STERLING CAPITAL CORPORATION
Report for the Year Ended December 31, 1998
OFFICERS
Walter Scheuer ........................... Chairman of the Board of Directors
Wayne S. Reisner ......................... President
Richard Kaufman .......................... Executive Vice President
Michael Carey ............................ Treasurer
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 Tocci Skadden, Arps,
& Goldstein LLP Slate, Meagher & Flom
342 Madison Avenue 919 Third Avenue
New York, New York 10173 New York, New York 10022
<PAGE>
STERLING CAPITAL CORPORATION
635 Madison Avenue
New York, N.Y. 10022
February 23, 1999
To our Shareholders:
Fueled by three interest rate reductions by the Federal Reserve and a
subsequent acceleration in the pace of economic growth, equity prices increased
20% in the final three months of 1998. The year end rally enabled both the Dow
Jones Industrial Average and S&P 500 to record above average rates of gain for
the year of 16.1% and 26.7%, respectively. However, the performance divergence
among stocks was the widest ever with a few large capitalization and certain
technology stocks posting very large gains, but the majority of stocks not
participating. Although the capitalization weighted S&P 500 index increased
sharply, it is significant to note that 60% of all NYSE and NASDAQ stocks
experienced price declines for the year. The S&P Small Cap index and the Russell
2000 index both recorded losses in 1998 and thus demonstrated the lack of
participation by companies with smaller capitalizations. In short, performance
for the average stock was much more subdued than the most widely followed
indices would indicate.
The pace of economic activity in the second half of the year well
exceeded most forecasts. Real GDP growth of 5.6% in the fourth quarter was
particularly strong and nearly twice the rate expected by most economists.
Although industries dependent on exports and producers of commodities did
experience weaker demand during the past year, economic problems in other parts
of the world did not adversely impact the U.S. economy to the degree
anticipated. The consumer sector, which accounts for 2/3 of the economy, was
strong as favorable employment conditions and lower interest rates led to
increased spending. The wealth effect from rising prices in the financial
markets is also believed to have contributed to an increase in consumer
confidence and spending plans. With the unemployment rate at a twenty-eight year
low of 4.3% and wages rising, it appears unlikely that the consumer will reduce
spending in the near term. Capital spending has also contributed to recent
economic growth as companies increase purchases of productivity enhancing
equipment in order to remain competitive.
Despite the strength in the economy, inflation has remained remarkably
low. The Consumer Price Index at 1.6% in 1998 was at a twelve year low and the
Producer Price Index recorded a decline for the year. Although we expect energy
prices to increase at some point in 1999 following the sharp declines last year
and wages are likely to show an upward bias, the continued gains in productivity
combined with excess capacity worldwide for many goods and services should
prevent inflation from sharply accelerating in the near term.
Corporate profit growth was modestly positive in 1998 but did not meet
expectations. This is an important concern to investors since equity valuations
are already high and earnings growth is needed to justify price appreciation
from current levels. Moreover, corporate profits are key to capital spending and
hiring plans both of which are vital to economic growth. If earnings do not show
greater progress in 1999, we believe the equity market will be vulnerable to a
meaningful decline.
<PAGE>
To summarize, we would note that (1) the economy is entering its ninth
year of expansion without showing any serious signs of deterioration, (2)
inflation and interest rates may increase somewhat in 1999 but should still
provide a favorable backdrop for equities, and (3) corporate profits, which have
been sluggish, need to improve in order for economic growth and equity price
appreciation to continue. Our strategy within the equity market is to take
advantage of the current wide disparities in valuation among stocks. We continue
to purchase companies that are selling at significant discounts to private
market value. We have also maintained relatively large holdings in the financial
services and the telecommunications industries where long-term earnings
prospects are favorable and trends toward consolidation should benefit stock
performance. Our holdings in real estate investment trusts, while not performing
well in 1998, showed solid earnings progress and continue to offer compelling
value.
We enclose a report of our Corporation's operations for the year ended
December 31, 1998. The net asset value per share of the Corporation's Common
Stock as at December 31, 1998 was $8.48, as compared with its net asset value at
December 31, 1997 of $8.13 per share, in both instances giving effect to the
Corporation's distributions to shareholders of $.0497 per share paid on
September 11, 1998 to shareholders of record at the close of business on August
28, 1998, and $.04 per share paid on January 22, 1999 to shareholders of record
at the close of business on December 30, 1998. As at February 19, 1999 the
unaudited net asset value per share was approximately $8.38.
As at December 31, 1998 and February 19, 1999 the closing sales price
for shares of the Corporation's Common Stock on the American Stock Exchange was
$5.625 and $5.50, respectively. Thus, as at December 31, 1998 and February 19,
1999 the market price for the Corporation's shares represented discounts of
approximately 34% 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, 1998 certain of the Corporation's officers and directors and their associates
have purchased an aggregate of 13,400 shares of the Corporation's capital stock.
Officers and directors of the Corporation currently own beneficially, directly
or indirectly, an aggregate of 1,950,196 shares (78.0% 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,
/s/Wayne S. Reisner
- -------------------
Wayne S. Reisner
President
<PAGE>
Independent Auditor's Report
To the Shareholders and Board of Directors of
Sterling Capital Corporation:
We have audited the statement of assets and liabilities of Sterling
Capital Corporation, including the schedule of investments, as of December 31,
1998, and the related statement of operations for the year then ended, the
statements of changes in net assets for the years ended December 31, 1998 and
1997, 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 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 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 and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1998, 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 financial highlights
referred to above present fairly, in all material respects, the financial
position of Sterling Capital Corporation as of December 31, 1998, the results of
its operations for the year then ended, the changes in net assets for the years
ended December 31, 1998 and 1997, and the financial highlights for each of the
five years in the period then ended, in conformity with generally accepted
accounting principles.
/s/STAVISKY KNITTLE TOCCI & GOLDSTEIN LLP
- -----------------------------------------
STAVISKY KNITTLE TOCCI & GOLDSTEIN LLP
New York, N.Y.
February 23, 1999
<PAGE>
<TABLE>
<CAPTION>
STERLING CAPITAL CORPORATION
SCHEDULE OF INVESTMENTS
December 31, 1998
Number of Market Value
Shares (Note A)
--------- ----------
<S> <C> <C>
Common and Preferred Stocks - 68.10%
Financial Services - 15.92%
Mellon Bank Corp. ............................ 12,000 $ 825,000
Chase Manhattan Corp. ........................ 10,000 710,000
MBIA, Inc. ................................... 6,000 393,375
American Express Co. ......................... 3,000 307,500
Citigroup Inc. ............................... 5,000 248,438
Fleet Financial Group ........................ 5,000 223,438
PNC Bank Corp. ............................... 4,000 216,000
Equitable Cos Inc. ........................... 3,500 202,562
Conseco Financing Trust Pfd. ................. 5,000 127,500
Amerus Life Holdings 7 % Pfd ................. 5,000 120,625
----------
$3,374,438
----------
Real Estate and
Real Estate Investment Trusts - 13.89%
Camden Property Trust ........................ 22,690 $ 589,940
Chateau Communities, Inc. .................... 15,630 458,154
Amli Residential Properties Trust ............ 18,000 400,500
Equity Residential Properties Trust .......... 7,950 320,484
Catellus Development Corp. * ................. 17,500 250,469
Equity Office Properties Trust ............... 10,000 240,000
Felcor Lodging Trust Inc. .................... 10,000 230,000
St. Joe Co. .................................. 9,000 210,938
Equity Residential Properties Trust Pfd C .... 5,000 129,375
CarrAmerica Realty Trust 8.55% Pfd C ......... 5,000 111,562
Merry Land Properties Inc. * ................. 750 2,719
----------
$2,944,141
----------
</TABLE>
* Non-income producing security
The accompanying notes are an integral part of these statements
<PAGE>
<TABLE>
<CAPTION>
STERLING CAPITAL CORPORATION
SCHEDULE OF INVESTMENTS - continued
December 31, 1998
Number of Market Value
Shares (Note A)
------ --------
<S> <C> <C>
Telecommunication and Media - 11.58%
BCE, Inc. .................................... 15,000 $ 569,063
SBC Communications Inc. ...................... 10,000 536,250
Viacom Inc. Cl A * ........................... 5,000 367,813
GTE Corp. .................................... 5,000 325,000
Tele-Communications Inc. Liberty Media A * ... 5,800 267,163
Airtouch Communications Inc.* ................ 3,000 217,313
Tribune Co. "TLC" Decs ....................... 4,000 98,500
Telebras - Sponsored ADR ..................... 1,000 72,688
----------
$2,453,790
----------
Technology - 8.76%
Parkervision Inc. * .......................... 33,000 $ 775,500
Avnet, Inc. .................................. 5,000 302,500
Philips Electronics NV Holdings .............. 4,000 270,750
Electronics for Imaging, Inc. * .............. 5,000 200,000
Sun Microsystems, Inc. * ..................... 2,000 171,250
Seagate Technology * ......................... 4,500 136,125
----------
$1,856,125
----------
Healthcare - 4.01%
Rhone Poulenc S.A. ADR ....................... 5,886 $ 295,771
Health Care Property Invs Inc. ............... 9,000 276,750
Pharmacia & Upjohn, Inc. ..................... 3,000 169,875
Nationwide Health Property Inc. .............. 5,000 107,812
Matria Healthcare, Inc. * .................... 40 115
----------
$ 850,323
----------
Office Equipment and Services - 3.45%
Xerox Corp. .................................. 3,000 $ 354,000
Norrell Corp. ................................ 15,000 221,250
OfficeMax Inc. * ............................. 7,500 91,875
Ikon Office Solutions ........................ 7,500 64,219
----------
$ 731,344
----------
</TABLE>
* Non-income producing security
The accompanying notes are an integral part of these statements
<PAGE>
<TABLE>
<CAPTION>
STERLING CAPITAL CORPORATION
SCHEDULE OF INVESTMENTS - continued
December 31, 1998
Number of Market Value
Shares (Note A)
------ --------
<S> <C> <C>
Consumer Goods - 2.77%
Kimberly-Clark Corp. ............................ 7,000 $381,500
American Greetings Cl A ......................... 5,000 205,312
--------
$586,812
--------
Transportation Services - 2.64%
KLM Royal Dutch Airlines ........................ 10,000 $300,000
Ryder System Inc. ............................... 10,000 260,000
--------
$560,000
--------
Retail - 1.69%
J C Penney Co., Inc. ............................ 4,000 $187,500
Cole National Corp. * ............................ 10,000 171,250
--------
$358,750
--------
Automotive and Automotive Products - 1.38%
Ford Motor Co. .................................. 5,000 $293,437
--------
Energy & Related Services - 0.80%
ENSCO Intl Inc .................................. 8,000 $ 85,500
Occidental Petroleum Corp. ...................... 5,000 84,375
--------
$169,875
--------
Industrial Products - 0.58%
York International Corp. ........................ 3,000 $122,437
--------
</TABLE>
* Non-income producing security
The accompanying notes are an integral part of these statements
<PAGE>
<TABLE>
<CAPTION>
STERLING CAPITAL CORPORATION
SCHEDULE OF INVESTMENTS - continued
December 31, 1998
Number of Market Value
Shares (Note A)
------ --------
<S> <C> <C>
Chemicals - 0.35%
Rhodia S.A. - Sponsored ADR * .............. 5,000 $ 75,000
-----------
Miscellaneous Securities - 0.28%
Technology General Corp. * ** ........... 292,600 $ 58,520
-----------
Total common and preferred stocks (cost $10,023,915) $14,434,992
-----------
</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, 1998.
The accompanying notes are an integral part of these statements
<PAGE>
<TABLE>
<CAPTION>
STERLING CAPITAL CORPORATION
SCHEDULE OF INVESTMENTS - continued
December 31, 1998
Principal Market Value
Amount (Note A)
------ --------
<S> <C> <C> <C> <C>
Commercial Paper - 7.08%
Ford Motor Credit Co. .......................
5.35% due 1/6/1999 ......................... $ 500,000 $ 500,000
Ford Motor Credit Co. .......................
6% due 1/8/1999 ............................ 250,000 250,000
General Motors Acceptance Corporation
6% due 1/8/1999 ............................ 750,000 750,000
-----------
Total Commercial Paper (cost $1,500,000) ..... $ 1,500,000
-----------
Corporate Bonds and Notes - 2.05%
Stop and Shop Companies 9.75%
senior subordinated note due 2/1/2002 ...... $ 150,000 $ 166,500
Caesar's World 8.875% senior
subordinated note due 8/15/2002 ............ 200,000 201,000
Danka Business Systems 6.75%
convertible corporate bond due 4/1/2002 ... 200,000 66,000
-----------
Total corporate bonds and notes
(cost $543,875) ........................ $ 433,500
-----------
U.S. Government Obligations - 5.93%
U.S. Treasury Note 5.5% due 2/28/1999 ....... $ 500,000 $ 500,625
U.S. Treasury Note 6.25% due 3/31/1999 ...... 250,000 250,938
U.S. Treasury Note 6% due 8/15/1999 ......... 250,000 252,031
U.S. Treasury Note 6% due 10/15/1999 ........ 250,000 252,578
-----------
Total U.S. Government Obligations
(cost $1,242,184) .................... $ 1,256,172
-----------
Total Investments (cost $13,309,974) ......... $17,624,664
===========
</TABLE>
The accompanying notes are an integral part of these statements
<PAGE>
<TABLE>
<CAPTION>
STERLING CAPITAL CORPORATION
CALL OPTIONS WRITTEN
December 31, 1998
Number of Market Value
Contracts (Note A)
--------- --------
<S> <C> <C>
Description/Expiration Date/Exercise Price
Electronics for Imaging Inc/January 1999/ $45
(sales proceeds $6,197) ....................... 25 $ 1,093
Sun Microsystems Inc/January 1999/ $65
(sales proceeds $6,687) ....................... 20 41,500
-------
Total Call Options written
(sales proceeds $12,884) ............. $42,593
=======
</TABLE>
The accompanying notes are an integral part of these statements
<PAGE>
<TABLE>
<CAPTION>
STERLING CAPITAL CORPORATION
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
ASSETS
<S> <C>
Investment in securities, at value
(identified cost $13,309,974) (Note A) ................... $ 17,624,664
Cash ......................................................... 3,451,921
Investment in real estate (cost $100,000) .................... 50,000
Receivables:
Dividends and interest ................................... 90,396
Other .................................................... 40,704
Deposits with brokers for covered
call options written (Note C) ............................ 107,741
Prepaid Pension Cost ......................................... 12,090
Prepaid Insurance ............................................ 6,125
------------
Total assets ................................................. $ 21,383,641
------------
LIABILITIES
Distribution payable to shareholders ......................... $ 100,000
Covered call options written, at value
(premiums received $12,884) .................................. 42,593
Payables:
Accrued expenses and other liabilities ................... 47,399
------------
Total liabilities ............................................ $ 189,992
------------
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 . (6,554,502)
Excess of net realized gain on investments over distributions 3,290,454
Unrealized appreciation of investments ....................... 4,234,979
------------
Net assets ................................................... $ 21,193,649
============
Net assets per outstanding share ............................. $ 8.48
============
</TABLE>
The accompanying notes are an integral part of these statements
<PAGE>
<TABLE>
<CAPTION>
STERLING CAPITAL CORPORATION
STATEMENT OF OPERATIONS
For the year ended December 31, 1998
<S> <C>
Investment income and expenses:
Dividends ................................................ $341,938
Interest ................................................. 281,106
Other Income ............................................. 11,468
--------
Total income ................................................. $634,512
--------
Expenses (Notes D, E and F):
Officers' salaries ....................................... $173,000
Office salaries .......................................... 67,860
Pension plan ............................................. 48,533
Directors' fees and expenses ............................. 45,637
Payroll taxes, fees and employee benefits ................ 43,240
Custodian fees and expenses .............................. 26,398
Legal, audit and professional fees ....................... 25,319
Equipment rentals ........................................ 25,186
Transfer agent and registrar fees ........................ 24,144
Rent and Electric ........................................ 21,937
American Stock Exchange listing fee ...................... 7,500
Insurance ................................................ 7,267
Federal, state and local taxes ........................... 5,643
Miscellaneous ............................................ 5,134
--------
Total expenses ......................................... $526,798
--------
Net investment income ........................................ $107,714
--------
</TABLE>
(continued)
The accompanying notes are an integral part of these statements
<PAGE>
<TABLE>
<CAPTION>
STERLING CAPITAL CORPORATION
STATEMENT OF OPERATIONS-continued
For the year ended December 31, 1998
<S> <C>
Net investment income (from previous page) .................. $ 107,714
-----------
Net gain on investments (Notes A and B):
Realized gain from securities transactions:
Proceeds from sales ................................... 11,581,969
Cost of securities sold ............................... 11,476,452
-----------
Net realized gain ..................................... 105,517
-----------
Unrealized appreciation of investments:
Beginning of period ..................................... 3,591,852
End of period ........................................... 4,234,979
-----------
Net increase in unrealized appreciation ................. 643,127
-----------
Net realized and unrealized gain on investments ............. 748,644
-----------
Net increase in net assets resulting from operations ........ $ 856,358
===========
</TABLE>
The accompanying notes are an integral part of these statements
<PAGE>
<TABLE>
<CAPTION>
STERLING CAPITAL CORPORATION
STATEMENT OF CHANGES IN NET ASSETS
For the years ended December 31, 1998 and 1997
Year ended
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
From investment activities:
Net investment income ........................ $ 107,714 $ 189,081
Net realized gain from securities transactions 105,517 2,060,216
Net change in unrealized appreciation ........ 643,127 145,140
------------ ------------
Increase in net assets derived from
investment activities ........................ 856,358 2,394,437
Distributions to shareholders (Note G) ......... (224,250) (2,217,500)
Net Assets:
Beginning of year ............................ 20,561,541 20,384,604
------------ ------------
End of year .................................. $ 21,193,649 $ 20,561,541
============ ============
</TABLE>
The accompanying notes are an integral part of these statements
<PAGE>
STERLING CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
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, 1998 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, 1998. 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.
<PAGE>
STERLING CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
(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, 1998:
<TABLE>
<CAPTION>
<S> <C>
Purchases (excludes $3,000,000 of short term corporate commercial paper) ....... $ 7,398,720
Sales (excludes $4,050,000 of short term corporate commercial paper
and $745,778 of U.S. Government Obligations) ....................... $10,759,131
</TABLE>
Net realized and unrealized gain on investments for the year ended
December 31, 1998 was $748,644. This amount represents the net increase in value
of investments held during the period. The components are as follows:
Long transactions .......... $ 762,780
Covered call options written (14,136)
---------
Net gain on investments .... $ 748,644
=========
As of December 31, 1998, gross unrealized appreciation and
(depreciation) were as follows:
Unrealized appreciation .................. $5,085,979
Unrealized depreciation ................... (851,000)
-----------
Net unrealized appreciation ............. $4,234,979
==========
<PAGE>
STERLING CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
Note C - Call Options Written
As of December 31, 1998, $107,741 was held in escrow by a broker in
connection with covered call options written.
Note D - 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 $21,000.
Note E - Other Transactions with Affiliates
Aggregate remuneration paid or accrued by the Corporation for the year
ended December 31, 1998 to certain persons who were "affiliated persons" within
the meaning of the Act, was as follows:
Officers' salaries ................................. $173,000
Amount paid or accrued under Pension Plan .......... 29,576
Directors' fees .................................... 44,500
Incident to the sublease arrangements for office space at 635 Madison
Avenue referred to in Note D 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, 1998, Mr. Scheuer and the Corporation paid or accrued
approximately $531,000 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 F - 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.
<PAGE>
STERLING CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
The following tables provide a reconciliation of the changes in the
plan's benefit obligations, fair value of assets, and a statement of the funded
status for the year ended December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Change in Benefit Obligation
Benefit Obligation at Beginning of Year ................. $ 376,153
Service Cost ............................................ 31,474
Interest Cost ........................................... 23,714
Actuarial Loss .......................................... 17,691
---------
Benefit Obligation at End of Year ....................... $ 449,032
=========
Change in Plan Assets
Fair Value at Beginning of Year ......................... $ 291,767
Actual Return on Plan Assets ............................ 29,175
Employer Contributions .................................. 25,815
---------
Fair Value at End of Year ............................... $ 346,757
=========
Funded Status
Unfunded Status of the Plan ............................. $(102,275)
Unrecognized Net Actuarial Gain ......................... (25,243)
Unrecognized Prior Service Costs ........................ 39,978
Unrecognized Transition Obligation ...................... 99,630
---------
Prepaid Benefit Cost .................................... $ 12,090
=========
</TABLE>
The following table provides amounts recognized in the balance sheet as of
December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Prepaid Benefit Cost .................................... $12,090
-------
Net Amount Recognized ................................... $12,090
=======
</TABLE>
The components of net pension costs are as follows:
<TABLE>
<CAPTION>
<S> <C>
Service Cost ................................................ $ 31,474
Interest Cost ............................................... 23,714
Expected Return on Plan Assets .............................. (29,175)
Amortization of Unrecognized Transition Assets .............. 5,244
Prior Service Costs Recognized .............................. 2,352
Recognized Net Actuarial Gain ............................... 4,371
--------
Net Periodic Pension Cost ................................... $ 37,980
========
</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%.
<PAGE>
STERLING CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
Note G- Distributions to Shareholders
On September 11, 1998 the Corporation paid a cash distribution of
$.0497 per share to shareholders of record at the close of business on August
28, 1998. 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 1997 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 1998 even though the
distribution represented net capital gains and "investment company taxable
income" realized by the Corporation during 1997. The Board of Directors
determined that of the aggregate amount of the distribution ($124,250), $52,516
be considered a charge on the Corporation's books against net investment income
and $71,734 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, 1999 the Corporation paid a cash distribution of $.04
per share to shareholders of record at the close of business on December 30,
1998. 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 1998 even though the distribution was paid to
shareholders in 1999. The Board of Directors determined that of the aggregate
amount of the distribution ($100,000), $65,000 be considered a charge on the
Corporation's books against net investment income and $35,000 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.
Note H - Year 2000 Readiness Disclosure
The Company has conducted a comprehensive review of its computer
systems to identify the systems that could be affected by the Year 2000 Issue
and is developing and implementing a plan to resolve this issue. The Year 2000
Issue is the result of computer programs being written using two digits rather
than four to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations. The Company presently believes that with modifications to
existing software and conversions to new software, the Year 2000 problem will
not pose significant operational problems for the Company's computer systems as
so modified and converted. However, if such modifications and conversions are
not completed timely, the Year 2000 problem may have a material impact on the
operations of the Company.
<PAGE>
STERLING CAPITAL CORPORATION
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Investment income .......................... $.26 $.30 $.27 $.39 $.38
Expenses ................................... .21 .22 .21 .25 .28
----- ----- ----- ----- -----
Net investment income ...................... .05 .08 .06 .14 .10
Distributions of net realized
capital gains .............................. (.04) (.82) (.36) (.53) -
Distributions of net investment income ..... (.05) (.06) (.06) (.15) (.08)
Net realized gain (loss) and increase
(decrease) in unrealized appreciation....... .30 .87 1.02 1.16 (.68)
----- ----- ----- ----- -----
Net increase (decrease) in net asset value . .26 .07 .66 .62 (.66)
Net asset value:
Beginning of period ..................... 8.22 8.15 7.49 6.87 7.53
----- ----- ----- ----- -----
End of period .......................... $8.48 $8.22 $8.15 $7.49 $6.87
===== ===== ===== ===== =====
Ratio of expenses to average net assets .... 2.5% 2.6% 2.6% 3.4% 3.8%
Ratio of net investment income to
average net assets ......................... .5% .9% .8% 1.8% 1.3%
Portfolio turnover ........................ 41% 40% 57% 51% 77%
Number of shares outstanding at end
of year (in 000's) ........................ 2,500 2,500 2,500 2,500 2,500
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 21,127
<RECEIVABLES> 131
<ASSETS-OTHER> 126
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 21,384
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 190
<TOTAL-LIABILITIES> 190
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 17,723
<SHARES-COMMON-STOCK> 2,500
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (6,554)
<ACCUMULATED-NET-GAINS> 3,290
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,235
<NET-ASSETS> 21,194
<DIVIDEND-INCOME> 342
<INTEREST-INCOME> 281
<OTHER-INCOME> 12
<EXPENSES-NET> 527
<NET-INVESTMENT-INCOME> 108
<REALIZED-GAINS-CURRENT> 105
<APPREC-INCREASE-CURRENT> 643
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 118
<DISTRIBUTIONS-OF-GAINS> 106
<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> 20,814
<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> 8.48
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
