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SIGNATURE H. THOMAS WEBB III
TITLE PRESIDENT
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
12/31/97 CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE 1997 ANNUAL REPORT
AND FORM N-SAR AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 1997
ANNUAL REPORT TO STOCKHOLDERS AND FORM N-SAR.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 13,334,195
<INVESTMENTS-AT-VALUE> 109,249,600
<RECEIVABLES> 270,988
<ASSETS-OTHER> 4,665,000
<OTHER-ITEMS-ASSETS> 9,198,659
<TOTAL-ASSETS> 123,384,247
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 42,634,158
<TOTAL-LIABILITIES> 42,634,158
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 1,075,700
<SHARES-COMMON-PRIOR> 1,094,822
<ACCUMULATED-NII-CURRENT> 1,970,131
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,493,050
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 55,765,228
<NET-ASSETS> 80,750,089
<DIVIDEND-INCOME> 823,391
<INTEREST-INCOME> 16,661
<OTHER-INCOME> 4,991,927
<EXPENSES-NET> 2,814,946
<NET-INVESTMENT-INCOME> 3,017,033
<REALIZED-GAINS-CURRENT> 979,931
<APPREC-INCREASE-CURRENT> 20,653,701
<NET-CHANGE-FROM-OPS> 24,650,665
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,046,902
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 22,600
<SHARES-REINVESTED> 3,478<F1>
<NET-CHANGE-IN-ASSETS> 22,459,340
<ACCUMULATED-NII-PRIOR> 907,207
<ACCUMULATED-GAINS-PRIOR> 513,119
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,814,946
<AVERAGE-NET-ASSETS> 66,536,841
<PER-SHARE-NAV-BEGIN> 53.24
<PER-SHARE-NII> 2.78
<PER-SHARE-GAIN-APPREC> 19.96
<PER-SHARE-DIVIDEND> .97
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> .06<F2>
<PER-SHARE-NAV-END> 75.07
<EXPENSE-RATIO> 4.23
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>THE 3478 SHARES REINVESTED REPRESENT THE NET CHANGE IN ADDITIONAL SHARES
ATTRIBUTABLE TO STOCK OPTIONS.
<F2>THE .06 PER SHARE RETURN OF CAPITAL INDICATED ABOVE REPRESENTS SHARE
TRANSACTIONS AND NOT A RETURN OF CAPITAL OR OTHER DISTRIBUTION.
</FN>
</TABLE>
<PAGE>
EXHIBIT 99.77b
Board of Directors
First Carolina Investors, Inc.
In planning and performing our audit of the financial statements of First
Carolina Investors, Inc. for the year ended December 31, 1997, we considered its
internal control structure, including procedures for safeguarding securities,
in order to determine our auditing procedures for the purpose of expressing our
opinion on the financial statements and to comply with the requirements of Form
N-SAR, not to provide assurance on the internal control structure.
The management of First Carolina Investors, Inc. is responsible for
establishing and maintaining an internal control structure. In fulfilling this
responsibility, estimates and judgments by management and required to assess
the expected benefits and related costs of internal control structure policies
and procedures. Two of the objectives of an internal control structure are to
provide management with reasonable, but not absolute, assurance that assets are
safeguarded against loss from unauthorized use or disposition and that
transactions are executed in accordance with management's authorization and
recorded properly to permit preparation of financial statements in conformity
with generally accepted accounting principles.
Because of inherent limitations in any internal control structure, errors or
irregularities may occur and not be detected. Also, projection of any
evaluation of the structure to future periods is subject to the risk that it
may become inadequate because of changes in conditions or that the
effectiveness of the design and operation may deteriorate.
Our consideration of the internal control structure would not necessarily
disclose all matters in the internal control structure that might be material
weakness under standards established by the American Institute of Certified
Public Accountants. A material weakness in a condition in which the design or
operation of the specific internal control structure elements does not reduce
to a relatively low level the risk that errors or irregularities in amounts
that would be material in relation to the financial statements being audited
may occur and not be detected within a timely period be employees in the normal
course of performing their assigned functions. However, we noted no matters
involving the internal control structure including procedures for safeguarding
securities, that we consider to be material weaknesses as defined above as of
December 31, 1997.
This report is solely for the information and use of management and the
Securities and Exchange Commission.
February 18, 1998.
<PAGE>
FIRST CAROLINA INVESTORS, INC.
1 9 9 7
ANNUAL REPORT
<PAGE>
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.
FORM N-SAR
- --------------------------------------------------------------------------------
A copy of the Company's December 31, 1997 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 of Contents
- --------------------------------------------------------------------------------
Letter to Stockholders .......................... 1
Management's Discussion and Analysis of Financial
Condition and Results of Operation .............. 2
Management's Report ............................. 5
Independent Auditor's Report .................... 6
Consolidated Financial Statements ............... 7
Noted to Consolidated Financial Statements ...... 10
Per Share Data and Ratios ....................... 16
Quarterly Stock Prices and Dividends Paid Per Share
- --------------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------------
Quarter First Second Third Fourth
High Bid $50.00 48.50 56.00 60.00
Low Bid $42.00 48.50 48.50 56.00
Cash Dividends $0.25 .25 .25 .25
- --------------------------------------------------------------------------------
1996
- --------------------------------------------------------------------------------
Quarter First Second Third Fourth
High Bid $37.00 37.00 39.00 44.00
Low Bid $34.50 36.50 36.75 38.00
Cash Dividends $0.30 .10 .10 .10
- --------------------------------------------------------------------------------
There were approximately 550 record holders of Shares of Common Stock at January
2, 1998. The stock prices reflect interdealer prices, without retail mark-up,
mark-down, or commission, and may not represent actual transactions.
<PAGE>
Letter to Stockholders
First Carolina Investors, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
TO OUR STOCKHOLDERS:
1997 was an outstanding year for First Carolina Investors, Inc. (FCI). During
the year FCI disposed of most its remaining real estate assets on a favorable
basis. Net income before realized and unrealized appreciation on investments was
$3,017,033 in 1997 versus $921,728 in 1996. The gain realized on investments in
other companies net of tax provisions was $979,931. The net asset value per
share was $75.07 at December 31, 1997 compared to $53.24 at year end 1996.
During the year $1.00 in dividends per share were paid.
The real estate sales were primarily at Providence Country Club where lots were
sold at a pretax gain of $1,190,115. In addition 137 acres of raw land adjacent
to Providence was sold at a gain of $1,962,234. An additional 110 acres were
sold with the recognition of the sale deferred pending the receipt of note
payments due on or before December, 1999. At year end 1997 only 8 lots and 30
acres of raw land remained unsold or not under contract. It is anticipated that
all remaining lots will be sold in 1998.
Two tracts of land in the Park Crossing community were sold in 1997 at a gain of
$864,253. We anticipate additional sales of the remaining Park Crossing acreage
in 1998.
The gain on sale of investments in other companies was derived entirely from the
sale of the company's holdings in American Precision Industries.
Effective December 31, 1997, James Traynor resigned from the Company and H.
Thomas Webb III is no longer salaried. The company anticipates closing its
Providence Country Club office by the end of the first quarter. These actions
should reduce the company operating expenses commensurate with the reduction in
real estate revenues.
The significant increase in the year-end net asset per share is due in large
measure to the increased market valuation of First Empire State Corporation.
This single investment constituted over 75% of FCI's total assets at year end.
At their February 18, 1998 Board meeting, your directors reaffirmed their
commitment to the share repurchase program. During 1997 22,600 shares were
acquired at a cost of $50.64 per share. At the same meeting the directors
authorized a $.25 per share quarterly dividend payable April 15, 1998 to
shareholders of record April 1, 1998.
Respectfully submitted,
/s/ Brent D. Baird
------------------------------
Brent D. Baird
Chairman
/s/ H. Thomas Webb III
------------------------------
H. Thomas Webb III
February 18, 1998 President
1
<PAGE>
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 are recorded at fair value.
1997 OPERATION COMPARED TO 1996
The net asset value of the Company increased by $22,459,340 or $21.83 per share
during 1997 as compared to an increase of $9,985,204 or $9.31 per share during
1996. The increase in net asset value for both periods is primarily attributable
to a significant increase in the market value of the Company's largest security
holding - First Empire State Corporation. During 1997 the value of this
investment increased by $35,400,000 as compared to an increase of $14,000,000
during 1996 . At the end of 1997 the value of the Company's investment in First
Empire State Corporation was $93,000,000.
During both 1997 and 1996 real estate operations were a significant contributor
to earnings. The company's Charlotte real estate investments contributed
$4,016,602 to total income during 1997 as compared to $1,061,606 during 1996.
(See gains on sale of real estate below).
During 1997 the Company completed the sale of its holdings of American Precision
Industries, Inc., selling 240,000 shares at an after tax gain $1,307,980 as
compared to the sale of 60,000 shares in 1996 at an after tax gain of $318,568.
During 1997 the Company made one new investment. The Company purchased 157,300
shares of Ecology and Environment, Inc., at an average cost of $11.01 per share.
Ecology and Environment, Inc. provides international consulting and advice on
environmental matters. The firm is in Lancaster, NY. The Company also increased
its investment in Exolon-Esk Company purchasing 14,500 shares at an average cost
of $29.96.
2
<PAGE>
1997 OPERATIONS COMPARED TO 1996 (CONTINUED)
Net income before realized and unrealized appreciation on investments was
$3,017,033 for 1997 as compared to $921,728 for 1996. The net gain realized on
investments in other companies was $979,931 in 1997 versus $320,209 in 1996. The
increase in net unrealized appreciation of investments was $20,653,701 in 1997
as compared to $9,721,317 in 1996. These components combined to produce a net
increase in net assets resulting from operations of $24,650,665 and $10,963,254
for 1997 and 1996, respectively.
At year end net asset value per share was $75.07 in 1997 and $53.24 in 1996.
Dividend income increased during 1997 as compared to 1996. An increase in the
dividend rate of First Empire State Corporation was the primary reason for the
increase in dividend income. This increase was partially offset by the sale of
the remaining holdings of American Precision Industries, Inc. For additional
information, including a detailed list of dividends paid, see Note 2 of Notes To
Consolidated Financial Statements. At the end of 1997 and 1996 two of the
Company's investees did not pay dividends and are therefore considered
non-income producing.
Interest on mortgage loans was $16,661 during 1997 as compared to $18,524 during
1996. This decrease is attributable to a reduction in the average outstanding
balance of mortgage notes receivable.
Gain on sale of real estate was $4,016,602 during 1997 as compared to $1,061,606
during 1996. During 1997, twenty-eight (28) lots were sold in the Providence
Country Club community at a total gross sales price of $2,119,500 and a gain of
$1,190,115. Also sold during 1997 was 137 acres of undeveloped land in Union
County at a gain of $1,962,235 and 12.5 acres at Park Crossing at a gain of
$864,252. During 1996 twenty-three (23) lots were sold in the Providence Country
Club community at a total gross sales price of $1,862,000 and a gain of
$1,060,606. At December 31, 1997 the Company had eight (8) remaining lots to
sell in the Providence Country Club community, nine acres at Park Crossing and
140 acres in Union County contiguous to Providence Country Club.
Equity earnings of joint venture was $146,965 in 1997 as compared to $139,443 in
1996. The company owns a 1/3 interest in the joint venture Goodsell/Carolinas
Associates. During 1997 the venture sold 3 lots and 1 outparcel at a total gross
sales of $630,000. During 1996 the venture sold 3 lots at a total gross sales
price of $570,000.
Other income was $828,360 during 1997 as compared to $621,496 during 1996. Other
income for 1997 includes $185,000 of income recognized upon receipt of a refund
of 1993 and 1994 North Carolina intangibles tax, net commission income of
$60,000, interest income on short term investments of $162,000, income of
$274,000 attributable to assets held in the deferred compensation plan, fee
income of $71,000 from Providence Country Club operations and miscellaneous
income of $76,000. For 1996 other income includes net commission income of
$71,000, income of $269,000 related to a partial reimbursement of cost
associated with a waste water treatment plant, income of $109,000 attributable
to assets held in the deferred income compensation plan, fee income of $121,000
from Providence Country Club operations and miscellaneous income of $51,000.
General and administrative expense increased significantly in 1997 to $1,302,889
as compared to $792,402 during 1996. For both years personnel costs were the
largest component of the category and totaled approximately $1,061,000 in 1997
as compared to $590,000 in 1996. The reason for the significant increase during
1997 are payments due pursuant to an incentive compensation plan and severance
payments due in conjunction with the closing of the Providence Country Club
operations. Also included in general administrative expenses are various taxes,
principally franchise taxes of $96,000 in 1997 and $82,000 in 1996.
Sales and marketing expenses declined significantly during 1997 and 1996. The
reduction for both years is indicative of the completion of the development of
Providence Country Club, reduced lot inventory levels and, in 1997, the
termination of sales operations at December 31. Sales and marketing expenses for
both years are related to Providence Country Club and include advertising,
promotional, model home and sales office expense.
Other expense increased significantly during 1997 after experiencing a
significant decrease in 1996. Other expenses for 1997 include directors fees and
expenses of $59,000, expenses associated with the Providence Country Club
community of $30,000, expenses of $274,000 which corresponds with and offsets
income earned by assets in the deferred compensation plan, real estate taxes of
$16,000 and miscellaneous expense of $48,000. Other expenses of 1996 include
real estate taxes of $54,000, directors fees and expenses of $42,000,
depreciation of $1,000, expenses associated with the Providence Country Club
community of $38,000, expenses of $109,000 which corresponds with and offsets
income earned by assets in the deferred compensation plan and miscellaneous
expenses of $57,000.
Gain realized on investments in other companies, net of income taxes, was
$979,931 for 1997 as compared to $320,209 for 1996. These amounts are net of
income taxes of $628,836 in 1997 and $204,000 in 1996. The 1997 gain is the
result
3
<PAGE>
of the sale of the company's remaining holdings of American Precision
Industries, Inc. The 1996 gain is a result of the sale of a portion of the
Company's holdings of the previously referred to investee.
INTERNAL AND EXTERNAL SOURCES OF LIQUIDITY
The three major components of the company's assets are investments in other
companies, cash, including short term investments, and real estate.
INVESTMENT IN OTHER COMPANIES
While investment in other companies consist of marketable securities, they are
considered mid to long term investment and are generally not a source of current
liquidity.
REAL ESTATE
Land under contract and land held for investment should generally not be
considered a source of current liquidity. Finished lots are a source for current
liquidity but are no longer a significant source. The general liquidity of any
real estate investment is heavily influenced by 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 quite
favorable during 1997 and 1996. The availability of construction financing has
been good during both years and indications are that the availability will
continue to be good. As of the date of this report, the 1998 real estate market
is expected to remain favorable; however, as the company continues its
transition away from real estate investments, real estate will continue to
become less significant to overall operations.
CASH, INCLUDING SHORT TERM INVESTMENTS
At December 31, 1997, the Company held cash and short term investments of
$6,661,935. The short term investments of $6,163,000 are highly liquid and
accordingly are, in addition to the line of credit discussed below, the
Company's best sources of liquidity.
LINE OF CREDIT
The Company has a $5,000,000 line of credit with the bank. There is no debt
outstanding pursuant to the credit line. The credit line is a readily available
source of liquidity. See Note 7 of Notes to Consolidated Financial Statements.
COMMITMENTS FOR CAPITAL EXPENDITURES
At December 31, 1997 the Company had contractual and other commitments of
approximately $250,000 related to real estate.
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 1997 and 1996 were considered satisfactory. In its
third year as an investment company, the Company continues its transition away
from real estate related investments in securities.
During 1997 the net increase in net assets resulting from operations was
$24,650,665 as compared to $10,963,254 for 1996. At December 31, 1997 net assets
per share are $75.07. This is an increase of $21.83 per share from the December
31, 1996 net assets per share of $53.24.
The Company's investments in securities had solid performances for both 1997 and
1996. The increase in earnings and market value of First Empires State
Corporation led the way for the Company's overall results for both years. We are
cautiously optimistic about 1998. The 1997 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 interest rates and
generally good economic climate. It is projected that the 8 remaining lots in
the Providence Country Club community will be sold in 1998 and that additional
parcels of the Company's undeveloped land will also be sold.
4
<PAGE>
- --------------------------------------------------------------------------------
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, 1997, 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
5
<PAGE>
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, 1997 and 1996 and the
related consolidated statement of operations and the statement of changes in net
assets for each of the two years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and per share data and ratios 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 per share data
and ratios 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 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 consolidated financial statements and selected per share
data and ratios referred to above present fairly, in all material respects, the
financial position of First Carolina Investors, Inc. and subsidiaries as of
December 31, 1997 and the results of their operations for the years then ended,
and the changes in its net assets for each of the two years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Charlotte, North Carolina
February 18, 1998.
6
<PAGE>
FIRST CAROLINA INVESTORS, INC. & SUBSIDIARIES
Consolidated Statements of Assets and Liabilities
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ----------
<S> <C> <C>
Assets
Investments in securities, at value (note 2)
(cost of $13,334,195 in 1997 and $14,038,332 in 1996) $109,249,600 74,055,100
Cash, including short term
investments of $6,163,000 in 1997 and
$120,710 in 1996 ...................................... 6,661,935 707,575
Mortgage loans, secured by real estate (note 3) ........ 115,747 163,301
Real estate (note 4) .................................... 4,215,000 7,724,000
Investment in joint venture (note 5) ................... 450,000 540,000
Accrued dividend and interest receivable ................ 155,241 142,531
Other assets (note 6) .................................. 2,536,724 2,705,613
------------ ----------
Total assets ........................................ 123,384,247 86,038,120
------------ ----------
Liabilities
Accounts payable and accrued liabilities (note 8) ....... 4,298,434 3,460,745
Federal and state income taxes payable (note 9) ........ 996,856 --
Deferred income taxes payable (note 9) ................. 37,203,768 24,210,647
------------ ----------
Total liabilities ................................... 42,499,058 27,671,392
------------ ----------
Deferred Income (note 10) ............................... 135,100 75,979
------------ ----------
Net Assets .............................................. $ 80,750,089 58,290,749
============ ==========
Net assets per share (3,500,000 no par value common
shares authorized, 1,506,542 shares issued,
1,075,700 and 1,094,822 shares outstanding in
1997 and 1996, respectively) ............................ $ 75.07 53.24
============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
FIRST CAROLINA INVESTORS, INC.
Consolidated Statements of Operations
For the year ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
INCOME
Dividends .......................................... $ 823,391 765,750
Interest on mortgage loans ......................... 16,661 18,524
Gain on sale of real estate ........................ 4,016,602 1,061,606
Equity in earnings of
joint venture ...................................... 146,965 139,443
Other .............................................. 828,360 621,496
------------ -----------
Total income ....................................... 5,831,979 2,606,819
------------ -----------
EXPENSES
General and administrative ......................... 1,302,889 792,402
Professional fees .................................. 93,489 104,703
Sales and markting ................................. 91,693 189,322
Interest ........................................... -- 11,770
Other .............................................. 426,875 300,894
------------ -----------
Total expenses ..................................... 1,914,946 1,399,091
------------ -----------
Earnings before income taxes and realized
and unrealized appreciation on investments ......... 3,917,033 1,207,728
Provision for income taxes (note 9) ................ (900,000) (286,000)
------------ -----------
Net income before realized and unrealized
appreciation on investments ........................ 3,017,033 921,728
Gain realized on investments in other
companies (net of income tax provision
of $628,836 in 1997 and $204,000 in 1996) .......... 979,931 320,209
Change in unrealized appreciation of investments
for the period (net of deferred taxes of $13,204,285
in 1997 and $6,214,034 in 1996) .................... 20,653,701 9,721,317
------------ -----------
Net increase in net assets resulting from operations $ 24,650,665 10,963,254
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements
8
<PAGE>
FIRST CAROLINA INVESTORS, INC. & SUBSIDIARIES
Consolidated Statements of Changes in Net Assets For the year
ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Increase in net assets from operations
Investment income, net .................... $ 3,017,033 921,728
Realized gain on investments, net ......... 979,931 320,209
Change in unrealized appreciation, net .... 20,653,701 9,721,317
Net increase in net assets resulting
from operations ........................ 24,650,665 10,963,254
------------ -----------
Distributions to shareholders of $1.00 per share
In 1997 and $.60 per share in 1996
from investment income, net ............. (1,046,902) (638,989)
Treasury shares purchased ...................... (1,144,423) (339,061)
------------ -----------
Total increase .......................... 22,459,340 9,985,204
Net assets
Beginning of year ....................... 58,290,749 48,305,545
------------ -----------
End of year ............................. $ 80,750,089 58,290,749
============ ===========
</TABLE>
See accompanying notes to financial statements.
FIRST CAROLINA INVESTORS, INC. & SUBSIDIARIES
INVESTMENTS IN SECURITIES
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------------------------- -----------------------------
No. Fair No. Fair
Shares Value Shares Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Common Stocks - 100%
Banking and insurance - 87.7%
First Empire State Corporation ....... 200,000 $ 93,000,000 200,000 $57,600,000
Merchants Group, Inc. ................ 135,000 2,868,750 135,000 2,497,500
Shipbuilding - 2.7%
Todd Shipyards Corporation ............ 700,000 2,931,250 700,000 4,550,000
Manufacturing
American Precision Industries, Inc. ... -- -- 240,000 4,800,000
Transportation and chemical - 7.9%
Oglebay Norton Company ................ 160,000 6,560,000 80,000 3,500,000
Exolon-Esk Co. ........................ 57,100 2,041,325 42,600 1,107,600
Environmental - 1.7%
Ecology & Environment, Inc. ............ 157,300 1,848,275 -- --
------------
Total - 100% (cost of $13,871,981 in 1997
and $14,038,332 in 1996) .............. $109,249,600 $74,055,100
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE>
FIRST CAROLINA INVESTORS, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 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 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.
(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.
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.
(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.
(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
declaration date.
10
<PAGE>
(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:
<TABLE>
<CAPTION>
December 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Fair Value Unrealized Unrealized
Number as a % of Holding Holding Fair Dividend
of shares Net Assets Cost Gains Losses Value Income
--------- ---------- ----------------- -------------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
First Empire State Corp 200,000 115.2 $ 3,180,120 89,819,880 - 93,000,000 640,000
Oglebay Norton Company 160,000 6.2 2,244,128 4,315,872 - 6,560,000 120,000
Todd Shipyards Corp. 700,000 8.5 2,931,250 - - 2,931,250 -
Merchants Group, Inc. 135,000 5.0 2,051,021 817,729 - 2,868,750 27,000
Exolon-Esk Co. 57,100 2.5 1,195,648 845,677 - 2,041,325 -
Ecology & Environment, Inc. 157,300 2.3 1,732,028 116,247 - 1,848,275 20,128
------------ ---------- ------------- ----------- -------
$13,334,195 95,915,405 - 109,249,600 807,128
============ ========== ============= =========== =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Fair Value Unrealized Unrealized
Number as a % of Holding Holding Fair Dividend
of shares Net Assets Cost Gains Losses Value Income
--------- ---------- ---------------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
First Empire State Corp 200,000 98.8 $ 3,180,120 54,419,880 - 57,600,000 560,000
Oglebay Norton Company 80,000 6.0 2,244,128 1,255,872 - 3,500,000 104,000
Todd Shipyards Corp. 700,000 7.8 3,469,036 1,080,964 - 4,550,000 -
American Precision 240,000 8.2 2,332,799 2,467,201 - 4,800,000 74,750
Merchants Group, Inc. 135,000 4.3 2,051,021 446,479 - 2,497,500 27,000
Miscellaneous - 1.9 761,228 346,372 - 1,107,600 -
------------ ---------- ------- ---------- -------
$ 14,038,332 60,016,768 - 74,055,100 765.750
============ ========== ======= ========== =======
</TABLE>
Purchases and sales of investment securities were $2,166,448 and $2,332,800
during 1997 and $604,878 and $1,128,709 during 1996. The net gain on sale of
investments in other companies was $979,931 and $320,209 for 1997 and 1996,
respectively. In addition, during 1997 the Company reduced to fair value it's
cost basis in an equity security. The realized loss was $537,786 and is included
in net gain on sale of investments. Net gains are computed using the average
cost method. Dividend income of $16,263 was received on securities sold during
1997.
(3) MORTGAGE LOANS
The Company's investments in mortgage loans as of December 31, 1997 and 1999 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Permanent loans on condominiums $ 80,647 82,701
Junior loans on lots (note 10) 35,100 80,600
Total mortgage loans, net $115,747 163,301
======== =======
</TABLE>
11
<PAGE>
(4) REAL ESTATE
The estimated fair value of real estate owned at December 31, 1997 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ---------------------------
Description Quantity Fair Value Quantity Fair Value
- ----------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Land under contract:
Providence Country Club 110 acres $2,400,000
Land held for investment:
Providence Country Club 30 acres 853,000 300 acres $3,967,000
Park Crossing 8.9 acres 760,000 24 acres 2,024,000
Finished lot inventory 8 lots 202,000 30 lots 1,733,000
---------- ----------
Total real estate, net $4,215,000 $7,724,000
========== ==========
</TABLE>
During 1997, the company entered into a contract for the sale of 195 acres of
land held for investment. Payment in full was received for 85 acres and a
purchase money mortgage was received for the remaining 110 acres. The 110 acre
transaction did not qualify as a sole pursuant to the accounting policy
described in note 1(d) and has be reflected in the accompanying Consolidated
Financial Statements as land under contract.
(5) INVESTMENT IN AND ADVANCES TO JOINT VENTURE
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 9 lots at a cost of $410,026 and a fair value of $1,280,000 at
December 31, 1997.
(6) OTHER ASSETS
The components of other assets at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Deferred compensation, funded $1,967,359 1,724,596
Sales center 549,049 492,080
Model home -- 233,246
Income tax receivable -- 200,774
Miscellaneous 20,316 54,917
---------- ---------
$ 2,536,724 2,705,613
========== =========
</TABLE>
The deferred compensation includes $1,724,000 and $1,498,000 at December 31,
1997 and 1996, respectively, owed to affiliated persons pursuant to a deferred
compensation plan. The deferred compensation has accrued over thirteen years.
Contributions are no longer being made to the plan.
(7) NOTE PAYABLE TO BANK
At December 31, 1997 and 1996 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, 1997). There was no outstanding
bank indebtedness at December 31, 1997 and 1996, and for the years then ended
the Company was in compliance with all covenants of said agreement.
Additional information relating to bank debt is as follows:
<TABLE>
<CAPTION>
1997 1996
------ --------
<S> <C> <C>
Weighted average interest rate of indebtedness
outstanding during the year 8.5% 8.25%
------ --------
Maximum amount of indebtedness outstanding at
any month end during the year $ -- $515,000
------ --------
Approximate average aggregate indebtedness
outstanding during the year $ -- $150,000
====== ========
</TABLE>
12
<PAGE>
(8) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The components of accounts payable and accrued liabilities at December 31, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Trade accounts payable $1,895,109 1,246,578
Deferred compensation (note 6) 1,967,359 1,724,596
Dividends payable 266,166 319,069
Miscellaneous accruals and payable 166,206 140,735
Cash held in escrow 9,094 29,767
---------- ---------
$4,298,434 3,460,745
========== =========
</TABLE>
(9) INCOME TAXES
Total income tax expense for the years ended December 31, 1997 and 1996 are
allocated as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------- --------------------------
Earnings Earnings
before before
Income Tax Income Tax Income Tax Income Tax
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Investment income $ 3,917,033 900,000 1,207,728 286,000
Gains realized on
investments in other
companies 1,608,767 628,836 524,209 204,000
Change in unrealized
appreciation of investments 33,857,986 13,204,285 15,935,351 6,214,034
----------- ---------- ---------- ---------
$39,393,786 14,733,121 17,667,288 6,704,034
=========== ========== ========== =========
</TABLE>
The components of Federal and state income tax expense (benefit) from continuing
operations are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
Current:
Federal $ 1,320,124 420,659
State 419,876 70,015
----------- ---------
1,740,000 490,674
Deferred 12,993,121 6,213,360
----------- ---------
$14,733,121 6,704,034
=========== =========
</TABLE>
Income tax expense for the years presented 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>
1997 % 1996 %
------------ ---- ---------- ----
<S> <C> <C> <C> <C>
Income tax expense at Federal rate $ 13,390,487 34.0% 6,006,878 34.0%
Change in the beginning of the year
balance of the valuation allowance
for deferred tax assets allocated
to income tax expense (14,000) (0.0%) (30,000) (0.2%)
State income tax net of Federal tax
benefit 1,806,232 4.6% 861,643 4.9%
Dividend exclusion (198,128) (0.5%) (157,643) (0.9%)
Other, net (251,470) 0.0% 23,156 0.1%
------------ ---- ---------- ----
Provision for income taxes $ 14,733,121 37.4% 6,704,034 37.9%
============ ==== ========== ====
</TABLE>
13
<PAGE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1997 and
1996 are presented below:
<TABLE>
<CAPTION>
Deferred tax assets: 1997 1996
------------ -----------
<S> <C> <C>
Deferred compensation liability, principally
due to accrual for financial reporting purposes $ 763,040 677,805
State net operating loss carry forwards 15,469 27,822
------------ -----------
778,509 705,627
Total gross deferred tax assets
Less valuation allowance (16,000) (30,000)
------------ -----------
Net deferred tax assets 762,509 675,627
------------ -----------
Deferred tax liabilities:
Real estate investments, principally due to
unrealized gains (404,203) (1,200,057)
Investments in other companies, principally due
to unrealized gains on securities (37,197,829) (23,407,427)
------------ -----------
Other (364,245) (278,790)
------------ -----------
Total gross deferred tax liabilities ($37,966,277) (24,886,274)
------------ -----------
Net deferred tax liability ($37,203,768) (24,210,647)
============ ===========
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1996 was
$60,000. The net change in the total valuation allowance for the years ended
December 31, 1997 and 1996 was a decrease of $14,000 and $30,000, respectively.
The valuation allowance primarily relates to certain state temporary differences
and state net operating loss carry forwards. It is management's belief that the
realization of the net 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 1994 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, 1997 and 1996, the Company had deferred income
relating to such sales of $135,100 and $75.979, respectively.
(11) OTHER INCOME
Other income for 1996 includes $268,893 received from a municipality in final
settlement of amounts due from the transfer of title to a waste water treatment
plant.
(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. At December 31, 1997, all the
options are fully vested and exercisable but no options have been exercised.
(13) 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, 1,075,700
at December 31, 1997 and 1,094,822 on December 31, 1996. The computation assumes
that outstanding stock options were exercised and the proceeds used to purchase
common stock.
14
<PAGE>
(14) SHARE REPURCHASE PROGRAM
At December 31, 1997 the Company has repurchased 466,288 shares as treasury
shares at a cost of $9,596,448. During 1997 the Company repurchased 22,600 at an
average cost of $50.64 per share. Said repurchase price represents a weighted
average discount of 18% per share relative to net asset value.
(15) ACCUMULATED UNDISTRIBUTED INCOME
At December 31, 1997 accumulated undistributed investment income-net was
$2,877,338, accumulated undistributed net realized gains on investment
transactions was $1,493,050, and net unrealized appreciations in value of
investments was $55,765,228.
(16) COMMITMENTS AND CONTINGENCIES
The Company has $250,000 of undisbursed contractual commitments in connection
with real estate. In order to protect its investments, the Company may be
required to furnish amounts in excess of its current investments or commitments.
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.
15
<PAGE>
- --------------------------------------------------------------------------------
Selected Per Share Data and Ratios
For the Years ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PER SHARE DATA AND RATIOS* 1997 1996
- -------------------------- ------ -----
<S> <C> <C>
Investment income $5.38 2.38
Expenses (including income taxes) (2.60) ( 1.54)
------ -------
Investment income - net 2.78 0.57
Distributions from investment income - net ( .97) ( 0.58)
Net realized and unrealized gain on securities 19.96 9.15
Share transactions .06 ( 0.10)
------ -------
Net increase in net asset value 21.83 9.31
Net asset value:
Beginning of year 53.24 43.93
------- ------
End of year $75.07 53.24
======= ======
RATIOS
Ratio of expenses to average net assets 4.23% 3.20%
Ratio of investment income - net to average net assets 8.77% 1.75%
Portfolio turnover 2.55% 0.93%
AVERAGE SHARES OUTSTANDING 1,083,696 1,097,032
</TABLE>
*Per share data is based upon the average number of shares outstanding for the
year. The computation assumes that outstanding stock options were exercised and
the proceeds used to purchase common stock.
- --------------------------------------------------------------------------------
Computation of Net Asset Value per Share
Basic and Diluted
For the Year Ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C> <C> <C>
BASIC
Net Asset $ 80,750,089 $ 58,290,749
============ ============
Shares Outstanding 1,040,262 1,062,862
============ ============
Net Asset Value per Share $ 77.62 $ 54.84
============ ============
DILUTED
Options 45,000 45,000
Exercise Price $12.75 $12.75
Market Price 60.00 (9,562) 44.00 (13,040)
------------ ------------
Additional Share Attributable to
Stock Options 35,438 31,960
Shares Outstanding 1,040,262 1,062,862
------------ ------------
1,075,700 1,094,822
============ ============
Net Asset Value per Share $ 75.07 $ 53.24
============ ============
</TABLE>
16
<PAGE>
First Carolina Investors, Inc.
- --------------------------------------------------------------------------------
DIRECTORS
Brent D. Baird*
Private Investor
Bruce C. Baird
President
Belmont Contracting Co., Inc.
Patrick W.E. Hodgson*+
Chairman
President of American Investments Ltd. and
Todd Shipyards Corporation
Theodore E. Dann, Jr. +
President
Buffalo Technologies
H. Thomas Webb III *
Senior Vice-President
Crescent Resources, Inc.
*Member of Executive Committee
+Member of the Audit Committee
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
GENERAL COUNSEL
Waggoner, Hamrick, Hasty & Monteith and Kratt, PLLC
Two First Union Center
Suite 2750
Charlotte, NC 28282
AUDITORS
KPMG Peat Marwick, LLP
2800 Two First Union Center
Charlotte, NC 28282
17
