DEAR FELLOW SHAREHOLDERS:
Net income for the quarter was $571,400 or $.26 per share. A dividend of
$.25 was declared on October 7, 1999, payable October 29, 1999, to holders of
record October 22, 1999.
This has been a bad year for bond investors. We make no excuses, but our
fund never has been recommended as a performance vehicle. It has and does
continue to offer decent income from a portfolio of excellent quality. That's
Excelsior in a nutshell; that may turn out to be a pretty good "nut".
Now that the millennium is looming it is tempting to make some sort of
weighty sounding pronouncement. Everyone else is doing so, and almost any
opinion has the merit of being unoriginal.
We note that it is fashionable to predict a Dow average of 40000, and it is
equally "in" to inveigh against the size of our asset bubble. Both beliefs,
though mutually exclusive logically, have been supported by highly credentialed
commentators.
We do wonder if the national balance of trade is sustainable forever, but
better heads than ours have addressed this question at length. And brevity helps
both the writer and reader.
One approach to the year 2000 has been absent from everything we've read;
humor, to fill that regrettable gap we offer a splendid thought from that
excellent author Aubrey Mennon:
"Reality consists of three things: God, human folly and laughter. Since the
first two are inscrutable, we must make what we can from the third."
It is our hope for the years ahead that we all retain the ability to
laugh--especially at ourselves! Sincerely,
/s/ Townsend Brown II
Townsend Brown II
Chairman and President
October 7, 1999
1
<PAGE>
Excelsior Income Shares, Inc.
SCHEDULE OF INVESTMENTS
September 30, 1999 (Note 1)
<TABLE>
<CAPTION>
U.S. GOVERNMENT AND FEDERAL Moody's
AGENCIES OBLIGATIONS--51.07% Rating** Face Amount Cost* Value
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Federal National Mortgage Assn., Deb.,
6%, 4/1/28 (1) $ 2,874,507 $ 2,827,346 $ 2,680,167
Federal National Mortgage Assn., Global Bond,
8.50%, 2/1/05 1,600,000 1,600,000 1,614,448
Government National Mortgage Assn.,
6%, 7/20/27 (1) 448,787 450,961 452,208
6%, 11/20/28 (1) 2,940,566 2,896,917 2,721,164
7%, 5/15/22 (1) 207,412 207,153 203,658
7%, 4/15/23 (1) 2,452,038 2,453,571 2,407,649
7%, 5/15/23 (1) 541,007 539,401 531,213
7%, 3/15/24 (1) 1,215,168 1,202,257 1,193,170
7%, 7/20/29 (1) 3,984,235 3,929,608 3,902,148
7.50%, 12/15/25 (1) 602,749 601,807 604,912
8%, 8/15/24 (1) 744,505 740,433 761,657
8%, 1/15/25 (1) 575,817 556,743 589,083
8.50%, 7/15/17 (1) 563,265 577,611 585,997
8.50%, 5/15/21 (1) 201,652 206,788 209,790
10%, 1/15/18 (1) 496,648 538,940 541,378
U.S. Treasury Bond,
7.25%, 5/15/16 (1) 1,000,000 975,000 1,080,938
----------- ----------- -----------
20,448,356 20,304,536 20,079,580
----------- ----------- -----------
<CAPTION>
BONDS AND NOTES--33.66%
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Commercial Mortgage Asset Trust
6.64%, 4/17/10 Aaa 1,000,000 1,012,969 955,210
DuPont (EI) de Nemours & Co., Notes,
8.25%, 9/15/06 Aa2 1,500,000 1,495,875 1,604,106
Ford Motor Credit
6.125, 1/9/06 A1 2,000,000 1,989,980 1,895,084
KFW International Finance Inc., Notes,
7.20%, 3/15/14 Aaa 2,000,000 1,978,500 2,019,204
Nationslink Funding Corp.
6.476%, 7/20/08 Aaa 1,000,000 1,014,414 961,980
Republic N.Y. Corp., Notes,
7.75%, 5/15/09 A1 1,800,000 1,806,138 1,856,858
Wachovia Corp. Sub. Notes,
6.375%, 2/1/09 A1 2,000,000 1,997,400 1,891,056
Wisconsin Elec. Power Co.,
7.25%, 8/1/04 Aa2 2,000,000 1,988,600 2,051,106
----------- ----------- -----------
13,300,000 13,283,876 13,234,604
----------- ----------- -----------
<CAPTION>
SHORT-TERM HOLDINGS--15.27%
<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
10/15/99 4,000,000 3,991,942 3,991,942
Fidelity Cash Management Fund 108,588 108,588 108,588
----------- ----------- -----------
6,008,588 6,000,530 6,000,530
----------- ----------- -----------
TOTAL INVESTMENTS IN SECURITIES $39,756,944 $39,588,942 $39,314,714
----------- ----------- -----------
----------- ----------- -----------
<FN>
- ---------------
Percentages are based on total investments.
</FN>
</TABLE>
The accompanying notes are an integral part of this schedule.
2
<PAGE>
Excelsior Income Shares, Inc.
SCHEDULE OF INVESTMENTS (continued)
September 30, 1999 (Note 1)
The aggregate market value at September 30, 1999 for the long-term holdings in
terms of Quality Ratings is as follows:
Rating** Value Percent
--------------- ----------- -------
Aaa (1) $24,015,974 72.09
Aa2 3,655,212 10.97
A1 5,642,998 16.94
----------- -------
Total $33,314,184 100.00
----------- -------
----------- -------
(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 $ 454,288
Aggregate gross unrealized
depreciation (728,516)
-----------
Net unrealized appreciation ($ 274,228)
-----------
-----------
Cost for Federal Income Tax
Purposes $39,588,942
-----------
-----------
**Credit ratings are unaudited.
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1999
ASSETS:
- ------------------------------
Investments (Note 1) in securities
at value (identified
cost $39,588,942):
U.S. Government and
Federal Agencies
obligations $20,079,580
Bonds and notes 13,234,604
Short-term holdings 6,000,530
-----------
Total Investments $39,314,714
Cash 5,280
Interest receivable 304,751
Prepaid expenses 266
-----------
Total Assets 39,625,011
-----------
LIABILITIES:
- ------------------------------
Accrued advisory fee (Note 3) 50,774
Accrued operating expenses 50,020
-----------
Total Liabilities 100,794
-----------
Net Assets $39,524,217
-----------
-----------
NET ASSETS consist of:
Undistributed net investment
income $ 531,098
Accumulated net realized losses
from investment transactions (254,999)
Unrealized appreciation on
investments (274,228)
Capital shares (Note 5) 21,781
Additional paid-in capital 39,500,565
-----------
$39,524,217
-----------
-----------
Net Asset Value per share
($39,524,217 / 2,178,091 shares) $18.14
-----------
-----------
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, 1999
(Note 1)
INVESTMENT INCOME:
- ------------------------------
INCOME--Interest $ 1,986,867
EXPENSES:
Investment advisory fee $142,860
Directors' fees and expenses 24,580
Officer's salary 30,399
Postage and printing 22,909
Professional fees 25,079
Insurance 17,514
Transfer agent and
registrar fees 8,642
The New York Stock
Exchange, Inc.--annual fee
11,893
Miscellaneous 21,412
----------
Total expenses 305,288
-----------
Investment Income--Net 1,681,579
-----------
REALIZED GAIN AND UNREALIZED APPRECIATION
(DEPRECIATION) ON INVESTMENTS--NET:
- ------------------------------
Realized gain from security
transactions
(excluding short-term securities):
Proceeds from sales $8,955,622
Cost of sales 8,864,238
----------
Net realized gain 91,384
Unrealized appreciation
(depreciation)
on investment securities:
Beginning of period 1,824,564
End of period (274,228)
----------
Change in unrealized
appreciation--net (2,098,792)
-----------
Net realized gain and change
in unrealized appreciation
(depreciation) on investments (2,007,408)
-----------
Net decrease in Net Assets
Resulting from Operations ($ 325,829)
-----------
-----------
STATEMENT OF CHANGES IN NET ASSETS
For the
nine For the
months year
ended ended
Sept. 30, Dec. 31,
1999 1998
----------- -----------
INCREASE (DECREASE)
IN NET ASSETS:
- -----------------------
Operations:
Investment income--
net (Note 1) $ 1,681,579 $ 2,314,162
Realized gain on
investments--net
(Note 2) 91,384 29,104
Change in unrealized
appreciation--net (2,098,792) 487,983
----------- -----------
Net increase
(decrease)
in net assets
resulting from
operations (325,829) 2,831,249
Dividends to share-
holders from:
Investment income--
net (1,092,433) (2,251,982)
Cost of shares
purchased pursuant to
Section 23 of the
Investment Company
Act of 1940 (Note 5) (126,619) --
----------- -----------
Total increase
(decrease) in net
assets (1,544,881) 579,267
NET ASSETS:
- -----------------------
Beginning of period 41,069,098 40,489,831
----------- -----------
End of period
(including
undistributed
(overdistributed) net
investment income of
$531,098 and
($57,285) in 1999 and
1998, respectively) $39,524,217 $41,069,098
----------- -----------
----------- -----------
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 ---------------------------------------------------------------
9/30/99 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value, beginning of
period $ 18.78 $18.52 $18.23 $18.94 $16.87
-------- ------ ------ ------ ------
Net investment income .77 1.06 1.08 1.11 1.14
Net gain (loss) on securities
(realized and unrealized) (.92) .23 .38 (.64) 2.05
-------- ------ ------ ------ ------
Total from investment
operations (.15) 1.29 1.46 .47 3.19
-------- ------ ------ ------ ------
Less Dividends and
Distributions:
Dividends from net investment
income (.50) (1.03) (1.17) (1.18) (1.12)
Distribution from realized
gains on investments -- -- -- -- --
-------- ------ ------ ------ ------
Total dividends and
distributions (.50) (1.03) (1.17) (1.18) (1.12)
-------- ------ ------ ------ ------
Treasury stock transaction .01 -- .00 -- --
-------- ------ ------ ------ ------
Net asset value, end of period $ 18.14 $18.78 $18.52 $18.23 $18.94
-------- ------ ------ ------ ------
-------- ------ ------ ------ ------
Market value per share, end of
period $ 15.438 $16.56 $16.75 $15.75 $16.00
-------- ------ ------ ------ ------
-------- ------ ------ ------ ------
Total Investment Return:
Based on market value per share (3.86%) 5.55% 14.51% 5.68% 17.04%
Ratios To Average Net Assets:
Expenses 0.76% 0.97% 1.08% 1.07% 1.08%
Net investment income 4.18% 5.62% 5.89% 6.02% 6.26%
Supplemental Data:
Net assets at end of period
(000 omitted) $ 39,524 $ 41,069 $ 40,490 $ 39,887 $ 41,452
Portfolio turnover rate 15.92% 15.88% 2.91% 5.50% 25.07%
</TABLE>
The accompanying notes are an integral part of this schedule.
5
<PAGE>
Excelsior Income Shares, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
- --------------------------------------------------------------------------------
(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, 1999, 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 $254,999 expiring on December 31,
2003, 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, 1998 is an increase in undistributed net investment
income of $13,363, a decrease in accumulated net realized loss of $13,363.
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.
(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
6
<PAGE>
Excelsior Income Shares, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
September 30, 1999
- --------------------------------------------------------------------------------
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.
Mr. Alexander R. Powers, has been principal Investment Advisor since August
1997. Mr. Powers has been a managing director of the Fixed Income Division of
United States Trust Company of New York since March 1998 and was Senior Vice
President from August 1997 to March 1998.
(4) PURCHASES AND PROCEEDS FROM SALES OF SECURITIES:
For the period ended September 30, 1999, purchases and proceeds from sales of
securities other than short-term United States Government and Federal Agencies
obligations aggregated $2,027,382 and $-0-, respectively. Purchases and proceeds
from sales of United States Government and Federal Agencies obligations
aggregated $6,871,055 and $8,955,622, respectively.
(5) CAPITAL STOCK:
At September 30, 1999, 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 year ended December 31, 1997 the
Company purchased 2,000 shares in the open market at a cost of $30,805. For the
period ended September 30, 1999, the Company purchased 8,300 shares in the open
market at a cost of $126,619.
ADDITIONAL INFORMATION:
YEAR 2000:
Like other investment companies, financial and business organizations and
individuals around the world, the Company could be affected adversely if the
computer systems used by the Investment Adviser and the Company's other service
providers do not properly process and calculate date-related information and
data from and after January 1, 2000. This is commonly known as the "Year 2000
Problem." The Investment Adviser and the Company's other service providers have
informed the Company that they are taking steps to address the Year 2000 Problem
with respect to the computer systems that they use. At this time, however, there
can be no assurance that these steps will be sufficient to avoid any adverse
impact on the Company as a result of the Year 2000 Problem.
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
PricewaterhouseCoopers LLP
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
September 30, 1999
- -------------------------------------------------------------------------------
