<PAGE> 1
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
Robert R. Fortune
Chairman and President November 1, 1996
Dear Shareholder:
Our Fund earned $1.04 per share from net investment income in the first
nine months of 1996. Earnings in the same period of 1995 were $1.03 per share.
Monthly dividends of $.115 per share were paid from January to October
1996, however, the January dividend was treated as taxable in 1995.
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, 1996, securities
representing 93% of the portfolio's market value were invested in bonds rated in
the four highest investment grades.
Comments on the fixed income markets and on the performance of our Fund are
provided in the accompanying Investment Adviser's Report.
Yours sincerely,
/s/ ROBERT R. FORTUNE
---------------------
Robert R. Fortune
<PAGE> 2
INVESTMENT ADVISER'S REPORT
The third quarter of 1996 provided bond investors with their best quarterly
returns of the year. Continued tame employment, inflation and retail sales data
kept the Federal Reserve from raising short term rates. Fixed income investors
experienced better returns by owning corporates during the third quarter as the
Lehman Corporate Index returned 2.12% versus 1.76% for the Lehman
Government/Corporate Index. The yield curve steepened slightly in the third
quarter with the two year treasury declining 0.02% while the 30-year treasury
rose 0.03%. Interest rates were relatively flat across the yield curve as shown
in the table below:
<TABLE>
<CAPTION>
06/30/96 09/30/96 CHANGE
-------- -------- ------
<S> <C> <C> <C>
2-year Treasury Notes 6.11% 6.09% -0.02%
5-year Treasury Notes 6.46% 6.45% -0.01%
10-year Treasury Notes 6.71% 6.70% -0.01%
30-year Treasury Bonds 6.89% 6.92% +0.03%
</TABLE>
The portfolio underperformed the Lehman Government/Corporate Index and the
Lipper Investment Grade Closed End Bond Fund average by 0.09% and 0.55%,
respectively. The Fund underperformed during the third quarter as the market
expectations for lower rates negatively impacted spreads in callable bonds.
Investment returns are shown in the table below:
<TABLE>
<CAPTION>
TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 1996
ANNUALIZED
-----------------------
YR. 12 2 5 10
QUARTER TO DATE MOS. YRS. YRS. YRS.
------- ------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Independence Square Income Securities, Inc.*......... 1.67% -0.79% 4.52% 10.36% 8.72% 8.95%
Lehman Bros. Gov't/Corp. Bond Index.................. 1.76% 2.24% 4.50% 9.32% 7.65% 8.38%
Lipper Investment Grade Closed End Fds. (Avg.)....... 2.22% 0.64% 5.20% 10.45% 8.57% 9.01%
Lipper Invt. Grade Closed End Bond Funds:
ISIS Rank/No. of Funds............................. 15/16 13/16 11/16 7/16 7/15 7/15
ISIS Percentile Rank............................... 94% 81% 69% 44% 47% 47%
</TABLE>
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*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 expect the 1996 GDP growth rate to be approximately 2.5%
based upon the strength of the economy in the first half and the expected slow
down in the fourth quarter. We are maintaining our expectation of inflation at
slightly below 3.0% with long term rates in a range of 6.5% to 7.5%.
PNC INSTITUTIONAL MANAGEMENT CORPORATION
<PAGE> 3
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
STATEMENT OF NET ASSETS
SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT COST VALUE
- ----------- ----------- ------------
<C> <S> <C> <C>
BONDS AND OTHER DEBT OBLIGATIONS
$ 1,000,000 Ahmanson (H.F.) & Co., 9.875%, 11/15/1999................................ $ 995,465 $ 1,078,750
1,000,000 Appalachian Power Co., 8.50%, 12/01/2022................................. 1,059,020 1,023,750
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............................. 490,265 536,250
500,000 BankAmerica Corp., 9.50%, 4/01/2001...................................... 497,265 548,125
145,000 Boeing Co., 7.25%, 6/15/2025............................................. 146,073 139,563
1,000,000 Chase Manhattan Corp. Sub Notes, 10.00%, 6/15/1999....................... 1,117,080 1,081,250
1,000,000 Chrysler Corp., 10.95%, 8/01/2017........................................ 997,500 1,081,250
1,000,000 Citicorp Capital Sub Notes, 9.75%, 8/01/1999............................. 983,110 1,078,750
1,000,000 Cleveland Electric Co., 10.00%, 6/01/2020................................ 988,250 1,015,000
1,000,000 Comerica Bank, 8.375%, 7/15/2024......................................... 983,750 1,033,750
300,000 Comerica Co., 9.75%, 5/01/1999........................................... 288,840 321,000
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............................... 537,500 501,250
1,000,000 Delta Airlines, 9.25%, 03/15/2022........................................ 1,141,490 1,088,750
500,000 Federal Express, 9.625%, 10/15/2019...................................... 551,345 540,625
1,096,000 Federal Home Loan Mortgage Corp., 5.745%, 10/01/1996..................... 1,096,000 1,096,000
500,000 First Chicago Corp., 8.875%, 3/15/2002................................... 503,660 543,125
1,000,000 First Interstate Bank, 9.00%, 11/15/2004................................. 1,000,000 1,055,000
500,000 First Union Corp., 8.00%, 8/15/2009...................................... 498,965 505,000
1,000,000 Ford Motor Credit Co., 9.14%, 12/30/2014................................. 997,660 1,106,250
500,000 Great Western Financial Senior Notes, 8.60%, 2/01/2002................... 494,710 535,000
300,000 GTE California, 8.07%, 04/15/2024........................................ 322,233 297,375
500,000 Harris Bancorp, 9.375%, 6/01/2001........................................ 493,285 548,125
1,000,000 International Paper Co., Debenture, 8.125%, 6/15/2024.................... 979,860 992,500
1,000,000 Jersey Central Power and Light, 8.45%, 03/24/2025........................ 1,026,150 1,015,000
500,000 New England Power Co., 8.00%, 8/01/2022.................................. 494,350 499,375
800,000 New York State Electric & Gas Corp., 9.875%, 5/01/2020................... 793,000 863,000
1,000,000 OPC Scherer Funding Corp. Serial Facility Bond, 9.70%, 6/30/2011......... 1,000,000 1,053,750
11,237 Participation in Asset Exchange.......................................... 11,237 10,938
500,000 Penney (J.C.) Co., Inc. 8.25%, 8/15/2022................................. 497,445 496,250
500,000 PECO Energy Co., 8.75%, 4/01/2022........................................ 500,510 516,250
1,000,000 PECO Energy Co., 8.625%, 6/01/2022....................................... 983,840 1,021,250
1,000,000 Quebec-Hydro, 10.70%, 10/15/2007......................................... 1,081,500 1,041,250
500,000 Quebec-Hydro, 8.40%, 1/15/2022........................................... 508,395 526,875
1,000,000 TCI Communications Inc., 8.75%, 08/01/2015............................... 1,053,060 966,250
</TABLE>
<PAGE> 4
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
STATEMENT OF NET ASSETS -- (Continued)
SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT COST VALUE
- ----------- ----------- ------------
<C> <S> <C> <C>
BONDS AND OTHER DEBT OBLIGATIONS--(CONTINUED)
$ 1,000,000 Texas Utilities Electric Co., 8.875%, 2/01/2022.......................... $ 1,029,240 $ 1,046,250
500,000 Texas Utilities, 8.75%, 11/01/2023....................................... 546,545 520,000
500,000 Time Warner, 9.15%, 02/01/2023........................................... 527,845 527,670
1,000,000 Time Warner Inc., 8.375%, 03/15/2023..................................... 978,020 982,500
1,000,000 Virginia Electric & Power Corp. Series B, 8.625%, 10/01/2024............. 1,014,120 1,058,750
----------- ------------
TOTAL INVESTMENTS -- 99.68%.............................................. $31,196,083 32,075,546
===========
OTHER ASSETS LESS LIABILITIES -- 0.32%................................... 100,833
------------
TOTAL NET ASSETS -- 100.00%.............................................. $ 32,176,379
============
</TABLE>
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*Aggregate cost for federal income tax purposes at September 30, 1996 was
$31,196,083. The aggregate gross unrealized appreciation for all securities is
as follows: excess of value over tax cost $1,248,065; excess of tax cost over
value ($368,602).
See accompanying notes to financial statements.
<PAGE> 5
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest.................... $2,076,756
-----------
Expenses
Fees:
Investment adviser.......... 90,545
Directors and officers...... 23,496
Custodian................... 10,936
Transfer agent.............. 14,667
Legal and audit............. 20,955
Taxes (other than income)... 4,001
Printing.................... 9,350
Insurance................... 1,666
Miscellaneous............... 3,334
-----------
Total expenses.............. 178,950
-----------
Net investment income....... $1,897,806
-----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Realized gain from security
transactions (excluding short-
term securities):
Proceeds from sales........... $ 7,397,377
Cost of securities sold....... 7,002,689
-----------
Net realized gain............. 394,688
-----------
Unrealized appreciation
(depreciation) of investments:
Beginning of period........... 3,483,815
End of period................. 879,463
-----------
Decrease in unrealized
appreciation............... (2,604,352)
-----------
Net realized and unrealized
loss on investments........ (2,209,664)
-----------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS..... $ (311,858)
===========
</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, -----------------------------------------------
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........... 1.04 1.38 1.38 1.41 1.46 1.50
Net Gains (Losses) on Securities
(realized and unrealized).... (1.22) 2.19 (1.99) 0.82 0.42 1.26
------- ------- ------- ------- ------- -------
Total From Investment
Operations.............. (0.18) 3.57 (0.61) 2.23 1.88 2.76
------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends (from net investment
income)...................... (0.92) (1.38) (1.38) (1.42) (1.44) (1.50)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period.... $ 17.67 $ 18.77 $ 16.58 $ 18.57 $ 17.76 $ 17.32
======= ======= ======= ======= ======= =======
Per Share Market Value,
End of Period................... $ 16.50 $ 17.25 $ 15.25 $ 17.25 $17.125 $17.375
======= ======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN, based on
market value(1)................. 1.32%(2) 22.71% (4.0%) 9.0% 7.0% 27.0%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in
000's)....................... $32,176 $34,163 $30,179 $33,808 $32,324 $31,424
Ratio of Expenses to Average Net
Assets....................... 0.73%(2) 0.76% 0.85% 0.81% 0.85% 0.90%
Ratio of Net Investment Income
to Average Net Assets........ 7.74%(2) 7.64% 7.88% 7.61% 8.27% 8.97%
Portfolio Turnover Rate......... 23% 22% 28% 32% 18% 6%
</TABLE>
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1 See Note G.
2 Annualized.
See accompanying notes to financial statements.
<PAGE> 7
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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, 1996.
C. Purchases and sales of investment securities other than short term
obligations for the period ended September 30, 1996 were $6,905,955 and
$7,002,689, respectively.
D. Values for securities listed on a national securities exchange are based
on the latest quoted sale prices on September 30, 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 September 30, 1996, net assets consisted of:
<TABLE>
<S> <C>
Paid-in capital............................................... $31,062,017
Undistributed net investment income........................... 287,651
Accumulated net realized loss on investments.................. (52,752)
Net unrealized appreciation of investments.................... 879,463
-----------
Total......................................................... $32,176,379
===========
</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
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INDEPENDENCE SQUARE INCOME SECURITIES, INDEPENDENCE
INC. SQUARE
One Aldwyn Center INCOME
Villanova, PA 19085 SECURITIES,
(610) 964-8882 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
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 Third Quarter Report
(800) 852-4750 to Shareholders
(302) 791-2748 (Delaware) September 30, 1996
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