<PAGE> 1
FIRST CAROLINA INVESTORS, INC.
REPORT TO STOCKHOLDERS
JUNE 30, 1998
<PAGE> 2
FIRST CAROLINA INVESTORS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
Investments in securities, at value (cost of $15,861,656 in
1998 and $12,424,136 in 1997)............................. $125,931,488 $79,093,875
Cash, including short term investments of $1,714,039 in 1998
and $1,932,507 in 1997.................................... 1,883,983 2,669,192
Mortgage loans, secured by real estate...................... 99,081 196,807
Real estate................................................. 4,439,000 10,888,000
Investment in joint venture................................. 250,000 450,000
Amounts due from sale of security........................... 5,304,506 --
Accrued dividend and interest receivable.................... 168,172 162,853
Other assets................................................ 2,673,003 2,521,017
------------ -----------
Total assets...................................... $140,749,233 $95,981,744
------------ -----------
LIABILITIES
Accounts payable and accrued liabilities.................... $ 3,391,817 $ 2,952,863
Federal and state income taxes payable...................... 1,931,773 355,321
Deferred income taxes payable............................... 42,975,680 27,985,478
------------ -----------
Total liabilities................................. 48,299,270 31,293,662
------------ -----------
Deferred Income............................................. 119,500 110,479
------------ -----------
Net Assets.................................................. $ 92,330,463 $64,577,603
============ ===========
Net assets per share (3,500,000 no par value common shares
authorized, 1,506,542 shares issued, 1,073,366 and
1,084,516 shares outstanding in 1998 and 1997
respectively)............................................. $ 86.02 $ 59.55
============ ===========
</TABLE>
The Consolidated Financial Statements should be read in conjunction with the
1997 Annual Report.
1
<PAGE> 3
FIRST CAROLINA INVESTORS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
INCOME
Dividends................................................... $ 483,100 $ 405,763
Interest on mortgage loans.................................. 202,857 8,014
Gain on sale of real estate................................. 153,316 397,061
Equity in earnings of joint venture......................... 156,990 142,336
Other....................................................... 137,790 174,954
----------- ----------
Total income...................................... 1,134,053 1,128,128
----------- ----------
EXPENSES
General and administrative.................................. 161,128 321,668
Professional fees........................................... 27,793 46,330
Sales and marketing......................................... 4,370 51,307
Other....................................................... 68,415 93,341
----------- ----------
Total expenses.................................... 261,706 512,646
----------- ----------
Earnings before income taxes and realized and unrealized
appreciation on investments............................... 872,347 615,482
Provision for income taxes.................................. (256,000) (174,000)
----------- ----------
Net income before realized and unrealized appreciation on
investments............................................... 616,347 441,482
Gain realized on investments in other companies (net of
income tax provision of $2,069,000 in 1998 and $661,000 in
1997)..................................................... 3,235,506 1,032,755
Change in unrealized appreciation of investments for the
period, net of deferred taxes............................. 8,490,680 5,905,579
----------- ----------
Net increase in net assets resulting from
operations...................................... $12,342,533 $7,379,816
=========== ==========
</TABLE>
The Consolidated Financial Statements should be read in conjunction with the
1997 Annual Report.
2
<PAGE> 4
FIRST CAROLINA INVESTORS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Increase in net assets from operations
Investment income, net.................................... $ 616,347 $ 441,482
Realized gain on investments, net......................... 3,235,506 1,032,755
Change in unrealized appreciation, net.................... 8,490,680 5,905,579
----------- -----------
Net increase in net assets resulting from operations... 12,342,533 7,379,816
Distributions to shareholders of $.50 per share
In 1998 and in 1997 from investment income, net........... (518,731) (526,421)
Treasury shares purchased................................... (243,428) (566,541)
----------- -----------
Total increase............................................ 11,580,374 6,286,854
Net assets
Beginning of year......................................... 80,750,089 58,290,749
----------- -----------
End of period............................................. $92,330,463 $64,577,603
=========== ===========
</TABLE>
The Consolidated Financial Statements should be read in conjunction with the
1997 Annul Report.
3
<PAGE> 5
FIRST CAROLINA INVESTORS, INC. & SUBSIDIARIES
INVESTMENTS IN SECURITIES
JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
-------------------------- -------------------------
COMMON STOCKS -- 100% NO. SHARES VALUE NO. SHARES VALUE
- --------------------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Financial Services -- 86% in 1998 and
89% in 1997
M & T Bank Corporation............... 190,000 $105,260,000 200,000 $67,400,000
Merchants Group, Inc................. 135,000 3,189,375 135,000 2,767,500
Manufacturing -- 5% in 1998 and 7% in
1997
Exolon -- Esk Co..................... 64,200 2,407,500 52,000 1,586,000
Todd Shipyards Corporation........... 700,000 3,893,750 700,000 2,887,500
American Precision Industries,
Inc............................... -- -- 46,600 902,875
Services -- 4% in 1998
Ecology & Environment, Inc........... 306,300 3,063,000 -- --
Barrister Information Systems,
Inc............................... 1,598,100 1,797,862 -- --
Diversified -- 5% in 1998 and 4% in
1997
Oglebay Norton Company............... 160,000 6,320,000 80,000 3,550,000
------------ -----------
Total -- 100% (cost of $15,861,656 in
1998 and $12,424,136 in 1997)........ $125,931,487 $79,093,875
============ ===========
</TABLE>
The Consolidated Financial Statements should be read in conjunction with the
1997 Annual Report.
4
<PAGE> 6
FIRST CAROLINA INVESTORS, INC., & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
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 on 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. Financial information for periods prior
to January 3, 1995 is available by referring to quarterly filings on Form 10-Q,
annual filing on Form 10-KSB and reports to stockholders.
(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.
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. The venture owns 7 lots at a cost of $283,893 at June 30, 1998 and
owned 9 lots at a cost of $415,772 at June 30, 1997.
(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 for
income taxes in accordance with the provisions of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes.
5
<PAGE> 7
FIRST CAROLINA INVESTORS, INC., & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Statements of Assets and Liabilities.
(G) Management's use of estimates
The preparation of financial statements in conformity with generally
accepted accounting 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.
(H) Other
The Company follows the industry practice of recording security
transactions on the trade date. Dividend income is recognized on the ex-dividend
date. Interest income is recognized on the accrual basis.
2. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities were $2,686,581 and $5,304,506
respectively for the six month period ended June 30, 1998 and $265,651 and
$3,573,603 respectively in 1997. The net gain on sale of investments in other
companies was $3,235,506 in 1998 and $1,032,755 in 1997.
The gross unrealized gain on investments in other companies totaled
$110,362,897 and $67,251,275 for the 6 months ended June 30, 1998 and 1997,
respectively. Gross unrealized losses were $293,066 and $581,536 at June 30,
1998 and 1997.
3. MORTGAGE LOANS
The Company's investments in mortgage loans as of June 30, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------- ---------------------------------
INTEREST MATURITY OUTSTANDING INTEREST MATURITY OUTSTANDING
RATE DATE BALANCE RATE DATE BALANCE
-------- -------- ----------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Permanent first mortgage
loans on condominiums...... 16% 12/2002 $79,581 16% 12/2002 $ 81,707
Junior mortgage loans secured
by residential lots........ 8 12/98 19,500 8 12/98 115,100
------- --------
$99,081 $196,807
======= ========
</TABLE>
4. REAL ESTATE
The estimated fair value of real estate owned at June 30, 1998 and 1997,
respectively is $4,439,000 and $10,888,000. It consists of 140 acres of land
held for investment for both periods and 5 developed lots at June 30, 1998 and
26 developed lots at June 30, 1997. The aggregate cost for Federal income tax
purposes is approximately $2,600,000 at June 30, 1998 and $4,500,000 1997
respectively. Land held for investment is considered non-income producing.
6
<PAGE> 8
FIRST CAROLINA INVESTORS, INC., & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. OTHER ASSETS
The components of other assets at June 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred compensation, funded............................... $1,967,359 $1,693,632
Sales center................................................ 561,759 511,033
Model home.................................................. -- 304,595
Miscellaneous............................................... 143,885 11,757
---------- ----------
$2,673,003 $2,521,017
========== ==========
</TABLE>
The deferred compensation includes $1,724,000 and $1,510,000 at June 1998
and 1997 respectively, that is owed to affiliated persons pursuant to a deferred
compensation plan. The balance of deferred compensation is owed to a former
director. The deferred compensation has accrued over fourteen years.
Contributions are no longer being made to the plan.
6. LINE OF CREDIT
At June 30, 1998 the Company had a $1,000,000 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. Borrowings under this credit line bear interest at
the prime rate.
Additional information relating to bank debt is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Weighted average interest rate of indebtedness outstanding
during the year........................................... -- --
Maximum amount of indebtedness outstanding at any month end
during the year........................................... -- --
--- ---
Approximate average aggregate indebtedness outstanding
during the period......................................... -- --
--- ---
</TABLE>
For the six months ended June 30, 1998 and 1997 respectively, there was no
bank indebtedness.
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The components of accounts payable and accrued liabilities at June 30, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Trade accounts payable...................................... $ 911,850 $ 823,191
Deferred compensation (note 5).............................. 1,967,359 1,693,632
Dividends payable........................................... 259,315 262,741
Miscellaneous accruals and payable.......................... 242,555 160,017
Cash held in escrow......................................... 10,738 13,282
---------- ----------
$3,391,817 $2,952,863
========== ==========
</TABLE>
8. 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 1,073,366
and 1,084,516 at June 30, 1998 and 1997, respectively. The computation assumes
that outstanding stock options were exercised and the proceeds used to purchase
common stock resulting in the issuance of an additional 36,804 shares of common
stock at June 30, 1998 and 33,544 shares at June 30, 1997.
7
<PAGE> 9
FIRST CAROLINA INVESTORS, INC., & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At June 30, 1998, accumulated undistributed net investment income is
$2,974,954; accumulated and undistributed net realized gains on investment
transactions are $4,728,556 and the net unrealized appreciation in value of
investments is $64,041,109.
9. SHARE REPURCHASE PROGRAM
At June 30, 1998 the Company has repurchased 469,980 shares as treasury
shares at a cost of $9,838,876. On April 24, 1998, 468,480 treasury shares were
cancelled and retired. During 1998 through June 30, the Company has repurchased
3,700 shares at an average cost of $65.79 per share on the Boston Stock
Exchange, the exchange on which the Company's shares are traded. Said repurchase
price represents a weighted average discount of 16.94% per share relative to net
asset value. At the May 29, 1998 Board of Directors meeting, the directors
authorized the continuation of the share repurchase program.
10. DISTRIBUTION TO STOCKHOLDERS
Two dividends of $0.25 each per share were declared during the six months
ended June 30, 1998 and 1997, respectively. The dividends are taxable to
stockholders as ordinary income.
11. RENUMERATION
Each Director receives fees of $2,500 per directors' meeting attended and
$100 per audit committee meeting attended. The Chairman also receives a $1,500
monthly salary. For the six months ended June 30, 1998 and 1997 directors' fees
totaled $25,200 and $29,200, respectively.
Aggregate renumeration paid to or set aside for all officers during the six
month periods was $395,169 for 1998 and 1997.
The Company paid brokerage fees of $8,995 and $10,175 to Trubee, Collins &
Co., Inc. for the six months ended June 30, 1998 and 1997, respectively. Mr.
Baird, Chairman of the Company, is an employee of Trubee, Collins & Co., Inc.
12. 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. All options are
fully vested and exercisable but no options have been exercised.
13. COMMITMENTS AND CONTINGENCIES
At June 30, 1998 the Company has approximately $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 additional 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 operations, or liquidity.
8
<PAGE> 10
FIRST CAROLINA INVESTORS, INC., & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMPUTATION OF NET ASSET VALUE PER SHARE
PRIMARY AND FULLY DILUTED
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Primary
Net Assets.................................................. $92,330,463 $64,577,603
=========== ===========
Shares Outstanding.......................................... 1,036,562 1,050,962
=========== ===========
Net Asset Value per Share................................... $ 89.07 $ 61.45
=========== ===========
Fully Diluted
Options..................................................... 45,000 45,000
Exercise Price of $12.75
Market Price of $70.00 in 1998 and $50.13 in 1997........... $ (8,196) $ (11,446)
----------- -----------
Additional Shares Attributable to Stock Options............. 36,804 33,554
Shares Outstanding.......................................... 1,036,562 1,050,962
----------- -----------
1,073,366 1,084,516
Net Asset Value per Share................................... $ 86.02 $ 59.55
=========== ===========
</TABLE>
Annual Meeting Summary
On May 29, 1998 the annual stockholders meeting was held in Buffalo, New
York. At the meeting, six directors were elected to serve a one year term. In
addition, the appointment of the Company's independent public accountants was
ratified. The votes were as follows:
<TABLE>
<CAPTION>
DIRECTORS NAME FOR WITHHELD
-------------- ------- --------
<S> <C> <C>
Brent D. Baird.............................................. 914,703 425
Bruce C. Baird.............................................. 914,703 425
Theodore E. Dann, Jr........................................ 914,701 427
Patrick W. E. Hodgson....................................... 914,703 425
James E. Traynor............................................ 914,701 427
H. Thomas Webb III.......................................... 914,703 425
</TABLE>
To ratify the appointment of KPMG Peat Marwick LLP the votes were as
follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C>
914,201 202 725
</TABLE>
9
<PAGE> 11
FIRST CAROLINA INVESTORS, INC., & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SELECTED PER SHARE DATA AND RATIOS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Per Share Data and Ratios*
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Investment income........................................... $ 1.06 $ 1.04
Expenses (including income taxes)......................... (.48) (.63)
------ ------
Investment income, net.................................... .58 .41
Distributions from investment income, net................. (.48) (.48)
------ ------
Net realized and unrealized gain on securities............ 10.79 6.37
Share transactions.......................................... .06 .01
------ ------
Net increase in net asset value............................. 10.95 6.31
Net asset value:
Beginning of year......................................... 75.07 53.24
------ ------
End of period............................................. $86.02 $59.55
====== ======
Ratios
Ratio of expenses to average net assets................... 0.64% 1.13%
Ratio of investment income, net, to average net assets.... 1.39 0.73
Portfolio turnover........................................ 2.44 0.04
</TABLE>
* Per Share data is based upon the average number of shares outstanding for the
6 month periods. The computation assumes that outstanding stock options were
exercised and the proceeds used to purchase common stock.
10
<PAGE> 12
DIRECTORS
Brent D. Baird*
Private Investor
Bruce C. Baird
President
Belmont Contracting Co., Inc.
Patrick W.E. Hodgson*+
President of Cinnamon Investments Ltd. and
Chairman Todd Shipyards Corporation
Theodore E. Dann, Jr.+
President
Buffalo Technologies
James E. Traynor+
President
Clear Springs Development Co., LLC
H. Thomas Webb III*
Senior Vice-President
Crescent Resources, Inc.
OFFICERS
Brent D. Baird
Chairman
H. Thomas Webb III
President
Bruce C. Baird
Vice President, Secretary & Treasurer
Cynthia Raby
Assistant Secretary
REGISTRAR, TRANSFER AND DISBURSING AGENT
Continental Stock Transfer and Trust Company
2 Broadway
New York, NY 10004
AUDITORS
KPMG Peat Marwick LLP
2800 Two First Union Center
Charlotte, NC 28282
* Member of Executive Committee
+ Member of the Audit Committee
11
