<PAGE> 1
Transamerica Income Shares, Inc.
SEMI-ANNUAL REPORT
SEPTEMBER 30, 1996
LOGO
<PAGE> 2
REPORT TO SHAREHOLDERS
Real economic growth in the third quarter of 1996 slowed markedly from the
second quarter's 4.8% pace. In fact, consumption in real terms probably declined
as consumers began to rebuild overstretched balance sheets. Employment grew
strongly, but retail sales (excluding autos) declined in each month. Surveys
point to consumer confidence at peak levels, and a modest fourth quarter rebound
is predicted. However, with non-mortgage debt at a historic high, borrowing is
taking place at a slower rate. Slower debt growth points to a slower rate of
economic growth, although consumer debt levels probably will not decline in
absolute terms until the next recession.
As signs of the economic weakness anticipated early next year become
apparent, both short and long-term interest rates should begin to move lower
towards the end of this year. This probable economic slowdown is not expected to
be serious, but several quarters of growth below 2% in real GDP terms are likely
as consumers continue to rebuild savings. We believe that recession is unlikely
unless the Federal Reserve errs on the side of too much restraint. The current
level of long-term U.S. Treasury rates near 7% present a very attractive
opportunity to earn a long-term real return in excess of 4%.
At September 30, 1996, the Company's total net assets were $152,737,580 or
$24.17 per share compared to $155,294,334 or $24.58 per share on March 31, 1996.
Unaudited net investment income for the six months ended September 30, 1996 was
$5,941,838 or 94 cents per share compared to net investment income of 96 cents
per share for the comparable period of 1995. The dividend, which is payable
monthly, remains at 16 cents per share, for a current annual rate of $1.92.
Highlights: For the six months ended September 30:
<TABLE>
<CAPTION>
Per Share: 1996 1995
<S> <C> <C>
Net investment income................. $ 0.94 $ 0.96
Distributions paid.................... 0.96* 0.96
Net asset value....................... 24.17 24.88
</TABLE>
* Includes a distribution of 3.42 cents from realized capital gains.
Dividends: For the fiscal years ended March 31:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C>
$1.93 $1.99** $2.01** $2.01 $2.16
</TABLE>
** Includes a distribution of 5.88235 and 7.25 cents from realized capital gains
in 1995 and 1994, respectively.
Quality: Ratings used are the highest by Moody's or Standard & Poor's for bonds
owned on September 30, 1996:
<TABLE>
<CAPTION>
LOWER OR
AAA AA A BBB NON-RATED
<S> <C> <C> <C> <C>
1.3% 7.3% 27.9% 48.7% 14.8%
</TABLE>
<PAGE> 3
INVESTMENT PORTFOLIO
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Coupon % Par Market
& Maturity Value Value
-------------- ---------- ------------
<S> <C> <C> <C> <C>
BONDS &
DEBENTURES (98.2%)
ELECTRIC & GAS UTILITIES
(15.3%)
Arizona Public 10 1/4s, '20
Service............. $2,250,000 $ 2,512,192
Arkansas Power &
Light................ 10s, '20 1,985,000 2,129,786
Boston Edison......... 9 3/8s, '21 2,200,000 2,359,170
11 1/8s, '16
CTC Mansfield......... 1,000,000 1,057,930
Commonwealth Edison... 9 7/8s, '20 2,000,000 2,255,840
8s, '23 900,000 872,433
Detroit Edison........ 8.21s, '22 1,000,000 1,047,610
8.24s, '23 2,000,000 2,088,180
Gulf States
Utilities........... 8.94s, '22 2,500,000 2,633,725
Hydro-Quebec.......... 8s, '13 3,000,000 3,066,060
Long Island Lighting.. 9 5/8s, '24 2,300,000 2,292,065
Virginia Electric
& Power.............. 8 5/8s, '24 1,000,000 1,043,190
FINANCIAL (8.3%)
Barclays North 10 1/2s, '17
American............. 3,000,000 3,240,330
Citicorp.............. 8s, '03 1,000,000 1,044,820
Fleet Financial
Group............... 8 1/8s, '04 2,000,000 2,088,820
Ford Motor Credit..... 8.20s, '02 2,000,000 2,101,700
General Motors
Acceptance........... 8 1/2s, '03 3,000,000 3,194,670
Mellon Bank........... 7s, '06 1,000,000 974,740
FOREIGN
GOVERNMENT (3.0%)
Commonwealth of 9 5/8s, '06
Australia........... 4,000,000 4,608,320
FOREST & PAPER PRODUCTS
(4.7%)
Georgia-Pacific....... 9 5/8s, '22 3,000,000 3,240,510
8 1/4s, '23 3,000,000 2,885,730
James River........... 9 1/4s, '21 1,000,000 1,105,770
</TABLE>
<PAGE> 4
INVESTMENT PORTFOLIO (CONTINUED)
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Coupon % Par Market
& Maturity Value Value
------------ ---------- ------------
<S> <C> <C> <C> <C>
HEALTHCARE (1.7%)
Tenet Healthcare...... 8 5/8s, '03 $2,500,000 $ 2,600,000
INDUSTRIALS (13.7%)
Carpenter Technology.. 9s, '22 1,000,000 1,054,640
Caterpillar........... 9 3/4s, '19 2,500,000 2,764,725
9 3/8s, '21 1,000,000 1,184,480
Cincinnati Milacron... 8 3/8s, '04 2,000,000 2,013,700
Conagra............... 9 3/4s, '21 3,000,000 3,574,080
General Motors Ser A.. 9.40s, '21 3,750,000 4,357,725
McDonnell Douglas..... 9 1/4s, '02 4,000,000 4,398,440
National Steel........ 8 3/8s, '06 575,000 543,375
Textron............... 8 3/4s, '22 1,000,000 1,037,890
MEDIA (8.1%)
Continental
Cablevision......... 9 1/2s, '13 1,000,000 1,090,000
News America
Holdings............. 9 1/4s, '13 2,500,000 2,750,950
Tele-Communications... 9.80s, '12 2,500,000 2,683,900
9 1/4s, '23 2,000,000 1,946,420
Time Warner
Entertainment........ 8 3/8s, '33 4,000,000 3,900,080
PETROLEUM (5.2%)
10 1/8s, '09
Occidental Petroleum.. 500,000 603,905
9 1/4s, '19 1,100,000 1,284,668
Phillips Petroleum.... 8.49s, '23 4,000,000 4,026,840
7.92s, '23 1,000,000 982,930
Union Oil of
California........... 8 3/4s, '01 1,000,000 1,072,270
PIPELINES (10.6%)
Colorado Interstate
Gas................. 10s, '05 2,000,000 2,327,520
NorAm Energy.......... 8.90s, '06 5,200,000 5,754,892
Northwest Pipeline.... 9s, '22 2,000,000 2,103,020
Texas Gas
Transmission........ 8 5/8s, '04 1,000,000 1,070,110
Transcanada
Pipelines........... 8 1/2s, '23 2,000,000 2,116,240
Transco Energy........ 9 3/8s, '01 2,500,000 2,738,825
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
Coupon % Par Market
& Maturity Value Value
------------- ---------- ------------
<S> <C> <C> <C> <C>
RETAIL (8.4%)
Dayton Hudson......... 10s, '11 $1,000,000 $ 1,181,080
9 1/4s, '11 2,800,000 3,136,868
8 1/2s, '22 1,000,000 998,070
May Department
Stores.............. 9 3/4s, '21 750,000 896,302
8 3/8s, '22 2,000,000 2,025,160
Pathmark Stores....... 9 5/8s, '03 3,000,000 2,925,000
Smith's Food & Drug 11 1/4s, '07
Centers............. 1,500,000 1,593,750
TELECOMMUNICATIONS (4.1%)
General Telephone & 10 3/4s, '17
Electronics.......... 3,000,000 3,253,560
Pacific Bell.......... 8 1/2s, '31 3,000,000 3,077,340
TRANSPORTATION (13.9%)
Burlington Northern... 9 1/4s, '06 1,000,000 1,095,040
CSX................... 9s, '06 3,000,000 3,326,580
10 3/8s, '11
Delta Air Lines....... 2,000,000 2,388,940
9 3/4s, '21 2,000,000 2,309,020
Federal Express....... 9 5/8s, '19 2,500,000 2,570,225
Kansas City Southern
Industries........... 6 5/8s, '05 2,800,000 2,639,784
8.80s, '22 2,250,000 2,342,003
United Air Lines...... 9 3/4s, '21 4,000,000 4,564,520
U.S. GOVERNMENT (1.2%)
10 3/4s, '05
U.S. Treasury Bond.... 1,500,000 1,898,430
------------
TOTAL SECURITIES (98.2%)........................ 150,046,888
SHORT-TERM INVESTMENT (0.7%)
State Street Bank Eurodollar
Time Deposit... 4 1/2s, 10-01-96
1,003,297
------------
TOTAL INVESTMENT PORTFOLIO (98.9%).............. 151,050,185
Receivables and other assets,
less liabilities (1.1%)....................... 1,687,395
------------
TOTAL NET ASSETS (100.0%)....................... $152,737,580
============
</TABLE>
See notes to financial statements.
<PAGE> 6
FINANCIAL STATEMENTS (UNAUDITED)
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1996
<TABLE>
<S> <C>
ASSETS:
Investment portfolio:
Securities at market value
(Identified cost $141,885,221)..... $150,046,888
Short-term investments (at cost plus
interest earned)................... 1,003,297
------------
151,050,185
Interest receivable................... 2,829,398
Other assets.......................... 29,297
------------
153,908,880
------------
LIABILITIES:
Payable for:
Income dividends declared........... 1,011,003
Management fee...................... 62,463
Accrued expenses and other
liabilities......................... 97,834
------------
1,171,300
------------
Total Net Assets -- equivalent to
$24.17 per share.................... $152,737,580
============
SUMMARY OF SHAREHOLDERS' EQUITY
Common Stock -- 6,318,771 shares of $1
par value outstanding, 20,000,000
shares authorized................... $ 6,318,771
Additional capital.................... 137,464,657
------------
Capital paid in....................... 143,783,428
Capital gains retained................ 405,455
Undistributed net investment income... 343,457
Undistributed net realized gains...... 43,573
Net unrealized appreciation of
securities.......................... 8,161,667
------------
Total Net Assets...................... $152,737,580
============
</TABLE>
See notes to financial statements.
<PAGE> 7
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1996
<TABLE>
<S> <C> <C>
Investment Income:
Income:
Interest................ $ 6,418,194
Expenses:
Management fee
(Note 2................ $ 381,954
Transfer agent fee and
expenses............... 20,810
Auditing fee............ 16,514
Postage................. 16,424
Insurance............... 9,521
Custodian fee........... 8,173
NYSE annual fee......... 8,107
Directors fees and
expenses............... 6,777
Other................... 8,076 476,356
----------- -----------
Net investment income....... 5,941,838
Net Realized and
Unrealized Loss on
Securities:
Net realized gain from
security transactions
(excluding short-term
investments):
Proceeds from securities
sold................... 5,748,640
Cost of securities
sold................... 5,705,290
-----------
Net realized gain on
security transactions
(Note 3)................. 43,350
-----------
Unrealized appreciation of
securities:
Beginning of period..... 10,637,588
End of period........... 8,161,667
-----------
Decrease in unrealized
appreciation of
securities............... (2,475,921)
-----------
Net realized and unrealized
loss on securities......... (2,432,571)
-----------
Net increase in net assets
resulting from
operations................. $ 3,509,267
===========
</TABLE>
See notes to financial statements.
<PAGE> 8
STATEMENT OF CHANGES IN TOTAL NET ASSETS
<TABLE>
<CAPTION>
Six Months Year
Ended Ended
9-30-96 3-31-96
------------ ------------
<S> <C> <C>
Increase (Decrease) In
Total Net Assets:
Operations:
Net investment income... $ 5,941,838 $ 12,239,442
Net realized gain on
security
transactions........... 43,350 270,780
Net unrealized gain
(loss) on securities... (2,475,921) 7,309,768
------------ ------------
Increase in total net
assets resulting from
operations............... 3,509,267 19,819,990
Dividends to shareholders
from net investment
income ($0.93 and $1.93
per share, respectively). (5,849,918) (12,195,228)
Distribution to
shareholders from net
realized capital gains
($0.03 per share)........ (216,103) --
------------ ------------
Increase (decrease) in
total net assets......... (2,556,754) 7,624,762
Total Net Assets:
Beginning of period
(includes undistributed
net investment income
of $251,537 and
$207,323, respectively). 155,294,334 147,669,572
------------ ------------
End of period (includes
undistributed net
investment income of
$343,457 and $251,537,
respectively).......... $152,737,580 $155,294,334
============ ============
</TABLE>
See notes to financial statements.
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- The Company, which is registered under the Investment Company Act of
1940 as a diversified, closed-end management investment company, consistently
follows the following accounting policies:
A -- The Company primarily invests in debt securities such as bonds and
debentures. These securities, even though sometimes listed on a national
securities exchange, primarily trade in the over-the-counter market.
Accordingly, prices used are the current bid or similar ascertainable market
value when the over-the-counter market more accurately reflects value. U.S.
Government securities are valued at the bid price. In instances where securities
are listed and primarily trade on a national securities exchange, they are
valued at the sale price on the last business day of the period. Prices are
provided by Merrill Lynch Securities Pricing Service, a non-affiliated
securities pricing service. Short-term investments with maturities of 60 days or
less are valued at cost plus interest earned, which approximates market value.
B -- It is the Company's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its net investment income and net realized capital gains to
its shareholders in accordance with the minimum distribution requirements of the
Code.
C -- Security transactions are accounted for on the transaction date and
distributions to shareholders are recorded on the ex-dividend date.
NOTE 2 -- The management fee, computed on weekly net assets at the annual rate
of 1/2 of 1%, was paid to Transamerica Investment Services, Inc.
NOTE 3 -- The cost of securities purchased and the proceeds of securities sold
(excluding short-term investments) were $5,652,296 and $5,748,640, respectively,
for the six months ended September 30, 1996. Realized gains or losses are based
on the specific-certificate identification method. At September 30, 1996, the
gross unrealized gain on securities held in the investment portfolio was
$8,776,040 and the gross unrealized loss was $614,373. The cost of securities
held at September 30, 1996 was the same for federal income tax and financial
reporting purposes.
<PAGE> 10
NOTE 4 -- Financial highlights for each share of Common Stock outstanding
throughout each period.
<TABLE>
<CAPTION>
Six Months Year ended March 31
Ended --------------------------------------------------------
9-30-96 1996 1995 1994 1993+ 1992
---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Per share operating
performance:
Net asset value,
beginning of
period............ $24.58 $23.37 $24.17 $25.15 $24.00 $23.13
------ ------ ------ ------ ------ ------
Net investment
income............ 0.94 1.94 1.93 1.95 2.03 2.13
Net realized and
unrealized gain
(loss) on
securities........ (0.39) 1.20 (0.74) (0.92) 1.61 0.90
------ ------ ------ ------ ------ ------
Total from
investment
operations........ 0.55 3.14 1.19 1.03 3.64 3.03
------ ------ ------ ------ ------ ------
Less distributions:
Dividends from net
investment
income............ (0.93) (1.93) (1.93) (1.94) (2.01) (2.16)
Distributions from
net realized
capital gains..... (0.03) -- (0.06) (0.07) -- --
------ ------ ------ ------ ------ ------
Total
distributions..... (0.96) (1.93) (1.99) (2.01) (2.01) (2.16)
------ ------ ------ ------ ------ ------
Dilution resulting
from rights
offering.......... -- -- -- -- (0.48) --
------ ------ ------ ------ ------ ------
Net asset value,
end of period..... $24.17 $24.58 $23.37 $24.17 $25.15 $24.00
====== ====== ====== ====== ====== ======
Per share market
value, end of
period............ $24.375 $24.375 $22.50 $23.375 $26.375 $25.50
Total investment
return*........... 3.99% 17.08% 5.07% -4.27% 11.81% 18.78%
Ratios/supplemental
data:
Net assets, end of
period (000s)..... $152,738 $155,294 $147,670 $152,699 $158,912 $126,361
Ratio of expenses
to average net
assets............ 0.63%** 0.62% 0.68% 0.69% 0.60% 0.68%
Ratio of net
investment income
to average net
assets............ 7.80%** 7.83 8.35% 7.60% 8.27% 8.98%
Portfolio turnover
rate.............. 8%** 14% 15% 15% 32% 30%
</TABLE>
- ---------------------------
+ Based on monthly average shares outstanding during the period.
* Based on the market price of the Company's shares. The total return for the
six months ended September 30, 1996, is not annualized.
** Annualized.
The number of shares outstanding at the end of each period was 6,318,771 except
for the fiscal year ending in 1992 when the number outstanding was 5,265,643
shares.
<PAGE> 11
ANNUAL SHAREHOLDER MEETING RESULTS
At the shareholders meeting held July 24, 1996, a total of 5,429,440 shares
were represented by proxy, 85.93% of all outstanding shares. The five current
directors were reelected. The votes for reelection of Donald E. Cantlay, Richard
N. Latzer, DeWayne W. Moore, Gary U. Rolle, and Peter J. Sodini were 5,356,684,
5,369,780, 5,346,590, 5,369,006 and 5,369,599, respectively, and the votes
withheld as to each were 72,756, 59,660, 82,850, 60,434 and 59,841,
respectively.
A proposal to continue the present Management and Investment Advisory
Agreement between the Company and Transamerica Investment Services, Inc. was
approved as follows: 5,308,296 votes for, and 36,162 votes against, with 84,983
abstentions. A proposal to ratify the selection of Ernst & Young LLP as
independent auditors for the Company was also approved as follows: 5,333,577
votes for, and 21,713 votes against, with 74,151 abstentions.
In certain circumstances, brokers and nominees can return a proxy as a
"non-vote"; however, no non-votes were received on any of the above matters.
<PAGE> 12
OFFICERS AND DIRECTORS
THOMAS M. ADAMS, Secretary
J. RICHARD ATWOOD, Treasurer
DONALD E. CANTLAY, Director
SHARON K. KILMER, Vice President
RICHARD N. LATZER, Director
DeWAYNE W. MOORE, Director
GARY U. ROLLE, President & Chairman
SUSAN A. SILBERT, Vice President
PETER J. SODINI, Director
- ----------------------------------------------------------
MANAGER
Transamerica Investment Services, Inc.
Box 2438, Los Angeles, CA 90051
TRANSFER AGENT
ChaseMellon Shareholder Services, L.L.C.
111 Founders Plaza, Suite 1100
East Hartford, CT 06108
1-800-288-9541
For hearing and speech impaired (TDD)
1-800-231-5469
LISTED
New York Stock Exchange
Symbol: TAI
- ----------------------------------------------------------
A dividend reinvestment plan is available.
For information, contact the plan agent:
ChaseMellon Shareholder Services, L.L.C.
Shareholder Investment Services
P.O. Box 750
Pittsburgh, PA 15230-0750
1-800-288-9541
- ----------------------------------------------------------
Transamerica Income Shares is a closed-end investment company which invests
primarily in debt securities. Its objective is to provide a high level of
current income.
