<PAGE> 1
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
Robert R. Fortune
Chairman and President February 9, 1996
Dear Shareholder:
I am pleased to enclose the Annual Report of Independence Square Income
Securities, Inc. for the year 1995.
Despite several bond calls in 1995, the Investment Adviser was able to
reinvest the proceeds so that the effect on interest income was minimal. This
fact, coupled with a reduction in expenses, enabled us to earn $1.38 per share
from net investment income, also the amount earned in 1994.
Dividends declared in 1995 amounted to $1.38 per share, the same amount per
share declared in 1994. The dividends declared and considered taxable in 1995
include the dividend of $.115 per share received by you in January 1996.
As of March 1, 1995, Bruce W. Repasy, Senior Investment Officer with the
PNC Asset Management Group, became responsible for the day-to-day management of
our portfolio. Mr. Repasy joined PNC Bank in 1992 where he served as a trader
and later portfolio manager in the trust, mutual fund and endowment areas. In
1991, Mr. Repasy worked for the Securities and Exchange Commission as a
compliance examiner of mutual funds and investment advisers.
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
Robert R. Fortune
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INVESTMENT ADVISER'S REPORT
The year 1995 proved a stark contrast to 1994's terrible year for bond
investors. Moderation in economic growth and inflation combined with gradual
Federal Reserve easing to provide bond investors with significantly better
returns in 1995. The Lehman Government/Corporate Index returned 19.24% for 1995,
a dramatic increase over the negative 3.51% return for 1994. The yield curve
steepened throughout the year with rates on the two year treasury declining
2.54% versus a decline of 1.93% for 30 year treasury rates. Interest rates
declined across the yield curve as shown in the table below:
<TABLE>
<CAPTION>
12/31/95 12/31/94 CHANGE
-------- -------- ------
<S> <C> <C> <C>
2-year Treasury Notes 5.15% 7.69% -2.54%
5-year Treasury Notes 5.37% 7.83% -2.46%
10-year Treasury Notes 5.57% 7.83% -2.26%
30-year Treasury Notes/Bonds 5.95% 7.88% -1.93%
</TABLE>
The portfolio outperformed the Lehman Government/Corporate Index and the
Lipper Investment Grade Closed End Bond Fund average by 2.97% and 1.54%,
respectively. The portfolio benefitted from its long duration and from being
fully invested in corporate bonds. Total return for corporates, as measured by
the Lehman Corporate Bond Index, was 22.25% versus 18.34% for governments.
Investment returns through December 31, 1995, are shown in the table below:
<TABLE>
<CAPTION>
TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1995
ANNUALIZED
------------------------
12 10
QUARTER MOS. 2 YRS. 5 YRS. YRS.
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Independence Square Income Securities, Inc.*............ 5.36% 22.21% 8.34% 11.66% 9.96%
Lehman Brothers Gov't/Corp. Bond Index.................. 4.66% 19.24% 7.27% 9.80% 9.65%
Lipper Investment Grade Closed-End Bond Funds (Avg.).... 4.53% 20.67% 7.56% 11.45% 10.09%
Lipper Investment Grade Closed-End Bond Funds:
I.S.I.S. Rank/No. of Funds............................ 4/17 6/17 6/17 8/16 9/16
I.S.I.S. Percentile Rank.............................. 23% 35% 35% 50% 56%
</TABLE>
- ------------------
*The total returns are cumulative based on the net asset value on the first day
of the periods presented and assumed (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 GDP growth rate to be 3.3% with a decline through 1996 to
2.6%. Inflation, as measured by CPI, is anticipated to be 2.8% in 1995 and
remain slightly below 3.0% in 1996. We expect long term interest rates to remain
near 6.00% for 1996.
PNC INSTITUTIONAL MANAGEMENT CORPORATION
January 24, 1996
<PAGE> 4
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1995
<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 $ 1,123,750
1,000,000 Appalachian Power Co., 8.50%, 12/01/2022................................. 1,059,020 1,102,390
1,000,000 Arizona Public Service Co., 10.25%, 5/15/2020............................ 1,000,000 1,156,250
500,000 Arizona Public Service Co., 9.50%, 4/15/2021............................. 490,265 615,000
500,000 BankAmerica Corp., 9.50%, 4/01/2001...................................... 497,265 578,125
500,000 Banc One Corp. (Columbus), 7.75%, 7/15/2025.............................. 494,965 556,250
170,000 Boeing Co., 7.25%, 6/15/2025............................................. 171,258 184,025
1,000,000 Chase Manhattan Corp. Sub Notes, 10.00%, 6/15/1999....................... 1,117,080 1,128,750
1,000,000 Chrysler Corp., 10.95%, 8/01/2017........................................ 997,500 1,118,750
1,000,000 Citicorp Capital Sub Notes, 9.75%, 8/01/1999............................. 983,110 1,122,500
1,000,000 Cleveland Electric Co., 10.00%, 6/01/2020................................ 988,250 1,066,250
1,000,000 Comerica Bank, 8.375%, 7/15/2024......................................... 983,750 1,162,500
300,000 Comerica Co., 9.75%, 5/01/1999........................................... 288,840 334,125
1,000,000 Commonwealth Edison Co., 9.50%, 5/01/2016................................ 987,500 1,057,500
500,000 Commonwealth Edison Co., 8.625%, 2/01/2022............................... 537,500 551,875
1,000,000 Domtar, Inc., 11.25%, 9/15/2017.......................................... 997,500 1,066,250
500,000 First Chicago Corp., 8.875%, 3/15/2002................................... 503,660 573,750
1,000,000 First Interstate Bank, 9.00%, 11/15/2004................................. 1,000,000 1,127,500
500,000 First Union Corp., 8.00%, 8/15/2009...................................... 498,965 550,000
1,000,000 Ford Motor Credit Co., 9.14%, 12/30/2014................................. 997,660 1,146,250
143,000 General Electric Capital Corp., 5.81%, 1/09/1996......................... 143,000 143,000
1,000,000 General Motors Corp., 8.125%, 4/15/2016.................................. 974,550 1,063,750
500,000 Great Western Financial Senior Notes, 8.60%, 2/01/2002................... 494,710 561,875
300,000 GTE California, 8.07%, 4/15/2024......................................... 322,233 323,250
1,000,000 GTE Corp., 7.83%, 5/01/2023.............................................. 1,000,000 1,077,500
500,000 Harris Bancorp, 9.375%, 6/01/2001........................................ 493,285 580,625
1,000,000 International Business Machines Corp., 8.375%, 11/01/2019................ 1,006,330 1,200,000
1,000,000 International Paper Co., Debenture, 8.125%, 6/15/2024.................... 979,860 1,140,000
500,000 New England Power Co., 8.00%, 8/01/2022.................................. 494,350 566,875
800,000 New York State Electric & Gas Corp., 9.875%, 5/01/2020................... 793,000 882,000
1,000,000 Norsk-Hydro, 7.75%, 6/15/2023............................................ 995,350 1,118,750
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 1,071,250
14,152 Participation in Asset Exchange.......................................... 14,152 14,218
500,000 Penney (J.C.) Co., Inc. 8.25%, 8/15/2022................................. 497,445 555,000
500,000 PECO Energy Co., 8.75%, 4/01/2022........................................ 500,510 535,000
1,000,000 PECO Energy Co., 8.625%, 6/01/2022....................................... 983,840 1,057,500
</TABLE>
<PAGE> 5
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
SCHEDULE OF INVESTMENTS -- (Continued)
DECEMBER 31, 1995
<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 $ 1,158,750
1,000,000 Texas Utilities Electric Co., 8.875%, 2/01/2022.......................... 1,029,240 1,183,750
1,000,000 Virginia Electric & Power Corp. Series B, 8.625%, 10/01/2024............. 1,014,120 1,196,250
----------- -----------
TOTAL INVESTMENTS........................................................ $30,339,818* $ 33,823,633
=========== ===========
</TABLE>
- ------------------
*Aggregate cost for federal income tax purposes at December 31, 1995 was
$30,339,818. The aggregate gross unrealized appreciation for all securities is
as follows: excess of value over tax cost $3,483,815.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS
Investments at value (cost-- $30,339,818)................................... $33,823,633
Cash........................................................................ 31,412
Accrued interest receivable................................................. 700,116
Prepaid expenses............................................................ 256
-----------
34,555,417
-----------
LIABILITIES
Dividend payable............................................................ 209,359
Accrued expenses............................................................ 182,950
-----------
392,309
-----------
NET ASSETS applicable to 1,820,511 capital shares outstanding, $0.10 par value
(authorized 10,000,000 shares).............................................. $34,163,108
===========
NET ASSET VALUE PER SHARE ($34,163,108 / 1,820,511 shares).................... $18.77
=======
</TABLE>
See accompanying notes to financial statements.
<PAGE> 6
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest income.......................... $2,751,326
----------
Expenses
Fees:
Investment adviser................... 120,359
Directors and officers............... 33,451
Custodian............................ 16,386
Transfer agent....................... 22,355
Legal and Audit...................... 30,765
Taxes (other than income).............. 5,096
Printing............................... 12,241
Insurance.............................. 2,561
Miscellaneous.......................... 5,315
----------
Total Expenses....................... 248,529
----------
Net investment income.................... 2,502,797
==========
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Realized loss from security transactions
(excluding short-term securities):
Proceeds from sales.................... $6,968,324
Cost of securities sold................ 6,972,349
----------
Net realized loss...................... (4,025)
----------
Unrealized appreciation (depreciation)
of investments:
Beginning of year...................... (514,132)
End of year............................ 3,483,815
----------
Increase in unrealized appreciation.... 3,997,947
----------
Net realized and unrealized gain on
investments.......................... 3,993,922
----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS............................. $6,496,719
==========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income....................................................... $ 2,502,797 $ 2,510,686
Net realized loss from security transactions................................ (4,025) (303,783)
Increase (decrease) in unrealized appreciation of investments............... 3,997,947 (3,323,530)
----------- -----------
Net increase (decrease) in net assets resulting from operations........... 6,496,719 (1,116,627)
Dividends to shareholders from net investment income
($1.38 in 1995 and $1.38 in 1994)........................................... (2,512,305) (2,512,305)
----------- -----------
Total increase (decrease) in net assets................................... 3,984,414 (3,628,932)
NET ASSETS
Beginning of year............................................................. 30,178,694 33,807,626
----------- -----------
End of year (including undistributed net investment
income of $64,716 in 1995 and $74,224 in 1994).............................. $34,163,108 $30,178,694
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 7
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF THE FUND OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Year........... $ 16.58 $ 18.57 $ 17.76 $ 17.32 $ 16.06
------- ------- ------- ------- -------
Net Investment Income...................... 1.38 1.38 1.41 1.46 1.50
Net Gains (Losses) on Securities
(realized and unrealized)............... 2.19 (1.99) 0.82 0.42 1.26
------- ------- ------- ------- -------
Total From Investment Operations...... 3.57 (0.61) 2.23 1.88 2.76
------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends (from net investment income)..... (1.38) (1.38) (1.42) (1.44) (1.50)
------- ------- ------- ------- -------
Net Asset Value, End of Year................. $ 18.77 $ 16.58 $ 18.57 $ 17.76 $ 17.32
======= ======= ======= ======= =======
Per Share Market Value, End of Year.......... $ 17.25 $ 15.25 $ 17.25 $17.125 $17.375
======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN, based on
market value(1)............................ 22.71% (4.0%) 9.0% 7.0% 27.0%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (in 000's)......... $34,163 $30,179 $33,808 $32,324 $31,424
Ratio of Expenses to Average Net Assets.... 0.76% 0.85% 0.81% 0.85% 0.90%
Ratio of Net Investment Income to Average
Net Assets.............................. 7.64% 7.88% 7.61% 8.27% 8.97%
Portfolio Turnover Rate.................... 22% 28% 32% 18% 6%
</TABLE>
- ------------------
(1) See Note G.
See accompanying notes to financial statements.
<PAGE> 8
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 year ended December 31, 1995.
C. Purchases and sales of investment securities other than short term
obligations for the year ended December 31, 1995 were $6,939,088 and
$6,972,349, respectively.
D. Values for securities listed on a national securities exchange are based
on the latest quoted sale prices on December 31, 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, 1995, a capital loss carryover of $447,439 was available
to offset possible future realized capital gains. The carryover expires
as follows: $139,631 in 1998, $303,783 in 2002 and $4,025 in 2003.
F. At, December 31, 1995, net assets consisted of:
<TABLE>
<S> <C>
Paid-in capital............................................... $31,062,016
Undistributed net investment income........................... 64,716
Accumulated net realized loss on investments.................. (447,439)
Net unrealized appreciation of investments.................... 3,483,815
-----------
Total......................................................... $34,163,108
===========
</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> 9
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, 1995, 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, 1995, 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, 1995, 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 9, 1996
<PAGE> 10
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
SUMMARY OF THE FUND'S DIVIDEND INVESTMENT PLAN
The Fund has an Automatic Dividend Investment Plan which permits
participating shareholders to receive income dividends and capital gain
distributions ("Distributions") in additional shares of the Fund'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
Fund 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 Fund 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 Fund
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> 11
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<PAGE> 12
- --------------------------------------------------------------------------------
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
One Aldwyn Center
Villanova, PA 19085
(610) 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, DE 19899
(800) 852-4750
(302) 791-2748 (Delaware)
- --------------------------------------------------------------------------------
INDEPENDENCE
SQUARE
INCOME
SECURITIES,
INC.
Annual Report
to Shareholders
December 31, 1995
