As filed with the SEC on February 29, 2012.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-Q
QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED
MANAGEMENT INVESTMENT COMPANY
Investment Company Act file number: 811-02273
TRANSAMERICA INCOME SHARES, INC.
(Exact Name of Registrant as Specified in Charter)
570 Carillon Parkway, St. Petersburg, Florida 33716
(Address of Principal Executive Offices) (Zip Code)
Registrant’s Telephone Number, including Area Code: (727) 299-1800
Dennis P. Gallagher, Esq. P.O. Box 9012, Clearwater, Florida 33758-9771
(Name and Address of Agent for Service)
Date of fiscal year end: March 31
Date of reporting period: October 1, 2011 – December 31, 2011
Item 1. Schedule of Investments.
The unaudited Schedule of Investments of Registrant as of December 31, 2011 is attached.
Transamerica Income Shares, Inc.
SCHEDULE OF INVESTMENTS
At December 31, 2011
(unaudited)
| The notes are an integral part of this report. | ||||
| Transamerica Income Shares, Inc. | December 31, 2011 Form N-Q | |||
| Page 1 |
Transamerica Income Shares, Inc.
SCHEDULE OF INVESTMENTS (continued)
At December 31, 2011
(unaudited)
| The notes are an integral part of this report. | ||||
| Transamerica Income Shares, Inc. | December 31, 2011 Form N-Q | |||
| Page 2 |
Transamerica Income Shares, Inc.
SCHEDULE OF INVESTMENTS (continued)
At December 31, 2011
(unaudited)
| The notes are an integral part of this report. | ||||
| Transamerica Income Shares, Inc. | December 31, 2011 Form N-Q | |||
| Page 3 |
Transamerica Income Shares, Inc.
SCHEDULE OF INVESTMENTS (continued)
At December 31, 2011
(unaudited)
NOTES TO SCHEUDLE OF INVESTMENTS (all amounts in thousands):
| * | Floating or variable rate note. Rate is listed as of 12/30/2011. |
| Ž | The security has a perpetual maturity. The date shown is the next call date. |
| § | Illiquid. This security had a value of $855, or 0.63%, of the fund’s net assets. |
| ^ | All or a portion of this security is on loan. The value of all securities on loan is $7,749. |
| W | Payment in-kind. Securities pay interest or dividends in the form of additional bonds or preferred stock. |
| p | Rate shown reflects the yield at 12/30/2011. |
| P | Aggregate cost for federal income tax purposes is $140,608. Aggregate gross unrealized appreciation/depreciation for all securities in which there is an excess of value over tax cost were $7,389 and $2,677, respectively. Net unrealized appreciation for tax purposes is $4,712. |
DEFINITIONS (all amounts in thousands):
| 144A | 144A Securities are registered pursuant to Rule 144A of the Securities Act of 1933. These securities are deemed to be liquid for purposes of compliance limitations on holdings of illiquid securities and may be resold as transactions exempt from registration, normally to qualified institutional buyers. At 12/31/2011, these securities aggregated $59,934, or 43.82%, of the fund’s net assets. | |
| IO | Interest Only | |
| REMIC | Real Estate Mortgage Investment Conduits (consist of a fixed pool of mortgages broken apart and marketed to investors as individual securities) |
CURRENCY ABBREVIATIONS:
| BRL | Brazilian Real | |
| CAD | Canadian Dollar | |
| CLP | Chilean Peso | |
| MXN | Mexican Peso |
| The notes are an integral part of this report. | ||||
| Transamerica Income Shares, Inc. | December 31, 2011 Form N-Q | |||
| Page 4 |
Transamerica Income Shares, Inc.
SCHEDULE OF INVESTMENTS (continued)
At December 31, 2011
(unaudited)
VALUATION SUMMARY (all amounts in thousands): '
| Investment Securities |
Level 1 - Quoted Prices |
Level 2 - Other Significant Observable Inputs |
Level 3 - Significant Unobservable Inputs |
Value at 12/31/2011 |
||||||||||||
| Asset-Backed Securities |
$ | — | $ | 3,598 | $ | — | $ | 3,598 | ||||||||
| Convertible Bonds |
— | 617 | — | 617 | ||||||||||||
| Convertible Preferred Stocks |
1,118 | — | — | 1,118 | ||||||||||||
| Corporate Debt Securities |
— | 91,722 | — | 91,722 | ||||||||||||
| Foreign Government Obligations |
— | 4,887 | — | 4,887 | ||||||||||||
| Mortgage-Backed Securities |
— | 12,679 | — | 12,679 | ||||||||||||
| Municipal Government Obligations |
— | 2,026 | — | 2,026 | ||||||||||||
| Preferred Corporate Debt Securities |
— | 8,285 | — | 8,285 | ||||||||||||
| Preferred Stocks |
2,570 | — | — | 2,570 | ||||||||||||
| Repurchase Agreement |
— | 4,126 | — | 4,126 | ||||||||||||
| Securities Lending Collateral |
7,910 | — | — | 7,910 | ||||||||||||
| U.S. Government Agency Obligations |
— | 494 | — | 494 | ||||||||||||
| U.S. Government Obligations |
— | 5,288 | — | 5,288 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 11,598 | $ | 133,722 | $ | — | $ | 145,320 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| ' | See the notes to the schedules of investments for more information regarding pricing inputs and valuation techniques. |
| The notes are an integral part of this report. | ||||
| Transamerica Income Shares, Inc. | December 31, 2011 Form N-Q | |||
| Page 5 |
Transamerica Income Shares, Inc.
NOTES TO THE SCHEDULE OF INVESTMENTS
At December 31, 2011
(unaudited)
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Transamerica Income Shares, Inc. (the “Fund”) is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as a diversified, closed-end management investment company. The following is a summary of significant accounting policies followed by the Fund.
Repurchase agreements: Securities purchased subject to a repurchase agreement are held at the Fund’s custodian and, pursuant to the terms of the repurchase agreements, must be collateralized by securities with an aggregate market value greater than or equal to 100% of the resale price. The Fund will bear the risk of value fluctuations until the securities can be sold and may encounter delays and incur costs in liquidating the securities. In the event of bankruptcy or insolvency of the seller, delays and costs may be incurred.
Foreign currency denominated investments: The accounting records of the Fund are maintained in U.S. dollars. Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the closing exchange rate each day. The cost of foreign securities is translated at the exchange rates in effect when the investment was acquired.
Foreign currency denominated assets may involve risks not typically associated with domestic transactions. These risks include revaluation of currencies, adverse fluctuations in foreign currency values and possible adverse political, social and economic developments, including those particular to a specific industry, country or region.
Treasury inflation-protected securities (“TIPS”): The Fund invests in TIPS, specially structured bonds in which the principal amount is adjusted daily to keep pace with inflation as measured by the U.S. Consumer Price Index.
Restricted and illiquid securities: Restricted and illiquid securities are subject to legal or contractual restrictions on resale or are illiquid. Restricted securities generally may be resold in transactions exempt from registration. A security may be considered illiquid if it lacks a readily available market or if its valuation has not changed for a certain period of time. Disposal of these securities may involve time-consuming negotiations and expense, and prompt sale at the current valuation may be difficult.
The restricted and illiquid securities at December 31, 2011 are listed in the Schedule of Investments.
Payment in-kind securities (“PIKs”): PIKs give the issuer the option at each interest payment date of making interest payments in either cash or additional debt securities. Those additional debt securities usually have the same terms, including maturity dates and interest rates, and associated risks as the original bonds.
The PIKs at December 31, 2011 are listed in the Schedule of Investments.
Securities lending: Securities are lent to qualified financial institutions and brokers. The lending of Fund’s securities exposes the Fund to risks such as the following: (i) the borrowers may fail to return the loaned securities; (ii) the borrowers may not be able to provide additional collateral; (iii) the Fund may experience delays in recovery of the loaned securities or delays in access to collateral; or (iv) the Fund may experience losses related to the investment collateral. To minimize certain risks, loan counterparties pledge cash collateral equal to at least the market value of the securities loaned. Cash collateral received is invested in the State Street Navigator Securities Lending Trust-Prime Portfolio, a money market mutual fund registered under the 1940 Act. By lending such securities, the Fund seeks to increase its net investment income through the receipt of interest (after rebates and fees).
The value of loaned securities and related collateral outstanding at December 31, 2011 are shown in the Schedule of Investments.
Real estate investment trusts (“REITs”): There are certain additional risks involved in investing in REITs. These include, but are not limited to, economic conditions, changes in zoning laws, real estate values, property taxes and interest rates.
NOTE 2. SECURITY VALUATIONS
All investments in securities are recorded at their estimated fair value. The Fund values its investments at the close of the New York Stock Exchange (“NYSE”), normally 4 p.m. Eastern Time, each day the NYSE is open for business. The Fund utilizes various methods to measure the fair value of its investments on a recurring basis. Accounting principles generally accepted in the United States of America establish a hierarchy that prioritizes inputs to valuation methods. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three Levels of inputs of the fair value hierarchy are defined as follows:
Level 1—Unadjusted quoted prices in active markets for identical securities.
| Transamerica Income Shares, Inc. | December 31, 2011 Form N-Q | |||
| Page 6 |
Transamerica Income Shares, Inc.
NOTES TO THE SCHEDULE OF INVESTMENTS (continued)
At December 31, 2011
(unaudited)
NOTE 2. (continued)
Level 2—Inputs, other than quoted prices included in Level 1, that are observable, either directly or indirectly. These inputs may include quoted prices for the identical instrument on an inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates and similar data.
Level 3—Unobservable inputs, which may include Transamerica Asset Management, Inc’s (“TAM”) Valuation Committee’s own assumptions in determining the fair value of investments.
The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, but not limited to, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is generally greatest for instruments categorized in Level 3.
The inputs used to measure fair value may fall into different Levels of the fair value hierarchy. In such cases, for disclosure purposes, the Level in the fair value hierarchy that is assigned to the fair value measurement of a security is determined based on the lowest Level input that is significant to the fair value measurement in its entirety.
Fair value measurements: Descriptions of the valuation techniques applied to the Fund’s major categories of assets and liabilities measured at fair value on a recurring basis are as follows:
Equity securities (common and preferred stock): Securities are stated at the last reported sales price or closing price on the day of valuation taken from the primary exchange where the security is principally traded. To the extent these securities are actively traded and valuation adjustments are not applied, they are categorized in Level 1 of the fair value hierarchy.
Foreign securities, in which the primary trading market closes at the same time or after the NYSE, are valued based on quotations from the primary market in which they are traded and are categorized in Level 1. Because many foreign securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close. Certain foreign securities may be fair valued using a pricing service that considers the correlation of the trading patterns of the foreign security to the intraday trading in the U.S. markets for investments such as American Depositary Receipts, financial futures, Exchange Traded Funds, and the movement of the certain indices of securities based on a statistical analysis of their historical relationship; such valuations generally are categorized in Level 2.
Preferred stock, repurchase agreements, and other equities traded on inactive markets or valued by reference to similar instruments are also generally categorized in Level 2.
Securities lending collateral: Securities lending collateral is a money market fund which is valued at the net assets of the underlying portfolios and no valuation adjustments are applied. It is categorized in Level 1 of the fair value hierarchy.
Corporate bonds: The fair value of corporate bonds is estimated using various techniques, which consider recently executed transactions in securities of the issuer or comparable issuers, market price quotations (where observable), bond spreads, fundamental data relating to the issuer, and credit default swap spreads adjusted for any basis difference between cash and derivative instruments. While most corporate bonds are categorized in Level 2 of the fair value hierarchy, in instances where lower relative weight is placed on transaction prices, quotations, or similar observable inputs, they are categorized in Level 3.
Asset backed securities: The fair value of asset backed securities is estimated based on models that consider the estimated cash flows of each tranche of the entity, establish a benchmark yield, and develop an estimated tranche specific spread to the benchmark yield based on the unique attributes of the tranche. To the extent the inputs are observable and timely, the values would generally be categorized in Level 2 of the fair value hierarchy; otherwise they would be categorized as Level 3.
Short-term notes: Short-term notes are valued using amortized cost, which approximates fair value. To the extent the inputs are observable and timely, the values would be generally categorized in Level 2 of the fair value hierarchy.
Government securities: Government securities are normally valued using a model that incorporates market observable data such as reported sales of similar securities, broker quotes, yields, bids, offers, and reference data. Certain securities are valued by principally using dealer quotations. Government securities generally are categorized in Level 2 of the fair value hierarchy.
| Transamerica Income Shares, Inc. | December 31, 2011 Form N-Q | |||
| Page 7 |
Transamerica Income Shares, Inc.
NOTES TO THE SCHEDULE OF INVESTMENTS (continued)
At December 31, 2011
(unaudited)
NOTE 2. (continued)
U.S. government agency securities: U.S. government agency securities are comprised of two main categories consisting of agency issued debt and mortgage pass-throughs. Generally, agency issued debt securities are valued in a manner similar to U. S. government securities. Mortgage pass-throughs include to be announced (“TBA”) securities and mortgage pass-through certificates. Generally, TBA securities and mortgage pass-throughs are valued using dealer quotations. Depending on market activity levels and whether quotations or other observable data are used, these securities are typically categorized in Level 2 of the fair value hierarchy.
Other: Securities for which quotations are not readily available or whose values have been determined to be unreliable are valued at fair market value as determined in good faith by TAM’s Valuation Committee under the supervision of the Fund’s Board of Directors. For instances which daily market quotes are not readily available, securities may be valued, pursuant to procedures adopted by the Board of Directors, with reference to other instruments or indices. Depending on the relative significance of valuation inputs, these instruments may be classified in either Level 2 or Level 3 of the fair value hierarchy. When the Fund must use fair valuation methods that rely on significant unobservable inputs to determine a security’s value, the Valuation Committee will choose the method that is believed to accurately reflect fair market value. These securities are categorized as Level 3 of the fair value hierarchy.
The hierarchy classification of inputs used to value the Fund’s investments, at December 31, 2011, is disclosed in the Valuation Summary of the Fund’s Schedule of Investments. Transfers between Levels are considered to have occurred at the end of the reporting period.
There were no significant transfers between Level 1 and Level 2 during the period ended December 31, 2011.
| Transamerica Income Shares, Inc. | December 31, 2011 Form N-Q | |||
| Page 8 |
Item 2. Controls and Procedures.
| (a) | The Registrant’s principal executive officer and principal financial officer evaluated the Registrant’s controls and procedures within 90 days of this filing and have concluded that the Registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940), are appropriately designed to ensure that information required to be disclosed by the Registrant in the reports that it files on Form N-Q (a) is accumulated and communicated to Registrant’s management, including its principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure, and (b) is recorded, processed, summarized and reported, within the time periods specified in the rules and forms adopted by the U.S. Securities and Exchange Commission. |
| (b) | The Registrant’s principal executive officer and principal financial officer are aware of no change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting. |
Item 3. Exhibits.
Separate certifications by the Registrant’s principal executive officer and principal financial officer, as required by Rule 30a-2(a) under the Investment Company Act of 1940, are attached.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Transamerica Income Shares, Inc. | ||
| (Registrant) | ||
| By: | /s/ John K. Carter | |
| Chief Executive Officer | ||
| Date: | February 29, 2012 | |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| By: | /s/ John K. Carter | |
| Chief Executive Officer | ||
| Date: | February 29, 2012 |
| By: | /s/ Elizabeth Strouse | |
| Principal Financial Officer | ||
| Date: | February 29, 2012 |