<PAGE> 1
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
Robert R. Fortune
Chairman and President August 10, 1998
Dear Shareholder:
Our Fund earned $0.65 per share from net investment income in the first six
months of 1998. Earnings in the same period of 1997 were $0.69 per share.
Monthly dividends of $0.11 per share were paid from February to July 1998.
The January 1998 dividend of $0.115 per share was taxable in 1997.
An internal restructuring affecting our Investment Adviser has occurred
since our last report to you. BlackRock Financial Management, Inc. (BFM), a
majority-owned subsidiary of PNC Bank, N.A. (PNC Bank), and one of the largest
fixed-income investment management firms in the United States, now has
responsibility for PNC Bank's fixed-income investment management activities. In
connection with this restructuring, the name of our adviser, PNC Institutional
Management Corporation, has changed to BlackRock Institutional Management
Corporation (BIMC). In addition, BIMC has assumed the responsibilities of PNC
Bank as Sub-Adviser to provide research, credit analysis, and recommendations
with respect to the Fund's investments, and to provide certain computer
facilities, personnel, and other services.
The new co-managers of our portfolio are Robert S. Kapito who is Vice
Chairman of BIMC and also Vice Chairman of BFM since its founding in 1988, and
Dennis M. Schaney, Managing Director of BFM, who prior to joining BFM in 1998
spent nine years with Merrill Lynch where he was a Managing Director in that
firm's Global Fixed-Income Economics Department. Your Board of Directors looks
forward to working with the BlackRock organization.
Your comments or questions about Independence Square Income Securities,
Inc. are welcomed.
Sincerely,
/s/ Robert R. Fortune
Robert R. Fortune
<PAGE> 2
INVESTMENT ADVISER'S REPORT
The Funds' neutral weighting to finance-related corporate bonds and
underweight to dollar denominated bonds issued by non-U.S. companies (Yankees)
versus its benchmark aided performance during the reporting period.
Specifically, the Fund outperformed the Lehman Corporate Bond Index by 39 basis
points (0.39%), and the Lipper Investment Grade Fund peer group by 27 basis
points (0.27%). Investment returns are shown in the table below:
<TABLE>
<CAPTION>
TOTAL RETURNS AS OF JUNE 30, 1998:
ANNUALIZED
YEAR ------------------
QUARTER TO DATE 1 YEAR 2 YEARS 5 YEARS
------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Independence Square Income Securities*............. 3.03% 4.54% 12.20% 10.70% 7.92%
Lehman Corporate Bond Index........................ 2.58% 4.15% 11.39% 10.08% 7.55%
Lipper Investment Grade Funds (Avg.)............... 2.46% 4.27% 11.88% 10.89% 7.78%
Lipper Investment Grade Bond Funds:
ISIS Rank........................................ 3/16 6/16 8/16 9/16 6/16
ISIS Percentile.................................. 18 36 48 53 36
</TABLE>
- ------------------
Source: Lipper Analytical Services, Inc.
*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) reinvestments of dividends and distributions at the net
asset value next determined after each ex-dividend date in the period.
Despite an environment of generally strong economic growth, inflation
stayed surprisingly subdued. One explanation for the absence of inflation in the
U.S. economy stems from the aftermath of the Asian financial crisis. U.S.
exports to Asia have slowed, while the strength of the dollar caused cheap Asian
imports to flood the U.S. market and exert downward price pressure on domestic
goods. These factors contributed to the continued strong performance of U.S.
Treasuries. For example, the yield of the 10-year Treasury posted a net decline
of 29 basis points (0.29%), beginning 1998 at 5.74% and closing on June 30, 1998
at 5.45%. Investment grade corporate bonds underperformed Treasuries during the
reporting period, in part due to heavy corporate supply and less robust
corporate earnings.
Interest rates decreased across the yield curve as indicated in the table
below:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1998 CHANGE
----------------- ------------- ------
<S> <C> <C> <C>
2-year Treasury Note 5.64% 5.48% -0.16%
5-year Treasury Note 5.71% 5.47% -0.24%
10-year Treasury Note 5.74% 5.45% -0.29%
30-year Treasury Note 5.92% 5.63% -0.29%
</TABLE>
While we expect that interest rates will be fairly stable in the near-term,
our longer-term outlook for the domestic bond market remains optimistic, based
on the fundamentally favorable backdrop of low inflation, a currently high level
of real yields, and declining Treasury borrowing.
August 4, 1998 BLACKROCK INSTITUTIONAL MANAGEMENT CORPORATION
<PAGE> 3
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
SCHEDULE OF INVESTMENTS
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT COST VALUE
- ---------- ----------- -----------
<C> <S> <C> <C>
U.S. AGENCY OBLIGATIONS--2.8%
$1,000,000 Federal National Mortgage Association, 7.50%, 8/01/2006..... $ 918,815 $ 940,671
----------- -----------
BONDS AND OTHER DEBT OBLIGATIONS--97.2%
1,000,000 Ahmanson (H. F.) & Company, 9.875%, 11/15/1999.............. 995,465 1,045,360
500,000 BankAmerica, 9.50%, 4/01/2001............................... 497,265 541,875
500,000 Borden, Inc., 8.375%, 4/15/2016............................. 519,690 520,000
500,000 CBS, Inc., 8.875%, 6/01/2022................................ 546,520 556,875
1,000,000 Citicorp Capital Sub Notes, 9.75%, 8/01/1999................ 983,110 1,038,750
1,000,000 Cleveland Electric, 10.00%, 6/01/2020....................... 1,061,810 1,091,250
850,000 Comcast Cable Communications, 8.375%, 5/1/2007.............. 944,324 952,000
1,000,000 Comerica Bank, 8.375%, 7/15/2024............................ 983,750 1,198,750
300,000 Comerica Co., 9.75%, 5/01/1999.............................. 288,840 308,625
500,000 Commonwealth Edison Company, 8.625%, 2/01/2022.............. 537,500 550,625
1,000,000 Delta Airlines, Inc., 9.25%, 3/15/2022...................... 1,141,490 1,258,750
500,000 Federal Express, 9.625%, 10/15/2019......................... 551,345 535,000
500,000 First Chicago NBD Corp., 8.875%, 3/15/2002.................. 503,660 545,625
1,000,000 First Interstate Bancorp., 9.00%, 11/15/2004................ 1,000,000 1,041,250
500,000 First Union Corp., 8.00%, 8/15/2009......................... 498,965 560,000
1,000,000 Ford Motor Credit Co., 9.14%, 12/30/2014.................... 997,660 1,138,750
500,000 Great Western Financial Senior Notes, 8.60%, 2/01/2002...... 494,710 536,250
300,000 GTE California, Inc., 8.07%, 4/15/2024...................... 322,233 328,875
1,000,000 Gulf States Utilities, 8.70%, 4/01/2024..................... 1,057,420 1,088,750
500,000 Harris Bancorp, 9.375%, 6/01/2001........................... 493,285 543,125
500,000 Hydro-Quebec, 8.40%, 1/15/2022.............................. 508,395 610,625
1,000,000 Hydro-Quebec, 8.875%, 3/01/2026............................. 1,195,260 1,297,500
1,000,000 Jersey Central Power and Light, 8.45%, 3/24/2025............ 1,026,150 1,103,750
500,000 New England Power Co., 8.00%, 8/01/2022..................... 494,350 540,000
800,000 New York State Electric & Gas Corp., 9.875%, 5/01/2020...... 793,000 878,000
1,000,000 News America Holdings, 9.50%, 7/15/2024..................... 1,178,140 1,276,250
7,219 +Participation in Asset Exchange, 7.00%, 12/01/2020......... 7,220 7,296
500,000 PECO Energy Co., 8.75%, 4/01/2022........................... 500,510 528,750
1,000,000 PECO Energy Co., 8.625%, 6/01/2022.......................... 983,840 1,051,250
500,000 Penney (J.C.) & Company, 8.25%, 8/15/2022................... 497,445 535,000
1,000,000 TCI Communications, 8.75%, 2/15/2023........................ 957,060 1,103,750
1,000,000 Tenneco Inc., 7.625%, 5/15/2017............................. 999,080 1,098,750
1,000,000 Texas Utilities Co., 8.875%, 2/01/2022...................... 1,029,240 1,110,000
</TABLE>
<PAGE> 4
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
SCHEDULE OF INVESTMENTS -- (Concluded)
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT COST VALUE
- ---------- ----------- -----------
<C> <S> <C> <C>
BONDS AND OTHER DEBT OBLIGATIONS--(CONTINUED)
$ 500,000 Texas Utilities Co., 8.75%, 2/01/2023....................... $ 546,545 $ 555,625
1,000,000 Time Warner Entertainment, Inc., 8.375%, 7/15/2033.......... 990,210 1,200,000
500,000 Time Warner, Inc. Debentures, 9.150%, 2/01/2023............. 527,845 633,750
500,000 U.S. Can Corp., Series B, 10.130%, 10/15/2006............... 536,250 528,125
1,000,000 U.S. West, 8.875%, 6/01/2031................................ 1,060,720 1,121,250
450,000 United Air Lines, 9.210%, 1/21/2017......................... 522,329 540,594
Virginia Electric & Power Corp. Series B, 8.625%,
1,000,000 10/01/2024.................................................. 1,014,120 1,122,500
----------- -----------
TOTAL BONDS AND OTHER DEBT OBLIGATIONS...................... 29,786,751 32,223,250
----------- -----------
TOTAL INVESTMENTS--100.0%................................... $30,705,566* $33,163,921
=========== ===========
</TABLE>
- ------------------
+ Non-income producing
* Aggregate cost for federal income tax purposes at June 30, 1998 was
$30,705,566. The aggregate gross unrealized appreciation (depreciation) for
all securities is as follows: excess of value over tax cost $2,482,825;
excess of tax cost over value ($24,470).
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost--$30,705,566)................. $33,163,921
Cash...................................................... 59,416
Accrued interest receivable............................... 709,644
Prepaid expenses.......................................... 5
-----------
33,932,986
-----------
LIABILITIES
Accrued expenses.......................................... 120,317
-----------
NET ASSETS applicable to 1,820,511 capital shares
outstanding, $0.10 par value (Authorized 10,000,000
shares)................................................... $33,812,669
===========
NET ASSET VALUE PER SHARE ($33,812,669 / 1,820,511)......... $18.57
-------
-------
</TABLE>
See accompanying notes to financial statements.
<PAGE> 5
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest............................. $1,310,650
----------
Expenses
Fees
Investment adviser............... 59,804
Directors and officers........... 14,001
Custodian........................ 8,250
Transfer agent................... 8,750
Legal and audit.................. 19,400
Taxes(other than income)........... 1,249
Printing........................... 7,999
Insurance.......................... 709
Miscellaneous...................... 3,749
----------
Total expenses................. 123,911
----------
Net investment income................ $1,186,739
==========
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized gain on investment
securities............................ 45,991
----------
Unrealized appreciation of investments:
Beginning of period................... 2,183,586
End of period......................... 2,458,355
----------
Increase in unrealized appreciation... 274,769
----------
Net realized and unrealized gain on
investments......................... 320,760
----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS..................... $1,507,499
==========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
------------- ------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income................................... $ 1,186,739 $ 2,470,307
Net realized gain from security transactions............ 45,991 185,346
Increase in unrealized appreciation of investments...... 274,769 833,709
----------- -----------
Net increase in net assets resulting from
operations........................................... 1,507,499 3,489,362
Dividends to shareholders from net investment income ($.55
in 1998 and $1.38 in 1997).............................. (1,001,281) (2,512,305)
Dividends to shareholders from net realized gains ($.09 in
1997)................................................... -- (165,302)
----------- -----------
Total increase in net assets.......................... 506,218 811,755
NET ASSETS
Beginning of period....................................... 33,306,451 32,494,696
----------- -----------
End of period (including undistributed net investment
income of $246,224 in 1998 and $60,766 in 1997)......... $33,812,669 $33,306,451
=========== ===========
</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
1998 -----------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
----------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of
Period............................ $ 18.30 $ 17.85 $ 18.77 $ 16.58 $ 18.57 $ 17.76
------- ------- ------- ------- ------- -------
Net Investment Income............. 0.65 1.36 1.40 1.38 1.38 1.41
Net Gains (Losses) on Securities
(realized and unrealized)...... 0.17 0.56 (0.94) 2.19 (1.99) 0.82
------- ------- ------- ------- ------- -------
Total From Investment
Operations................ 0.82 1.92 0.46 3.57 (0.61) 2.23
------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends (from net investment
income)........................ (0.55) (1.38) (1.38) (1.38) (1.38) (1.42)
Dividends (from net realized
gains)......................... -- (0.09) -- -- -- --
------- ------- ------- ------- ------- -------
Total Distributions.......... (0.55) (1.47) (1.38) (1.38) (1.38) (1.42)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period...... $ 18.57 $ 18.30 $ 17.85 $ 18.77 $ 16.58 $ 18.57
======= ======= ======= ======= ======= =======
Per Share Market Value,
End of Period..................... $ 18.00 $ 17.75 $ 16.25 $ 17.25 $ 15.25 $ 17.25
======= ======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN, based on
market value(1)................... 5.02% 19.22% 3.72% 22.71% (4.00%) 9.00%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in
000's)......................... $33,813 $33,306 $32,495 $34,163 $30,179 $33,808
Ratio of Expenses to Average
Net Assets..................... 0.74%(2) 0.79% 0.68% 0.76% 0.85% 0.81%
Ratio of Net Investment Income to
Average Net Assets............. 7.12%(2) 7.52% 7.80% 7.64% 7.88% 7.61%
Portfolio Turnover Rate........... 3% 20% 33% 22% 28% 32%
</TABLE>
- ------------------
(1) See Note F.
(2) Annualized.
See accompanying notes to financial statements.
<PAGE> 7
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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 ex-dividend and
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 statements 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 BlackRock Institutional Management Corporation (formerly
known as PNC Institutional Management Corporation, "BIMC"), an indirect
majority-owned subsidiary of PNC Bank, BIMC manages the Fund's portfolio
and serves as its administrative agent. The Fund pays BIMC, 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.
BIMC 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, 1998.
C. Purchases and sales of investment securities other than short term
obligations for the period ended June 30, 1998 were $1,066,210 and
$1,148,655, respectively.
D. Values for securities listed on a national securities exchange are based
on the latest quoted sale prices on June 30, 1998. 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 value.
E. At June 30, 1998, net assets consisted of:
<TABLE>
<S> <C>
Paid-in capital............................................. $31,062,017
Undistributed net investment income......................... 246,224
Accumulated net realized gain on investments................ 46,073
Net unrealized appreciation of investments.................. 2,458,355
-----------
Total....................................................... $33,812,669
===========
</TABLE>
F. 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 Automatic
Dividend Investment 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
LANGHORNE B. SMITH
DAVID R. WILMERDING, JR.
OFFICERS
ROBERT R. FORTUNE, Chairman and
President
EDWARD J. ROACH, Vice President and
Treasurer
GARY M. GARDNER, Secretary
INVESTMENT ADVISER
BLACKROCK 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.
Semiannual Report
to Shareholders
June 30, 1998
- --------------------------------------------------------------------------------
