DEAR FELLOW SHAREHOLDERS:
Net investment income for the full year and for the fourth quarter was
$2,234,226 and $552,647, respectively. A dividend of $.26 was declared on
December 1, 1999 payable January 28, 2000 to holders of record December 23,
1999. We have been advised that 6.17% of 1999 dividend income is deemed to have
been derived from interest earned on U.S. federal obligations.
Jim O'Leary, a founder of Excelsior, has retired. We shall miss his
consistent good sense, good humor, and good company. The word "good" doesn't
apply to very many people; Jim has earned that description in all his many walks
of life. One of his skills is little known; he played professional baseball. As
far as all of us are concerned, Jim will be long remembered as our "designated
hitter."
Geoffrey O'Connor has joined our board. He is an expert tax and estate
attorney who started his legal career in the Tax Court and has, along the way,
appeared before the Supreme Court of the United States. After being a member of
a large firm in New York City, Geoff moved to his own practice several years
ago. We welcome his educated insight.
There is no way that anyone would pass up a chance to make predictions for
this New Year. So here goes:
The genius of America is our "can do" optimism. That spirit should
underwrite our continuing run as the successor to the British Empire. For now,
we rule the roost, and it would be a real error to bet against us. The world is
on a dollar standard, and we are strong enough so that the next election really
doesn't matter. Other countries are worried about feeding their citizens; we
debate about the budget surplus!
How will it end? Certainly there will be stock market swings. After all
e-commerce amounts to only about 12 billion out of a total of three trillion
dollars of consumption spending. The annual revenues of Amazon were not much
bigger than Wal-Mart's volume on the day before Thanksgiving. Valuation excesses
will change--the fancy way to put it is that "markets regress to the mean."
So what? All sorts of handwringers will look smart for a while. There will
surely be still another paradigm to replace the supposedly "new" one which rules
today. But the American run won't end until we lose the will to squelch the
barbarians, many of whom are already within our walls.
It's been a great run; we've got a good long way to go.
HAPPY NEW YEAR!
Sincerely,
/s/ Townsend Brown II
Townsend Brown II
Chairman and President
January 7, 2000
1
<PAGE>
Excelsior Income Shares, Inc.
SCHEDULE OF INVESTMENTS
December 31, 1999 (Note 1)
<TABLE>
<CAPTION>
U.S. GOVERNMENT AND FEDERAL Moody's
AGENCIES OBLIGATIONS--49.89% Rating** Face Amount Cost* Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal National Mortgage Assn., Deb.,
6%, 4/1/28 (1) $ 2,820,809 $ 2,774,530 $ 2,582,510
Federal National Mortgage Assn., Global Bond,
8.50%, 2/1/05 1,600,000 1,600,000 1,602,650
Government National Mortgage Assn.,
6%, 7/20/27 (1) 409,893 411,878 411,822
6%, 11/20/28 (1) 2,901,529 2,858,459 2,633,779
7%, 5/15/22 (1) 186,724 186,491 180,442
7%, 4/15/23 (1) 2,369,725 2,371,206 2,289,993
7%, 5/15/23 (1) 524,769 523,211 507,110
7%, 3/15/24 (1) 1,198,895 1,186,157 1,158,557
7%, 7/20/29 (1) 3,955,274 3,901,043 3,811,120
7.50%, 12/15/25 (1) 582,632 581,722 576,563
8%, 8/15/24 (1) 653,973 650,397 660,990
8%, 1/15/25 (1) 558,962 540,446 564,959
8.50%, 7/15/17 (1) 509,424 522,398 524,123
8.50%, 5/15/21 (1) 191,896 196,783 197,433
10%, 1/15/18 (1) 423,795 459,884 459,746
U.S. Treasury Bond,
7.25%, 5/15/16 (1) 1,000,000 975,000 1,045,313
----------- ----------- -----------
19,888,300 19,739,605 19,207,110
----------- ----------- -----------
<CAPTION>
BONDS AND NOTES--33.60%
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial Mortgage Asset Trust,
6.64%, 4/17/10 Aaa 1,000,000 1,012,969 935,910
DuPont (EI) de Nemours & Co., Notes,
8.25%, 9/15/06 Aa2 1,500,000 1,495,875 1,567,019
Ford Motor Credit,
6.125, 1/9/06 A1 2,000,000 1,989,980 1,871,262
KFW International Finance Inc., Notes,
7.20%, 3/15/14 Aaa 2,000,000 1,978,500 1,974,910
Nationslink Funding Corp.,
6.476%, 7/20/08 Aaa 1,000,000 1,014,414 938,090
Republic N.Y. Corp., Notes,
7.75%, 5/15/09 A1 1,800,000 1,806,138 1,786,495
Wachovia Corp. Sub. Notes,
6.375%, 2/1/09 A1 2,000,000 1,997,400 1,852,342
Wisconsin Elec. Power Co.,
7.25%, 8/1/04 Aa2 2,000,000 1,988,600 2,007,720
----------- ----------- -----------
13,300,000 13,283,876 12,933,748
----------- ----------- -----------
<CAPTION>
SHORT-TERM HOLDINGS--16.51%
- --------------------------------------------------------------------------------------------------------
<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
1/13/00 4,000,000 3,992,567 3,992,567
Fidelity Cash Management Fund 461,578 461,578 461,578
----------- ----------- -----------
6,361,578 6,354,145 6,354,145
----------- ----------- -----------
TOTAL INVESTMENTS IN SECURITIES $39,549,878 $39,377,626 $38,495,003
=========== =========== ===========
</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, 1999 (Note 1)
The aggregate market value at December 31, 1999 for the long-term holdings in
terms of Quality Ratings is as follows:
Rating** Value Percent
--------------- ----------- -------
Aaa (1) $23,056,020 71.74
Aa2 3,574,739 11.12
A1 5,510,099 17.14
----------- -------
Total $32,140,858 100.00
=========== =======
(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 $ 200,706
Aggregate gross unrealized
depreciation (1,083,329)
-----------
Net unrealized depreciation ($ 882,623)
===========
Cost for Federal Income Tax
Purposes $39,377,626
===========
**Credit ratings are unaudited.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1999
ASSETS:
- ------------------------------
Investments (Note 1) in securities
at value (identified
cost $39,377,626):
U.S. Government and
Federal Agencies
obligations $19,207,110
Bonds and notes 12,933,748
Short-term holdings 6,354,145
-----------
Total Investments $38,495,003
Cash 1,822
Interest receivable 450,991
Prepaid expenses 7,850
-----------
Total Assets 38,955,666
-----------
LIABILITIES:
- ------------------------------
Dividend payable 565,784
Accrued advisory fee (Note 3) 52,396
Accrued operating expenses 54,787
-----------
Total Liabilities 672,967
-----------
Net Assets $38,282,699
===========
NET ASSETS consist of:
Overdistributed net investment
income ($ 23,736)
Accumulated net realized losses
from investment transactions (260,046)
Unrealized appreciation on
investments (882,623)
Capital shares (Note 5) 21,731
Additional paid-in capital 39,427,373
-----------
$38,282,699
===========
Net Asset Value per share
($38,282,699 / 2,173,091 shares) $17.62
===========
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, 1999
(Note 1)
INVESTMENT INCOME:
- ------------------------------
INCOME--Interest $ 2,654,806
EXPENSES:
Investment advisory fee $193,272
Directors' fees and
expenses 34,561
Officer's salary 51,827
Postage and printing 28,958
Professional fees 30,120
Insurance 23,853
Transfer agent and
registrar fees (8,838)
The New York Stock
Exchange, Inc.--
annual fee 15,969
Miscellaneous 50,858
---------
Total expenses 420,580
-----------
Investment Income--Net 2,234,226
-----------
REALIZED GAIN AND UNREALIZED APPRECIATION
(DEPRECIATION) ON INVESTMENTS--NET:
- ------------------------------
Realized gain from security
transactions
(excluding short-term securities):
Proceeds from sales $9,515,506
Cost of sales 9,429,169
----------
Net realized gain 86,337
Unrealized appreciation
(depreciation) on
investment securities:
Beginning of year 1,824,564
End of year (882,623)
----------
Change in unrealized
appreciation--net (2,707,187)
-----------
Net realized gain and change
in unrealized appreciation
(depreciation) on investments (2,620,850)
-----------
Net decrease in Net Assets
Resulting from Operations ($ 386,624)
===========
STATEMENT OF CHANGES IN NET ASSETS
For the For the
year year
ended ended
Dec. 31, Dec. 31,
1999 1998
----------- -----------
INCREASE (DECREASE)
IN NET ASSETS:
- -----------------------
Operations:
Investment income--
net (Note 1) $ 2,234,226 $ 2,314,162
Realized gain on
investments--net
(Note 2) 86,337 29,104
Change in unrealized
appreciation--net (2,707,187) 487,983
----------- -----------
Net increase
(decrease)
in net assets
resulting from
operations (386,624) 2,831,249
Dividends to share-
holders from:
Investment income--
net (2,200,677) (2,251,982)
Cost of shares
purchased pursuant to
Section 23 of the
Investment Company
Act of 1940 (Note 5) (199,098) --
----------- -----------
Total increase
(decrease) in net
assets (2,786,399) 579,267
NET ASSETS:
- -----------------------
Beginning of year 41,069,098 40,489,831
----------- -----------
End of year (including
(overdistributed) net
investment income of
($23,736) and
($57,285) in 1999 and
1998, respectively) $38,282,699 $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 year ended
-------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value, beginning of
year $ 18.78 $ 18.52 $ 18.23 $ 18.94 $ 16.87
------- ------- ------- ------- -------
Net investment income 1.03 1.06 1.08 1.11 1.14
Net gain (loss) on securities
(realized and unrealized) (1.20) .23 .38 (.64) 2.05
------- ------- ------- ------- -------
Total from investment
operations (.17) 1.29 1.46 .47 3.19
------- ------- ------- ------- -------
Less Dividends and
Distributions:
Dividends from net investment
income (1.01) (1.03) (1.17) (1.18) (1.12)
------- ------- ------- ------- -------
Total dividends and
distributions (1.01) (1.03) (1.17) (1.18) (1.12)
------- ------- ------- ------- -------
Treasury stock transaction .02 -- .00 -- --
------- ------- ------- ------- -------
Net asset value, end of year $ 17.62 $ 18.78 $ 18.52 $ 18.23 $ 18.94
======= ======= ======= ======= =======
Market value per share, end of
year $ 14.25 $ 16.56 $ 16.75 $ 15.75 $ 16.00
======= ======= ======= ======= =======
Total Investment Return:
Based on market value per share (8.39%) 5.55% 14.51% 5.68% 17.04%
Ratios To Average Net Assets:
Expenses 1.05% 0.97% 1.08% 1.07% 1.08%
Net investment income 5.60% 5.62% 5.89% 6.02% 6.26%
Supplemental Data:
Net assets at end of period
(000 omitted) $38,283 $41,069 $40,490 $39,887 $41,452
Portfolio turnover rate 16.09% 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
December 31, 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 December 31, 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 $260,046 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.
6
<PAGE>
Excelsior Income Shares, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1999
- --------------------------------------------------------------------------------
(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 year ended December 31, 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 $9,515,506, respectively.
(5) CAPITAL STOCK:
At December 31, 1999, 2,173,091 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 December 31, 1999, the Company purchased 13,300 shares in the open
market at a cost of $199,098.
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 the financial highlights present fairly, in all
material respects, the financial position of Excelsior Income Shares, Inc. (the
"Fund"), as of December 31, 1999, 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 the five years in the period
then ended, in conformity with accounting principles generally accepted in the
United States. 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. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in the
United States, 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, 1999 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 10, 2000
8
<PAGE>
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.
9
<PAGE>
10
<PAGE>
11
<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
Geoffrey J. O'Connor
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
1177 Avenue of the Americas
New York, NY 10036
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, 1999
--------------------------------------
