Transamerica Income Shares, Inc.
ANNUAL REPORT
MARCH 31, 2003
(TRANSAMERICA INVESTMENT MANAGEMENT, LLC LOGO)
REPORT TO SHAREHOLDERS:
During the first half of the year ended March 31, 2003, the U.S. corporate bond
market was swamped by high-profile bankruptcies and a crisis in corporate
credibility. Added to this was a trend toward more stringent lending standards
that made capital harder for businesses to come by. During this period, only the
highest-credit quality, most defensive corporate issuers found favor with
investors. The types of bonds we favor, undervalued or misunderstood bonds with
improving credit profiles and above-average potential for capital appreciation,
lagged under the weight of investor caution.
Later, with the corporate credibility crisis waning, confidence in the economy
rising and interest rates falling, market conditions improved. Investors sifting
through the debris left by the earlier storm found pockets of value among
lesser-quality bonds, which came roaring back to life. After underperforming in
the first half of the year, the fund bounced back, ending the 12-month period
with a total return of 1.27% based upon market price with distributions
reinvested.
The fund's quick recovery can be attributed to the general rebound among
lesser-quality corporate bonds. It also was due to our intense focus on
characteristics important to corporate survival in a capital-constrained
environment: ample liquidity, hard assets and free cash flow. By mid-fiscal
year, we had sold securities of companies that lacked these strengths and
replaced them with a sizable number of attractively priced debentures from
issuers in the Printing & Publishing, Business Services, Telecommunications and
Electric Services sectors with solid or improving balance sheets. Among them
were News America Holdings, Clear Channel Communications, Inc., Sprint Capital
Corporation, and FirstEnergy Corp. Our faith in these companies was rewarded in
the second half of the year, when each was a strong contributor to results.
At this juncture, we continue to focus on sound but underappreciated,
higher-yielding bonds with capital ap-
1
preciation potential. We anticipate a modest economic recovery that should favor
this market subsector.
Although war in the Middle East overshadowed economic fundamentals and crimped
consumer confidence in early 2003, we expect that first-quarter economic growth
will be positive. Consumer spending proved reasonably resilient, and a moderate
increase in unemployment was offset by historically low mortgages rates that
stimulated strong housing sales. Going forward, the situation should improve as
consumers and businesses receive support from a federal tax-cut program, a
weaker U.S. dollar, and lower oil prices once the war in Iraq is concluded. With
the end of war, business and consumer confidence should improve as well.
Finally, if needed, the Federal Reserve can stimulate the economy by lowering
interest rates again. We expect that the types of businesses we hold in
Transamerica Income Shares, Inc. should benefit from the stronger economic
conditions that may result.
/s/ Heidi Y. Hu
Heidi Y. Hu
Portfolio Manager
2
TRANSAMERICA INCOME SHARES, INC.
SCHEDULE OF INVESTMENTS
AT MARCH 31, 2003
PRINCIPAL MARKET
AMOUNT VALUE
---------------------------------------------------------
CORPORATE DEBT SECURITIES -- (93.7%)
AIR TRANSPORTATION -- (0.7%)
Delta Air Lines, Inc.
9.75%, due 05/15/2021 $ 2,000,000 $ 950,000
---------------------------------------------------------
AMUSEMENT & RECREATION SERVICES -- (2.5%)
MGM MIRAGE
6.75%, due 08/01/2007 3,500,000 3,587,500
---------------------------------------------------------
AUTOMOTIVE -- (2.9%)
General Motors Corporation
9.40%, due 07/15/2021 3,750,000 4,137,518
---------------------------------------------------------
BUSINESS CREDIT INSTITUTIONS -- (2.5%)
Boeing Capital Corporation (a)
6.50%, due 02/15/2012 3,500,000 3,625,293
---------------------------------------------------------
BUSINESS SERVICES -- (4.4%)
Clear Channel Communications, Inc.
7.25%, due 09/15/2003 3,200,000 3,267,875
International Lease
Finance Corporation
(a)
5.63%, due 06/01/2007 3,000,000 3,146,688
------------
6,414,563
------------
---------------------------------------------------------
COMMERCIAL BANKS -- (3.9%)
HSBC Capital Funding LP -- 144A (b) (d)
10.18%, due 12/31/2049 4,000,000 5,704,539
---------------------------------------------------------
COMMUNICATION -- (2.6%)
Echostar DBS Corporation
9.38%, due 02/01/2009 3,500,000 3,727,500
---------------------------------------------------------
DEPARTMENT STORES -- (3.5%)
Dillard's, Inc.
6.88%, due 06/01/2005 1,900,000 1,909,500
J.C. Penney Company,
Inc.
8.00%, due 03/01/2010 3,000,000 3,105,000
------------
5,014,500
------------
---------------------------------------------------------
3
TRANSAMERICA INCOME SHARES, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
AT MARCH 31, 2003
PRINCIPAL MARKET
AMOUNT VALUE
---------------------------------------------------------
ELECTRIC SERVICES -- (6.1%)
AEP Texas Central Co. -- 144A (b)
6.65%, due 02/15/2033 $ 2,000,000 $ 2,074,548
FirstEnergy Corp.
6.45%, due 11/15/2011 3,500,000 3,700,158
TXU Energy Company
LLC -- 144A (b)
7.00%, due 03/15/2013 3,000,000 3,059,433
------------
8,834,139
------------
---------------------------------------------------------
ELECTRIC, GAS & SANITARY SERVICES -- (2.1%)
NiSource Finance Corporation
6.15%, due 03/01/2013 3,000,000 3,120,186
---------------------------------------------------------
FOOD STORES -- (3.5%)
Delhaize America, Inc. (a)
8.13%, due 04/15/2011 2,500,000 2,537,500
Stater Bros. Holdings Inc.
10.75%, due 08/15/2006 2,550,000 2,601,000
------------
5,138,500
------------
---------------------------------------------------------
GAS PRODUCTION & DISTRIBUTION -- (1.1%)
Northwest Pipeline Corporation
9.00%, due 08/01/2022 2,000,000 1,585,000
---------------------------------------------------------
HEALTH SERVICES -- (2.9%)
HCA Inc.
7.88%, due 02/01/2011 3,700,000 4,142,024
---------------------------------------------------------
HOLDING & OTHER INVESTMENT OFFICES -- (2.4%)
EOP Operating Limited Partnership
8.38%, due 03/15/2006 3,000,000 3,412,833
---------------------------------------------------------
INDUSTRIAL MACHINERY & EQUIPMENT -- (0.9%)
Caterpillar Inc.
9.38%, due 03/15/2021 1,000,000 1,373,254
---------------------------------------------------------
INSTRUMENTS & RELATED PRODUCTS -- (2.0%)
Raytheon Company
6.50%, due 07/15/2005 2,750,000 2,956,256
---------------------------------------------------------
4
TRANSAMERICA INCOME SHARES, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
AT MARCH 31, 2003
PRINCIPAL MARKET
AMOUNT VALUE
---------------------------------------------------------
INSURANCE -- (3.2%)
ACE Capital Trust II
9.70%, due 04/01/2030 $ 4,000,000 $ 4,713,420
---------------------------------------------------------
LUMBER & WOOD PRODUCTS -- (2.3%)
Nexfor Inc.
8.13%, due 03/20/2008 3,000,000 3,387,738
---------------------------------------------------------
MOTION PICTURES -- (3.7%)
AOL Time Warner Inc. (a)
9.13%, due 01/15/2013 4,500,000 5,307,620
---------------------------------------------------------
OIL & GAS EXTRACTION -- (6.6%)
Nexen Inc.
7.88%, due 03/15/2032 2,750,000 3,062,224
Occidental Petroleum Corporation
10.13%, due 09/15/2009 500,000 657,363
Pemex Finance Ltd.
9.03%, due 02/15/2011 4,900,000 5,867,847
------------
9,587,434
------------
---------------------------------------------------------
PAPER & ALLIED PRODUCTS -- (1.5%)
Abitibi-Consolidated Inc.
8.85%, due 08/01/2030 2,000,000 2,109,230
---------------------------------------------------------
PERSONAL CREDIT INSTITUTIONS -- (3.4%)
ERAC USA Finance Company -- 144A (b)
8.25%, due 05/01/2005 4,500,000 4,918,856
---------------------------------------------------------
PETROLEUM REFINING -- (1.5%)
Premcor Refining Group, Inc. (The) -- 144A (b)
9.25%, due 02/01/2010 2,000,000 2,130,000
---------------------------------------------------------
PRINTING & PUBLISHING -- (6.9%)
Belo Corp.
8.00%, due 11/01/2008 4,200,000 4,941,896
News America Holdings
9.25%, due 02/01/2013 3,985,000 5,059,946
------------
10,001,842
------------
---------------------------------------------------------
5
TRANSAMERICA INCOME SHARES, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
AT MARCH 31, 2003
PRINCIPAL MARKET
AMOUNT VALUE
---------------------------------------------------------
RADIO & TELEVISION BROADCASTING -- (1.8%)
USA Interactive
7.00%, due 01/15/2013 $ 2,500,000 $ 2,663,390
---------------------------------------------------------
RAILROADS -- (3.5%)
Burlington Northern Santa Fe Corporation
9.25%, due 10/01/2006 1,000,000 1,161,100
Kansas City Southern
9.50%, due 10/01/2008 3,500,000 3,902,500
------------
5,063,600
------------
---------------------------------------------------------
REAL ESTATE -- (2.1%)
Simon Property Group, L.P. -- 144A (b)
6.75%, due 11/15/2003 3,000,000 3,079,116
---------------------------------------------------------
RESTAURANTS -- (3.0%)
YUM! Brands, Inc. (a)
7.70%, due 07/01/2012 4,000,000 4,320,000
---------------------------------------------------------
STONE, CLAY & GLASS PRODUCTS -- (3.3%)
Cemex, SA de CV
9.63%, due 10/01/2009 4,250,000 4,845,000
---------------------------------------------------------
TELECOMMUNICATIONS -- (6.9%)
AT&T Corp. (a)
7.00%, due 11/15/2006 4,000,000 4,276,260
AT&T Wireless Services, Inc.
8.13%, due 05/01/2012 2,500,000 2,829,525
Sprint Capital Corporation (a)
5.88%, due 05/01/2004 3,000,000 3,060,000
------------
10,165,785
------------
---------------------------------------------------------
Total Corporate Debt Securities
(cost: $126,947,386) 136,016,636
----------------
---------------------------------------------------------
6
TRANSAMERICA INCOME SHARES, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
AT MARCH 31, 2003
NUMBER OF
SHARES MARKET VALUE
---------------------------------------------------------
PREFERRED STOCKS -- (5.2%)
TELECOMMUNICATIONS
Centaur Funding
Corp. -- 144A (b) (c) 6,750 $ 7,500,573
------------
(cost: $6,844,146)
COLLATERAL
PRINCIPAL MARKET
AMOUNT VALUE
---------------------------------------------------------
SECURITIES LENDING COLLATERAL -- (8.3%)
MONEY MARKET FUND -- (4.8%)
Merrimac Cash Fund --
Premium Class
1-day yield of 1.26% $ 7,000,000 $ 7,000,000
EURO DOLLAR TERM --
(3.5%)
Bank of Montreal
1-day yield of 1.25% 5,036,880 5,036,880
------------
TOTAL SECURITIES LENDING COLLATERAL
(cost: $12,036,880) 12,036,880
------------
TOTAL INVESTMENT SECURITIES
(cost: $145,828,412)
(d) $155,554,089
============
---------------------------------------------------------
SUMMARY:
Investments, at market
value -- 107.2% $155,554,089
Liabilities in excess
of other assets --
(7.2)% (10,404,828)
------------
Net assets -- 100.0% $145,149,261
============
NOTES TO SCHEDULE OF INVESTMENTS:
(a) At March 31, 2003, all or a portion of this security is on loan (see Note
1B). The market value at March 31, 2003 of all securities on loan is
$11,757,078.
(b) Securities are registered pursuant to Rule 144A of the Securities Act of
1933. These securities may be resold as transac-
7
TRANSAMERICA INCOME SHARES, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
AT MARCH 31, 2003
tions exempt from registration, normally to qualified institutional buyers.
(c) Securities valued as determined in good faith in accordance with procedures
established by the Fund's Board of Directors.
(d) Aggregate cost for Federal tax purposes is $146,035,850. Aggregate gross
unrealized appreciation for all securities in which there is an excess of
value over tax cost and aggregate gross unrealized depreciation for all
securities in which there is an excess of tax cost over value were
$10,922,880 and $1,404,641, respectively. Net unrealized appreciation for
tax purposes is $9,518,239.
The notes to the financial statements are an integral part of this report.
8
TRANSAMERICA INCOME SHARES, INC.
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 2003
ASSETS:
Investment securities, at market value
(cost $145,828,412) -- including
$11,757,078 of securities on loan $155,554,089
Cash 152,250
Receivables:
Interest 2,554,384
Other 377
------------
158,261,100
------------
LIABILITIES:
Account payables and accrued liabilities:
Management and advisory fees 67,268
Income dividends declared 947,816
Payable for securities on loan 12,036,880
Other 59,875
------------
13,111,839
------------
NET ASSETS applicable to 6,318,771 capital
shares outstanding, $1.00 par value
(authorized 20,000,000 shares) $145,149,261
============
NET ASSET VALUE PER SHARE $ 22.97
============
NET ASSETS CONSIST OF:
Paid-in-capital $142,200,593
Undistributed net investment income 786,839
Accumulated net realized loss on
investments (7,563,848)
Net unrealized appreciation on investments 9,725,677
------------
NET ASSETS $145,149,261
============
The notes to the financial statements are an integral part of these statements.
9
TRANSAMERICA INCOME SHARES, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 2003
INVESTMENT INCOME:
Interest $10,625,694
Dividends 634,150
Income from loaned securities -- net 1,469
-----------
11,261,313
-----------
EXPENSES:
Management and advisory fees 706,127
Transfer agent fees and expenses 75,819
Custody and accounting fees and expenses 19,250
Administration expenses 26,459
Directors' fees and expenses 20,347
Professional fees 71,386
Other 108,648
-----------
1,028,036
-----------
NET INVESTMENT INCOME 10,233,277
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized loss on investments (7,503,800)
Net unrealized appreciation on investments 7,877,937
-----------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS 374,137
-----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $10,607,414
===========
The notes to the financial statements are an integral part of these statements.
10
TRANSAMERICA INCOME SHARES, INC.
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED MARCH 31,
2003 2002
------------ ------------
INCREASE (DECREASE) IN NET
ASSETS FROM:
OPERATIONS:
Net investment income $ 10,233,277 $ 10,941,492
Net realized gain (loss) on
investments (7,503,800) 2,630,193
Net unrealized appreciation
(depreciation) on investments 7,877,937 (5,074,939)
------------ ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 10,607,414 8,496,746
------------ ------------
DIVIDENDS/DISTRIBUTIONS TO
SHAREHOLDERS:
Net investment income (11,373,788) (11,373,788)
Net realized gains (570,901) (3,402,114)
------------ ------------
Net decrease in net assets
resulting from distributions (11,944,689) (14,775,902)
------------ ------------
Net decrease in net assets (1,337,275) (6,279,156)
------------ ------------
NET ASSETS:
Beginning of year 146,486,536 152,765,692
------------ ------------
End of year $145,149,261 $146,486,536
============ ============
UNDISTRIBUTED NET INVESTMENT
INCOME: $ 786,839 $ 771,704
============ ============
The notes to the financial statements are an integral part of these statements.
11
TRANSAMERICA INCOME SHARES, INC.
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each year:
YEAR ENDED MARCH 31,
----------------------------------------------------
2003 2002 2001 2000 1999
------------------------------------------------------------------------------------
NET ASSET VALUE
Beginning of year $ 23.18 $ 24.18 $ 23.54 $ 25.01 $ 25.31
-------- -------- -------- -------- --------
OPERATIONS:
Net investment income(1) 1.62 1.73 1.88 1.93 1.89
Net realized and unrealized
gain (loss) 0.06 (0.39) 0.65 (1.48) (0.19)
-------- -------- -------- -------- --------
Total from investment
operations 1.68 1.34 2.53 0.45 1.70
-------- -------- -------- -------- --------
DIVIDENDS/DISTRIBUTIONS TO
SHAREHOLDERS:
Net investment income (1.80) (1.80) (1.89) (1.91) (1.88)
Net realized gains (0.09) (0.54) -- (0.01) (0.12)
-------- -------- -------- -------- --------
Total dividends/distributions (1.89) (2.34) (1.89) (1.92) (2.00)
-------- -------- -------- -------- --------
NET ASSET VALUE
End of year $ 22.97 $ 23.18 $ 24.18 $ 23.54 $ 25.01
======== ======== ======== ======== ========
MARKET VALUE PER SHARE
End of year $ 24.120 $ 25.700 $ 24.900 $ 21.563 $ 25.188
======== ======== ======== ======== ========
TOTAL RETURN(2) 1.27% 12.86% 25.03% (7.01)% 4.44%
RATIOS AND SUPPLEMENTAL DATA:
Expenses to average net assets 0.73% 0.65% 0.64% 0.64% 0.63%
Net investment income 7.25% 7.19% 8.04% 8.02% 7.45%
Portfolio turnover 76% 54% 122% 64% 33%
Net assets, end of year (in
thousands) $145,149 $146,487 $152,766 $148,772 $158,031
======== ======== ======== ======== ========
The number of shares outstanding at the end of each period was 6,318,771.
(1) If the company had not adopted the amortization provision of the AICPA Guide
for Investment Companies, net investment income per share would have been
$1.83 for the year ended March 31, 2002.
(2) Based on the market price of the Fund's shares and including the
reinvestment of dividends and distributions at prices obtained by the Fund's
dividend reinvestment plan.
The notes to the financial statements are an integral part of these statements.
12
TRANSAMERICA INCOME SHARES, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2003
1. SIGNIFICANT ACCOUNTING POLICIES -- Transamerica Income Shares, Inc. (the
"Fund") is registered under the Investment Company Act of 1940 as a diversified,
closed-end management investment company. The Fund's investment objective is to
seek as high a level of current income consistent with prudent investment, with
capital appreciation as only a secondary objective. The Fund consistently
followed the following accounting principles generally accepted in the United
States in the preparation of its financial statements:
(A) Valuation of Securities -- Fund investments traded on an exchange are stated
at the last reported sales price on the day of valuation on the exchange where
the security is principally traded. Securities traded in the over-the-counter
market and listed securities for which no sale was reported on that date are
valued at the last quoted bid price. Debt securities are valued by commercial
pricing services or broker-dealer supplied quotations; however, those that
mature in sixty days or less are valued at amortized cost, which approximates
market value. Other securities for which quotations are not readily available
are valued at fair value determined in such a manner as the adviser and
sub-advisers, under the supervision of the Board of Directors and the Fund's
Valuation Committee, determine in good faith.
(B) Securities Lending -- The Fund may lend securities to enhance fund earnings
from investing cash collateral received in making such loans to qualified
borrowers (typically broker/dealers). The Fund has engaged its custodian bank,
Investors Bank & Trust Company ("IBT"), as lending agent to administer its
securities lending program. IBT earns a portion of program net income for its
services. When the Fund makes a security loan, it receives cash collateral as
protection against risk the borrower will default on the loan, and records an
asset for the cash/invested collateral and a liability for the
13
TRANSAMERICA INCOME SHARES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
return of the collateral. Securities on loan continue to be included in
investment securities at market value on the Statement of Assets and Liabilities
and remain on the Schedule of Investments.
Loans of securities are required at all times to be secured by collateral at
least equal to 102% of the market value of the securities on loan and not less
then 100% thereafter. The Fund may invest cash collateral in short-term money
market instruments including: U.S. Treasury Bills, U.S. agency obligations,
commercial paper, money market mutual funds, repurchase agreements and other
highly rated, liquid investments. During the life of securities loans, the
collateral and securities loaned remain subject to fluctuation in market value.
IBT marks to market securities loaned and the collateral each business day. If
additional collateral is due (at least $1,000), IBT collects additional cash
collateral from the borrowers. Although securities loaned will be fully
collateralized at all times, IBT may experience delays in, or may be prevented
from, recovering the collateral on behalf of the Fund. The Fund may recall a
loaned security position at any time from the borrower through IBT. In the event
the borrower fails to timely return a recalled security, IBT indemnifies the
Fund by purchasing replacement securities for the Fund as its own expense and
claiming the collateral to fund such a purchase. IBT absorbs the loss if the
collateral value is not sufficient to cover the cost of the replacement
securities. If replacement securities are not available, IBT will credit the
equivalent cash value to the Fund.
(C) Securities Transactions and related Investment Income -- Security
transactions are accounted for on the trade date. Security gains and losses are
calculated on the specific identification basis. Dividend income is recorded on
the ex-dividend date. Interest income, adjusted for discounts and premiums, is
recorded on the accrual basis commencing on the settlement date.
14
TRANSAMERICA INCOME SHARES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
(D) Federal Income Taxes -- No provisions for Federal income or excise taxes
have been made as the Fund intends to distribute substantially all net income
and realized gains to shareholders and otherwise qualify as regulated investment
companies under the Internal Revenue Code.
(E) Use of Estimates -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
(F) Dividends and Distributions -- Dividends from net investment income are
declared and paid monthly. Dividends and distributions paid by the Company are
recorded on the ex-dividend date. Income and capital gain distributions are
determined in accordance with income tax regulations that may differ from
accounting principles generally accepted in the United States. These differences
are primarily due to differing treatments of income, expenses and gains on
various investment securities held by the Fund and timing differences. Permanent
items identified in the year ended March 31, 2003, have been reclassified among
the components of net assets as follows: a decrease in paid in capital by
$1,039,579, an increase in undistributed net investment income by $1,155,646,
and a decrease of accumulated net realized gains by $116,067.
The character of distributions paid to shareholders during 2003 and 2002 were as
follows:
15
TRANSAMERICA INCOME SHARES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
2002 2003
----------- -----------
Ordinary Income................. $11,373,788 $11,373,788
Long-Term Capital Gain.......... 3,402,114 570,901
----------- -----------
Total......................... $14,775,902 $11,944,689
=========== ===========
As of March 31, 2003, the components of accumulated earnings on a tax basis were
as follows:
Undistributed Ordinary Income................ 786,839
Undistributed Long-Term Gain................. 0
Capital Loss Carryforward*................... (7,563,848)
Unrealized Appreciation**.................... 9,518,239
Total Accumulated Earnings................... 2,741,230
* The Capital Loss Carryforward as of March 31, 2003, is available to offset
future realized capital gains through March 31, 2011.
** Differences between book basis and tax basis unrealized appreciation is
attributable primarily to the difference between book and tax amortization
method for premium and market discount.
2. INVESTMENT ADVISORY FEES AND TRANSACTIONS WITH AFFILIATES -- The Fund has
entered into a Management and Investment Advisory Agreement with
AEGON/Transamerica Fund Advisers, Inc. (the "Adviser"), which is a direct,
wholly-owned subsidiary of Western Reserve Life Assurance Co. of Ohio, which is
wholly-owned by AUSA Life Insurance Company ("AUSA"), a stock life insurance
company. AUSA is a wholly-owned subsidiary of Transamerica Holding Company,
which is wholly-owned by AEGON USA, Inc., a financial services holding company
whose primary emphasis is on life and health insurance and annuity and
investment products. AEGON USA, Inc. is a wholly-owned indirect subsidiary of
AEGON N.V., a Netherlands corporation. Transamerica Investment Management,
L.L.C. ("Transamerica") serves as sub-adviser to the Fund. Transamerica is an
indirect wholly owned subsidiary of AEGON N.V.
For its services to the Fund, the Adviser receives a fee of 0.50% of the average
daily net assets of the Fund. This fee is paid to the Adviser monthly. The
Adviser has agreed
16
TRANSAMERICA INCOME SHARES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
to reimburse the Fund if the Fund's total operating expenses (exclusive of
brokerage commissions, interest and taxes) exceed 1.50% of the average daily net
assets of the Fund up to $30 million and 1.00% of the average net assets of the
Fund in excess of $30 million. No such reimbursements were necessary during the
year ended March 31, 2003.
As of March 31, 2003, an affiliate of Transamerica Corporation held 7.6% of the
outstanding shares of the Company.
Officers and certain directors of the Adviser or its affiliates are also
officers and directors of the Fund; however, they receive no compensation from
the Fund.
3. SECURITY TRANSACTIONS -- The aggregate cost of securities purchased and the
proceeds from securities sold (excluding short-term investments) were
$105,961,420 and $106,399,968, respectively, for the year ended March 31, 2003.
17
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Transamerica Income Shares, Inc.
We have audited the accompanying statement of assets and liabilities of
Transamerica Income Shares, Inc. (the "Company"), including the schedule of
investments, as of March 31, 2003, and the related statement of operations for
the year then ended, the statements of changes in 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. These financial statements and financial
highlights are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in this United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of March 31, 2003, by correspondence with
the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statements presentation. We believe that our
audits provide a reasonable basis for our opinion.
18
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Transamerica Income Shares, Inc. as of March 31, 2003, 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.
/s/ Ernst & Young LLP
Los Angeles, California
April 25, 2003
19
AUTOMATIC REINVESTMENT PLAN
Holders of 50 shares or more of the Company's common stock are offered the
opportunity to reinvest dividends and other distributions in shares of the
common stock of the Company through participation in the Automatic Reinvestment
Plan. Under the Plan, Mellon Investor services, as Transfer Agent (the "Transfer
Agent"), automatically invests dividends and other distributions in shares of
the fund's common stock by making purchases in the open market. Plan
participants may also deposit cash in amounts between $25 and $2,500 with the
Transfer Agent for the purchase of additional shares. Dividends, distributions
and cash deposits are invested in, and each participant's account credited with,
full and fractional shares.
The price at which the Transfer Agent is deemed to have acquired shares for a
participant's account is the average price (including brokerage commissions and
any other costs of purchase) of all shares purchased by it for all participants
in the Plan.
Your dividends and distributions, even though automatically reinvested, continue
to be taxable as though received in cash.
Another feature of the Plan is the "Optional Cash Only" feature. You can make
additional investments only, without reinvesting your monthly dividend. If you
own 50 shares or more, registered in your name and currently in your Plan
account, and desire to periodically send additional contributions between $25
and $2,500 for investment, you may do so. The shares you own and the new shares
acquired through this feature will not participate in automatic reinvestment of
dividends and distributions. Rather, the shares you acquire if you participate
in the "Optional Cash Only" feature of the Plan will be held for safekeeping in
your Plan account. Each investment will be made on or near the next dividend
payment date. All other procedures for the purchase and sale of shares described
above will apply.
20
The Transfer Agent charges a service fee of $1.75 for each investment, including
both dividend reinvestment and optional cash investment.
Shareholders interested in obtaining a copy of the Plan should contact the
Transfer Agent:
Mellon Investor Services
Shareholder Investment Services
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
(800) 288-9541
21
DIRECTORS AND OFFICERS (UNAUDITED)
The Directors and Officers of the Company are listed below together with their
respective positions with the Company and a brief statement of their principal
occupations during the past five years.
PRINCIPAL
OCCUPATION(S)
NAME, ADDRESS & DATE OR EMPLOYMENT
OF BIRTH ("DOB") POSITION HELD IN THE PAST 5 YEARS
----------------------------------------------------------------------
Peter R. Brown Vice Chairman Vice Chairman and
11180 6th Street East Director,
Treasure Island, AEGON/Transamerica
FL 33706 Series Fund, Inc. (ATSF)
(DOB 5/10/28) (1986-present); Director
of Transamerica Index
Funds, Inc.
(2002-present); Vice
Chairman and Trustee,
IDEX Mutual Funds (IDEX)
(1986-present); Vice
Chairman and Manager,
Transamerica
Occidental's Separate
Account Fund B (Fund B)
(2002-present); Chairman
of the Board, Peter
Brown Construction
Company (1963-2000);
Rear Admiral (Ret.) U.S.
Navy Reserve, Civil
Engineer Corps.
Daniel Calabria Director Trustee, IDEX (1996-
7068 S. Shore Drive S. present); Director, ATSF
South Pasadena, (June 2001-present);
FL 33707 Manager, Fund B
(DOB 3/5/36) (2002-present); Trustee,
Florida Tax Free Funds
(1993-present);
President (1993-1995).
22
DIRECTORS AND OFFICERS (UNAUDITED) (CONTINUED)
PRINCIPAL
OCCUPATION(S)
NAME, ADDRESS & DATE OR EMPLOYMENT
OF BIRTH ("DOB") POSITION HELD IN THE PAST 5 YEARS
----------------------------------------------------------------------
Janice B. Case Director Director, ATSF (2001-
205 Palm Island NW present); Trustee, IDEX
Clearwater, (2002-present); Manager,
FL 33767 Fund B (2002-present);
(DOB 9/27/52) Senior Vice President
(1996-2000), Vice
President (1990-1996)
and Director of Customer
Service & Marketing
(1987-1990), Florida
Power Corp.; Director,
Central Vermont Public
Service Co. (Audit
Committee); Director
Western Electricity
Coordinating Council
(Chairman, Human
Resources and
Compensation Committee).
Charles C. Harris Director Director, ATSF (1986-
2 Seaside Lane # 304 present); Trustee, IDEX
Belleair, (March 1994-present);
FL 33756 Manager, Fund B
(DOB 1/15/30) (2002-present).
Leo J. Hill Director Trustee, IDEX (2002-
2201 N. Main St. present); Manager, Fund
Gainesville, B (2002-present); Owner
FL 32609 & President, Prestige
(DOB 3/27/56) Automotive Group
(2001-present); Market
President (1997-1998),
NationsBank; President &
CEO (1994-1998), Barnett
Bank of the Treasure
Coast, Florida;
Director, ATSF
(2001-present).
23
DIRECTORS AND OFFICERS (UNAUDITED) (CONTINUED)
PRINCIPAL
OCCUPATION(S)
NAME, ADDRESS & DATE OR EMPLOYMENT
OF BIRTH ("DOB") POSITION HELD IN THE PAST 5 YEARS
----------------------------------------------------------------------
Russell A. Kimball, Jr. Director General Manager,
1160 Gulf Boulevard Sheraton Sand Key Resort
Clearwater Beach, (1975-present);
FL 34630 Director, ATSF (1986-
(DOB 8/17/44) present); Trustee, IDEX
(2002-present); Manager,
Fund B (2002-present).
John R. Kenney(1) Chairman Director & Chairman,
P.O. Box 5068 ATSF & Fund B; Chairman
Clearwater, & Director, Western
FL 34618 Reserve Life Assurance
(DOB 2/8/38) Co. of Ohio (1996-June,
2002); Chairman,
Director and Co-CEO,
Great Companies, L.L.C.;
Manager, Transamerica
Investment Management,
L.L.C.
Larry N. Norman(1) Director President & Chairman,
4333 Edgewood Road NE Transamerica Life
Cedar Rapids, IA 52499 Insurance Company;
(DOB 1/8/53) President, AFSG
Securities Corp. (AFSG);
Director,
AEGON/Transamerica Fund
Advisers, Inc. (ATFA);
Director,
AEGON/Transamerica
Investor Services, Inc.
(ATIS); Director,
AEGON/Transamerica Fund
Services, Inc. (ATFS);
Director, ATSF; Manager,
Fund B (2002-present);
Director, TIF (2002-
present); Trustee, IDEX
(2002-present).
24
DIRECTORS AND OFFICERS (UNAUDITED) (CONTINUED)
PRINCIPAL
OCCUPATION(S)
NAME, ADDRESS & DATE OR EMPLOYMENT
OF BIRTH ("DOB") POSITION HELD IN THE PAST 5 YEARS
----------------------------------------------------------------------
William W. Short, Jr. Director Director, ATSF
6911 Bryan Dairy Road (September 2000-
Suite 210 present); Trustee, IDEX
Largo, FL 33777 (1986-present); Manager,
(DOB 2/25/36) Fund B (2002-present);
President and majority
shareholder of Shorts,
Inc.; Chairman of
Southern Apparel
Corporation, S.A.S.C.
Apparel Corporation and
S.A.C. Distributors.
---------------
(1) May be deemed as "interested person" of the Fund as defined in the 1940 Act
due to employment with an affiliate of ATFA; Transamerica Investment
Management, LLC, the Fund's sub-adviser, ATSF, Fund B, IDEX and TIF, all
affiliates of the Fund. Such director received no compensation directly from
the Fund.
25
DIRECTORS AND OFFICERS (UNAUDITED) (CONTINUED)
OFFICERS
BRIAN C. SCOTT
President and Chief Executive Officer
KIM D. DAY
Vice President, Treasurer and
Principal Financial Officer
JOHN K. CARTER
Senior Vice President,
Secretary and General Counsel
WILLIAM T. DAVIS
Vice President,
Investment Manager Oversight and Relations
GAYLE A. MORDEN
Assistant Vice President and Assistant Secretary
TERESA PEPLOWSKI
Assistant Secretary
KATHI WILLIAMS
Assistant Secretary
26
TRANSAMERICA INCOME SHARES, INC.
RESULTS OF SHAREHOLDER PROXY (UNAUDITED)
Section 270.30d-1 under the Investment Company Act of 1940, as amended, titled
"Reports of Stockholders of Management Companies," requires regulated investment
companies to report on all subject matters put to the vote of shareholders and
provide final results. Accordingly, Transamerica Income Shares solicited a vote
at a meeting of shareholders held July 11, 2002 for:
PROPOSAL 1: Election of eight new directors to the Board.
ABSTENTIONS/
BROKER
FOR AGAINST NON-VOTES
------------------------------------------------------------
Peter R. Brown 97.25% 1.09% 1.65%
Daniel Calabria 97.30% 0.92% 1.77%
Janice B. Case 97.40% 0.83% 1.76%
Charles C. Harris 97.19% 1.18% 1.61%
John R. Kenney 97.30% 0.87% 1.82%
Russell A. Kimball, Jr. 97.40% 0.82% 1.76%
William W. Short, Jr. 97.25% 0.90% 1.84%
Leo J. Hill 97.31% 0.91% 1.76%
PROPOSAL 2: To ratify the Management and Investment Advisory Agreement between
the Fund and AEGON/Transamerica Fund Advisers, Inc. (the "Agreement").
ABSTENTIONS/
BROKER NON-
FOR AGAINST VOTES
------------------------------------------------------------
97.22% 0.79% 1.97%
PROPOSAL 3: To ratify Ernst & Young LLP as independent auditors
ABSTENTIONS/
BROKER NON-
FOR AGAINST VOTES
------------------------------------------------------------
97.67% 0.87% 1.45%
---------------------------------------------------------
INVESTMENT ADVISER
AEGON/Transamerica Fund Advisers, Inc.
570 Carillon Parkway
St. Petersburg, FL 33716-1202
SUB-ADVISER
Transamerica Investment Management, LLC
1150 S. Olive Street, 27th Floor
Los Angeles, CA 90015
TRANSFER AGENT
Mellon Investor Services
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
1-800-288-9541
For hearing and speech impaired (TDD)
1-800-231-5469
www.mellon-investor.com
CUSTODIAN
Investors Bank & Trust Company
LISTED
New York Stock Exchange
Symbol: TAI
NASDAQ SYMBOL: XTAIX
---------------------------------------------------------
Transamerica Income Shares, Inc. is a closed-end investment company which
invests primarily in debt securities. Its objective is to provide a high level
of current income.