<PAGE> 1
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
Robert R. Fortune
Chairman and President August 5, 1996
Dear Shareholder:
Our Fund earned $.68 per share from net investment income in the first six
months of 1996. Earnings in the same period of 1995 were $.69 per share.
Monthly dividends of $.115 per share were paid from January to July 1996,
however, the January dividend was treated as taxable in 1995.
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 second quarter of 1996 provided bond investors with considerably better
returns than the first quarter. The unexpected strength in the job market during
the first quarter did not cause the anticipated rise in manufacturing, retail
sales and inflation. The result was a change in expectations from the Federal
Reserve raising short term rates to a belief that they would not have to raise
short term rates before the end of the quarter. The yield curve steepened
slightly in the first half with the two year treasury rising 0.96% while the 30
year treasury rose 0.94%. Interest rates increased across the yield curve as
shown in the table below:
<TABLE>
<CAPTION>
12/31/95 06/30/96 CHANGE
-------- -------- ------
<S> <C> <C> <C>
2-year Treasury Notes 5.15% 6.11% +0.96%
5-year Treasury Notes 5.37% 6.46% +1.09%
10-year treasury notes 5.57% 6.71% +1.14%
30-year Treasury Bonds 5.95% 6.89% +0.94%
</TABLE>
The portfolio underperformed the Lehman Government/Corporate Index and the
Lipper Investment Grade Closed End Bond Fund average by 0.54% and 0.73%
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 first quarter. The fund outperformed
during the second quarter as the market corrected for the first quarter.
Investment returns are shown in the table below:
<TABLE>
<CAPTION>
TOTAL RETURNS
PERIODS ENDED JUNE 30, 1996
ANNUALIZED
-----------------------
6 12 2 5 10
QTR. MOS. MOS. YRS. YRS. YRS.
------- ------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Independence Square Income Securities, Inc.*.... 0.66% -2.42% 4.55% 9.40% 9.75% 9.04%
Lehman Bros. Gov't/Corp. Bond Index............. 0.47% -1.88% 4.66% 8.63% 8.48% 8.41%
Lipper Invt. Grade Closed-End Bond Fds (Avg.)... 0.46% -1.69% 5.31% 9.38% 9.28% 8.91%
Lipper Invt. Grade Closed-End Bond Funds:
ISIS Rank/No. of Funds........................ 6/16 10/16 13/16 7/16 5/15 6/15
ISIS Percentile Rank.......................... 37% 63% 81% 44% 33% 40%
</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 have revised our expectation for 1996 GDP growth rate to 2.5% from 2%
based upon the strength of the economy in the first half. Inflation, as measured
by CPI, is anticipated to be slightly below 3.0% in 1996. We have expanded our
long term interest rate range to 6.5% to 7.5% from 6.5% to 7.0%.
PNC INSTITUTIONAL MANAGEMENT CORPORATION
<PAGE> 3
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
SCHEDULE OF INVESTMENTS
JUNE 30, 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 $ 1,082,500
1,000,000 Appalachian Power Co., 8.5%, 12/01/2022.................................. 1,059,020 1,021,250
1,000,000 Arizona Public Service Co., 10.25%, 5/15/2020............................ 1,000,000 1,142,500
500,000 Arizona Public Service Co., 9.50%, 4/15/2021............................. 490,265 538,750
500,000 BankAmerica Corp., 9.50%, 4/01/2001...................................... 497,265 548,750
170,000 Boeing Co., 7.25%, 6/15/2025............................................. 171,258 164,475
1,000,000 Chase Manhattan Corp. Sub Notes, 10.00%, 6/15/1999....................... 1,117,080 1,086,250
1,000,000 Chrysler Corp., 10.95%, 8/01/2017........................................ 997,500 1,090,000
1,000,000 Citicorp Capital Sub Notes, 9.75%, 8/01/1999............................. 983,110 1,082,500
1,000,000 Cleveland Electric Co., 10.00%, 6/01/2020................................ 988,250 971,250
1,000,000 Comerica Bank, 8.375%, 7/15/2024......................................... 983,750 1,052,500
300,000 Comerica Co., 9.75%, 5/01/1999........................................... 288,840 322,125
1,000,000 Commonwealth Edison Co., 9.50%, 5/01/2016................................ 987,500 1,048,750
500,000 Commonwealth Edison Co., 9.625%, 7/01/2019............................... 537,500 508,125
1,000,000 Delta Airlines, 9.25%, 03/15/2022........................................ 1,141,490 1,100,000
1,000,000 Domtar, Inc., 11.25%, 9/15/2017.......................................... 997,500 1,061,250
500,000 Federal Express, 9.625%, 10/15/2019...................................... 551,345 542,500
500,000 First Chicago Corp., 8.875%, 3/15/2002................................... 503,660 543,750
1,000,000 First Interstate Bank, 9.00%, 11/15/2004................................. 1,000,000 1,053,750
500,000 First Union Corp., 8.00%, 8/15/2009...................................... 498,965 503,750
100,000 Ford Motor Credit Co., 5.39%, 07/31/96................................... 100,000 100,000
1,000,000 Ford Motor Credit Co., 9.14%, 12/30/2014................................. 997,660 1,106,250
1,000,000 General Motors Corp., 8.125%, 4/15/2006.................................. 974,550 1,008,750
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........................................ 322,233 300,000
1,000,000 GTE Corp., 7.83%, 5/01/2023.............................................. 1,000,000 976,250
500,000 Harris Bancorp, 9.375%, 6/01/2001........................................ 493,285 550,000
1,000,000 International Paper Co., Debenture, 8.125%, 11/01/2019................... 979,860 998,750
500,000 New England Power Co., 8.00%, 8/01/2022.................................. 494,350 509,375
800,000 New York State Electric & Gas Corp., 9.875%, 5/01/2020................... 793,000 867,000
1,000,000 OPC Scherer Funding Corp. Serial Facility Bond, 9.70%, 6/30/2011......... 1,000,000 1,063,750
13,544 Participation in Asset Exchange.......................................... 13,544 13,167
500,000 Penney (J.C.) Co., Inc. 8.25%, 8/15/2022................................. 497,445 500,000
500,000 PECO Energy Co., 8.75%, 4/01/2022........................................ 500,510 518,125
1,000,000 PECO Energy Co., 8.625%, 6/01/2022....................................... 983,840 1,025,000
1,000,000 Quebec-Hydro, 10.7%, 10/15/2007.......................................... 1,081,500 1,050,000
</TABLE>
<PAGE> 4
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
SCHEDULE OF INVESTMENTS -- (Continued)
JUNE 30, 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 $ 527,500
1,000,000 TCI Communications Inc., 8.75%, 08/01/2015............................... 1,053,060 981,250
1,000,000 Texas Utilities Electric Co., 8.875%, 2/01/2022.......................... 1,029,240 1,050,000
500,000 Texas Utilities, 8.75%, 11/01/2023....................................... 546,545 522,500
1,000,000 Virginia Electric & Power Corp. Series B, 8.625%, 10/01/2024............. 1,014,120 1,063,750
----------- -----------
TOTAL INVESTMENTS........................................................ $30,667,610* $ 31,731,142
=========== ===========
</TABLE>
- ------------------
*Aggregate cost for federal income tax purposes at June 30, 1996 was
$30,667,610. The aggregate gross unrealized appreciation for all securities is
as follows: excess of value over tax cost $1,409,340; excess of tax cost over
value ($345,808).
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1996
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost--$30,667,610)................................... $31,731,142
Cash........................................................................ 29,910
Accrued interest receivable................................................. 688,631
-----------
32,449,683
-----------
LIABILITIES
Accrued expenses............................................................ 175,985
-----------
NET ASSETS applicable to 1,820,511 capital shares outstanding, $0.10 par value
(Authorized 10,000,000 shares).............................................. $32,273,698
===========
NET ASSET VALUE PER SHARE ($32,273,698 / 1,820,511 shares).................... $17.73
=======
</TABLE>
See accompanying notes to financial statements.
<PAGE> 5
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest............................... $1,367,012
----------
Expenses
Fees:
Investment adviser..................... 60,563
Directors and officers................. 15,117
Custodian.............................. 7,071
Transfer agent......................... 11,041
Legal and audit........................ 15,258
Taxes (other than income).............. 2,709
Printing............................... 8,015
Insurance.............................. 1,541
Miscellaneous.......................... 2,500
----------
Total expenses......................... 123,815
----------
Net investment income.................. $1,243,197
==========
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Realized gain from security transactions
(excluding short-term securities):
Proceeds from sales.................... $4,337,618
Cost of securities sold................ 4,003,148
----------
Net realized gain...................... 334,470
----------
Unrealized appreciation (depreciation)
of investments:
Beginning of period.................... 3,483,815
End of period.......................... 1,063,532
----------
Decrease in unrealized appreciation.... (2,420,283)
----------
Net realized and unrealized loss on
investments.......................... (2,085,813)
----------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS...................... $ (842,616)
==========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1996 DECEMBER 31,
(UNAUDITED) 1995
------------- ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income....................................................... $ 1,243,197 $ 2,502,797
Net realized gain (loss) from security transactions......................... 334,470 (4,025)
Increase (decrease) in unrealized appreciation of investments............... (2,420,283) 3,997,947
----------- -----------
Net increase (decrease) in net assets resulting from operations........... (842,616) 6,496,719
Dividends to shareholders from net investment income
($.58 in 1996 and $1.38 in 1995)............................................ (1,046,794) (2,512,305)
----------- -----------
Total increase (decrease) in net assets................................... (1,889,410) 3,984,414
NET ASSETS
Beginning of period........................................................... 34,163,108 30,178,694
----------- -----------
End of period (including undistributed net investment
income of $261,119 in 1996 and $64,716 in 1995)............................. $32,273,698 $34,163,108
=========== ===========
</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>
SIX MONTHS
ENDED
JUNE 30 YEAR ENDED DECEMBER 31
1996 -----------------------------------------------
(UNAUDITED) 1995 1994 1993 1992 1991
---------- ------- ------- ------- ------- -------
<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.............. 0.68 1.38 1.38 1.41 1.46 1.50
Net Gain or (Loss) on Securities
(realized and unrealized)....... (1.14) 2.19 (1.99) 0.82 0.42 1.26
-------- ------- ------- ------- ------- -------
Total From Investment
Operations................. (0.46) 3.57 (0.61) 2.23 1.88 2.76
-------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends (from net investment
income)......................... (0.58) (1.38) (1.38) (1.42) (1.44) (1.50)
-------- ------- ------- ------- ------- -------
Net Asset Value, End of Period....... $ 17.73 $ 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).................... 12.75% 22.71% (4.0%) 9.0% 7.0% 27.0%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(in 000's)...................... $ 32,274 $34,163 $30,179 $33,808 $32,324 $31,424
Ratio of Expenses to Average Net
Assets.......................... 0.76%(2) 0.76% 0.85% 0.81% 0.85% 0.90%
Ratio of Net Investment Income to
Average Net Assets.............. 7.54%(2) 7.64% 7.88% 7.61% 8.27% 8.97%
Portfolio Turnover Rate............ 13% 22% 28% 32% 18% 6%
</TABLE>
- ------------------
(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 June 30, 1996.
C. Purchases and sales of investment securities other than short term
obligations for the period ended June 30, 1996 were $4,373,940 and
$4,003,148 respectively.
D. Values for securities listed on a national securities exchange are based
on the latest quoted sale prices on June 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 June 30, 1996, net assets consisted of:
<TABLE>
<S> <C>
Paid-in capital............................................... $31,062,016
Undistributed net investment income........................... 261,119
Accumulated net realized loss on investments.................. (112,969)
Net unrealized appreciation of investments.................... 1,063,532
-----------
Total......................................................... $32,273,698
===========
</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, 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
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 Semiannual Report
PNC BANK, N.A. to Shareholders
c/o PFPC INC. June 30, 1996
P.O. Box 8950
Wilmington, Delaware 19899
(800) 852-4750
(302) 791-2748 (Delaware)
- --------------------------------------------------------------------------------
