DEAR FELLOW SHAREHOLDERS:
The economic expansion we have experienced over the past decade lost
considerable momentum during the first half of 2001, and there is now a real
risk of a recession in the coming months. Recent corporate results have been
very disappointing, and analysts have repeatedly lowered earnings expectations
for the balance of the year. In response to these developments, the Federal
Reserve has reduced interest rates six times so far this year, and more cuts are
anticipated.
We are pleased to report that against this unsettling investment backdrop,
EIS Fund has produced an excellent total return over the past six months of more
than 11 percent, based on appreciation and reinvestment of dividends. These
results are directly due to the Fund's longstanding policy of maintaining only
high quality corporate and government bonds combined with low portfolio turnover
and moderate investment management expenses.
As you know, EIS Fund has historically sold at a market price that is lower
than its Net Asset Value. This "discount" has generally been within industry
norms for closed-end funds. Furthermore, since most of our shareholders
benefited from this discount when they purchased their shares, we consider it at
worst a moot point and arguably a modest benefit to long-term investors.
Nevertheless, certain shareholders have suggested that the Fund should endeavor
to reduce the prevailing discount by increasing our dividend to an artificially
high level, far in excess of the portfolio's income. These dissident
shareholders have also suggested large buy-backs of EIS stock in order to
temporarily inflate the market price. This same minority faction recently
solicited shareholders to remove the present Board of Directors, but received
only a small percentage of votes in support of the proposal. In addition,
another shareholder refused to vote a large block of stock, which significantly
impeded the Fund's ability to achieve a quorum at its regular Annual Meeting. As
a result, the Fund must now incur the unnecessary expense of holding a new
Annual Meeting and election this September.
The Board believes that the only cost-effective way of eliminating the
discount is to liquidate the Fund in its entirety. Accordingly, you will soon
have an opportunity to vote on a plan of liquidation, which the Board of
Directors has put on the proxy as a means of allowing shareholders to determine
the future of the Fund. As I mentioned earlier, the Board of Directors considers
this discount to be a non-issue, but will of course implement the liquidation
plan forthwith, if the requisite two-thirds of shares vote in favor of it.
If shareholders vote to continue EIS Fund and maintain the current
Directors, we will make sure that your Fund is managed with the same
conservative investment principles that have guided the Fund over the past
quarter of a century. We urge all shareholders to vote in this important matter.
Finally, I would like to take this opportunity to thank Townsend Brown, II,
who retired from his post of Chairman and President of the Fund last April,
after nine years of service. We are grateful for his dedication and keen
insight, and we hope that he remains on the Board of Directors for many years to
come.
Thank you for your confidence and support.
Sincerely,
Perry W. Skjelbred
Chairman and President
July 31, 2001
EIS Fund
SCHEDULE OF INVESTMENTS
June 30, 2001 (Note 1)
U.S. GOVERNMENT AND FEDERAL Moody's
AGENCIES OBLIGATIONS--46.72% Rating** Face Amount Cost* Value
--------------------------------------------------------------------------------------------------------
Federal National Mortgage Assn., Deb.,
6%, 3/1/28 (1) $ 2,431,000 $ 2,391,116 $ 2,336,013
Government National Mortgage Assn.,
6%, 7/20/27 (1) 197,888 198,847 203,378
6%, 11/20/28 (1) 2,531,229 2,493,656 2,443,400
7%, 5/15/22 (1) 179,491 179,267 181,260
7%, 4/15/23 (1) 2,048,925 2,050,206 2,069,115
7%, 5/15/23 (1) 408,460 407,247 412,485
7%, 3/15/24 (1) 936,322 926,374 945,549
7%, 7/20/29 (1) 3,272,917 3,228,042 3,291,873
7.50%, 12/15/25 (1) 445,603 444,907 457,374
8%, 8/15/24 (1) 501,452 498,710 519,896
8%, 1/15/25 (1) 386,023 373,236 400,221
8%, I, 4/15/30 (1) 636,962 640,545 660,390
8%, II, 3/20/30 (1) 1,335,886 1,345,487 1,380,429
8%, II, 4/20/30 (1) 1,303,488 1,309,598 1,346,952
8.50%, 7/15/17 (1) 354,873 363,910 370,809
8.50%, 5/15/21 (1) 132,759 136,140 138,720
10%, 1/15/18 (1) 321,165 348,515 336,203
U.S. Treasury Bond,
7.25%, 5/15/16 (1) 1,000,000 975,000 1,137,906
----------- ----------- -----------
18,424,443 18,310,803 18,631,973
----------- ----------- -----------
BONDS AND NOTES--15.68%
--------------------------------------------------------------------------------------------------------
Commercial Mortgage Asset Trust,
6.64%, 9/17/10 Aaa 1,000,000 1,012,969 1,006,313
KFW International Finance Inc., Notes,
7.20%, 3/15/14 Aaa 2,000,000 1,978,500 2,155,624
Nationslink Funding Corp.,
6.476%, 7/20/08 Aaa 1,000,000 1,014,414 1,000,894
Wisconsin Elec. Power Co.,
7.25%, 8/1/04 Aa2 2,000,000 1,988,600 2,089,558
----------- ----------- -----------
6,000,000 5,994,483 6,252,389
----------- ----------- -----------
SHORT-TERM HOLDINGS--37.60%
--------------------------------------------------------------------------------------------------------
Dreyfus Government Cash Management Fund 1,800,000 1,800,000 1,800,000
Federal Home Loan Banks, Disc. Note 7/2/01 2,000,000 1,992,868 1,992,868
Federal Home Loan Banks, Disc. Note 7/16/01 8,000,000 7,967,911 7,967,911
Federal Home Loan Banks, Disc. Note 7/27/01 2,000,000 1,992,231 1,992,231
Fidelity Treasury Cash Portfolio 1,243,055 1,243,055 1,243,055
----------- ----------- -----------
15,043,055 14,996,065 14,996,065
----------- ----------- -----------
TOTAL INVESTMENTS IN SECURITIES $39,467,498 $39,301,351 $39,880,427
=========== =========== ===========
---------------
Percentages are based on total investments.
The accompanying notes are an integral part of this schedule.
2
EIS Fund
SCHEDULE OF INVESTMENTS (continued)
June 30, 2001 (Note 1)
The aggregate market value at June 30, 2001 for the long-term holdings in terms
of Quality Ratings is as follows:
Rating** Value Percent
--------------- ----------- -------
Aaa (1) $22,794,804 91.60
Aa2 2,089,558 8.40
----------- -------
Total $24,884,362 100.00
=========== =======
(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 $ 716,923
Aggregate gross unrealized
depreciation (137,847)
-----------
Net unrealized appreciation $ 579,076
===========
Cost for Federal Income Tax
Purposes $39,301,351
===========
**Credit ratings are unaudited.
STATEMENT OF ASSETS AND LIABILITIES
June 30, 2001
ASSETS:
------------------------------
Investments (Note 1) in securities
at value (identified
cost $39,301,351):
U.S. Government and
Federal Agencies
obligations $18,631,973
Bonds and notes 6,252,389
Short-term holdings 14,996,065
-----------
Total Investments $39,880,427
Cash 2,693
Interest receivable 269,710
Prepaid expenses 15,927
-----------
Total Assets 40,168,757
-----------
LIABILITIES:
------------------------------
Accrued advisory fee (Note 3) 40,630
Accrued operating expenses 126,218
-----------
Total Liabilities 166,848
-----------
Net Assets $40,001,909
===========
NET ASSETS consist of:
Undistributed net investment
income $ 118,029
Accumulated net realized losses
from investment transactions (102,779)
Unrealized appreciation on
investments 579,076
Capital shares (Note 5) 21,691
Additional paid-in capital 39,385,892
-----------
$40,001,909
===========
Net Asset Value per share
($40,001,909 / 2,169,091 shares) $18.44
===========
The accompanying notes are an integral part of this statement.
3
EIS Fund
STATEMENT OF OPERATIONS
for the six months ended June 30, 2001
(Note 1)
INVESTMENT INCOME:
------------------------------
INCOME--Interest $ 1,338,866
EXPENSES:
Investment advisory fee $99,727
Directors' fees and
expenses 19,745
Officer's salary 204,142
Postage and printing 16,390
Professional fees 212,972
Insurance 10,369
Transfer agent and
registrar fees 4,987
The New York Stock
Exchange, Inc.--
annual fee 10,917
Miscellaneous 81,192
----------
Total expenses 660,441
-----------
Investment Income--Net 678,425
-----------
REALIZED GAIN AND UNREALIZED APPRECIATION
(DEPRECIATION) ON INVESTMENTS--NET:
------------------------------
Realized (loss) from
security transactions
(excluding short-term
securities):
Proceeds from sales $10,547,714
Cost of sales 10,237,724
----------
Net realized loss 309,990
Unrealized appreciation
(depreciation)
on investment securities:
Beginning of period 663,466
End of period 579,076
----------
Change in unrealized
appreciation--net (84,390)
-----------
Net realized (loss) and change
in unrealized appreciation
(depreciation) on investments 225,600
-----------
Net increase in Net Assets
Resulting from Operations $ 904,025
===========
STATEMENT OF CHANGES IN NET ASSETS
For the six For the
months year
ended ended
June 30, Dec. 31,
2001 2000
----------- -----------
INCREASE (DECREASE)
IN NET ASSETS:
-----------------------
Operations:
Investment income--
net (Note 1) $ 678,425 $ 2,316,836
Realized (loss)/gain
on investments--net
(Note 2) 309,990 (139,067)
Change in unrealized
appreciation--net (84,390) 1,516,089
----------- -----------
Net increase
in net assets
resulting from
operations 904,025 3,693,858
Dividends to share-
holders from:
Investment income--
net (542,273) (2,279,870)
Cost of shares
purchased pursuant to
Section 23 of the
Investment Company
Act of 1940 (Note 5) -- (56,530)
----------- -----------
Total increase
(decrease) in net
assets 361,752 1,357,458
NET ASSETS:
-----------------------
Beginning of period 39,640,157 38,282,699
----------- -----------
End of period
(including
undistributed net
investment income of
$118,029 and $13,230
in 2001 and 2000,
respectively) $40,001,909 $39,640,157
=========== ===========
The accompanying notes are an integral part of these statements.
4
EIS Fund
FINANCIAL HIGHLIGHTS
For the
six
months For the year ended
ended -------------------------------------------
6/30/01 2000 1999 1998 1997
------- ------- ------- ------- -------
Per Share Operating
Performance:
Net asset value, beginning of
period $ 18.28 $ 17.62 $ 18.78 $ 18.52 $ 18.23
------- ------- ------- ------- -------
Net investment income .31 1.07 1.03 1.06 1.08
Net gain (loss) on securities
(realized and unrealized) .10 .63 (1.20) .23 .38
------- ------- ------- ------- -------
Total from investment
operations .41 1.70 (.17) 1.29 1.46
------- ------- ------- ------- -------
Less Dividends and
Distributions:
Dividends from net investment
income .25 (1.05) (1.01) (1.03) (1.17)
------- ------- ------- ------- -------
Total dividends and
distributions .25 (1.05) (1.01) (1.03) (1.17)
------- ------- ------- ------- -------
Treasury stock transaction -- .01 .02 -- .00
------- ------- ------- ------- -------
Net asset value, end of period $ 18.44 $ 18.28 $ 17.62 $ 18.78 $ 18.52
======= ======= ======= ======= =======
Market value per share, end of
period $ 17.10 $15.875 $ 14.25 $ 16.56 $ 16.75
======= ======= ======= ======= =======
Total Investment Return:
Based on market value per share 11.18% 19.02% (8.39%) 5.55% 14.51%
Ratios To Average Net Assets:
Expenses 1.64% 1.06% 1.05% 0.97% 1.08%
Net investment income 1.68% 5.97% 5.60% 5.62% 5.89%
Supplemental Data:
Net assets at end of period
(000 omitted) $40,002 $39,640 $38,283 $41,069 $40,490
Portfolio turnover rate 32.82% 15.87% 16.09% 15.88% 2.91%
The accompanying notes are an integral part of this schedule.
5
EIS Fund
NOTES TO FINANCIAL STATEMENTS
June 30, 2001
--------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
EIS Fund (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, 2001, 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 $102,779 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
EIS Fund
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 2001
--------------------------------------------------------------------------------
(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 evaluating
alternatives.
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, 2001, purchases and proceeds from sales of
securities other than short-term United States Government and Federal Agencies
obligations aggregated $-0- and $7,654,736, respectively. Purchases and proceeds
from sales of United States Government and Federal Agencies obligations
aggregated $-0- and $2,892,978, respectively.
(5) CAPITAL STOCK:
At June 30, 2001, 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
EIS FUND
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
Perry W. Skjelbred, 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
Firstar Mutual Funds Services, LLC
615 E. Michigan Street
Milwaukee, WI 53202
(800) 637-7549
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 EIS Fund, is published weekly by
The Wall Street Journal and The New York Times.
------------------------------------------------------
[LOGO]
EIS
Fund
Semi-Annual Report
June 30, 2001
------------------------------------------------------
EIS Fund Audit Committee Charter
page 1
EXCELSIOR INCOME SHARES, INC.
d/b/a/ EIS Fund
Audit Committee Charter
ORGANIZATION
There shall be a committee of the Board of Directors, selected and voted
upon by the full Board of Directors of the EIS Fund, to be known as the Audit
Committee. The members shall be all disinterested directors of the EIS Fund.
STATEMENT OF POLICY
The Audit Committee oversees the financial reporting process for the EIS
Fund. The Audit Committee must monitor the process and the results to assure
accuracy of performance reporting and asset valuation. Both are key to providing
shareholders and regulators adequate, meaningful information for decision
making. Members of the Audit Committee must be knowledgeable and current
regarding the accounting process and the control structure in place. Open
communication with management, the independent auditors and the internal audit
staff is essential.
RESPONSIBILITIES OF THE AUDIT COMMITTEE
The following listed committee responsibilities describe areas of attention
in broad terms in order to provide flexibility.
* The Audit Committee's role is clearly one of overview and not of direct
management of the audit process.
* Audit Committee members are responsible for a general understanding of the EIS
Fund accounting systems and controls.
* The Audit Committee considers management's recommendations of the Fund's
independent audit firms. Committee members continuously evaluate the
independent audit firm's performance, costs, and financial stability. The
Audit Committee will make recommendations to the full board of the selection
of independent audit firms.
* The Audit Committee, working with the Fund's advisors is responsible for
reviewing audit plans prepared by the Fund's independent auditors and the
internal audit staff. Special attention is to be given by the committee to see
that the two plans are coordinated.
* The Audit Committee is responsible for recording the minutes of all meetings
and reporting all activity to the full board. The Audit Committee meets
regularly with the Fund's counsel in order to be well informed on all legal
issues having the possibility of impacting the financial reporting process or
database. This would include items of industry wide importance and internal
issues such as litigation.
EIS Fund Audit Committee Charter
page 2
* Because all Fund assets and cash management are held by or performed under
third party contractual arrangements, the Audit Committee has responsibility
to review and assure the full board that such arrangements properly provide
audit opportunity to ensure accurate, timely financial reporting.
* The Audit Committee is responsible for reviewing financial statements
contained in the annual and other periodic reports to shareholders with
management and the independent auditors to determine that the independent
auditors are satisfied with the disclosure and content of the annual financial
statements.
* The Audit Committee should keep apprised of the data processing procedures and
programs.
* The Audit Committee should keep apprised of regulatory changes and new
accounting pronouncements that affect net asset value calculations and
financial statement reporting requirements.