STERLING CAPITAL CORPORATION
Report for the Six Months Ended June 30, 1999
OFFICERS
Walter Scheuer ........................ Chairman of the Board of Directors
Wayne S. Reisner ...................... President
Michael Carey ......................... Vice President and Treasurer
Tracey Stefano ....................... 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 Tocci & Skadden, Arps,
Goldstein L.L.P. 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
August 23, 1999
To our Shareholders:
Equity prices remained in an uptrend during the first half of 1999 with
both the Dow Jones Industrial Average and the S&P 500 Index posting double digit
increases. The performance disparity between those stocks with the largest
capitalization and the rest of the market finally shifted in the latest period
with the average stock performing as well as the capitalization weighted
indices. After a prolonged period of underperformance, small capitalization
stocks rallied sharply in the second quarter which enabled the Russell 2000
Index to show a respectable 8.5% increase for the six month period. This
broadening of the market advance to include more stocks benefited our portfolio
and led to a first half gain of 13% versus an increase of 11.7% for the S&P 500
Index.
The bond market did not fare well in the first half with the Lehman
Long-term Bond Index declining more than 10% in price. In contrast to last
year's concerns regarding deflation, stronger than expected rates of GDP growth
and a tight labor market led to fears of higher inflation, which in turn,
resulted in an increase in short-term interest rates by the Federal Reserve on
June 24. Although the reported inflation rates at both the consumer and producer
level so far have remained low, signs of upward pressure on wages have been
reported with both average hourly earnings and the employment cost index rising
at a faster rate in the second quarter. Energy and other commodity prices are
showing an upward bias and an economic recovery in foreign markets combined with
a weaker dollar could contribute to future inflation. As a result, investors
continue to have a cautious outlook towards the bond market, and long-term
Treasury yields, which reached a low of 4.75% during the fourth quarter of 1998,
remain close to 6%.
The pace of economic growth is expected to slow to under 3% in the
current quarter in response to higher interest rates, but the expansion, which
is now in its ninth year, should continue. Job creation remains strong, incomes
are rising , and consumer spending is not likely to experience a meaningful
downturn in the near term. Corporate profits, after a weak performance in 1998,
rebounded with an 11% increase in the second quarter representing the best
quarterly gain since 1997. Given the weakness in earnings in the last year's
third quarter, profit comparisons are estimated to show an even larger increase
of approximately 20% in the current quarter.
Despite its recent strong performance, the general equity market does
face some important obstacles. The first half increase in interest rates
occurred at a time when most market models already indicated that stocks were
overvalued relative to bonds. The Federal Reserve's stock market model, which
compares earnings yields to ten year bond yields, presently shows an
overvaluation for equities of 30%. Such high levels of valuation leave little
room for appreciation, especially if interest rates increase further or
disappointing economic developments occur. On the other hand, we would note that
- 1 -
<PAGE>
extremely high valuations of a few large capitalization growth stocks has
distorted the valuation of the S&P 500 Index. Therefore, the average stock is
not nearly as expensive as the index would suggest and many stocks are selling
at price/earnings ratios of only 50-60% that of the overall market. As a result,
we are still able to find stocks that have reasonable valuations relative to
their earnings prospects.
Enclosed is a report of our Corporation's operations for the six months
ended June 30, 1999. The unaudited net asset value per share of the
Corporation's Common Stock as at June 30, 1999 was $9.58, as compared with its
audited net asset value at December 31, 1998 of $8.48 per share, in both
instances giving effect to the Corporation's distribution to shareholders of
$.04 per share paid on January 22, 1999 to shareholders of record at the close
of business on December 30, 1998. As at August 20, 1999 the unaudited net asset
value per share was approximately $9.01 after further giving effect to a
distribution to shareholders of $.04529 per share, payable on September 10, 1999
to shareholders of record at the close of business on August 27, 1999. As at
June 30, 1999 and August 20, 1999 the closing sales price for shares of the
Corporation's Common Stock on the American Stock Exchange was $6.875 and $7.00
respectively. Thus, as at June 30, 1999 and August 20, 1999 the market price for
the Corporation's shares represented discounts of approximately 28% and 22%,
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, 1999 certain of the Corporation's officer's and directors and their
associates have purchased an aggregate of 20,600 shares of the Corporation's
capital stock. Officers and directors of the Corporation currently own
beneficially, directly or indirectly, an aggregate of 1,967,296 shares (78.7% 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>
<TABLE>
<CAPTION>
STERLING CAPITAL CORPORATION
SCHEDULE OF INVESTMENTS
June 30, 1999
(Unaudited)
Number of Market Value
Shares (Note A)
------ --------
<S> <C> <C>
Common and Preferred Stocks - 73.75%
Financial Services - 17.63%
Mellon Bank Corp. .............................. 24,000 $ 873,000
Chase Manhattan Corp. .......................... 10,000 865,000
American Express Co. ........................... 3,000 390,375
MBIA, Inc. ..................................... 6,000 388,500
Citigroup Inc. ................................. 7,500 356,250
PNC Bank Corp. ................................. 5,000 288,125
Equitable Cos Inc. ............................. 3,500 234,500
Fleet Financial Group .......................... 5,000 221,875
Chicago Title .................................. 5,000 178,437
KeyCorp ........................................ 5,000 160,625
Amerus Life Holdings 7% Pfd .................... 5,000 136,250
Conseco Financing Trust Pfd .................... 5,000 127,500
----------
$4,220,437
----------
Real Estate and
Real Estate Investment Trusts - 13.38%
Camden Property Trust .......................... 22,690 $ 629,648
Chateau Communities, Inc. ...................... 15,630 467,923
Amli Residential Properties Trust .............. 18,000 402,750
Equity Residential Properties Trust ............ 7,950 358,247
St. Joe Co. .................................... 10,000 270,000
Catellus Development Corp. * ................... 17,500 266,875
Equity Office Properties Trust ................. 10,000 256,250
Felcor Lodging Trust Inc. ...................... 10,000 207,500
Equity Residential Properties Trust Pfd C ...... 5,000 127,500
CarrAmerica Realty Trust 8.55% Pfd C ........... 5,000 115,625
Prison Realty Trust ............................ 10,000 98,125
Merry Land Properties Inc. * ................... 750 3,703
----------
$3,204,146
----------
</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
SCHEDULE OF INVESTMENTS - continued
June 30, 1999
(Unaudited)
Number of Market Value
Shares (Note A)
------ --------
<S> <C> <C>
Consumer Goods - 13.02%
Windmere Durable Holdings * .................... 135,200 $2,281,500
Kimberly-Clark Corp. ........................... 7,000 399,000
American Greetings Cl A ........................ 10,000 301,250
Eastman Kodak Co. .............................. 2,000 135,500
----------
$3,117,250
----------
Telecommunication and Media - 10.23%
BCE, Inc. ...................................... 15,000 $ 739,687
SBC Communications Inc. ........................ 10,000 580,000
Viacom Inc. Cl A * ............................. 10,000 441,250
GTE Corp. ...................................... 5,000 377,500
AT&T Liberty Media A * ......................... 6,000 220,500
Telebras - Sponsored ADR ....................... 1,000 90,000
Telecomunicacoes Br - Telebras ADS * ........... 1,000 63
----------
$2,449,000
----------
Technology - 8.18%
Parkervision Inc. * ............................ 22,000 $ 770,000
Koninklijke Philips Electronics ................ 4,600 464,025
Avnet, Inc. .................................... 6,000 279,000
Computer Associates ............................ 3,000 164,250
Ciber Inc. * ................................... 5,000 95,625
Lockheed Martin Corp. .......................... 2,500 93,125
Filenet Corp. * ................................ 8,000 91,500
----------
$1,957,525
----------
Office Equipment and Services - 3.44%
Xerox Corp. .................................... 10,000 $ 590,625
OfficeMax Inc. * ............................... 10,000 120,000
Ikon Office Solutions .......................... 7,500 112,500
----------
$ 823,125
----------
</TABLE>
* Non-income producing security
The accompanying notes are an integral part of these statements
- 4 -
<PAGE>
<TABLE>
<CAPTION>
STERLING CAPITAL CORPORATION
SCHEDULE OF INVESTMENTS - continued
June 30, 1999
(Unaudited)
Number of Market Value
Shares (Note A)
------ --------
<S> <C> <C>
Healthcare - 2.26%
Rhone Poulenc S.A. ADR ............................ 5,886 $ 272,595
Pharmacia & Upjohn, Inc. .......................... 3,000 170,438
Rite Aid Corp. .................................... 4,000 98,500
Matria Healthcare, Inc. * ......................... 40 290
-----------
$ 541,823
-----------
Transportation Services - 2.00%
KLM Royal Dutch Airlines .......................... 10,000 $ 285,625
Ryder System Inc. ................................. 7,500 193,125
-----------
$ 478,750
-----------
Retail - 1.29%
J C Penney Co., Inc. .............................. 4,000 $ 194,250
Saks Inc. * ........................................ 4,000 115,500
-----------
$ 309,750
-----------
Automotive - 1.18%
Ford Motor Co. .................................... 5,000 $ 282,188
-----------
Industrial Products - 0.89%
York International Corp. .......................... 5,000 $ 214,063
-----------
Miscellaneous Securities - 0.25%
Technology General Corp. * ** ..................... 292,600 $ 58,520
-----------
Total common and preferred stocks (cost $11,164,286) $17,656,577
-----------
</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 June 30, 1999.
The accompanying notes are an integral part of these statements
- 5 -
<PAGE>
<TABLE>
<CAPTION>
STERLING CAPITAL CORPORATION
SCHEDULE OF INVESTMENTS - continued
June 30, 1999
(Unaudited)
Principal Market Value
Amount (Note A)
------ --------
<S> <C> <C>
Corporate Bonds and Notes - 1.51%
Stop and Shop Companies 9.75%
senior subordinated note due 2/1/2002 ............ $ 150,000 $ 160,218
Caesar's World 8.875% senior
subordinated note due 8/15/2002 .................. 200,000 201,750
-----------
Total corporate bonds and notes
(cost $347,625) .............................. $ 361,968
-----------
U.S. Government Obligations - 2.10%
U.S. Treasury Note 6% due 8/15/1999 ............... $ 250,000 $ 250,391
U.S. Treasury Note 6% due 10/15/1999 .............. 250,000 250,781
-----------
Total U.S. Government Obligations (cost $497,770) .. $ 501,172
-----------
Government Agencies - 1.85%
Federal National Mortgage Association
5.50% due 2/15/2002 ............................ $ 200,000 $ 196,813
Federal Home Loan Mortgage Corp. ..................
5.75% due 7/15/2003 ............................. 250,000 246,835
-----------
Total Government Agencies (cost $444,878) .......... $ 443,648
-----------
Total Investments (cost $12,454,559) ............... $18,963,365
===========
</TABLE>
The accompanying notes are an integral part of these statements
- 6 -
<PAGE>
<TABLE>
<CAPTION>
STERLING CAPITAL CORPORATION
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1999
(Unaudited)
<S> <C>
ASSETS
Investment in securities, at value
(identified cost $12,454,559) (Note A) ................................ $ 18,963,365
Cash ...................................................................... 4,596,198
Investment in real estate (cost $100,000) ................................. 50,000
Receivables:
Investment securities sold ............................................ 265,939
Dividends and interest ................................................ 91,221
Other ................................................................. 9,721
Prepaid Pension Costs ..................................................... 12,090
------------
Total assets .............................................................. $ 23,988,534
------------
LIABILITIES
Payables:
Accrued expenses and other liabilities ................................ $ 46,732
------------
Total liabilities ......................................................... $ 46,732
------------
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 .............. (6,497,913)
Excess of net realized gain on investments over distributions ............. 3,758,191
Unrealized appreciation of investments .................................... 6,458,806
------------
Net assets ................................................................ $ 23,941,802
============
Net assets per outstanding share ....................................... $9.58
=====
</TABLE>
The accompanying notes are an integral part of these statements
- 7 -
<PAGE>
<TABLE>
<CAPTION>
STERLING CAPITAL CORPORATION
STATEMENT OF OPERATIONS
For the Six Months ended June 30, 1999
(Unaudited)
<S> <C>
Investment income and expenses:
Interest ..................................................... $109,146
Dividends .................................................... 220,368
--------
Total income ................................................... $329,514
--------
Expenses (Notes C, D and E):
Officers' salaries ........................................... $ 86,500
Office salaries .............................................. 36,689
Payroll taxes, fees and employee benefits .................... 24,969
Pension plan ................................................. 24,905
Directors' fees and expenses ................................. 20,550
Transfer agent and registrar fees ............................ 18,268
Equipment rentals ............................................ 12,590
Rent and Electric ............................................ 10,707
Legal, audit and professional fees ........................... 10,000
Custodian fees and expenses .................................. 9,758
American Stock Exchange listing fee .......................... 7,500
Federal, state and local taxes ............................... 5,185
Insurance .................................................... 3,517
Miscellaneous ................................................ 1,787
--------
Total expenses ............................................. $272,925
--------
Net investment income ............................................ $ 56,589
--------
</TABLE>
(continued)
The accompanying notes are an integral part of these statements
- 8 -
<PAGE>
<TABLE>
<CAPTION>
STERLING CAPITAL CORPORATION
STATEMENT OF OPERATIONS-continued
For the Six Months ended June 30, 1999
(Unaudited)
<S> <C>
Net investment income (from previous page) ................... $ 56,589
----------
Net gain on investments (Notes A and B):
Realized gain from securities transactions:
Proceeds from sales .................................... 3,455,476
Cost of securities sold ................................ 2,987,739
----------
Net realized gain ...................................... 467,737
----------
Unrealized appreciation of investments:
Beginning of period ...................................... 4,234,979
End of period ............................................ 6,458,806
----------
Net increase in unrealized appreciation .................. 2,223,827
----------
Net realized and unrealized gain on investments .............. 2,691,564
----------
Net increase in net assets resulting from operations ......... $2,748,153
==========
</TABLE>
The accompanying notes are an integral part of these statements
- 9 -
<PAGE>
<TABLE>
<CAPTION>
STERLING CAPITAL CORPORATION
STATEMENT OF CHANGES IN NET ASSETS
For the six months ended June 30, 1999 (unaudited)
and December 31, 1998
Six Months
ended Year Ended
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
From investment activities:
Net investment income ........................ $ 56,589 $ 107,714
Net realized gain from securities transactions 467,737 105,517
Net change in unrealized appreciation ........ 2,223,827 643,127
------------ ------------
Increase in net assets derived from
investment activities ........................ 2,748,153 856,358
Distributions to shareholders (Note F) ......... 0 (224,250)
Net Assets:
Beginning of year ............................ 21,193,649 20,561,541
------------ ------------
End of period ............................... $ 23,941,802 $ 21,193,649
============ ============
</TABLE>
The accompanying notes are an integral part of these statements
- 10 -
<PAGE>
STERLING CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
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. 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, 1999 will
probably be 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 will probably be "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. It is anticipated that the Corporation will not
have any undistributed personal holding company income for the year ended
December 31, 1999. 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.
- 11 -
<PAGE>
STERLING CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
(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 six months ended June 30, 1999:
Purchases ......................................................... $3,666,656
Sales (excludes $1,500,000 of short term corporate commercial paper
and $744,414 of U.S. Government Obligations) .......... $2,243,325
Net gain on investments for the six months ended June 30, 1999 was
$2,691,564. This amount represents the net increase in value of investments held
during the period. The components are as follows:
Long transactions ....................... $2,678,680
Covered call options written ............ 12,884
----------
Net gain on investments ................. $2,691,564
==========
As of June 30, 1999 gross unrealized appreciation and (depreciation)
were as follows:
Unrealized appreciation.................. $6,986,318
Unrealized depreciation.................. (527,512)
----------
Net unrealized appreciation.............. $6,458,806
==========
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<PAGE>
STERLING CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
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 $20,600.
Note D - Other Transactions with Affiliates
Aggregate remuneration paid or accrued by the Corporation for the six
months ended June 30, 1999 to certain persons who were "affiliated persons"
within the meaning of the Act, was as follows:
Officers' salaries ........................ $ 86,500
Amount paid or accrued under Pension Plan.. 29,576
Directors' fees ........................... 20,000
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 six
months ended June 30, 1999, Mr. Scheuer and the Corporation paid or accrued
approximately $277,000 and $52,000, 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 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:
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<PAGE>
STERLING CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
<TABLE>
<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
=========
<CAPTION>
The following table provides amounts recognized in the balance sheet as
of December 31, 1998:
<S> <C>
Prepaid Benefit Cost .................................... $ 12,090
---------
Net Amount Recognized ................................... $ 12,090
=========
<CAPTION>
The components of net pension costs are as follows:
<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%.
- 14 -
<PAGE>
STERLING CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
Note F - Distributions to Shareholders
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.
On July 28, 1999 the Board of Directors of the Corporation declared a
cash distribution of $.04529 per share, payable September 10, 1999 to
shareholders of record at the close of business on August 27, 1999. 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 1998 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 such calendar
year shareholders in 1999 even though the distribution represents net capital
gains and "investment company taxable income" realized by the Corporation during
1998. The Board of Directors determined that of the aggregate amount of the
distribution ($113,225), $42,708 be considered a charge on the Corporation's
books against net investment income and $70,517 be considered a charge on the
Corporation's books against net realized gains. Detailed information with
respect to the distribution will be provided to each shareholder.
Note G - 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.
- 15 -
<PAGE>
STERLING CAPITAL CORPORATION
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each
period:
<TABLE>
<CAPTION>
Six Months
ended Year Ended December 31
June 30, 1999 1998 1997 1996 1995 1994
------------- ---- ---- ---- ---- ----
(Unaudited)(1) (Audited)
<S> <C> <C> <C> <C> <C> <C>
Investment income ............................ $.13 $.26 $.30 $.27 $.39 $.38
Expenses ..................................... .11 .21 .22 .21 .25 .28
----- ----- ----- ----- ----- -----
Net investment income ........................ .02 .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......... 1.08 .30 .87 1.02 1.16 (.68)
----- ----- ----- ----- ----- -----
Net increase (decrease) in net asset value 1.10 .26 .07 .66 .62 (.66)
Net asset value:
Beginning of period ....................... 8.48 8.22 8.15 7.49 6.87 7.53
----- ----- ----- ----- ----- -----
End of period ............................ $9.58 $8.48 $8.22 $8.15 $7.49 $6.87
===== ===== ===== ===== ===== =====
Ratio of expenses to average net assets ...... 1.2% 2.5% 2.6% 2.6% 3.4% 3.8%
Ratio of net investment income to
average net assets ........................... .3% .5% .9% .8% 1.8% 1.3%
Portfolio turnover ........................... 13% 41% 40% 57% 51% 77%
Number of shares outstanding at end
of each period (in 000's) ................... 2,500 2,500 2,500 2,500 2,500 2,500
</TABLE>
(1) Not annualized
- 16 -
<TABLE> <S> <C>
<ARTICLE> 6
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 23,610
<RECEIVABLES> 367
<ASSETS-OTHER> 12
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 23,939
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 47
<TOTAL-LIABILITIES> 47
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 17,723
<SHARES-COMMON-STOCK> 2,500
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (6,498)
<ACCUMULATED-NET-GAINS> 3,758
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,459
<NET-ASSETS> 23,942
<DIVIDEND-INCOME> 220
<INTEREST-INCOME> 109
<OTHER-INCOME> 0
<EXPENSES-NET> 273
<NET-INVESTMENT-INCOME> 56
<REALIZED-GAINS-CURRENT> 468
<APPREC-INCREASE-CURRENT> 2,224
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<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> 22,097
<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> 9.58
<EXPENSE-RATIO> 0
</TABLE>
