SHEPMYERS INVESTMENT COMPANY
ANNUAL REPORT TO SHAREHOLDERS
December 31, 1998
P.O. Box 339
Hanover, Pennsylvania 17331
<PAGE>
/LOGO/
Shepmyers Investment Company
P.O. Box 339
Hanover, Pennsylvania 17331
March 25, 1999
Dear Shareholder:
We are pleased to forward the Annual Report reflecting the company's financial
results for the year ended December 31, 1998.
In 1998 the U.S. economy continued to show a mixed picture of both strength and
weakness. The consumer sector continued to be the driving force of strength
spurred by consumer consumption expenditures, strong housing demand and Consumer
Confidence rebounding. Weakness was evident in the manufacturing sector as
global difficulties abounded. Asia continued to stagnate, Russia defaulted on
bond payments and Brazil's economy began to collapse. As the U.S. began to feel
the effects of the global economic turmoil, The Federal Reserve cut the federal
funds rate twice during 1998. As a result of a slowing economy and the federal
funds rate cuts, the 30-year treasury yield actually dipped below 4.75% in early
October. Although additional reductions in the federal funds rate were
anticipated, the Fed has since stayed on the sidelines as inflation fears began
to appear.
The yield on the Bond Buyer Index decreased from 5.15% at the end of 1997 to
5.03% at the close of 1998. The portfolio's yield likewise declined from 5.34%
at December 31, 1997 to 5.23% at December 31, 1998.
The portfolio continues to embody the goals of strong credit quality,
diversification of holdings and conservative maturity structure. The portfolio
is diversified among fifty-five separate issuers across twenty-three states.
This diversification mitigates the risks associated with economic events
occurring in any one state or region. Fifty-six percent of the bonds mature in
eight years or less and the longest maturity in the portfolio is just under
sixteen years. The weighted average maturity of the portfolio is conservative at
7.14 years.
On behalf of the Board of Directors, I am pleased to report the declaration of
an extra dividend of $0.32 per share from earnings generated by the company
during 1998. This is payable March 1, 1999 to shareholders of record 2/1/99.
This brings the total distributions from 1998 earnings to $.9315.
To assist you in preparation of your 1998 income tax returns, listed below are
certain tax attributes concerning the dividends paid to you during 1998.
1) Capital gain distribution represented $.0235 per share.
2) The remainder of the distributions to you ($.95 per share)
during 1998 represented tax-exempt interest dividends for
federal income tax purposes.
<PAGE>
3) For Pennsylvania residents, 54.65% of the federally tax-exempt
interest dividends should be considered Pennsylvania
exempt-interest dividends and are not subject to Pennsylvania
Personal Income Tax in 1998.
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
PES/sk
<PAGE>
[ERNST & YOUNG LLP LETTERHEAD]
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, 1998, 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, 1998, 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, 1998, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
January 29, 1999
<PAGE>
Shepmyers Investment Company
Statement of Assets and Liabilities
December 31, 1998
Assets
Investments at market value (cost $14,802,794) $15,452,520
Accrued interest receivable and other assets 195,783
-----------
Total assets 15,648,303
Liabilities
Dividends payable --
Accrued liabilities 30,231
-----------
Total liabilities 30,231
-----------
Net assets at market, applicable to 768,238
issued and outstanding common shares
at $.50 par value per share, equivalent
to $20.33 a share (2,000,000 shares authorized) $15,618,072
===========
See accompanying notes.
2
<PAGE>
Shepmyers Investment Company
Investments
December 31, 1998
<TABLE>
<CAPTION>
Principal Market
Amount Description Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Housing finance agency bonds--5.07%
$ 100,000 Oregon State Housing and Community Service Depart-
ment, Single Family Mortgage, 4.20%, due 7/1/99 $ 100,390
400,000 Pennsylvania Housing Finance System, Single Family
Mortgage, Series S, 7.25%, due 10/1/03 428,000
250,000 Alaska State Housing Finance Corporation, 4.80%, due
6/1/09, callable 6/1/08 at 101 255,000
-----------
Total housing finance agency bonds 783,390
General obligation bonds--63.85%
640,000 Commonwealth of Pennsylvania, First Series, 6.60%,
due 6/1/01, pre-refunded 6/1/99 at 101.5 658,304
300,000 New Hampshire, 6.50%, due 10/1/99, callable
4/1/99 at 102 306,960
300,000 Dauphin County, Pennsylvania, 4.90%, due 3/15/00
(MBIA) 304,950
200,000 Pleasant Valley, Pennsylvania School District, 6.00%,
due 3/15/07, pre-refunded 3/15/00 at 100 (MBIA) 206,120
500,000 Washington Suburban Sanitation District, Maryland
water supply, 6.80, due 6/1/05, pre-refunded 6/1/01 at
102 545,350
300,000 New Mexico State Severance, 5.20%, due 7/1/01, callable
7/1/99 at 100 302,220
350,000 Montgomery County, Pennsylvania, 5.20%, due
10/15/07, pre-refunded 10/15/00 at 100 361,095
215,000 Utah State Municipal Finance Coop., Salt Lake,
6.90%, due 3/1/02 (LOC - Government Revenue
Pooled), callable 3/1/01 at 100 229,190
155,000 Cambria County, Pennsylvania, 5.20%, due 8/15/02
(FGIC) 162,657
300,000 Haverford Township, Pennsylvania School District
(Delaware County), 6.00%, due 6/1/09, pre-refunded
6/1/04 at 100 (FGIC) 330,180
350,000 Erie County, Pennsylvania, 4.90%, due 9/1/04
callable 9/1/98 at 100 350,000
</TABLE>
See accompanying notes.
3
<PAGE>
Shepmyers Investment Company
Investments (continued)
December 31, 1998
<TABLE>
<CAPTION>
Principal Market
Amount Description Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
General obligation bonds -- 63.85% (continued)
$ 225,000 Wilkes-Barre, Pennsylvania School District, (Luzerne
County), 6.00%, due 4/1/08, pre-refunded 10/1/04 at
100 (FGIC) $ 248,895
250,000 Wissahickon, Pennsylvania School District, 4.75%, due
11/15/05, callable 11/15/02 at 100 260,525
510,000 Indiana Bond Bank, Series A2, 6.75%, due 1/1/06,
callable 1/1/01 at 102 (LOC Sumitomo Bank Ltd.) 542,793
200,000 Seneca Valley, Pennsylvania School District, 5.50%,
due 2/15/09, pre-refunded 8/15/05 at 100 216,800
225,000 Tunkhannock, Pennsylvania Area School District, 4.45%,
due 7/15/06 (AMBAC) 229,478
150,000 Kane, Cook & Dupage Counties, Illinois, 4.45%. due
1/1/07 (FSA) 152,655
185,000 Greenville County, South Carolina, 4.00%, due 4/1/07 184,538
225,000 Johnson County, Kansas, 4.00%, due 9/1/07, callable
9/1/06 at 100 224,438
195,000 Shaler, Pennsylvania Area School District, 4.30%, due
10/1/07 (FSA) 196,638
170,000 Reading, Pennsylvania, 4.50%, due 11/15/07 callable
11/15/05 at 100 (AMBAC) 173,094
250,000 Dauphin County, Pennsylvania General Authority,
4.95%, due 6/1/26, puttable 6/2/08 at 100 259,100
275,000 Nevada State Capital Improvement, 4.10%, due 4/15/08 274,313
210,000 Delaware County, Pennsylvania, 5.35%, due 1O/1/08,
callable 10/1/00 at 100 225,288
300,000 Minneapolis, Minnesota Special School District, No. 1,
4.20%, due 2/1/09, callable 2/1/07 299,250
290,000 Ephrata Pennsylvania Area School District, 5.40%, due
10/15/09, callable 10/15/01 at 100 (FGIC) 296,061
275,000 Shippensburg, Pennsylvania, 5.00%, due 11/15/09,
callable 11/1/02 at 100 (FGIC) 282,095
200,000 Connecticut State, 5.35%, due 5/15/10, callable 5/15/06
at 101 212,820
125,000 Berks County, Pennsylvania, 5.00%, due 5/15/10 (FGIC) 127,637
210,000 Beaver County, Pennsylvania, 5.50%, due 10/1/10,
pre-refunded 10/1/06 at 100 (MBIA) 228,816
</TABLE>
See accompanying notes.
4
<PAGE>
Shepmyers Investment Company
Investments (continued)
December 31, 1998
<TABLE>
<CAPTION>
Principal Market
Amount Description Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
General obligation bonds--63.85% (continued)
325,000 Port Houston Authority, Harris County, Texas, 5.00%,
due 10/1/10, callable 10/1/07 at 100 $ 338,195
100,000 Arlington Heights, Illinois, 5.00%, due 12/l/11, callable
12/1/05 at 100 103,290
250,000 Pennsylvania State Refunding and Projects, 5.375%, due
4/15/12, callable 4/15/03 at 101.50 260,900
450,000 Florida State Board of Education, 5.30%, due 6/1/13,
callable 6/1/03 at 101 465,975
300,000 Armstrong, Pennsylvania School District, 5.00%, due
9/15/14, callable 9/15/04 at 100 (FGIC) 305,940
-----------
Total general obligation bonds 9,866,560
Special obligation bonds--1.99%
300,000 Pennsylvania Intergovernmental Coop Authority,
Special Tax Revenue, Philadelphia Fund, 4.70%,
due 6/15/01 (FGIC) 307,380
-----------
Total special obligation bonds 307,380
Revenue bonds--27.17%
250,000 Kane County, Illinois Public Building, Elgin Community
College, 6.80%, due 12/1/02, pre-refunded 12/1/99 at
100 258,275
300,000 Pennsylvania State Certificates of Participation, Lease
Revenue, 4.90%, due 7/1/02 (AMBAC) 310,920
350,000 District of Columbia, Georgetown University, 6.90%, due
4/1/04, callable 4/1/99 at 102 359,135
275,000 East Penn Pennsylvania School District, 5.55%, due
11/15/13, pre-refunded 5/15/02 at 100 (MBIA) 290,263
125,000 East Penn Pennsylvania School District, 5.45%, due
11/15/11, pre-refunded 5/15/02 at 100 (MBIA) 131,537
450,000 Chester County, Pennsylvania Health and Education
Authority (Main Line Health System), 4.90%,
due 5/15/04 468,269
200,000 Allegheny County Pennsylvania Hospital Authority,
(Children's Hospital), 4.85%, due 7/1/05 (MBIA) 207,980
</TABLE>
See accompanying notes.
5
<PAGE>
Shepmyers Investment Company
Investments (continued)
December 31, 1998
<TABLE>
<CAPTION>
Principal Market
Amount Description Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue bonds--22.17% (continued)
$ 175,000 State Public Schools Pennsylvania College Revenue
(Harrisburg Community), 5.10%, due 4/l1/06 (MBIA) $ 184,117
250,000 Lancaster County, Pennsylvania Vo-Tech School
Authority, 6.50%, due 2/15/07, callable 2/15/04 at 100 278,050
200,000 Tennessee State LOC Development Authority, 4.75%,
due 3/1/08, callable 3/1/06 at 100 (MBIA) 207,720
200,000 Salt River Project Arizona, Agricultural and Power
System Electric System, 5.00%, due 1/1/10, callable
1/1/99 at 100 204,000
200,000 Kentucky State Property and Building, 5.00%, due 9/1/10 206,360
200,000 Lincoln Nebraska Electric System, 5.25%, due 9/1/11,
callable 9/1/03 at 102 209,220
200,000 Madison Wisconsin Sewer System, 5.00%, due 12/l/11,
callable 12/1/06 at 100 207,440
350,000 Lancaster Pennsylvania Area Sewer Authority, 5.50%,
due 4/1/12, callable 10/1/03 at 100 (MBIA) 363,930
200,000 Governor Mifflin Pennsylvania School District, 5.40%,
due 9/15/12, callable 9/15/03 at 100 (AMBAC) 207,440
100,000 Virginia Resource Authority (Appromattox River Water
Authority), 5.25%, due 10/1/13, callable 10/1/03 at 102 104,070
-----------
Total revenue bonds 4,198,726
Short-term investments--at cost, approximating
market--1.92%
296,464 Muni Fund Portfolio of Municipal Funds for Temporary
Investment 296,464
-----------
Total short-term investments 296,464
-----------
Total investments--100% (cost $14,802,794) $15,452,520
===========
</TABLE>
See accompanying notes.
6
<PAGE>
Shepmyers Investment Company
Statement of Operations
Year ended December 31, 1998
Investment income:
Interest $ 817,285
Expenses:
Investment advisory fees 25,000
Custodian fees 8,760
Transfer and dividend disbursing agent fees 3,120
Legal and professional fees 31,500
Officers' salaries and directors' fees 26,850
Capital stock tax 1,884
Clerical 2,500
Insurance 2,478
Miscellaneous 9,617
---------
111,709
---------
Net investment income 705,576
Realized and unrealized gain on investments:
Net realized gain from investment transactions 8,775
Net unrealized appreciation of investments 99,691
---------
Net gain on investments 108,466
---------
Net increase in net assets resulting from operations $ 814,042
=========
See accompanying notes.
7
<PAGE>
Shepmyers Investment Company
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended December 31
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Changes resulting from operations:
Net investment income $ 705,576 $ 732,833
Net realized gain from investment transactions 8,775 42,711
Net unrealized appreciation of investments 99,691 17,992
----------- -----------
Net increase in net assets resulting from operations 814,042 793,536
Distributions to shareholders:
Dividends from net investment income (729,853) (760,556)
Dividends from realized capital gains (18,026) (36,624)
----------- -----------
Total Increase (decrease) in net assets 66,163 (3,644)
Net assets:
Beginning of year 15,551,909 15,555,553
----------- -----------
End of year (including undistributed net investment
income of $245,026 and $269,297, respectively) $15,618,072 $15,551,909
----------- -----------
</TABLE>
See accompanying notes.
8
<PAGE>
Shepmyers Investment Company
Financial Highlights
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (for a share outstanding
throughout the indicated year)
Net asset value, beginning of year $ 20.24 $ 20.25 $ 20.49 $ 19.81 $ 20.82
Income from investment operations:
Investment income 1.06 1.10 1.15 1.16 1.15
Expenses .14 .15 .15 .14 .15
------- ------- ------- ------- -------
Net investment income .92 .95 1.00 1.02 1.00
Net realized and unrealized gain (loss) on
investments .14 .08 (.21) .67 (.95)
------- ------- ------- ------- -------
Total from investment operations 1.06 1.03 .79 1.69 .05
Less distributions:
Dividends from net investment income (.95) (.99) (1.03) (1.01) (1.06)
Distribution from net realized gain from
investment transactions (.02) (.05) -- -- --
------- ------- ------- ------- -------
Total distributions (.97) (1.04) (1.03) (1.01) (1.06)
------- ------- ------- ------- -------
Net asset value, end of year $ 20.33 $ 20.24 $ 20.25 $ 20.49 $ 19.81
======= ======= ======= ======= =======
Total return based on net asset value
per share (1) 5.24% 5.09% 3.80% 8.58% .10%
======= ======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $15,618 $15,552 $15,556 $15,745 $15,220
Ratio of expenses to average net assets .72% .75% .75% .72% .73%
Ratio of net investment income to average net
assets 4.5% 4.78% 4.99% 5.10% 5.02%
Portfolio turnover rate 14.52% 21.71% 12.61% 11.00% 12.68%
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
<PAGE>
Shepmyers Investment Company
Notes to Financial Statements
December 31, 1998
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. 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, 1998, $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 1998, of which $4,250 is payable at December 31, 1998.
11
<PAGE>
Shepmyers Investment Company
Notes to Financial Statements (continued)
2. Investment Advisory Fee and Other Transactions With Affiliates (continued)
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.
3. 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 $2,224,987 and
$2,202,650, respectively, during the year ended December 31, 1998.
At December 31, 1998, the cost of investment securities owned is the same for
financial reporting and federal income tax purposes. Net unrealized appreciation
of investment securities is $649,726 (aggregate gross unrealized appreciation of
$650,750 less aggregate gross unrealized depreciation of $1,024).
4. Components of Net Assets
The components of net assets at December 31, 1998, are as follows:
Common stock issued and outstanding, including
additional paid-in capital $14,723,326
Undistributed net investment income 245,020
Undistributed net capital gains --
Net unrealized appreciation of investments 649,726
-----------
Net assets $15,618,072
===========
12
<PAGE>
Shepmyers Investment Company
Matters Submitted to Shareholders for Approval (Unaudited)
At the annual meeting of shareholders, the following matters were submitted to
the shareholders, and the results of their voting is as follows:
1. Approval of Directors
Name of Candidate In Favor Against Abstain
- ----------------- -------- ------- -------
P. E. Spears 685,548 -- 65
G. P. King 685,548 -- 65
L. S. DeVan 685,548 -- 65
J. M. Fuss 685,548 -- 65
R. E. Lemmon, Jr. 685,548 -- 65
R. P. Myers 685,548 -- 65
P. F. Spears 685,548 -- 65
J. F. Thompson, III 685,548 -- 65
C. D. Weber 685,548 -- 65
2. Continuation of Existing Investing Advisory Contract
685,580 -- 33
3. Selection of Ernst & Young LLP as Independent Certified Public Accountants
685,613 -- --
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
Harrisburg, Pennsylvania
COUNSEL
Drinker Biddle & Reath LLP
Philadelphia, Pennsylvania
INVESTMENT ADVISOR
The Rittenhouse Trust Company
Radnor, Pennsylvania
CUSTODIAN, TRANSFER AGENT, REGISTRAR & DIVIDEND DISBURSING AGENT
Investors Trust Company
Wyomissing, Pennsylvania
