<PAGE> 1
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
Robert R. Fortune
Chairman and President February 6, 1998
Dear Shareholder:
I am pleased to enclose the Annual Report of Independence Square Income
Securities, Inc. for the year ended December 31, 1997.
Our Fund earned $1.36 per share from net investment income in 1997 compared
to $1.40 per share in 1996. The call of several higher coupon bonds, requiring
the reinvestment of the proceeds at a lower coupon, is primarily responsible for
the reduced net investment income in 1997.
Dividends from net investment income declared in 1997 amounted to $1.38 per
share, the same amount per share declared in 1996. In addition, a long-term
capital gain distribution of $.0908 per share was declared in 1997 and paid in
January 1998. The gains on securities were realized as bond prices increased due
to the continued decline in interest rates. The amounts taxable in 1997 include
the distributions received by you in January 1998.
In light of the lower income levels projected for 1998, the Board of
Directors has determined that a reduction in the dividend for February 1998 to
$.11 per share is necessary. The monthly dividend was most recently $.115 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
INVESTMENT ADVISER'S REPORT
The Fund's efforts to purchase long maturity non-callable debt during the
3rd and 4th quarters led to strong 4th quarter 1997 returns. Those returns
helped the Fund to outperform the Lipper Investment Grade Closed-End Bond Fund
Average by 0.02%, the Lehman Government Corporate Index by 1.50% and the Lehman
Corporate Index by 1.03% for the year. Investment returns are shown in the table
below:
<TABLE>
<CAPTION>
TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1997
------------------------------------------
ANNUALIZED
-------------------
QUARTER 1 YEAR 2 YEARS 5 YEARS
------- ------ ------- -------
<S> <C> <C> <C> <C>
Independence Square Income Sec.*........................................ 3.48% 11.26% 6.95% 8.68%
Lehman Gov't/Corp. Bond Index........................................... 3.21% 9.76% 6.28% 7.61%
Lehman Corporate Bond Index............................................. 2.92% 10.23% 6.70% 8.44%
Lipper Invest. Grade Funds (Avg.)....................................... 3.12% 11.24% 7.76% 8.67%
Lipper Investment Grade Bond Funds:
-- I.S.I.S. Rank/No. of Funds......................................... 6/16 8/16 11/16 8/15
-- I.S.I.S. Percentile Rank........................................... 37% 50% 69% 53%
</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.
The fixed income markets posted stellar returns for a year in which the only
Federal Open Market Committee activity was a 25 basis point rate increase on
February 5th. Total return (investment income plus or minus the change in market
value) on fixed income securities, as measured by the Lehman Government
Corporate Index, was 9.76% in 1997. Long-term government interest rates rose
during the early part of the year, peaking at 7.17% during April, and declined
through the remainder of 1997 to close the year at 5.92%. Spreads on corporate
debt tightened through the first nine months before the Asian financial crisis
forced spreads to widen significantly during the last quarter. Despite this
widening, the corporate market, as measured by the Lehman Corporate Index,
returned 10.23% and was the year's best performing sector.
Interest rates decreased across the yield curve as indicated in the table
below:
<TABLE>
<CAPTION>
12/31/96 12/31/97 CHANGE
--------- --------- -------
<S> <C> <C> <C>
2-year Treasury Note.......................................................... 5.87% 5.64% -0.23%
5-year Treasury Note.......................................................... 6.21% 5.71% -0.50%
10-year Treasury Note.......................................................... 6.42% 5.74% -0.68%
30-year Treasury Bond.......................................................... 6.64% 5.92% -0.72%
</TABLE>
We have revised our outlook for the 1997 GDP growth rate to 3.7% from 3.6%.
We expect GDP to decline to 2.4% in 1998 due to the impact of the Asian
financial crisis. We are revising our inflation outlook, as measured by the
Consumer Price Index, from 2.6% to 2.3% in 1997, while expecting CPI to remain
at that level in 1998. We are revising our expectation of long-term interest
rates from 6.5% to 7.5% to between 6.25% and 5.5%.
PNC INSTITUTIONAL MANAGEMENT CORPORATION
January 28, 1998
<PAGE> 3
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT COST VALUE
- ---------- ----------- -----------
<C> <C> <S> <C> <C>
BONDS AND OTHER DEBT OBLIGATIONS 96.3%
$1,000,000 Ahmanson (H.F.) & Company, 9.875%, 11/15/1999............................ $ 995,465 $ 1,060,000
500,000 BankAmerica, 9.50%, 4/01/2001............................................ 497,265 546,250
1,000,000 Citicorp Capital Sub Notes, 9.75%, 8/01/1999............................. 983,110 1,052,500
1,000,000 Cleveland Electric, 10.00%, 6/01/2020.................................... 1,061,810 1,097,500
850,000 Comcast Cable Communications, 8.375%, 5/1/2007........................... 944,324 946,687
1,000,000 Comerica Bank, 8.375%, 7/15/2024......................................... 983,750 1,152,500
300,000 Comerica Co., 9.75%, 5/01/1999........................................... 288,840 313,500
500,000 Commonwealth Edison Company, 8.625%, 2/01/2022........................... 537,500 541,875
1,000,000 Delta Airlines, Inc., 9.25%, 3/15/2022................................... 1,141,490 1,230,000
500,000 Federal Express, 9.625%, 10/15/2019...................................... 551,345 538,750
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 1,051,250
500,000 First Union Corp., 8.00%, 8/15/2009...................................... 498,965 550,625
1,000,000 Ford Motor Credit Co., 9.14%, 12/30/2014................................. 997,660 1,132,500
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................................... 322,233 321,750
1,000,000 Gulf States Utilities 8.70%, 4/01/2024................................... 1,057,420 1,095,000
500,000 Harris Bancorp, 9.375%, 6/01/2001........................................ 493,285 546,875
500,000 Hydro-Quebec, 8.40%, 1/15/2022........................................... 508,395 587,500
1,000,000 Hydro-Quebec, 8.875%, 3/01/2026.......................................... 1,195,260 1,236,250
1,000,000 Jersey Central Power and Light, 8.45%, 3/24/2025......................... 1,026,150 1,098,750
500,000 New England Power Co., 8.00%, 8/01/2022.................................. 494,350 534,375
800,000 New York State Electric & Gas Corp., 9.875%, 5/01/2020................... 793,000 898,000
1,000,000 News America Holdings, 9.50%, 7/15/2024.................................. 1,178,140 1,243,750
1,000,000 OPC Scherer Funding Corp. Serial Facility Bond, 9.70%, 6/30/2011......... 1,000,000 1,046,250
7,706 + Participation in Asset Exchange, 7.00%, 12/01/2020....................... 7,706 7,757
500,000 PECO Energy Co., 8.75%, 4/01/2022........................................ 500,510 523,125
1,000,000 PECO Energy Co., 8.625%, 6/01/2022....................................... 983,840 1,041,250
500,000 Penney (J.C.) & Company, 8.25%, 8/15/2022................................ 497,445 532,500
1,000,000 TCI Communications, 8.75%, 2/15/2023..................................... 957,060 1,082,500
1,000,000 Tenneco Inc., 7.625%, 5/15/2017.......................................... 999,080 1,075,000
1,000,000 Texas Utilities Co., 8.875%, 2/01/2022................................... 1,029,240 1,111,250
500,000 Texas Utilities Co., 8.75%, 2/01/2023.................................... 546,545 553,125
</TABLE>
<PAGE> 4
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT COST VALUE
- ---------- ----------- -----------
<C> <C> <S> <C> <C>
$1,000,000 Time Warner Entertainment, Inc., 8.375%, 7/15/2033....................... $ 990,210 $ 1,141,250
500,000 Time Warner, Inc., 9.15%, 2/01/2023...................................... 527,845 613,750
500,000 U.S. Can Corp., Series B, 10.13%, 10/15/2006............................. 536,250 527,500
1,000,000 U.S. West, 8.875%, 6/01/2031............................................. 1,060,720 1,118,750
450,000 United Air Lines, 9.21%, 1/21/2017....................................... 522,329 529,283
1,000,000 Virginia Electric & Power Corp. Series B, 8.625%, 10/01/2024............. 1,014,120 1,127,500
----------- -----------
TOTAL BONDS AND OTHER DEBT OBLIGATIONS................................... 29,721,027 31,888,852
----------- -----------
AGENCY OBLIGATIONS 3.1%
1,000,000 Federal National Mortgage Association, 7.50%, 8/01/2006.................. 1,021,839 1,037,600
----------- -----------
COMMERCIAL PAPER 0.6%
198,000 General Electric Credit Corp., 5.814%, 1/15/1998......................... 198,000 198,000
----------- -----------
TOTAL INVESTMENTS 100.0%................................................. $30,940,866* $33,124,452
=========== ===========
</TABLE>
- ---------------
+ Non-income producing.
* Aggregate cost for federal income tax purposes at December 31, 1997 was
$30,940,866. The aggregate gross unrealized appreciation (depreciation) for
all securities is as follows: excess of value over tax cost $2,205,414; excess
of tax cost over value ($21,828).
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost -- $30,940,866)............................................ $33,124,452
Cash................................................................................... 1,492
Accrued interest receivable............................................................ 700,219
Prepaid expenses....................................................................... 715
-----------
Total Assets......................................................................... 33,826,878
-----------
LIABILITIES
Dividend payable....................................................................... 374,661
Investment advisory fees payable....................................................... 120,425
Other accrued expenses................................................................. 25,341
-----------
Total Liabilities.................................................................... 520,427
-----------
NET ASSETS applicable to 1,820,511 capital shares outstanding, $0.10 par value
(authorized 10,000,000 shares)......................................................... $33,306,451
-----------
NET ASSET VALUE PER SHARE ($33,306,451 / 1,820,511 shares)............................... $ 18.30
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 5
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest income..................... $2,728,582
----------
Expenses
Investment adviser................ 120,425
Directors and officers............ 33,352
Custodian......................... 17,137
Transfer agent.................... 17,290
Legal and audit................... 44,124
Printing.......................... 18,037
Insurance......................... 776
Miscellaneous..................... 7,134
----------
Total expenses............. 258,275
----------
Net investment income............... $2,470,307
==========
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Realized gain from security
transactions...................... $ 185,346
----------
Unrealized appreciation of
investments:
Beginning of year................. 1,349,877
End of year....................... 2,183,586
----------
Increase in unrealized
appreciation.................... 833,709
----------
Net realized and unrealized gain
on investments.................. 1,019,055
==========
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS................... $3,489,362
==========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income................................................. $ 2,470,307 $ 2,550,353
Net realized gain from security transactions.......................... 185,346 427,477
Increase (decrease) in unrealized appreciation of investments......... 833,709 (2,133,937)
----------- -----------
Net increase in net assets resulting from operations................ 3,489,362 843,893
Dividends to shareholders:
From net investment income ($1.38 in 1997 and $1.38 in 1996).......... (2,512,305) (2,512,305)
From net realized gains ($.09 in 1997)................................ (165,302) --
----------- -----------
Total increase (decrease) in net assets............................. 811,755 (1,668,412)
NET ASSETS
Beginning of year....................................................... 32,494,696 34,163,108
----------- -----------
End of year (including undistributed net investment income of $60,766 in
1997 and $102,764 in 1996)............................................ $33,306,451 $32,494,696
=========== ===========
</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
-----------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Year........... $ 17.85 $ 18.77 $ 16.58 $ 18.57 $ 17.76
------- ------- ------- ------- -------
Net Investment Income...................... 1.36 1.40 1.38 1.38 1.41
Net Gains (Losses) on Securities (realized
and unrealized)......................... 0.56 (0.94) 2.19 (1.99) 0.82
------- ------- ------- ------- -------
Total From Investment Operations...... 1.92 0.46 3.57 (0.61) 2.23
------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends (from net investment income)..... (1.38) (1.38) (1.38) (1.38) (1.42)
Dividends (from net realized gains)........ (0.09) -- -- -- --
------- ------- ------- ------- -------
Total Distributions................... (1.47) (1.38) (1.38) (1.38) (1.42)
------- ------- ------- ------- -------
Net Asset Value, End of Year................. $ 18.30 $ 17.85 $ 18.77 $ 16.58 $ 18.57
======= ======= ======= ======= =======
Per Share Market Value, End of Year.......... $ 17.75 $ 16.25 $ 17.25 $ 15.25 $ 17.25
======= ======= ======= ======= =======
Total Investment Return, based on market
value(1)................................... 19.22% 3.72% 22.71% (4.0%) 9.0%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (in 000's)......... $33,306 $32,495 $34,163 $30,179 $33,808
Ratio of Expenses to Average Net Assets.... 0.79% 0.68% 0.76% 0.85% 0.81%
Ratio of Net Investment Income to Average
Net Assets.............................. 7.52% 7.80% 7.64% 7.88% 7.61%
Portfolio Turnover Rate.................... 20% 33% 22% 28% 32%
</TABLE>
- ------------------
(1) See Note F.
See accompanying notes to financial statements.
<PAGE> 7
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 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 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 year ended December 31, 1997.
C. Purchases and sales of investment securities other than short term
obligations for the year ended December 31, 1997 were $11,102,213 and
$6,489,310, respectively.
D. Values for securities listed on a national securities exchange are based on
the latest quoted sale prices on December 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 amortized cost which approximates market value.
E. At December 31, 1997, net assets consisted of:
<TABLE>
<S> <C>
Paid-in capital.............................................................. $31,062,017
Undistributed net investment income.......................................... 60,766
Accumulated net realized gain on investments................................. 82
Net unrealized appreciation of investments................................... 2,183,586
-----------
Total........................................................................ $33,306,451
===========
</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
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,
including the schedule of investments, of Independence Square Income Securities,
Inc. (the "Fund"), as of December 31, 1997, and the related statement of
operations for the year then ended, the statements 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, 1997 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, 1997, 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
the 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 30, 1998
<PAGE> 9
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
SUMMARY OF THE FUND'S DIVIDEND INVESTMENT PLAN
The Fund has an Automatic Dividend Investment Plan which permits
participating shareholders to receive income dividends and capital gain
distributions ("Distributions") in additional shares of the Fund'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 Fund
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
Fund 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> 10
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<PAGE> 11
- --------------------------------------------------------------------------------
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
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, 1997
