<PAGE> 1
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
Robert R. Fortune
Chairman and President November 7, 1997
Dear Shareholder:
Our Fund earned $1.03 per share from net investment income in the first
nine months of 1997. Earnings in the same period of 1996 were $1.04 per share.
The call of several higher coupon bonds and reinvestment of the proceeds at a
lower coupon is primarily responsible for the reduced net investment income.
Monthly dividends of $.115 per share were paid from January to October
1997, however, the January dividend was treated as taxable in 1996.
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. At September 30, 1997, securities representing
91.3% of the portfolio's market value were invested in bonds rated in the four
highest investment grades.
Please let us know if we may be of assistance in connection with your Fund
investment.
Yours sincerely,
/s/ ROBERT R. FORTUNE
Robert R. Fortune
<PAGE> 2
INVESTMENT ADVISER'S REPORT
The Fund ended the third quarter of 1997 with a total return of 3.73%,
underperforming the Lipper Investment Grade Closed-End Bond Average by 0.31% and
outperforming the Lehman Government Corporate Index by 0.23% for the period
beginning June 30(th) and ending September 30(th). Investment returns are shown
in the table below:
<TABLE>
<CAPTION>
TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 1997
9 ANNUALIZED
QUARTER MONTHS 1 YEAR 2 YEARS
------- ------ ------ ----------
<S> <C> <C> <C> <C>
Independence Square Income Securities, Inc.*................ 3.73% 7.54% 11.44% 7.93%
Lehman Gov't/Corp. Bond Index............................... 3.50% 6.34% 9.60% 7.09%
Lipper Invest. Grade Closed End Bond Funds (Avg.)*.......... 4.04% 7.86% 11.88% 8.49%
Lipper Investment Grade Closed End Bond Funds:
ISIS Rank/No. of Funds.................................... 10/16 12/16 11/16 12/16
ISIS Percentile Rank...................................... 63% 75% 69% 75%
</TABLE>
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*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.
The Federal Reserve kept short term rates unchanged at the July and
September FOMC meetings, reflecting the U.S. economy's stellar performance of
steady growth and the lowest inflation levels in 31 years. The apparent absence
of inflationary pressures during the third quarter led to a significant rally
across the Treasury curve.
<TABLE>
<CAPTION>
06/30/97 09/30/97 CHANGE
-------- -------- ------
<S> <C> <C> <C>
2-year Treasury Note 6.06% 5.77% -0.29%
5-year Treasury Note 6.37% 5.99% -0.38%
10-year Treasury Note 6.49% 6.11% -0.38%
30-year Treasury Bond 6.78% 6.40% -0.38%
</TABLE>
We have revised our fourth quarter 1997 GDP growth rate estimate to 2.7%,
slightly slower than the 3.3% pace of the second quarter and well below the
prior two quarter average of 4.6%. Our inflation outlook remains subdued for the
remainder of 1997, from 2.3% to 2.8% as measured by the Consumer Price Index.
Our expectations of long term interest rates reflect a trading range from 6.2%
to 6.5%.
PNC INSTITUTIONAL MANAGEMENT CORPORATION
<PAGE> 3
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
STATEMENT OF NET ASSETS
SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT COST VALUE
- ----------- ----------- ------------
<C> <S> <C> <C>
U.S. GOVERNMENT SECURITIES -- 3.2%
$ 1,000,000 U.S. Treasury Notes, 7.000%, 07/15/2006.................................. $ 1,037,500 $ 1,054,210
----------- -----------
BONDS AND OTHER DEBT OBLIGATIONS -- 91.1%
1,000,000 Ahmanson (H.F.) & Company, 9.875%, 11/15/1999............................ 995,465 1,067,500
500,000 BankAmerica, 9.500%, 4/01/2001........................................... 497,265 548,125
145,000 Boeing Co., 7.250%, 6/15/2025............................................ 146,073 150,438
1,000,000 Chase Manhattan Corp. Sub Notes, 10.00%, 8/15/1999....................... 1,117,080 1,061,250
1,000,000 Citicorp Capital Sub Notes, 9.75%, 8/01/1999............................. 983,110 1,061,250
1,000,000 Cleveland Electric, 10.00%, 6/01/2020.................................... 988,250 1,057,500
1,000,000 Comerica Bank, 8.375%, 7/15/2024......................................... 983,750 1,111,250
300,000 Comerica Co., 9.75%, 5/01/1999........................................... 288,840 316,125
500,000 Commonwealth Edison Company, 8.625%, 2/01/2022........................... 537,500 528,750
1,000,000 Delta Airlines, Inc., 9.25%, 3/15/2022................................... 1,141,490 1,186,250
500,000 Federal Express, 9.625%, 10/15/2019...................................... 551,345 538,125
500,000 First Chicago NBD Corp., 8.875%, 3/15/2002............................... 503,660 544,375
1,000,000 First Interstate Bancorp., 9.00%, 11/15/2004............................. 1,000,000 1,053,750
500,000 First Union Corp., 8.00%, 8/15/2009...................................... 498,965 536,250
1,000,000 Ford Motor Credit Co., 9.14%, 12/30/2014................................. 997,660 1,112,500
500,000 Great Western Financial Senior Notes, 8.60%, 2/01/2002................... 494,710 537,500
300,000 GTE California Inc., 8.07%, 4/15/2024.................................... 322,233 313,125
1,000,000 Gulf States Utilities 8.70%, 4/01/2024................................... 1,057,420 1,047,500
500,000 Harris Bancorp, 9.375%, 6/01/2001........................................ 493,285 546,875
1,000,000 Hydro-Quebec, 10.70%, 10/15/2007......................................... 1,081,500 1,001,250
500,000 Hydro-Quebec, 8.40%, 1/15/2022........................................... 508,395 565,000
1,000,000 Jersey Central Power and Light, 8.45%, 3/24/2025......................... 1,026,150 1,090,000
1,000,000 Lockheed Martin Corp., 7.875%, 3/15/2023................................. 1,040,112 1,031,250
500,000 New England Power Co., 8.00%, 8/01/2022.................................. 494,350 520,000
800,000 New York State Electric & Gas Corp., 9.875%, 5/01/2020................... 793,000 930,000
1,000,000 OPC Scherer Funding Corp. Serial Facility Bond, 9.70%, 6/30/2011......... 1,000,000 1,050,950
7,970 Participation in Asset Exchange, 7.00%, 12/01/2020....................... 7,970 7,952
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
500,000 Penney (J.C.) & Company, 8.25%, 8/15/2022................................ 497,445 525,625
1,000,000 Tenneco Inc., 7.625%, 5/15/2017.......................................... 999,080 1,036,250
500,000 Texas Utilities Co., 8.75%, 11/01/2023................................... 546,545 555,000
1,000,000 Texas Utilities Co., 8.875%, 2/01/2022................................... 1,029,240 1,086,250
1,000,000 TCI Communications, 8.75%, 2/15/2023..................................... 957,060 1,043,750
</TABLE>
<PAGE> 4
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
STATEMENT OF NET ASSETS -- (Concluded)
SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT COST VALUE
- ----------- ----------- -----------
<C> <S> <C> <C>
BONDS AND OTHER DEBT OBLIGATIONS--(CONTINUED)
$ 500,000 Time Warner, Inc., 9.15%, 2/01/2023...................................... $ 527,845 $ 581,250
1,000,000 Time Warner Entertainment, Inc., 8.375%, 7/15/2033....................... 990,210 1,075,000
1,000,000 U.S. West, 8.875%, 6/01/2031............................................. 1,060,720 1,116,250
1,000,000 Virginia Electric & Power Corp. Series B, 8.625%, 10/01/2024............. 1,014,120 1,116,250
----------- -----------
TOTAL BONDS AND OTHER DEBT OBLIGATIONS................................... 28,656,193 30,237,340
----------- -----------
AGENCY OBLIGATIONS -- 3.1%
1,000,000 Federal National Mortgage Association, 7.500%, 8/01/2006................. 1,022,273 1,031,570
----------- -----------
COMMERCIAL PAPER -- 0.6%
210,000 General Electric Credit Corp., 5.546%, 10/31/1997........................ 210,000 210,000
----------- -----------
TOTAL INVESTMENTS -- 98.0%............................................... $30,925,966 32,533,120
===========
OTHER ASSETS LESS LIABILITIES -- 2.0%.................................... 659,647
-----------
TOTAL NET ASSETS -- 100.0%............................................... $ 33,192,767
===========
</TABLE>
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*Aggregate cost for federal income tax purposes at September 30, 1997 was
$30,925,966. The aggregate gross unrealized appreciation (depreciation) for all
securities is as follows: excess of value over tax cost $1,793,111; excess of
tax cost over value ($185,957).
See accompanying notes to financial statements.
<PAGE> 5
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest..................... $2,067,281
----------
Expenses
Fees:
Investment adviser........... 90,454
Directors and officers....... 28,542
Custodian.................... 12,562
Transfer agent............... 11,871
Legal and audit.............. 29,710
Taxes (other than income).... 2,165
Printing..................... 12,715
Insurance.................... 1,226
Miscellaneous................ 6,545
----------
Total expenses............... 195,790
----------
Net investment income........ $1,871,491
----------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS
Realized gain from security
transactions (excluding short-
term securities):
Proceeds from sales............ $5,285,464
Cost of securities sold........ 5,041,291
----------
Net realized gain.............. 244,173
----------
Unrealized appreciation
of investments:
Beginning of period............ 1,349,878
End of period.................. 1,607,154
----------
Increase in unrealized
appreciation................ 257,276
----------
Net realized and unrealized
gain on investments......... 501,449
----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS...... $2,372,940
==========
</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, -----------------------------------------------
1997 1996 1995 1994 1993 1992
------------- ------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of
Period.......................... $ 17.85 $ 18.77 $ 16.58 $ 18.57 $ 17.76 $ 17.32
-------- ------- ------- ------- ------- -------
Net Investment Income........... 1.03 1.40 1.38 1.38 1.41 1.46
Net Gains (Losses) on Securities
(realized and unrealized).... 0.27 (0.94) 2.19 (1.99) 0.82 0.42
-------- ------- ------- ------- ------- -------
Total From Investment
Operations.............. 1.30 0.46 3.57 (0.61) 2.23 1.88
-------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends (from net investment
income)...................... (0.92) (1.38) (1.38) (1.38) (1.42) (1.44)
-------- ------- ------- ------- ------- -------
Net Asset Value, End of Period.... $ 18.23 $ 17.85 $ 18.77 $ 16.58 $ 18.57 $ 17.76
======== ======= ======= ======= ======= =======
Per Share Market Value,
End of Period................... $ 17.50 $ 16.25 $ 17.25 $ 15.25 $ 17.25 $ 17.13
======== ======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN, based on
market value(1)................. 18.95%(2) 3.72% 22.71% (4.0%) 9.0% 7.0%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in
000's)....................... $33,193 $32,495 $34,163 $30,179 $33,808 $32,324
Ratio of Expenses to Average Net
Assets....................... 0.80%(2) 0.68% 0.76% 0.85% 0.81% 0.85%
Ratio of Net Investment Income
to Average Net Assets........ 7.66%(2) 7.80% 7.64% 7.88% 7.61% 8.27%
Portfolio Turnover Rate......... 17% 33% 22% 28% 32% 18%
</TABLE>
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(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
indirectly 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, 1997.
C. Purchases and sales of investment securities other than short term
obligations for the period ended September 30, 1997 were $5,664,100 and
$5,298,560, respectively.
D. Values for securities listed on a national securities exchange are based
on the latest quoted sale prices on September 30, 1997. 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, 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 September 30, 1997, net assets consisted of:
<TABLE>
<S> <C>
Paid-in capital............................................... $31,062,016
Undistributed net investment income........................... 299,386
Accumulated net realized gain on investments.................. 224,211
Net unrealized appreciation of investments.................... 1,607,154
-----------
Total......................................................... $33,192,767
===========
</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
<TABLE>
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<S> <C>
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
LANGHORNE B. SMITH 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, 1997
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</TABLE>
