DEAR FELLOW SHAREHOLDERS:
Net income for the quarter was $570,452, or $.26 per share. A dividend of
$.27 was declared on July 8, 1998, payable July 31, 1998, to shareholders of
record July 24, 1998.
Recently we were asked about increasing our trading activity in order to
add to income. As you know, Excelsior tends to buy and hold securities rather
than to turn over the portfolio. We feel that our shareholders are generally
better served by this admittedly stodgy approach to money management. There are
several reasons for this belief.
No trade is free. While most bonds change hands on a net basis, rather than
being subject to a commission, the seller is not acting out of charity. Dealers
always try to make money. Accordingly, unless we are able to improve yield
within acceptable risk parameters, the burden of proof for trading is
substantial. In today's market there is little reason to disturb our portfolio.
Probably two other facts are even more persuasive: not all traders make a
profit, and short-term sales cost individual shareholders a tax at their top
bracket. We do not believe that it is possible to beat the market on a
consistent basis, and we see no reason to take the risk of losing money to make
profits, which are both fully taxable and totally uncertain.
Another question has been raised about our discount from net asset value.
As you know, most closed-end funds sell at such a discount, and Excelsior is no
exception. One can argue that our situation is quite attractive since a
purchaser can acquire an interest in an excellent portfolio for the cost of a
stock market commission, at a bargain price.
Lest that be considered begging the question, we add that there is really
no very sensible way to eliminate the discount short of liquidation of the fund.
Excelsior is too small to be run as open-ended company, administrative costs
would be prohibitive. Partial buy-backs would pose the same problem of spreading
fixed costs over a shrinking asset base. In effect any shareholder would be
penalized for not selling.
What all this really boils down to is pretty simple. No one should buy
Excelsior without understanding that we offer a safe, dull investment. We also
offer the small investor a chance to own part of an excellent portfolio at a
price below its market value.
Sincerely yours,
/s/ Townsend Brown II
Townsend Brown II
July 9, 1998 Chairman and President
1
<PAGE>
Excelsior Income Shares, Inc.
SCHEDULE OF INVESTMENTS
June 30, 1998 (Note 1)
<TABLE>
<CAPTION>
U.S. GOVERNMENT AND FEDERAL Moody's
AGENCIES OBLIGATIONS--48.13% 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 $ 2,541,193
7.50%, 7/25/20 (1) 2,323,910 2,300,490 2,345,012
Federal National Mortgage Assn., Global
Bond,
8.50%, 2/1/05 1,600,000 1,600,000 1,664,346
Government National Mortgage Assn.,
6%, 7/20/27 (1) 918,682 923,132 928,815
7%, 5/15/22 (1) 250,868 250,554 254,789
7%, 4/15/23 (1) 3,148,103 3,150,071 3,197,308
7%, 5/15/23 (1) 724,921 722,768 736,251
7%, 3/15/24 (1) 1,479,578 1,463,857 1,502,704
7.50%, 12/15/25 (1) 889,903 888,513 914,100
8%, 8/15/24 (1) 1,266,568 1,259,641 1,312,088
8%, 1/15/25 (1) 1,096,488 1,060,166 1,135,895
8.50%, 7/15/17 (1) 804,754 825,250 848,510
8.50%, 5/15/21 (1) 391,762 401,740 413,065
10%, 1/15/18 (1) 726,957 788,862 793,746
U.S. Treasury Bond,
7.25%, 5/15/16 (1) 1,000,000 975,000 1,171,875
----------- ----------- -----------
19,122,494 19,033,989 19,759,697
----------- ----------- -----------
<CAPTION>
BONDS AND NOTES--29.43%
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
DuPont (EI) de Nemours & Co., Notes,
8.25%, 9/15/06 Aa2 1,500,000 1,495,875 1,713,026
Ford Motor Credit
6.125, 1/9/06 A1 2,000,000 1,989,980 1,991,472
KFW International Finance Inc., Notes,
7.20%, 3/15/14 Aaa 2,000,000 1,978,500 2,224,228
Republic N.Y. Corp., Notes,
7.75%, 5/15/09 A1 1,800,000 1,806,138 2,002,181
Wachovia Corp. Sub. Notes,
6.375%, 2/1/09 A1 2,000,000 1,997,400 2,030,942
Wisconsin Elec. Power Co.,
7.25%, 8/1/04 Aa2 2,000,000 1,988,600 2,121,004
----------- ----------- -----------
11,300,000 11,256,493 12,082,853
----------- ----------- -----------
<CAPTION>
SHORT-TERM HOLDINGS--22.44%
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Dreyfus Government Cash Management Fund 1,900,000 1,900,000 1,900,000
Federal National Mortgage Assn., Disc.
Note 7/1/98 6,000,000 5,995,741 5,995,741
Fidelity U.S. Treasury Cash Management
Fund 1,313,589 1,313,589 1,313,589
----------- ----------- -----------
9,213,589 9,209,330 9,209,330
----------- ----------- -----------
TOTAL INVESTMENTS IN SECURITIES $39,636,083 $39,499,812 $41,051,880
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ---------------
Percentages are based on total investments.
The accompanying notes are an integral part of this schedule.
2
<PAGE>
Excelsior Income Shares, Inc.
SCHEDULE OF INVESTMENTS (continued)
June 30, 1998 (Note 1)
The aggregate market value at June 30, 1998 for the long-term holdings in terms
of Quality Ratings is as follows:
Rating** Value Percent
--------------- ----------- -------
Aaa (1) $21,983,925 69.04
A1 6,024,595 18.92
Aa2 3,834,030 12.04
----------- -------
Total $31,842,550 100.00
----------- -------
----------- -------
(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 $ 1,552,068
Aggregate gross unrealized
depreciation --
-----------
Net unrealized appreciation $ 1,552,068
-----------
-----------
Cost for Federal Income Tax
Purposes $39,499,812
-----------
-----------
**Credit ratings are unaudited.
The accompanying notes are an integral part of this schedule.
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1998
ASSETS:
- ------------------------------
Investments (Note 1)
in securities
at value (identified
cost $39,499,812):
U.S. Government and
Federal Agencies
obligations $19,759,697
Bonds and notes 12,082,853
Short-term holdings 9,209,330
-----------
Total Investments $41,051,880
Cash 2,349
Interest receivable 446,435
Prepaid expenses 10,526
-----------
Total Assets 41,511,190
-----------
LIABILITIES:
- ------------------------------
Accrued advisory fee (Note 3) 57,036
Accrued operating expenses 40,652
-----------
Total Liabilities 97,688
-----------
Net Assets $41,413,502
-----------
-----------
NET ASSETS consist of:
Undistributed net investment
income $ 585,598
Accumulated net realized losses
from investment transactions (372,366)
Unrealized appreciation on
investments 1,552,068
Capital shares (Note 5) 21,864
Additional paid-in capital 39,626,338
-----------
$41,413,502
-----------
-----------
Net Asset Value per share
($41,413,502 / 2,186,391 shares) $18.94
-----------
-----------
The accompanying notes are an integral part of this statement.
3
<PAGE>
Excelsior Income Shares, Inc.
STATEMENT OF OPERATIONS
for the six months ended June 30, 1998
(Note 1)
INVESTMENT INCOME:
- ------------------------------
INCOME--Interest $1,374,440
EXPENSES:
Investment advisory fee $81,295
Directors' fees and
expenses 9,029
Officer's salary 26,203
Postage and printing 16,860
Professional fees 7,876
Insurance 10,985
Transfer agent and
registrar fees 9,917
The New York Stock
Exchange, Inc.
--annual fee 7,788
Miscellaneous 9,917
----------
Total expenses 179,870
----------
Investment Income--Net 1,194,570
----------
REALIZED GAIN AND UNREALIZED APPRECIATION
(DEPRECIATION) ON INVESTMENTS--NET:
- ------------------------------
Realized gain from
security transactions
(excluding short-term
securities):
Proceeds from sales $2,521,954
Cost of sales 2,505,470
----------
Net realized gain 16,484
Unrealized appreciation
(depreciation)
on investment
securities:
Beginning of period 1,336,581
End of period 1,552,068
----------
Change in unrealized
appreciation--net 215,487
----------
Net realized gain and change
in unrealized appreciation
(depreciation) on investments 231,971
----------
Net Increase in Net Assets
Resulting from Operations $1,426,541
----------
----------
STATEMENT OF CHANGES IN NET ASSETS
For the six For the
months year
ended ended
June 30, Dec. 31,
1998 1997
----------- -----------
INCREASE (DECREASE)
IN NET ASSETS:
- -----------------------
Operations:
Investment income--
net (Note 1) $ 1,194,570 $ 2,371,900
Realized gain on
investments--net
(Note 2) 16,484 (14,361)
Change in unrealized
appreciation
(depreciation)--net 215,487 835,219
----------- -----------
Net increase
in net assets
resulting from
operations 1,426,541 3,192,758
Dividends to share-
holders from:
Investment income--
net (502,870) (2,559,157)
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 923,671 602,796
NET ASSETS:
- -----------------------
Beginning of period 40,489,831 39,887,035
----------- -----------
End of period
(including
undistributed
(overdistributed) net
investment income of
($585,598) and
($106,102) in 1998
and 1997,
respectively) $41,413,502 $40,489,831
----------- -----------
----------- -----------
The accompanying notes are an integral part of these statements.
4
<PAGE>
Excelsior Income Shares, Inc.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
For the six
months For the year ended
ended ---------------------------------------
6/30/98 1997 1996 1995 1994*
----------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value, beginning of
period $ 18.52 $18.23 $18.94 $18.87 $18.97
------- ------ ------ ------ ------
Net investment income .55 1.08 1.11 1.14 1.06
Net gain (loss) on securities
(realized and unrealized) .10 .38 (.64) 2.05 (2.00)
------- ------ ------ ------ ------
Total from investment
operations .65 1.46 .47 3.19 (.94)
------- ------ ------ ------ ------
Less Dividends and
Distributions:
Dividends from net investment
income .23 (1.17) (1.18) (1.12) (1.03
Distribution from realized
gains on investments -- -- -- -- (.16)
------- ------ ------ ------ ------
Total dividends and
distributions .23 (1.17) (1.18) (1.12) (1.19)
------- ------ ------ ------ ------
Treasury stock transaction -- .00 -- -- .03
------- ------ ------ ------ ------
Net asset value, end of period $ 18.94 $18.52 $18.23 $18.94 $16.87
------- ------ ------ ------ ------
------- ------ ------ ------ ------
Market value per share, end of
period $ 16.69 $16.75 $15.75 $16.00 $14.63
------- ------ ------ ------ ------
------- ------ ------ ------ ------
Total Investment Return:
Based on market value per share 3.20% 14.51% 5.68% 17.04% (8.64%)
Ratios To Average Net Assets:
Expenses .44% 1.08% 1.07% 1.08% 1.15%
Net investment income 2.92% 5.89% 6.02% 6.26% 5.92%
Supplemental Data:
Net assets at end of period
(000 omitted) $41,414 $40,490 $39,887 $41,452 $36,928
Portfolio turnover rate 7.55% 2.91% 5.50% 25.07% 95.53%
</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
June 30, 1998
- --------------------------------------------------------------------------------
(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 June 30, 1998, 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 $95,048 and $277,318 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, 1997 is a decrease in undistributed net investment
income of $14,015, a decrease in accumulated net realized loss of $15,038, and a
decrease in additional paid-in capital of $1,023.
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)
June 30, 1998
- --------------------------------------------------------------------------------
(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.
Two 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 June 30, 1998, 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
$-0- and $2,521,954, respectively.
(5) CAPITAL STOCK:
At June 30, 1998, 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 years ended December 31, 1997 and
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, 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
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.
- ------------------------------------------------------
[LOGO]
Excelsior
Income Shares,
Inc.
Semi-Annual Report
June 30, 1998
- ------------------------------------------------------
