<PAGE> 1
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
Robert R. Fortune
Chairman and President February 7, 1995
Dear Shareholder:
I am pleased to enclose the Annual Report of Independence Square Income
Securities, Inc. for the year 1994.
During 1994 we were successful in offsetting income reductions from bond
calls with other bond trades. However, net investment income was reduced by
3 cents per share from $1.41 in 1993 to $1.38 in 1994, reflecting the
full-year impact of numerous bond calls in 1993 when interest rates declined
dramatically over the course of the year.
Dividends declared in 1994 amounted to $1.38 per share, as compared to
$1.42 per share in 1993. The dividends declared and considered taxable in
1994 include the dividend of $.115 per share received by you in January 1995.
The shares of Independence Square Income Securities, Inc., traded on the
NASDAQ System, were last traded in 1994 at $15.25 per share.
The accompanying Investment Adviser's Report provides a comparison of our
Fund's performance to key indices and other closed-end bond funds.
Yours sincerely,
/s/ Robert R. Fortune
<PAGE> 2
INVESTMENT ADVISER'S REPORT
1994 was a terrible year for bond investors. The Federal Reserve's
decision in February to raise interest rates was both sooner and more
dramatic than most observers had anticipated. In all, the Fed raised interest
rates six times in 1994-the most ever in one year. The speed and strength of
these increases caught most fixed income investors by surprise. One-year
Treasuries doubled from 3.58% to 7.16% and thirty-year Treasuries rose from
6.35% to 7.88%. Long government bonds recorded a negative total return of
7.73%, the second worst single year performance since 1926! For the first
time since its inception in 1972 the Lehman Government/Corporate Index
recorded a negative return for 1994 (-3.51). Additionally, four areas were
problematic for many investors: excessive leverage, derivatives,
mortgaged-backed securities and emerging market debt.
Fortunately, none of these areas was a disaster for the Independence
Square Income Securities, Inc. portfolio. Although the portfolio recorded a
negative total return for the year, as the table below shows, its return was
respectable relative to bond returns generally:
<TABLE>
<CAPTION>
TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1994
Annualized
---------------------------
Quarter 12 Mos. 2 Yrs. 5 Yrs. 10 Yrs.
--------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Independence Square Income Securities, Inc.* ........ 0.46% -3.96% 4.11% 7.99% 10.43%
Lehman Brothers Gov't/Corp. Bond Index ............... 0.37% -3.51% 3.51% 7.70% 9.84%
Lipper Investment Grade Closed-End Bond Funds (Avg.) 0.39% -4.04% 4.05% 8.24% 10.56%
Lipper Investment Grade Closed-End Bond Funds:
--I.S.I.S. Rank/No. of Funds ....................... 12/18 7/18 8/17 13/17 9/16
--I.S.I.S. Percentile Rank ......................... 67% 39% 47% 76% 56%
</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 expect 1995 to be a better year for bond investors. We project real GDP
growth to slow from an estimated 4.0% in 1994 to 3.1% with a further slowing
to 2.1% in 1996. We project inflation, as measured by the CPI, to increase,
but not so much as to cause great concern in the bond market. The CPI rose
2.7% in 1994 and we project 3.4% in 1995 and 3.6% in 1996. Against this
background we expect long-term interest rates will decline modestly,
primarily in the second half of the year.
January 18, 1995 PNC INSTITUTIONAL MANAGEMENT CORPORATION
<PAGE> 3
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
SCHEDULE OF INVESTMENTS
December 31, 1994
<TABLE>
<CAPTION>
Principal
Amount Cost Value
- - ------------ ----------- ----------
<S> <C> <C> <C>
BONDS AND OTHER DEBT OBLIGATIONS--100.0%
$1,000,000 ABN-AMRO Bank, 7 3/4 %, 5/15/2023............................ $ 997,000 $ 893,750
1,000,000 Ahmanson (H.F.) & Co., 9 7/8 %, 11/15/1999 .................. 995,465 1,047,500
1,000,000 Alltel Corp., 8 7/8 %, 3/01/2022 ............................ 956,480 973,750
1,000,000 American Airlines, Inc., 14 3/8 %, 1/06/2005................. 1,000,000 1,061,250
1,000,000 Arizona Public Service Co., 10 1/4 %, 5/15/2020 ............. 1,000,000 1,071,250
500,000 Arizona Public Service Co., 9 1/2 %, 4/15/2021 .............. 490,265 508,125
500,000 BankAmerica Corp., 9 1/2 %, 4/01/2001 ....................... 497,265 519,375
400,000 Boeing Co., 7 1/4 %, 6/15/2025............................... 402,960 340,000
1,000,000 Chase Manhattan Corp. Sub Notes, 10%, 6/15/1999 ............. 1,117,080 1,050,000
1,000,000 Chrysler Corp., 10.95%, 8/01/2017............................ 997,500 1,051,250
1,000,000 Citicorp Capital Sub Notes, 9 3/4 %, 8/01/1999 .............. 983,110 1,042,500
1,000,000 Cleveland Electric Co., 10%, 6/01/2020....................... 988,250 915,000
1,000,000 Comerica Bank, 8.375%, 7/15/2024 ............................ 983,750 932,500
300,000 Comerica Co., 9 3/4 %, 5/01/1999 ............................ 288,840 312,375
1,000,000 Commonwealth Edison Co., 9 1/2 %, 5/01/2016.................. 987,500 995,000
500,000 Commonwealth Edison Co., 9 5/8 %, 7/01/2019.................. 499,450 528,750
500,000 Continental Corp., 8 3/8 %, 8/15/2012 ....................... 500,000 480,000
1,000,000 Domtar, Inc., 11 1/4 %, 9/15/2017............................ 997,500 982,500
500,000 First Chicago Corp., 8 7/8 %, 3/15/2002...................... 503,660 505,625
1,000,000 First Interstate Bank, 9%, 11/15/2004 ....................... 1,000,000 1,012,500
500,000 First Union Corp., 8%, 8/15/2009 ............................ 498,965 461,250
1,000,000 Florida Power & Light Co., 7%, 9/01/2025..................... 1,014,910 817,500
100,000 General Electric Capital Corp., 5.75% 1/30/1995 ............. 100,000 100,000
1,000,000 General Motors Corp., 8.125%, 4/15/2006...................... 974,550 915,000
500,000 Great Western Financial Senior Notes, 8.60%, 2/01/2002....... 494,710 500,000
1,000,000 GTE Corp., 7.83%, 5/01/2023 ................................. 1,000,000 880,000
500,000 Harris BanCorp, 9 3/8 %, 6/01/2001........................... 493,285 522,500
1,000,000 International Business Machines Corp., 8.375%, 11/01/2019.... 1,006,330 962,500
1,000,000 International Paper Co., Debenture, 8.125%, 6/15/2024........ 979,860 935,000
500,000 New England Power Co., 8%, 8/01/2022 ........................ 494,350 455,000
800,000 New York State Electric & Gas Corp., 9 7/8 %, 5/01/2020...... 793,000 833,000
1,000,000 Norsk-Hydro, 7 3/4 %, 6/15/2023 ............................. 995,350 882,500
1,000,000 Oglethorpe Power Fac Bond Georgia, 9.70%, 6/30/2011 ......... 1,000,000 1,037,500
1,000,000 Ohio Edison Corp., 9 3/4 %, 7/15/2019 ....................... 997,500 1,060,000
17,509 Participation in Asset Exchange ............................. 17,509 16,447
500,000 Penney (J.C.) Co., Inc. 8 1/4 %, 8/15/2022 .................. 497,445 477,500
500,000 Philadelphia Electric Co., 7 3/4 %, 5/01/2023................ 482,300 438,750
300,000 Potomac Electric Power, 8 5/8 %, 8/15/2019 .................. 294,360 291,000
1,000,000 Quebec--Hydro, 8.40%, 1/15/2022 ............................. 1,016,790 937,500
1,000,000 Texas Utilities Electric, 9 7/8 %, 11/01/2019................ 992,790 $ 1,070,000
----------- -----------
Total Bonds and Other Debt Obligations................ 30,330,079 29,815,947
----------- -----------
TOTAL INVESTMENTS--100.00% ............................... $30,330,079* $29,815,947
=========== ===========
</TABLE>
- - ------
* Aggregate cost for federal income tax purposes at December 31, 1994 was
$30,330,079. The aggregate gross unrealized appreciation (depreciation) for
all securities is as follows: excess of value over tax cost $681,430; excess
of tax cost over value ($1,195,562).
See accompanying notes to financial statements.
<PAGE> 4
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1994
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments at value (cost--$30,330,079) ................................. $29,815,947
Cash ..................................................................... 78,497
Accrued interest receivable .............................................. 687,510
-----------
Total assets .......................................................... 30,581,954
-----------
LIABILITIES
Dividends payable ........................................................ 209,359
Accrued expenses ......................................................... 193,901
-----------
Total liabilities ..................................................... 403,260
-----------
NET ASSETS applicable to 1,820,511 capital shares outstanding, $0.10 par
value (authorized 10,000,000 shares) ....................................... $30,178,694
===========
NET ASSET VALUE PER SHARE ($30,178,694 (divided by) 1,820,511 shares) ....... $16.58
===========
</TABLE>
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1994
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME
Interest income ............... $ 2,782,002
-----------
Expenses
Fees:
Investment adviser ........ 119,357
Directors and officers .... 35,498
Custodian ................. 19,001
Transfer agent ............ 20,269
Legal ..................... 15,651
Audit ..................... 23,695
Taxes (other than income) ... 10,936
Printing .................... 11,758
Insurance ................... 3,247
Miscellaneous ............... 11,904
------------
Total expenses ........... 271,316
------------
Net investment income ......... 2,510,686
------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS
Realized loss from security
transactions (excluding
short-term securities):
Proceeds from sales ......... $ 8,627,901
Cost of securities sold ..... 8,931,684
------------
Net realized loss ........... (303,783)
------------
Unrealized appreciation
(depreciation) of
investments:
Beginning of year ........... 2,809,398
End of year ................. (514,132)
------------
Increase in unrealized
depreciation .............. (3,323,530)
------------
Net realized and unrealized
loss on investments ....... (3,627,313)
------------
NET DECREASE IN NET
ASSETS RESULTING FROM
OPERATIONS .................. $(1,116,627)
============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 5
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31
<TABLE>
<CAPTION>
1994 1993
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income .............................................. $ 2,510,686 $ 2,571,915
Net realized gain (loss) from security transactions ................ (303,783) 863,258
Increase in unrealized appreciation (depreciation) of investments .. (3,323,530) 633,928
------------- -------------
Net increase (decrease) in net assets resulting from operations . (1,116,627) 4,069,101
Dividends to shareholders from net investment income ($1.38 in 1994 ,
and $1.42 in 1993) ................................................. (2,512,305) (2,585,126)
------------- -------------
Total increase (decrease) in net assets ......................... (3,628,932) 1,483,975
NET ASSETS:
Beginning of year .................................................... 33,807,626 32,323,651
------------- -------------
End of year (including undistributed net investment income of $74,224
in 1994 and $75,843 in 1993) ....................................... $30,178,694 $33,807,626
============= =============
</TABLE>
FINANCIAL HIGHLIGHTS
(For a Share of the Fund Outstanding Throughout Each Year)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------
1994 1993 1992 1991 1990
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net Asset Value, Beginning of Year ........... $ 18.57 $ 17.76 $ 17.32 $ 16.06 $ 17.05
------- ------- ------- ------- -------
Net Investment Income ........................ 1.38 1.41 1.46 1.50 1.53
Net Gains or (Losses) on Securities (realized
and unrealized) ............................. (1.99) 0.82 0.42 1.26 (1.01)
------- ------- ------- ------- -------
Total From Investment Operations ......... (.61) 2.23 1.88 2.76 .52
------- ------- ------- ------- -------
Less Distributions
Dividends (from net investment income) ..... (1.38) (1.42) (1.44) (1.50) (1.51)
------- ------- ------- ------- -------
Net Asset Value, End of Year ................. $ 16.58 $ 18.57 $ 17.76 $ 17.32 $ 16.06
======= ======= ======= ======= =======
Per Share Market Value, End of Year ......... $ 15.25 $ 17.25 $17.125 $17.375 $ 15.00
======= ======= ======= ======= =======
Total Investment Return, based on market
value(1) ................................... (4.0%) 9.0% 7.0% 27.0% 0.7%
Ratios/Supplemental Data
Net Assets, End of Year (in 000's) ......... $30,179 $33,808 $32,324 $31,424 $29,113
Ratio of Expenses to Average Net Assets .... 0.85% 0.81% 0.85% 0.90% 1.00%
Ratio of Net Investment Income to Average
Net Assets ............................... 7.88% 7.61% 8.27% 8.97% 9.35%
Portfolio Turnover Rate .................... 28% 32% 18% 6% 25%
</TABLE>
(1) See Note G.
See accompanying notes to financial statements.
<PAGE> 6
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), a 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 year ended December 31, 1994.
C. Purchases and sales of investment securities other than short term
obligations for the year ended December 31, 1994 were $8,664,914 and
$8,627,901, respectively. Sales included $149,578 of U.S. Government
securities.
D. Values for securities listed on a national securities exchange are based on
the latest quoted sale prices on December 31, 1994. 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 December 31, 1994, net assets consisted of:
<TABLE>
<CAPTION>
<S> <C>
Paid-in capital ............................. $31,062,016
Undistributed net investment income ........ 74,224
Accumulated net realized loss on investments (443,414)
Net unrealized depreciation of investments . (514,132)
-----------
Total ....................................... $30,178,694
===========
</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 Company's dividend reinvestment
plan.
<PAGE> 7
Report of Independent Accountants
To the Shareholders and Directors of Independence Square Income Securities,
Inc.:
We have audited the accompanying statement of assets and liabilities of
Independence Square Income Securities, Inc., including the schedule of
investments, as of December 31, 1994 and the related statement of operations
for the year then ended, the statement 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 Fund'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 generally accepted auditing
standards. 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. Our procedures included confirmation of
securities owned as of December 31, 1994 by correspondence with the
custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Independence Square Income Securities, Inc., as of December 31, 1994, 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 generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 15, 1995
<PAGE> 8
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
Summary of the Fund's Dividend Investment Plan
The Company has an Automatic Dividend Investment Plan which permits
participating shareholders to receive income dividends and capital gain
distributions ("Distributions") in additional shares of the Company's Common
Stock. A shareholder may elect to participate in the Plan by completing an
Authorization Form. Under the Plan, the number of shares allocated to a
shareholder's account in the Plan is determined generally as follows: (i) if
the net asset value ("NAV") per share on the Determination Date is higher
than the market value per share, shares are purchased on the open market and
allocated to each Participant based on the average cost per share, including
brokerage commissions; and (ii) if the NAV per share on the Determination
Date is equal to or lower than the market price, shares are issued by the
Company based on NAV on the Payment Date, subject to certain adjustments.
Shareholders will receive confirmations of Distribution transactions.
Distributions of dividend income and capital gain are treated as being
realized for tax purposes, even though received in additional shares of
Common Stock rather than cash. The Company presently pays the costs of
participating in the Plan other than brokerage commissions, although
Participants may be charged for extra services requested by them in
connection with the Plan. The Plan may be modified at any time by the Company
upon 30-days' prior notice to shareholders. Participants may terminate
participation in the Plan at any time on 15-days' prior notice, and will
receive certificates for shares held in their accounts and cash for any
fractional share. Additional information about the Automatic Dividend
Investment Plan and an Authorization Form may be obtained by writing:
Wilmington Trust Company, Rodney Square North, Wilmington, Delaware 19890,
Attention: Corporate Trust Department.
<PAGE> 9
INDEPENDENCE SQUARE INCOME SECURITIES, INC. INDEPENDENCE
One Aldwyn Center SQUARE
Villanova, PA 19085 INCOME
(610) 964-8882 SECURITIES,
INC.
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, DE 19899 Annual Report
(800) 852-4750 to Shareholders
(302) 791-1072 (Delaware) December 31, 1994
