<PAGE> 1
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
Robert R. Fortune
Chairman and President November 1, 1995
Dear Shareholder:
In the first nine months of 1995, our Fund earned $1.03 per share from net
investment income. Earnings were also $1.03 per share in the first nine months
of 1994.
Monthly dividends of $.115 per share were paid in each month from January
to October 1995. However, the January dividend was treated as taxable in 1994.
The Fund's investment objective is to seek as high a level of current
income as is consistent with prudent investment. At least 60% of the Fund's
assets must be in securities which are rated at the time of purchase in the four
highest investment grades assigned by Moody's Investors Service, Inc. or
Standard & Poor's Ratings Group. As of September 30, 1995, securities
representing 93.3% of the portfolio's market value were invested in bonds rated
Baa, BBB or higher.
Please let us know if we may be of assistance in connection with your
investment in Independence Square Income Securities, Inc.
Yours sincerely,
/s/ Robert R. Fortune
Robert R. Fortune
<PAGE> 2
INVESTMENT ADVISER'S REPORT
The strong returns provided by the fixed income markets during the first
half of 1995 moderated during the third quarter as interest rates stabilized.
Mixed economic signals during the period prevented the Federal Reserve from
reducing short term interest rates as many market participants had anticipated.
Interest rates were little changed as indicated in the table below:
<TABLE>
<CAPTION>
06/30/95 09/30/95 CHANGE
-------- -------- ------
<S> <C> <C> <C>
2-year Treasury Notes...................................... 5.79% 5.85% +0.06%
5-year Treasury Notes...................................... 5.97% 6.01% +0.04%
10-year Treasury Notes..................................... 6.20% 6.18% -0.02%
30-year Treasury Notes..................................... 6.62% 6.50% -0.12%
</TABLE>
The sustained decline of rates throughout 1995 caused the portfolio to
underperform during the quarter as several higher coupon issues were called.
This problem, combined with investor caution in the utility sector, more than
offset the portfolio's relatively long duration. Investment returns are shown
below:
<TABLE>
<CAPTION>
TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 1995
ANNUALIZED
-----------------------
12 2 5 10
QUARTER YTD MOS. YRS. YRS. YRS.
------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Independence Square Income Securities, Inc.*.... 1.69% 16.00% 16.53% 5.89% 11.42% 10.29%
Lehman Bros. Gov't/Corp. Bond Index............. 1.91% 13.94% 14.35% 4.70% 9.89% 9.95%
Lipper Invt. Grade Closed-End Bond Funds
(Avg.)........................................ 2.57% 15.36% 15.93% 5.39% 11.25% 10.54%
Lipper Invt. Grade Closed-End Bond Funds:
I.S.I.S. Rank/No. of Funds.................... 15/17 7/17 7/17 4/17 9/16 10/16
I.S.I.S. Percentile Rank...................... 88% 41% 41% 23% 56% 62%
</TABLE>
- ------------------
*The cumulative total returns are based on the net asset value on the first day
of the periods presented and assume (i) no payment of any sales load or
commissions and (ii) reinvestment of dividends and distributions at the net
asset value next determined after each ex-dividend date in the period.
We continue to predict the 1995 Gross Domestic Product (GDP) growth rate to
be 2.8%, with inflation, as measured by the Consumer Price Index (CPI), to be
3.1% in 1995. We expect long term interest rates to remain in a range of 6.25%
to 7.0% through the remainder of 1995. We are lowering the range from our
previous estimate of 6.50% to 7.25% due to continuing signs that inflation
remains under control.
PNC INSTITUTIONAL MANAGEMENT CORPORATION
October 24, 1995
<PAGE> 3
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
STATEMENT OF NET ASSETS
SEPTEMBER 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT COST VALUE
- ----------- ----------- ------------
<C> <S> <C> <C>
BONDS AND OTHER DEBT OBLIGATIONS--100.0%
$ 1,000,000 Ahmanson (H.F.) & Co., 9.875%, 11/15/1999................................ $ 995,465 $ 1,107,500
1,000,000 Alltel Corp., 8.875%, 3/01/2022.......................................... 956,480 1,058,750
1,000,000 Arizona Public Service Co., 10.25%, 5/15/2020............................ 1,000,000 1,135,000
500,000 Arizona Public Service Co., 9.50%, 4/15/2021............................. 490,265 573,125
500,000 Banc One Corp., 7.75%, 7/15/2025......................................... 494,965 516,250
500,000 BankAmerica Corp., 9.50%, 4/01/2001...................................... 497,265 566,250
175,000 Boeing Co., 7.25%, 6/15/2025............................................. 176,295 176,531
1,000,000 Chase Manhattan Corp. Sub Notes, 10.00%, 6/15/1999....................... 1,117,080 1,113,750
1,000,000 Chrysler Corp., 10.95%, 8/01/2017........................................ 997,500 1,117,500
1,000,000 Citicorp Capital Sub Notes, 9.75%, 8/01/1999............................. 983,110 1,106,250
1,000,000 Cleveland Electric Co., 10.00%, 6/01/2020................................ 988,250 1,011,250
1,000,000 Comerica Bank, 8.375%, 7/15/2024......................................... 983,750 1,090,000
300,000 Comerica Corp., 9.75%, 5/01/1999......................................... 288,840 329,625
1,000,000 Commonwealth Edison Co., 9.50%, 5/01/2016................................ 987,500 1,077,500
500,000 Commonwealth Edison Co., 9.625%, 7/01/2019............................... 499,450 527,500
1,000,000 Domtar, Inc., 11.25%, 9/15/2017.......................................... 997,500 1,063,750
500,000 First Chicago Corp., 8.875%, 3/15/2002................................... 503,660 560,625
1,000,000 First Interstate Bank, 9.00%, 11/15/2004................................. 1,000,000 1,090,000
500,000 First Union Corp., 8.00%, 8/15/2009...................................... 498,965 526,875
1,000,000 Ford Motor Credit Co., 9.14%, 12/30/2014................................. 997,660 1,110,000
1,000,000 General Motors Corp., 8.125%, 4/15/2006.................................. 974,550 1,041,250
500,000 Great Western Financial Senior Notes, 8.60%, 2/01/2002................... 494,710 546,875
1,000,000 GTE Corp., 7.83%, 5/01/2023.............................................. 1,000,000 1,002,500
500,000 Harris Bancorp, 9.375%, 6/01/2001........................................ 493,285 570,000
1,000,000 International Business Machines Corp., 8.375%, 11/01/2019................ 1,006,330 1,136,250
1,000,000 International Paper Co., Debenture, 8.125%, 11/01/2019................... 979,860 1,060,000
500,000 New England Power Co., 8.00%, 8/01/2022.................................. 494,350 527,500
800,000 New York State Electric & Gas Corp., 9.875%, 5/01/2020................... 793,000 868,000
1,000,000 Norsk-Hydro, 7.75%, 6/15/2023............................................ 995,350 1,047,500
1,000,000 OPC Scherer Funding Corp., Serial Facility Bond, 9.70%, 6/30/2011........ 1,000,000 1,072,500
1,000,000 Ohio Edison Corp., 9.75%, 7/15/2019...................................... 997,500 1,070,000
14,623 Participation in Asset Exchange.......................................... 14,623 14,477
500,000 Penney (J.C.) Co., Inc. 8.25%, 8/15/2022................................. 497,445 537,500
500,000 PECO Energy Co., 8.75%, 4/01/22.......................................... 500,510 533,750
1,000,000 PECO Energy Co., 8.625%, 6/01/2022....................................... 983,840 1,051,250
300,000 Potomac Electric Power, 8.625%, 8/15/2019................................ 294,360 315,000
</TABLE>
<PAGE> 4
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
STATEMENT OF NET ASSETS -- (Continued)
SEPTEMBER 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT COST VALUE
- ----------- ----------- ------------
<C> <S> <C> <C>
BONDS AND OTHER DEBT OBLIGATIONS--(CONTINUED)
$ 1,000,000 Quebec-Hydro, 8.40%, 1/15/2022........................................... $ 1,016,790 $ 1,081,250
1,000,000 Texas Utilities Electric Co., 9.875%, 2/1/2022........................... 1,029,240 1,093,750
1,000,000 Virginia Electric & Power Corp. Series B, 8.625%, 10/01/2024............. 1,014,120 1,116,250
----------- -----------
TOTAL INVESTMENTS -- 97.87%.............................................. $30,033,863* 32,543,633
-----------
-----------
OTHER ASSETS LESS LIABILITIES -- 2.13%................................... 708,087
-----------
TOTAL NET ASSETS -- 100.00%.............................................. $ 33,251,720
-----------
-----------
</TABLE>
- ------------------
*Aggregate cost for federal income tax purposes at September 30, 1995 was
$30,033,863. The aggregate gross unrealized appreciation (depreciation) for
all securities is as follows: excess of value over tax cost $2,513,246; excess
of tax cost over value ($3,476).
See accompanying notes to financial statements.
<PAGE> 5
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest..................... $2,065,328
----------
Expenses
Fees:
Investment adviser........... 89,737
Directors and officers....... 25,158
Custodian.................... 11,604
Transfer agent............... 16,856
Legal and audit.............. 23,340
Taxes (other than income).... 4,495
Printing..................... 9,091
Insurance.................... 1,936
Miscellaneous................ 4,065
----------
Total expenses............... 186,282
----------
Net investment income........ 1,879,046
----------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Realized loss from security
transactions (excluding short-
term securities):
Proceeds from sales............ $5,221,499
Cost of securities sold........ 5,376,551
----------
Net realized loss.............. (155,052)
----------
Unrealized appreciation
(depreciation) of investments:
Beginning of period............ (514,132)
End of period.................. 2,509,770
----------
Increase in unrealized
appreciation................ 3,023,902
----------
Net realized and unrealized
gain on investments......... 2,868,850
----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS...... $4,747,896
==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 6
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF THE FUND OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
JANUARY 1
THROUGH YEAR ENDED DECEMBER 31
SEPTEMBER 30, -----------------------------------------------
1995 1994 1993 1992 1991 1990
------------- ------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning
of Period....................... $ 16.58 $ 18.57 $ 17.76 $ 17.32 $ 16.06 $ 17.05
------- ------- ------- ------- ------- -------
Net Investment Income........... 1.03 1.38 1.41 1.46 1.50 1.53
Net Gains or (Losses) on Securities
(realized and unrealized).... 1.58 (1.99) 0.82 0.42 1.26 (1.01)
------- ------- ------- ------- ------- -------
Total From Investment
Operations.............. 2.61 (0.61) 2.23 1.88 2.76 0.52
------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends (from net investment
income)...................... (0.92) (1.38) (1.42) (1.44) (1.50) (1.51)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period.... $ 18.27 $ 16.58 $ 18.57 $ 17.76 $ 17.32 $ 16.06
======= ======= ======= ======= ======= =======
Per Share Market Value,
End of Period................... $17.625 $ 15.25 $ 17.25 $17.125 $17.375 $ 15.00
======= ======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN, based on
market value1................... 16.80%2 (4.0%) 9.0% 7.0% 27.0% 0.7%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(in 000's)................... $33,252 $30,179 $33,808 $32,324 $31,424 $29,113
Ratio of Expenses to Average Net
Assets....................... .76%2 0.85% 0.81% 0.85% 0.90% 1.00%
Ratio of Net Investment Income
to Average Net Assets........ 7.63%2 7.88% 7.61% 8.27% 8.97% 9.35%
Portfolio Turnover Rate......... 16% 28% 32% 18% 6% 25%
</TABLE>
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1 See Note G.
2 Annualized.
See accompanying notes to financial statements.
<PAGE> 7
NOTES TO FINANCIAL STATEMENTS
A. The Fund is registered under the Investment Company Act of 1940, as
amended, as a diversified closed-end management investment company.
Significant accounting policies are as follows: Investments are carried
at value in the accompanying financial statements (See Note D). Security
transactions are accounted for on the trade date. The cost of
investments sold is determined by use of the specific identification
method for both financial reporting and income tax purposes. Premiums
and discounts on bonds held for investment are not amortized for
financial reporting or federal income tax purposes inasmuch as the Fund
does not generally intend to hold such securities until maturity. For
federal income tax purposes, discounts on original issue bonds are
amortized over the life of the issue. No provision is made for federal
taxes as it is the Fund's policy to continue to qualify as a regulated
investment company and to make the requisite distribution of taxable
income to its shareholders which will relieve it from all or
substantially all federal income and excise taxes. Dividends payable are
recorded on the dividend record date. Interest income is recorded on an
accrual basis.
B. Under Agreements among the Fund, PNC Bank, National Association (PNC
Bank), and PNC Institutional Management Corporation (PIMC), an indirect
wholly owned subsidiary of PNC Bank, PIMC manages the Fund's portfolio
and serves as its administrative agent. The Fund pays PIMC, as
investment adviser, a quarterly fee of .05% (annually .20%) of the
Fund's average net assets and .5% (annually 2%) of the Fund's gross
income for such quarter.
PIMC has agreed to reimburse the Fund to the extent that the aggregate
expenses borne by the Fund in any fiscal year, exclusive of brokerage
commissions, interest and taxes, exceed 1 1/2% of average net assets up
to $30,000,000 and 1% of any excess. No such fee reimbursement was
necessary during the period ended September 30, 1995.
C. Purchases and sales of investment securities other than short term
obligations for the period ended September 30, 1995 were $5,020,335 and
$5,221,499.
D. Values for securities listed on a national securities exchange are based
on the latest quoted sale prices on September 30, 1995. Securities not
so listed or not traded on that date are valued at their most recent
quoted bid prices or at prices determined by investment bankers or
brokers. Short-term obligations are valued at cost which approximates
market.
E. At December 31, 1994, a capital loss carryover of $443,414 was available
to offset possible future realized capital gains. The carryover expires
as follows: $139,631 in 1998 and $303,783 in 2002.
F. At September 30, 1995, net assets consisted of:
<TABLE>
<S> <C>
Paid-in capital............................................... $31,062,016
Undistributed net investment income........................... 278,402
Accumulated net realized loss on investments.................. (598,468)
Net unrealized appreciation of investments.................... 2,509,770
Total......................................................... $33,251,720
</TABLE>
G. The "Total Investment Return" is based on a purchase (or sale) at the
market price on the first (or last) day of the period, assuming (i) no
payment of any sales load or commissions and (ii) reinvestment of
dividends and distributions at prices obtained by the Fund's dividend
reinvestment plan.
<PAGE> 8
- --------------------------------------------------------------------------------
INDEPENDENCE SQUARE INCOME SECURITIES,
INC.
One Aldwyn Center
Villanova, PA 19085
(215) 964-8882
BOARD OF DIRECTORS
ROBERT R. FORTUNE G. WILLING PEPPER
R. STEWART RAUCH DAVID R. WILMERDING, JR.
OFFICERS
ROBERT R. FORTUNE, Chairman and President
ROBERT T. ARNOLD, Executive Vice President
ROBERT J. CHRISTIAN, Vice President
EDWARD J. ROACH, Vice President and Treasurer
GARY M. GARDNER, Secretary
INVESTMENT ADVISER
PNC INSTITUTIONAL
MANAGEMENT CORPORATION
400 Bellevue Parkway
Wilmington, DE 19809
TRANSFER AGENT
PNC BANK, N.A.
c/o PFPC INC.
P.O. Box 8950
Wilmington, Delaware 19899
(800) 852-4750
(302) 791-2748 (Delaware)
- --------------------------------------------------------------------------------
INDEPENDENCE
SQUARE
INCOME
SECURITIES,
INC.
Third Quarter Report
to Shareholders
September 30, 1995
