-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E6CkbxhXSC0xL7PVBtL8AFdZcyXWrdKNeg6px0zDxB3s0SIg2wM6Dq5TibTD65LQ MYa2Me8EZoeMDybUPgro8Q== 0000950144-99-002290.txt : 19990302 0000950144-99-002290.hdr.sgml : 19990302 ACCESSION NUMBER: 0000950144-99-002290 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990301 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST CAROLINA INVESTORS INC CENTRAL INDEX KEY: 0000811040 STANDARD INDUSTRIAL CLASSIFICATION: LAND SUBDIVIDERS & DEVELOPERS (NO CEMETERIES) [6552] IRS NUMBER: 561005066 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-08942 FILM NUMBER: 99553466 BUSINESS ADDRESS: STREET 1: 1130 EAST THIRD SRREET SUITE 410 CITY: CHARLOTTE STATE: NC ZIP: 28204 BUSINESS PHONE: 7043730501 MAIL ADDRESS: STREET 1: P O BOX 33607 CITY: CHARLOTTE STATE: NC ZIP: 28233-3607 N-30D 1 FIRST CAROLINA INVESTORS, INC. 1 FIRST CAROLINA INVESTORS, INC. 1998 ANNUAL REPORT 2 Company Profile FIRST CAROLINA INVESTORS, INC. AND SUBSIDIARIES Description of Business - ----------------------- First Carolina Investors (the Company) was organized December 2, 1971. The Company is a non-diversified, closed-end management investment company under the Investment Company Act of 1940. 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 - ----------------- 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
Quarterly Stock Prices (Boston Stock Exchange) and Dividends Paid Per Share - -------------------------------------------------------------------------------- 1998 ---- - --------------------------------------------------------------------------------
Quarter First Second Third Fourth 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
- -------------------------------------------------------------------------------- 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
- -------------------------------------------------------------------------------- There were approximately 490 record holders of Shares of Common Stock at January 2, 1999. 3 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 4 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 5 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 6 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 7 - -------------------------------------------------------------------------------- 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 8 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 9 FIRST CAROLINA INVESTORS, INC. AND SUBSIDIARIES Consolidated Statements of Assets and Liabilities December 31, 1998 and 1997
1998 1997 ------------ ----------- 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 ============ ===========
See accompanying notes to consolidated financial statements. 7 10 FIRST CAROLINA INVESTORS, INC. AND SUBSIDIARIES Consolidated Statements of Operations For the years ended December 31, 1998 and 1997
1998 1997 ------------ ---------- 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 ============ ==========
See accompanying notes to consolidated financial statements. 8 11 FIRST CAROLINA INVESTORS, INC. AND SUBSIDIARIES Consolidated Statements of Changes in Net Assets For the years ended December 31, 1998 and 1997
1998 1997 ------------ ----------- 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 ============ ===========
See accompanying notes to consolidated financial statements. FIRST CAROLINA INVESTORS, INC. AND SUBSIDIARIES INVESTMENTS IN SECURITIES December 31, 1998 and 1997
1998 1997 ------------------------- ----------------------- Number Number Shares Fair Value Shares Fair Value --------- ------------ ------- ------------ 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 ============ ============
See accompanying notes to consolidated financial statements. 9 12 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 13 (i) Other The Company follows the industry practice of recording security transactions on the trade date. Interest income is recognized on the accrual basis. Dividend income is recognized on the ex-dividend date. (2) INVESTMENTS IN OTHER COMPANIES The Company's investments in the common stock of financial and other entities, which are stated at market value, are as follows:
December 31, 1998 --------------------------------------------------------------------------------------- Gross Gross Fair Value Unrealized Unrealized Number as a % of Holding Holding Fair Dividend of shares Net Assets Cost Gains Losses Value Income --------- ---------- ----------- ---------- ---------- ----------- -------- 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 =========== ========== ======= =========== =======
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 --------- ---------- ----------- ---------- ---------- ----------- -------- 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 =========== ========== ======= =========== =======
- --------------- * 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:
1998 1997 ------- -------- 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 ======= ========
11 14 (4) REAL ESTATE The estimated fair value of real estate owned at December 31, 1998 and 1997 are summarized as follows:
1998 1997 ----------------------- ----------------------- Fair Fair Description Quantity Value Quantity Value ----------- --------- ---------- --------- ---------- 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 ========== ==========
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:
1998 1997 ---------- ---------- Deferred compensation, funded $2,191,947 $1,967,359 Sales center -- 549,049 Miscellaneous 26,038 20,316 ---------- ---------- $2,217,985 $2,536,724 ========== ==========
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:
1998 1997 ---------- ---------- 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 ========== ==========
12 15 (9) INCOME TAXES Total income tax expense for the years ended December 31, 1998 and 1997 are allocated as follows:
1998 1997 -------------------------- ------------------------ Earnings Earnings before before Income Tax Income Tax Income Tax Income Tax ------------ ---------- ---------- ---------- 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 ============ ========== ========== ==========
The components of Federal and state income tax expense (benefit) from continuing operations are summarized as follows:
1998 1997 ----------- ---------- 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 =========== ==========
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:
1998 % 1997 % ---------- ----- ---------- ----- 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% ========== ===== ========== =====
13 16 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:
1998 1997 ------------ ------------ 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) ============ ============
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 17 (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 18 - -------------------------------------------------------------------------------- Selected Per Share Data and Ratios For the Years Ended December 31, 1998 and 1997 - --------------------------------------------------------------------------------
1998 1997 1996 1995 --------- --------- --------- --------- 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
* 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 - --------------------------------------------------------------------------------
1998 1997 ----------- ----------- 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 =========== ===========
\ 16 19 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 -----END PRIVACY-ENHANCED MESSAGE-----