STERLING CAPITAL CORPORATION
Report for the Year Ended December 31, 1997
OFFICERS
Walter Scheuer ........................ Chairman of the Board of Directors
Wayne S. Reisner ...................... President
Richard Kaufman ....................... Executive Vice President
Michael Carey ......................... Treasurer
Elizabeth Acton ....................... Secretary
DIRECTORS
Jay Eliasberg Nathan Kingsley
Arthur P. Floor Archer Scherl
Walter Scheuer
Transfer Agent and Registrar Custodian
Registrar and Transfer Company Citibank, N.A.
10 Commerce Drive 120 Broadway
Cranford, New Jersey 07016 New York, New York 10271
Auditors General Counsel
Stavisky, Knittle, Isaacs Skadden, Arps,
& Dichek, C.P.A., P.C. Slate, Meagher & Flom
342 Madison Avenue 919 Third Avenue
New York, New York 10173 New York, New York 10022
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<PAGE>
STERLING CAPITAL CORPORATION
635 Madison Avenue
New York, N.Y. 10022
February 23, 1998
To our Shareholders:
Despite an increase in volatility and a sharp price correction in
October due to the Asian crisis, the equity market advanced sharply in 1997 with
the S&P 500 Index and the Dow Jones Industrial Average increasing 31% and 23%,
respectively. This followed strong gains in the previous two years and
represented the first time in U.S. stock market history that increases in the
major indices exceeded 20% for three consecutive years. The increase was fueled,
at least in part, by individual investors who committed a record $232 billion to
equity mutual funds. Bond prices, which had been weak earlier in the year in
response to an increase in short-term interest rates by the Federal Reserve,
rallied strongly in the fourth quarter due to lower than expected rates of
inflation and a flight to quality in the form of dollar denominated fixed income
securities. For the year, long-term Treasury bonds recorded a total return of
nearly 15%.
The economy turned in a solid performance last year with real GDP
growth accelerating and the rate of inflation declining versus the prior year.
The Consumer Price Index increased only 1.7% in 1997 and the Producers Price
Index actually declined by 1.8%. These levels of inflation were the lowest
experienced in more than ten years and occurred despite the fact that the
economy was in its seventh year of an expansion. Although companies were limited
in their ability to raise prices, gains in productivity combined with a
continued emphasis on cost controls led to an above average rate of growth in
corporate profits.
Looking forward, the economic problems in Southeast Asia are expected
to slow economic activity in the U.S. as our exports to that part of the world
decline and as competition from imports increases. Despite this negative, the
current strength in employment and wages and a high level of consumer confidence
should enable the economy to avoid a recession. Moreover, some slowing in
economic activity combined with the strong U.S. dollar should lead to a benign
outlook for inflation and interest rates in the current year.
Although valuation models for equities have not proven to be a reliable
timing tool in recent years, it should be noted that the present level of
valuation leaves little room for disappointment. Equities are currently trading
at the highest level ever relative to book value and dividends. While the
current P/E ratio is not at an all time high, it is 50% above its historical
average. Given these factors and an expected slowdown in corporate profits, we
believe that gains in stock prices are likely to be more modest in 1998 than
those achieved in the last three years. In terms of our equity portfolio, we
have continued to focus on companies selling at lower price earnings multiples
and valuations than the market generally as well as certain smaller companies
that are not well followed and which we believe are inefficiently priced.
Sectors in which we have strong representation at present include
telecommunications, financial services, technology, and real estate investment
trusts. With the recent sharp decline in oil and gas prices, we anticipate
finding additional values in the energy and related services sector. Consumer
nondurables and healthcare stocks are currently underweighted in our portfolio
primarily due to the high valuations in those sectors.
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<PAGE>
We enclose a report of our Corporation's operations for the year ended
December 31, 1997. The net asset value per share of the Corporation's Common
Stock as at December 31, 1997 was $8.22, as compared with its net asset value at
December 31, 1996 of $7.26 per share, in both instances giving effect to the
Corporation's distributions to shareholders of $.037 per share paid on September
10, 1997 to shareholders of record at the close of business on August 27, 1997,
and $.85 per share paid on January 22, 1998 to shareholders of record at the
close of business on December 30, 1997. As at February 20, 1998 the unaudited
net asset value per share was approximately $8.46.
As at December 31, 1997 and February 20, 1998 the closing sales price
for shares of the Corporation's Common Stock on the American Stock Exchange was
$6.125 and $7.125, respectively. Thus, as at December 31, 1997 and February 20,
1998 the market price for the Corporation's shares represented discounts of
approximately 25% and 16%, respectively, from the Corporation's net asset values
at such dates.
Certain of the Corporation's officers and directors and their
associates may from time to time add to their investments in the Corporation's
Common Stock by open market purchases or in private transactions. Since January
1, 1997 certain of the Corporation's officers and directors and their associates
have purchased an aggregate of 70,000 shares of the Corporation's capital stock.
Officers and directors of the Corporation currently own beneficially, directly
or indirectly, an aggregate of 1,940,296 shares (77.6% of the outstanding
shares) of the Corporation's capital stock, not including 101,000 shares (4.04%
of the Corporation's outstanding shares) owned by certain associates of such
persons with respect to which such officers and directors disclaim any
beneficial interest.
Very truly yours,
Wayne S. Reisner
President
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<PAGE>
Report of Independent
Certified Public Accountants
To the Board of Directors and Shareholders of
Sterling Capital Corporation
We have audited the statement of assets and liabilities of Sterling
Capital Corporation, including the portfolio of investments in securities, as of
December 31, 1997, and the related statement of operations for the year then
ended, and the statement of changes in net assets for each of the two years in
the period then ended, as well as the supplementary information, included on
page 17, for each of the five years in the period then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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 supplementary
information 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 securities owned at December
31, 1997, by correspondence with the custodian and brokers. 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 supplementary information
referred to above present fairly, in all material respects, the financial
position of Sterling Capital Corporation as of December 31, 1997, and the
results of its operations for the year then ended, and the changes in net assets
for each of the two years in the period then ended, as well as the supplementary
information for each of the five years in the period then ended in conformity
with generally accepted accounting principles.
STAVISKY, KNITTLE, ISAACS & DICHEK, C.P.A., P.C.
New York, N.Y.
February 23, 1998
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<PAGE>
<TABLE>
<CAPTION>
STERLING CAPITAL CORPORATION
INVESTMENTS IN SECURITIES
As at December 31, 1997
Number of Market Value
Shares (Note A)
--------- ----------
<S> <C> <C>
Common and Preferred Stocks - 73.28%
Technology - 16.56%
Parkervision Inc. * ...................... 112,100 $2,031,813
Avnet, Inc. .............................. 5,000 330,000
Sun Microsystems, Inc. * ................. 7,000 279,125
Electronics for Imaging, Inc. * .......... 15,000 249,375
Electronic Data Systems Corp. ............ 5,000 219,687
Cabletron Systems, Inc. * ................ 10,000 150,000
Seagate Technology * ..................... 7,500 144,375
----------
$3,404,375
----------
Telecommunication and Media - 14.96%
Airtouch Communications Inc.* ............ 17,000 $ 706,563
Viacom Inc. Cl A * ....................... 15,000 613,125
BCE, Inc. ................................ 15,000 499,687
SBC Communications Inc. .................. 5,000 366,250
AT&T Corp. ............................... 5,000 306,563
GTE Corp. ................................ 5,000 261,250
Tele-Communications Int'l Inc.* .......... 10,000 180,000
Cellular Technical Services Inc.* ........ 45,000 143,437
----------
$3,076,875
----------
Financial Services - 13.90%
Mellon Bank Corp. ........................ 12,000 $ 727,500
Chase Manhattan Corp. .................... 5,000 547,500
MBIA, Inc. ............................... 6,000 400,875
SunAmerica Inc. .......................... 9,000 384,750
Long Island Bancorp ...................... 5,000 248,125
PartnerRe Ltd. ........................... 5,000 231,875
Fleet Financial Group .................... 2,500 187,813
Conseco Financing Trust Pfd. ............. 5,000 129,375
----------
$2,857,813
----------
</TABLE>
* Non-income producing security
The accompanying notes are an integral part of these statements
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<PAGE>
<TABLE>
<CAPTION>
STERLING CAPITAL CORPORATION
INVESTMENTS IN SECURITIES - continued
As at December 31, 1997
Number of Market Value
Shares (Note A)
--------- ----------
<S> <C> <C>
Real Estate and
Real Estate Investment Trusts - 9.73%
Chateau Communities, Inc. ................... 15,630 $ 492,345
Camden Property Trust ....................... 15,100 468,100
Oasis Residential, Inc. ..................... 10,000 223,125
Amli Residential Properties Trust ........... 10,000 222,500
United Dominion Realty Trust ................ 15,000 209,063
Catellus Development Corp. * ................ 10,000 200,000
Equity Residential Properties Trust Pfd C ... 5,000 134,687
Capstead Mortgage Corp. ..................... 2,500 49,844
----------
$1,999,664
----------
Office Equipment and Services - 5.57%
Norrell Corp. ............................... 15,000 $ 298,125
Ikon Office Solutions ....................... 9,000 253,125
Xerox Corp. ................................. 3,000 221,625
OfficeMax Inc. * ............................ 15,000 213,750
Danka Business Systems ...................... 10,000 159,375
----------
$1,146,000
----------
Healthcare - 4.76%
Rhone Poulenc S.A. ADR ...................... 10,386 $ 458,931
Rhone Poulenc Overseas LTD 8.125%
Preferred Series A ........................ 10,000 263,750
Pharmacia & Upjohn, Inc. .................... 7,000 256,375
Matria Healthcare, Inc. * ................... 40 225
----------
$ 979,281
----------
Energy & Related Services - 2.68%
Occidental Petroleum Corp. .................. 7,500 $ 219,844
Global Marine Inc. * ........................ 7,500 184,219
Triton Energy Corp.* ........................ 5,000 145,937
----------
$ 550,000
----------
</TABLE>
* Non-income producing security
The accompanying notes are an integral part of these statements
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<PAGE>
<TABLE>
<CAPTION>
STERLING CAPITAL CORPORATION
INVESTMENTS IN SECURITIES - continued
As at December 31, 1997
Number of Market Value
Shares (Note A)
--------- -----------
<S> <C> <C>
Automotive and Automotive Products - 1.80%
Ford Motor Co. .............................. 5,000 $ 242,813
Goodyear Tire & Rubber Co. .................. 2,000 127,250
-----------
$ 370,063
-----------
Consumer Goods - 1.51%
Chiquita Brands International, Inc. ......... 10,000 $ 163,125
Kimberly-Clark Corp. ........................ 3,000 147,937
-----------
$ 311,062
-----------
Transportation Services - 0.80%
Ryder System Inc. ........................... 5,000 $ 163,750
-----------
Retail - 0.73%
J C Penney Co., Inc. ........................ 2,500 $ 150,781
-----------
Miscellaneous Securities - 0.28%
Technology General Corp. * ** .............. 292,600 $ 58,520
-----------
Total common and preferred stocks (cost $11,496,214) $15,068,184
-----------
</TABLE>
* Non-income producing security
** Investment in a company representing 5% or more of such company's outstanding
voting securities (such company is defined as an "affiliated company" in Section
2(a)(2) of the Investment Company Act of 1940, as amended). This investment was
purchased on February 7, 1969 at a cost of $266,000 and is valued at the average
of the bid and ask prices in the over-the-counter market on December 31, 1997.
The accompanying notes are an integral part of these statements
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<PAGE>
<TABLE>
<CAPTION>
STERLING CAPITAL CORPORATION
INVESTMENTS IN SECURITIES - continued
As at December 31, 1997
Principal Market Value
Amount (Note A)
---------- ----------
<S> <C> <C>
Commercial Paper - 12.40%
Ford Motor Credit Co.
5.83% due 1/5/1998 .............................. $ 350,000 $ 350,000
Ford Motor Credit Co.
6.16% due 1/6/1998 .............................. 250,000 250,000
General Motors Acceptance Corporation
5.86% due 1/7/1998 .............................. 350,000 350,000
General Electric Capital Corporation
6.08% due 1/9/1998 .............................. 500,000 500,000
General Motors Acceptance Corporation
5.89% due 1/9/1998 .............................. 500,000 500,000
General Motors Acceptance Corporation
5.93% due 1/14/1998 ............................. 600,000 600,000
----------
Total Commercial Paper (cost $2,550,000) .......... $2,550,000
----------
Corporate Bonds and Notes - 1.82%
Stop and Shop Companies 9.75%
senior subordinated note due 2/1/2002 ........... $ 150,000 $ 167,531
Caesar's World 8.875% senior
subordinated note due 8/15/2002 ................. 200,000 206,750
----------
Total corporate bonds and notes
(cost $347,625) ............................. $ 374,281
----------
U.S. Government Obligations - 9.84%
U.S. Treasury Note 5.125% due 2/28/1998 .......... $ 500,000 $ 500,000
U.S. Treasury Note 5.5% due 2/28/1999 ............ 500,000 499,063
U.S. Treasury Note 6.25% due 3/31/1999 ........... 250,000 251,797
U.S. Treasury Note 6% due 8/15/1999 .............. 250,000 251,250
U.S. Treasury Note 6% due 10/15/1999 ............. 250,000 251,406
U.S. Treasury Note 7% due 7/15/2006 .............. 250,000 269,922
----------
Total U.S. Government Obligations (cost $1,987,962) $2,023,438
----------
</TABLE>
The accompanying notes are an integral part of these statements
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<PAGE>
<TABLE>
<CAPTION>
STERLING CAPITAL CORPORATION
INVESTMENTS IN SECURITIES - continued
As at December 31, 1997
Principal Market Value
Amount (Note A)
---------- -----------
<S> <C> <C>
Government Agencies - 10.25%
Federal Home Loan Mortgage Corp.
6.625% due 6/4/2002 ........................ $ 250,000 $ 250,937
Federal Home Loan Mortgage Corp.
7% due 8/26/2004 ........................... 200,000 200,375
Federal Home Loan Bank
7.01% due 11/10/2005 ....................... 200,000 200,250
Federal National Mortgage Association
8% due 6/15/2006 ........................... 200,000 202,125
Federal Home Loan Mortgage Corp.
Step-Up Notes 7.2% due 8/7/2006 ............. 200,000 202,125
Federal Home Loan Mortgage Corp.
7.29% due 2/26/2007 ........................ 200,000 199,813
Federal Home Loan Mortgage Corp.
7% due 7/23/2007 ........................... 200,000 199,750
Federal Home Loan Mortgage Corp.
Step-Up Notes 6.5% due 10/15/2007 .......... 400,000 401,875
Federal National Mortgage Association
7% due 12/10/2007 .......................... 250,000 250,000
-----------
Total Government Agencies (cost $2,099,500) .... $ 2,107,250
-----------
Total Investments (cost $18,481,301) ........... $22,123,153
-----------
</TABLE>
The accompanying notes are an integral part of these statements
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<PAGE>
<TABLE>
<CAPTION>
STERLING CAPITAL CORPORATION
STATEMENT OF ASSETS AND LIABILITIES
As at December 31, 1997
ASSETS
<S> <C>
Investment in securities, at value
(identified cost $18,481,301) (Note A) ................... $ 22,123,153
Cash ......................................................... 16,084
Vista U.S. Government Money Market Fund ...................... 748,016
Investment in real estate (cost $100,000) .................... 50,000
Receivables:
Investment securities sold ............................... 144
Dividends and interest ................................... 127,475
Other .................................................... 1,106
Prepaid Pension Cost ......................................... 24,255
Prepaid Insurance ............................................ 6,542
------------
Total assets ................................................. $ 23,096,775
------------
LIABILITIES
Distribution payable to shareholders ......................... $ 2,125,000
Payables:
Investment securities purchased .......................... 331,156
Accrued expenses and other liabilities ................... 79,078
------------
Total liabilities ............................................ $ 2,535,234
------------
NET ASSETS
Common Stock, authorized 10,000,000 shares,
outstanding 2,500,000 shares, $1 par value each .......... $ 2,500,000
Paid in capital .............................................. 17,722,718
Excess of distributions over accumulated net investment loss . (6,544,699)
Excess of net realized gain on investments over distributions 3,291,670
Unrealized appreciation of investments ....................... 3,591,852
------------
Net assets ................................................... $ 20,561,541
------------
Net assets per outstanding share ............................. $ 8.22
------------
</TABLE>
The accompanying notes are an integral part of these statements
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<PAGE>
<TABLE>
<CAPTION>
STERLING CAPITAL CORPORATION
STATEMENT OF OPERATIONS
For the year ended December 31, 1997
<S> <C>
Investment income and expenses:
Interest ................................................. $358,566
Dividends ................................................ 389,450
--------
Total income ................................................. $748,016
Expenses (Notes C, D and E):
Officers' salaries ....................................... $171,250
Office salaries .......................................... 68,648
Custodian fees and expenses .............................. 60,812
Directors' fees and expenses ............................. 46,275
Pension plan ............................................. 45,492
Payroll taxes, fees and employee benefits ................ 44,760
Transfer agent and registrar fees ........................ 25,462
Equipment rentals ........................................ 25,167
Rent and Electric ........................................ 23,503
Legal, audit and professional fees ....................... 21,851
Insurance ................................................ 7,850
American Stock Exchange listing fee ...................... 7,500
Federal, state and local taxes ........................... 5,896
Miscellaneous ............................................ 4,469
--------
Total expenses ......................................... $558,935
--------
Net investment income ........................................ $189,081
--------
</TABLE>
(continued)
The accompanying notes are an integral part of these statements
- 11 -
<PAGE>
<TABLE>
<CAPTION>
STERLING CAPITAL CORPORATION
STATEMENT OF OPERATIONS-continued
For the year ended December 31, 1997
<S> <C>
Net investment income (from previous page) ................... $ 189,081
----------
Net gain on investments (Notes A and B):
Realized gain from securities transactions:
Proceeds from sales .................................... $7,768,143
Cost of securities sold ................................ 5,707,927
----------
Net realized gain ...................................... $2,060,216
----------
Unrealized appreciation of investments:
Beginning of period ...................................... $3,446,712
End of period ............................................ 3,591,852
----------
Net increase in unrealized appreciation .................. $ 145,140
----------
Net realized and unrealized gain on investments .............. $2,205,356
----------
Net increase in net assets resulting from operations ......... $2,394,437
----------
</TABLE>
The accompanying notes are an integral part of these statements
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<PAGE>
<TABLE>
<CAPTION>
STERLING CAPITAL CORPORATION
STATEMENT OF CHANGES IN NET ASSETS
For the years ended December 31, 1997 and December 31, 1996
Year ended
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
From investment activities:
Net investment income ........................ $ 189,081 $ 148,887
Net realized gain from securities transactions 2,060,216 869,485
Net change in unrealized appreciation ........ 145,140 1,691,663
------------ ------------
Increase in net assets derived from
investment activities ........................ 2,394,437 2,710,035
Distributions to shareholders (Note F) ......... (2,217,500) (1,055,000)
Net Assets:
Beginning of year ............................ 20,384,604 18,729,569
------------ ------------
End of year .................................. $ 20,561,541 $ 20,384,604
------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements
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<PAGE>
STERLING CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
As at December 31, 1997
Note A - Significant Accounting Policies
Sterling Capital Corporation (the "Corporation") (formerly known as The
Value Line Development Capital Corporation) is registered under the Investment
Company Act of 1940, as amended (the "Act"), and is a diversified, closed-end
investment company. The Corporation operates exclusively as an internally
managed investment company whereby its own officers and employees, under the
general supervision of its Board of Directors, conduct its operations. The
following is a summary of significant accounting policies consistently followed,
in all material respects, by the Corporation in the preparation of its financial
statements. The policies are in conformity with generally accepted accounting
principles.
(1) Security Valuation
Investments in securities traded on a national securities exchange (or
reported on the NASDAQ national market) are valued at the last reported sales
price on the day of valuation; other securities traded in the over-the-counter
market and listed securities for which no sale was reported on that date are
valued at the last quoted bid price, except for short positions and call options
written, for which the last quoted asked price is used. Corporate commercial
paper is valued at cost, which approximates market value. Investments in real
estate are valued at fair value as determined by the Board of Directors.
(2) Federal Income Taxes
The Corporation's policy is to comply with the requirements of the
Internal Revenue Code of 1986, as amended (the "Code") that are applicable to
regulated investment companies and to distribute substantially all its taxable
income to its shareholders.
The Corporation for the fiscal year ending December 31, 1997 was a
"personal holding company" under the Code, since five or fewer shareholders own
directly or indirectly more than 50% in value of the Corporation's outstanding
stock, and more than 60% of the Corporation's adjusted ordinary income was
"personal holding company income". As a personal holding company, the
Corporation will be subject to penalty taxes unless it distributes to its
shareholders an amount at least equal to its otherwise undistributed personal
holding company income, net of appropriate deductions applicable thereto. The
Corporation did not have any undistributed personal holding company income for
the year ended December 31, 1997. Personal holding company income does not
include the excess, if any, of net realized long-term capital gains over net
realized short-term capital losses, less any Federal income tax attributable to
such excess. The Corporation has considered methods of minimizing the possible
tax impact of being a personal holding company, and if appropriate, will make
sufficient distributions to shareholders so that the Corporation will not be
subject to such penalty tax.
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<PAGE>
(3) Securities Transactions
Securities transactions are accounted for on the date the securities
are purchased or sold (trade date), dividend income is recorded on the
ex-dividend date and interest income is accrued as earned. Gains and losses from
securities transactions were computed on the identified cost basis.
(4) Distributions to Shareholders
Dividends to shareholders are recorded on the dividend declaration
date.
5) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
Note B - Securities Transactions
The following summarizes all securities transactions by the Corporation
for the year ended December 31, 1997:
Purchases (includes $30,550,000 of short term
corporate commercial paper)..................... $41,268,258
Sales (includes $29,000,000 of short term
corporate commercial paper) .................... $36,002,287
Net gain on investments for the year ended December 31, 1997 was
$2,205,356. This amount represents the net increase in value of investments held
during the period. The components are as follows:
Long transactions ........................ $2,205,356
----------
Net gain on investments .................. $2,205,356
----------
Gross unrealized gains and losses in the Corporation's portfolio of
investments amounted to $4,346,761 and $754,909, respectively, as at December
31, 1997.
Note C - Rent
The Corporation sublets a portion of office space at 635 Madison
Avenue, New York, NY, from Windy Gates Corporation ("Windy Gates"), a
corporation controlled by Walter Scheuer, the Chairman of the Board of Directors
and principal shareholder of the Corporation. The term of the Windy Gates lease
expires on June 30, 2004. The term of the sublease to the Corporation expires on
June 30, 2004. The annual rental obligation of these premises is being allocated
between the Corporation and Windy Gates on the basis of each such party's use of
this space. The Corporation's current net annual expense for this space is
approximately $22,500.
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<PAGE>
Note D - Other Transactions with Affiliates
Aggregate remuneration paid or accrued by the Corporation for the year
ended December 31, 1997 to certain persons who were "affiliated persons" within
the meaning of the Act, was as follows:
Officers' salaries .............................. 171,250
Amount paid or accrued under Pension Plan ....... 30,395
Directors' fees ................................. 44,500
Incident to the sublease arrangements for office space at 635 Madison
Avenue referred to in Note C above, Mr. Scheuer and the Corporation, have
allocated certain of the expenses incurred in connection with each of such
party's use of various services located thereat, including office equipment and
secretarial, administrative and internal accounting personnel. For the year
ended December 31, 1997, Mr. Scheuer and the Corporation paid or accrued
approximately $503,000 and $97,000, respectively, in connection with the
allocation of expenses incurred with respect to the use of such services. In
addition, during the period certain persons who are also officers of the
Corporation rendered services to Mr. Scheuer personally for which they received
compensation from Mr. Scheuer.
Note E - Pension Plan
The Corporation has a defined benefit pension plan covering
substantially all of its employees', other than Union employees and part-time
employees. The benefits are based on years of service and the employee's
compensation. The Corporation's funding policy is to contribute annually the
maximum amount that can be deducted for Federal income tax purposes.
Contributions are intended to provide not only for benefits attributed to
service to date but also for those expected to be earned in the future.
The following table sets forth the plan's funded status and amounts
recognized in the Corporation's statement of assets and liabilities at December
31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including
vested benefits of $265,058 .............................. ($267,363)
---------
Projected benefit obligation for service rendered to date .. (376,153)
Plan assets at fair value .................................. 291,767
---------
Projected benefit obligation in excess of plan assets ...... (84,386)
Prior service costs ........................................ 42,330
Unrecognized net loss (gain) from past experience different
from that assumed and effect of changes in assumptions .. (38,563)
Unrecognized net transition obligation at January 1, 1997,
being recognized over 25 years .......................... 104,874
Accrued pension expense .................................... 0
---------
Prepaid pension cost included in other assets .............. 24,255
---------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Net pension cost for 1997 included the following components:
Service cost - benefits earned during the period ........... $ 27,359
Interest cost on projected benefit obligation .............. 19,260
Actual return on plan assets ............................... (35,074)
Net amortization and deferral .............................. 23,694
---------
Net periodic pension cost .................................. $ 35,239
---------
</TABLE>
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 6.0% and 3.0% respectively. The expected
long-term rate of return on assets was 8.0%.
Note F- Distributions to Shareholders
On September 10, 1997 the Corporation paid a cash distribution of $.037
per share to shareholders of record at the close of business on August 27, 1997.
The entire amount of the distribution represents a distribution of net capital
gains and "investment company taxable income" to shareholders realized by the
Corporation during 1996 that was not previously distributed to shareholders. The
Corporation believes that the entire amount of the distribution should be
treated as a distribution of net capital gains and "investment company taxable
income" to shareholders and for Federal income tax purposes is taxable to
calendar year shareholders in 1997 even though the distribution represented net
capital gains and "investment company taxable income" realized by the
Corporation during 1996. The Board of Directors determined that of the aggregate
amount of the distribution ($92,500), $23,015 be considered a charge on the
Corporation's books against net investment income and $69,485 be considered a
charge on the Corporations books against net realized gains. Detailed
information with respect to the distribution has been provided to each
shareholder.
On January 22, 1998 the Corporation paid a cash distribution of $.85
per share to shareholders of record at the close of business on December 30,
1997. The Corporation believes that the entire amount of the distribution should
be treated as a distribution of net capital gains and "investment company
taxable income" to shareholders and for Federal income tax purposes was taxable
to calendar year shareholders in 1997 even though the distribution was paid to
shareholders in 1998. The Board of Directors determined that of the aggregate
amount of the distribution ($2,125,000), $136,518 be considered a charge on the
Corporation's books against net investment income and $1,988,482 be considered a
charge on the Corporation's books against net realized gains. Detailed
information with respect to the distribution has been provided to each
shareholder.
- 17 -
<PAGE>
STERLING CAPITAL CORPORATION
SUPPLEMENTARY INFORMATION
As at December 31, 1997
Selected data for each share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
Investment income ......................... $ .30 $ .27 $ .39 $ .38 $ .36
Expenses .................................. .22 .21 25 .28 .24
------ ------- ------- ------- ------
Net investment income .................... .08 .06 .14 .10 .12
Distributions of net realized
capital gains ............................. (.82) (.36) (.53) - (.67)
Distributions of net investment income (.06) (.06) (.15) (.08) (.15)
Net realized gain (loss) and increase
(decrease) in unrealized appreciation.. .87 1.02 1.16 (.68) 1.08
------ ------ ------- ------ ------
Net increase (decrease) in net asset value .07 .66 .62 (.66) .38
Net asset value:
Beginning of period .................... 8.15 7.49 6.87 7.53 7.15
------ ------ ------- ------ ------
End of period ......................... $ 8.22 $ 8.15 $ 7.49 $ 6.87 $ 7.53
====== ====== ======= ====== ======
Ratio of expenses to average net assets . 2.6% 2.6% 3.4% 3.8% 3.1%
Ratio of net investment income to
average net assets ........................ .9% .8% 1.8% 1.3% 1.6%
Portfolio turnover ....................... 40% 57% 51% 77% 95%
Number of shares outstanding at end
of year (in 000's) ....................... 2,500 2,500 2,500 2,500 2,500
</TABLE>
- 18 -
<TABLE> <S> <C>
<ARTICLE> 6
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 22,937
<RECEIVABLES> 129
<ASSETS-OTHER> 31
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 23,097
<PAYABLE-FOR-SECURITIES> 331
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,204
<TOTAL-LIABILITIES> 2,535
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 17,723
<SHARES-COMMON-STOCK> 2,500
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (6,545)
<ACCUMULATED-NET-GAINS> 3,292
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,592
<NET-ASSETS> 20,562
<DIVIDEND-INCOME> 389
<INTEREST-INCOME> 359
<OTHER-INCOME> 0
<EXPENSES-NET> 559
<NET-INVESTMENT-INCOME> 189
<REALIZED-GAINS-CURRENT> 2,060
<APPREC-INCREASE-CURRENT> 145
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 159
<DISTRIBUTIONS-OF-GAINS> 2,058
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 21,454
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.22
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
