<PAGE> 1
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
Robert R. Fortune
Chairman and President February 4, 1997
Dear Shareholder:
I am pleased to enclose the Annual Report of Independence Square Income
Securities, Inc. for the year 1996.
A combination of increased interest income and reduced expenses enabled the
Fund to earn $1.40 per share from net investment income in 1996, compared to
$1.38 per share earned in 1995.
Dividends declared in 1996 amounted to $1.38 per share, the same amount per
share declared in 1995. The dividends declared and considered taxable in 1996
include the dividend of $.115 per share received by you in January 1997.
The current annual dividend rate of $1.38 represents a return of 8.5% on
the Fund's year-end closing asked price of $16.25 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 on a total return basis.
Yours sincerely,
/s/ Robert R. Fortune
-------------------------
Robert R. Fortune
<PAGE> 2
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INVESTMENT ADVISER'S REPORT
Total returns (investment income plus or minus the change in market value)
on fixed income securities for 1996 of 2.90% contrasted sharply to 1995's total
returns of 19.24%, as measured by the Lehman Government Corporate Index. The
first and second halves of 1996 provided fixed income total returns that were
studies in contrast. The first half provided returns of -1.88% due to unexpected
strength in the job market, raising inflation fears and interest rates which
reduced market values. The second half's returns were 4.88% as the anticipation
that the strength in employment would lead to inflation never materialized and
market values had a mild recovery. For the year, yields across the curve rose,
with the middle of the curve experiencing the largest rise in rates as shown in
the table below:
<TABLE>
<CAPTION>
12/31/95 12/31/96 CHANGE
-------- -------- ------
<S> <C> <C> <C>
2-year Treasury Notes......................................................... 5.15% 5.87% 0.72%
5-year Treasury Notes......................................................... 5.37% 6.21% 0.84%
10-year Treasury Notes......................................................... 5.57% 6.42% 0.85%
30-year Treasury Bonds......................................................... 5.95% 6.64% 0.69%
</TABLE>
During the first half of the year, long maturity callable debt was purchased
to help maintain the Fund's dividend rate. When the market rallied later in
1996, underperformance of these securities contributed to the Fund's total
return being less than the Lehman Government/Corporate Index and the Lipper
Investment Grade Closed-End Bond Fund Average by 0.09% and 1.57%, respectively.
Investment returns are shown in the table below:
<TABLE>
<CAPTION>
TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1996
----------------------------------------
12 ANNUALIZED
QUARTER MONTHS 2 YRS.
-------- -------- ----------
<S> <C> <C> <C>
Independence Square Income Securities, Inc.*............................ 3.63% 2.81% 12.09%
Lehman Brothers Gov't/Corp. Bond Index.................................. 3.06% 2.90% 10.77%
Lipper Investment Grade Closed-End Bond Funds (Avg.).................... 3.73% 4.38% 12.21%
Lipper Investment Grade Closed-End Bond Funds:
-- I.S.I.S. Rank/No. of Funds......................................... 8/16 13/16 7/16
-- I.S.I.S. Percentile Rank........................................... 50% 81% 44%
</TABLE>
- ---------------
* The cumulative total returns are based on the net asset values on the first
and last 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 interest rates in a range of 6.5% to 7.5%.
PNC INSTITUTIONAL MANAGEMENT CORPORATION
January 31, 1997
<PAGE> 4
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
<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 $ 1,080,000
1,000,000 Appalachian Power Co., 8.5%, 12/01/2022................................... 1,059,020 1,045,000
1,000,000 Arizona Public Service Co., 10.25%, 5/15/2020............................. 1,000,000 1,138,750
500,000 Arizona Public Service Co., 9.50%, 4/15/2021.............................. 490,265 550,625
500,000 BankAmerica Corp., 9.50%, 4/01/2001....................................... 497,265 551,250
145,000 Boeing Co., 7.25%, 6/15/2025.............................................. 146,073 143,731
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 1,075,000
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 1,045,000
1,000,000 Comerica Bank, 8.375%, 7/15/2024.......................................... 983,750 1,078,750
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................................ 537,500 518,125
1,000,000 Delta Airlines, 9.25%, 03/15/2022......................................... 1,141,490 1,133,750
500,000 Federal Express, 9.625%, 10/15/2019....................................... 551,345 542,500
500,000 First Chicago Corp., 8.875%, 3/15/2002.................................... 503,660 548,125
500,000 First Interstate Bancorp., 12.75%,5/01/1997............................... 518,605 510,735
1,000,000 First Interstate Bancorp., 9.00%, 11/15/2004.............................. 1,000,000 1,047,500
500,000 First Union Corp., 8.00%, 8/15/2009....................................... 498,965 531,250
1,000,000 Ford Motor Credit Co., 9.14%, 12/30/2014.................................. 997,660 1,108,750
500,000 Great Western Financial Senior Notes, 8.60%, 2/01/2002.................... 494,710 540,625
300,000 GTE California, 8.07%, 04/15/2024......................................... 322,233 306,375
1,000,000 Gulf State Utilities, 8.70%,4/01/2024..................................... 1,057,420 1,030,000
500,000 Harris Bancorp., 9.375%, 6/01/2001........................................ 493,285 551,250
1,000,000 Jersey Central Power & Light, 8.45%,03/24/2025............................ 1,026,150 1,045,000
500,000 New England Power Co., 8.00%, 8/01/2022................................... 494,350 505,000
800,000 New York State Electric & Gas Corp., 9.875%, 5/01/2020.................... 793,000 900,000
1,000,000 OPC Scherer Funding Corp. Serial Facility Bond, 9.70%, 6/30/2011.......... 1,000,000 1,051,250
10,746 Participation in Asset Exchange........................................... 10,746 10,608
500,000 Penney (J.C.) Co., Inc. 8.25%, 8/15/2022.................................. 497,445 507,500
500,000 PECO Energy Co., 8.75%, 4/01/2022......................................... 500,510 530,625
1,000,000 PECO Energy Co., 8.625%, 6/01/2022........................................ 983,840 1,056,250
</TABLE>
<PAGE> 5
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT COST VALUE
- ---------- ----------- -----------
<C> <S> <C> <C>
1,000,000 Quebec-Hydro, 10.70%, 10/15/2007.......................................... 1,081,500 1,032,500
500,000 Quebec-Hydro, 8.40%, 1/15/2022............................................ 508,395 547,500
1,000,000 TCI Communications, Inc., 8.75%, 02/15/2023............................... 957,060 950,000
1,000,000 Texas Utilities Co., 8.875%, 2/01/2022.................................... 1,029,240 1,075,000
500,000 Texas Utilities Co., 8.75%, 11/01/2023.................................... 546,545 533,125
500,000 Time Warner, Inc., 9.15%, 02/01/2023...................................... 527,845 541,875
1,000,000 Time Warner Entertainment, Inc., 8.375%, 07/15/2033....................... 990,210 1,006,250
1,000,000 Virginia Electric & Power Corp. Series B, 8.625%, 10/01/2024.............. 1,014,120 1,062,500
----------- -----------
TOTAL INVESTMENTS......................................................... $30,611,947* $31,961,824
=========== ===========
</TABLE>
- ---------------
* Aggregate cost for federal income tax purposes at December 31, 1996 was
$30,611,947. The aggregate gross unrealized appreciation for all securities is
as follows: excess of value over tax cost $1,558,795; excess of tax cost over
value ($208,918).
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost -- $30,611,947)................................. $31,961,824
Cash........................................................................ 235,326
Accrued interest receivable................................................. 637,067
Prepaid expenses............................................................ 50
-----------
32,834,267
-----------
LIABILITIES
Dividend payable............................................................ 209,359
Accrued expenses............................................................ 130,212
-----------
339,571
-----------
NET ASSETS applicable to 1,820,511 capital shares outstanding, $0.10 par value
(authorized 10,000,000 shares).............................................. $32,494,696
-----------
NET ASSET VALUE PER SHARE ($32,494,696/1,820,511 shares)...................... $ 17.85
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 6
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest income....................... $ 2,771,827
----------
Expenses
Fees:
Investment adviser................ 120,865
Directors and officers............ 27,637
Custodian......................... 17,684
Transfer agent.................... 4,666
Legal and Audit................... 29,421
Taxes (other than income)........... 4,001
Printing............................ 12,200
Insurance........................... 1,666
Miscellaneous....................... 3,334
----------
Total expenses............... 221,474
----------
Net investment income................. $ 2,550,353
==========
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain from security
transactions (excluding short-term
securities):
Proceeds from sales................. $10,441,598
Cost of securities sold............. 10,014,121
----------
Net realized gain................... 427,477
----------
Unrealized appreciation (depreciation)
of investments:
Beginning of year................... 3,483,815
End of year......................... 1,349,878
----------
Decrease in unrealized
appreciation...................... (2,133,937)
----------
Net realized and unrealized loss on
investments....................... (1,706,460)
----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS................... $ 843,893
==========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income.................................................. $ 2,550,353 $ 2,502,797
Net realized gain (loss) from security transactions.................... 427,477 (4,025)
Increase (decrease) in unrealized appreciation of investments.......... (2,133,937) 3,997,947
----------- -----------
Net increase in net assets resulting from operations................. 843,893 6,496,719
Dividends to shareholders from net investment income ($1.38 in 1996 and
$1.38 in 1995)......................................................... (2,512,305) (2,512,305)
----------- -----------
Total increase (decrease) in net assets.............................. (1,668,412) 3,984,414
NET ASSETS
Beginning of year........................................................ 34,163,108 30,178,694
----------- -----------
End of year (including undistributed net investment income of $102,764 in
1996 and $64,716 in 1995).............................................. $32,494,696 $34,163,108
=========== ===========
</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
-----------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Year........... $ 18.77 $ 16.58 $ 18.57 $ 17.76 $ 17.32
------- ------- ------- ------- -------
Net Investment Income...................... 1.40 1.38 1.38 1.41 1.46
Net Gains (Losses) on Securities
(realized and unrealized)............... (0.94) 2.19 (1.99) 0.82 0.42
------- ------- ------- ------- -------
Total From Investment
Operations......................... 0.46 3.57 (0.61) 2.23 1.88
------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends (from net investment income)..... (1.38) (1.38) (1.38) (1.42) (1.44)
------- ------- ------- ------- -------
Net Asset Value, End of Year................. $ 17.85 $ 18.77 $ 16.58 $ 18.57 $ 17.76
======== ======== ======== ======== ========
Per Share Market Value, End of Year.......... $ 16.25 $ 17.25 $ 15.25 $ 17.25 $17.125
======== ======== ======== ======== ========
Total Investment Return, based on market
value(1)................................... 3.72% 22.71% (4.0%) 9.0% 7.0%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (in 000's)......... $32,495 $34,163 $30,179 $33,808 $32,324
Ratio of Expenses to Average Net Assets.... 0.68% 0.76% 0.85% 0.81% 0.85%
Ratio of Net Investment Income to..........
Average Net Assets...................... 7.80% 7.64% 7.88% 7.61% 8.27%
Portfolio Turnover Rate.................... 33% 22% 28% 32% 18%
</TABLE>
- ------------------
(1) See Note G.
See accompanying notes to financial statements.
<PAGE> 8
NOTES TO FINANCIAL STATEMENTS
A. Independence Square Income Securities, Inc. ("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.
The preparation of financial statements in conformity with generally
accepted principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of
the financial statement and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
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 December 31, 1996.
C. Purchases and sales of investment securities other than short term
obligations for the period ended December 31, 1996 were $10,429,250 and
$10,014,121, respectively.
D. Values for securities listed on a national securities exchange are based on
the latest quoted sale prices on December 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 amortized cost which approximates market.
E. At December 31, 1996, a capital loss carryover of $19,962 was available to
offset possible future realized capital gains. The carryover expires as
follows: $15,937 in 2002 and $4,025 in 2003.
F. At December 31, 1996, net assets consisted of:
<TABLE>
<S> <C>
Paid-in capital.............................................................. $31,062,016
Undistributed net investment income.......................................... 102,764
Accumulated net realized loss on investments................................. (19,962)
Net unrealized appreciation of investments................................... 1,349,878
-----------
Total........................................................................ $32,494,696
===========
</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. (the "Fund"), including the schedule
of investments, as of December 31, 1996, 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 investments owned as of
December 31, 1996, 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 1996, 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
January 24, 1997
<PAGE> 10
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> 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
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, 1996
