<PAGE>
DEAR FELLOW SHAREHOLDERS:
Net income for the quarter was $545,612 or $.25 per share. A dividend of
$.25 was declared on July 7, 1999, payable July 30, 1999, to holders of record
July 23, 1999.
Excelsior's financial statements reflect a large short term position as
well as a payable for securities purchased. This, while correct, does not take
into account our purchase for July settlement of four million dollars of AAA
rated bonds yielding over seven percent--an improvement in income of more than
two hundred basis points. We make this investment at a time when the equity
market seems to be celebrating not just the millennium but the arrival of
endless prosperity.
Without doubt the American economy is acting like a tireless race horse,
brilliantly ridden by its stellar jockey, Alan Greenspan. His achievements have
been unparalleled; he is also both mortal and elderly. It is difficult to
conceive of an encore performance by any successor.
A couple of commentators have addressed situations like the present. That
somewhat inaccessible Austrian, Joseph Schumpeter, observed that new
technologies which create whole new industries are often accompanied by
speculative manias. Formerly conservative people are driven to overestimate the
potential for gain and throw capital at dubious ventures.
No less an authority than Bill Gates pointed out that "Gold rushes
encourage impetuous investments." He warned that when the frenzy ends, there
will be amazement that anyone could have funded the folly.
One final cautionary note seems worth sounding. The Bible warns against
putting new wine in old bottles. No doubt a great deal of new wine is cascading
into the old bottles of the marketplace. Unfortunately, the guardians of our
various markets are facing the unknown; a fact amply demonstrated by the near
collapse of Long Term Capital Management. Those same guardians are likely soon
to confront twenty-four hour trading days, where the speed of light is the only
limiting factor to speculative enthusiasm.
We make no predictions, but we are comfortable with our safe,
income-oriented fund. We hope that our shareholders share that feeling.
Sincerely,
/s/ Townsend Brown II
Townsend Brown II
Chairman and President
July 7, 1999
1
<PAGE>
Excelsior Income Shares, Inc.
SCHEDULE OF INVESTMENTS
June 30, 1999 (Note 1)
<TABLE>
<CAPTION>
U.S. GOVERNMENT AND FEDERAL Moody's
AGENCIES OBLIGATIONS--47.86% Rating** Face Amount Cost* Value
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Federal National Mortgage Assn., Deb.,
7.50%, 7/25/20 (1) $ 60,729 $ 60,117 $ 60,514
6%, 4/1/28 (1) 2,920,001 2,872,094 2,748,191
Federal National Mortgage Assn., Global Bond,
8.50%, 2/1/05 1,600,000 1,600,000 1,626,389
Government National Mortgage Assn.,
6%, 7/20/27 (1) 511,231 513,707 516,156
6%, 11/20/28 (1) 2,975,885 2,931,711 2,775,837
7%, 5/15/22 (1) 208,525 208,265 206,058
7%, 4/15/23 (1) 2,465,633 2,467,174 2,436,465
7%, 5/15/23 (1) 566,791 565,108 560,086
7%, 3/15/24 (1) 1,267,769 1,254,299 1,252,772
7%, 7/15/29 (1) 2,000,000 1,976,406 1,978,750
7%, 7/20/29 (1) 2,000,000 1,968,750 1,978,750
7.50%, 12/15/25 (1) 632,755 631,767 639,817
8%, 8/15/24 (1) 785,728 781,431 807,651
8%, 1/15/25 (1) 597,854 578,050 614,535
8.50%, 7/15/17 (1) 660,897 677,729 692,054
8.50%, 5/15/21 (1) 240,340 246,461 251,671
10%, 1/15/18 (1) 560,673 608,418 612,388
U.S. Treasury Bond,
7.25%, 5/15/16 (1) 1,000,000 975,000 1,097,500
----------- ----------- -----------
21,054,811 20,916,487 20,855,584
----------- ----------- -----------
<CAPTION>
BONDS AND NOTES--30.79%
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Commercial Mortgage Asset Trust
6.64%, 4/17/10 Aaa 1,000,000 1,012,969 966,295
DuPont (EI) de Nemours & Co., Notes,
8.25%, 9/15/06 Aa2 1,500,000 1,495,875 1,625,304
Ford Motor Credit
6.125, 1/9/06 A1 2,000,000 1,989,980 1,905,748
KFW International Finance Inc., Notes,
7.20%, 3/15/14 Aaa 2,000,000 1,978,500 2,112,676
Nationslink Funding Corp.
6.476%, 7/20/08 Aaa 1,000,000 1,014,414 972,545
Republic N.Y. Corp., Notes,
7.75%, 5/15/09 A1 1,800,000 1,806,138 1,857,317
Wachovia Corp. Sub. Notes,
6.375%, 2/1/09 A1 2,000,000 1,997,400 1,915,098
Wisconsin Elec. Power Co.,
7.25%, 8/1/04 Aa2 2,000,000 1,988,600 2,065,260
----------- ----------- -----------
13,300,000 13,283,876 13,420,243
----------- ----------- -----------
<CAPTION>
SHORT-TERM HOLDINGS--21.35%
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Dreyfus Government Cash Management Fund 1,900,000 1,900,000 1,900,000
Federal National Mortgage Assn., Disc. Note
7/12/99 7,000,000 6,989,755 6,989,755
Fidelity Cash Management Fund 413,860 413,860 413,860
----------- ----------- -----------
9,313,860 9,303,615 9,303,615
----------- ----------- -----------
TOTAL INVESTMENTS IN SECURITIES $43,668,671 $43,503,978 $43,579,442
----------- ----------- -----------
----------- ----------- -----------
<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)
June 30, 1999 (Note 1)
The aggregate market value at June 30, 1999 for the long-term holdings in terms
of Quality Ratings is as follows:
Rating** Value Percent
--------------- ----------- -------
Aaa (1) $24,907,100 72.67
Aa2 3,690,564 10.76
A1 5,678,163 16.57
----------- -------
Total $34,275,827 100.00
----------- -------
----------- -------
(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 $ 649,783
Aggregate gross unrealized
depreciation (574,319)
-----------
Net unrealized appreciation $ 75,464
-----------
-----------
Cost for Federal Income Tax
Purposes $43,503,978
-----------
-----------
**Credit ratings are unaudited.
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1999
ASSETS:
- ------------------------------
Investments (Note 1) in securities
at value (identified
cost $43,503,978):
U.S. Government and
Federal Agencies
obligations $20,855,584
Bonds and notes 13,420,243
Short-term holdings 9,303,615
-----------
Total Investments $43,579,442
Cash 4,294
Interest receivable 433,251
Prepaid expenses 10,681
-----------
Total Assets 44,027,668
-----------
LIABILITIES:
- ------------------------------
Payable for securities purchased 3,945,156
Accrued advisory fee (Note 3) 61,687
Accrued operating expenses 40,364
-----------
Total Liabilities 4,047,207
-----------
Net Assets $39,980,461
-----------
-----------
NET ASSETS consist of:
Undistributed net investment
income $ 506,296
Accumulated net realized losses
from investment transactions (249,501)
Unrealized appreciation on
investments 75,464
Capital shares (Note 5) 21,864
Additional paid-in capital 39,626,338
-----------
$39,980,461
-----------
-----------
Net Asset Value per share
($39,980,461 / 2,186,391 shares) $18.29
-----------
-----------
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, 1999
(Note 1)
INVESTMENT INCOME:
- ------------------------------
INCOME--Interest $ 1,326,296
EXPENSES:
Investment advisory fee $104,137
Directors' fees and expenses 22,811
Officer's salary 20,372
Postage and printing 16,860
Professional fees 11,550
Insurance 11,174
Transfer agent and
registrar fees 9,917
The New York Stock
Exchange, Inc.--annual fee 7,818
Miscellaneous 11,478
----------
Total expenses 216,117
-----------
Investment Income--Net 1,110,179
-----------
REALIZED GAIN AND UNREALIZED APPRECIATION
(DEPRECIATION) ON INVESTMENTS--NET:
- ------------------------------
Realized gain from security
transactions
(excluding short-term securities):
Proceeds from sales $8,349,268
Cost of sales 8,252,386
----------
Net realized gain 96,882
Unrealized appreciation
(depreciation)
on investment securities:
Beginning of period 1,824,564
End of period 75,464
----------
Change in unrealized
appreciation--net (1,749,100)
-----------
Net realized gain and change
in unrealized appreciation
(depreciation) on investments (1,652,218)
-----------
Net decrease in Net Assets
Resulting from Operations ($ 542,039)
-----------
-----------
STATEMENT OF CHANGES IN NET ASSETS
For the six For the
months year
ended ended
June 30, Dec. 31,
1999 1998
----------- -----------
INCREASE (DECREASE)
IN NET ASSETS:
- -----------------------
Operations:
Investment income--
net (Note 1) $ 1,110,179 $ 2,314,162
Realized gain on
investments--net
(Note 2) 96,882 29,104
Change in unrealized
appreciation--net (1,749,100) 487,983
----------- -----------
Net increase
(decrease)
in net assets
resulting from
operations (542,039) 2,831,249
Dividends to share-
holders from:
Investment income--
net (546,598) (2,251,982)
Cost of shares
purchased pursuant to
Section 23 of the
Investment Company
Act of 1940 (Note 5) -- --
----------- -----------
Total increase
(decrease) in net
assets (1,088,637) 579,267
NET ASSETS:
- -----------------------
Beginning of period 41,069,098 40,489,831
----------- -----------
End of period
(including
undistributed
(overdistributed) net
investment income of
$506,296 and
($57,285) in 1999 and
1998, respectively) $39,980,461 $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 six
months For the year ended
ended ---------------------------------------------------------
6/30/99 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 .51 1.06 1.08 1.11 1.14
Net gain (loss) on securities
(realized and unrealized) (.75) .23 .38 (.64) 2.05
------- ------ ------ ------ ------
Total from investment
operations (.24) 1.29 1.46 .47 3.19
------- ------ ------ ------ ------
Less Dividends and
Distributions:
Dividends from net investment
income (.25) (1.03) (1.17) (1.18) (1.12)
Distribution from realized
gains on investments -- -- -- -- --
------- ------ ------ ------ ------
Total dividends and
distributions (.25) (1.03) (1.17) (1.18) (1.12)
------- ------ ------ ------ ------
Treasury stock transaction -- -- .00 -- --
------- ------ ------ ------ ------
Net asset value, end of period $ 18.29 $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 (3.80%) 5.55% 14.51% 5.68% 17.04%
Ratios To Average Net Assets:
Expenses 0.53% 0.97% 1.08% 1.07% 1.08%
Net investment income 2.73% 5.62% 5.89% 6.02% 6.26%
Supplemental Data:
Net assets at end of period
(000 omitted) $39,980 $41,069 $40,490 $39,887 $41,452
Portfolio turnover rate 4.56% 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
June 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 June 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 $249,501 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)
June 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 June 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 $6,871,154 and $8,349,268, respectively.
(5) CAPITAL STOCK:
At June 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.
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.
- ------------------------------------------------------
Excelsior
Income Shares,
Inc.
Semi-Annual Report
June 30, 1999
- ------------------------------------------------------
