EXHIBIT 17(e)
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
Robert R. Fortune
Chairman and President February 5, 1999
Dear Shareholder:
I am pleased to enclose the Annual Report of Independence Square Income
Securities, Inc. for the year ended December 31, 1998.
Our Fund earned $1.30 per share from net investment income in 1998 compared
to $1.36 per share in 1997. In recent years, several higher coupon bonds were
called and the proceeds reinvested at a lower coupon. As the Adviser's Letter
indicates, purchases of higher yielding non-investment grade bonds were made in
1998 to enhance earnings.
Dividends from net investment income declared in 1998 amounted to $1.32 per
share, compared to $1.38 per share in 1997. In addition, a long-term capital
gain distribution of $.0917 per share was declared in 1998 and paid in January
1999. The gains on securities were realized as bond prices increased due to the
continued decline in interest rates. The amounts taxable in 1998 include the
$0.11 per share regular dividend and the $0.0917 per share capital gain
distribution received by you in January 1999.
The accompanying Investment Adviser's Report provides a comparison of our
Fund's performance to key indexes and other closed-end bond funds on a total
return basis.
Yours sincerely,
/s/ Robert R. Fortune
Robert R. Fortune
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INVESTMENT ADVISER'S REPORT
The Fund emphasized adding non-investment grade (or "high yield") corporate
bonds during 1998 to enhance the portfolio's income earning capability. The high
yield sector experienced significant price weakness between August and October,
which was driven by a credit panic precipitated by the Russian default and hedge
fund de-leveraging, but provided the Fund an opportunity to add bonds at
attractive prices. For the year, the Fund underperformed the Lehman Corporate
Index but outperformed its Lipper peer group average. Investment returns are
shown in the table below:
TOTAL RETURNS AS OF DECEMBER 31, 1998:
Annualized
-----------------------------
Quarter 1 Year 2 Years 3 Years 5 Years
------- ------ ------- ------- -------
Independence Square Income Securities*............. 1.34% 7.34% 9.28% 7.08% 7.58%
Lehman Corporate Index............................. 0.60% 8.57% 9.40% 7.32% 7.74%
Lipper Investment Grade Funds Avg.................. 0.81% 6.66% 8.91% 7.37% 7.45%
ISIS Rank........................................ 7/16 5/16 7/16 10/16 7/16
ISIS Percentile.................................. 42 30 42 59 42
______________
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 in 1998 was a study in contrast, as economic growth boomed
but inflation declined, which is an unusual combination. This is a result of the
high investment spending undertaken by businesses and very strong consumer-
driven retail sales and housing activity. Both these phenomena have been fueled
by record equity market gains, which calls into question the sustainability of
this growth. U.S. Treasury yields fell dramatically during the year, as demand
for those securities rose due to the flight-to-quality between August and
October and a net reduction in Treasury supply. For example, the yield of the
10-year Treasury posted a net decline of 109 basis points (1.09%), beginning
1998 at 5.74% and ending the year at 4.65%. Not surprisingly, both investment
grade and non-investment grade corporate bonds underperformed Treasuries during
the reporting period, as investors favored government issues and shunned credit
risk.
Interest rates decreased dramatically across the yield curve as indicated
in the table below:
12/31/97 12/31/98 Change
-------- -------- --------
2-year Treasury Note........................ 5.64% 4.53% -1.11%
5-year Treasury Note........................ 5.71% 4.54% -1.17%
10-year Treasury Note....................... 5.74% 4.65% -1.09%
30-year Treasury Bond....................... 5.92% 5.09% -0.83%
We believe that non-Treasury securities, including corporate bonds, are
currently attractively valued and offer historically high yield premiums. Even
though we expect economic growth to slow during 1999 from its current rate of
3.5% to approximately 2.0%. we expect that corporate bonds will post strong
performance versus Treasuries.
February 1, 1999 BlackRock Institutional Management Corporation
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
SCHEDULE OF INVESTMENTS
December 31, 1998
Principal
Amount Cost Value
- --------- ----------- -----------
U.S. AGENCY OBLIGATIONS 8.0%
$1,680,000 Federal Home Loan Mortgage Corp., 4.70%, 01/04/99............................... $ 1,679,342 $ 1,679,342
900,000 Federal National Mortgage Association, 7.50%, 8/01/2006......................... 931,235 942,269
----------- -----------
TOTAL U.S. AGENCY OBLIGATIONS................................................... 2,610,577 2,621,611
----------- -----------
BONDS AND OTHER DEBT OBLIGATIONS 92.0%
1,000,000 Ahmanson (H.F.) & Company, 9.875%, 11/15/1999................................... 995,465 1,033,099
500,000 BankAmerica, 9.50%, 4/01/2001................................................... 497,265 542,067
550,000 Calpine Corp., 9.25%, 2/01/2004................................................. 555,500 566,500
1,000,000 Citicorp Capital Sub Notes, 9.75%, 8/01/1999.................................... 983,110 1,024,310
1,000,000 Cleveland Electric Illuminating, 9.00%, 7/01/2023............................... 1,061,810 1,080,000
850,000 Comcast Cable Communications, 8.375%, 5/01/2007................................. 944,324 975,669
1,000,000 Comerica Bank, 8.375%, 7/15/2024................................................ 983,750 1,145,747
300,000 Comerica, Inc., 9.75%, 5/01/1999................................................ 288,840 303,409
500,000 Commonwealth Edison Co., 8.625%, 2/01/2022...................................... 537,500 548,437
1,000,000 Delta Airlines, Inc., 9.25%, 3/15/2022.......................................... 1,141,490 1,155,737
500,000 Federal Express, 9.625%, 10/15/2019............................................. 551,345 531,779
500,000 First Chicago NBD Corp., 8.875%, 3/15/2002...................................... 503,660 547,270
1,000,000 First Interstate Bancorp., 9.00%, 11/15/2004.................................... 1,000,000 1,030,000
500,000 First Union Corp., 8.00%, 8/15/2009............................................. 498,965 549,506
1,000,000 Ford Motor Credit Co., 9.14%, 12/30/2014........................................ 997,660 1,150,080
500,000 Great Western Financial Senior Notes, 8.60%, 2/01/2002.......................... 494,710 539,028
300,000 GTE California, Inc., 8.07%, 4/15/2024.......................................... 322,233 329,512
1,000,000 Gulf States Utilities 8.70%, 4/01/2024.......................................... 1,057,420 1,081,250
500,000 Harris Bancorp, 9.375%, 6/01/2001............................................... 493,285 541,715
250,000 Horton (D.R.), Inc. Guarantee Notes, 10.00%, 4/15/2006.......................... 257,500 265,000
500,000 Hydro-Quebec, 8.40%, 1/15/2022.................................................. 508,395 610,123
1,000,000 Hydro-Quebec, 8.875%, 3/01/2026................................................. 1,195,260 1,279,887
1,000,000 Jersey Central Power and Light, 8.45%, 3/24/2025................................ 1,026,150 1,130,400
800,000 New York State Electric & Gas Corp., 9.875%, 5/01/2020.......................... 793,000 839,000
1,000,000 News America Holdings, 9.50%, 7/15/2024......................................... 1,178,140 1,275,831
1,000,000 Nextlink Communications, Inc. Sr. Notes, 12.50%, 4/15/2006...................... 1,065,000 1,080,000
6,369 +Participation in Asset Exchange, 7.00%, 12/01/2020.............................. 6,369 6,369
500,000 Penney (J.C.) & Company, 8.25%, 8/15/2022....................................... 497,445 526,250
200,000 Sinclair Broadcast Group Sr. Sub. Notes, 10.00%, 9/30/2005...................... 205,250 209,000
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
SCHEDULE OF INVESTMENTS (Continued)
December 31, 1998
Principal
Amount Cost Value
- --------- ----------- -----------
$1,000,000 TCI Communications, 8.75%, 2/15/2023........................................ $ 957,060 $ 1,127,707
1,000,000 Texas Utilities Co., 8.875%, 2/01/2022...................................... 1,029,240 1,123,500
500,000 Texas Utilities Co., 8.75%, 11/01/2023...................................... 546,545 568,946
1,000,000 Time Warner Entertainment, Inc., 8.375%, 7/15/2033.......................... 990,210 1,234,448
500,000 Time Warner, Inc. Debentures, 9.150%, 2/01/2023............................. 527,845 658,874
1,000,000 U.S. West, 8.875%, 6/01/2031................................................ 1,060,720 1,104,294
450,000 United Air Lines, 9.210%, 1/21/2017......................................... 522,329 510,345
1,000,000 Veritas DGC, Inc., 9.75%, 10/15/2003........................................ 1,023,750 1,015,000
1,000,000 Virginia Electric & Power Corp. Series B, 8.625%, 10/01/2024................ 1,014,120 1,079,813
----------- -----------
TOTAL BONDS AND OTHER DEBT OBLIGATIONS...................................... 28,312,660 30,319,902
----------- -----------
TOTAL INVESTMENTS 100.0%.................................................... $30,923,237* $32,941,513
=========== ===========
________________
+ Non-income producing.
* Aggregate cost for federal income tax purposes at December 31, 1998 was
$30,923,237. The aggregate gross unrealized appreciation (depreciation) for
all securities is as follows: excess of value over tax cost $2,058,576; excess
of tax cost over value ($40,300).
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
ASSETS
Investments, at value (cost -- $30,923,237)............................... $32,941,513
Cash...................................................................... 17,640
Accrued interest receivable............................................... 726,705
-----------
Total Assets............................................................ 33,685,858
-----------
LIABILITIES
Dividend payable.......................................................... 367,649
Investment advisory fees payable.......................................... 149,786
Other accrued expenses.................................................... 8,140
-----------
Total Liabilities....................................................... 525,575
-----------
NET ASSETS applicable to 1,822,752 capital shares outstanding,
$0.10 par value (Authorized 10,000,000 shares)............................ $33,160,283
===========
NET ASSET VALUE PER SHARE ($33,160,283 divided by 1,822,752 shares)......... $ 18.19
===========
See accompanying notes to financial statements.
INDEPENDENCE SQUARE INCOME SECURITIES, INC
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
INVESTMENT INCOME
Interest............................................ $2,636,453
----------
Expenses
Fees
Investment adviser.............................. 119,712
Directors and officers.......................... 29,501
Custodian....................................... 16,499
Transfer agent.................................. 17,500
Legal and audit................................. 44,614
Taxes (other than income)........................... 2,498
Printing............................................ 15,209
Insurance........................................... 1,406
Miscellaneous....................................... 7,813
----------
Total expenses................................ 254,752
----------
Net investment income............................... $2,381,701
==========
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS
Net realized gain on investment
securities......................................... $ 167,192
----------
Unrealized appreciation of
investments:
Beginning of year.................................. 2,183,586
End of year........................................ 2,018,276
----------
Decrease in unrealized
appreciation...................................... (165,310)
----------
Net realized and unrealized gain on
investments....................................... 1,882
----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.......................... $2,383,583
==========
STATEMENT OF CHANGES IN NET ASSETS
Years Ended December 31
1998 1997
----------- -----------
INCREASE IN NET ASSETS:
Operations:
Net investment income............................................................. $ 2,381,701 $ 2,470,307
Net realized gain from security transactions...................................... 167,192 185,346
Increase(decrease) in unrealized appreciation of investments...................... (165,310) 833,709
----------- -----------
Net increase in net assets resulting from operations............................ 2,383,583 3,489,362
Dividends to shareholders:
From net investment income ($1.32 in 1998 and $1.38 in 1997)...................... (2,403,446) (2,512,305)
From net realized gains ($.09 in both 1998 and 1997).............................. (167,146) (165,302)
Net asset value of shares issued in reinvestment of dividends
(2,241 shares in 1998).......................................................... 40,841 --
----------- -----------
Total increase(decrease) in net assets.......................................... (146,168) 811,755
NET ASSETS
Beginning of year.................................................................. 33,306,451 32,494,696
----------- -----------
End of year (including undistributed net investment income of $39,021 in
1998 and $60,766 in 1997)....................................................... $33,160,283 $33,306,451
=========== ===========
See accompanying notes to financial statements.
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
FINANCIAL HIGHLIGHTS
(For a Share of the Fund Outstanding Throughout Each Period)
Year Ended December 31
------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Per Share Operating Performance
Net Asset Value, Beginning of Year.......................... $ 18.30 $ 17.85 $ 18.77 $ 16.58 $ 18.57
------- ------- ------- ------- -------
Net Investment Income...................................... 1.30 1.36 1.40 1.38 1.38
Net Gains (Losses) on Securities (realized
and unrealized)........................................... -- 0.56 (0.94) 2.19 (1.99)
------- ------- ------- ------- -------
Total From Investment Operations......................... 1.30 1.92 0.46 3.57 (0.61)
------- ------- ------- ------- -------
Less Distributions
Dividends (from net investment income)..................... (1.32) (1.38) (1.38) (1.38) (1.38)
Dividends (from net realized gains)........................ (0.09) (0.09) -- -- --
------- ------- ------- ------- -------
Total Distributions...................................... (1.41) (1.47) (1.38) (1.38) (1.38)
------- ------- ------- ------- -------
Net Asset Value, End of Year................................ $ 18.19 $ 18.30 $ 17.85 $ 18.77 $ 16.58
======= ======= ======= ======= =======
Per Share Market Value, End of Year......................... $17.875 $ 17.75 $ 16.25 $ 17.25 $ 15.25
======= ======= ======= ======= =======
Total Investment Return, based on market
value/1/................................................... 7.88% 19.22% 3.72% 22.71% (4.00%)
Ratios/Supplemental Data
Net Assets, End of Year (000's)............................ $33,160 $33,306 $32,495 $34,163 $30,179
Ratio of Expenses to Average Net Assets.................... 0.76% 0.79% 0.68% 0.76% 0.85%
Ratio of Net Investment Income to Average
Net Assets................................................ 7.11% 7.52% 7.80% 7.64% 7.88%
Portfolio Turnover Rate.................................... 10% 20% 33% 22% 28%
___________________
/1/ See Note F.
See accompanying notes to financial statements.
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, 1998.
C. Purchases and sales of investment securities other than short term
obligations for the year ended December 31, 1998 were $4,048,586 and
$3,128,384, respectively.
D. Values for securities listed on a national securities exchange are based on
the latest quoted sale prices on December 31, 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 December 31, 1998, net assets consisted of:
Paid-in capital........................................... $31,102,858
Undistributed net investment income....................... 39,021
Accumulated net realized gain on investments.............. 128
Net unrealized appreciation of investments................ 2,018,276
-----------
Total..................................................... $33,160,283
===========
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.
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, 1998, 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 presented, in conformity with generally accepted accounting
principles. 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 generally accepted auditing standards, 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, 1998 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 22, 1999
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.
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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.
Annual Report
to Shareholders
December 31, 1998