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<PAGE> PAGE 2
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SIGNATURE CYNTHIA RABY
TITLE ASSISTANT SECRETARY
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 12/31/98
CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE 1998 ANNUAL REPORT AND
FORM N-SAR AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 1998 ANNUAL
REPORT TO STOCKHOLDERS AND FORM N-SAR.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 21,516,823
<INVESTMENTS-AT-VALUE> 100,780,644
<RECEIVABLES> 77,705
<ASSETS-OTHER> 2,850,000
<OTHER-ITEMS-ASSETS> 11,874,326
<TOTAL-ASSETS> 115,582,675
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 34,787,356
<TOTAL-LIABILITIES> 34,787,356
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 1,015,166
<SHARES-COMMON-PRIOR> 1,075,700
<ACCUMULATED-NII-CURRENT> 929,069
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 16,565,750
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 44,230,970
<NET-ASSETS> 80,795,319
<DIVIDEND-INCOME> 873,200
<INTEREST-INCOME> 323,706
<OTHER-INCOME> 2,480,673
<EXPENSES-NET> 1,726,148
<NET-INVESTMENT-INCOME> 1,951,431
<REALIZED-GAINS-CURRENT> 15,072,700
<APPREC-INCREASE-CURRENT> (11,534,258)
<NET-CHANGE-FROM-OPS> 5,489,873
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,038,087
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 61,900
<SHARES-REINVESTED> 1,366
<NET-CHANGE-IN-ASSETS> 45,230
<ACCUMULATED-NII-PRIOR> 2,877,338
<ACCUMULATED-GAINS-PRIOR> 1,493,050
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,726,148
<AVERAGE-NET-ASSETS> 83,324,507
<PER-SHARE-NAV-BEGIN> 75.07
<PER-SHARE-NII> 1.85
<PER-SHARE-GAIN-APPREC> 3.35
<PER-SHARE-DIVIDEND> (.98)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> .30
<PER-SHARE-NAV-END> 79.59
<EXPENSE-RATIO> 1.07
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>THE $0.30 PER SHARE RETURN OF CAPITAL INDICATED ABOVE REPRESENTS
SHARE TRANSACTIONS AND NOT A RETURN OF CAPITAL OR OTHER DISTRIBUTION.
<F2>THE 1366 SHARES REINVESTED REPRESENTS THE NET CHANGE IN ADDITIONAL
SHARES ATTRIBUTABLE TO STOCK OPTIONS.
</FN>
</TABLE>
<PAGE>
[KPMG LOGO]
Suite 2800
Two First Union Center
Charlotte, NC 28282-8290
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, 1998, 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 are 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
fraud 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
weaknesses under standards established by the American Institute of Certified
Public Accountants. A material weakness is 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 fraud in amounts that would
be material in relation to the financial statements being audited may occur and
not be detected within a timely period by 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,
1998.
This report is solely for the information and use of management and the
Securities and Exchange Commission and is not intended to be and should not be
used by anyone other than these specified parties.
/s/ KPMG LLP
January 22, 1999
<PAGE>
FIRST CAROLINA INVESTORS, INC.
1998
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, 1998 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
- -----------------
<TABLE>
<S> <C>
Management's Discussion and Analysis
of Financial Conditions and Results
of Operations...................... 1
Management's Report.................. 5
Independent Auditor's Report......... 6
Consolidated Financial Statements.... 7
Notes to Consolidated Financial
Statements......................... 10
Per Share Data and Ratios............ 16
</TABLE>
Quarterly Stock Prices (Boston Stock Exchange) and Dividends Paid Per Share
- --------------------------------------------------------------------------------
1998
----
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter First Second Third Fourth
<S> <C> <C> <C> <C>
High Bid $68.00 70.00 75.00 71.25
Low Bid $60.00 67.00 70.00 70.00
Cash Dividends $ 0.25 .25 .25 .25
</TABLE>
- --------------------------------------------------------------------------------
1997
----
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter First Second Third Fourth
<S> <C> <C> <C> <C>
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
</TABLE>
- --------------------------------------------------------------------------------
There were approximately 490 record holders of Shares of Common Stock at January
2, 1999.
<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 Statements 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.
1998 OPERATION COMPARED TO 1997
The net asset value of the Company increased by $5,489,873 or $4.52 per share
during 1998 as compared to an increase of $22,459,340 or $21.83 per share during
1997. During 1998 the value of the Company's investment in M & T Bank
Corporation, the Company's largest security holding, increased by $8,090,000 as
compared to an increase of $35,400,000 during 1997. At the end of 1998 the value
of the Company's investment in M & T Bank Corporation was $77,840,625.
During 1998 the Company reported the sale of its holdings of 50,000 shares of M
& T Bank Corporation at an after tax gain of $15,484,125. During 1998 the
Company made three new investments. The Company purchased 700,000 shares of
Marine Transport Corporation at an average cost of $2.36 per share. Marine
Transport Corporation provides marine transport services and owns and manages
ships, supply vessels and chartered vessels. The firm is located in Weehawken,
New Jersey. The Company also purchased 785,900 shares of Acme Electric
Corporation, located in East Aurora, New York. Acme Electric designs and
manufactures power conversion equipment for electronic and electrical systems.
The average cost per share was $4.90. Barrister Information Systems Corporation,
a firm located in Buffalo, New York, provides Windows-based client server
software. The Company purchased 1,598,100 at a cost of $.50.
1
<PAGE>
During both 1998 and 1997 real estate operations contributed to earnings. The
Company's Charlotte real estate investments contributed $1,513,284 to total
income during 1998 as compared to $4,016,602 during 1997. (See gains on sale of
real estate below).
Net income before realized and unrealized appreciation on investments was
$1,951,431 for 1998 as compared to $3,017,033 for 1997. The net gain realized on
investments in other companies was $15,072,700 in 1998 versus $979,931 in 1997.
The (decrease) increase in net unrealized appreciation of investments was
$(11,534,258) in 1998 as compared to $20,653,701 in 1997. These components
combined to produce a net increase in net assets resulting from operations of
$5,489,873 and $24,650,665 for 1998 and 1997, respectively.
At year end net asset value per share was $79.59 in 1998 and $75.07 in 1997.
Dividend income increased during 1998 as compared to 1997. An increase in the
dividend rate of M & T Bank Corporation as well as the increase in the number of
shares purchased of Ecology & Environment, Inc. were the primary reasons for the
increase in dividend income. For additional information, including a detailed
list of dividends paid see Note 2 of Notes To Consolidated Financial Statements.
At the end of 1998 six of the Company's investees did not pay dividends as
compared to two in 1997, and are therefore considered non-income producing.
Gain on sale of real estate was $1,513,284 during 1998 as compared to $4,016,602
during 1997. During 1998, four (4) lots were sold in the Providence Country Club
community at a total gross sales price of $327,850 and a gain of $198,696. Also
during 1998 the release of 63 acres of undeveloped land in Union County produced
a gain of $975,492 and 3.9 acres at Park Crossing was sold at a gain of
$339,095. 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. At December 31, 1998 the Company had four (4) remaining lots to sell
in the Providence Country Club community, five acres at Park Crossing and 77
acres in Union County contiguous to Providence Country Club.
Equity earnings of joint venture was $152,903 in 1998 as compared to $146,965 in
1997. The Company owns a 1/3 interest in the joint venture Goodsell/Carolinas
Associates. During 1998 the venture sold 2 lots and 1 outparcel at a total gross
sales price of $622,000. During 1997 the venture sold 3 lots and 1 outparcel at
a total gross sales price of $630,000.
Other income was $814,486 during 1998 as compared to $828,360 during 1997. Other
income for 1998 includes $44,000 of interest income recognized due to 1993 and
1994 North Carolina intangibles tax refunds, interest income on short term
investments of $466,000 and income of $224,000 attributable to assets held in
the deferred compensation plan and miscellaneous income of $80,000. For 1997
other income 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.
General and administrative expense decreased significantly in 1998 to $446,043
as compared to $1,302,889 during 1997. For both years personnel costs were the
largest component of the category and totaled approximately $333,542 in 1998 as
compared to $1,302,889 in 1997. The reason for the significant decrease during
1998 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 $78,000 in 1998 and $96,000 in 1997.
Sales and marketing expenses declined significantly during 1998 and 1997. The
reduction of both years is indicative of the completion of the development of
Providence Country Club, reduced lot inventory levels and in 1997, the
termination of the sales operations at December 31. Expenses of 1998 are the
result of marketing the sales office which sold in the fourth quarter. Sales and
marketing expense for 1997 are related to Providence Country Club and include
advertising, promotional and sales office expense.
Other expense decreased during 1998 after experiencing a significant increase in
1997. Other expenses for 1998 include directors fees and expenses of $40,000,
expenses of $224,000 which corresponds with and offsets income earned by assets
in the deferred compensation plan, real estate taxes of $24,000 and
miscellaneous expense of $85,000. Other expenses of 1997 include real estate
taxes of $16,000, 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 and miscellaneous expenses of $48,000.
2
<PAGE>
Gain realized on investments in other companies, net of income taxes, was
$15,072,700 for 1998 as compared to $979,931 for 1997. These amounts are net of
income taxes of $9,960,000 in 1998 and $628,836 in 1997. The 1998 gain is the
result of the sale of the Company's 50,000 shares of M & T Bank Corporation. The
1997 gain is a result of the sale of a portion of the Company's remaining
holdings of American Precision Industries, Inc.
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.
INVESTMENTS IN OTHER COMPANIES
While investments in other companies consist of marketable securities, they are
considered mid to long term investments 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 1998 and 1997. 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 1999 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, 1998, the Company held cash and short term investments of
$9,656,341. The short term investments of $9,208,851 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 $1,000,000 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, 1998 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.
YEAR 2000 COMPLIANCE
The Company has completed its assessment of its Year 2000 readiness and
determined that its current computer system is not Year 2000 compliant. This
could cause the Company's computer system to be unable to operate effectively
beyond December 31, 1999 and consequently could then have a material effect on
the Company's business, results of its operations or its financial condition.
The Company has therefore decided to upgrade its current computer system to be
Year 2000 compliant in June of 1999 at an estimated cost of $10,000. The
Company's management believes, however, that if this issue were not addressed
prior to December 31, 1999 the Company's operations could still be performed
manually (without information technology) without significant business
interruption. The Company's operations do not significantly rely on any
non-information technology systems as defined by the Securities and Exchange
Commission.
3
<PAGE>
The Company has obtained written representations from third party vendors with
which it has a material relationship regarding their Year 2000 readiness. The
Company has assessed the risk of third-party non-compliance as low based upon
these written representations. If these material third parties are not
compliant, however, they will have a material effect on the Company's operations
and financial condition.
SUMMARY
The operating results for 1998 and 1997 were considered satisfactory. In its
fourth year as an investment company, the Company continued its transition away
from real estate assets.
During 1998 the net increase in net assets resulting from operations was
$5,489,873 as compared to $24,650,665 for 1997. At December 31, 1998 net assets
per share are $79.59. This is an increase of $4.52 per share from the December
31, 1997 net assets per share of $75.07.
The Company's investments in securities had good performances for both 1998 and
1997. The increase in earnings and market value of M & T Bank Corporation was
significant for both years. It is projected that the 4 remaining lots in the
Providence Country Club community will be sold in 1999 and that additional
parcels of the Company's undeveloped land may 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, 1998, 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 audited by KPMG LLP, independent
certified public accountants, in accordance with generally accepted auditing
standards. Their audit includes consideration 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.
Brent D. Baird H. Thomas Webb III
Chairman President
5
<PAGE>
Independent Auditors' Report
FIRST CAROLINA INVESTORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
The Directors and Shareholders
First Carolina Investors, Inc.
We have audited the accompanying consolidated statements of assets and
liabilities of First Carolina Investors, Inc. and subsidiaries including the
schedule of portfolio investments as of December 31, 1998 and 1997 and the
related consolidated statements of operations and the statements of changes in
net assets for each of the two years in the period ended December 31, 1998.
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, 1998 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, 1998 in conformity with generally accepted accounting principles.
KPMG LLP
Charlotte, North Carolina
January 22, 1999
6
<PAGE>
FIRST CAROLINA INVESTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Assets and Liabilities
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Assets
Investments in securities, at value (note 2) (cost of
$21,516,823 in 1998 and $13,334,195 in 1997) $100,780,644 109,249,600
Cash, including short term investments of $9,208,851
in 1998 and $6,163,000 in 1997 9,656,341 6,661,935
Mortgage loans, secured by real estate (note 3) 74,579 115,747
Real estate (note 4) 2,600,000 4,215,000
Investment in joint venture (note 5) 250,000 450,000
Accrued dividend and interest receivable 3,126 155,241
Other assets (note 6) 2,217,985 2,536,724
------------ -----------
Total assets 115,582,675 123,384,247
------------ -----------
Liabilities
Accounts payable and accrued liabilities (note 8) 3,428,776 4,298,434
Federal and state income taxes payable (note 9) 107,605 996,856
Deferred income taxes payable (note 9) 31,131,475 37,203,768
------------ -----------
Total liabilities 34,667,856 42,499,058
------------ -----------
Deferred Income (note 10) 119,500 135,100
------------ -----------
Net Assets $ 80,795,319 80,750,089
============ ===========
Net assets per share (3,500,000 no par value common
shares authorized, 1,015,666 shares issued,
1,015,166 and 1,075,700 shares outstanding in 1998
and 1997, respectively) $ 79.59 75.07
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
FIRST CAROLINA INVESTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ----------
<S> <C> <C>
INCOME
Dividends $ 873,200 823,391
Interest 323,706 16,661
Gain on sale of real estate 1,513,284 4,016,602
Equity in earnings of joint venture 152,903 146,965
Other 814,486 828,360
------------ ----------
Total income 3,677,579 5,831,979
------------ ----------
EXPENSES
General and administrative 446,043 1,302,889
Professional fees 67,203 93,489
Sales and marketing 6,933 91,693
Interest -- --
Other 372,969 426,875
------------ ----------
Total expenses 893,148 1,914,946
------------ ----------
Earnings before income taxes and realized and
unrealized appreciation on investments 2,784,431 3,917,033
Provision for income taxes (833,000) (900,000)
------------ ----------
Net income before realized and unrealized
appreciation on investments 1,951,431 3,017,033
Gain realized on investments in other companies
(net of income tax provision of $9,960,000 in
1998 and $628,836 in 1997) 15,072,700 979,931
Change in unrealized appreciation (depreciation) of
investments for the period, net of deferred
taxes (benefit) of ($5,865,293) in 1998 and
$13,204,285 in 1997 (11,534,258) 20,653,701
------------ ----------
Net increase in net assets resulting from
operations $ 5,489,873 24,650,665
============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
FIRST CAROLINA INVESTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Net Assets
For the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Increase in net assets from operations
Investment income, net $ 1,951,431 $ 3,017,033
Realized gain on investments, net 15,072,700 979,931
Change in unrealized appreciation, net (11,534,258) 20,653,701
------------ -----------
Net increase in net assets resulting from
operations 5,489,873 24,650,665
Distributions to shareholders of $1.00 per share
In 1998 and 1997 from investment income, net (1,038,087) (1,046,902)
Treasury shares purchased (4,406,556) (1,144,423)
------------ -----------
Total increase 45,230 22,459,340
Net assets
Beginning of year 80,750,089 58,290,749
------------ -----------
End of year $ 80,795,319 $80,750,089
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
FIRST CAROLINA INVESTORS, INC. AND SUBSIDIARIES
INVESTMENTS IN SECURITIES
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------------------- -----------------------
Number Number
Shares Fair Value Shares Fair Value
--------- ------------ ------- ------------
<S> <C> <C> <C> <C>
Common Stock - 100%
Financial Services
80% in 1998 and 87.8% in 1997
M & T Bank Corporation 150,000 $ 77,840,625 200,000 $ 93,000,000
Merchants Group, Inc. 135,000 2,775,937 135,000 2,868,750
Manufacturing
10.5% in 1998 and 4.5% in 1997
Exolon-ESK Company 64,700 1,949,088 57,100 2,041,325
Todd Shipyards Corporation 700,000 3,325,000 700,000 2,931,250
Marine Transport Corporation 700,000 1,575,000 -- --
Acme Electric Corporation 785,900 3,733,025 -- --
Services
5.6% in 1998 and 1.7% in 1997
Ecology & Environment, Inc. 425,000 3,931,250 157,300 1,848,275
Barrister Information Systems, Inc. 1,598,100 1,498,219 -- --
Roy F. Weston, Inc. 70,000 192,500 -- --
Diversified
3.9% in 1998 and 6% in 1997
Oglebay Norton Company 160,000 3,960,000 160,000 6,560,000
Total - 100% (cost of $21,516,823 in 1998
and $13,334,195 in 1997) $100,780,644 $109,249,600
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE>
FIRST CAROLINA INVESTORS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
- --------------------------------------------------------------------------------
(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 fair market comparables in the existing
subdivision developed by the venture 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 for 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 join venture in the accompanying Consolidated Statement of Assets
and Liabilities.
(g) Distributions to Shareholders
Dividends payable to shareholders are recorded on the declaration
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.
10
<PAGE>
(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, 1998
---------------------------------------------------------------------------------------
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>
M & T Bank 150,000 96.3 $ 2,385,000 75,455,625 -- 77,840,625 653,600
Merchants Group, Inc. 135,000 3.4 2,051,021 724,916 -- 2,775,937 27,000
*Exolon-ESK Company 64,700 2.4 1,477,419 471,669 -- 1,949,088 --
*Todd Shipyards Corporation 700,000 4.1 2,931,250 393,750 -- 3,325,000 --
*Marine Transport Corporation 700,000 1.9 1,651,305 -- 76,305 1,575,000 --
*Acme Electric Corporation 785,900 4.6 3,847,482 -- 114,457 3,733,025 --
*Ecology & Environment, Inc. 425,000 4.9 3,931,250 -- -- 3,931,250 45,600
*Barrister Information Systems, Inc 1,598,100 1.9 799,050 699,169 -- 1,498,219 --
Roy F. Weston, Inc. 70,000 0.2 198,918 -- 6,418 192,500 --
Olgebay Norton Company 160,000 4.9 2,244,128 1,715,872 -- 3,960,000 128,000
----------- ---------- ------- ----------- -------
$21,516,823 79,461,001 197,180 100,780,644 854,200
=========== ========== ======= =========== =======
</TABLE>
<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>
M & T Bank 200,000 115.2 $ 3,180,120 89,819,880 -- 93,000,000 640,000
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 --
*Todd Shipyards Corp. 700,000 8.5 2,931,250 -- -- 2,931,250 --
*Ecology & Environment, Inc. 157,300 2.3 1,732,028 116,247 -- 1,848,275 20,128
Oglebay Norton Company 160,000 6.2 2,244,128 4,315,872 -- 6,560,000 120,000
----------- ---------- ------- ----------- -------
$13,334,195 95,915,405 -- 109,249,600 807,128
=========== ========== ======= =========== =======
</TABLE>
- ---------------
* Investments in affiliated companies in which the Company owns more than 5% of
voting shares.
Purchases and sales of investment securities were $9,674,612 and $795,120 during
1998 and $2,166,448 and $2,332,800 during 1997. The net gain on sale of
investments in other companies was $15,072,700 and $979,931 for 1998 and 1997,
respectively. In addition, during 1998 and 1997 the Company reduced to fair
value its cost basis in an equity security. The realized loss was $696,864 for
1998 and $537,786 for 1997 and is included in net gain on sale of investments.
Net gains are computed using the average cost method. Dividend income of $19,000
in 1998 and $16,263 in 1997 was received on securities sold during 1998.
(3) MORTGAGE LOANS
The Company's investments in mortgage loans as of December 31, 1998 and 1997 are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
Permanent loans on condominiums $55,079 $ 80,647
Junior loans on lots (note 10) 19,500 35,100
------- --------
Total mortgage loans, net $74,579 $115,747
======= ========
</TABLE>
11
<PAGE>
(4) REAL ESTATE
The estimated fair value of real estate owned at December 31, 1998 and 1997 are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
Fair Fair
Description Quantity Value Quantity Value
----------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Land under contract:
Providence Country Club 47 acres $1,077,000 110 acres $2,400,000
Land held for investment:
Providence Country Club 30 acres 853,000 30 acres 853,000
Park Crossing 5.0 acres 500,000 8.9 acres 760,000
Finished lot inventory 4 lots 170,000 8 lots 202,000
---------- ----------
Total real estate, net $2,600,000 $4,215,000
========== ==========
</TABLE>
During 1998, payment was received for release of 63 acres. 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 sale pursuant to the accounting policy described in note 1(d)
and has been 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 7 lots at a cost of $293,236 and a fair value of $795,000 at
December 31, 1998. At December 31, 1997, the venture owned 9 lots at a cost of
$410,026 and a fair market value of $1,280,000.
(6) OTHER ASSETS
The components of other assets at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred compensation, funded $2,191,947 $1,967,359
Sales center -- 549,049
Miscellaneous 26,038 20,316
---------- ----------
$2,217,985 $2,536,724
========== ==========
</TABLE>
The deferred compensation includes $2,191,000 and $1,967,000 at December 31,
1998 and 1997, respectively, owed to affiliated persons pursuant to a deferred
compensation plan. The deferred compensation has accrued over fourteen years.
Contributions are no longer being made to the plan.
(7) LINE OF CREDIT
At December 31, 1998 and 1997 the Company had a $1,000,000 and $5,000,000,
respectively, 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 bears interest at the prime rate (7.75% at December 31,
1998). There was no outstanding bank indebtedness at December 31, 1998 and 1997
and for the years then ended the Company was in compliance with all covenants of
said agreement.
(8) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The components of accounts payable and accrued liabilities at December 31, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Trade accounts payable $ 803,551 $1,889,609
Deferred compensation (note 6) 2,191,947 1,967,359
Dividends payable 244,716 266,166
Miscellaneous accruals and payable 188,562 166,206
Cash held in escrow -- 9,094
---------- ----------
$3,428,776 $4,298,434
========== ==========
</TABLE>
12
<PAGE>
(9) INCOME TAXES
Total income tax expense for the years ended December 31, 1998 and 1997 are
allocated as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------- ------------------------
Earnings Earnings
before before
Income Tax Income Tax Income Tax Income Tax
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Investment income $ 2,784,431 833,000 3,917,033 900,000
Gains realized on investments in other
companies 25,032,700 9,960,000 1,608,767 628,836
Change in unrealized appreciation of
investments (17,399,551) (5,865,293) 33,857,986 13,204,285
------------ ---------- ---------- ----------
$ 10,417,580 4,927,707 39,383,786 14,733,121
============ ========== ========== ==========
</TABLE>
The components of Federal and state income tax expense (benefit) from continuing
operations are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Current:
Federal $ 9,006,578 1,320,124
State 1,993,422 419,876
----------- ----------
11,000,000 1,740,000
Deferred (6,072,293) 12,993,121
----------- ----------
$ 4,927,707 14,733,121
=========== ==========
</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>
1998 % 1997 %
---------- ----- ---------- -----
<S> <C> <C> <C> <C>
Income tax expense at Federal rate $3,646,153 35.0% 13,390,487 34.0%
Change in Federal tax rate affecting taxable
temporary differences 952,110 9.1% -- --
Change in the beginning of the year balance of the
valuation allowance for deferred tax assets
allocated to income tax expense (9,000) (0.1%) (14,000) (0.0%)
State income tax net of Federal tax benefit 490,928 4.7% 1,806,232 4.6%
Dividend exclusion (266,503) (2.6%) (198,128) (0.5%)
Other, net 114,019 1.2% (251,470) (0.7%)
---------- ----- ---------- -----
Provision for income taxes $4,927,707 47.3% 14,733,121 37.4%
========== ===== ========== =====
</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, 1998 and
1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Deferred compensation liability, principally due to accrual
for financial reporting purposes $ 870,000 $ 763,040
State net operating loss carryforwards 6,154 15,469
------------ ------------
Total gross deferred tax assets 876,154 778,509
Less valuation allowance (7,000) (16,000)
------------ ------------
Net deferred tax assets 869,154 762,509
------------ ------------
Deferred tax liabilities:
Real estate investments, principally due to unrealized gains (444,838) (404,203)
Investments in other companies, principally due to
unrealized gains on securities (31,270,991) (37,197,829)
------------ ------------
Other (284,800) (364,245)
------------ ------------
Total gross deferred tax liabilities $(32,000,629) $(37,966,277)
------------ ------------
Net deferred tax liability $(31,131,475) $(37,203,768)
============ ============
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1997 was
$30,000. The net change in the total valuation allowance for the years ended
December 31, 1998 and 1997 was a decrease of $9,000 and $14,000, 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 1995 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, 1998 and 1997, the Company had deferred income
relating to such sales of $119,500 and $135,100, respectively.
(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, 1998, 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, 1,015,166
at December 31, 1998 and 1,075,700 on December 31, 1997. The computation assumes
that outstanding stock options were exercised and the proceeds used to purchase
common stock.
(13) SHARE REPURCHASE PROGRAM
At December 31, 1998 the Company has repurchased 528,180 shares as treasury
shares at a cost of $14,003,004. During 1998, the Company repurchased 61,900
shares at an average cost of $71.19 per share. Said repurchase price represents
a weighted average discount of 10% per share relative to net asset value.
During 1998 the Company cancelled and retired 527,680 shares.
14
<PAGE>
(14) ACCUMULATED UNDISTRIBUTED INCOME
At December 31, 1998 accumulated undistributed investment income-net was
$3,806,407 accumulated undistributed net realized gains on investment
transactions was $16,565,750 and net unrealized appreciation in value of
investments was $44,230,970.
(15) 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, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
PER SHARE DATA AND RATIOS*
Investment income $ 3.48 $ 5.38 $ 2.38 $ 3.55
Expenses (including income taxes) (1.63) (2.60) (1.54) (2.40)
--------- --------- --------- ---------
Investment income - net 1.85 2.78 0.84 1.15
Distributions from investment income - net (.98) (.97) (0.58) (0.58)
Net realized and unrealized gain on
securities 3.35 19.96 9.15 9.31
Share transactions .30 .06 (0.10) 0.08
--------- --------- --------- ---------
Net increase in net asset value 4.52 21.83 9.31 9.96
Net asset value:
Beginning of year 75.07 53.24 43.93 33.97
--------- --------- --------- ---------
End of year $ 79.59 $ 75.07 $ 53.24 $ 43.93
========= ========= ========= =========
RATIOS
Ratio of expenses to average net assets 1.07% 4.23% 3.20% 6.30%
Ratio of investment income - net to average
net assets 2.34% 8.77% 1.75% 3.01%
Portfolio turnover 8.31% 2.55% 0.93% 1.36%
AVERAGE SHARES OUTSTANDING 1,056,454 1,083,696 1,097,032 1,106,052
</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, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C> <C> <C>
BASIC
Net Asset $80,795,319 $80,750,089
=========== ===========
Shares Outstanding 978,362 1,040,262
=========== ===========
Net Asset Value per Share $ 82.58 $ 77.62
=========== ===========
DILUTED
Options 45,000 45,000
Exercise Price $12.75 $12.75
Market Price 71.25 (8,196) 60.00 (9,562)
----------- -----------
Additional Shares Attributable to Stock
Options 36,804 35,438
Shares Outstanding 978,362 1,040,262
----------- -----------
1,015,166 1,075,700
=========== ===========
Net Asset Value per Share $ 79.59 $ 75.07
=========== ===========
</TABLE>
\
16
<PAGE>
First Carolina Investors, Inc.
- --------------------------------------------------------------------------------
DIRECTORS
Brent D. Baird*
Private Investor
Bruce E. Baird
President
Belmont Contracting Co., Inc.
Patrick W.E. Hodgson*+
President of Cinnamon Investments Ltd. and
Chairman of Todd Shipyards Corporation
Theodore E. Dann, Jr.+
President
Buffalo Technologies Corporation
James E. Traynor+
President
Clear Springs Development Co., LLC
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
AUDITORS
KPMG LLP
2800 Two First Union Center
Charlotte, NC 28282
