<PAGE> 1
FIRST CAROLINA
INVESTORS, INC.
1 9 9 5
ANNUAL REPORT
<PAGE> 2
Company Profile
FIRST CAROLINA INVESTORS, INC. AND SUBSIDIARIES
Description of Business
First Carolina Investors,(the Company) was organized December 2, 1971. The
Company is a non-diversified, closed-end management investment company under
the Investment Company Act of 1940.
Stockholders' Meeting
The Annual Stockholders' Meeting will be held on May 16, 1996 at the Radisson
Hotel, 4243 Genesse Street, Buffalo, New York. The meeting will convene at
2:00 p.m.
FORM N-SAR
A copy of the Company's December 31, 1995 report on Securities and Exchange
Commission Form N-SAR will be furnished without charge to stockholders upon
written request directed to the Secretary, First Carolina Investors, Inc., P.O.
Box 33607 Charlotte, NC 28233
<TABLE>
<CAPTION>
Table of Contents
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<S> <C>
Letter to Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Management's Discussion
and Analysis of Financial Condition and Results of Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Management's Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Independent Auditor's
Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Noted to Consolidated
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Selected Financial
Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Directory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
Quarterly Stock Prices and Dividends Paid Per Share
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
1995
- -------------------------------------------------------------------------------------------------------------------------
Quarter First Second Third Fourth
<S> <C> <C> <C> <C>
High Bid $28.50 28.50 31.00 33.50
Low Bid $27.00 27.75 28.00 30.00
Cash Dividends $0.30 .10 .10 .10
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
1994
- -------------------------------------------------------------------------------------------------------------------------
Quarter First Second Third Fourth
<S> <C> <C> <C> <C>
High Bid $25.50 26.50 28.00 28.00
Low Bid $25.00 25.00 26.50 27.00
Cash Dividends $0.125 - .10 .10
</TABLE>
There were approximately 590 record holders of Shares of Common Stock at
January 4, 1996. The stock prices reflect interdealer prices, without retail
mark-up, mark-down, or commission, and may not represent actual transactions.
<PAGE> 3
Letter to Stockholders
First Carolina Investors, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
TO OUR STOCKHOLDERS:
At the end of our first year as an investment company, the net asset value of
First Carolina Investors, Inc. (FCI) was $48,305,545 or $43.93 per share. The
net income before gain or loss investments was $1,270,486 or $1.15 per share.
The real estate sales at Providence Country experienced another good year with
66 lots closing (gross sales of $4,900,000). Essentially all of the
development at Providence was completed during 1995. At year end,
approximately 50 homesites remained unsold in the community. These included 19
sites for courtyard homes that FCI is venturing with a local builder.
The increase in net asset value since the previous year end is primarily
attributable to the significant increase in the market value of First Empire
State Corporation. During the year, FCI made significant investments in two
new investees, both based in Buffalo, New York. We purchased 135,000 shares
of Merchants Group, Inc., a casualty insurance firm at an average cost of
$15.19 per share. Additionally, 236,700 shares of American Precision
Industries were acquired at an average cost of $9.40 per share. American
Precision is a manufacturer of heat transfer, electronic components and motion
control products and has annual sales in the $80 million range. Subsequent to
year end 1995, FCI has acquired an additional 24,000 shares of American
Precision at an average cost of $11.26 per share.
During 1996, FCI intends to sell the balance of the Providence Country
Club inventory as market conditions permit. We are optimistic that a portion
or all of the remaining 24 acres in the Park Crossing community will be sold in
1996. The Company is continuing to evaluate the development or sales
alternatives for its 300 acre holding in Union County, North Carolina.
Pursuant to our share repurchase program, we purchased 21,626 shares in 1995 at
an average cost of $28.14 per share.
Respectfully submitted,
Brent D. Baird
Chairman
H. Thomas Webb III
February 21, 1996 President
<PAGE> 4
Management's Discussion and Analysis of Financial Conditions and
Results of Operations
FIRST CAROLINA INVESTORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS
First Carolina Investors, Inc. (the Company) was organized December 2, 1971 as
a South Carolina unincorporated business trust. On July 1, 1987 the Company
incorporated by merging into a wholly owned subsidiary (First Carolina
Investors, Inc.) established solely for this purpose. The Company was
incorporated November 24, 1986 under the laws of the state of Delaware.
From the inception of operations through December 31, 1975 the Company operated
as a real estate investment trust ("REIT") as defined in the Internal Revenue
Code. Subsequently the Company became active in land development through both
direct ownership and joint ventures as well as investments in equity securities
of financial and other entities. Real estate activities continued to be the
Company's primary business through the end of 1994. On January 3, 1995 the
Company, pursuant to the requirements of the Investment Company Act of 1940,
filed notification of registration.
The Company is a closed-end, non-diversified management investment company.
As a closed-end, non-diversified management investment company, the Company
values assets and liabilities at estimated fair value. This represents a
significant change from the Company's prior accounting policies and financial
statement presentation. As an investment company, the Company now prepares
consolidated statements of assets and liabilities, consolidated statement of
operations, consolidated statement of changes in net assets and a statement of
investments in securities. The most significant changes from the December 31,
1994 balance sheet included in the 1994 annual report Form 10-K, and the
accompanying consolidated Statement of Assets and Liabilities are as follows:
Real estate - The Board of Directors and management of the Company
value its real property investments at estimated fair values.
Procedures utilized to determine the estimated fair value include
appraisals by an independent appraiser, estimated net cash flows,
utilization of fair market comparables in existing subdivisions
developed by the Company and other market comparables.
Investment in joint venture - The Board of Directors and management
of the Company value the investment in joint venture at its
estimated fair value. The procedure to determine the estimated
fair value utilizes fair market comparables in the existing
subdivision developed by the joint venture, other market
comparables and estimated net cash flow.
Deferred income taxes payable - Deferred income taxes payable were
increased to reflect the income tax liability on unrealized gains
in real estate and in investment in joint venture as included in
the accompanying Consolidated State of Assets and Liabilities.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investment in Debt and Equity
Securities" (Statement 115) prior to 1994. Accordingly the Company's
investments in securities had previously been recorded at fair value.
Due to the lack of comparability between financial statements prepared before
and after the Company became an investment company, the reader is directed to
refer to prior years financial statements for such information. (A copy of the
1994 annual report and/or Form 10K will be provided upon written request to the
Secretary of the Company).
1995 OPERATIONS
This was the Company's first year as an investment company. The net asset
value of the Company increased by $10,318,330 or $9.96 per share to $48,305,545
or $43.93 per share. The increase in net asset value is primarily attributable
to a significant increase in the market value of the Company's largest security
holding - First Empire State Corporation. During 1995 the value of this
investment increased by $16,400,000 to a year end value of $43,600,000.
Real estate operations were the major contributor to earnings during 1995. The
Company's Charlotte, North Carolina real estate - Providence Country Club,
contributed $2,463,376 to total income.
<PAGE> 5
During 1995 the Company made significant investments in two companies. 135,000
shares of Merchant Group, Inc., were purchased at an average cost of $15.19 per
share. Merchants Group, Inc. is a casualty insurance firm based in Buffalo,
New York. The Company also significantly increased its investment in American
Precision Industries by acquiring 236,700 shares at an average cost of $9.40
per share. American Precision is a manufacturer of heat transfer, electronic
components and motion control products and is also based in Buffalo, New York.
The stock repurchase program, which was instituted in 1980, continued during
1995. During 1995 the Company purchased 21,626 shares at an average cost of
$28.14 per share. At December 31, 1995 there were 434,620 treasury shares
acquired at an average cost of $18.67 per share.
Net income before realized and unrealized appreciation on investments was
$1,270,486. The gain realized on investments in other companies, net of a
income tax provision of $123,000, was $192,910. The increase in unrealized
appreciation of investments during 1995 was $10,109,432. These components
combined to produce a net increase in net assets resulting from operations of
$11,572,828.
Net asset value per share at December 31, 1995 was $43.93.
Dividend income was $672,238 for 1995. Dividend income is primarily
attributable to First Empire State Corporation and Oglebay Norton Company. For
additional information regarding dividends see Note 2 of Notes to Consolidated
Financial Statements. At year end, three of the Company's investees did not
pay dividends and therefore are considered non- income producing.
Interest on mortgage loans was $92,803. The majority of interest income earned
during 1995 was on a mortgage note receivable which was repaid in December.
While this income category was not a significant contributor to earnings,
interest on mortgage loans should decline significantly during 1996.
Gains on sale of real estate were $2,463,376. During 1995 sixty-six (66) lots
were sold in the Providence Country Club community at gross sales prices of
$4,897,000 and at a gain of $2,422,607. Also during 1995 the Company
completed the sale of its last remaining lot in the Park Crossing community.
This final lot sale produced a gain of $40,769.
Lots sales have been a significant contributor to the Company's earnings. As
we look towards 1996, the Company has fifty-three (53) remaining lots to sell
in the Providence Country Club community.
Equity in earnings of joint venture was $133,651. This is the Company's
one-third interest in the sale of lots owned the joint venture
Goodsell-Carolinas Associates. During 1995 the venture sold 3 lots at a total
gross sales price of $620,000.
Other income was $565,262 for 1995. Other income includes net commission
income of $62,000, income attributable to assets held in the deferred income
compensation plan of $193,000, fee income of $200,000 from Providence Country
Club and miscellaneous income of $110,000.
General and administrative expenses totaled $1,102,335 for 1995. Personnel
costs are the largest component of this category and total approximately
$850,000. Also included are $125,000 of taxes other than income tax.
Sales and marketing expenses are $434,712 for 1995. Sales and marketing
expenses are related to the Providence Country Club community and include
advertising, promotional and model home/sales office expense and approximately
$75,000 of non-recurring expenses associated with hosting a home tour during
the fall of 1995.
Other expenses totaled $538,915 for 1995. Other expenses include real estate
taxes of $55,000, directors fees and expenses of $53,000, depreciation of
$101,000, expenses associated with Providence Country Club of $72,000, expenses
of $193,000 which correspond with and offset income earned by assets in the
deferred compensation plan, and miscellaneous expenses of $65,000.
Gain realized on investments in other companies was $192,910 for 1995. This
represents a gain on the liquidation of the Company's total investment in a
financial entity. The gain is net of a tax provision of $123,000.
<PAGE> 6
INTERNAL AND EXTERNAL SOURCES OF LIQUIDITY
The three major components of the Company's assets are investments in other
companies, real estate and mortgage loans/investment in joint venture.
INVESTMENTS IN OTHER COMPANIES
While investments in other companies consist of marketable securities, they are
considered long-term investments and generally not source of current
liquidity.
REAL ESTATE
Land held for investment should generally not be considered a source of current
liquidity. Finished lots are held for sale in the ordinary course of business
and are a source of liquidity. The number of finished lots that are likely to
be sold in any particular period is heavily influenced by general real estate
market conditions, interest rates and the availability of construction loans.
These factors were positive during the past several years. Long term interest
rates were favorable during 1995 and are expected to remain so during 1996.
The availability of construction financing is good and indications are that the
availability will continue to be good. As of the date of this report, the 1996
real estate market is expected to remain favorable.
MORTGAGE LOAN AND INVESTMENT IN JOINT VENTURE
At year-end the mortgage loan portfolio totaled $136,320. The mortgage loans
consist of condominium end loans and one lot loan. The condominium end loans
are due in seven years. The lot loan is due in one year. While these loans
could be sold, they are generally not considered sources of liquidity. The
Company has an equity interest in an Atlanta joint venture. Discussions for
the sale of the Company's interest in the venture have been discontinued. As
the venture continues to sell lots, the Company will receive its 1/3 portion of
earnings. Accordingly the Company's interest in the venture is considered to be
a source of limited liquidity.
LINE OF CREDIT
The Company has a $5,000,000 line of credit with a bank. There is no debt
outstanding pursuant to the credit line. Additionally, at year-end the Company
has cash and short term investments of $1,342,225. These are the Company's
most readily available sources of liquidity. See Note 7 of Notes to
Consolidated Financial Statements.
COMMITMENTS FOR CAPITAL EXPENDITURES
At December 31, 1995 the Company had contractual commitments of approximately
$250,000 related to real estate development at Providence Country Club. While
this represents the only contractual commitment, the Company may be required,
from time to time, to make additional capital expenditures. If the Company
chooses to develop all or a portion of the 300 acres owned in Union County,
North Carolina, additional expenditures will be required. The timing and
amount of these expenditures will be evaluated in light of market conditions
before the expenditures are made.
While the Company has no contractual commitments to purchase additional equity
securities, the Company may from-time-to- time make significant expenditures
for this purpose.
The Company's stock repurchase program has been in effect since 1980. Although
it has no contractual obligation to repurchase its shares, the Company
currently intends to repurchase shares subject to availability and price.
SUMMARY
The operating results for 1995 were satisfactory. As previously discussed, on
January 3, 1995 the Company filed a notification with the Securities and
Exchange Commission that it had become an investment company pursuant to the
Investment Company Act of 1940. This was brought about by the continued
liquidation of real estate holdings combined with significant increases in both
the number of investments and an increase in the fair value of investments in
other companies. The Company is a closed-end, non-diversified, management
investment company.
<PAGE> 7
The Company's investments in securities performed quite well during 1995,
particularly First Empire State Corporation. The Company currently has
unrealized gains in all equity positions. 1995 was a year of records for the
stock market. Given the early results for the year, we are cautiously
optimistic about the 1996 performance. The 1996 budgeted income before realized
and unrealized appreciation on investments reflects a year of profitable
operations and positive cash flow. The budget is predicated upon stable or
slightly declining interest rates and a generally good economic climate. It is
projected that substantially all of the remaining lots in the Providence
Country Club community will be sold by the end of calendar year 1996. The
Company continues to review alternatives for the 300 acres of undeveloped land
contiguous to Providence Country Club.
<PAGE> 8
Management's Report
FIRST CAROLINA INVESTORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
The Management of First Carolina Investors, Inc. is responsible for the
preparation, integrity and objectivity of the financial statements and other
information in the accompanying Annual Report. These financial statements have
been prepared in accordance with generally accepted accounting principles and
necessarily include some estimates which are based upon Management's judgment.
Management is also responsible for establishing and maintaining a system of
internal controls to provide reasonable assurance that assets are safeguarded,
transactions are properly executed and financial records are adequate and
reliable for the preparation of financial statements.
The system of internal controls, while restricted due to a very small number of
employees, provides for certain divisions of responsibilities. Management
monitors the system for compliance and performs analytical reviews for
reasonableness. Management believes that, as of December 31, 1995, the
Company's system of internal controls is adequate to accomplish the objectives
discussed herein.
The Audit Committee of the Board of Directors meets periodically with
Management and the independent certified public accountants to review matters
relating to the quality of financial reporting, internal accounting control and
the results of the annual independent audit. The independent certified public
accountants have direct and unlimited access to the Audit Committee with or
without Management present.
The accompanying financial statements have been examined by KPMG Peat Marwick
LLP, independent certified public accountants, in accordance with generally
accepted auditing standards. Their examination includes a study and evaluation
of the Company's system of internal accounting controls in order to establish a
basis for reliance thereon in determining the nature, extent and timing of
auditing procedures required to support their opinion on the financial
statements.
H. Thomas Webb III James E. Traynor
President Vice President
<PAGE> 9
Independent Auditors' Report
FIRST CAROLINA INVESTORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
The Directors and Stockholders
First Carolina Investors, Inc.
We have audited the accompanying consolidated statement of assets and
liabilities of First Carolina Investors, Inc. and subsidiaries, including the
schedule of portfolio investments as of December 31, 1995 and the related
consolidated statement of operations, and the statement of changes in net
assets at December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit 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 are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used, significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Carolina
Investors, Inc. and subsidiaries as of December 31, 1995, the results of their
operations and the change in net assets for the year then ended, in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Charlotte, North
Carolina February 21, 1996.
<PAGE> 10
FIRST CAROLINA INVESTORS, INC. & SUBSIDIARIES
Consolidated Statement of Assets and Liabilities
December 31, 1995
<TABLE>
<CAPTION>
Assets
<S> <C>
Investments in securities, at value (note 2)
(cost of $14,037,955) $56,892,025
Cash, including short term
investments of $1,014,998 1,342,225
Mortgage loans, secured by real estate (note 3) 136,320
Real estate (note 4) 9,649,000
Investment in joint venture (note 5) 520,000
Accrued dividend and interest receivable 141,663
Other assets (note 6) 2,044,406
-----------
Total assets 70,725,639
-----------
Liabilities
Accounts payable and accrued liabilities (note 8) 4,338,136
Federal and state income taxes payable (note 9) 48,863
Deferred income taxes payable (note 9) 17,997,287
-----------
Total liabilities 22,384,286
-----------
Deferred Income (note 10) 35,808
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Net Assets $48,305,545
===========
Net assets per share (3,500,000 no par value common
shares authorized, 1,506,542 shares issued and
1,099,646 shares outstanding) (note 12) $43.93
===========
</TABLE>
See accompaning notes to consolidated financial statements
<PAGE> 11
FIRST CAROLINA INVESTORS, INC. & SUBSIDIARIES
Consolidated Statement of Operations
For the year ended December 31, 1995
<TABLE>
<S> <C>
INCOME
Dividends $ 672,238
Interest on mortgage loans 92,803
Gain on sale of real estate 2,463,376
Equity in earnings of
joint venture 133,651
Other (note 2) 565,262
-----------
Total income 3,927,330
-----------
EXPENSES
General and administrative 1,102,335
Professional fees 92,230
Sales and marketing 434,712
Interest 1,652
Other 538,915
-----------
Total expenses 2,169,844
-----------
Earnings before income taxes and realized
and unrealized appreciation on investments 1,757,486
Provision for income taxes (note 9) (487,000)
-----------
Net income before realized and unrealized
appreciation on investments 1,270,486
Gain realized on investments in other companies
(net of income tax provision of $123,000) 192,910
Change in unrealized appreciation of investments
for the period (net of deferred taxes of $6,463,413) 10,109,432
-----------
Net increase in net assets resulting
from operations $11,572,828
===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 12
FIRST CAROLINA INVESTORS, INC. & SUBSIDIARIES
Consolidated Statement of Changes in Net Assets
For the year ended December 31, 1995
<TABLE>
<S> <C>
Increase in net assets from operations
Investment income, net $ 1,270,486
Realized gain on investments 192,910
Change in unrealized appreciation 10,109,432
-----------
Net increase in net assets resulting
from operations 11,572,828
Distributions to shareholders of $0.60 per
share from investment income, net (646,018)
Treasury shares purchased (608,480)
-----------
Total increase 10,318,330
Net assets
Beginning of year 37,987,215
-----------
End of year $48,305,545
===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 13
FIRST CAROLINA INVESTORS, INC. & SUBSIDIARIES
INVESTMENTS IN SECURITIES
December 31, 1995
<TABLE>
<CAPTION>
Fair
No. Shares Value
---------- -----
<S> <C> <C>
Common Stocks - 100%
Banking and insurance - 80.9%
First Empire State Corporation 200,000 $43,600,000
Merchants Group, Inc. 135,000 2,396,250
Shipbuilding - 7.2%
Todd Shipyards Corporation 700,000 4,112,500
Manufacturing - 4.9%
American Precision Industries, Inc. 250,000 2,781,250
Transportation and natural resources - 7.0%
Oglebay Norton Company 80,000 2,980,000
Exclon-Esk Co. 41,600 998,400
Other - 0.0% 23,625
-----------
Total - 100% (cost $14,037,955) $56,892,025
===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 14
FIRST CAROLINA INVESTORS, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995
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(1) Summary of significant accounting policies, financial statement
presentation and organization
(a) Organization
First Carolina Investors, Inc. was organized December 2, 1971
and subsequently incorporated in the state of Delaware July 1,
1987. On January 3, 1995 First Carolina Investors, Inc.
registered as a non- diversified, closed-end management
investment company under the Investment Company Act of 1940.
(b) Principles of consolidation and financial statement
presentation
The accompanying consolidated financial statements include
First Carolina Investors, Inc. and its subsidiaries (the
Company), all of which are wholly-owned. In consolidation, all
significant intercompany accounts and transactions have been
eliminated.
The Company became an investment company on January 3, 1995,
and accordingly has prepared its consolidated financial
statements on a fair value basis. Prior to this time the
Company prepared its consolidated financial statements on a
historical cost basis. Consequently the Company has not
presented comparative consolidated financial statements as of
December 31, 1995. Prior period information is available by
referring to quarterly filings on Form 10-Q, annual filing on
Form 10-KSB and reports to stockholders.
As a result of becoming an investment company, all investments
are required to be carried at fair value. Unrealized
appreciation and/or depreciation is included in the statement
of operations, net of the effective tax rate, to arrive at the
change in net assets. The effect of the change on January 3,
1995 was to increase the fair value of real estate by
$6,002,591, increase the deferred tax payable by $2,485,345,
and to increase net assets by $3,882,642 or $3.55 per share.
The unrealized appreciation as of January 3, 1995 was
$19,163,420 net of tax.
(c) Security valuation
Investments in securities traded on a national securities
exchange (or reported on the NASDAQ national market) are stated
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
stated at the last quoted bid price.
(d) Real estate
The Board of Directors and management of the Company value its
real property investments at estimated fair value. Procedures
utilized to determine the estimated fair value include
appraisals by an independent appraiser, estimated net cash
flows, utilization of fair market comparables in existing
subdivisions developed by the Company and other market
comparables. Because of the inherent uncertainty of valuation,
the estimate of fair value may differ significantly from the
values that would have been used had a ready market existed for
the real estate, and the difference could be material.
The Company accounts for sales of real estate in accordance
with Statement of Financial Accounting Standards No.66,
"Accounting for Sales of Real Estate."
(e) Investment in joint venture
The Company has an interest in a joint venture which is engaged
in the development and sale of real estate. The Board of
Directors and management have used both fair market comparables
in the existing subdivision developed by the venture and
discounted net cash flows in valuing its investment at its
estimated fair value.
<PAGE> 15
(f) Income taxes
The Company is subject to Federal and state corporate income
taxes. The Company files a consolidated Federal income tax
return. The Company accounts of income taxes in accordance
with the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes."
Deferred income taxes payable have been increased to reflect
the estimated Federal and state income tax liabilities on
unrealized gains in real estate, investments in other companies
and investment in joint venture in the accompanying
Consolidated Statement of Assets and Liabilities.
(g) Distributions to Shareholders
Dividends payable to shareholders are recorded on the
ex-divided date.
(h) Management's use of estimates
The preparation of financial statements in conformity with
generally accepted account principals requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, revenues and expenses, and
disclosure of contingent assets and liabilities at the date of
the financial statements. Actual results may differ from these
estimates.
(i) Other
The Company follows the industry practice of recording security
transactions on the trade date. Interest income is recognized
on the accrual basis. Dividend income is recognized on the
ex-dividend date.
(2) Investments in other companies
The Company's investments in the common stock of financial and other entities,
which are stated at market value, are as follows:
December 31, 1995
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Number % of Holding Holding Fair Dividend
of shares Net Assets Cost Gains Losses Value Income
--------- ---------- ----------- ---------- ---------- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
First Empire
State Corp 200,000 90.3 $ 3,180,120 40,419,880 - 43,600,000 500,000
Oglebay Norton Company 80,000 6.2 2,244,128 735,872 - 2,980,000
96,000
Todd Shipyards Corp. 700,000 8.5 3,469,036 643,464 - 4,112,500
- -
American Precision 250,000 5.8 2,327,581 453,669 - 2,781,250 34,088
Merchants Group, Inc. 135,000 5.0 2,051,021 345,229 - 2,396,250 19,750
Exolon-Esk Co. 41,600 2.0 744,175 254,225 - 998,400 -
Miscellaneous 21,894 1,731 - 23,625 -
----------- ---------- ---------- ---------- ----------
$14,037,955 42,854,070 - 56,892,025 649,838
=========== ========== =========== ========== ==========
</TABLE>
Purchases and sales of investment securities were $4,321,462 and $632,894
respectively. The net gain on sale of investments in other companies for the
year ended December 31, 1995 was $192,910. Dividend income of $22,400 was
received on securities sold during 1995. The aggregate cost of investments is
approximately the same for Federal income tax purposes as reflected above.
Investments not paying dividends are considered non-income producing.
During 1995 brokerage commissions of $25,782 were paid to Trubee, Collins &
Co., Inc. (Trubee, Collins) of which Brent D. Baird, Chairman of the Board and
an affiliated person of the Company, is an employee. During 1995 the Company
executed all of its transactions involving investment securities through
Trubee, Collins.
(3) Mortgage Loans
The Company's investments in mortgage loans as of December 31, 1995 are
summarized as follows:
<TABLE>
<CAPTION>
1995
----------
<S> <C>
Permanent loans on condominiums $ 117,873
Junior loans on lots (note 10) 28,750
Unearned discount ( 10,303)
----------
Total mortgage loans, net $ 136,320
==========
</TABLE>
<PAGE> 16
(4) Real estate
The estimated fair value of real estate owned at December 31, 1995 is
$9,649,000 and consists of 324 acres of land held for investment and 53
developed lots.
The aggregate cost for Federal income tax purposes is $5,628,000. Land held
for investment is considered non-income producing.
(5) Investment in joint venture
At December 31, 1995 the Company has a 1/3 ownership interest in a joint
venture Goodsell-Carolinas. The Company's initial investment in and all
advances to the venture have been repaid.
The venture owns 13 lots at a cost of $650,458 and a fair value of $1,560,000
at December 31, 1995. The Company's cost basis in the venture is $214,947.
(6) Other assets
The components of other assets at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
1995
-----------
<S> <C>
Deferred compensation, funded $1,549,869
Sales center 492,080
Miscellaneous 2,457
-----------
$2,044,406
===========
</TABLE>
The deferred compensation includes $1,312,000 owed to affiliated persons
pursuant to a deferred compensation plan. The balance of deferred compensation
is owed to two former directors. The deferred compensation has accrued over
twelve years.
(7) Note payable to bank
At December 31, 1995 the Company had a $5,000,000 line of credit with a bank.
The credit line, which is unsecured, is payable on demand and is subject to a
quarterly review by the bank. Borrowing under this credit line bear interest
at the prime rate (8.5% at December 31, 1995). There was no outstanding bank
indebtedness at December 31, 1995, and for the year ended the Company was in
compliance with all covenants of said agreement.
Additional information relating to bank debt is as follows:
<TABLE>
<CAPTION>
1995
----------
<S> <C>
Weighted average interest rate of indebtedness
outstanding during the year 8.5 %
----------
Maximum amount of indebtedness outstanding at
any month end during the year $ 200,000
----------
Approximate average aggregate indebtedness
outstanding during the year $ 15,000
==========
</TABLE>
(8) Accounts payable and accrued liabilities
The components of accounts payable and accrued liabilities at December 31,1995
are as follows:
<TABLE>
<CAPTION>
1995
----------
<S> <C>
Trade accounts payable $2,331,197
Deferred compensation (note 6) 1,549,869
Dividends payable 321,877
Miscellaneous accruals and payable 78,105
Cash held in escrow 57,088
----------
$4,338,136
==========
</TABLE>
<PAGE> 17
(9) Income taxes
Total income tax expense for the year ended December 31, 1995 is allocated as
follows:
<TABLE>
<CAPTION>
Earnings
before
Income Tax Income Tax
----------- ----------
<S> <C> <C>
Investment income $ 1,757,486 487,000
Gains realized on investments in other companies 315,910 123,000
Change in unrealized appreciation
of investments 16,572,845 6,463,413
---------- ----------
$18,646,241 7,073,413
=========== ==========
</TABLE>
The components of Federal and state income tax expense from continuing
operations are summarized as follows:
<TABLE>
<S> <C>
Current:
Federal $ 444,552
State 163,919
----------
608,471
Deferred 6,464,942
----------
$7,073,413
==========
</TABLE>
Income tax expense for the year ended December 31, 1995 was different than the
amounts computed by applying the statutory Federal income tax rate to earnings
before income taxes. The sources of these differences and the tax effects of
each are as follows:
<TABLE>
<CAPTION>
%
--------
<S> <C> <C>
Income tax expense at Federal rate $6,339,722 34.0%
Change in the beginning of the year
balance of the valuation allowance
for deferred tax assets allocated
to income tax expense ( 130,000) ( .7%)
State income tax net of Federal tax
benefit 950,005 5.1%
Dividend exclusion (166,770) ( .9%)
Other, net 80,456 .4%
---------- ------
Provision for income taxes $7,073,413 37.9%
========== ======
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred
tax liabilities at December 31, 1995 are presented below:
Deferred tax assets:
Deferred compensation liability, principally
due to accrual for financial reporting purposes $ 638,961
State net operating loss carryforwards 58,074
-------------
697,035
Total gross deferred tax assets
Less valuation allowance (60,000)
-------------
Net deferred tax assets 637,035
-------------
Deferred tax liabilities:
Real estate investments, principally due to
unrealized gains (1,679,475)
Investments in other companies, principally due
to unrealized gains on securities (16,713,975)
Other (240,872)
-------------
Total gross deferred tax liabilities (18,634,322)
-------------
Net deferred tax liability ($17,997,287)
=============
</TABLE>
<PAGE> 18
The valuation allowance for deferred tax assets as of January 1, 1995 was
$190,000. The net change in the total valuation allowance for the year ended
December 31, 1995 was a decrease of $130,000. The valuation allowance primarily
relates to certain state temporary differences and state net operating loss
carryforwards. It is management's belief that the realization of the deferred
tax asset is more likely than not based upon the Company's history of taxable
income and estimated future income.
Federal and state income tax returns of the Company for 1992 and subsequent
years are subject to examination by the Internal Revenue Service and various
other taxing authorities.
(10) Deferred income
When sales of real estate do not meet the requirements for profit recognition,
the gain on the sale is deferred until the requirements for recognition have
been met. At December 31, 1995, the Company had deferred income relating to
such sales of $23,738. Also included in deferred income at December 31, 1995 is
$12,070 of interest on loans to a joint venture which was deferred in
proportion to the Company's ownership interest.
(11) Stock option plan
During 1987 options for 45,000 shares of common stock were awarded to certain
employees. These options are exercisable at the rate of 20% per year beginning
July 1, 1988 at a price of $12.75 per share which was equal to the market price
at the date of the adoption of the amended plan. At December 31, 1995, all the
options are fully vested and exercisable but no options have been exercised.
(12) Net assets per share
Net assets per share are based on the number of shares of common stock and
common stock equivalents outstanding, after deducting treasury stock, 1,099,646
on December 31, 1995. The computation assumes that outstanding stock options
were exercised and the proceeds used to purchase common stock. This results in
the issuance of an additional 27,724 shares of common stock.
At December 31, 1995 accumulated undistributed investment income, net is
$624,468; accumulated undistributed net realized gains on investment
transactions are $192,910 and the net unrealized appreciation in value of
investments is $25,390,210.
(13) Share repurchase program
At December 31, 1995 the Company has repurchased 434,620 shares as treasury
shares at a cost of $8,112,964. During 1995 the Company repurchased 21,626
shares at an average cost of $28.14 per share. Said repurchase price
represents a weighted average discount of 26% per share relative to net asset
value.
(14) Commitments and contingencies
The Company has $250,000 of undisbursed contractual commitments in connection
with real estate development. In order to protect its investments, the Company
may be required to furnish amounts in excess of its current contractual
investments or commitments. The future development of the Company's land
holdings may require substantial expenditures.
The Company is involved in various legal actions arising in the ordinary course
of business. In the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on the Company's financial
position, results of operation, or liquidity.
<PAGE> 19
<TABLE>
<CAPTION>
Selected Per Share Data and Ratios
For the Year ended December 31, 1995
- ----------------------------------------------------------------------------------------------------
Per Share Data and Ratios* 1995
- -------------------------- ------
<S> <C>
Investment income $3.55
Expenses (including income taxes) (2.40)
------
Investment income - net 1.15
Distributions from investment income - net (0.58)
Net realized and unrealized gain on securities 9.31
Share transactions 0.08
----
Net increase in net asset value 9.96
Net asset value:
Beginning of year 33.97
-------
End of year $43.93
=======
Ratios
- ------
Ratio of expenses to average net assets 6.30%
Ratio of investment income - net to average net assets 3.01%
Portfolio turnover 1.36%
</TABLE>
*Per share data is based upon 1,106,052 shares which is the average number of
shares outstanding for the year ended December 31, 1995. The computation
assumes that outstanding stock options were exercised and the proceeds used to
purchase common stock.
<TABLE>
<CAPTION>
Computation of Net Asset Value per Share
Primary and Fully Diluted
For the Year Ended December 31, 1995
- ----------------------------------------------------------------------------------------------------
Primary
- -------
<S> <C>
Net Asset $48,305,545
===========
Shares Outstanding 1,071,922
===========
Net Asset Value per Share $45.06
======
Fully Diluted
- -------------
Options 45,000
Exercise Price $12.75
Market Price 33.21 (17,276)
-----------
Additional Shares Attributable to
Stock Options 27,724
Shares outstanding 1,071,922
-----------
1,099,646
===========
Net Asset Value per Share $43.93
======
</TABLE>
<PAGE> 20
First Carolina Investors, Inc.
- --------------------------------------------------------------------------------
Directors
Brent D. Baird*
Private Investor
Bruce C. Baird
President
Belmont Management Co., Inc.
Patrick W.E. Hodgson*+
Chairman & CEO
Todd Shipyards Corporation
Theodore E. Dann, Jr. +
Secretary, Treasurer & General Counsel
Ferro Alloys Services, Inc.
H. Thomas Webb III*
President
First Carolina Investors, Inc.
*Member of Executive Committee
+Member of the Audit Committee
Officers:
Brent D. Baird
Chairman
H. Thomas Webb III
President
James E. Traynor
Vice President, Secretary & Treasurer
Karen K. Sides
Assistant Secretary
Registrar, Transfer and Disbursing Agent
Continental Stock Transfer and Trust Company
2 Broadway
New York, NY 10004
General Counsel
Waggoner, Hamrick, Hasty & Montieth
First Union Center, Suite 2500
Charlotte, NC 28282
Auditors
KPMG Peat Marwick, LLP
2800 Two First Union Center
Charlotte, NC 28282
