--------------------------------
Excelsior
Income Shares,
Inc.
Annual Report
December 31, 1997
--------------------------------
<PAGE>
DEAR FELLOW SHAREHOLDERS:
Net investment income for the full year and for the fourth quarter were
$2,371,900, and $588,962, respectively.
A dividend of $.37 was declared December 2, 1997, payable January 30, 1998
to shareholders of record December 19, 1997. We have been advised that 10.23% of
1997 dividend income is considered to be derived from interest earned on U.S.
federal obligations.
This has been some year! The country thrived economically; most owners of
American stocks prospered, and brokers must be laughing all the way to the bank.
The odds against putting four consecutive years of heady markets back to back
are enormous -- they were pretty high at the start of 1997. For what it is
worth, we feel that the burden of proof is on the bulls.
Why the negative vote? Asia is one reason; mounting consumer debt is
another.
What well might happen is a hit to the "top line" of corporate income
statements. That is not a prediction, just a note of caution, which makes us
feel comfortable with our conservative fund. We are not going to change from the
quality and liquidity, which exemplify our portfolio. We provide a pretty safe
resting-place for investors who should look elsewhere for capital gains.
We have no idea how the Asian "bubble" economies will look in a year's
time. There may well be huge opportunities for the courageous investor; there
may also be chaos. The domestic credit situation is more quantifiable. Consumer
debt has reached $1.2 trillion, and has risen by about 50% in four years.
Repayment delinquencies are rising. Since consumer spending accounts for around
two-thirds of our economy, it's hard to see very much growth in the year ahead,
and a slowdown could hurt earnings.
Investors may not always have a free ride.
One prediction, however, we make with conviction: this country will remain
the best hope for free people everywhere. On that confident note, we wish all
our shareholders a joyous 1998.
Sincerely yours,
/s/ Townsend Brown II
Townsend Brown II
Chairman and President
December 31, 1997
1
<PAGE>
Excelsior Income Shares, Inc.
SCHEDULE OF INVESTMENTS
December 31, 1997 (Note 1)
<TABLE>
<CAPTION>
U.S. GOVERNMENT AND FEDERAL Moody's
AGENCIES OBLIGATIONS--58.65% 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 $ 2,536,078
7.50%, 7/25/20 (1) 3,665,024 3,628,088 3,709,481
Federal National Mortgage Assn., Global
Bond,
8.50%, 2/1/05 1,600,000 1,600,000 1,666,707
Government National Mortgage Assn.,
6%, 7/20/27 (1) 982,865 987,626 990,669
7%, 5/15/22 (1) 276,168 275,822 278,239
7%, 4/15/23 (1) 3,346,828 3,348,920 3,371,929
7%, 5/15/23 (1) 772,472 770,178 778,265
7%, 3/15/24 (1) 1,610,369 1,593,259 1,622,447
7.50%, 12/15/25 (1) 958,736 957,238 981,806
8%, 8/15/24 (1) 1,486,074 1,477,947 1,540,873
8%, 1/15/25 (1) 1,372,030 1,326,582 1,422,624
8.50%, 7/15/17 (1) 813,306 834,020 854,226
8.50%, 5/15/21 (1) 454,479 466,054 477,345
10%, 1/15/18 (1) 806,133 874,780 878,183
U.S. Treasury Bond,
7.25%, 5/15/16 (1) 1,000,000 975,000 1,138,438
----------- ----------- -----------
21,644,484 21,539,459 22,247,310
----------- ----------- -----------
<CAPTION>
BONDS AND NOTES--31.33%
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
DuPont (EI) de Nemours & Co., Notes,
8.25%, 9/15/06 Aa2 1,500,000 1,495,875 1,696,498
Ford Motor Credit
6.125, 1/9/06 A1 2,000,000 1,989,980 1,953,060
KFW International Finance Inc., Notes,
7.20%, 3/15/14 Aaa 2,000,000 1,978,500 2,163,805
Republic N.Y. Corp., Notes,
7.75%, 5/15/09 A1 1,800,000 1,806,138 1,977,410
Wachovia Corp. Sub. Notes,
6.375%, 2/1/09 A1 2,000,000 1,997,400 1,991,766
Wisconsin Elec. Power Co.,
7.25%, 8/1/04 Aa2 2,000,000 1,988,600 2,102,684
----------- ----------- -----------
11,300,000 11,256,493 11,885,223
----------- ----------- -----------
<CAPTION>
SHORT-TERM HOLDINGS--10.02%
<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
----------- ----------- -----------
3,800,000 3,800,000 3,800,000
----------- ----------- -----------
TOTAL INVESTMENTS IN SECURITIES $36,744,484 $36,595,952 $37,932,533
----------- ----------- -----------
----------- ----------- -----------
</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)
December 31, 1997 (Note 1)
The aggregate market value at December 31, 1997 for the long-term holdings in
terms of Quality Ratings is as follows:
Rating** Value Percent
--------- ----------- -------
Aaa (1) $24,411,115 71.52
A1 5,922,236 17.35
Aa2 3,799,182 11.13
----------- -------
Total $34,132,533 100.00
----------- -------
----------- -------
(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 $ 1,379,135
Aggregate gross unrealized
depreciation (42,554)
-----------
Net unrealized appreciation $ 1,336,581
-----------
-----------
Cost for Federal Income Tax
Purposes $36,595,952
-----------
-----------
**Credit ratings are unaudited.
The accompanying notes are an integral part of this schedule.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
ASSETS:
- ------------------------------
Investments (Note 1) in securities
at value (identified
cost $36,595,952):
U.S. Government and
Federal Agencies
obligations $22,247,310
Bonds and notes 11,885,223
Short-term holdings 3,800,000
-----------
Total Investments $37,932,533
Cash 3,021,301
Interest receivable 461,557
Prepaid expenses 10,129
-----------
Total Assets 41,425,520
-----------
LIABILITIES:
- ------------------------------
Dividends payable 808,965
Accrued advisory fee (Note 3) 73,454
Accrued operating expenses 53,270
-----------
Total Liabilities 935,689
-----------
Net Assets $40,489,831
-----------
-----------
NET ASSETS consist of:
Overdistributed net investment
income $ (106,102)
Accumulated net realized losses
from investment transactions (388,850)
Unrealized appreciation on
investments 1,336,581
Capital shares (Note 5) 21,864
Additional paid-in capital 39,626,338
-----------
$40,489,831
-----------
-----------
Net Asset Value per share
($40,489,831 / 2,186,391 shares) $18.52
-----------
-----------
The accompanying notes are an integral part of this statement.
3
<PAGE>
Excelsior Income Shares, Inc.
STATEMENT OF OPERATIONS
for the year ended December 31, 1997
(Note 1)
INVESTMENT INCOME:
- ------------------------------
INCOME--Interest $2,806,467
EXPENSES:
Investment advisory fee $209,424
Directors' fees and
expenses 45,875
Officer's salary 42,312
Postage and printing 33,907
Professional fees 21,938
Insurance 23,187
Transfer agent and
registrar fees 19,944
The New York Stock
Exchange, Inc.--
annual fee 15,663
Miscellaneous 22,317
----------
Total expenses 434,567
----------
Investment Income--Net 2,371,900
----------
REALIZED LOSS AND UNREALIZED APPRECIATION
(DEPRECIATION) ON INVESTMENTS--NET:
- ------------------------------
Realized loss from security
transactions (excluding
short-term securities):
Proceeds from sales $6,769,115
Cost of sales 6,783,476
----------
Net realized loss (14,361)
Unrealized appreciation
(depreciation)
on investment securities:
Beginning of period 501,362
End of period 1,336,581
----------
Change in unrealized
appreciation--net 835,219
----------
Net realized loss and change
in unrealized appreciation
(depreciation) on investments 820,858
----------
Net Increase in Net Assets
Resulting from Operations $3,192,758
----------
----------
STATEMENT OF CHANGES IN NET ASSETS
For the For the
year year
ended ended
Dec. 31, Dec. 31,
1997 1996
----------- -----------
INCREASE (DECREASE)
IN NET ASSETS:
- -----------------------
Operations:
Investment income--
net (Note 1) $ 2,371,900 $ 2,430,355
Realized (loss) on
investments--net
(Note 2) (14,361) (26,841)
Change in unrealized
appreciation
(depreciation)--net 835,219 (1,386,342)
----------- -----------
Net increase
in net assets
resulting from
operations 3,192,758 1,017,172
Dividends to share-
holders from:
Investment income--
net (2,559,157) (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 602,796 (1,565,129)
NET ASSETS:
- -----------------------
Beginning of year 39,887,035 41,452,164
----------- -----------
End of year (including
(overdistributed)
undistributed net
investment income of
($106,102) and
$95,170 in 1997 and
1996, respectively) $40,489,831 $39,887,035
----------- -----------
----------- -----------
The accompanying notes are an integral part of these statements.
4
<PAGE>
Excelsior Income Shares, Inc.
FINANCIAL HIGHLIGHTS
<TABLE>
For the year ended
--------------------------------------------------------------------------------
<CAPTION>
1997 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 1.08 1.11 1.14 1.06 1.17
Net gain (loss) on securities
(realized and unrealized) (.38) (.64) 2.05 (2.00) .71
------------ ------------ ------------ ------------ ------------
Total from investment
operations 1.46 .47 3.19 (.94) 1.88
------------ ------------ ------------ ------------ ------------
Less Dividends and
Distributions:
Dividends from net investment
income (1.17) (1.18) (1.12) (1.03) (1.17)
Distribution from realized
gains on investments -- -- -- (.16) (.28)
------------ ------------ ------------ ------------ ------------
Total dividends and
distributions (1.17) (1.18) (1.12) (1.19) (1.45)
------------ ------------ ------------ ------------ ------------
Treasury stock transaction .00 -- -- .03 --
------------ ------------ ------------ ------------ ------------
Net asset value, end of period $18.52 $18.23 $18.94 $16.87 $18.97
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Market value per share, end of
period $16.75 $15.75 $16.00 $14.63 $17.50
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Total Investment Return:
Based on market value per share 14.51% 5.68% 17.04% (8.64%) 5.98%
Ratios To Average Net Assets:
Expenses 1.08% 1.07% 1.08% 1.15% 1.08%
Net investment income 5.89% 6.02% 6.26% 5.92% 6.07%
Supplemental Data:
Net assets at end of period
(000 omitted) $ 40,490 $ 39,887 $ 41,452 $ 36,928 $ 42,130
Portfolio turnover rate 2.91% 5.50% 25.07% 95.53% 81.23%
</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, 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 December 31, 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 $111,532 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)
December 31, 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.
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 December 31, 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
$994,796 and $2,307,887, respectively.
(5) CAPITAL STOCK:
At December 31, 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 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>
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, 1997, and the related statement of operations for the
year then ended, the statement of changes in net assets for each of the two
years in the period then ended and the financial highlights for each of the
three 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 two 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, 1997, 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 present fairly, in all material respects, the financial position of
Excelsior Income Shares, Inc. as of December 31, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the three years in the period then ended, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
New York, New York
February 17, 1998.
8
<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.
