DEAR FELLOW SHAREHOLDERS:
Net investment income for the full year and for the fourth quarter was
$2,316,836 and $595,468, respectively. A dividend of $.30 was declared on
December 4, 2000 payable January 26, 2001 to holders of record December 22,
2000. We have been advised that 8.35% of 2000 dividend income is deemed to have
been derived from interest earned on U.S. federal obligations.
This is a good time to reaffirm our basic goals as a company. We offer a
source of safe dividends derived from a portfolio of excellent quality, liquid
bonds, generally bought below par. No shareholder should look to this fund for
performance; stability, is our mission and our promise.
It is also important for investors to remember that closed-end funds
generally sell at a discount from net asset value. That discount acts as
something of an insurance policy to our investors; they are likely to get their
asset value back in the event of liquidation. From time to time so-called
advisors urge us to open-end the fund or dissolve it. The first change would be
economically unsound and the second would strand faithful shareholders. Neither
is going to happen!
Too much has been written about the nature of the "landing" coming in 2001.
We suggest that no one can make a valid prediction and urge our shareholders to
take a hard look at the possible conflicts of interest many of the self-styled
"experts" face.
Our fund approaches the new year intact and we plan to stay that way. It
makes no difference to our essential ethos what name we use or what
advisor/administrator we hire. Both may change, but they are matters of form,
not substance.
We close with an admonition appropriate both specifically to ourselves and
to the world at large. The words are from the Prophet Isaiah:
"Be mindful of the rock whence ye were hewn,
For it is the source of thy strength."
Sincerely,
/s/ Townsend Brown II
Townsend Brown II
Chairman and President
December 31, 2000
Excelsior Income Shares, Inc.
SCHEDULE OF INVESTMENTS
December 31, 2000 (Note 1)
U.S. GOVERNMENT AND FEDERAL Moody's
AGENCIES OBLIGATIONS--53.79% Rating** Face Amount Cost* Value
--------------------------------------------------------------------------------------------------------
Federal National Mortgage Assn., Deb.,
6%, 3/1/28 (1) $ 2,565,022 $ 2,522,939 $ 2,481,312
Government National Mortgage Assn.,
6%, 11/20/28 (1) 2,700,413 2,660,329 2,611,440
7%, 5/15/22 (1) 181,934 181,707 182,706
7%, 4/15/23 (1) 2,161,884 2,163,236 2,171,051
7%, 5/15/23 (1) 454,208 452,860 456,134
7%, 3/15/24 (1) 1,010,710 999,971 1,014,995
7%, 7/20/29 (1) 3,692,152 3,641,530 3,689,346
7.50%, 12/15/25 (1) 506,206 505,415 514,521
7,75%, 7/20/27 (1) 293,519 294,940 299,810
8%, 8/15/24 (1) 579,743 576,572 593,977
8%, 1/15/25 (1) 468,758 453,230 480,266
8%, I, 4/15/30 (1) 972,869 978,341 996,755
8%, II, 3/20/30 (1) 1,875,626 1,889,108 1,915,230
8%, II, 4/20/30 (1) 1,885,362 1,894,199 1,925,171
8.50%, 7/15/17 (1) 417,726 428,365 430,145
8.50%, 5/15/21 (1) 177,334 181,850 182,606
10%, 1/15/18 (1) 373,958 405,802 393,123
U.S. Treasury Bond,
7.25%, 5/15/16 (1) 1,000,000 975,000 1,177,252
----------- ----------- -----------
21,317,424 21,205,394 21,515,840
----------- ----------- -----------
BONDS AND NOTES--34.16%
--------------------------------------------------------------------------------------------------------
Chase Manhattan Bank, Notes,
7.875%, 6/15/10 A1 2,000,000 2,051,140 2,109,864
Commercial Mortgage Asset Trust,
6.64%, 9/17/10 Aaa 1,000,000 1,012,969 1,013,697
DuPont (EI) de Nemours & Co., Notes,
8.25%, 9/15/06 Aa2 1,500,000 1,495,875 1,650,467
Ford Motor Credit,
6.125%, 1/9/06 A1 2,000,000 1,989,980 1,929,186
KFW International Finance Inc., Notes,
7.20%, 3/15/14 Aaa 2,000,000 1,978,500 2,033,282
Nationslink Funding Corp.,
6.476%, 7/20/08 Aaa 1,000,000 1,014,414 1,008,272
Republic N.Y. Corp., Notes,
7.75%, 5/15/09 A1 1,800,000 1,806,138 1,860,160
Wisconsin Elec. Power Co.,
7.25%, 8/1/04 Aa2 2,000,000 1,988,600 2,055,708
----------- ----------- -----------
13,300,000 13,337,616 13,660,636
----------- ----------- -----------
SHORT-TERM HOLDINGS--12.05%
--------------------------------------------------------------------------------------------------------
Dreyfus Government Cash Management Fund 1,800,000 1,800,000 1,800,000
Federal Home Loan Banks, Disc. Note 4/12/01 2,000,000 1,966,406 1,966,406
Fidelity Treasury Cash Portfolio 1,053,485 1,053,485 1,053,485
----------- ----------- -----------
4,853,485 4,819,891 4,819,891
----------- ----------- -----------
TOTAL INVESTMENTS IN SECURITIES $39,470,909 $39,362,901 $39,996,367
=========== =========== ===========
---------------
Percentages are based on total investments.
The accompanying notes are an integral part of this schedule.
2
Excelsior Income Shares, Inc.
SCHEDULE OF INVESTMENTS (continued)
December 31, 2000 (Note 1)
The aggregate market value at December 31, 2000 for the long-term holdings in
terms of Quality Ratings is as follows:
Rating** Value Percent
-------- ----- -------
Aaa (1) $25,571,091 72.69
Aa2 3,706,175 10.54
A1 5,899,210 16.77
----------- ------
Total $35,176,476 100.00
=========== ======
(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 $ 803,596
Aggregate gross unrealized
depreciation (170,130)
-----------
Net unrealized appreciation $ 633,466
===========
Cost for Federal Income Tax
Purposes $39,362,901
===========
**Credit ratings are unaudited.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2000
ASSETS:
------------------------------
Investments (Note 1) in securities at value (identified cost $39,362,901):
U.S. Government and
Federal Agencies
obligations $21,515,840
Bonds and notes 13,660,636
Short-term holdings 4,819,891
-----------
Total Investments $39,996,367
Cash 5,289
Interest receivable 373,753
Prepaid expenses 8,913
-----------
Total Assets 40,384,322
-----------
LIABILITIES:
------------------------------
Dividend payable 650,727
Accrued advisory fee (Note 3) 50,974
Accrued operating expenses 42,464
-----------
Total Liabilities 744,165
-----------
Net Assets $39,640,157
===========
NET ASSETS consist of:
Undistributed net investment
income $ 11,877
Accumulated net realized losses
from investment transactions (412,769)
Unrealized appreciation on
investments 633,466
Capital shares (Note 5) 21,691
Additional paid-in capital 39,385,892
-----------
$39,640,157
===========
Net Asset Value per share
($39,640,157 / 2,169,091 shares) $18.28
======
The accompanying notes are an integral part of this statement.
3
Excelsior Income Shares, Inc.
STATEMENT OF OPERATIONS
for the year ended December 31, 2000
(Note 1)
INVESTMENT INCOME:
------------------------------
INCOME--Interest $ 2,727,000
EXPENSES:
Investment advisory fee $191,950
Directors' fees and
expenses 35,699
Officer's salary 46,340
Postage and printing 44,999
Professional fees 29,999
Insurance 20,708
Transfer agent and
registrar fees 7,900
The New York Stock
Exchange, Inc.--
annual fee 16,170
Miscellaneous 16,399
---------
Total expenses 410,164
-----------
Investment Income--Net 2,316,836
-----------
REALIZED (LOSS) AND UNREALIZED APPRECIATION
(DEPRECIATION) ON INVESTMENTS--NET:
------------------------------
Realized (loss) from security
transactions (excluding
short-term securities):
Proceeds from sales $5,421,618
Cost of sales 5,560,685
----------
Net realized loss (139,067)
Unrealized appreciation
(depreciation)
on investment securities:
Beginning of year (882,623)
End of year 633,466
----------
Change in unrealized
appreciation--net 1,516,089
-----------
Net realized (loss) and change
in unrealized appreciation
(depreciation) on investments 1,377,022
-----------
Net increase in Net Assets
Resulting from Operations $ 3,693,858
===========
STATEMENT OF CHANGES IN NET ASSETS
For the year For the year
ended ended
Dec. 31, 2000 Dec. 31, 1999
------------- -------------
INCREASE (DECREASE)
IN NET ASSETS:
-----------------------
Operations:
Investment income--
net (Note 1) $ 2,316,836 $ 2,234,226
Realized (loss)/gain
on investments--net
(Note 2) (139,067) 86,337
Change in unrealized
appreciation--net 1,516,089 (2,707,187)
----------- -----------
Net increase
(decrease)
in net assets
resulting from
operations 3,693,858 (386,624)
Dividends to share-
holders from:
Investment income--
net (2,279,870) (2,200,677)
Cost of shares
purchased pursuant to
Section 23 of the
Investment Company
Act of 1940 (Note 5) (56,530) (199,098)
----------- -----------
Total increase
(decrease) in net
assets 1,357,458 (2,786,399)
NET ASSETS:
-----------------------
Beginning of year 38,282,699 41,069,098
----------- -----------
End of year (including
undistributed
(overdistributed) net
investment income of
$11,877 and ($23,736)
in 2000 and 1999,
respectively) $39,640,157 $38,282,699
=========== ===========
The accompanying notes are an integral part of these statements.
4
Excelsior Income Shares, Inc.
FINANCIAL HIGHLIGHTS
For the year ended
-----------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
Per Share Operating Performance:
Net asset value, beginning of year $ 17.62 $ 18.78 $ 18.52 $ 18.23 $ 18.94
------- ------- ------- ------- -------
Net investment income 1.07 1.03 1.06 1.08 1.11
Net gain (loss) on securities
(realized and unrealized) .63 (1.20) .23 .38 (.64)
------- ------- ------- ------- -------
Total from investment operations 1.70 (.17) 1.29 1.46 .47
------- ------- ------- ------- -------
Less Dividends and Distributions:
Dividends from net investment income (1.05) (1.01) (1.03) (1.17) (1.18)
------- ------- ------- ------- -------
Total dividends and distributions (1.05) (1.01) (1.03) (1.17) (1.18)
------- ------- ------- ------- -------
Treasury stock transaction .01 .02 -- .00 --
------- ------- ------- ------- -------
Net asset value, end of year $ 18.28 $ 17.62 $ 18.78 $ 18.52 $ 18.23
======= ======= ======= ======= =======
Market value per share, end of year $15.875 $ 14.25 $ 16.56 $ 16.75 $ 15.75
======= ======= ======= ======= =======
Total Investment Return:
Based on market value per share 19.02% (8.39%) 5.55% 14.51% 5.68%
Ratios To Average Net Assets:
Expenses 1.06% 1.05% 0.97% 1.08% 1.07%
Net investment income 5.97% 5.60% 5.62% 5.89% 6.02%
Supplemental Data:
Net assets at end of year
(000 omitted) $39,640 $38,283 $41,069 $40,490 $39,887
Portfolio turnover rate 15.87% 16.09% 15.88% 2.91% 5.50%
The accompanying notes are an integral part of this schedule.
5
Excelsior Income Shares, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 2000
--------------------------------------------------------------------------------
(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, 2000, 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 $412,769 expiring in varying amounts
through December 31, 2008, 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.
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.
6
Excelsior Income Shares, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2000
--------------------------------------------------------------------------------
(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.
The Advisor has informed the Company that it does not intend to renew the
advisory agreement. The Company's Board is in the process of selecting a new
investment advisor.
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, 2000, purchases and proceeds from sales of
securities other than short-term United States Government and Federal Agencies
obligations aggregated $2,051,140 and $1,851,400, respectively. Purchases and
proceeds from sales of United States Government and Federal Agencies obligations
aggregated $5,029,074 and $3,570,218, respectively.
(5) CAPITAL STOCK:
At December 31, 2000, 2,169,091 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
year ended December 31, 1999, the Company purchased 13,300 shares in the open
market at a cost of $199,098. For the year ended December 31, 2000, the Company
purchased 4,000 shares in the open market at a cost of $56,530.
7
Excelsior Income Shares, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2000
--------------------------------------------------------------------------------
(6) REVISED AICPA AUDIT AND ACCOUNTING GUIDE:
In November 2000, a revised AICPA Audit and Accounting Guide, Audits of
Investment Companies, was issued, and is effective for fiscal years beginning
after December 15, 2000. The revised Guide will require the Company to amortize
premium and discount on all fixed-income securities, and classify gains and
losses realized on prepayments received on mortgage-backed securities presently
included in realized gain/loss, as part of interest income. Upon initial
adoption, the Company will be required to adjust the cost of its fixed-income
securities by the cumulative amount of amortization that would have been
recognized had amortization been in effect from the purchase date of each
holding. Adopting these accounting principles will not affect the Company's net
asset value, but will change the classification of certain amounts between
interest income and realized and unrealized gain/loss in the Statement of
Operations.
Had the Company included paydown gains and losses in interest income in its
Statement of Operations for the year ended December 31, 2000, net investment
income would have increased by $7,293, and realized loss on investments would
have increased by the same amount. The Company expects that the impact of the
adoption of premium and discount amortization will not be material to the
financial statements.
8
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"), at December 31, 2000, 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 each of the five years in the period
then ended, in conformity with accounting principles generally accepted in the
United States of America. 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 of America, 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 at December 31, 2000 by
correspondence with the custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
February 2, 2001
9
EXCELSIOR INCOME SHARES, INC.
114 W. 47th Street, 14th Floor
New York, NY 10036-1532
(212) 852-3732
DIRECTORS
Townsend Brown II
Geoffrey J. O'Connor
John H. Reilly
Perry W. Skjelbred
Philip J. Tilearcio
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.
------------------------------------------------------
Excelsior
Income Shares,
Inc.
Annual Report
December 31, 2000
------------------------------------------------------