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NUMBER: 04634917 BUSINESS ADDRESS: STREET 1: 9347A FOUNDERS STREET CITY: FORT MILL STATE: SC ZIP: 29708 BUSINESS PHONE: 8028020890 MAIL ADDRESS: STREET 1: P O BOX 1827 CITY: FORT MILL STATE: SC ZIP: 29716 NSAR-B 1 answer.fil FCII FORM NSAR-B PAGE 1 000 B000000 12/31/2003 000 C000000 0000811040 000 D000000 N 000 E000000 NF 000 F000000 Y 000 G000000 N 000 H000000 N 000 I000000 6.1 000 J000000 A 001 A000000 FIRST CAROLINA INVESTORS, INC. 001 B000000 811-8942 001 C000000 8038020890 002 A000000 9437A FOUNDERS STREET 002 B000000 FORT MILL 002 C000000 SC 002 D010000 29708 003 000000 N 004 000000 N 005 000000 N 006 000000 N 007 A000000 N 007 B000000 0 007 C010100 1 007 C010200 2 007 C010300 3 007 C010400 4 007 C010500 5 007 C010600 6 007 C010700 7 007 C010800 8 007 C010900 9 007 C011000 10 012 A000001 CONTINENTAL STOCK TRANSFER & TRUST COMPANY 012 B000001 84-00034 012 C010001 NEW YORK 012 C020001 NY 012 C030001 10004 013 A000001 KPMG, LLP 013 B010001 CHARLOTTE 013 B020001 NC 013 B030001 28202 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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, 2003 report on Securities and Exchange Commission Form N-SAR will be furnished without charge to shareholders upon written request directed to the Secretary, First Carolina Investors, Inc., P.O. Box 1827, Fort Mill, SC 29716 Table of Contents Management's Discussion and Analysis of Financial Conditions and Results of Operations...................... 1 Management's Report.................. 3 Independent Auditors' Report......... 4 Consolidated Financial Statements.... 5 Notes to Consolidated Financial Statements......................... 9 Financial Highlights................. 14
Quarterly Stock Prices (Boston Stock Exchange and OTC Bulletin Board) and Dividends Paid Per Share - -------------------------------------------------------------------------------- 2003 - --------------------------------------------------------------------------------
Quarter First Second Third Fourth High Bid $85.15 90.50 104.75 76.60 Low Bid $84.00 89.50 101.75 70.00 Cash Dividends $ 0.50 0.50 0.50 25.00
- -------------------------------------------------------------------------------- 2002 - --------------------------------------------------------------------------------
Quarter First Second Third Fourth High Bid $85.10 88.50 84.00 89.00 Low Bid $84.10 85.00 83.15 84.00 Cash Dividends $ 0.50 0.50 0.50 2.00
- -------------------------------------------------------------------------------- There were approximately 346 record holders of Shares of Common Stock at January 2, 2004. This stock is not actively traded. Management's Discussion and Analysis of Financial Conditions and Results of Operations FIRST CAROLINA INVESTORS, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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 and until 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. 2003 OPERATIONS COMPARED TO 2002 The net asset value of the Company as a result of operations increased by $18,872,305 or $21.48 per share during 2003 as compared to an increase of $525,741 or $0.81 per share during 2002. During 2003, the Company decreased its investments in non-investment grade debentures. At the end of 2003 the value of the Company's investment in M & T Bank Corporation was $24,575,000 compared to $23,805,000 at the end of 2002. Total value of distressed and high yield debt was $18,409,426 at the end of 2003 as compared to $36,061,000 at the end of 2002. During 2003 the Company reported the sale of 50,000 shares of M & T Bank Corporation resulting in an after tax realized gain of $2,517,000. During 2002, the Company reported the sale of 200,000 shares of M&T Bank Corporation resulting in an after tax realized gain of $9,474,000. In 2003, the Company purchased $4,381,000 of Mercantile Bankshares Corporation, a regional multibank holding company located in Baltimore, Maryland, at an average price of $38.18 per share. In 2003, the Company, through sales or calls of debentures, reduced its investments in debentures. The Company sold $15,000,000 of Finova Group, Inc. at a gain of $1,877,000. Rose Hill Company called $8,885,000, resulting in a gain of $892,000. Investment income, net, was $5,341,042 for 2003 as compared to $4,878,796 for 2002. The net gain realized on investments in other companies, net of income taxes, was $4,570,220 in 2003 as compared to $13,217,475 in 2002. The increase in net unrealized appreciation of investments was $8,961,043 in 2003 as compared to a decrease of $17,790,645 in 2002. These components combined to produce a net increase in net assets resulting from operations of $18,872,305 in 2003 compared to an increase of $525,741 in 2002. At year end net asset value per share was $93.34 in 2003 and $98.36 in 2002. Dividend income increased during 2003 as compared to 2002. M & T Bank Corporation continues to be the largest contributor to dividend income. Also the purchase of shares of one new stock and the payment of a conversion dividend from preferred to common stock resulted in an 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 2003 and 2002, seven of the Company's investees did not pay dividends and are therefore considered non-income producing as compared to eight in 2002. Interest income for 2003 was $7,660,565 as compared to $7,219,798 for 2002. During 2003 interest income reported from debenture investments was $7,513,066 as compared to $6,941,817 for 2002. The majority of the increase in interest income is due to the Company's investments in distressed and high yield debt purchased at significant discounts to par. Included in the interest income from debenture investments, the interest income from discount accretion on distressed and high yield debt was $3,205,332 in 2003 as compared to $2,831,498 in 2002. Also during 2003, other interest income received from money market fund investments was $147,499 as compared to $277,981 in 2002. Interest on mortgage loans for 2002 was approximately $4,300. 1 General and administrative expense decreased in 2003 to $100,324 as compared to $123,587 during 2002. For both years personnel costs were a large component of the category and totaled approximately $47,000 in 2003 as compared to $67,500 in 2002. The President and Chairman no longer receives a salary. Instead, the President and Chairman only receives fees as a director. The directors fees were increased in 2003 to include a $10,000 annual retainer per director. Professional fees increased in 2003 to $328,897, as additional fees were paid to attorneys for various services in connection with the First Union Real Estate and Mortgage Investments litigation. Other expenses decreased in 2003 to $41,905 as compared to $56,517 during 2002. Other expenses include registrar and transfer agent fees and printing fees. Gain on sale of real estate, net of income tax, was $220,115 during 2002. On December 19, 2003 the Company paid a special year-end dividend of $25.00 per share. The Board of Directors declared this special dividend based on the excess liquidity of the Company and the favorable income tax provisions accorded qualifying dividends under The Jobs and Growth Tax Relief Reconciliation Act of 2003. INTERNAL AND EXTERNAL SOURCES OF LIQUIDITY The two major components of the Company's source of liquidity are investments in other companies and cash (including short term investments). INVESTMENTS IN OTHER COMPANIES While investments in other companies consist mainly of marketable securities, they are considered mid to long term investments. REAL ESTATE It is our present policy not to make additional active real estate investments. CASH, INCLUDING SHORT TERM INVESTMENTS At December 31, 2003, the Company held net cash and short term investments consisting of a money market mutual fund of $20,356,811, which are highly liquid and accordingly are the Company's best sources of liquidity. COMMITMENTS FOR CAPITAL EXPENDITURES While the Company has no contractual commitments to purchase additional equity securities, the Company may from time-to-time make significant investments for this purpose. The Company's stock repurchase program had been in effect since 1980. As of December, 2003 the Company discontinued repurchasing shares. CRITICAL ACCOUNTING POLICY Our accounting and reporting policies are in accordance with accounting principles generally accepted in the United States of America, and they conform to general practices within the industry. The application of these principles involves judgments and the use of estimates based on assumptions that involved uncertainty at the time of estimation. We have identified the policy for valuing investments in securities that are privately held issuers or for which market quotations are reading available as a critical accounting policy. Securities for which market quotations are not readily available are valued at fair value as determined by the pricing committee of the Board of Directors. The pricing committee may consider, if available, financial statements such as balance sheets and statements of operations: business and strategic plans; evaluations of major assets; quality of management; legal, contractual or market restrictions or limitations on sale of securities; and other factors which the pricing committee deems relevant. SUMMARY During 2003 the net increase in net assets resulting from operations was $18,872,305 as compared to an increase of $525,741 for 2002. At December 31, 2003 net assets per share are $93.34. This is a decrease of $5.02 per share from the December 31, 2002 net assets per share of $98.36. 2 - -------------------------------------------------------------------------------- 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 accounting principles generally accepted in the United States of America 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 having only one employee, 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, 2003, 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 auditing standards generally accepted in the United States of America. 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 President 3 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 investments, as of December 31, 2003 and 2002 and the related consolidated statements of operations, consolidated statements of changes in net assets for each of the years in the two-year period then ended and the financial highlights for each of the years in the five-year period then ended. These consolidated financial statements and financial highlights are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. Our procedures included confirmation of securities owned as of December 31, 2003 and 2002, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of First Carolina Investors, Inc. and subsidiaries as of December 31, 2003 and 2002 and the results of their operations and the changes in their net assets for each of the years in the two-year period then ended and the financial highlights for each of the years in the five-year period then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Charlotte, North Carolina February 13, 2004 4 FIRST CAROLINA INVESTORS, INC. AND SUBSIDIARIES Consolidated Statements of Assets and Liabilities December 31, 2003 and 2002
2003 2002 ----------- ---------- Assets Investments in securities, at value (note 2) (cost of $47,909,686 in 2003 and $67,418,417 in 2002) $73,728,693 78,725,613 Short term money market investments 20,356,811 16,459,858 Accrued dividend and interest receivable 207,212 568,765 Amount due from sale of security 475,617 -- Other assets (note 3) 2,245,950 2,331,315 ----------- ---------- Total assets 97,014,283 98,085,551 ----------- ---------- Liabilities Accounts payable and accrued liabilities (note 4) 2,381,766 2,475,634 Federal and state income taxes payable 2,484,660 3,349,694 Deferred income taxes payable (note 5) 9,395,403 2,653,638 ----------- ---------- Total liabilities 14,261,829 8,478,966 ----------- ---------- Net Assets $82,752,454 89,606,585 =========== ========== Analysis of Net Assets: Net capital paid in on shares of capital stock 8,391,763 10,597,642 Undistributed net investment income and realized gains 58,417,454 72,026,749 Net unrealized appreciation of investments 15,943,237 6,982,194 ----------- ---------- Net Assets $82,752,454 89,606,585 =========== ========== Net assets per share (3,500,000 no par value common shares authorized, 886,679 and 912,306 shares issued, 886,579 and 910,981, shares outstanding, in 2003 and 2002, respectively (note 7) $ 93.34 98.36 =========== ==========
See accompanying notes to consolidated financial statements. 5 FIRST CAROLINA INVESTORS, INC. AND SUBSIDIARIES Consolidated Statements of Operations For the years ended December 31, 2003 and 2002
2003 2002 ----------- ----------- INCOME Dividends $ 1,088,147 1,068,051 Interest 7,660,565 7,219,798 Other 172,610 15,075 ----------- ----------- Total income 8,921,322 8,302,924 ----------- ----------- EXPENSES General and administrative 100,324 123,587 Director fees and expenses 143,363 72,734 Professional fees 328,897 276,351 State and local taxes 14,032 107,656 Other 41,905 56,517 ----------- ----------- Total expenses 628,521 636,845 ----------- ----------- Earnings before income taxes and realized and unrealized appreciation on investments 8,292,801 7,666,079 Provision for income taxes (Note 5) (2,951,759) (2,787,283) ----------- ----------- Investment income, net 5,341,042 4,878,796 Gain on sale of real estate, net of income tax expense of $143,621 in 2002 -- 220,115 Gain realized on investments in other companies, net of income tax expense of $2,830,946 in 2003 and $7,060,465 in 2002 4,570,220 13,217,475 Change in unrealized appreciation (depreciation) of investments for the period, net of deferred taxes expense (benefit) of $5,550,768 in 2003 and $(10,187,122) in 2002 8,961,043 (17,790,645) ----------- ----------- Net increase in net assets resulting from operations $18,872,305 525,741 =========== ===========
See accompanying notes to consolidated financial statements. 6 FIRST CAROLINA INVESTORS, INC. AND SUBSIDIARIES Consolidated Statements of Changes in Net Assets For the years ended December 31, 2003 and 2002
2003 2002 ------------ ----------- Increase in net assets from operations Investment income, net $ 5,341,042 4,878,796 Realized gain on real estate, net -- 220,115 Realized gain on investments, net 4,570,220 13,217,475 Change in unrealized appreciation (depreciation), net 8,961,043 (17,790,645) ------------ ----------- Net increase in net assets resulting from operations 18,872,305 525,741 Distributions to shareholders of $26.50 per share in 2003 and $3.50 per share in 2002 from investment income, net (Note 8) (23,520,557) (3,211,266) Capital Share Transactions (Note 7) (2,205,879) (1,288,952) ------------ ----------- Total increase (decrease) (6,854,131) (3,974,477) Net assets Beginning of year 89,606,585 93,581,062 ------------ ----------- End of year (undistributed net investment income and realized gains of $58,417,454 in 2003 and $72,026,749 in 2002) $ 82,752,454 89,606,585 ============ ===========
See accompanying notes to consolidated financial statements. 7 FIRST CAROLINA INVESTORS, INC. AND SUBSIDIARIES SCHEDULE OF INVESTMENTS December 31, 2003 and 2002
2003 2002 ------------------------ ------------------------ Principal Principal Amount Amount or Shares Fair Value or Shares Fair Value ---------- ----------- ---------- ----------- Common and Preferred Stocks - 75.0% in 2003 and 54.2% in 2002 Financial Services 66.2% in 2003 and 67.2% in 2002 Coast Financial Holdings, Inc. 100,000 $ 1,360,000 100,000 $ 1,100,000 Evans Bancorp, Inc. 67,257 1,520,008 33,600 785,568 ** Finova Group 1,369,494 897,019 -- -- M & T Bank Corporation 250,000 24,575,000 300,000 23,805,000 Mercantile Bankshares Corporation 114,750 5,230,305 -- -- Merchants Group, Inc. 121,100 2,884,602 135,000 2,970,000 Ravensource Fund 28,200 130,586 -- -- Manufacturing 13.4% in 2003 and 11.5% in 2002 ** Allied Healthcare Products, Inc. 850,000 3,272,500 850,000 2,337,500 ** Amcast Industrial Corporation 1,087,900 2,828,540 1,087,900 1,849,430 Halterm Income Fund 58,000 208,046 -- -- ** Sun-Rype Products Ltd. 177,200 1,095,096 177,200 732,899 Services 7.0% in 2003 and 7.7% in 2002 ** Barrister Global Services Network, Inc. 159,810 807 159,810 63,924 Call-Net Enterprises, Inc. -- -- 111,889 69,371 Ecology & Environment, Inc. 399,300 3,893,175 399,300 3,170,442 **, + High Falls Brewery Company, LLC 193,900 -- 185,000 -- Diversified 13.4% in 2003 and 13.6% in 2002 ** Alderwoods Group, Inc. 538,313 5,070,908 598,088 2,834,937 CPAC, Inc. -- -- 28,388 143,388 Denison Energy, Inc. -- -- 212,025 323,338 First Union Real Estate Equity and Mortgage Investments Preferred Conv Ser A 91,000 2,074,800 134,000 2,479,000 Price Legacy Corporation Series A Pfd 17,100 277,875 -- -- ----------- ----------- Total Common and Preferred Stocks (cost of $33,406,338 in 2003 and $30,523,944 in 2002) 55,319,267 42,664,797 ----------- ----------- Debentures - 25.0% in 2003 and 45.8% in 2002 Alderwoods Group, Inc. 11% Senior Secured Notes due 2007 -- -- 5,981,158 5,981,158 Alderwoods Group, Inc. 12.25% Senior Unsecured Notes due 2009 1,824,700 2,052,787 1,824,700 1,660,477 Call-Net Enterprises, Inc. 10.625% Senior Secured Notes due 2009 10,000,000 9,962,500 17,328,177 9,357,216 Finova Group, Inc. 7.5% Senior Notes due 2009 5,000,000 3,000,000 20,000,000 6,900,000 First Union Real Estate Equity & Mortgage Investments 8.875% Senior Notes due 2003 -- -- 2,000 1,861 + High Falls Brewery Company, LLC 12% Notes due 2008 1,110,000 -- 1,110,000 555,000 Lindsey Morden Group 7% Notes due 2008 3,500,000 1,733,410 -- -- Malan Realty Investments, Inc. 9.5% Conv Sub Notes due 2004 1,641,000 1,638,949 3,597,000 3,480,098 Moran Energy, Inc. 8.75% Sub Notes due 2008 22,000 21,780 45,000 39,656 Rose Hills Company 9.5% Senior Sub Notes due 2004 -- -- 8,885,000 8,085,350 ----------- ----------- Total Debentures (cost of $14,503,348 in 2003 and $36,894,473 in 2002) 18,409,426 36,060,816 ----------- ----------- Total - 100% (cost of $47,909,686 in 2003 and $67,418,417 in 2002) $73,728,693 $78,725,613 =========== =========== + Fair Value determined by Board of Directors. The fair value of investments determined by the Pricing Committee of the Board of Directors totaled $0 in 2003 and $1,655,000 in 2002. ** Non-Income Producing Securities. See accompanying notes to consolidated financial statements.
8 FIRST CAROLINA INVESTORS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2003 - -------------------------------------------------------------------------------- (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) Investments in Securities The Company records security transactions based on the trade date. 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. Securities of privately-held issuers or for which market quotations are not readily available are valued at fair value as determined in good faith by the Company's Pricing Committee of the Board of Directors. In determining fair value, the Pricing Committee of the Board of Directors may consider, if available, financial statements; business and strategic plans; evaluations of major assets; quality of management; legal, contractual or market restrictions or limitations on sale of the securities; and other factors which the directors deem relevant. Realized gains and losses are determined based on the average cost of the securities sold. Interest income is recognized on the accrual basis. Dividend income is recognized on the ex-dividend date. Discounts and premiums on debentures are amortized to cost over the life of the debentures at the effective rate of interest. (d) 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 deferred income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (e) Distributions to Shareholders Dividends payable to shareholders are recorded on the declaration date. (f) Management's use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of increase and decrease in net assets from operations during the reporting period. Actual results may differ from these estimates. 9 (2) INVESTMENTS IN SECURITIES The Company's investments in common stocks and debentures, which are stated at market value, are as follows:
December 31, 2003 ------------------------------------------------------------------------------------------ Principal Gross Gross Amount or Fair Value Unrealized Unrealized Number as a % of Holding Holding Fair Dividend of shares Net Assets Cost Gains Losses Value Income ----------- ---------- ----------- ---------- ----------- ---------- --------- Common and Preferred Stocks - ------------------------- Coast Financial Holdings, Inc. 100,000 1.6% $ 1,100,000 260,000 -- 1,360,000 160,505 Evans Bancorp, Inc. 67,257 1.8 1,236,450 283,559 -- 1,520,008 31,462 M & T Bank Corporation 250,000 29.7 397,580 24,177,420 -- 24,575,000 315,000 *Merchants Group, Inc. 121,100 3.5 1,839,880 1,044,722 -- 2,884,602 51,270 *Allied Healthcare Products, Inc. 850,000 4.0 2,391,625 880,875 -- 3,272,500 -- *Amcast Industrial Corporation 1,087,900 3.4 9,532,474 -- (6,703,934) 2,828,540 -- Sun-Rype Products Ltd. 177,200 1.3 616,969 478,127 -- 1,095,096 -- Barrister Global Services Network, Inc. 159,810 0.0 91,092 -- (90,285) 807 -- *Ecology & Environment, Inc. 399,300 4.7 2,121,345 1,771,829 -- 3,893,175 131,769 *High Falls Brewery Company, LLC 193,900 0.0 564,324 -- (564,324) -- -- CPAC, Inc. -- -- -- -- -- -- 1,039 Alderwoods Group, Inc. 538,313 6.1 6,184,052 -- (1,113,143) 5,070,908 -- First Union Real Estate Equity & Mortgage Investments Preferred Conv Ser A 91,000 2.5 1,896,854 177,946 -- 2,074,800 283,500 Finova Group 1,369,494 1.1 457,243 439,775 -- 897,019 -- Halterm Income Fund 58,000 0.3 186,264 21,782 -- 208,046 -- Mercantile Bankshares Corporation 114,750 6.3 4,380,639 849,666 -- 5,230,305 113,602 Price Legacy Corporation Series A Pfd 17,100 0.3 277,875 -- -- 277,875 -- Ravensource Fund 28,200 0.2 131,672 -- (1,086) 130,586 -- Debentures - --------- Alderwoods Group, Inc. 12.25% Senior Unsecured Notes due 2009 $ 1,824,700 2.5 1,825,334 227,454 -- 2,052,788 -- Call-Net Enterprises, Inc. 10.625% Senior Secured Notes due 2008 $10,000,000 12.0 5,562,551 4,399,949 -- 9,962,500 -- Finova Group, Inc. 7.5% Senior Notes due 2009 $ 5,000,000 3.6 2,707,326 292,674 -- 3,000,000 -- Lindsay Morden Group 7% Notes due 2008 $ 3,500,000 2.1 1,680,000 53,410 -- 1,733,410 -- High Falls Brewing Company, LLC 12% Notes due 2008 $ 1,110,000 0.0 1,110,000 -- (1,110,000) -- -- Malan Realty Investments, Inc. 9.5% Conv Sub Notes due 2004 $ 1,641,000 2.0 1,604,971 33,978 -- 1,638,949 -- Moran Energy, Inc. 8.75% Sub Notes due 2008 $ 22,000 0.0 13,166 8,614 -- 21,780 -- ----------- ---------- ----------- ---------- --------- $47,909,686 35,401,779 (9,582,772) 73,728,693 1,088,147 =========== ========== =========== ========== =========
December 31, 2002 ------------------------------------------------------------------------------------------ Principal Gross Gross Amount or Fair Value Unrealized Unrealized Number as a % of Holding Holding Fair Dividend of shares Net Assets Cost Gains Losses Value Income ----------- ---------- ----------- ---------- ----------- ---------- --------- Common and Preferred Stocks - ------------------------- *Coast Bank of Florida Preferred 100,000 1.2 $ 1,100,000 -- -- 1,100,000 -- Evans Bancorp, Inc. 33,600 0.9 607,098 178,470 -- 785,568 18,816 M & T Bank Corporation 300,000 26.5 477,080 23,327,920 -- 23,805,000 365,000 *Merchants Group, Inc. 135,000 3.3 2,051,021 918,979 -- 2,970,000 54,000 Three Rivers Bancorp, Inc. -- -- -- -- -- -- 192,224 *Allied Healthcare Products, Inc. 850,000 2.6 2,391,625 -- (54,125) 2,337,500 -- *Amcast Industrial Corporation 1,087,900 2.1 9,532,474 -- (7,683,044) 1,849,430 -- Sun-Rype Products Ltd. 177,200 0.8 616,969 115,930 -- 732,899 -- Barrister Global Services Network, Inc. 159,810 0.1 91,092 -- (27,168) 63,924 -- Call-Net Enterprises, Inc. 111,889 0.1 675,796 -- (606,425) 69,371 -- *Ecology & Environment, Inc. 399,300 3.5 2,121,346 1,049,096 -- 3,170,442 131,888 *High Falls Brewery Company, LLC 193,900 0.0 564,324 -- (564,324) -- -- Alderwoods Group, Inc. 598,088 3.2 6,870,737 -- (4,035,800) 2,834,937 -- CPAC, Inc. 26,388 0.2 174,741 -- (31,353) 143,388 24,723 Denison Energy, Inc. 212,025 0.4 457,111 -- (133,773) 323,338 -- First Union Real Estate Equity & Mortgage Investments Preferred Conv Ser A 134,000 2.8 2,792,530 -- (313,530) 2,479,000 281,400 Debentures - --------- Alderwoods Group, Inc. 11% Senior Secured Notes due 2007 $ 5,981,158 6.7 5,981,158 -- -- 5,981,158 -- Alderwoods Group, Inc. 12.25% Senior Unsecured Notes due 2009 $ 1,824,700 1.9 1,825,334 -- (164,857) 1,660,477 -- Call-Net Enterprises, Inc. 10.625% Senior Secured Notes due 2008 $17,328,177 10.4 8,104,952 1,252,264 -- 9,357,216 -- Excel Legacy Corporation 10% Senior Notes due 2004 $ -- 0.0 -- -- -- -- -- Finova Group, Inc. 7.5% Senior Notes due 2009 $20,000,000 7.7 8,851,945 -- (1,951,945) 6,900,000 -- First Union Real Estate Equity & Mortgage Investments 8.875% Senior Notes due 2003 $ 2,000 0.0 2,063 -- (202) 1,861 -- High Falls Brewing Company, LLC 12% Notes due 2008 $ 1,110,000 0.6 1,110,000 -- (555,000) 555,000 -- Malan Realty Investments, Inc. 9.5% Conv Sub Notes due 2004 $ 3,597,000 3.9 3,329,977 150,121 -- 3,480,098 -- Moran Energy, Inc. 8.75% Sub Notes due 2008 $ 45,000 0.0 36,026 3,630 -- 39,656 -- Rose Hills Company 9.5% Senior Sub Notes due 2004 $ 8,885,000 9.0 7,653,018 432,332 -- 8,085,350 -- ----------- ---------- ----------- ---------- --------- $67,418,417 27,428,742 (16,121,546) 78,725,613 1,068,051 =========== ========== =========== ========== =========
- --------------- * Investments in affiliated companies in which the Company owns more than 5% of voting shares. 10 Cost of purchases and proceeds from sales of investment securities were $7,817,927 and $37,933,139 during 2003 and $24,275,104 and $27,740,910 during 2002. The net gain on sale of investments in other companies was $7,401,166 and $20,277,940 for 2003 and 2002, respectively. Net gains are computed using the average cost method. During 2002, $192,224 of dividend income on securities sold was received. The U.S. federal income tax basis of the Company's investments at December 31, 2003, was $46,920,421, and net unrealized appreciation for U.S. federal income tax purposes was $26,808,272 (gross unrealized appreciation $36,783,466; gross unrealized depreciation $9,975,194.) The difference between tax basis and the book basis of undistributed income is primarily due to computing gains and losses on investments using the specific identification method for tax and average cost for book purposes. (3) OTHER ASSETS The components of other assets at December 31, 2003 and 2002 are as follows:
2003 2002 ---------- ---------- Deferred compensation, funded (note 4) $2,236,170 $2,319,686 Miscellaneous 9,780 11,629 ---------- ---------- $2,245,950 $2,331,315 ========== ==========
The deferred compensation includes amounts owed to affiliate persons pursuant to a deferred compensation plan. The deferred compensation has accrued over nineteen years. Contributions are no longer being made to the plan. (4) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES The components of accounts payable and accrued liabilities at December 31, 2003 and 2002 are as follows:
2003 2002 ---------- ---------- Overdrafts $ 4,350 $ 17,769 Trade accounts payable 2,922 3,832 Deferred compensation (note 3) 2,236,170 2,319,686 Miscellaneous accruals and payables 138,324 134,347 ---------- ---------- $2,381,766 $2,475,634 ========== ==========
(5) INCOME TAXES Total income tax expense (benefit) for the years ended December 31, 2003 and 2002 are allocated as follows:
2003 2002 ----------------------------- ------------------------------ Earnings (loss) Earnings (loss) before before Income Tax Income Tax Income Tax Income Tax --------------- ----------- --------------- ------------ Investment income $ 8,292,801 $ 2,951,759 $ 7,666,079 $ 2,787,283 Realized gain on sale of real estate -- -- 363,736 143,621 Gain realized on investments in other companies 7,401,166 2,830,946 20,277,940 7,060,465 Change in unrealized depreciation of investments 14,511,811 5,550,768 (27,977,767) (10,187,122) ----------- ----------- ------------ ------------ $30,205,778 $11,333,473 $ 329,988 $ (195,753) =========== =========== ============ ============
11 The components of Federal and state income tax expense (benefit) from continuing operations are summarized as follows:
2003 2002 ----------- ------------ Current: Federal $ 3,998,233 $ 8,862,643 State 593,475 1,856,096 ----------- ------------ 4,591,708 10,718,739 Deferred: Federal 5,860,488 (8,890,343) State 881,277 (2,024,149) ----------- ------------ 6,741,765 (10,914,492) ----------- ------------ $11,333,473 $ (195,753) =========== ============
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:
2003 % 2002 % ----------- ---- --------- ----- Income tax expense at Federal rate $10,572,023 35.0 $ 115,496 35.0 State income tax net of Federal tax benefit 958,588 3.2 (109,234) (33.1) Dividend exclusion (197,138) (0.7) (202,015) (61.2) ----------- ---- --------- ----- Provision for income taxes $11,333,473 37.5 $(195,753) (59.3) =========== ==== ========= =====
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2003 and 2002 are presented below:
2003 2002 ------------ ----------- Deferred tax assets: Other basis differences in securities $ -- $ 780,659 Deferred compensation liability 858,761 890,705 State net operating loss carryforwards -- 7,000 ------------ ----------- Total gross deferred tax assets 858,761 1,678,364 Less valuation allowance -- (7,000) ------------ ----------- Net deferred tax assets 858,761 1,671,364 ------------ ----------- Deferred tax liabilities: Investments in securities, principally due to unrealized gains on securities (9,875,770) (4,325,002) Other basis differences in securities (378,394) -- ------------ ----------- Total gross deferred tax liabilities $(10,254,164) (4,325,002) ------------ ----------- Net deferred tax liability $ (9,395,403) $(2,653,638) ============ ===========
The valuation allowance of $7,000 at December 31, 2002 primarily relates to state net operating loss carry forwards. For 2003 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. The calculation of deferred tax assets and liabilities at the end of each year is based on tax laws and rates enacted for future years. In December 2002, the Company moved its operations from North Carolina to South Carolina, which resulted in an adjustment to the tax rate and cumulative deferred taxes. Federal and state income tax returns of the Company for 2000 and subsequent years are subject to examination by the Internal Revenue Service and various other taxing authorities. (6) 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, 886,579 at December 31, 2003 and 910,981 on December 31, 2002. 12 (7) SHARE REPURCHASE PROGRAM During 2003 and 2002, the Company repurchased 24,402 and 15,120 shares at an average cost of $90.40 and $86.42 per share, which was an average discount of 14.63% and 14.91% to average net asset value. At December 31, 2003 the Company has repurchased 639,302 shares as treasury shares at a cost of $22,498,467. At December 31, 2003, 639,202 treasury shares were cancelled and retired. (8) DISTRIBUTIONS TO SHAREHOLDERS Four dividends totaling $26.50 and $3.50 per share were declared during the twelve months ended December 31, 2003 and 2002, respectively. The dividends are taxable to stockholders as dividend income. The Company's directors have adopted a dividend policy to reflect the Company's intention to distribute to shareholders as dividends not less than all undistributed personal holding company income of the Company as defined in the Internal Revenue Code. In the Company's case, the sources of such income are primarily dividends and interest received and, in addition, to include in the fourth quarter dividend an adjusting dividend if necessary to effect a distribution of all undistributed personal holding company income for the fiscal year. (9) RELATED PARTY TRANSACTIONS Each Director receives fees of $2,500 per directors' meeting attended and $1,000 per audit committee meeting attended. In 2003 each Director received an additional $10,000 yearly fee. For the twelve months ended December 31, 2003 and 2002 directors' fees totaled $132,000 and $66,000, respectively. The Company paid brokerage fees of $12,911 and $33,233 for the year ended December 31, 2003 and 2002, respectively. The Company has executed securities transactions through the brokerage firm of Trubee, Collins and Co., Inc., of which Brent D. Baird, Chairman of the Board and an affiliated person of the Company, is a registered person. Trubee, Collins & Co., Inc. received $4,175 and $2,300 during the year ended December 31, 2003 and 2002, respectively. 13 - -------------------------------------------------------------------------------- Financial Highlights For the Years Ended December 31 - --------------------------------------------------------------------------------
2003 2002 2001 2000 1999 ---------- ---------- ---------- ---------- ---------- FINANCIAL HIGHLIGHTS* Investment income $ 9.94 $ 9.01 $ 4.45 $ 4.02 $ 2.19 Expenses (including income taxes) (3.99) (3.71) (1.97) (1.53) (1.71) ---------- ---------- ---------- ---------- ---------- Investment income - net 5.95 5.30 2.48 2.49 0.48 Net realized and unrealized gain (loss) on real estate and investments 15.53 (4.49) 5.09 19.82 (4.19) ---------- ---------- ---------- ---------- ---------- Total from investment operations 21.48 .81 7.57 22.31 (3.71) Distributions from investment income - net (26.50) (3.50) (2.00) (1.75) (0.96) ---------- ---------- ---------- ---------- ---------- Net increase (decrease) in net asset value (5.02) (2.69) 5.57 20.56 (4.67) Net asset value: Beginning of year 98.36 101.05 95.48 74.92 79.59 ---------- ---------- ---------- ---------- ---------- End of year $ 93.34 $ 98.36 $ 101.05 $ 95.48 $ 74.92 ========== ========== ========== ========== ========== Market value end of year $ 76.60 $ 84.00 $ 82.10 $ 74.00 $ 63.50 Total Net Assets 82,752,454 89,606,585 93,581,062 91,156,411 72,993,361 RATIOS Ratio of expenses to average net assets .66% 0.68% 0.83% 0.71% 2.13% Ratio of investment income - net to average net assets 5.62% 5.18% 2.48% 3.12% 4.24% Portfolio turnover 9.66% 28.47% 42.83% 12.36% 3.29% Total return based on market price 23.22% 6.52% 13.74% 16.38% (5.09)% AVERAGE SHARES OUTSTANDING 897,503 921,210 945,592 960,200 997,549
* 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 For the Year Ended December 31, 2003 and 2002 - --------------------------------------------------------------------------------
2003 2002 ----------- ----------- Net Asset $82,752,454 $89,606,585 =========== =========== Shares Outstanding 886,579 910,981 =========== =========== Net Asset Value per Share $ 93.34 $ 98.36 =========== ===========
14 First Carolina Investors, Inc. - -------------------------------------------------------------------------------- DIRECTORS Brent D. Baird*, ++ Private Investor Bruce C. Baird President Belmont Contracting Co., Inc. Patrick W.E. Hodgson*+ President of Cinnamon Investments Ltd. and Chairman of Todd Shipyards Corporation Theodore E. Dann, Jr.+ Executive Vice President Advance Foam Plastics, Inc. 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 ++Member of the Pricing Committee OFFICERS: Brent D. Baird Chairman President Bruce C. Baird Vice President, Secretary Cynthia Raby Assistant Secretary REGISTRAR, TRANSFER AND DISBURSING AGENT Continental Stock Transfer and Trust Company 17 Battery Place New York, NY 10004 INDEPENDENT AUDITORS KPMG LLP 401 South Tryon Street Charlotte, NC 28202 EX-99.77Q1 OTHR EXHB 4 g87323ex906.txt SECTION 906 CERTIFICATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2003 In connection with the foregoing Annual Report of First Carolina Investors, Inc. (the "Company") on Form N-SAR for the period ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Brent D. Baird, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. The Company has no designated chief financial officer. /s/ Brent D. Baird -------------------------- Chief Executive Officer February 26, 2004 -----END PRIVACY-ENHANCED MESSAGE-----