- ------------------------------------------------------------------------------
Excelsior
Income Shares,
Inc.
Quarterly Report
September 30, 1998
- --------------------------------------------------------------------------------
<PAGE>
DEAR FELLOW SHAREHOLDERS:
Net income for the quarter was $570,002, or $.26 per share.
A dividend of $.26 was declared on October 8, 1998, payable October 30, 1998, to
shareholders of record October 23, 1998.
It seems appropriate to caution owners of Excelsior about
the possibility of our dividend falling as bonds either mature or are paid down.
Current interest rates make it impossible to replace the coupons that typify our
portfolio without taking absurd risks. Be assured that we are not going to do
any such thing.
The issue of risk continues to be dead center on the
investment stage. A number of commentators have argued about whether to view the
financial glass as half empty or half full. We think they are missing the point.
Their concern should not be quantitative; rather they should ask if the system
is indeed made of glass. Without judging, we do ask if the world financial
system's integrity is questionable.
A recent popular activity followed by some hedge funds was
borrowing Yen in Japan at very low rates and buying U.S. Treasuries on margin.
The strategy was designed to take advantage of relatively high U.S. interest
rates and the likelihood of making large profits as the dollar appreciated. That
worked for a while. To the chagrin of some less nimble speculators, however, the
dollar fell against the yen and leveraged positions had to be unwound at a loss.
There is an added unknown downside: lenders had to make this losing speculation
possible. The debt of those lenders may still be washing around the world
banking system, secured only by the promise of a defaulted borrower.
We suggest that Barings' failure may not be a singular
event.
We are also rather glad that our portfolio does not contain
anything but top quality assets. While Excelsior may be dull, its integrity is
assured.
Sincerely yours,
/s/ Townsend Brown II
Townsend Brown II
October 8, 1998 Chairman and President
1
<PAGE>
Excelsior Income Shares, Inc.
SCHEDULE OF INVESTMENTS
September 30, 1998 (Note 1)
<TABLE>
<CAPTION>
U.S. GOVERNMENT AND FEDERAL Moody's
AGENCIES OBLIGATIONS--44.92% 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 $ 2,545,235
7.50%, 7/25/20 (1) 1,740,518 1,722,977 1,757,140
Federal National Mortgage Assn., Global Bond,
8.50%, 2/1/05 1,600,000 1,600,000 1,673,406
Government National Mortgage Assn.,
6%, 7/20/27 (1) 862,227 866,404 870,278
7%, 5/15/22 (1) 232,568 232,277 239,763
7%, 4/15/23 (1) 3,044,730 3,046,633 3,138,928
7%, 5/15/23 (1) 683,886 681,855 705,044
7%, 3/15/24 (1) 1,436,421 1,421,159 1,480,861
7.50%, 12/15/25 (1) 843,149 841,832 873,186
8%, 8/15/24 (1) 1,151,857 1,145,557 1,199,731
8%, 1/15/25 (1) 994,865 961,910 1,036,214
8.50%, 7/15/17 (1) 800,231 820,612 845,994
8.50%, 5/15/21 (1) 358,402 367,532 378,899
10%, 1/15/18 (1) 704,802 764,822 769,336
U.S. Treasury Bond,
7.25%, 5/15/16 (1) 1,000,000 975,000 1,243,438
----------- ----------- -----------
17,953,656 17,872,515 18,757,453
----------- ----------- -----------
BONDS AND NOTES--30.05%
- --------------------------------------------------------------------------------------------------------
DuPont (EI) de Nemours & Co., Notes,
8.25%, 9/15/06 Aa2 1,500,000 1,495,875 1,801,007
Ford Motor Credit
6.125, 1/9/06 A1 2,000,000 1,989,980 2,053,622
KFW International Finance Inc., Notes,
7.20%, 3/15/14 Aaa 2,000,000 1,978,500 2,305,278
Republic N.Y. Corp., Notes,
7.75%, 5/15/09 A1 1,800,000 1,806,138 2,076,993
Wachovia Corp. Sub. Notes,
6.375%, 2/1/09 A1 2,000,000 1,997,400 2,100,984
Wisconsin Elec. Power Co.,
7.25%, 8/1/04 Aa2 2,000,000 1,988,600 2,209,256
----------- ----------- -----------
11,300,000 11,256,493 12,547,140
----------- ----------- -----------
SHORT-TERM HOLDINGS--25.03%
- --------------------------------------------------------------------------------------------------------
Dreyfus Government Cash Management Fund 1,900,000 1,900,000 1,900,000
Federal National Mortgage Assn., Disc. Note
10/6/98 7,000,000 6,992,020 6,992,020
Fidelity U.S. Treasury Cash Management Fund 1,556,758 1,556,758 1,556,758
----------- ----------- -----------
10,456,758 10,448,778 10,448,778
----------- ----------- -----------
TOTAL INVESTMENTS IN SECURITIES $39,710,414 $39,577,786 $41,753,371
----------- ----------- -----------
----------- ----------- -----------
</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)
September 30, 1998 (Note 1)
The aggregate market value at September 30, 1998 for the long-term holdings in
terms of Quality Ratings is as follows:
Rating** Value Percent
--------------- ----------- -------
Aaa (1) $21,062,731 67.28
A1 6,231,599 19.91
Aa2 4,010,263 12.81
----------- -------
Total $31,304,593 100.00
----------- -------
----------- -------
(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 $ 2,175,585
Aggregate gross unrealized
depreciation --
-----------
Net unrealized appreciation $ 2,175,585
-----------
-----------
Cost for Federal Income Tax
Purposes $39,577,786
-----------
-----------
**Credit ratings are unaudited.
The accompanying notes are an integral part of this schedule.
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1998
ASSETS:
- ------------------------
Investments (Note 1)
in securities
at value (identified
cost $39,577,786):
U.S. Government and
Federal Agencies
obligations $18,757,453
Bonds and notes 12,547,140
Short-term holdings 10,448,778
-----------
Total Investments $41,753,371
Cash 24,812
Interest receivable 341,713
Prepaid expenses 18,583
-----------
Total Assets 42,138,479
-----------
LIABILITIES:
- -----------------------
Accrued advisory fee (Note 3) 58,200
Accrued operating expenses 56,422
-----------
Total Liabilities 114,622
-----------
Net Assets $42,023,857
-----------
-----------
NET ASSETS consist of:
Undistributed net investment income $ 565,275
Accumulated net realized losses
from investment transactions (365,205)
Unrealized appreciation on
investments 2,175,585
Capital shares (Note 5) 21,864
Additional paid-in capital 39,626,338
-----------
$42,023,857
-----------
-----------
Net Asset Value per share
($42,023,857 / 2,186,391 shares) $19.22
------
------
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, 1998
(Note 1)
INVESTMENT INCOME:
- ----------------------------
INCOME--Interest $2,053,855
EXPENSES:
Investment advisory fee $134,226
Directors' fees and expenses 20,624
Officer's salary 37,351
Postage and printing 25,430
Professional fees 13,421
Insurance 16,568
Transfer agent and
registrar fees 14,958
The New York Stock
Exchange, Inc.--annual fee 11,747
Miscellaneous 14,958
--------
Total expenses 289,283
----------
Investment Income--Net 1,764,572
----------
REALIZED GAIN AND UNREALIZED APPRECIATION
(DEPRECIATION) ON INVESTMENTS--NET:
- ----------------------------
Realized gain from security
transactions (excluding
short-term securities):
Proceeds from sales
$3,690,589
Cost of sales 3,666,944
----------
Net realized gain 23,645
Unrealized appreciation
(depreciation) on
investment securities:
Beginning of period 1,336,581
End of period 2,175,585
----------
Change in unrealized
appreciation--net 839,004
----------
Net realized gain and change
in unrealized appreciation
(depreciation) on investments 862,649
----------
Net Increase in Net Assets
Resulting from Operations $2,627,221
----------
----------
STATEMENT OF CHANGES IN NET ASSETS
For the
nine For the
months year
ended ended
Sept. 30, Dec. 31,
1998 1997
----------- -----------
INCREASE (DECREASE)
IN NET ASSETS:
- -----------------------
Operations:
Investment income--
net (Note 1) $ 1,764,572 $ 2,371,900
Realized gain on
investments--net
(Note 2) 23,645 (14,361)
Change in unrealized
appreciation
(depreciation)--net 839,004 835,219
----------- -----------
Net increase
in net assets
resulting from
operations 2,627,221 3,192,758
Dividends to share-
holders from:
Investment income--
net (1,093,195) (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 1,534,026 602,796
NET ASSETS:
- -----------------------
Beginning of period 40,489,831 39,887,035
----------- -----------
End of period
(including
undistributed
(overdistributed)
net investment
income of $565,275
and ($106,102) in
1998 and 1997,
respectively) $42,023,857 $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
nine
months For the year ended
ended ---------------------------------------
9/30/98 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 .81 1.08 1.11 1.14 1.06
Net gain (loss) on securities
(realized and unrealized) .39 .38 (.64) 2.05 (2.00)
------ ------ ------ ------ ------
Total from investment
operations 1.20 1.46 .47 3.19 (.94)
------ ------ ------ ------ ------
Less Dividends and Distributions:
Dividends from net investment
income (.50) (1.17) (1.18) (1.12) (1.03
Distribution from realized
gains on investments -- -- -- -- (.16)
------ ------ ------ ------ ------
Total dividends and
distributions (.50) (1.17) (1.18) (1.12) (1.19)
------ ------ ------ ------ ------
Treasury stock transaction -- .00 -- -- .03
------ ------ ------ ------ ------
Net asset value, end of period $19.22 $18.52 $18.23 $18.94 $16.87
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Market value per share, end of
period $17.00 $16.75 $15.75 $16.00 $14.63
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total Investment Return:
Based on market value per share 6.70% 14.51% 5.68% 17.04% (8.64%)
Ratios To Average Net Assets:
Expenses .70% 1.08% 1.07% 1.08% 1.15%
Net investment income 4.29% 5.89% 6.02% 6.26% 5.92%
Supplemental Data:
Net assets at end of period
(000 omitted) $42,024 $40,490 $39,887 $41,452 $36,928
Portfolio turnover rate 11.26% 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
September 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 September 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 $87,887 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)
September 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 September 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 $3,690,589, respectively.
(5) CAPITAL STOCK:
At September 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.
