SHEPMYERS INVESTMENT COMPANY
ANNUAL REPORT TO SHAREHOLDERS
December 31, 1996
P.O. Box 339
Hanover, Pennsylvania 17331
<PAGE>
Shepmyers Investment Company
P.O. Box 339
HANOVER, PENNSYLVANIA 17331
February 7, 1997
Dear Shareholder:
We are pleased to forward the Annual Report reflecting the company's financial
results for the year ended December 31, 1996.
After making one small rate reduction in January, 1996 the Federal Reserve
stayed on the sidelines for the remainder of the year. The U.S. economy charted
a course of moderate strength that led some observers to dub it the "Goldilocks
economy." This was a reference to the almost uncanny tendency of the economy to
continue on a path that was neither too strong nor too weak. While job growth
slowed in the second half of the year, the overall labor market remained
relatively tight and a number of employers reported difficulty in finding
qualified labor. Strong labor conditions have helped to push consumer confidence
to its highest level in nearly seven years.
Contrary to broadly-held expectations for lower rates at the beginning of 1996,
municipal yields rose modestly during the year. The yield on the Bond Buyer
Index increased from 5.44% at the end of 1995 to 5.66% at the close of 1996. The
Portfolio's net asset value, which moves in the opposite direction of interest
rates, decreased to $20.25 at December 31, 1996 from $20.49 at December 31,
1995.
The portfolio continues to embody the goals of strong credit quality,
diversification of holdings and conservative maturity structure. Eighty-six
percent of the bonds are rated at least "AA-" by either Standard & Poor's or
Moody's Investors Service. The portfolio is diversified among fifty-two separate
issuers across twenty-one states. This diversification mitigates the risks
associated with economic events occurring in any one state or region.
Seventy-four percent of the bonds mature in eight years or less and the longest
maturity in the portfolio is only sixteen years. The weighted average maturity
of the portfolio is conservative at 5.31 years.
On behalf of the Board of Directors, I am pleased to report the declaration of
an extra dividend of $0.39 per share from earnings generated by the company
during 1996. This is payable March 3, 1997 to shareholders of record February
21, 1997. This brings the total distributions from 1996 earnings to $1.003.
To assist you in preparation of your 1996 income tax returns, listed below are
certain tax attributes concerning the dividends paid to you during 1996.
1) All distributions to you during 1996 represented tax-exempt interest
dividends for federal income tax purposes.
2) For Pennsylvania residents, 41.57% of the federally tax-exempt interest
dividends should be considered Pennsylvania exempt-interest dividends
and are not subject to Pennsylvania Personal Income Tax in 1996.
We appreciate the confidence you have expressed in the Board and welcome your
questions and suggestions.
Sincerely,
/s/ Paul E. Spears
- ---------------------------------
Paul E. Spears
President & Chairman of the Board
<PAGE>
Shepmyers Investment Company
Statement of Assets and Liabilities
December 31, 1996
<TABLE>
<S> <C>
Assets
Investments at market value (cost $15,133,591) $15,665,634
Cash 1,000
Accrued interest receivable and other assets 244,545
-----------
Total assets 15,911,179
Liabilities
Investment purchases payable 200,000
Dividends payable 125,223
Accrued liabilities 30,403
-----------
Total liabilities 355,626
-----------
Net assets at market, applicable to 768,238 issued and outstanding
common shares at $.50 par value per share, equivalent to $20.25 a
share (2,000,000 shares authorized) $15,555,553
===========
</TABLE>
See accompanying notes.
-1-
<PAGE>
Shepmyers Investment Company
Investments
December 31, 1996
<TABLE>
<CAPTION>
Principal Market
Amount Description Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Highway construction bonds--1.29%
$200,000 Illinois Toll Highway Bonds, 6.35%, due 1/1/00, pre-refunded
1/1/97 at 101 $ 202,000
----------
Total highway construction bonds 202,000
Housing finance agency bonds--7.44%
190,000 Massachusetts Housing Finance Agency, 6.75%, due 6/1/99,
callable 12/1/96 at 102 198,075
130,000 Minnesota Housing Finance Agency, Single Family Mortgage,
6.80%, due 1/1/99, callable 1/1/96 at 102 135,525
100,000 Oregon State Housing and Community Service Department, Single
Family Mortgage, 4.20%, due 7/1/99 99,750
300,000 Virginia State Housing Authority, Series A, 7.15%, due 7/1/99 312,750
400,000 Pennsylvania Housing Finance System, Single Family Mortgage,
Series S, 7.25%, due 10/1/03 420,000
----------
Total housing finance agency bonds 1,166,100
General obligation bonds--52.44%
200,000 Connecticut State, Series A, 5.25%, due 3/15/97 200,500
550,000 Maricopa County, Arizona, 6.80%, due 7/1/03, pre-refunded
7/1/97 at 101 563,200
200,000 Vermont Muni Bond Bank, 6.50%, due 12/1/97 204,700
200,000 Port Corpus Christi Authority, 4.40%, due 2/1/98 200,800
400,000 Pittsburgh, Pennsylvania, 6.875%, due 3/1/98, callable 3/1/97 at
102 (FGIC) 409,360
250,000 Wisconsin State, 6.40%, due 5/1/00, pre-refunded 5/1/98 at 101 260,100
175,000 Birmingham, Alabama, 7.00%, due 7/1/98 182,735
</TABLE>
See accompanying notes.
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<PAGE>
Shepmyers Investment Company
Investments (continued)
December 31, 1996
<TABLE>
<CAPTION>
Principal Market
Amount Description Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
General obligation bonds - 52.44% (continued)
$640,000 Commonwealth of Pennsylvania, First Series, 6.60%, due 6/1/01,
pre-refunded 6/1/99 at 101.5 $681,984
200,000 Dade County, Florida, Public Improvement, Series 1, 6.80%, due
7/1/99, callable 7/1/89 at 102.75 (MBIA) 204,420
300,000 New Hampshire, 6.50%, due 10/1/99, callable 4/1/99 at 102 316,980
300,000 Dauphin County Pennsylvania, 4.90%, due 3/15/00 (MBIA) 304,560
200,000 Pleasant Valley Pennsylvania School District, 6.00%, due 3/15/07,
pre-refunded 3/15/00 at 100 (MBIA) 208,960
300,000 New Mexico State Severance, 5.20%, due 7/1/01, callable 7/1/99
at 100 305,580
215,000 Utah State Municipal Finance Coop., Salt Lake, 6.90%, due
3/1/02 (LOC - Government Revenue Pooled), callable 3/1/01 at
100 233,855
155,000 Cambria County Pennsylvania, 5.20%, due 8/15/02 (FGIC) 159,170
500,000 Washington Suburban Sanitation District, Maryland Water Supply,
6.80%, due 6/1/05, pre-refunded 11/1/01 at 102 552,550
350,000 Erie County Pennsylvania, 4.90%, due 9/1/04 callable 9/1/98 at
100 350,210
250,000 Wissahickon Pennsylvania School District, 4.75%, due 11/15/05,
callable 11/15/02 at 100 248,750
510,000 Indiana Bond Bank, Series A2, 6.75%, due 1/1/06, callable 1/1/01
at 102 (LOC Sumitomo Bank Ltd.) 549,065
</TABLE>
See accompanying notes.
-3-
<PAGE>
Shepmyers Investment Company
Investments (continued)
December 31, 1996
<TABLE>
<CAPTION>
Principal Market
Amount Description Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
General obligation bonds - 52.44% (continued)
$350,000 Montgomery County Pennsylvania, 5.20%, due 10/15/07, callable
10/15/00 at 100 $ 351,470
225,000 Wilkes-Barre, Pennsylvania School District, (Luzerne County),
6.00%, due 4/1/08, callable 10/1/04 at 100 (FGIC) 237,240
200,000 Seneca Valley Pennsylvania School District, 5.50%, due 2/15/09,
callable 8/15/05 at 100 202,220
210,000 Delaware County, Pennsylvania, 5.35%, due 10/1/08, callable
10/1/00 at 100 213,948
300,000 Haverford Township, Pennsylvania School District (Delaware
County), 6.00%, due 6/1/09, callable 6/1/04, 100 (FGIC) 322,440
290,000 Ephrata Pennsylvania Area School District, 5.40%, due 10/15/09,
callable 10/15/01 at 100 (FGIC) 290,464
210,000 Beaver County Pennsylvania, 5.50%, due 10/1/10, callable
10/1/06 at 100 (MBIA) 211,029
250,000 Pennsylvania State Refunding and Projects, 5.375%, due 4/15/12,
callable 4/15/03 at 101.50 248,750
----------
Total general obligation bonds 8,215,040
Special obligation bonds - 3.39%
225,000 Connecticut State Special Tax Obligation, 6.80%, due 10/1/97 229,860
300,000 Pennsylvania Intergovernmental Coop Authority, Special Tax
Revenue, Philadelphia Fund, 4.70%, due 6/15/01 (FGIC) 301,650
Total special obligation bonds 531,510
Revenue bonds - 31.74%
200,000 Harrisburg Authority, Dauphin County Lease Revenue, 5.80%,
due 6/1/97 201,600
325,000 Knoxville, Tennessee Water Revenue, 6.70%, due 11/1/03, pre-
refunded 11/1/97 at 102 338,748
150,000 Memphis-Shelby County Tennessee Airport Authority, 4.25%, due
2/15/98 150,375
</TABLE>
See accompanying notes.
-4-
<PAGE>
Shepmyers Investment Company
Investments (continued)
December 31, 1996
<TABLE>
<CAPTION>
Principal Market
Amount Description Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue bonds - 31.74% (continued)
$245,000 Kenton County Kentucky School District, Finance Corporate
School Building, 4.25%, due 7/1/98 $ 245,931
275,000 Fort Wayne, Indiana, Hospital Revenue Bond, 6.60%, due 7/1/98,
callable 7/1/96 at 102 285,368
500,000 Hillsborough County Florida Aviation Authority (Tampa
International Airport), 4.25%, due 10/1/98 502,300
300,000 West Chester Pennsylvania Area School District, 3.55%, due
12/1/98 296,790
250,000 Kane County Illinois Public Building, Elgin Community College,
6.80%, due 12/1/02, pre-refunded 12/1/99 at 100 266,675
230,000 Intermountain Power Agency, Utah, 6.80%, due 7/1/02, callable
1/1/97 at 102 237,214
300,000 Pennsylvania State Certificates of Participation, Lease Revenue,
4.90%, due 7/1/02 (AMBAC) 303,570
350,000 District of Columbia, Georgetown University, 6.90%, due 4/1/04,
callable 4/1/99 at 102 371,665
450,000 Chester County Pennsylvania Health and Education Authority
(Main Line Health System), 4.90%, due 5/15/04 447,750
200,000 Allegheny County Pennsylvania Hospital Authority, (Children's
Hospital), 4.85%, due 7/1/05 (MBIA) 200,000
175,000 State Public Schools Pennsylvania College Revenue (Harrisburg
Community), 5.10%, due 4/1/06 (MBIA) 175,718
250,000 Lancaster County Pennsylvania Vo-Tech School Authority, 6.50%,
due 2/15/07, callable 2/15/04 at 100 271,600
125,000 Fleetwood Pennsylvania Area School District, 5.45%, due 4/1/08
(FGIC) 126,500
350,000 Lancaster Pennsylvania Area Sewer Authority, 5.50%, due 4/1/12,
callable 10/1/03 at 100 (MBIA) 350,000
200,000 Governor Mifflin Pennsylvania School District, 5.40%, due
9/15/12, callable 9/15/03 at 100 (AMBAC) 199,500
----------
Total revenue bonds 4,971,404
</TABLE>
See accompanying notes.
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<PAGE>
Shepmyers Investment Company
Investments (continued)
December 31, 1996
<TABLE>
<CAPTION>
Principal Market
Amount Description Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Industrial revenue bonds - .83%
$130,000 Chester County Pennsylvania Industrial Development Authority,
Glenn Avenue Associates, 4.375%, due 11/15/98 (Guaranteed by
Provident Mutual Life) $ 130,312
-----------
Total industrial revenue bonds 130,312
Short-term investments - at cost, approximating market - 2.87%
449,268 Muni Fund Portfolio of Municipal Funds for Temporary
Investment 449,268
-----------
Total short-term investments 449,268
-----------
Total investments - 100% (cost $15,133,591) $15,665,634
===========
</TABLE>
See accompanying notes.
-6-
<PAGE>
Shepmyers Investment Company
Statement of Operations
Year ended December 31, 1996
Investment income:
Interest $ 884,378
Expenses:
Investment advisory fees 25,000
Custodian fees 7,824
Transfer and dividend disbursing agent fees 3,316
Legal and professional fees 31,050
Officers' salaries and directors' fees 29,100
Capital stock tax 2,800
Clerical 2,500
Insurance 2,315
Miscellaneous 11,031
---------
114,936
---------
Net investment income 769,442
Realized and unrealized gain (loss) on investments:
Net realized gain from investment transactions 16,057
Net unrealized depreciation of investments (180,868)
Net loss on investments (164,811)
Net increase in net assets resulting from operations $ 604,631
=========
See accompanying notes.
-7-
<PAGE>
Shepmyers Investment Company
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended December 31
1996 1995
-------------------------------
<S> <C> <C>
Changes resulting from operations:
Net investment income $ 769,442 $ 784,475
Net realized gain (loss) from investment transactions 16,057 (2,632)
Net unrealized (depreciation) appreciation
of investments (180,868) 518,238
-------------------------------
Net increase in net assets resulting from operations 604,631 1,300,081
Distributions to shareholders:
Dividends from net investment income (793,590) (775,921)
-------------------------------
Total (decrease) increase in net assets (188,959) 524,160
Net assets:
Beginning of year 15,744,512 15,220,352
-------------------------------
End of year (including undistributed net investment
income of $297,020 and $321,168, respectively) $15,555,553 $15,744,512
===============================
</TABLE>
See accompanying notes.
-8-
<PAGE>
Shepmyers Investment Company
Financial Highlights
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994 1993 1992
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (for a share outstanding
throughout the indicated year)
Net asset value, beginning of year $20.49 $19.81 $20.82 $20.82 $20.65
Income from investment operations:
Investment income 1.15 1.16 1.15 1.19 1.27
Expenses .15 .14 .15 .14 .14
---------------------------------------------------------------------------
Net investment income 1.00 1.02 1.00 1.05 1.13
Net realized and unrealized (loss) gain on
investments (.21) .67 (.95) .11 .26
---------------------------------------------------------------------------
Total from investment operations .79 1.69 .05 1.16 1.39
Less distributions:
Dividends from net investment income (1.03) (1.01) (1.06) (1.13) (1.21)
Distribution from net realized gain from
investment transactions -- -- -- (.03) (.01)
---------------------------------------------------------------------------
Total distributions (1.03) (1.01) (1.06) (1.16) (1.22)
---------------------------------------------------------------------------
Net asset value, end of year $20.25 $20.49 $19.81 $20.82 $20.82
===========================================================================
Total return based on net asset value
per share (1) 3.80% 8.58% .10% 5.57% 6.75%
=======================================================================
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) 15,556 $15,745 $15,220 $15,994 $15,993
Ratio of expenses to average net assets .75% .72% .73% .67% .66%
Ratio of net investment income to average net
assets 4.99% 5.10% 5.02% 5.14% 5.55%
Portfolio turnover rate 12.61% 11.00% 12.68% 14.92% 13.09%
Number of shares outstanding at end of year 768,238 768,238 768,238 768,238 768,238
</TABLE>
- ----------
(1) Total return based on market price has not been disclosed due to lack
of market price information.
See accompanying notes.
-9-
PHTRANS:149404_1.WP5
<PAGE>
Shepmyers Investment Company
Notes to Financial Statements
December 31, 1996
1. Summary of Significant Accounting Policies
The Company is registered under the Investment Company Act of 1940, as amended,
as a diversified, closed-end management company and intends to meet the
requirements of a regulated investment company as defined under Subchapter M of
the Internal Revenue Code. The following is a summary of significant accounting
policies followed by the Company in the preparation of its financial statements.
The Company's investment objective is to seek as high a level of income and
capital gains, net of federal income tax as is consistent with the preservation
of capital. The Company will invest primarily in tax-exempt obligations, but may
also own taxable obligations, preferred stock (including convertible preferred
stocks), other fixed-income securities and common stocks (including warrants and
rights to purchase common stocks). The relative proportions of the types of the
Company's portfolio securities will vary from time to time but not less than 50%
of the portfolio will be invested in obligations issued by states, territories,
and possessions of the United States and the District of Columbia, and their
political subdivisions, duly constituted authorities and corporations, the
interest on which is exempt from federal income tax in the opinion of bond
counsel to the issuers.
Valuation of Investments
Investments are valued based on prices furnished by an independent pricing
service. This service determines the valuations based on valuations for normal
institutional size trading units of debt securities. In most instances, these
valuations represent the mean between the most recently quoted bid and ask
prices. In the event that market quotations are not readily available,
securities are valued at their fair value by the investment advisor under the
supervision and responsibility of the Company's Board of Directors. These
valuations are believed to accurately reflect the fair market value of such
securities.
Recording of Transactions
Security transactions are accounted for on the date the securities are purchased
or sold (trade date). Dividends and distributions to shareholders are recorded
on the declaration date.
-10-
<PAGE>
Shepmyers Investment Company
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
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 disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Determination of Realized Gains or Losses from Investment Transactions
Realized gains or losses from investment transactions are calculated on the
identified cost basis.
Federal Income Tax
It is the Company's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
substantially all of its net investment income and realized net gain from
investment transactions to its shareholders and, accordingly, no provision has
been made for Federal income taxes.
Investment Income
The Company records interest income on the accrual basis. In computing net
investment income, the Company amortizes premium over the life of the security,
unless said premium is in excess of any call price, in which case the excess is
amortized to the earliest call date. Original issue discount is accreted over
the life of the security.
2. Dividends
On November 12, 1996 and October 7, 1996, the Board of Directors declared a cash
dividend from net investment income of $.013 per share and $.15 per share,
respectively; payable December 27, 1996 and January 2, 1997, respectively; to
shareholders of record on December 6, 1996 and December 1, 1996, respectively.
-11-
<PAGE>
Shepmyers Investment Company
Notes to Financial Statements (continued)
3. Investment Advisory Fee and Other Transactions With Affiliates
The Investment Advisory Agreement provides that the Company will pay to the
Investment Advisor, as compensation for services provided, a fee at an annual
rate of $25,000. At December 31, 1996, $6,250 is payable.
An officer of the Company is a partner in a law firm that provides legal
services to the Company. Fees to the firm for legal services aggregated $17,000
in 1996, of which $4,250 is payable at December 31, 1996.
The Board of Directors has resolved that each director be paid $250 per meeting
attended plus an annual fee of $600, and that the Chairman of the Board be paid
an annual consulting fee of $15,000 and other officers an annual salary of $100
as compensation for their services. Directors and officers are reimbursed by the
Company for out-of-pocket expenses incurred in attending meetings of the Board
of Directors.
4. Cost, Purchases, and Sales of Security Investments
Cost of purchases and proceeds from sales and maturities of investment
securities, other than short-term investments, aggregated $2,078,436 and
$1,911,057, respectively, during the year ended December 31, 1996.
At December 31, 1996, the cost of investment securities owned is the same for
financial reporting and federal income tax purposes. Net unrealized appreciation
of investment securities is $532,043 (aggregate gross unrealized appreciation of
$537,253 less aggregate gross unrealized depreciation of $5,210).
5. Components of Net Assets
The components of net assets at December 31, 1996, are as follows:
Common stock issued and outstanding, including
additional paid-in capital $14,723,326
Undistributed net investment income 297,020
Undistributed net capital gains 3,164
Net unrealized appreciation of investments 532,043
-----------
Net assets $15,555,553
===========
-12-
<PAGE>
Report of Independent Auditors
Shareholders and Board of Directors
Shepmyers Investment Company
We have audited the accompanying statement of assets and liabilities of
Shepmyers Investment Company, including the schedule of investments, as of
December 31, 1996, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, 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 and financial highlights 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. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian and broker. 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
Shepmyers Investment Company as of December 31, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended, in conformity with generally accepted
accounting principles.
January 17, 1997
-13-
<PAGE>
CORPORATE DIRECTORY
DIRECTORS AND OFFICERS
- ----------------------
P.E. Spears*
President and Chairman of the Board
G.P. King*
Vice President & Treasurer
W.B. McConnel, III
Secretary
L.S. DeVan*
J.M. Fuss*
R.E. Lemmon, Jr.*
R.P. Myers*
P.F. Spears*
J.F. Thompson, III*
C.D. Weber*
*Director
AUDITOR
- -------
Ernst & Young LLP
Reading, Pennsylvania
COUNSEL
- -------
Drinker Biddle & Reath
Philadelphia, Pennsylvania
INVESTMENT ADVISOR
- ------------------
Rittenhouse Financial Services, Inc.
Radnor, Pennsylvania
CUSTODIAN, TRANSFER AGENT, REGISTRAR & DIVIDEND DISBURSING AGENT
- ----------------------------------------------------------------
Investors Trust Company
Wyomissing, Pennsylvania
<PAGE>
