<PAGE>
DEAR FELLOW SHAREHOLDERS:
Net investment income for the full year and for the fourth quarter was
$2,314,162 and $549,590, respectively. A dividend of $.27 was declared on
December 2, 1998 payable January 29, 1999 to holders of record December 18,
1998. We have been advised that 6.09% of 1998 dividend income is deemed to have
been derived from interest earned on U.S. federal obligations.
Shareholders should bear in mind that our fund could properly be
characterized as a bond masquerading as a stock. We are happy with that rather
stodgy description since it warns investors that Excelsior is NOT intended to be
a performance fund. Our goal is to provide steady income from a top quality
highly liquid bond portfolio. We hope that shareholders have been fortunate
enough to have profited mightily from the Internet stocks, while relying on our
safe haven as an income source.
From time to time, shareholders have suggested that Excelsior should trade
more actively, in the hope of increasing profits. That really is not our style.
An account can be actively managed without substantial amounts of turnover. In
fact, trading can hurt returns because every transaction has a price. In a
closed end fund, both the buy and sell decisions have to be right, or we will
lose money for investors. For the record, Excelsior has provided a total return
better than the Lehman Intermediate Aggregate Index for one, three and five
years. Our duration is very similar to that index. We feel comfortable with
those results.
It is a time of year when soothsayers try to predict the future. For what
it is worth, we have a few thoughts about the year ahead: Inflation should stay
low; our economic engine may slow, thus hurting corporate profits; interest
rates aren't expected to provide a lot of drama, but the rest of the world could
well have some nasty surprises for investors. The Internet stocks seem to have a
market that is unique in memory; at some point even Amazon.com, Inc., will have
to demonstrate at least the possibility of growing earnings rather than losses.
It is quite possible that the "new era" believers will find some old truths
still are valid.
In any case, we are not going to evolve into "Excelsior.com", and we hope
that our shareholders will take comfort from that fact.
All good wishes for the New Year!
Sincerely yours,
/s/ Townsend Brown II
Townsend Brown II
Chairman and President
January 4, 1999
1
<PAGE>
Excelsior Income Shares, Inc.
SCHEDULE OF INVESTMENTS
December 31, 1998 (Note 1)
<TABLE>
<CAPTION>
U.S. GOVERNMENT AND FEDERAL Moody's
AGENCIES OBLIGATIONS--55.83% 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 $ 2,526,573
7.50%, 7/25/20 (1) 1,149,923 1,138,334 1,153,419
6%, 4/1/28 (1) 3,000,000 2,950,781 2,961,267
Federal National Mortgage Assn., Global Bond,
8.50%, 2/1/05 1,600,000 1,600,000 1,657,854
Government National Mortgage Assn.,
6%, 7/20/27 (1) 711,747 715,195 720,090
6%, 11/20/28 (1) 3,015,000 2,970,246 2,984,850
7%, 5/15/22 (1) 231,270 230,980 236,545
7%, 4/15/23 (1) 2,715,355 2,717,052 2,777,293
7%, 5/15/23 (1) 639,133 637,236 653,712
7%, 3/15/24 (1) 1,407,620 1,392,664 1,439,727
7.50%, 12/15/25 (1) 777,913 776,698 801,982
8%, 8/15/24 (1) 1,046,523 1,040,800 1,087,076
8%, 1/15/25 (1) 872,396 843,498 906,202
8.50%, 7/15/17 (1) 795,536 815,798 843,269
8.50%, 5/15/21 (1) 356,895 365,985 378,309
10%, 1/15/18 (1) 648,301 703,508 707,661
U.S. Treasury Bond,
7.25%, 5/15/16 (1) 1,000,000 975,000 1,213,125
----------- ----------- -----------
22,467,612 22,297,720 23,048,954
----------- ----------- -----------
<CAPTION>
BONDS AND NOTES--29.87%
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
DuPont (EI) de Nemours & Co., Notes,
8.25%, 9/15/06 Aa2 1,500,000 1,495,875 1,780,523
Ford Motor Credit
6.125, 1/9/06 A1 2,000,000 1,989,980 2,039,920
KFW International Finance Inc., Notes,
7.20%, 3/15/14 Aaa 2,000,000 1,978,500 2,241,075
Republic N.Y. Corp., Notes,
7.75%, 5/15/09 A1 1,800,000 1,806,138 1,997,653
Wachovia Corp. Sub. Notes,
6.375%, 2/1/09 A1 2,000,000 1,997,400 2,093,872
Wisconsin Elec. Power Co.,
7.25%, 8/1/04 Aa2 2,000,000 1,988,600 2,176,780
----------- ----------- -----------
11,300,000 11,256,493 12,329,823
----------- ----------- -----------
<CAPTION>
SHORT-TERM HOLDINGS--14.30%
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Dreyfus Government Cash Management Fund 1,900,000 1,900,000 1,900,000
Federal National Mortgage Assn., Disc. Note 2/12/99 3,000,000 2,972,027 2,972,027
Fidelity U.S. Treasury Cash Management Fund 1,031,995 1,031,995 1,031,995
----------- ----------- -----------
5,931,995 5,904,022 5,904,022
----------- ----------- -----------
TOTAL INVESTMENTS IN SECURITIES $39,699,607 $39,458,235 $41,282,799
----------- ----------- -----------
----------- ----------- -----------
</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, 1998 (Note 1)
The aggregate market value at December 31, 1998 for the long-term holdings in
terms of Quality Ratings is as follows:
Rating** Value Percent
--------------- ----------- -------
Aaa (1) $25,290,029 71.48
A1 6,131,445 17.33
Aa2 3,957,303 11.19
----------- -------
Total $35,378,777 100.00
----------- -------
----------- -------
(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 $ 1,824,564
Aggregate gross unrealized
depreciation --
-----------
Net unrealized appreciation $ 1,824,564
-----------
-----------
Cost for Federal Income Tax
Purposes $39,458,235
-----------
-----------
**Credit ratings are unaudited.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
ASSETS:
- -------------------------------------------------
Investments (Note 1) in securities
at value (identified
cost $39,458,235):
U.S. Government and
Federal Agencies
obligations $23,048,954
Bonds and notes 12,329,823
Short-term holdings 5,904,022
-----------
Total Investments $41,282,799
Cash 1,075
Interest receivable 458,265
Prepaid expenses 12,041
-----------
Total Assets 41,754,180
-----------
LIABILITIES:
- -------------------------------------------------
Dividend payable 590,326
Accrued advisory fee (Note 3) 58,602
Accrued operating expenses 36,154
-----------
Total Liabilities 685,082
-----------
Net Assets $41,069,098
-----------
-----------
NET ASSETS consist of:
Distribution in excess of net
investment income $ (57,285)
Accumulated net realized losses
from investment transactions (346,383)
Unrealized appreciation on
investments 1,824,564
Capital shares (Note 5) 21,864
Additional paid-in capital 39,626,338
-----------
$41,069,098
-----------
-----------
Net Asset Value per share
($41,069,098 / 2,186,391 shares) $18.78
------
------
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, 1998
(Note 1)
INVESTMENT INCOME:
- -------------------------------------------------
INCOME--Interest $2,712,858
EXPENSES:
Investment advisory fee $187,157
Directors' fees and
expenses 32,219
Officer's salary 47,398
Postage and printing 34,000
Professional fees 18,965
Insurance 22,152
Transfer agent and
registrar fees 19,998
The New York Stock
Exchange, Inc.--annual
fee 15,706
Miscellaneous 21,101
--------
Total expenses 398,696
----------
Investment Income--Net 2,314,162
----------
REALIZED GAIN AND UNREALIZED APPRECIATION
(DEPRECIATION) ON INVESTMENTS--NET:
- -------------------------------------------------
Realized gain from security
transactions (excluding
short-term securities):
Proceeds from sales $5,191,867
Cost of sales 5,162,763
----------
Net realized gain 29,104
Unrealized appreciation
(depreciation) on
investment securities:
Beginning of period 1,336,581
End of period 1,824,564
----------
Change in unrealized
appreciation--net 487,983
----------
Net realized gain and change
in unrealized appreciation
(depreciation) on investments 517,087
----------
Net Increase in Net Assets
Resulting from Operations $2,831,249
----------
----------
STATEMENT OF CHANGES IN NET ASSETS
For the For the
year year
ended ended
Dec. 31, Dec. 31,
1998 1997
----------- -----------
INCREASE (DECREASE)
IN NET ASSETS:
- -----------------------
Operations:
Investment income--
net (Note 1) $ 2,314,162 $ 2,371,900
Realized gain/(loss) on
investments--net
(Note 2) 29,104 (14,361)
Change in unrealized
appreciation--net 487,983 835,219
----------- -----------
Net increase
in net assets
resulting from
operations 2,831,249 3,192,758
Dividends to share-
holders from:
Investment income--
net (2,251,982) (2,559,157)
Cost of shares
purchased pursuant
to Section 23 of
the Investment
Company Act of 1940
(Note 5) -- (30,805)
----------- -----------
Total increase in
net assets 579,267 602,796
NET ASSETS:
- -----------------------
Beginning of year 40,489,831 39,887,035
----------- -----------
End of year
(including
distribution in
excess of net
investment income
of ($57,285) and
($106,102) in
1998 and 1997,
respectively) $41,069,098 $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 year ended
--------------------------------------------------------------------------------
1998 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 1.06 1.08 1.11 1.14 1.06
Net gain (loss) on securities
(realized and unrealized) .23 .38 (.64) 2.05 (2.00)
------ ------ ------ ------ ------
Total from investment operations 1.29 1.46 .47 3.19 (.94)
------ ------ ------ ------ ------
Less Dividends and Distributions:
Dividends from net investment income (1.03) (1.17) (1.18) (1.12) (1.03)
Distribution from realized
gains on investments -- -- -- -- (.16)
------ ------ ------ ------ ------
Total dividends and distributions (1.03) (1.17) (1.18) (1.12) (1.19)
------ ------ ------ ------ ------
Treasury stock transaction -- .00 -- -- .03
------ ------ ------ ------ ------
Net asset value, end of period $18.78 $18.52 $18.23 $18.94 $16.87
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Market value per share, end of period $16.56 $16.75 $15.75 $16.00 $14.63
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total Investment Return:
Based on market value per share 5.55% 14.51% 5.68% 17.04% (8.64%)
Ratios To Average Net Assets:
Expenses .97% 1.08% 1.07% 1.08% 1.15%
Net investment income 5.62% 5.89% 6.02% 6.26% 5.92%
Supplemental Data:
Net assets at end of period
(000 omitted) $41,069 $40,490 $39,887 $41,452 $36,928
Portfolio turnover rate 15.88% 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
December 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 December 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 $69,065 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, 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.
6
<PAGE>
Excelsior Income Shares, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
December 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.
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 December 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
$5,921,024 and $5,191,867, respectively.
(5) CAPITAL STOCK:
At December 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.
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
EXCELSIOR INCOME SHARES, INC.:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of operations
and of changes in net assets and financial highlights present fairly, in all
material respects, the financial position of Excelsior Income Shares, Inc. (the
"Fund"), as of December 31, 1998, the results of its operations for the year
then ended, the changes in its net assets and the financial highlights for the
five years presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. The financial highlights for the year 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, which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities owned at December 31, 1998 by correspondence with the custodian,
provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 22, 1999.
8
<PAGE>
ADDITIONAL INFORMATION:
On June 17, 1997, the Board of Directors approved certain amendments to the
Company's by-laws. The amendments relate to the presentation of proposals at
regular and special meetings of shareholders of the Company. Such proposals
include any business to be brought at an annual or special meeting of
shareholders, including nomination of persons for election to the Board of
Directors. A summary of the amendments follows. The summary is qualified in its
entirety by the text of the by-laws, a copy of which is available upon request.
For business to be brought by a shareholder, such shareholder must give
timely written notice thereof in proper written form (the "Notice") to the
Secretary of the Company. For an annual meeting, the Notice must be delivered to
or mailed and received at the principal executive offices of the Company not
less than sixty (60) days nor more than ninety (90) days prior to the
anniversary date of the immediately preceding annual meeting of shareholders;
provided, however, that in the event that the annual meeting is called for a
date that is not within thirty (30) days before or after such anniversary date,
the Notice must be so received not later than the close of business on the tenth
(10th) day following the day on which notice of the date of the annual meeting
was mailed or public disclosure of the date of the annual meeting was made,
whichever first occurs. For a special meeting, the Notice must be delivered to
or mailed and received at the principal executive offices of the Company not
less than sixty (60) days nor more than ninety (90) days prior to such special
meeting or the tenth (10th) day following the day on which public announcement
is first made of the date of the special meeting.
Where the business relates to a shareholder's nomination of a person for
election to the Board of Directors, to be in proper form the Notice must set
forth certain information relating to the shareholder and the shareholder's
proposed nominee. For other business brought by a shareholder, the Notice must
provide a brief description of the business to be brought before the annual or
special meeting and the reasons for conducting such business, as well as
information relating to the shareholder.
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.
9
<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.
Annual Report
December 31, 1998
- --------------------------------------------------------------------------------
