliable "constant" is the volatility of both bond and stock
markets. Lots of experts fill the media with predictions, and most brokers are
getting richer by the minute.
We are not churlish enough to question the value added by Wall Street
commentators, but "new paradigm" jargon has a somewhat scary ring. Excelsior
remains a stodgy investment: a bond masquerading as a stock. We are, however,
not asleep -- just consistent.
One development in the bond market merits comment. There appears to be
growing investor acceptance of high risk in exchange for surprisingly small
reward. The spread between quality and low rated debt is the tightest it has
been in more than thirty years.
A student of the market recently pointed out that sixty percent of "junk"
bonds outstanding have been issued since January 1, 1995. The point is that this
paper has not had time to default. The situation becomes even more interesting
when viewed from the perspective of the closed-end fund market.
In chasing yield, investors have often run "junk" funds to premiums over
net asset values. Very simply, that leap of faith means that owners of those
funds are willing to pay-up for yield and do not fear possible capital risk.
That is not our style.
Excelsior offers a high-quality, liquid portfolio, which investors can buy
at a discount. Unlike many funds, we are not leveraged, and we are not going to
change that posture. We believe that our shareholders want the comfort of safety
and reasonable income; they can then use other assets to look for capital gains.
Sincerely yours,
Townsend Brown, II
Chairman
September 30, 1997
1
<PAGE>
Excelsior Income Shares, Inc.
SCHEDULE OF INVESTMENTS
September 30, 1997 (Note 1)
<TABLE>
<CAPTION>
U.S. GOVERNMENT AND FEDERAL Moody's
AGENCIES OBLIGATIONS--57.47% Rating** Face Amount Cost* Value
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Federal National Mortgage Assn., Deb.,
7.55%, 6/10/04 (1) $ 2,500,000 $ 2,423,945 $ 2,543,093
7.50%, 7/25/20 (1) 4,000,000 3,959,687 4,056,808
Federal National Mortgage Assn., Global
Bond,
8.50, 2/1/05 1,600,000 1,600,000 1,671,211
Government National Mortgage Assn.,
6%, 7/20/27 (1) 990,001 994,796 996,129
6%, 10/20/27 (1) 1,000,000 1,004,844 1,007,440
7%, 5/15/22 (1) 277,459 277,113 277,373
7%, 4/15/23 (1) 3,482,413 3,484,589 3,481,326
7%, 5/15/23 (1) 791,127 788,779 790,880
7%, 3/15/24 (1) 1,670,667 1,652,917 1,670,146
7.50%, 12/15/25 (1) 977,025 975,498 993,205
8%, 8/15/24 (1) 1,586,537 1,577,860 1,639,587
8%, 1/15/25 (1) 1,447,618 1,399,666 1,496,024
8.50%, 7/15/17 (1) 817,482 838,302 855,290
8.50%, 5/15/21 (1) 471,597 483,608 493,408
10%, 1/15/18 (1) 809,409 878,335 886,556
U.S. Treasury Bond,
7.25%, 5/15/16 (1) 1,000,000 975,000 1,085,938
----------- ----------- -----------
23,421,335 23,314,939 23,944,414
----------- ----------- -----------
<CAPTION>
BONDS AND NOTES--27.90%
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
DuPont (EI) de Nemours & Co., Notes,
8.25%, 9/15/06 Aa2 1,500,000 1,495,875 1,669,740
Ford Motor Credit
6.125, 1/9/06 A1 2,000,000 1,989,980 1,922,662
KFW International Finance Inc., Notes,
7.20%, 3/15/14 Aaa 2,000,000 1,978,500 2,084,436
Republic N.Y. Corp., Notes,
7.75%, 5/15/09 A1 1,800,000 1,806,138 1,932,253
Wachovia Corp. Sub. Notes,
6.375%, 2/1/09 A1 2,000,000 1,997,400 1,941,982
Wisconsin Elec. Power Co.,
7.25%, 8/1/04 Aa2 2,000,000 1,988,600 2,074,118
----------- ----------- -----------
11,300,000 11,256,493 11,625,191
----------- ----------- -----------
<CAPTION>
SHORT-TERM HOLDINGS--14.63%
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Dreyfus Government Cash Management Fund 1,900,000 1,900,000 1,900,000
Fidelity U.S. Treasury Cash Management
Fund 1,900,000 1,900,000 1,900,000
Fuji Securities Repurchase Agreement
10/1/97 2,296,000 2,296,000 2,296,000
----------- ----------- -----------
6,096,000 6,096,000 6,096,000
----------- ----------- -----------
TOTAL INVESTMENTS IN SECURITIES $40,817,335 $40,667,432 $41,665,605
----------- ----------- -----------
----------- ----------- -----------
<FN>
- ---------------
Percentages are based on total investments.
</TABLE>
The accompanying notes are an integral part of this schedule.
2
<PAGE>
Excelsior Income Shares, Inc.
SCHEDULE OF INVESTMENTS (continued)
September 30, 1997 (Note 1)
The aggregate market value at September 30, 1997 for the long-term holdings in
terms of Quality Ratings is as follows:
<TABLE>
<CAPTION>
Rating** Value Percent
--------------- ----------- -------
<S> <C> <C>
Aaa (1) 26,028,850 73.18
A1 5,796,897 16.30
Aa2 3,743,858 10.52
----------- -------
Total $35,569,605 100.00
----------- -------
----------- -------
<FN>
(1) These securities which are issued and/or guaranteed by the U.S. Government
or Federal Agencies are not rated but are deemed to be Aaa quality for
purposes of this report.
</TABLE>
*Based on cost for Federal income tax purposes:
<TABLE>
<S> <C>
Aggregate gross unrealized
appreciation $ 1,124,172
Aggregate gross unrealized
depreciation (125,999)
-----------
Net unrealized appreciation $ 998,173
-----------
-----------
Cost for Federal Income Tax
Purposes $40,667,432
-----------
-----------
<FN>
**Credit ratings are unaudited.
</TABLE>
The accompanying notes are an integral part of this schedule.
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1997
ASSETS:
- ------------------------------
<TABLE>
<S> <C> <C>
Investments (Note 1)
in securities at
value (identified
cost $40,667,432):
U.S. Government and
Federal Agencies
obligations $23,944,414
Bonds and notes 11,625,191
Short-term holdings 6,096,000
-----------
Total Investments $41,665,605
Cash 4,432
Interest receivable 366,438
Prepaid expenses 17,403
-----------
Total Assets 42,053,878
-----------
</TABLE>
LIABILITIES:
- ------------------------------
<TABLE>
<S> <C>
Payable for investments purchased 1,004,844
Accrued advisory fee (Note 3) 71,717
Accrued operating expenses 43,672
-----------
Total Liabilities 1,120,233
-----------
Net Assets $40,933,645
-----------
-----------
NET ASSETS consist of:
Undistributed net investment
income $ 696,350
Accumulated net realized losses
from investment transactions (410,103)
Unrealized appreciation on
investments 998,173
Capital shares (Note 5) 21,864
Additional paid-in capital 39,627,361
-----------
$40,933,645
-----------
-----------
Net Asset Value per share
($40,933,645 / 2,186,391 shares) $18.72
------
------
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE>
Excelsior Income Shares, Inc.
STATEMENT OF OPERATIONS
for the nine months ended September 30, 1997
(Note 1)
INVESTMENT INCOME:
- ------------------------------
<TABLE>
<S> <C> <C>
INCOME--Interest $ 2,108,066
EXPENSES:
Investment advisory fee $156,492
Directors' fees and
expenses 34,281
Officer's salary 32,961
Postage and printing 25,337
Professional fees 16,393
Insurance 17,604
Transfer agent and
registrar fees 14,903
The New York Stock
Exchange, Inc.--annual
fee 11,704
Miscellaneous 15,480
--------
Total expenses 325,155
-----------
Investment Income--Net 1,782,911
-----------
</TABLE>
REALIZED LOSS AND UNREALIZED (DEPRECIATION)
APPRECIATION ON INVESTMENTS--NET:
- ------------------------------
<TABLE>
<S> <C> <C>
Realized loss from
security transactions
(excluding short-term
securities):
Proceeds from sales $5,992,266
Cost of sales 6,012,842
----------
Net realized loss (20,576)
Unrealized appreciation
(depreciation)
on investment securities:
Beginning of period 501,362
End of period 998,173
----------
Change in unrealized
appreciation--net 496,811
-----------
Net realized loss and
change in unrealized
appreciation (depreciation)
on investments 476,235
-----------
Net increase in Net Assets
Resulting from Operations $ 2,259,146
-----------
-----------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the For the
nine months year
ended ended
Sept. 30, Dec. 31,
1997 1996
----------- -----------
<S> <C> <C>
INCREASE (DECREASE)
IN NET ASSETS:
- -----------------------
Operations:
Investment income--
net (Note 1) $ 1,782,911 $ 2,430,355
Realized (loss) on
investments--net
(Note 2) (20,576) (26,841)
Change in unrealized
appreciation
(depreciation)--net 496,811 (1,386,342)
----------- -----------
Net increase
in net assets
resulting from
operations 2,259,146 1,017,172
Dividends to share-
holders from:
Investment income--
net (1,181,731) (2,582,301)
Cost of shares
purchased pursuant to
Section 23 of the
Investment Company
Act of 1940 (Note 5) (30,805) --
----------- -----------
Total increase
(decrease)
in net assets 1,046,610 (1,565,129)
NET ASSETS:
- -----------------------
Beginning of period 39,887,035 41,452,164
----------- -----------
End of period
(including
undistributed net
investment income of
$696,350 in 1997 and
$95,170 in 1996,
respectively) $40,933,645 $39,887,035
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
Excelsior Income Shares, Inc.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
For the nine For the year ended
months ended ---------------------------------------------------------------
9/30/97 1996 1995 1994* 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value, beginning of
period $18.23 $18.94 $16.87 $18.97 $18.54
------ ------ ------ ------ ------
Net investment income .81 1.11 1.14 1.06 1.17
Net gain (loss) on securities
(realized and unrealized) (.22) (.64) 2.05 (2.00) .71
------ ------ ------ ------ ------
Total from investment
operations 1.03 .47 3.19 (.94) 1.88
------ ------ ------ ------ ------
Less Dividends and
Distributions:
Dividends from net investment
income (.54) (1.18) (1.12) (1.03) (1.17)
Distribution from realized
gains on investments -- -- -- (.16) (.28)
Distribution in excess of
realized gains on investments -- -- -- -- --
------ ------ ------ ------ ------
Total dividends and
distributions .49 (1.18) (1.12) (1.19) (1.45)
------ ------ ------ ------ ------
Treasury Stock Transaction -- -- -- .03 --
------ ------ ------ ------ ------
Net asset value, end of period $18.72 $18.23 $18.94 $16.87 $18.97
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Market value per share, end of
period $16.06 $15.75 $16.00 $14.63 $17.50
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total Investment Return:
Based on market value per share 7.98% 5.68% 17.04% (8.64%) 5.98%
Ratios To Average Net Assets:
Expenses .81% 1.07% 1.08% 1.15% 1.08%
Net investment income 4.44% 6.02% 6.26% 5.92% 6.07%
Supplemental Data:
Net assets at end of period
(000 omitted) $ 40,933 $ 39,887 $ 41,452 $ 36,928 $ 42,130
Portfolio turnover rate 5.87% 5.50% 25.07% 95.53% 81.23%
<FN>
*Based on average shares outstanding.
</TABLE>
The accompanying notes are an integral part of this schedule.
5
<PAGE>
Excelsior Income Shares, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Excelsior Income Shares, Inc. (the "Company") was incorporated on March 16, 1973
and commenced operations on May 15, 1973. The Company is registered under the
Investment Company Act of 1940, as amended, as a diversified, closed-end
management investment company. The significant accounting policies of the
Company, which are in conformity with generally accepted accounting principles,
are as follows:
a) Investments--Security transactions are recorded as of the trade date.
Investments owned at September 30, 1997, are reflected in the accompanying
financial statements at value. Valuations of the Company's investments are
supplied by a pricing service approved by the Board of Directors or by dealers
who regularly trade in the security being valued. Short-term holdings are
carried at cost plus accrued interest, which approximates value.
The difference between cost and value is reflected separately as unrealized
appreciation (depreciation) of investments.
The cost basis of bonds is not adjusted for amortization of premiums or
accretion of discounts, except for original issue discount which is accreted.
Realized gains and losses on security transactions are determined on the
basis of identified cost.
b) Federal Income Taxes--No provision for Federal income taxes has been
made in the accompanying financial statements since the Company intends to
comply with the provisions of Subchapter M of the Internal Revenue Code and to
distribute to its shareholders substantially all of its net investment income
and net realized capital gains, if any. For Federal income tax purposes the
Company has capital loss carryforwards of $92,433, $297,084 and $20,576 expiring
on December 31, 2002, December 31, 2003, and December 31, 2004, respectively,
available to offset future capital gains, if any.
c) Investment Income Recognition--The Company records interest and expenses
on the accrual basis.
d) Dividend Distributions--The Company records dividend distributions to
shareholders as of the ex-dividend date. The character of distributions made
during the year from net investment income or net realized gains may differ from
their ultimate characterization for federal income tax purposes due to
differences in the recognition of income and expense items for financial
statement and federal income tax purposes. The effect of these differences for
the year ended December 31, 1996 is an increase in undistributed net investment
income of $149,193, a decrease in accumulated net realize loss of $7,047, and a
decrease in additional paid-in capital of $156,240.
e) The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of income and expenses
during the reporting period. Actual results could differ from these estimates.
6
<PAGE>
Excelsior Income Shares, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
September 30, 1997
- --------------------------------------------------------------------------------
(2) DISTRIBUTIONS:
Realized gains from security transactions to the extent they exceed accumulated
net realized losses are distributed to shareholders in the succeeding year.
(3) RELATED PARTY TRANSACTIONS:
Under an investment advisory agreement, United States Trust Company of New York
(the "Advisor") furnishes investment advisory services to and performs certain
administrative functions for the Company. Quarterly fees for such services are
based on the net assets of the Company, as of the close of the last business day
of each quarter, at the annual rate of 0.5% of the first $100,000,000 of such
net assets, and at reduced rates thereafter.
The investment advisory agreement also provides that the Advisor will
reimburse the Company for all expenses (excluding interest, taxes, brokerage
commissions and certain other expenses, if any) borne by the Company in any
calendar year in excess of 1.5% of the first $30,000,000 of annual average net
assets, and 1% of annual average net assets in excess of $30,000,000.
Each director who is not an employee of United States Trust Company of New
York, receives from the Company an annual fee of $5,000, an attendance fee of
$300, and $100 for each audit committee meeting attended.
Three officers of the Company are officers of United States Trust Company
of New York.
(4) PURCHASES AND PROCEEDS FROM SALES OF SECURITIES:
For the period ended September 30, 1997, purchases and proceeds from sales of
securities other than short-term United States Government and Federal Agencies
obligations aggregated $-0- and $-0-, respectively. Purchases and proceeds from
sales of United States Government and Federal Agencies obligations aggregated
$6,460,870 and $5,992,266, respectively.
(5) CAPITAL STOCK:
At September 30, 1997, 2,186,391 shares of $.01 par value common stock
(15,000,000 shares authorized) were outstanding.
Pursuant to Section 23 of the Investment Company Act of 1940, the Company
may in the future purchase shares of Excelsior Income Shares, Inc. Common Stock
on the open market from time to time, at such times, and in such amounts as may
be deemed advantageous to the Company. Nothing herein shall be considered a
commitment to purchase such shares. For the period ended September 30, 1997 and
for the year ended December 31, 1994, the Company purchased 2,000 and 32,500
shares in the open market at a cost of $30,805 and $475,737, respectively.
7
<PAGE>
EXCELSIOR INCOME SHARES, INC.
114 W. 47th Street, 14th Floor
New York, NY 10036-1532
(212) 852-3732
DIRECTORS
Townsend Brown II
Edwin A. Heard
James J. O'Leary
John H. Reilly
Perry W. Skjelbred
Philip J. Tilearcio
Kenneth G. Walsh
OFFICERS
Townsend Brown II, Chairman,
President, Chief Executive Officer
Robert D. Cummings
Secretary and Treasurer
Robert R. Johnson
Assistant Treasurer
and Assistant Secretary
INVESTMENT ADVISOR
United States Trust Company
of New York
114 West 47th Street
New York, NY 10036-1532
TRANSFER AGENT REGISTRAR & CUSTODIAN
The Chase Manhattan Bank, N.A.
Customer Services
4 New York Plaza, 6th Floor
New York, NY 10043
(800) 257-2356
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
1301 Avenue of the Americas
New York, NY 10019
Listed on N.Y. Stock Exchange--Symbol EIS
A "Closed-End Bond Funds" table, which includes
current data on Excelsior, is published weekly by
The Wall Street Journal and The New York Times.
