Dear Fellow Shareholders:
Net Investment Income for the full year and for the fourth quarter were
$2,430,355, and $606,186, respectively.
A dividend of $0.38 was declared on December 5, 1996, payable January 31,
1997, to shareholders of record December 20, 1996. We have been advised that
4.66% of 1996 dividend income is deemed to be interest earned on Federal
obligations.
Year-end is a time for looking both forward and back; a time for resolutions
and a time for both regret and good cheer. On balance, 1996 turned out to be
reasonably benign to most Americans and a year for celebration by equity
investors. Since almost all of our shareholders own diversified stock
portfolios, we join them in toasting the past.
Now for the hard part: What about 1997?
It is pleasant to be responsible for a fund that tries to be stodgy and
safe. We do not have to joust in the performance game, and we never will. So
much for our New Year's resolution: it remains, "Steady as she goes."
The temptation to predict is indeed a strong one. At the risk of being
totally wrong, some thoughts are offered below:
*China may pose problems as new leaders fight to replace Mr. Deng and Hong
Kong reverts to mainland ownership.
*Mr. Yeltsin may be faced with enormous economic and political challenges
which would baffle even a healthy leader.
*Our President may be confronted by personal legal troubles from one of the
four special counsel investigations.
*The spirit of cooperation currently flourishing in Congress could turn
partisan if Republicans smell political blood.
*It is possible that deflation, rather than inflation could threaten
economic stability as countries cut expenditures to qualify for a European
Union.
*Terrorism and arrogant religious fundamentalism could derail progress
toward democracy and freedom.
Enough negative "might- be's". While any or all of them might happen, there
are lots of reasons to be thankful:
*Major wars do not seem to be in our predictable future.
*Medicine and science continue to improve the quality of life for most
people.
*Instant communication should remain the strongest weapon in the arsenal of
truth; ideas cannot be stopped by distance.
In the spirit of cautious optimism, the directors and officers of Excelsior
wish for a good year for all of us.
Sincerely,
Townsend Brown II
Chairman
December 31, 1996
1
<PAGE>
Excelsior Income Shares, Inc.
Schedule of Investments
December 31, 1996 (Note 1)
<TABLE>
<CAPTION>
U.S. GOVERNMENT AND FEDERAL Moody's
AGENCIES OBLIGATIONS-57.66% 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 $ 2,539,800
7.50%, 7/25/20 (1) 4,000,000 3,959,687 4,053,540
Federal National Mortgage Assn., Global Bond,
8.50%, 2/1/05 1,600,000 1,600,000 1,682,021
Government National Mortgage Assn.,
7%, 5/15/22 (1) 281,248 280,898 275,184
7%, 4/15/23 (1) 3,896,503 3,898,938 3,812,486
7%, 5/15/23 (1) 856,884 854,340 838,408
7%, 3/15/24 (1) 1,769,931 1,751,125 1,731,768
7.50%, 12/15/25 (1) 1,024,590 1,022,989 1,025,230
8%, 8/15/24 (1) 1,696,444 1,687,166 1,730,370
8%, 1/15/25 (1) 1,606,198 1,552,993 1,638,322
8.50%, 7/15/17 (1) 1,053,893 1,080,733 1,091,438
8.50%, 5/15/21 (1) 663,912 680,821 687,564
10%, 1/15/18 (1) 1,012,090 1,098,276 1,109,816
U.S. Treasury Bond,
7.25%, 5/15/16 (1) 1,000,000 975,000 1,055,938
----------- ----------- -----------
22,961,693 22,866,911 23,271,885
----------- ----------- -----------
BONDS and NOTES-28.13%
- ----------------------------------------------------------------------------------------------------
DuPont (EI) de Nemours & Co., Notes,
8.25%, 9/15/06 Aa2 1,500,000 1,495,875 1,647,719
Ford Motor Credit
6.125%, 1/9/06 A1 2,000,000 1,989,980 1,871,516
KFW International Finance Inc., Notes,
7.20%, 3/15/14 Aaa 2,000,000 1,978,500 2,013,448
Republic N.Y. Corp., Notes,
7.75%, 5/15/09 A1 1,800,000 1,806,138 1,890,016
Wachovia Corp. Sub. Notes,
6.375%, 2/1/09 A1 2,000,000 1,997,400 1,883,334
Wisconsin Elec. Power Co.,
7.25%, 8/1/04 Aa2 2,000,000 1,988,600 2,046,848
----------- ----------- -----------
11,300,000 11,256,493 11,352,881
----------- ----------- -----------
SHORT-TERM HOLDINGS-14.21%
- ----------------------------------------------------------------------------------------------------
Federal Farm Credit Bank Disc. Note 1/3/97 25,000 24,973 24,973
Federal Home Loan Bank Disc. Note 1/2/97 635,000 634,907 634,907
Federal Home Loan Bank Disc. Note 1/3/97 330,000 329,886 329,886
U.S. Treas. Bill 1/2/97 12,000 11,999 11,999
U.S. Treas. Bill 1/9/97 4,739,000 4,734,261 4,734,261
----------- ----------- -----------
5,741,000 5,736,026 5,736,026
----------- ----------- -----------
TOTAL INVESTMENTS IN SECURITIES $40,002,693 $39,859,430 $40,360,792
=========== =========== ===========
</TABLE>
- ---------------
Percentages are based on total investments.
The accompanying notes are an integral part of this schedule.
2
<PAGE>
(left column)
Excelsior Income Shares, Inc.
Schedule of Investments (continued)
December 31, 1996 (Note 1)
The aggregate market value at December 31, 1996 for the long-term holdings in
terms of Quality Ratings is as follows:
Rating** Value Percent
------ ----- -------
Aaa (1) $25,285,333 73.03
A1 5,644,866 16.30
Aa2 3,694,567 10.67
----------- ------
Total $34,624,766 100.00
=========== ======
(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.
**Based on cost for Federal income tax purposes:
Aggregate gross unrealized
appreciation $ 861,347
Aggregate gross unrealized
depreciation (359,985)
-----------
Net unrealized appreciation $ 501,362
===========
Cost for Federal Income Tax Purposes $39,859,430
===========
**Credit ratings are unaudited.
The accompanying notes are an integral part of this schedule.
(right column)
Statement of Assets and Liabilities
December 31, 1996 (Unaudited)
ASSETS:
- ---------------------------------
Investments (Note 1) in securities
at value (identified
cost $39,859,430):
U.S. Government and
Federal Agencies
obligations $23,271,885
Bonds and notes 11,352,881
Short-term holdings 5,736,026
-----------
Total Investments $40,360,792
Cash 2,712
Interest receivable 454,306
Prepaid expenses 9,016
-----------
Total Assets 40,826,826
-----------
LIABILITIES:
- ---------------------------------
Dividend payable 831,589
Accrued advisory fee (Note 3) 60,332
Accrued operating expenses 47,870
-----------
Total Liabilities 939,791
-----------
Net Assets $39,887,035
===========
NET ASSETS consist of:
Undistributed net investment income $ (95,170)
Accumulated net realized losses
from investment transactions (389,527)
Unrealized appreciation on investments 501,362
Capital shares (Note 5) 21,884
Additional paid-in capital 39,658,146
-----------
$39,887,035
===========
Net Asset Value per share
($39,887,035 d/b 2,188,391 shares) $18.23
======
The accompanying notes are an integral part of this statement.
3
<PAGE>
(left column)
Excelsior Income Shares, Inc.
Statement of Operations
for the year ended December 31, 1996
(Note 1)
INVESTMENT INCOME:
- ---------------------------------
INCOME-Interest $2,864,008
EXPENSES:
Investment advisory fee $208,848
Directors' fees and expenses 45,749
Officer's salary 40,856
Postage and printing 33,813
Professional fees 21,878
Insurance 23,979
Transfer agent and
registrar fees 19,889
The New York Stock
Exchange, Inc.-annual fee 15,620
Miscellaneous 23,021
-------
Total expenses 433,653
----------
Investment Income-Net 2,430,355
----------
REALIZED LOSS AND UNREALIZED (DEPRECIATION)/
APPRECIATION ON INVESTMENTS-NET:
- ---------------------------------
Realized loss from security transactions
(excluding short-term securities):
Proceeds from sales $1,974,967
Cost of sales 2,001,808
----------
Net realized loss (26,841)
Unrealized appreciation (depreciation)
on investment securities:
Beginning of year 1,887,704
End of year 501,362
----------
Change in unrealized
appreciation-net (1,386,342)
----------
Net realized loss and change
in unrealized appreciation
(depreciation) on investments (1,413,183)
----------
Net increase in Net Assets
Resulting from Operations $1,017,172
==========
(right column)
Statement of Changes in Net Assets
For the year For the year
ended ended
Dec. 31, 1996 Dec. 31, 1995
------------- -------------
INCREASE (DECREASE)
IN NET ASSETS
- ---------------------------------
Operations:
Investment income-
net (Note 1) $ 2,430,355 $ 2,484,734
Realized (loss) on
investments-net
(Note 2) (26,841) (277,290)
Change in unrealized
appreciation
(depreciation)-net (1,386,342) 4,767,536
----------- -----------
Net increase
in net assets
resulting from
operations 1,017,172 6,974,980
Dividends to share-
holders from:
Investment income-
net (2,582,301) (2,450,998)
----------- -----------
Total increase (decrease)
in net assets (1,565,129) 4,523,982
NET ASSETS:
- ---------------------------------
Beginning of year 41,452,164 36,928,182
----------- -----------
End of year (including
undistributed net invest-
ment income of $95,170
in 1996 and $97,923 in
1995, respectively) $39,887,035 $41,452,164
=========== ===========
The accompanying notes are an integral part of these statements.
4
<PAGE>
Excelsior Income Shares, Inc.
Financial Highlights
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
For the year ended
-----------------------------------------------------
1996 1995 1994* 1993 1992
Per Share Operating Performance:
Net asset value, beginning of year $18.94 $16.87 $18.97 $18.54 $18.74
------ ------ ------ ------ ------
Net investment income 1.11 1.14 1.06 1.17 1.32
Net gain (loss) on securities
(realized and unrealized) (.64) 2.05 (2.00) .71 (.08)
------ ------ ------ ------ ------
Total from investment operations .47 3.19 (.94) 1.88 1.24
------ ------ ------ ------ ------
Less Dividends and Distributions:
Dividends from net investment
income (1.18) (1.12) (1.03) (1.17) (1.33)
Distribution from realized gains on
investments _ - (.16) (.28) (.09)
Distribution in excess of realized
gains on investments - - - - (.02)
------ ------ ------ ------ ------
Total dividends and distributions (1.18) (1.12) (1.19) (1.45) (1.44)
------ ------ ------ ------ ------
Treasury Stock Transaction - - .03 - -
------ ------ ------ ------ ------
Net asset value, end of year $18.23 $18.94 $16.87 $18.97 $18.54
====== ====== ====== ====== ======
Market value per share, end of year $15.75 $16.00 $14.63 $17.50 $17.55
====== ====== ====== ====== ======
Total Investment Return:
Based on market value per share 5.68% 17.04% (8.64%) 5.98% 6.65%
Ratios To Average Net Assets:
Expenses 1.07% 1.08% 1.15% 1.08% .98%
Net investment income 6.02% 6.26% 5.92% 6.07% 7.14%
Supplemental Data:
Net assets at end of year
(000 omitted) $39,887 $41,452 $36,928 $42,130 $41,183
Portfolio turnover rate 5.50% 25.07% 95.53% 81.23% 155.60%
</TABLE>
*Based on average shares outstanding.
The accompanying notes are an integral part of this schedule.
5
<PAGE>
Excelsior Income Shares, Inc.
Notes to Financial Statements
December 31, 1996
- --------------------------------------------------------------------------------
(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 December 31, 1996, 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 $92,443 and $297,084 expiring on
December 31, 2002 and December 31, 2003, 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)
December 31, 1996
- --------------------------------------------------------------------------------
(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 year ended December 31, 1996, purchases and proceeds from sales of
securities other than short-term United States Government and Federal Agencies
obligations aggregated $1,989,980 and $-0-, respectively. Purchases and proceeds
from sales of United States Government and Federal Agencies obligations
aggregated $1,053,996 and $1,974,967, respectively.
(5) CAPITAL STOCK:
At December 31, 1996, 2,188,391 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 year ended December 31, 1994, the
Company purchased 32,500 shares in the open market at a cost of $475,737.
7
<PAGE>
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Excelsior Income Shares, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Excelsior Income Shares, Inc., (the
"Fund") as of December 31, 1996, and the related statement of operations for the
year then ended, the statement of changes in net assets and financial highlights
for each of the two years in the period then ended. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The financial highlights for each of
the three years in the period ended December 31, 1994 were audited by other
auditors, whose report, dated January 24, 1995, expressed an unqualified opinion
thereon.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above presentfairly, in all material respects, the financial position of
Excelsior Income Shares, Inc. as of December 31, 1996, the results of its
operations, for the year then ended, the changes in its net assets and financial
highlights for each of the two years in the period then ended, in conformity
with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
New York, New York
January 31, 1997.
8
<PAGE>
(left column)
Excelsior Income Shares, Inc.
114 W. 47th Street, 8th 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
Henry M. Milkewicz
Vice President
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
770 Broadway, 6th Floor
New York, NY 10003
(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.
(right column)
- -----------------------------------------------------------
LOGO
Excelsior
Income Shares,
Inc.
Annual Report
December 31, 1996
- -----------------------------------------------------------
