<PAGE> 1
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
Robert R. Fortune
Chairman and President May 7, 1997
Dear Shareholder:
Our Fund earned $.35 per share from net investment income in the first
quarter of 1997. Earnings in the first quarter of 1996 were $.34 per share.
Monthly dividends of $.115 per share were paid from January to April 1997,
however, the January dividend was treated as taxable in 1996.
Mr. R. Stewart Rauch, a director of the Company since 1986, retired in
February 1997. We thank him for his faithful service.
The current annual dividend rate of $1.38 represents a return of 8.4% on
the Fund's quarter-end closing market price of $16.50 per share.
Yours sincerely,
/s/ Robert R. Fortune
Robert R. Fortune
<PAGE> 2
INVESTMENT ADVISER'S REPORT
Total return (investment income plus or minus the change in market value)
on fixed income securities for the first quarter of 1997 was -0.86% as measured
by the Lehman Government/ Corporate Index. Concerns about a stronger than
expected economy which would lead to inflationary pressures caused the Federal
Reserve to raise the short term interest rate 25 basis points on March 25th.
Yields rose across the curve with the short end of the curve experiencing the
largest rise in rates as shown in the table below:
<TABLE>
<CAPTION>
12/31/96 03/31/97 CHANGE
-------- -------- ------
<S> <C> <C> <C>
2-year Treasury Note 5.87% 6.41% +0.54%
5-year Treasury Note 6.21% 6.75% +0.54%
10-year Treasury Note 6.42% 6.91% +0.49%
30-year Treasury Bond 6.64% 7.10% +0.46%
</TABLE>
The rise in interest rates caused a reduction in market values, resulting
in a negative total return of 0.52% for the Fund. Despite this negative return
in the first quarter, the Fund outperformed the Lehman Government/Corporate
Index and the Lipper Investment Grade Closed-End Bond Fund Average by 0.34% and
0.21%, respectively. Investment returns are shown in the table below:
<TABLE>
<CAPTION>
TOTAL RETURNS
PERIODS ENDED MARCH 31, 1997
ANNUALIZED
----------
6 1 2
QUARTER MOS. YR. YRS.
------- ---- ---- ----------
<S> <C> <C> <C> <C>
Independence Square Income Securities*................ -0.52% 3.09% 5.50% 8.54%
Lehman Bros. Gov't/Corp. Bond Index................... -0.86% 2.17% 4.46% 7.64%
Lipper Invest. Grade Bond Closed-End Funds (Avg.)..... -0.73% 2.97% 5.91% 8.85%
Lipper Investment Grade Closed-End Bond Funds:
ISIS Rank/No. of Funds.............................. 6/16 7/16 8/16 10/16
ISIS Percentile Rank................................ 37% 44% 50% 63%
</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 expect the 1997 GDP growth rate to be 2.8%, slightly higher than 1996's
GDP growth rate of 2.4%. We anticipate inflation, as measured by the Consumer
Price Index, to be unchanged at 2.9% in 1997. We are maintaining our expectation
of long term interest rates to remain in a range of 6.5% to 7.5%.
PNC INSTITUTIONAL MANAGEMENT CORPORATION
May 2, 1997
<PAGE> 3
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
STATEMENT OF NET ASSETS
MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT COST VALUE
- ----------- ----------- ------------
<C> <S> <C> <C>
BONDS AND OTHER DEBT OBLIGATIONS
$ 1,000,000 Ahmanson (H.F.) & Company, 9.875%, 11/15/1999............................ $ 995,465 $ 1,062,500
1,000,000 Appalachian Power Company, 8.50%, 12/01/2022............................. 1,059,020 980,000
1,000,000 Arizona Public Service Company, 10.25%, 05/15/2020....................... 1,000,000 1,118,750
500,000 Arizona Public Service Company, 9.50%, 04/15/2021........................ 490,265 543,125
500,000 BankAmerica, 9.50%, 04/01/2001........................................... 497,265 540,625
145,000 Boeing Company, 7.25%, 06/15/2025........................................ 146,073 138,838
1,000,000 Chase Manhattan Corporation, 10.00%, 06/15/1999.......................... 1,117,080 1,065,000
1,000,000 Chrysler Corporation, 10.95%, 08/01/2017................................. 997,500 1,063,750
1,000,000 Citicorp Capital Sub Notes, 9.75%, 08/01/1999............................ 983,110 1,061,250
1,000,000 Cleveland Electric, 10.00%, 06/01/2020................................... 988,250 1,048,750
1,000,000 Comerica Bank, 8.375%, 07/15/2024........................................ 983,750 1,025,000
300,000 Comerica Co., 9.75%, 05/01/1999.......................................... 288,840 316,500
500,000 Commonwealth Edison Company, 8.625%, 02/01/2022.......................... 537,500 492,500
1,000,000 Delta Airlines, Inc., 9.25%, 03/15/2022.................................. 1,141,490 1,107,500
500,000 Federal Express, 9.625%, 10/15/2019...................................... 551,345 535,000
500,000 First Chicago NBD Corp., 8.875%, 03/15/2002.............................. 503,660 533,750
1,000,000 First Interstate Bancorp., 9.00%, 11/15/2004............................. 1,000,000 1,043,750
500,000 First Interstate Bancorp., 12.75%, 05/01/1997............................ 518,605 502,550
500,000 First Union Corp., 8.00%, 08/15/2009..................................... 498,965 503,750
1,000,000 Ford Motor Credit Co., 9.14%, 12/30/2014................................. 997,660 1,077,500
500,000 Great Western Financial Senior Notes, 8.60%, 02/01/2002.................. 494,710 525,000
300,000 GTE California Inc., 8.07%, 04/15/2024................................... 322,233 290,625
1,000,000 Gulf States Utilities 8.70%, 04/01/2024.................................. 1,057,420 993,750
500,000 Harris Bancorp, 9.375%, 06/01/2001....................................... 493,285 538,750
1,000,000 Hydro-Quebec, 10.70%, 10/15/2007......................................... 1,081,500 1,018,750
500,000 Hydro-Quebec, 8.40%, 01/15/2022.......................................... 508,395 521,250
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%, 08/01/2022................................. 494,350 483,125
800,000 New York State Electric & Gas Corp., 9.875%, 05/01/2020.................. 793,000 880,000
1,000,000 OPC Scherer Funding Corp. Serial Facility Bond, 9.70%, 06/30/2011........ 1,000,000 1,050,930
8,834 Participation in Asset Exchange.......................................... 8,834 8,525
500,000 PECO Energy Co., 8.75%, 04/01/2022....................................... 500,510 511,875
1,000,000 PECO Energy Co., 8.625%, 06/01/2022...................................... 983,840 1,012,500
500,000 Penney (J.C.) & Company, 8.25%, 08/15/2022............................... 497,445 487,500
500,000 Texas Utilities Co., 8.75%, 11/01/2023................................... 546,545 521,875
1,000,000 Texas Utilities Co., 8.875%, 02/01/2022.................................. 1,029,240 1,045,000
</TABLE>
<PAGE> 4
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
STATEMENT OF NET ASSETS -- (Continued)
MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT COST VALUE
- ----------- ----------- ------------
<C> <S> <C> <C>
BONDS AND OTHER DEBT OBLIGATIONS -- (CONTINUED)
$ 1,000,000 TCI Communications, 8.75%, 02/15/2023.................................... $ 957,060 $ 923,750
500,000 Time Warner, Inc., 9.15%, 02/01/2023..................................... 527,845 531,250
1,000,000 Time Warner Entertainment, Inc., 8.375%, 07/15/2033...................... 990,210 975,000
1,000,000 U.S. West, 8.875%, 06/01/2031............................................ 1,060,720 1,031,250
1,000,000 Virginia Electric & Power Corp. Series B, 8.625%, 10/01/2024............. 1,014,120 1,045,000
----------- -----------
TOTAL INVESTMENTS -- 97.67%.............................................. $30,683,255* $ 31,171,093
===========
OTHER ASSETS LESS LIABILITIES -- 2.33%................................... 743,695
-----------
TOTAL NET ASSETS -- 100.00%.............................................. $ 31,914,788
===========
</TABLE>
- ------------------
*Aggregate cost for federal income tax purposes at March 31, 1997 was
$30,683,255. The aggregate gross unrealized appreciation (depreciation) for all
securities is as follows: excess of value over tax cost $1,030,881; excess of
tax cost over value ($543,043).
See accompanying notes to financial statements.
<PAGE> 5
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest..................... $696,141
----------
Expenses
Fees
Investment adviser........... 30,187
Directors and officers....... 7,807
Custodian.................... 3,413
Transfer agent............... 2,700
Legal and audit.............. 7,859
Taxes (other than income).... 492
Printing..................... 3,797
Insurance.................... 279
Miscellaneous................ 1,490
----------
Total expenses............... 58,024
----------
Net investment income........ $638,117
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Realized gain from security
transactions (excluding short-
term securities):
Proceeds from sales............ $1,086,726
Cost of securities sold........ 1,023,993
----------
Net realized gain.............. 62,733
----------
Unrealized appreciation
(depreciation) of investments:
Beginning of period............ 1,349,878
End of period.................. 487,837
----------
Decrease in unrealized
appreciation................ (862,041)
----------
Net realized and unrealized
loss on investments......... (799,308)
----------
NET DECREASE IN NET ASSETS
RESULTING
FROM OPERATIONS................ $ (161,191)
==========
</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>
YEAR ENDED DECEMBER 31
----------------------------------------------------
1996 1995 1994 1993 1992
JANUARY 1 ------- ------- ------- ------- -------
THROUGH
MARCH 31,
1997
-----------
(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.............. 0.35 1.40 1.38 1.38 1.41 1.46
Net Gains (Losses) on Securities
(realized and unrealized)........ (0.44) (0.94) 2.19 (1.99) 0.82 0.42
------- ------- ------- ------- ------- -------
Total From Investment
Operations.................. (0.09) 0.46 3.57 (0.61) 2.23 1.88
------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends (from net investment
income).......................... (0.23) (1.38) (1.38) (1.38) (1.42) (1.44)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period....... $ 17.53 $ 17.85 $ 18.77 $ 16.58 $ 18.57 $ 17.76
======= ======= ======= ======= ======= =======
Per Share Market Value, End of
Period............................. $ 16.50 $ 16.25 $ 17.25 $ 15.25 $ 17.25 $ 17.13
======= ======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN, based on
market value(1).................... 12.62%(2) 3.72% 22.71% (4.0%) 9.0% 7.0%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(in 000's)....................... $31,915 $32,495 $34,163 $30,179 $33,808 $32,324
Ratio of Expenses to Average Net
Assets........................... 0.72%(2) 0.68% 0.76% 0.85% 0.81% 0.85%
Ratio of Net Investment Income to
Average Net Assets............... 7.96%(2) 7.80% 7.64% 7.88% 7.61% 8.27%
Portfolio Turnover Rate............ 3% 33% 22% 28% 32% 18%
</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
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 March 31, 1997.
C. Purchases and sales of investment securities other than short term
obligations for the period ended March 31, 1997 were $1,060,720 and
$1,083,777, respectively.
D. Values for securities listed on a national securities exchange are based
on the latest quoted sale prices on March 31, 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 approximated 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 March 31, 1997, net assets consisted of:
<TABLE>
<S> <C>
Paid-in capital............................................... $31,062,016
Undistributed net investment income........................... 322,163
Accumulated net realized gain on investments.................. 42,771
Net unrealized appreciation of investments.................... 487,838
-----------
Total......................................................... $31,914,788
===========
</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.
One Aldwyn Center
Villanova, PA 19085
(610) 964-8882
BOARD OF DIRECTORS
ROBERT R. FORTUNE G. WILLING PEPPER
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.
First Quarter Report
to Shareholders
March 31, 1997
