<PAGE> 1
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
Robert R. Fortune
Chairman and President February 5, 2000
Dear Shareholder:
I am pleased to enclose the Annual Report of Independence Square Income
Securities, Inc. for the year ended December 31, 1999.
Our Fund earned $1.29 per share from net investment income in 1999 compared
to $1.30 per share in 1998. As you will recall, in recent years several higher
coupon bonds were called and the proceeds invested at a lower coupon. However,
as the Adviser's Letter indicates, purchases of higher yielding non-investment
grade bonds were made in 1999 to enhance earnings.
Dividends from net investment income declared in 1999 amounted to $1.30 per
share compared to $1.32 per share in 1998. However, a long-term capital gain
distribution of $0.02 per share was paid in addition to a $0.09 per share
dividend from net investment income received by you in January 2000. The entire
January 2000 distribution is taxable in 1999.
The accompanying Investment Adviser's Report provides a comparison of our
Fund's performance to a key index and other closed-end bond funds on a total
return basis.
I trust you have received my letter of December 10, 1999 explaining your
Board of Director's decision to approve an Agreement and Plan of Reorganization
between Independence Square Income Securities, Inc. and BlackRock Funds(TM).
This Agreement and Plan is subject to approval of the shareholders and, shortly,
you should receive a copy of these documents along with a proxy statement.
Footnote G to the accompanying financial statements provides more information on
this Agreement, which the Directors believe is appropriate in view of the
increasing difficulty in maintaining the level of the Fund's dividend. I hope
you will read with care the material you receive and vote in favor of the
proposed Agreement and Plan of Reorganization.
Yours sincerely,
/s/ Robert R. Fortune
Robert R. Fortune
<PAGE> 2
INVESTMENT ADVISER'S REPORT
The Fund continued to add non-investment grade (or "high yield") corporate
bonds during 1999, as we believed that sector offered good relative value and
had the potential to enhance the income earning capacity of the portfolio. This
strategy contributed to the Fund's outperformance versus its peer group during
the year. In 1999, the high yield market as measured by the Lehman High Yield
Index, significantly outperformed investment grade corporate bonds. Investment
returns are shown in the table below:
<TABLE>
<CAPTION>
TOTAL RETURNS AS OF DECEMBER 31, 1999:
ANNUALIZED
-----------------------------
QUARTER 1 YEAR 2 YEARS 3 YEARS 5 YEARS
------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Independence Square Income Securities*............ 0.34% -0.53% 3.33% 5.91% 8.34%
Lehman Corporate Bond Index....................... 0.04% -1.96% 3.18% 5.48% 8.18%
Lipper Corporate Investment Grade Funds Avg....... 0.12% -1.54% 2.47% 5.31% 8.01%
ISIS Rank/No. of Funds.......................... 7/16 5/16 4/16 3/16 4/16
ISIS Percentile................................. 42% 30% 24% 18% 24%
</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) reinvestment of dividends and distributions at
the net asset value next determined after each ex-dividend date in the period.
The U.S. economy sustained its growth during the past twelve months, as
U.S. exports and manufacturing continued to rebound. Additionally, consumer
strength remains an important contributor to economic growth as low unemployment
and rising incomes fuel domestic demand. After lowering interest rates three
times in the second half of 1998, and despite inflation concerns as measured by
the Consumer Price Index and Producer Price Index remaining relatively benign,
the Federal Reserve adopted a tightening bias and raised its target for the
Federal funds rate from 4.75% to 5.50% between June and November 1999. As
indicated in the chart below, U.S. Treasury yields rose dramatically during
1999, primarily due to the constant threat of inflation in response to the
strong economic data and the market's uncertainty over the Fed's policy
throughout the year. Recently, a weaker dollar, higher commodity prices and
strong gains in the U.S. and European equity markets have depressed overall
demand for fixed income securities.
U.S. Treasury yields:
<TABLE>
<CAPTION>
12/31/98 12/31/99 CHANGE
-------- -------- ------
<S> <C> <C> <C>
2-year Treasury Note........................................ 4.53% 6.42% 1.89%
5-year Treasury Note........................................ 4.54% 6.56% 2.02%
10-year Treasury Note....................................... 4.65% 6.66% 2.01%
30-year Treasury Bond....................................... 5.09% 6.60% 1.51%
</TABLE>
We believe that the U.S. economy will continue to exhibit strong growth and
that consumer confidence and spending will accelerate. These factors heighten
the possibility of higher inflation; accordingly, we anticipate that the Fed
will tighten 25-50 basis points at the February FOMC meeting.
January 28, 2000 BLACKROCK INSTITUTIONAL MANAGEMENT CORPORATION
<PAGE> 3
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT COST VALUE
- ---------- ----------- -----------
<C> <S> <C> <C>
U.S. TREASURY NOTES 2.5%
$ 410,000 U.S. Treasury Note, 6.125%, 8/15/2007....................... $ 424,839 $ 399,864
400,000 U.S. Treasury Note, 4.75%, 11/15/2008....................... 363,362 352,859
----------- -----------
TOTAL U.S. TREASURY NOTES................................... 788,201 752,723
----------- -----------
U.S. AGENCY OBLIGATIONS 9.1%
900,000 Federal National Mortgage Association, 7.50%, 8/01/2006..... 927,968 891,066
1,880,000 Federal Home Loan Bank Discount Notes, 1.50%, 1/03/2000..... 1,879,843 1,879,843
----------- -----------
TOTAL U.S. AGENCY OBLIGATIONS............................... 2,807,811 2,770,909
----------- -----------
BONDS AND OTHER DEBT OBLIGATIONS 88.4%
500,000 BankAmerica, 9.50%, 4/01/2001............................... 497,265 515,295
550,000 Calpine Corp., 9.250%, 2/01/2004............................ 555,500 556,875
1,000,000 Cleveland Electric Illuminating, 9.00%, 7/01/2023........... 1,061,810 986,302
1,000,000 Comerica Bank, 8.375%, 7/15/2024............................ 983,750 982,699
1,000,000 Delta Airlines, Inc., 9.25%, 3/15/2022...................... 1,141,490 1,054,202
500,000 Federal Express, 9.625%, 10/15/2019......................... 551,345 519,835
500,000 First Chicago NBD Corp., 8.875%, 3/15/2002.................. 503,660 516,726
500,000 First Union Corp., 8.00%, 8/15/2009......................... 498,965 499,418
1,000,000 Ford Motor Credit Co., 9.14%, 12/30/2014.................... 997,660 1,056,428
1,000,000 Golden Northwest Aluminum First Mortgage Notes, 12.00%,
12/15/2006................................................. 1,036,250 1,050,000
300,000 GTE California, Inc., 8.07%, 4/15/2024...................... 322,233 291,437
1,000,000.. Gulf States Utilities 8.70%, 4/01/2024...................... 1,057,420 993,363
500,000 Harris Bancorp, 9.375%, 6/01/2001........................... 493,285 513,113
250,000 Horton (D.R.), Inc. Co. Guarantee Notes, 10.00%,
4/15/2006.................................................. 257,500 252,500
1,000,000 Hydro-Quebec, 8.875%, 3/01/2026............................. 1,195,260 1,107,670
1,000,000 Jersey Central Power and Light, 8.45%, 3/24/2025............ 1,026,150 1,006,760
1,000,000 Lyondell Chemical Co., 10.875%, 5/01/2009................... 1,010,000 1,030,000
800,000 New York State Electric & Gas Corp., 9.875%, 5/01/2020...... 793,000 818,000
1,000,000 News America Holdings, 9.50%, 7/15/2024..................... 1,178,140 1,127,820
1,040,000 Nextel Communications, Inc., Sr. Discount Notes, 10.125%,
1/15/2004.................................................. 1,045,500 1,063,400
1,000,000 Nextlink Communications, Inc. Sr. Notes, 12.50%,
4/15/2006.................................................. 1,065,000 1,080,000
4,860 + Participation in Asset Exchange, 7.00%, 12/01/2020.......... 4,861 4,861
500,000 Penney (J.C.) & Company, 8.25%, 8/15/2022................... 497,445 450,000
1,000,000 RBF Finance Co., 11.375%, 3/15/2009......................... 1,051,875 1,075,000
1,000,000 Reynolds (R.J.) Tobacco Holdings, Inc., 7.375%, 5/15/2003... 980,890 938,750
</TABLE>
<PAGE> 4
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT COST VALUE
- ---------- ----------- -----------
<C> <S> <C> <C>
$ 200,000 Sinclair Broadcast Group Sr. Sub. Notes, 10.00%,
9/30/2005.................................................. $ 205,250 $ 199,000
500,000 Sonic Automotive, Inc., 11.00%, 8/01/2008................... 481,250 492,500
1,000,000 TCI Communications, 8.75%, 2/15/2023........................ 957,060 1,015,380
1,000,000 Time Warner Entertainment, Inc., 8.375%, 7/15/2033.......... 990,210 1,036,970
1,000,000 U.S. West, 8.875%, 6/01/2031................................ 1,060,720 1,048,230
450,000 United Air Lines, 9.21%, 1/21/2017.......................... 522,329 490,500
1,000,000 Veritas DGC, Inc., 9.75%, 10/15/2003........................ 1,023,750 1,012,500
1,000,000 Virginia Electric & Power Corp. Series B, 8.625%,
10/01/2024................................................. 1,014,120 1,013,210
500,000 Waterford Gaming L.L.C./Waterford Gaming Finance Corp. Sr.
Notes, 9.50%, 3/15/2010..................................... 491,250 492,500
500,000 Zurich Capital Trust 1, 8.376%, 6/01/2037................... 483,735 488,996
----------- -----------
TOTAL BONDS AND OTHER DEBT OBLIGATIONS...................... 27,035,928 26,780,240
----------- -----------
TOTAL INVESTMENTS 100.0%.................................... $30,631,940* $30,303,872
=========== ===========
</TABLE>
- ---------------
+ Non-income producing.
* Aggregate cost for federal income tax purposes at December 31, 1999 was
$30,631,940. The aggregate gross unrealized appreciation (depreciation) for
all securities is as follows: excess of value over tax cost $349,136; excess
of tax cost over value $(677,204).
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost -- $30,631,940)............... $30,303,872
Cash...................................................... 10,701
Accrued interest receivable............................... 693,492
Receivable from investment adviser........................ 33,468
-----------
Total Assets............................................ 31,041,533
-----------
LIABILITIES
Dividend payable.......................................... 200,503
Accrued expenses.......................................... 54,498
-----------
Total Liabilities....................................... 255,001
-----------
NET ASSETS applicable to 1,822,752 capital shares
outstanding, $0.10 par value (Authorized 10,000,000
shares)................................................... $30,786,532
===========
NET ASSET VALUE PER SHARE ($30,786,532 / 1,822,752
shares)................................................... $ 16.89
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 5
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest........................... $ 2,628,371
-----------
Expenses
Fees
Investment adviser............. 116,817
Directors and officers......... 32,503
Custodian...................... 21,500
Transfer agent................. 22,000
Legal and audit................ 49,899
Taxes(other than income)......... 2,500
Printing......................... 18,396
Insurance........................ 2,274
Miscellaneous.................... 18,223
-----------
Total expenses............ 284,112
-----------
Net investment income.............. $ 2,344,259
===========
REALIZED AND UNREALIZED GAIN(LOSS) ON
INVESTMENTS
Net realized gain on investment
securities....................... $ 34,367
-----------
Unrealized
appreciation(depreciation) of
investments:
Beginning of year................ 2,018,276
End of year...................... (328,068)
-----------
Decrease in unrealized
appreciation................... (2,346,344)
-----------
Net realized and unrealized loss
on investments................. (2,311,977)
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS........ $ 32,282
===========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income................................... $ 2,344,259 $ 2,381,701
Net realized gain from security transactions............ 34,367 167,192
Decrease in unrealized appreciation of investments...... (2,346,344) (165,310)
----------- -----------
Net increase(decrease) in net assets resulting from
operations........................................... 32,282 2,383,583
Dividends to shareholders:
From net investment income ($1.30 in 1999 and $1.32 in
1998).................................................. (2,371,538) (2,403,446)
From net realized gains ($.02 in 1999 and $.09 in
1998).................................................. (34,495) (167,146)
Net asset value of shares issued in reinvestment of
dividends (2,241 shares in 1998)....................... 0 40,841
----------- -----------
Total (decrease) in net assets........................ (2,373,751) (146,168)
NET ASSETS
Beginning of year......................................... 33,160,283 33,306,451
----------- -----------
End of year (including undistributed net investment income
of $11,742 in 1999 and $39,021 in 1998)................. $30,786,532 $33,160,283
=========== ===========
</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
-----------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Year........... $ 18.19 $ 18.30 $ 17.85 $ 18.77 $ 16.58
------- ------- ------- ------- -------
Net Investment Income...................... 1.29 1.30 1.36 1.40 1.38
Net Gains (Losses) on Securities (realized
and unrealized)......................... (1.27) -- 0.56 (0.94) 2.19
------- ------- ------- ------- -------
Total From Investment Operations...... 0.02 1.30 1.92 0.46 3.57
------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends (from net investment income)..... (1.30) (1.32) (1.38) (1.38) (1.38)
Dividends (from net realized gains)........ (0.02) (0.09) (0.09) -- --
------- ------- ------- ------- -------
Total Distributions................... (1.32) (1.41) (1.47) (1.38) (1.38)
------- ------- ------- ------- -------
Net Asset Value, End of Year................. $ 16.89 $ 18.19 $ 18.30 $ 17.85 $ 18.77
======= ======= ======= ======= =======
Per Share Market Value, End of Year.......... $ 15.50 $17.875 $ 17.75 $ 16.25 $ 17.25
======= ======= ======= ======= =======
Total Investment Return, based on market
value(1)................................... (4.52%) 7.88% 19.22% 3.72% 22.71%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (in 000's)......... $30,787 $33,160 $33,306 $32,495 $34,163
Ratio of Expenses to Average Net Assets.... 0.88% 0.76% 0.79% 0.68% 0.76%
Ratio of Net Investment Income to Average
Net Assets.............................. 7.30% 7.11% 7.52% 7.80% 7.64%
Portfolio Turnover Rate.................... 21% 10% 20% 33% 22%
</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. 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 ("BIMC", formerly known
as PNC Institutional Management Corporation), 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, an annual
fee of .20% of the Fund's average net assets and 2% of the Fund's gross
income.
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 year ended December 31, 1999.
C. Purchases and sales of investment securities other than short term
obligations for the year ended December 31, 1999 were $8,003,920 and
$6,225,310, respectively.
D. Values for securities listed on a national securities exchange are based on
the latest quoted sale prices on December 31, 1999. 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, 1999, net assets consisted of:
<TABLE>
<S> <C>
Paid-in capital............................................. $31,102,858
Undistributed net investment income......................... 11,742
Net unrealized depreciation of investments.................. (328,068)
-----------
Total....................................................... $30,786,532
===========
</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.
G. The Board of Directors of the Fund has approved an Agreement and Plan of
Reorganization by and between the Fund and BlackRock Funds(SM) subject to
approval by the stockholders of the Fund at a special meeting of
stockholders. In the proposed Reorganization, all of the assets and
liabilities of the Fund will be transferred to the High Yield Bond Portfolio
of BlackRock Funds(SM) in exchange for Series B Investor Shares of the High
Yield Bond Portfolio. The Fund will distribute the Series B Investor Shares
to the stockholders of the Fund. A holder of shares in the Fund will receive
Series B Investor Shares of the High Yield Bond Portfolio with the same
aggregate net asset value as the ISIS shares held by the stockholder
immediately before the transaction. The Reorganization is expected to be a
tax-free reorganization.
The Reorganization is expected to occur in the second quarter of 2000.
<PAGE> 8
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of Independence Square Income Securities, Inc.:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Independence Square Income
Securities, Inc. (the "Fund") at December 31, 1999, 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 its financial highlights for each of
the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States. These financial statements
and financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at December
31, 1999 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 21, 2000
<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 Distributions 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
- --------------------------------------------------------------------------------
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
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, 1999
