<PAGE>
DEAR FELLOW SHAREHOLDERS:
Income for the first quarter was $624,118, or $.29 per share. A dividend of
$.23 was declared on April 8, 1998, payable April 24, 1998 to holders of record
April 17, 1998.
Our twenty-fifth annual meeting was just adjourned. Perhaps the most
remarkable event which occurred was that our fund celebrated its "silver"
anniversary both intact and essentially unchanged in purpose or style since
inception. We have provided a place for investors looking to keep part of their
wealth safe and earning a decent return for the last generation.
Looking ahead, our goal will be to continue to offer the same sort of
quiet investment haven for the next generation.
When Excelsior was founded, few would have predicted that oil prices would
(in real terms) be lower today than they were at any time since 1973. Even
fewer would have bet accurately that the stock market would rise to levels
which were only recently believed to be unattainable in the real world. Both
events happened.
The imponderable question is: What happens now?
Fortunately we will leave stock price predictions to others. Interest rates
seem to be in a fairly narrow trench, with the good news of federal budget
restraint offsetting possible inflationary pressures from our truly wonderful
economy. There is a sense of awe which characterizes most bond market
observers. As of now, we seem to be enjoying the best of all possible economic
worlds -- and no one can produce a very good reason for doubting that the party
will go on.
Our federal government is running a surplus and faces the happy prospect of
refunding debt at lower interest rates. Corporate America has been on a merger
binge, but acquisitions have generally been financed with stock. Inflation
appears to be dead despite truly excellent employment numbers. No wonder that
the President wins a high approval rating for job performance.
We are not naive enough to believe that this picture of happy prosperity
will last for ever. For now, however, the good times seem to be rolling with
vigor and no evident potholes mar the road. When something unforeseen stops the
carnival, we hope to be sheltered from the consequences by remaining in our
safe haven. Our shareholders can count on a continued commitment to the quality
and liquidity which have characterized our past. We will not change course and
we will not try to outguess the market.
Our hope is that the person signing the golden anniversary letter will be
grateful.
Sincerely,
/s/ Townsend Brown II
Townsend Brown II
Chairman and President
April 8, 1998
1
<PAGE>
Excelsior Income Shares, Inc.
SCHEDULE OF INVESTMENTS
March 31, 1998 (Note 1)
<TABLE>
<CAPTION>
U.S. GOVERNMENT AND FEDERAL Moody's
AGENCIES OBLIGATIONS--51.74% 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 $ 2,528,935
7.50%, 7/25/20 (1) 3,099,221 3,067,987 3,128,760
Federal National Mortgage Assn.,
Global Bond,
8.50%, 2/1/05 1,600,000 1,600,000 1,659,339
Government National Mortgage Assn.,
6%, 7/20/27 (1) 958,868 963,510 971,545
7%, 5/15/22 (1) 252,220 251,905 254,664
7%, 4/15/23 (1) 3,238,937 3,240,962 3,270,323
7%, 5/15/23 (1) 751,931 749,699 759,217
7%, 3/15/24 (1) 1,569,473 1,552,798 1,584,682
7.50%, 12/15/25 (1) 929,390 927,938 952,916
8%, 8/15/24 (1) 1,370,647 1,363,151 1,419,048
8%, 1/15/25 (1) 1,303,897 1,260,706 1,349,942
8.50%, 7/15/17 (1) 809,078 829,685 853,072
8.50%, 5/15/21 (1) 393,386 403,405 414,776
10%, 1/15/18 (1) 769,329 834,842 840,972
U.S. Treasury Bond,
7.25%, 5/15/16 (1) 1,000,000 975,000 1,137,810
----------- ----------- -----------
20,546,377 20,445,533 21,126,001
----------- ----------- -----------
BONDS AND NOTES--29.17%
- -----------------------------------------------------------------------------------------------------
DuPont (EI) de Nemours & Co., Notes,
8.25%, 9/15/06 Aa2 1,500,000 1,495,875 1,703,138
Ford Motor Credit
6.125%, 1/9/06 A1 2,000,000 1,989,980 1,975,910
KFW International Finance Inc., Notes,
7.20%, 3/15/14 Aaa 2,000,000 1,978,500 2,166,740
Republic N.Y. Corp., Notes,
7.75%, 5/15/09 A1 1,800,000 1,806,138 1,972,890
Wachovia Corp. Sub. Notes,
6.375%, 2/1/09 A1 2,000,000 1,997,400 1,985,100
Wisconsin Elec. Power Co.,
7.25%, 8/1/04 Aa2 2,000,000 1,988,600 2,106,904
----------- ----------- -----------
11,300,000 11,256,493 11,910,682
----------- ----------- -----------
SHORT-TERM HOLDINGS--19.09%
- -----------------------------------------------------------------------------------------------------
Dreyfus Government Cash Management Fund 1,900,000 1,900,000 1,900,000
Federal National Mortgage Assn., Disc.
Note 4/2/98 4,000,000 3,999,399 3,999,399
Fidelity U.S. Treasury Cash Management
Fund 1,897,568 1,897,568 1,897,568
----------- ----------- -----------
7,797,568 7,796,967 7,796,967
----------- ----------- -----------
TOTAL INVESTMENTS IN SECURITIES $39,643,945 $39,498,993 $40,833,650
----------- ----------- -----------
----------- ----------- -----------
<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)
March 31, 1998 (Note 1)
The aggregate market value at March 31, 1998 for the long-term holdings in terms
of Quality Ratings is as follows:
Rating** Value Percent
--------------- ----------- -------
Aaa (1) $23,292,741 70.50
A1 5,933,900 17.97
Aa2 3,810,042 11.53
----------- -------
Total $33,036,683 100.00
----------- -------
----------- -------
(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 $ 1,361,028
Aggregate gross unrealized
depreciation (26,371)
-----------
Net unrealized appreciation $ 1,334,657
-----------
-----------
Cost for Federal Income Tax
Purposes $39,498,993
-----------
-----------
**Credit ratings are unaudited.
The accompanying notes are an integral part of this schedule.
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1998
ASSETS:
- ----------------------------------
Investments (Note 1) in securities
at value (identified
cost $39,498,993):
U.S. Government and
Federal Agencies
obligations $21,126,001
Bonds and notes 11,910,682
Short-term holdings 7,796,967
-----------
Total Investments $40,833,650
Cash 6,327
Interest receivable 354,145
Prepaid expenses 19,964
-----------
Total Assets 41,214,086
-----------
LIABILITIES:
- ----------------------------------
Accrued advisory fee (Note 3) 56,076
Accrued operating expenses 41,805
-----------
Total Liabilities 97,881
-----------
Net Assets $41,116,205
-----------
-----------
NET ASSETS consist of:
Undistributed net investment income $ 518,016
Accumulated net realized losses
from investment transactions (384,670)
Unrealized appreciation on investments 1,334,657
Capital shares (Note 5) 21,864
Additional paid-in capital 39,626,338
-----------
$41,116,205
-----------
-----------
Net Asset Value per share
($41,116,205 / 2,186,391 shares) $18.81
------
------
The accompanying notes are an integral part of this statement.
3
<PAGE>
Excelsior Income Shares, Inc.
STATEMENT OF OPERATIONS
for the three months ended March 31, 1998
(Note 1)
INVESTMENT INCOME:
- -----------------------------------
INCOME--Interest $691,177
EXPENSES:
Investment advisory fee $28,939
Directors' fees and expenses 2,561
Officer's salary 10,447
Postage and printing 3,383
Professional fees 3,391
Insurance 5,462
Transfer agent and
registrar fees 2,931
The New York Stock
Exchange, Inc.--annual fee 3,873
Miscellaneous 6,072
-------
Total expenses 67,059
--------
Investment Income--Net 624,118
--------
REALIZED GAIN AND UNREALIZED APPRECIATION
(DEPRECIATION) ON INVESTMENTS--NET:
- --------------------------------------
Realized gain from security transactions
(excluding short-term securities):
Proceeds from sales $1,098,104
Cost of sales 1,093,924
----------
Net realized gain 4,180
Unrealized appreciation (depreciation)
on investment securities:
Beginning of period 1,336,581
End of period 1,334,657
----------
Change in unrealized
appreciation--net (1,924)
--------
Net realized gain and change
in unrealized appreciation
(depreciation) on investments 2,256
--------
Net increase in Net Assets
Resulting from Operations $626,374
--------
--------
STATEMENT OF CHANGES IN NET ASSETS
For the
three For the
months year
ended ended
Mar. 31, Dec. 31,
1998 1997
----------- -----------
INCREASE (DECREASE)
IN NET ASSETS:
- -----------------------
Operations:
Investment income--
net (Note 1) $ 624,118 $ 2,371,900
Realized gain on
investments--net
(Note 2) 4,180 (14,361)
Change in unrealized
appreciation
(depreciation)--
net (1,924) 835,219
----------- -----------
Net increase
in net assets
resulting from
operations 626,374 3,192,758
Dividends to share-
holders from:
Investment
income--net -- (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 626,374 602,796
NET ASSETS:
- -----------------------
Beginning of period 40,489,831 39,887,035
----------- -----------
End of period
(including
undistributed
(overdistributed)
net investment
income of $518,016
and ($106,102) in
1998 and 1997,
respectively) $41,116,205 $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
three months For the year ended
ended ---------------------------------------------------------------
3/31/98 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 $16.87 $18.97
------ ------ ------ ------ ------
Net investment income .29 1.08 1.11 1.14 1.06
Net gain (loss) on
securities (realized
and unrealized) -- .38 (.64) 2.05 (2.00)
------ ------ ------ ------ ------
Total from investment
operations .29 1.46 .47 3.19 (.94)
------ ------ ------ ------ ------
Less Dividends and
Distributions:
Dividends from net investment
income -- (1.17) (1.18) (1.12) (1.03)
Distribution from realized
gains on investments -- -- -- (.16)
------ ------ ------ ------ ------
Total dividends and
distributions -- (1.17) (1.18) (1.12) (1.19)
------ ------ ------ ------ ------
Treasury stock transaction -- .00 -- -- .03
------ ------ ------ ------ ------
Net asset value, end of period $18.71 $18.52 $18.23 $18.94 $16.87
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Market value per share, end of
period $17.06 $16.75 $15.75 $16.00 $14.63
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total Investment Return:
Based on market value per share 4.05% 14.51% 5.68% 17.04% (8.64%)
Ratios To Average Net Assets:
Expenses 0.16% 1.08% 1.07% 1.08% 1.15%
Net investment income 1.53% 5.89% 6.02% 6.26% 5.92%
Supplemental Data:
Net assets at end of period
(000 omitted) $ 41,162 $ 40,490 $ 39,887 $ 41,452 $ 36,928
Portfolio turnover rate 3.25% 2.91% 5.50% 25.07% 95.53%
<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
March 31, 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 March 31, 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 $107,352 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)
March 31, 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 March 31, 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 $1,093,924, respectively.
(5) CAPITAL STOCK:
At March 31, 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.
Quarterly Report
March 31, 1998
- --------------------------------------------------------------------------------
