<PAGE> 1
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
Robert R. Fortune
Chairman and President May 6, 1996
Dear Shareholder:
Our Fund earned $.34 per share from net investment income in the first
quarter of 1996. Earnings in the first quarter of 1995 were also $.34 per share.
Monthly dividends of $.115 per share were paid from January to April 1996,
however, the January dividend was treated as taxable in 1995.
The enclosed Investment Adviser's Report provides commentary on the economy
and interest rates and data on the Fund's performance in the first quarter of
1996 and on a longer term basis.
Yours sincerely,
/s/ ROBERT R. FORTUNE
Robert R. Fortune
<PAGE> 2
INVESTMENT ADVISER'S REPORT
The first quarter of 1996 brought bond investors expectations for a repeat
of 1995's stellar returns back to reality. Unexpected strength in the job market
caused investors to rethink their expectations of a low growth, moderate
inflation environment. The result was a change in expectations from the Federal
Reserve lowering short term rates to a belief that they would raise short term
rates later in 1996. The yield curve steepened slightly in the quarter with the
two year treasury rising 0.60% while the 30 year treasury rose 0.72%. Interest
rates increased across the yield curve as shown in the table below:
<TABLE>
<CAPTION>
03/31/96 12/31/95 CHANGE
-------- -------- ------
<S> <C> <C> <C>
2-year Treasury Notes 5.75% 5.15% 0.60%
5-year Treasury Notes 6.08% 5.37% 0.71%
10-year Treasury Notes 6.32% 5.57% 0.75%
30-year Treasury Bonds 6.67% 5.95% 0.72%
</TABLE>
The portfolio underperformed the Lehman Government/Corporate Index and the
Lipper Investment Grade Closed End Bond Fund average by 0.71% and 1.16%,
respectively. The quick rise in rates which did not permit investors to properly
value callable corporate securities combined with the portfolio's long duration
caused the Fund's underperformance in the quarter. Investment returns are shown
in the table below:
<TABLE>
<CAPTION>
TOTAL RETURNS
PERIODS ENDED MARCH 31, 1996
ANNUALIZED
-------------------------
12 2 5 10
QUARTER MOS. YRS. YRS. YRS.
------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Independence Square Income Securities,
Inc.*....................................... -3.05% 11.67% 7.97% 10.05% 9.20%
Lehman Bros. Gov't/Corp. Bond Index........... -2.34% 10.93% 7.70% 8.70% 8.50%
Lipper Invt. Grade Closed End Bond Fds
(Avg.)...................................... -1.89% 12.33% 8.18% 9.86% 9.02%
Lipper Invt. Grade Closed End Bond Funds:
ISIS Rank/No. of Funds...................... 13/17 9/17 10/17 7/16 5/16
ISIS Percentile Rank........................ 76% 53% 59% 44% 31%
</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 1996 GDP growth rate to be slightly above 2%. Inflation, as
measured by CPI, is anticipated to be slightly below 3.0% in 1996. We have
revised our outlook on long term interest rates to a range of 6.5% to 7.0% from
our previous expectation of remaining near 6.00% for 1996.
PNC INSTITUTIONAL MANAGEMENT CORPORATION
April 30, 1996
<PAGE> 3
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
STATEMENT OF NET ASSETS
MARCH 31, 1996
(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 $ 1,097,500
1,000,000 Appalachian Power Co., 8.50%, 12/01/2022................................. 1,059,020 1,016,250
1,000,000 Arizona Public Service Co., 10.25%, 5/15/2020............................ 1,000,000 1,153,750
500,000 Arizona Public Service Co., 9.50%, 4/15/2021............................. 490,265 538,125
500,000 BankAmerica Corp., 9.50%, 4/01/2001...................................... 497,265 560,000
170,000 Boeing Co., 7.25%, 6/15/2025............................................. 171,258 168,087
1,000,000 Chase Manhattan Corp. Sub Notes, 10.00%, 6/15/1999....................... 1,117,080 1,102,500
1,000,000 Chrysler Corp., 10.95%, 8/01/2017........................................ 997,500 1,101,250
1,000,000 Citicorp Capital Sub Notes, 9.75%, 8/01/1999............................. 983,110 1,098,750
1,000,000 Cleveland Electric Co., 10.00%, 6/01/2020................................ 988,250 987,500
1,000,000 Comerica Bank, 8.375%, 7/15/2024......................................... 983,750 1,072,500
300,000 Comerica Co., 9.75%, 5/01/1999........................................... 288,840 327,000
1,000,000 Commonwealth Edison Co., 9.50%, 5/01/2016................................ 987,500 1,048,750
500,000 Commonwealth Edison Co., 8.625%, 2/01/2022............................... 537,500 514,375
1,000,000 Delta Airlines, 9.25%, 3/15/2022......................................... 1,141,490 1,107,500
1,000,000 Domtar, Inc., 11.25%, 9/15/2017.......................................... 997,500 1,061,250
500,000 Federal Express, 9.625%, 10/15/2019...................................... 551,345 547,500
500,000 First Chicago Corp., 8.875%, 3/15/2002................................... 503,660 553,750
1,000,000 First Interstate Bank, 9.00%, 11/15/2004................................. 1,000,000 1,080,000
500,000 First Union Corp., 8.00%, 8/15/2009...................................... 498,965 520,000
1,000,000 Ford Motor Credit Co., 9.14%, 12/30/2014................................. 997,660 1,102,500
1,000,000 General Motors Corp., 8.125%, 4/15/2016.................................. 974,550 990,000
500,000 Great Western Financial Senior Notes, 8.60%, 2/01/2002................... 494,710 543,125
300,000 GTE California 8.07%, 4/15/2024.......................................... 322,233 305,625
1,000,000 GTE Corp., 7.83%, 5/01/2023.............................................. 1,000,000 996,250
500,000 Harris Bancorp, 9.375%, 6/01/2001........................................ 493,285 561,250
1,000,000 International Paper Co., Debenture, 8.125%, 6/15/2024.................... 979,860 1,018,750
500,000 New England Power Co., 8.00%, 8/01/2022.................................. 494,350 518,750
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 1,028,750
1,000,000 OPC Scherer Funding Corp. Serial Facility Bond, 9.70% 6/30/2011.......... 1,000,000 1,066,250
13,850 Participation in Asset Exchange.......................................... 13,850 13,642
500,000 Penney (J.C.) Co., Inc. 8.25%, 8/15/2022................................. 497,445 512,500
500,000 PECO Energy Co., 8.75%, 4/01/2022........................................ 500,510 520,000
1,000,000 PECO Energy Co., 8.625%, 6/01/2022....................................... 983,840 1,028,750
1,000,000 Quebec-Hydro, 10.70%, 10/15/2007......................................... 1,081,500 1,063,750
</TABLE>
<PAGE> 4
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
STATEMENT OF NET ASSETS -- (Continued)
MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT COST VALUE
- ----------- ----------- ------------
<C> <S> <C> <C>
BONDS AND OTHER DEBT OBLIGATIONS--(CONTINUED)
$ 500,000 Quebec-Hydro, 8.40%, 1/15/2022........................................... $ 508,395 $ 534,376
1,000,000 Texas Utilities Electric Co., 8.875%, 2/01/2022.......................... 1,029,240 1,090,000
500,000 Texas Utilities, 8.75%, 11/01/2023....................................... 546,545 538,750
1,000,000 Virginia Electric & Power Corp. Series B, 8.625%, 10/01/2024............. 1,014,120 1,075,000
----------- -----------
TOTAL INVESTMENTS -- 97.94%.............................................. $30,510,206* 32,032,355
-----------
-----------
OTHER ASSETS LESS LIABILITIES -- 2.06%................................... 673,566
-----------
TOTAL NET ASSETS -- 100.00%.............................................. $ 32,705,921
-----------
-----------
</TABLE>
- ------------------
*Aggregate cost for federal income tax purposes at March 31, 1996 was
$30,510,206. The aggregate gross unrealized appreciation (depreciation) for all
securities is as follows: excess of value over tax cost $1,690,490; excess of
tax cost over value ($168,341).
See accompanying notes to financial statements.
<PAGE> 5
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest.................... $688,228
-----------
Expenses
Fees
Investment adviser.......... 30,544
Directors and officers...... 8,293
Custodian................... 3,883
Transfer agent.............. 5,500
Legal and audit............. 7,425
Taxes (other than income)... 1,500
Printing.................... 3,150
Insurance................... 625
Miscellaneous............... 1,250
-----------
Total expenses.............. 62,170
-----------
Net investment income....... $626,058
-----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Realized gain from security
transactions (excluding short-
term securities):
Proceeds from sales........... $ 3,304,632
Cost of securities sold....... 3,007,492
-----------
Net realized gain............. 297,140
-----------
Unrealized appreciation
(depreciation) of investments:
Beginning of period........... 3,483,815
End of period................. 1,522,149
-----------
Decrease in unrealized
appreciation............... (1,961,666)
-----------
Net realized and unrealized
loss on investments........ (1,664,526)
-----------
NET DECREASE IN NET ASSETS
RESULTING
FROM OPERATIONS............... $(1,038,468)
===========
</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
MARCH 31, -----------------------------------------------
1996 1995 1994 1993 1992 1991
----------- ------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning
of Period......................... $ 18.77 $ 16.58 $ 18.57 $ 17.76 $ 17.32 $ 16.06
-------- ------- ------- ------- ------- -------
Net Investment Income............. .34 1.38 1.38 1.41 1.46 1.50
Net Gains (Losses) on Securities
(realized and unrealized) ..... (.91) 2.19 (1.99) 0.82 0.42 1.26
-------- ------- ------- ------- ------- -------
Total From Investment
Operations................ (.57) 3.57 (0.61) 2.23 1.88 2.76
-------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends (from net investment
income)........................ (.23) (1.38) (1.38) (1.42) (1.44) (1.50)
-------- ------- ------- ------- ------- -------
Net Asset Value, End of Period...... $ 17.97 $ 18.77 $ 16.58 $ 18.57 $ 17.76 $ 17.32
======== ======= ======= ======= ======= =======
Per Share Market Value,
End of Period..................... $ 17.00 $ 17.25 $ 15.25 $ 17.25 $17.125 $17.375
======== ======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN, based on
market value (1).................. (.45%)(2) 22.71% (4.0%) 9.0% 7.0% 27.0%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in
000's)......................... $32,706 $34,163 $30,179 $33,808 $32,324 $31,424
Ratio of Expenses to Average Net
Assets......................... 0.74%(2) 0.76% 0.85% 0.81% 0.85% 0.90%
Ratio of Net Investment Income to
Average Net Assets............. 7.46%(2) 7.64% 7.88% 7.61% 8.27% 8.97%
Portfolio Turnover Rate........... 10% 22% 28% 32% 18% 6%
</TABLE>
- ------------------
(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 March 31, 1996.
C. Purchases and sales of investment securities other than short term
obligations for the period ended March 31, 1996 were $3,320,880 and
$3,007,492, respectively.
D. Values for securities listed on a national securities exchange are based
on the latest quoted sale prices on March 31, 1996. 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 March 31, 1996, net assets consisted of:
<TABLE>
<S> <C>
Paid-in capital............................................... $31,062,016
Undistributed net investment income........................... 272,056
Accumulated net realized loss on investments.................. (150,300)
Net unrealized appreciation of investments.................... 1,522,149
-----------
Total......................................................... $32,705,921
===========
</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. INDEPENDENCE
One Aldwyn Center SQUARE
Villanova, PA 19085 INCOME
(610) 964-8882 SECURITIES,
INC.
BOARD OF DIRECTOR
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
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)
- --------------------------------------------------------------------------------
First Quarter Report
to Shareholders
March 31, 1996
