<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to _________
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Commission File Number 2-27985
1st FRANKLIN FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Georgia 58-0521233
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
213 East Tugalo Street
Post Office Box 880
Toccoa, Georgia 30577
(Address of principal executive offices)
Registrant's telephone number, including area code: (706) 886-7571
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. (X)
(Cover page 1 of 2 pages)
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State the aggregate market value of the voting stock held by
nonaffiliated of the Registrant: Not Applicable.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class Outstanding at February 28, 1996
------------------------------------- --------------------------------
Voting Common Stock, $100 Par Value 1,700 shares
Non-Voting Common Stock, No Par Value 168,201 shares
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Annual Report to security holders for the
fiscal year ended December 31, 1995 are incorporated by reference into
Parts I, II and IV of this Form 10-K.
(Cover page 2 of 2 pages)
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PART I
Item 1. BUSINESS:
The Company, Page 1; Business, Pages 5 - 12; and Financial
Statements, Pages 18-30 of Registrant's Annual Report to security
holders for the fiscal year ended December 31, 1995 are
incorporated herein by reference.
Item 2. PROPERTIES:
Paragraph 1 of The Company, Page 1; Footnote 7 (Commitments) of
Notes to Consolidated Financial Statements, Page 28; and map on back
cover of Registrant's Annual Report to security holders for the
fiscal year ended December 31, 1995 are incorporated herein by
reference.
Item 3. LEGAL PROCEEDINGS:
The Company has been named as defendant in the following legal
proceedings in the state of Alabama:
Debra Underwood v. 1st Franklin Financial Corporation, et al.;
Filed in the Court of Chilton County, Alabama;
Civil Action No. CV-96-001-R.
This lawsuit was filed in January 1, 1996. The plaintiffs
allege that the Company required them to purchase credit life
insurance before extending a loan to them. The plaintiffs
allege that, in so requiring, the Company violated the Alabama
Mini-Code, committed fraudulent misrepresentation and
suppression, and engaged in a conspiracy. Plaintiffs also
allege that the Company and the other defendants fraudulently
suppressed the costs of refinancing their existing loan. At
the present, it is too early to reach any type of informed
assessment of the liability of the case. The case is being
vigorously defended.
Annie Liptrot, et al. v 1st Franklin Financial Corporation,
et al.; Filed in the United States District Court for the Middle
District of Alabama; Civil Action No. CV-95-T-1656-N.
This lawsuit was filed November 28, 1995 as a putative
statewide class action, in which the plaintiff alleges that
the Company has violated the Alabama Mini-Code and committed
fraud arising out of the sale of credit life insurance. At
the present, it is too early to reach any type of informed
assessment of the liability of the case. The case is being
vigorously defended.
Earnestine B. Simmons v. 1st Franklin Financial, et al.; Filed
January, 1996 in Superior Court for Dougherty County, Georgia;
Civil Action No. 96-CV-020
This class action case seeks recovery for alleged violations
of fraud and deceit, breach of contract and violations under
the Georgia RICO act arising out of the sale of non-filing
and personal property insurance. At the present, it is too
early to reach any type of informed assessment of the
liability of the case. The case is being vigorously defended.
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During recent months, the Company entered into settlement
agreements with certain borrowers who had previously asserted
claims against the Company. Although the Company and its employees
deny that they are guilty of any wrongdoing or any breach of any
legal obligation or duty to the Claimants, in recognition of the
expense and uncertainty of litigation, Management felt it was in
the best interest of the Company to dispose of these cases. The
following cases previously reported have been disposed of:
Mose Burks v. 1st Franklin, et al.; Filed May, 1994, in the
Circuit Court of Barbour County, Alabama, Clayton Division;
Civil Action No. CV-94-084; previously disclosed in the
Company's Form 10-K for the period ended December 31, 1994. The
case was settled on December 29, 1995.
Karen Hilliary v. 1st Franklin Financial, et al.; Filed
September, 1994 in the Circuit Court of Bullock County, Alabama;
Civil Action No. CV-94-92; previously disclosed in the Company's
Form 10-K for the period ended December 31, 1994. The case was
settled on December 29, 1995.
Vicie Davis v. 1st Franklin Financial Corporation, et al.;
Originally filed on May 11, 1995 in Circuit Court of Barbour
County, Alabama; Civil Action No. CV-95-0139; previously
disclosed in the Company's Form 10-Q for the period ended
June 30, 1995. The case was settled during February, 1996.
Corinthia Holman v. 1st Franklin Financial Corporation, et al.;
Filed May 11, 1995 in the Circuit Court of Barbour County,
Alabama; Civil Action No. CV-95-0142; previously disclosed in
the Company's Form 10-Q for the period ended June 30, 1995. The
case was settled during February, 1996.
Teri Foster v. 1st Franklin Financial Corporation, et al.;
Filed May 11, 1995 in the Circuit Court of Barbour County,
Alabama; Civil Action No. CV-95-0123; previously disclosed in
the Company's Form 10-Q for the period ended June 30, 1995. The
case was settled during February, 1996.
Nine other cases in Alabama, similar in nature to the
aforementioned, were filed during January and February, 1996.
The Company settled all of these during the first quarter
of 1996.
Other than ordinary routine litigation incidental to the finance
business, there are no other material pending legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
Not applicable.
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PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS:
Source of Funds, Page 12 of Registrant's Annual Report to
security holders for the fiscal year ended December 31, 1995 is
incorporated herein by reference.
Item 6. SELECTED FINANCIAL DATA:
Selected Consolidated Financial Information, Page 4 of
Registrant's Annual Report to security holders for the fiscal
year ended December 31, 1995 is incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
Management's Discussion of Operations, Pages 13 - 15 of
Registrant's Annual Report to security holders for the fiscal
year ended December 31, 1995 is incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
Pages 18 - 30 of Registrant's Annual Report to security holders
for the fiscal year ended December 31, 1995 are incorporated
herein by reference.
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE:
Not applicable.
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PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
DIRECTORS
Director Since
and
Date on Which Position
Name of Director Age Term Will Expire With Company
---------------- --- ---------------- ------------
W. Richard Acree (1)(2) 68 Since 1970; None
When successor
elected and qualified
Ben F. Cheek, III (3)(4)(5) 59 Since 1967; Chairman of
When successor Board
elected and qualified
Lorene M. Cheek (2)(4)(6) 86 Since 1946; None
When successor
elected and qualified
Jack D. Stovall (1)(2) 60 Since 1983; None
When successor
elected and qualified
Robert E. Thompson (1)(2) 64 Since 1970; None
When successor
elected and qualified
_______________________________________________________________________
(1) Member of Audit Committee.
(2) Mr. Acree is President of Acree Oil Company, a distributor of
petroleum products in Northeast Georgia; Mrs. Cheek is an honorary
member of the Board of Trustees of Tallulah Falls School;
Dr. Thompson is a physician at Toccoa Clinic; and Mr. Stovall is
President of Stovall Building Supplies, Inc. These positions have
been held by each respective Director for more than five years.
(3) Reference is made to the business experience of executive officers
of the Company as detailed below.
(4) Member of Executive Committee.
(5) Son of Lorene M. Cheek.
(6) Mother of Ben F. Cheek, III.
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EXECUTIVE OFFICERS
Name, Age, Position
and Family Relationship Business Experience
- ----------------------- ----------------------------------------------
Ben F. Cheek, III, 59 Joined the Company in 1961 as attorney and
Chairman of Board became Vice President in 1962, President in
1972 and Chairman of Board in 1989.
T. Bruce Childs, 59 Joined the Company in 1958 and was named Vice
President President in charge of Operations in 1973 and
No Family Relationship President in 1989.
Lynn E. Cox, 38 Joined the Company in 1983 and became
Secretary Secretary in 1989.
No Family Relationship
A. Roger Guimond, 41 Joined the Company in 1976 as an accountant and
Vice President and became Chief Accounting Officer in 1978, Chief
Chief Financial Officer Financial Officer in 1991 and Vice President in
No Family Relationship 1992.
Linda L. Sessa, 41 Joined the Company in 1984 and became
Treasurer Treasurer in 1989.
No Family Relationship
The term of office of each Executive Officer expires when a successor is
elected and qualified. There was no, nor is there presently any
arrangement or understanding between any officer and any other person
(except directors or officers of the registrant acting solely in their
capacities as such) pursuant to which the officer was selected.
No event such as bankruptcy, criminal proceedings or securities violation
proceeding has occurred within the past 5 years with regard to any
Director or Executive Officer of the Company.
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Item 11. EXECUTIVE COMPENSATION:
(b) Summary Compensation Table:
Other All
Name Annual Other
and Compen- Compen-
Principal Salary Bonus sation sation
Position Year $ $ $ $ *
-------- ---- ------- ------- ------ -------
Ben F. Cheek, III 1995 240,000 220,466 3,033 146,114
Chairman and 1994 228,000 189,693 2,760 38,594
CEO 1993 216,000 154,653 2,867 44,268
T. Bruce Childs 1995 228,000 219,986 4,236 130,447
President 1993 210,000 188,973 4,682 31,071
1992 194,000 153,773 7,179 38,574
A. Roger Guimond 1995 120,000 74,816 1,650 40,959
Vice President 1994 108,000 62,174 1,650 17,945
and CFO 1993 96,000 36,790 1,650 15,354
* Represents Company contributions to profit-sharing plan, and reported
compensation from premiums on life insurance policies for the benefit of
Ben F. Cheek, III in the amount of $4,425 for 1995, $3,816 for 1994 and
$5,984 for 1993. Includes Company contributions to profit-sharing plan
for the benefit of T. Bruce Childs. Also represents contributions to
profit-sharing plan, and reported compensation from premiums on a life
insurance policy for the benefit of A. Roger Guimond in the amount
of $574 for 1995.
(g) Compensation of Directors:
Directors who are not employees of the Company receive $1,000 per year
for attending scheduled board meetings.
(k) Board Compensation Committee Report on Executive Compensation:
The Company has no official executive compensation committee. Ben F.
Cheek, III (Chairman of the Company) establishes the bases for all
executive compensation. The Company is a family owned business with
Ben F. Cheek, III being the majority stockholder.
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Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT:
(a) Security Ownership of Certain Beneficial Owners as of March 26, 1996:
Name and Address of Amount and Nature of Percent
Beneficial Owner Title of Class Beneficial Ownership Of Class
------------------- -------------- --------------------- --------
Ben F. Cheek, III Voting Common 1,160 Shares - Direct 68.24%
225 Valley Drive
Toccoa, Georgia 30577
John Russell Cheek Voting Common 441 Shares - Direct 25.94%
181 Garland Road
Toccoa, Georgia 30577
(b) Security Ownership of Management as of March 26, 1996:
Ownership listed below represents ownership in 1st Franklin Financial
Corporation, of (i) Directors and named Executive Officers of the
Company and (ii) all Directors and Executive Officers as a group:
Amount and Nature of Percent
Name Title of Class Beneficial Ownership Of Class
---- -------------- -------------------- -------
Ben F. Cheek, III Voting Common Stock 1,160 Shares - Direct 68.24%
Non-Voting Common Stock 114,840 Shares (1) 68.24%
T. Bruce Childs Voting Common Stock None None
Non-Voting Common Stock None None
A. Roger Guimond Voting Common Stock None None
Non-Voting Common Stock None None
__________________________________________
All Directors and
Executive Officers
as a Group Voting Common Stock 1,160 Shares - Direct 68.24%
Non-Voting Common Stock 114,840 Shares 68.24%
(1) Such shares are owned by Cheek Investments, L.P., of which
Ben F. Cheek, III and his wife are the general partners.
(c) The Company knows of no contractual arrangements which may at a
subsequent date result in a change in control of the Company.
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Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
The Company leases its Home Office building and print shop for a
total of $12,600 per month from Franklin Enterprises, Inc. under
leases which expire December 31, 2004. Franklin Enterprises, Inc.
is 66.67% owned by Ben F. Cheek, III, a director and executive
officer of the Company. In Management's opinion, these leases are
at rates which approximate those obtainable from independent third
parties.
Beneficial owners of the Company are also beneficial owners of
Liberty Bank & Trust ("Liberty"). The Company and Liberty have
management and data processing agreements whereby the Company
provides certain administrative and data processing services to
Liberty for a fee. Income recorded by the Company during the three
year period ended December 31, 1995 related to these agreements
was $63,800 per year which in Management's opinion approximates
the Company's actual cost of these services.
Liberty leases its office space and equipment from the Company for
$4,200 per month, which in Management's opinion is at a rate which
approximates that obtainable from independent third parties.
At December 31, 1995, the Company maintained $2,300,000 of
certificates of deposit and $2,360 in a money market account with
Liberty at market rates and terms. The Company also had $1,431,090
in demand deposits with Liberty at December 31, 1995.
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PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:
(a) 1. Financial Statements:
Incorporated by reference from the Registrant's Annual Report to
security holders for the fiscal year ended December 31, 1995:
Report of Independent Public Accountants.
Consolidated Statements of Financial Position at December 31, 1995
and 1994.
Consolidated Statements of Income and Retained Earnings for the
three years ended December 31, 1995.
Consolidated Statements of Cash Flows for the three years ended
December 31, 1995.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules:
None - Financial statement schedules are omitted because of the
absence of conditions under which they are required or because the
required information is given in the financial statements or notes
thereto.
3. Exhibits:
2. (a) Articles of Merger of 1st Franklin Corporation with and
into 1st Franklin Financial Corporation dated December 31,
1994 (incorporated herein by reference to Exhibit 3(2)(a)
from Form 10-K for the fiscal year ended December 31, 1994).
3. (a) Restated Articles of Incorporation as amended January 26,
1996.
(b) Bylaws
4. (a) Executed copy of Indenture dated October 31, 1984,
covering the Variable Rate Subordinated Debentures -
Series 1 (incorporated herein by reference from
Registration Statement No. 2-94191, Exhibit 4a).
(b) Modification of Indenture dated March 29, 1995
(incorporated herein by reference to Exhibit 3(4)(b) from
Form 10-K for the fiscal year ended December 31, 1994).
9. Not applicable.
10. (a) Credit Agreement dated May, 1993 between the registrant
and SouthTrust Bank of Georgia, N.A.. (Incorporated
herein by reference from Form 10-K for the fiscal year
ended December 31, 1993.)
(b) Revolving Credit Agreement dated October 1, 1985 as
amended November 10, 1986; March 1, 1988; August 31, 1989
and May 1, 1990, among the registrant and the banks named
therein (Incorporated by reference to Exhibit 10 to the
registrant's Form SE dated November 9, 1990.)
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(c) Fifth Amendment to Revolving Credit Agreement dated
April 23, 1992. (Incorporated by reference to
Exhibit 10(c) to the Registrant's Form SE dated
November 5, 1992.)
(d) Sixth Amendment to Revolving Credit Agreement dated
July 20, 1992. (Incorporated by reference to
Exhibit 10(d) to the Registrant's Form SE dated
November 5, 1992.)
(e) Seventh Amendment to Revolving Credit Agreement dated
June 20, 1994. (Incorporated by reference to Exhibit 10(e)
from Form 10-K for the fiscal year ended December 31, 1994.)
(f) Merger of 1st Franklin Corporation with 1st Franklin
Financial Corporation Consent, Waiver and Eighth Amendment
to Revolving Credit and Term Loan Agreement. (Incorporated
herein by reference to Exhibit 10(f) from Form 10-K for
the fiscal year ended December 31, 1994.)
11. Computation of Earnings per Share is self-evident from the
Consolidated Statement of Income and Retained Earnings in the
Registrant's Annual Report to Security Holders for the fiscal
year ended December 31, 1995, incorporated by reference herein.
12. Ratio of Earnings to Fixed Charges.
13. Registrant's Annual Report to security holders for fiscal year
ended December 31, 1995.
18. Not applicable.
19. Not applicable.
21. Subsidiaries of Registrant.
22. Not applicable.
23. Consent of Independent Public Accountants.
24. Not applicable.
27. Financial Data Schedule
28. Not applicable.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during the quarter
ended December 31, 1995.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized:
1st FRANKLIN FINANCIAL CORPORATION
March 29, 1996 By: s/ Ben F. Cheek, III
-------------- --------------------
Date Chairman of Boad
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacity and on the dates indicated:
Signatures Title Date
s/ Ben F. Cheek, III Chairman of Board; March 29, 1996
- --------------------- Chief Executive --------------
Officer
s/ T. Bruce Childs President March 29, 1996
- --------------------- --------------
s/ A. Roger Guimond Vice President; March 29, 1996
- --------------------- Chief Financial --------------
Officer
s/ W. Richard Acree Director March 29, 1996
- --------------------- --------------
s/ Lorene M. Cheek Director March 29, 1996
- --------------------- --------------
s/ Jack D. Stovall Director March 29, 1996
- --------------------- --------------
s/ Robert E. Thompson Director March 29, 1996
- --------------------- --------------
Supplemental Information to be Furnished with Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered Securities
Pursuant to Section 12 of the Act.
(a) Except to the extent that the materials enumerated in (1) and/or (2)
below are specifically incorporated into this Form by reference (in
which case see Rule 12b-23b), every registrant which files an annual
report on this Form pursuant to Section 15(d) of the Act shall furnish
to the Commission for its information, at the time of filing its report
on this Form, four copies of the following:
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(1) Any annual report to security holders covering the registrant's last
fiscal year and
(2) Every proxy statement, form of proxy or other proxy soliciting
material sent to more than ten of the registrant's security
holders with respect to any annual or other meeting of
security holders.
(b) The foregoing material shall not be deemed to be "filed" with the
Commission or otherwise subject to the liabilities of Section 18 of
the Act, except to the extent that the registrant specifically
incorporates it in its annual report on this Form by reference.
(c) This Annual Report on Form 10-K incorporates by reference portions of
the Registrant's Annual Report to security holders for the fiscal year
ended December 31, 1995, which is filed as Exhibit 13 hereto. The
Registrant is a privately held corporation and therefore does not
distribute proxy statements or information statements.
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<PAGE>
<PAGE>
Exhibit 3(a)
RESTATED ARTICLES OF INCORPORATION
OF
FRANKLIN DISCOUNT COMPANY
Pursuant to the provisions of Section 22-907 of the Georgia
Business Corporation Code, the undersigned corporation, pursuant to a
resolution duly adopted by the stockholders, hereby adopts the following
Restated Articles of Incorporation:
1. The name of the Corporation is FRANKLIN DISCOUNT COMPANY.
2. The corporation is organized pursuant to the provisions of the
Georgia Business Corporation Code.
3. The corporation shall have perpetual duration.
4. The purposes for which the corporation is organized are: (a)
to carry on the business of a finance company, lending money on the
security of real estate or personal property, financing the sale
thereof, and leasing items or parcels thereof; (b) to carry on the
business of a mortgage broker, acquiring, holding and selling mortgages
on real estate and/or personal property; (c) to carry on the business of
an insurance broker, agent, and/or adjuster for insurance companies of
all kinds; (d) to provide means by which investors may invest their
money and secure an adequate return thereon; (e) to buy, acquire, own,
hold, manage and control real and personal property of every
description, including its own stock and stock in any other corporation,
to sell, convey, mortgage, pledge, lease and otherwise dispose of such
property or any part thereof, to lend money in connection therewith
either with or without security; and (f) to engage in other lawful
businesses from time to time without limitation.
5. The aggregate number of shares which the corporation shall
have authority to issue shall be 8,000 shares, such shares to consist of
2,000 shares of common stock, par value $100 per share, and 6,000 shares
of preferred stock, par value $100 per share. This class of preferred
stock shall have the designation, preferences, limitations, and rights
relative to the common stock set forth in paragraph 6 of these Restated
Articles of Incorporation.
6. The 6,000 shares of preferred stock, $100 par value, shall be
designated as "10% Mandatory Cumulative Preferred Stock" (hereinafter
referred to as the "Preferred Stock") and shall have the following
preferences, limitations and rights relative to the common stock:
(a) The Preferred Stock shall be transferable or redeemable
only in person or by a duly authorized attorney on the books of the
corporation upon surrender of the stock certificates properly endorsed.
(b) The holders of Preferred Stock shall be entitled to
receive dividends thereon at the rate of ten percent (10%) per annum,
payable in semiannual installments of five percent (5%) each on March 15
and September 15 of each year, before any dividends are paid to the
common stockholders. These dividends shall be payable from the
corporation's earned surplus and net earnings. Should these be
insufficient to pay any dividend, then such dividend will become a
charge against future net earnings of the corporation, and shall be paid
in full out of future net earnings before any dividends are paid to the
common stockholders.
<PAGE>
(c) If the corporation becomes in arrears in the payment of
two consecutive 5% dividends, the holders of the Preferred Stock shall
have the right to elect two additional directors, and the corporation
will, within 15 days after such default, call a meeting of the holders
of Preferred Stock for the purpose of electing two additional directors,
who will thereupon be seated on the corporation's Board of Directors.
Upon timely payment of dividends for one year following the date of
payment of all dividends in arrears, the holders of Preferred Stock
shall no longer have the right to elect two directors. Once the holders
of Preferred Stock have lost this right, however, the directors who were
elected by the holders of the Preferred Stock shall continue to serve as
directors until the next annual meeting of the stockholders at which
directors are elected.
(d) In the event of liquidation, dissolution, or winding up
of the corporation, holders of Preferred Stock shall be entitled to
receive the par value of their shares plus all accrued dividends, before
anything is paid to the common stockholders, and no more.
(e) Except as otherwise expressly provided herein, the
holders of Preferred Stock shall not be entitled to vote at meetings of
the stockholders of the corporation, nor to participate in its profits.
When voting as a class, the holders of Preferred Stock shall be entitled
to one vote per share.
(f) The holders of Preferred Stock will not be subject to
further calls nor assessments by the corporation, and their rights as
such holders may not be modified except by a majority vote of the shares
of the Preferred Stock outstanding, voting as a class. In particular,
but without limiting the generality of the previous sentence, while any
shares of Preferred Stock shall be outstanding, the number of directors
of the corporation may not be increased without the consent of a
majority of the shares of Preferred Stock outstanding, voting as a
class. The corporation will, upon the request of any stockholder,
furnish a full statement of the designations, preferences, and rights of
the holders of all classes of the corporation's capital stock.
(g) The corporation reserves the right to redeem any of its
shares of Preferred Stock on March 15 or September 15 of any year for a
redemption price of dividends accrued to date of redemption plus $104
per share. Notice of redemption shall be given by certified mail to the
holder not less than thirty nor more than sixty days prior to the date
fixed for redemption. In the event some portion, but not the entire
issue, is called for redemption, then the redemption call shall be made
in the inverse order of issue, the last shares issued to be the first
called for redemption.
(h) Except as may be prohibited by law, when requested to do
so by the holder, the corporation will redeem shares of Preferred Stock
for a redemption price of dividends accrued to date of redemption plus
$100 per share; provided, however, that the corporation shall not be
obligated to redeem these shares if at the time of the request (i) the
corporation is in default on any of its debt obligations, or is in
arrears in the payment of any Preferred Stock dividend, or (ii) the
effect of such redemption would be to reduce the corporation's remaining
outstanding Preferred Stock to an amount less than 90% of the amount of
such stock outstanding on the preceding September 16.
<PAGE>
7. The holders of the common stock of the corporation shall have
the preemptive right to acquire unissued shares of the common stock of
the corporation set forth in the Georgia Business Corporation Code.
8. These Restated Articles of Incorporation substantially amend
the Articles of Incorporation in certain respects, and they purport
merely to restate all those provisions of the Articles of Incorporation
not being amended.
9. These Restated Articles of Incorporation supersede the
original Articles of Incorporation as heretofore amended.
10. These Restated Articles of Incorporation were authorized at a
special called meeting of the shareholders June 3, 1981, by the
unanimous affirmative vote of the holders of all 1700 shares of the
common stock of the corporation outstanding and entitled to vote
thereon. The affirmative vote of 851 shares of such common stock was
the minimum required to adopt these Restated Articles of Incorporation.
IN WITNESS WHEREOF, Franklin Discount Company has caused these
Restated Articles of Incorporation to be executed and its corporate seal
to be affixed and has caused the foregoing to be attested, all by its
duly authorized officers, this June 22, 1981.
FRANKLIN DISCOUNT COMPANY
By: s/Ben F. Cheek, III, President
------------------------------
Attest: s/Hazel Henderson, Secretary
------------------------------
<PAGE>
ARTICLES OF AMENDMENT TO
THE RESTATED ARTICLES OF INCORPORATION OF
FRANKLIN DISCOUNT COMPANY
I.
The name of the corporation is: Franklin Discount Company.
II.
These Articles of Amendment relate amendments to the Restated
Articles of Incorporation of Franklin Discount Company which delete
Articles 6(g) and 6(h) and in lieu thereof add a new Article 6(g) which
reads as follows:
"(g) The Corporation shall have the right to redeem
on September 15, 1982 all of its shares of
outstanding Preferred Stock. The Corporation shall
effect the redemption by exchanging its Series D
Variable Rate Subordinated Debentures for the shares
of Preferred Stock in such a manner that each holder
of Preferred Stock as of such date shall receive a
Series D Variable Rate Subordinated Debenture having
a face value equivalent to the aggregate number of
shares of Preferred Stock held by such holder
multiplied by $100 per share (the par value of a
share). The Series D Variable Rate Subordinated
Debentures issued by the Corporation in exchange for
the Preferred Stock shall be redeemable by the
holders thereof on September 15, 1984. In the event
a holder of Preferred Stock has an aggregate number
of shares which when multiplied by $100 per share
yields an amount less than $500 (the minimum
denomination of a Series D Variable Rate
Subordinated Debenture), such holder shall receive
cash in an amount equal to the amount so determined.
The shares of Preferred Stock redeemed by the
Corporation shall be cancelled and shall have the
status of treasury shares."
III.
The affirmative vote of the holders of a majority of the
outstanding shares of common stock as well as a majority of the
outstanding shares of preferred stock of the Corporation voting as a
class were required to adopt the amendments. On the date of the
submission of the amendments to a vote of the holders of such shares,
1,700 shares of common stock and 3,835 shares of preferred stock were
outstanding and entitled to vote on the amendments. By the affirmative
vote of the holders of all shares of common stock and the holders of
more than 2,193 shares of preferred stock, the holders of the issued
stock of Franklin Discount Company approved the amendments.
IV.
The amendments do not provide for an exchange and subsequent
cancellation of issued shares of preferred stock of Franklin Discount
Company. The manner in which such shall be effected is set forth in the
amendment.
<PAGE>
V.
The amendments do not effect a change in the amount of stated
capital.
WITNESS the execution and attestation of these Articles of
Amendment by duly authorized officers of Franklin Discount Company as of
this 11th day of September, 1982.
FRANKLIN DISCOUNT COMPANY
By: s/Ben F. Cheek, III, President
------------------------------
Attest: s/Hazel Henderson, Secretary
------------------------------
(CORPORATE SEAL)
<PAGE>
ARTICLES OF AMENDMENT
OF
FRANKLIN DISCOUNT COMPANY
1.
The name of the Corporation is:
FRANKLIN DISCOUNT COMPANY
2.
The name of the Corporation shall be changed from
FRANKLIN DISCOUNT COMPANY
to:
1ST FRANKLIN FINANCIAL CORPORATION
The foregoing Articles of Amendment were adopted by the
Shareholders of the Corporation as of the 14th day of December, 1983.
The amendment was adopted by the unanimous vote of all shareholders.
WITNESS the execution and attestation of these Articles of
Amendment by duly authorized officers of Franklin Discount Company, as
of the 28th day of December, 1983.
FRANKLIN DISCOUNT COMPANY
BY: s/Ben F. Cheek, III, President
------------------------------
ATTEST: s/Hazel Henderson, Secretary
------------------------------
(CORPORATE SEAL)
<PAGE>
ARTICLES OF AMENDMENT
OF
RESTATED ARTICLES OF INCORPORATION
OF
1ST FRANKLIN FINANCIAL CORPORATION
1.
The name of the Corporation is 1st Franklin Financial Corporation.
2.
Article 5 of the Corporation's Restated Articles of Incorporation
is hereby amended and restated so that it shall read in its entirety as
follows:
"5. The aggregated number of shares which the corporation
shall have authority to issue shall be 206,000 shares, such
shares to consist of 2,000 shares of common stock, par value
$100 per share, 198,000 shares of non-voting common stock, no
par value, and 6,000 shares of preferred stock, par value $100
per share. This class of preferred stock shall have the
designation, preferences, limitations, and rights relative to
the common stock set forth in paragraph 6 of these Restated
Articles of Incorporation.
I.
COMMON STOCK
1. Dividends. The holders of shares of Common Stock shall be
entitled to receive such dividends as from time to time may be
declared by the Board of Directors of the Corporation, subject to the
rights of holders of Non-Voting Common Stock provided for herein.
2. Liquidation. In the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, the
holders of Common Stock and the holders of Non-Voting Common Stock shall
be entitled to share ratably based upon the number of shares held by
them in all assets of the Corporation available for distribution to its
shareholders.
3. Voting Rights. All shares of Common Stock shall be identical
with each other in every respect. The shares of Common Stock shall
entitle the holders thereof to one vote for each share upon all matters
upon which shareholders have the right to vote.
<PAGE>
II.
NON-VOTING COMMON STOCK
1. Dividends. The holders of shares of Non-Voting Common Stock
shall be entitled to receive such dividends as from time to time may be
declared by the Board of Directors of the Corporation. No dividend will
be declared or paid on Common Stock unless and equivalent per share
dividend is declared and paid on the Non-Voting Common Stock. In the
event that the holders of Common Stock receive a dividend payable in
shares of Common Stock, then holders of Non-Voting Common Stock shall
receive an equivalent dividend, payable in shares of Non-Voting Common
Stock.
2. Liquidation. In the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, the
holders of Common Stock and the holders of Non-Voting Common Stock shall
be entitled to share ratably based upon the number of shares held by
them in all assets of the Corporation available for distribution to its
shareholders.
3. Voting Rights. Holders of Non-Voting Common Stock shall have
no rights to vote except as provided by law."
4.
This amendment was adopted on January 26, 1996.
5.
This amendment was adopted by the unanimous vote of all directors
and all shareholders.
6.
No approval of this amendment by any person or persons other than
the Board of Directors or shareholders is required pursuant to O.C.G.A.
Section 14-3-1030 or 14-3-1041.
IN WITNESS WHEREOF, 1st Franklin Financial Corporation has caused
these Articles of Amendment to be executed, its corporate seal to be
affixed, and its seal and the execution hereof to be attested, all by
its duly authorized officers, this 26 of January, 1996.
1st Franklin Financial Corporation
By: s/T. Bruce Childs, President
----------------------------
Attest: s/Lynn Evans Cox, Secretary
----------------------------
(CORPORATE SEAL)
<PAGE>
<PAGE>
Exhibit 3(b)
BY-LAWS of Franklin Discount Company
NAME
The name of this corporation shall be FRANKLIN DISCOUNT COMPANY.
OFFICES
The principal office of the corporation shall be in Toccoa,
Georgia, but the corporation may have offices at such other places as
the business of the corporation may require.
SEAL
The corporate seal shall have inscribed thereon the words "Franklin
Discount Company, Toccoa, Georgia Seal" to be impressed. An impression
of said seal is impressed on the margin of this page.
MEETINGS OF STOCKHOLDERS
All meetings of stockholders shall be held at the office of the
corporation in Toccoa, Georgia.
The annual meeting of the stockholders shall be held on the second
Tuesday in September of each year at eight o'clock in the evening at
which time the stockholders shall elect a board of directors and
transact such other business as may properly be brought before the
meeting.
The holders of a majority of the common stock issued and
outstanding, present in person or represented by proxy, shall be
requisite and shall constitute a quorum at all meetings of stockholders
for the transaction of business. Each stockholder shall have one vote
for each share of stock registered in his name on the book of the
corporation.
Written notice of the annual meeting shall be mailed to each
stockholder at such address as appears on the stock book of the
corporation at least ten days prior to the meeting.
Special meetings of the stockholders for any purpose or purposes
may be called by the President, and shall be called by the President or
Secretary at the request in writing of a majority of the board of
directors, or at the request in writing of stockholders owning a
majority in amount of the entire capital stock of the corporation issued
and outstanding and entitled to vote. Such request shall state the
purpose or purposes of the proposed meeting.
Business transacted at all special meetings shall be confined to
the objects stated in the call.
Written notice of a special meeting of stockholders stating the
time, place, and object thereof, shall be mailed at least ten days
before such meeting to each stockholder at such address as appears on
the books of the corporation.
<PAGE>
DIRECTORS
The business of this corporation shall be directed by the board of
directors, a minimum of three and a maximum of fifteen in number.
Directors need not be stockholders. They shall be elected at the annual
meeting of the stockholders and each director shall be elected to serve
until his successor shall be elected and shall qualify.
The board of directors shall have all such powers as may be
exercised by the corporation subject to the provisions of the statute,
the certificate of incorporation and the by-laws, it being intended
specifically to incorporate herein the powers expressly conferred upon
the board of directors in the certificate of incorporation. All such
powers as are expressly conferred upon the board of directors shall be
construed to be in furtherance and not in limitation of the powers
conferred by law.
All meetings of the directors shall be held at the office of the
corporation in Toccoa, Georgia.
If the office of any director or directors shall become vacant by
reason of death, resignation, retirement, removal from office, or
otherwise, the remaining directors, though less than a quorum, shall
choose a successor or successors who shall hold office until the next
annual meeting of the stockholder, unless sooner displaced.
COMPENSATION OF DIRECTORS
Directors, as such, shall not receive any stated salary for their
service, but by resolution of the board a fixed sum for expenses of
attendance may be allowed; provided that nothing herein contained shall
be construed to preclude any director from serving the corporation in
any other capacity and receiving compensation therefor.
MEETINGS OF DIRECTORS
Immediately after each annual election of directors, the newly-
elected directors shall meet for the purpose of organizing and election
of officers, and the transaction of other business. If a majority of
the directors shall be present at such time no prior notice of such
meeting shall be required to be given to the directors; or they may meet
at such time as shall be fixed by the consent in writing of all the
directors.
Special meetings of the board may be called by the president on two
days' notice to each director, either personally or by mail. Special
meetings shall be called by the president or secretary in like manner on
the written request of a majority of the directors.
At all meetings of the board, a majority of the directors shall be
necessary and sufficient to constitute a quorum for the transaction of
business, and the act of a majority of the directors present at any
meeting at which there is a quorum shall be the act of the board of
directors, except as may be otherwise provided by statute or by these
by-laws.
OFFICERS
The officers of the corporation shall be chosen by the directors,
and shall be a President, a Vice President, and a Secretary-Treasurer.
The board of directors may choose a Secretary and a Treasurer instead of
one person as Secretary-Treasurer. They may also choose other Vice
Presidents, Assistant Secretaries and Assistant Treasurers. It is not
required that any officer of this corporation be a director or a
stockholder.
<PAGE>
The board may appoint or choose such other officers and agents as
it shall deem necessary, and all officers chosen by the board shall hold
office for such terms and shall exercise such powers and perform such
duties as shall be determined from time to time by the board.
The salaries of all officers of the corporation shall be fixed by
the board of directors.
The officers of the corporation shall hold office until their
successors are chosen and qualify in their stead.
PRESIDENT AND VICE PRESIDENT
The president shall preside at all meetings of the stockholders and
of the board of directors. He shall sign all certificates of stock and
all notes, debentures, and obligations of the corporation unless
otherwise directed by the board of directors. He shall sign all
contracts and instruments authorized by the board of directors, and
generally shall perform all duties usually incumbent upon the president
of a corporation. He shall make annual reports of the condition of the
company to the stockholders and to the directors at their annual
meetings.
The vice president shall perform all the duties of the president in
his absence, and such other duties as may be required of him by the
board of directors.
SECRETARY-TREASURER
The Board of Directors may choose one person to perform the duties
of the Secretary and of the Treasurer, or it may choose one person to
serve as Secretary and another as Treasurer. In the event it is one
person, then that person may be referred to as Secretary, or as
Treasurer, or as Secretary-Treasurer.
The secretary shall have care and custody of the books of the
corporation, give the necessary notices of all meetings of the
stockholders and directors, and keep the minutes of such meetings. He
shall have custody of the seal of the corporation and shall affix it to
all instruments requiring a seal, when authorized by the board of
directors. He shall keep such other books and minutes and perform all
such other duties as may be assigned to him by the board of directors or
the president.
The treasurer shall receive and have custody of all moneys and
securities of the corporation, shall pay such dividends as may be
declared from time to time by the board of directors, and do and perform
all such other duties as may be required of him by the board of
directors, and such other duties as usually devolve upon such officers.
He shall deposit funds to the credit of the company in such banks as the
board of directors shall direct, and shall disburse said funds under the
direction of the president. He shall sign all stock certificates and
evidences of indebtedness when signed by the president.
The Board may elect an assistant secretary, assistant treasurer, or
assistant secretary-treasurer, in which event he shall be authorized to
perform any of the duties or responsibilities set forth above for the
officer he is assistant to.
CAPITAL STOCK
Certificates of stock shall be issued, in the manner prescribed by
law, to each stockholder showing the number of shares to which he is
entitled. Each certificate shall be signed by the president or vice
president and by the treasurer or an assistant treasurer, and shall have
the corporate seal impressed thereon.
Stock shall be transferable only by entry upon the books of the
corporation upon surrender of the outstanding certificate with the
assignment thereof duly recorded and executed.
<PAGE>
DIVIDENDS
Dividends may be declared and paid out of the profits of the
corporation as often and at such times as the directors may determine.
These dividends may be paid out of the surplus of earnings retained from
previous years.
PURPOSES
The purpose of the corporation is to engage in the consumer finance
business and such other businesses as the board of directors may from
time to time determine, for the pecuniary gain of its stockholders.
AMENDMENTS
These by-laws may be amended or additional by-laws adopted by a
majority vote at any meeting of the stockholders in the notice of which
the proposed amendment or new by-laws shall be set forth at large.
(Adopted by Stockholders November 8, 1967)
AMENDMENT TO BY-LAWS
1. Amend Section of By-Laws entitled "DIRECTORS" by adding the
following paragraph:
"The directors shall elect a Chairman from
among their membership who shall preside at all
meetings of the Board of Directors."
2. Amend Section of By-Laws entitled "PRESIDENT AND VICE PRESIDENT" by
placing a period after the word "stockholders" and deleting the words
"and of the Board of Directors" in the first sentence.
(Adopted by Stockholders February 23, 1972)
AMENDMENT 2
Strike and revoke Amendment 1 which was adopted on February 23,
1972, and substitute in its stead the following:
1. Amend the section entitled "OFFICERS" by striking
the first paragraph in its entirety and putting in
place thereof the following paragraph, to-wit:
OFFICERS
The officers of the Corporation shall consist of a
Chairman of the Board, a President, an Executive
Vice President, one or more Vice Presidents, a
Secretary and a Treasurer. The offices of Secretary
and Treasurer may be held by one person. The
officers shall be elected by the Directors and each
officer shall hold office for the term to which he
is elected and until his successor has been elected
or appointed or until his earlier resignation,
removal from office, death or incapacity to serve.
<PAGE>
2. Amend the By-Laws by adding a new section entitled
"CHAIRMAN OF THE BOARD" following the section on
"OFFICERS" which will read as follows:
CHAIRMAN OF THE BOARD
The Directors shall elect a Chairman from among
their membership and the Chairman of the Board shall
preside at all meetings of the Board of Directors
and of the Shareholders, and shall be an ex-officio
member of all standing committees and shall preside
at meetings of such committees unless the Board of
Directors, in constituting such committees, shall
designate or elect some other person to be the
chairman thereof. The Chairman of the Board shall
also have such other duties and exercise such other
powers as the Board of Directors shall designate.
3. Amend section entitled "PRESIDENT AND VICE
PRESIDENT" by removing both paragraphs and placing
in their stead the following:
PRESIDENT, EXECUTIVE VICE PRESIDENT AND VICE PRESIDENT
The President, Executive Vice President and Vice
Presidents shall have such duties as the Board of
Directors shall designate from time to time. The
President, Executive Vice President or a Vice
President may sign notes, debentures, contracts or
other obligations of the Corporation when required
to carry out their duties as designated by the Board
of Directors.
<PAGE>
<PAGE>
Exhibit 12
RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31
------------------------------------------
1995 1994 1993 1992 1991
(In thousands, except ratio data)
Income Before Income Taxes . . $ 8,969 $10,319 $ 8,322 $ 6,177 $ 5,199
Interest on Indebtedness . . . 8,048 5,556 4,910 4,423 4,733
Portion of rents representative
of the interest factor . . 449 419 362 304 257
------- ------- ------- ------- -------
Earnings as adjusted . . $17,466 $16,294 $13,594 $10,904 $10,189
======= ======= ======= ======= =======
Fixed Charges:
Interest on Indebtedness . . . $ 8,048 $ 5,556 $ 4,910 $ 4,423 $ 4,733
Portion of rents representative
of the interest factor. . 449 419 362 304 257
------- ------- ------- ------- -------
Fixed Charges. . . $ 8,497 $ 5,975 $ 5,272 $ 4,727 $ 4,990
======= ======= ======= ======= =======
Ratio of Earnings
to Fixed Charges. . . . . 2.06 2.73 2.58 2.31 2.04
==== ==== ==== ==== ====
<PAGE>
<PAGE>
Exhibit 13
1st FRANKLIN FINANCIAL CORPORATION
ANNUAL REPORT
DECEMBER 31, 1995
<PAGE>
TABLE OF CONTENTS
The Company. . . . . . . . . . . . . . . . . . . . . . . . . 1
Ben F. Cheek, Jr. Office of the Year. . . . . . . . . . . . 2
Chairman's Letter. . . . . . . . . . . . . . . . . . . . . . 3
Selected Consolidated Financial Information. . . . . . . . . 4
Business . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Management's Discussion of Operations. . . . . . . . . . . . 13
Management's Report. . . . . . . . . . . . . . . . . . . . . 16
Report of Independent Public Accountants . . . . . . . . . . 17
Financial Statements . . . . . . . . . . . . . . . . . . . . 18
Directors and Management . . . . . . . . . . . . . . . . . . 32
Corporate Information. . . . . . . . . . . . . . . . . . . . 32
THE COMPANY
1st Franklin Financial Corporation has been engaged in the consumer
finance business since 1941, particularly in direct cash loans and real
estate loans. The business is operated through 89 branch offices in Georgia,
24 in Alabama and 15 in South Carolina.
As of December 31, 1995, the resources of the Company were invested
principally in loans which comprise 66% of the Company's assets. The
majority of the Company's revenues are derived from finance charges earned
on loans and other outstanding receivables. Remaining revenues are derived
from earnings on investment securities, insurance income and other
miscellaneous income. On the basis of total capital funds employed (common
stockholder's equity and subordinated debt), American Banker recently ranked
the Company as the 52nd largest finance company in the United States.
-1-
<PAGE>
DOUGLAS, GEORGIA
1995 BEN F. CHEEK, JR. "OFFICE OF THE YEAR"
*********************
** PICTURE OF EMPLOYEES **
*********************
This award is presented annually in recognition of the office that represents
the highest overall performance within the Company. Congratulations to the
entire Hazlehurst Staff for this significant achievement. The Friendly
Franklin Folks salute you!
-2-
<PAGE>
TO OUR INVESTORS, EMPLOYEES AND FRIENDS:
The "Friendly Franklin Folks" made a giant stride in 1995 toward reaching
our goal of $200 million in assets. With a growth of 33% during the year we
are now within $18 million of reaching our goal and we are running
considerably ahead of our target year 2000. A number of factors played an
important part in this growth with the two most important being the addition
of 11 new branch offices and a 44% growth in our investment center. New
offices were opened in Andalusia and Opp, Alabama; Columbia, Gaffney,
Greenville and Lancaster, South Carolina; Blakely, Dalton, Dawson, LaGrange
and Sandersville, Georgia. The addition of these new offices put our total
number of branches at 128 employing over 500 people. We expect to continue
this pattern in 1996 as the opportunities become available.
With the addition of our new branch offices came an increase in our net
loan and sales finance receivables. Let me quickly add however, that the
new branches were not the only source of this growth. The older branches
made their contribution also. Over the year, we saw an increase of 11% in
our net receivables and for the first time ever our loan volume topped $200
million. The number of outstanding accounts is now approaching 100,000.
Naturally, we are honored that this large number of our friends and neighbors
have chosen 1st Franklin as their source for additional family financing.
I mentioned above the important role that the Investment Center played in
our asset growth this year. None of our growth would be possible without the
funding provided by our 5,925 investors. Each of you are truly "partners"
with us and we will always be grateful for the confidence and support you
give 1st Franklin Financial.
In addition to the funding provided by our investors, we made another
significant addition to our capital base in 1995 showing a 15% growth in our
retained earnings. This strong foundation will give us the support we will
need to continue our growth in the years ahead.
Everyone at 1st Franklin Financial is looking forward to an exciting
1996. Our goals are set and we are determined to reach them. We invite each
of you, our investors, bankers and other friends to join us as we continue to
build toward the new millennium. Certainly we want to express a heartfelt
thanks for your invaluable support and encouragement in the past.
Very sincerely yours,
s/ Ben F. Cheek, III
---------------------
Chairman of the Board
-3-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
Set forth below is selected financial data of the Company. This
information should be read in conjunction with the more detailed financial
statements and notes thereto included elsewhere herein.
Year Ended December 31
-------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In 000's, except ratio data)
Selected Income Statement Data:
- ------------------------------
Revenues . . . . . . . . . . . $ 55,157 $ 49,334 $ 41,625 $ 34,613 $30,730
Net Interest Income. . . . . . 30,147 28,111 23,449 19,461 16,760
Interest Expense . . . . . . . 8,048 5,556 4,910 4,423 4,733
Provision for Loan Losses. . . 4,631 3,238 2,407 2,209 2,137
Income Before Income Taxes . . 8,969 10,319 8,322 6,177 5,199
Net Income . . . . . . . . . . 6,507 7,165 5,891 4,498 3,748
Ratio of Earnings to
Fixed Charges . . . . . . . 2.06 2.73 2.58 2.31 2.04
Selected Balance Sheet Data:
- ---------------------------
Loans, Net . . . . . . . . . . $120,763 $108,667 $ 97,485 $ 82,820 $70,748
Total Assets . . . . . . . . . 182,084 136,468 123,661 105,812 88,823
Senior Debt. . . . . . . . . . 95,541 66,677 60,540 47,822 34,603
Subordinated Debt. . . . . . . 30,617 21,603 20,875 21,455 22,312
Stockholder's Equity . . . . . 47,747 40,605 34,678 28,718 24,406
Ratio of Total Liabilities
to Stockholders' Equity . . 2.81 2.36 2.57 2.68 2.64
-4-
<PAGE>
BUSINESS
The Company is engaged in the business of making consumer loans to
individuals in relatively small amounts and for relatively short periods of
time and in making first and second mortgage loans on real estate in larger
amounts and for longer periods of time. The Company also purchases sales
finance contracts from various retail dealers. At December 31, 1995 direct
cash loans comprised 70% of the Company's outstanding loans, real estate
loans 21% and sales finance contracts 9%.
In connection with this business, the Company writes credit insurance as an
agent for a nonaffiliated company specializing in such insurance. Two wholly
owned subsidiaries, Frandisco Life Insurance Company and Frandisco Property
and Casualty Insurance Company, reinsure the life, the accident and health
and the property insurance so written.
The following table shows the sources of the Company's earned finance
charges over each of the past five periods:
Year Ended December 31
-------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In thousands)
Direct Cash Loans. . . . . . . $25,898 $22,962 $18,618 $14,669 $12,624
Real Estate Loans . . . . . . 7,058 7,284 6,722 6,587 6,454
Sales Finance Contracts . . . 2,757 2,472 2,249 1,825 1,523
------- ------- ------- ------- -------
Total Finance Charges. . . . $35,713 $32,718 $27,589 $23,081 $20,601
======= ======= ======= ======= =======
Direct cash loans are made primarily to people who need money for some
unusual or unforeseen expense or for the purpose of paying off an
accumulation of small debts. These loans are repayable in 6 to 48 monthly
installments and generally do not exceed $5,000 in principal amount. The
loans are generally secured by personal property, motor vehicles and/or real
estate. Interest and fees charged on these loans are in compliance with
applicable federal and state laws.
First and second mortgage loans on real estate are made to homeowners
who wish to improve their property or who wish to restructure their financial
obligations. They are generally made in amounts from $3,000 to $50,000 on
maturities of 35 to 120 months. Interest and fees on these loans are in
compliance with applicable federal and state laws.
Sales finance contracts are purchased from retail dealers. These
contracts have maturities that range from 3 to 48 months and generally do not
individually exceed $5,000 in principal amount. The interest rates charged on
these contracts are in compliance with applicable federal and state laws.
Prior to the making of a loan, a credit investigation is undertaken to
determine the income, existing indebtedness, length and stability of
employment, and other relevant information concerning the customer. In
granting the loan, the Company takes a security interest in real or personal
property of the borrower. In making direct cash loans, emphasis is placed
upon the customer's ability to repay rather than upon the potential resale
value of the underlying security. In making real estate and sales finance
loans, however, more emphasis is placed upon the marketability and value of
the underlying collateral.
-5-
<PAGE>
The Company is in competition with several national and regional finance
companies, as well as a variety of local finance companies in the communities
which it serves. The Company competes effectively in the market place
primarily based on its emphasis on customer service.
The business of the Company consists mainly of the making of loans to
salaried people and wage earners who depend on their earnings to make their
repayments. The continued profitable operation of the Company will therefore
depend to a large extent on the continued employment of these people and
their ability to meet their obligations as they become due. In the event of a
sustained recession or a significant downturn in business with consequent
unemployment, the Company's collection ratios and profitability could be
detrimentally affected.
The average annual yield on loans made by the Company (the % of finance
charges earned to average net outstanding balance) has been as follows:
Year Ended December 31
-----------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Direct Cash Loans. . . . . 31.26% 31.76% 31.81% 31.87% 32.55%
Real Estate Loans. . . . . 22.73 24.37 22.70 23.42 23.70
Sales Finance Contracts. . 22.28 21.27 20.47 20.66 20.94
Information regarding the Company's operations:
As of December 31
------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Number of Branch Offices. . 128 117 112 102 85
Number of Employees . . . . 527 473 456 390 346
Average Total Loans
Outstanding Per
Branch ( in 000's). . . $1,208 $1,202 $1,124 $1,037 $1,041
Average Number of Loans
Outstanding Per Branch. 765 814 778 761 772
-6-
<PAGE>
DESCRIPTION OF LOANS
Year Ended December 31
---------------------------------------------
1995 1994 1993 1992 1991
DIRECT CASH LOANS: ---- ---- ---- ---- ----
- ------------------
Number of Loans Made
to New Borrowers. . . . 25,840 26,616 24,978 23,479 17,779
Number of Loans Made
to Former Borrowers . . 14,740 13,185 11,710 9,639 7,901
Number of Loans Made
to Present Borrowers. . 61,304 60,014 54,311 44,866 37,708
Total Number of Loans
Made. . . . . . . . . . 101,884 99,815 90,999 77,984 63,388
Total Volume of Loans
Made (in 000's) . . . . $164,034 $150,658 $127,103 $100,176 $ 77,111
Average Size of
Loans Made. . . . . . . $ 1,610 $ 1,509 $ 1,397 $ 1,285 $ 1,216
Number of Loans
Outstanding . . . . . . 76,549 72,993 66,209 57,458 47,489
Total of Loans
Outstanding (in 000's). $107,960 $ 96,620 $ 82,595 $ 65,560 $ 51,027
Percent of Total Loans. . 70% 69% 66% 62% 58%
Average Balance on
Outstanding Loans . . . $ 1,410 $ 1,324 $ 1,247 $ 1,141 $ 1,075
REAL ESTATE LOANS:
- ------------------
Total Number of Loans
Made. . . . . . . . . . 2,674 2,264 2,315 1,886 3,345
Total Volume of Loans
Made (in 000's) . . . . $ 22,379 $ 18,755 $ 20,330 $ 15,366 $ 15,693
Average Size of
Loans Made. . . . . . . $ 8,369 $ 8,284 $ 8,782 $ 8,147 $ 4,692
Number of Loans
Outstanding . . . . . . 4,188 3,811 3,930 3,796 3,836
Total of Loans
Outstanding (in 000's). $ 32,653 $ 29,150 $ 30,174 $ 28,171 $ 28,388
Percent of Total Loans. . 21% 21% 24% 27% 32%
Average Balance on
Outstanding Loans . . . $ 7,797 $ 7,649 $ 7,678 $ 7,421 $ 7,401
SALES FINANCE CONTRACTS:
- -----------------------
Number of Contracts
Purchased . . . . . . . 19,195 21,744 20,726 20,507 17,463
Total Volume of Contracts
Purchased (in 000's). . $ 18,885 $ 20,489 $18,770 $17,512 $13,160
Average Size of Contracts
Purchased . . . . . . . $ 984 $ 942 $ 906 $ 854 $ 754
Number of Contracts
Outstanding . . . . . . 17,151 18,395 17,020 16,405 14,303
Total of Contracts
Outstanding (in 000's). $ 13,955 $ 14,806 $13,099 $12,053 $ 9,096
Percent of Total Loans. . 9% 10% 10% 11% 10%
Average Balance on
Outstanding Contracts . $ 814 $ 805 $ 770 $ 735 $ 636
-7-
<PAGE>
LOANS ACQUIRED, LIQUIDATED AND OUTSTANDING
Year Ended December 31
------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(in thousands)
LOANS ACQUIRED
DIRECT CASH LOANS . . . . $164,034 $150,217 $127,084 $ 98,488 $ 74,672
REAL ESTATE LOANS . . . . 22,000 17,916 19,485 13,779 11,195
SALES FINANCE CONTRACTS . 17,676 19,386 17,759 15,814 11,694
NET BULK PURCHASES. . . . 1,588 2,383 1,875 4,973 8,403
-------- -------- -------- -------- --------
TOTAL LOANS ACQUIRED. . . $205,298 $189,902 $166,203 $133,054 $105,964
======== ======== ======== ======== ========
LOANS LIQUIDATED
DIRECT CASH LOANS . . . . $152,694 $136,633 $110,068 $ 85,643 $ 71,602
REAL ESTATE LOANS . . . . 18,876 19,779 18,327 15,583 13,699
SALES FINANCE CONTRACTS . 19,736 18,782 17,724 14,555 11,808
-------- -------- -------- -------- --------
TOTAL LOANS LIQUIDATED. . $191,306 $175,194 $146,119 $115,781 $ 97,109
======== ======== ======== ======== ========
LOANS OUTSTANDING
DIRECT CASH LOANS . . . . $107,960 $ 96,620 $ 82,595 $ 65,560 $ 51,027
REAL ESTATE LOANS . . . . 32,653 29,150 30,174 28,171 28,388
SALES FINANCE CONTRACTS . 13,955 14,806 13,099 12,053 9,096
-------- -------- -------- -------- --------
TOTAL LOANS OUTSTANDING . $154,568 $140,576 $125,868 $105,784 $ 88,511
======== ======== ======== ======== ========
UNEARNED FINANCE CHARGES
DIRECT CASH LOANS . . . . $ 17,030 $ 16,114 $ 14,125 $ 10.959 $ 8,340
REAL ESTATE LOANS . . . . 12 43 65 133 176
SALES FINANCE CONTRACTS . 2,007 2,140 1,832 1,691 1,212
-------- -------- -------- -------- --------
TOTAL UNEARNED
FINANCE CHARGES. . . . $ 19,049 $ 18,297 $ 16,022 $ 12,783 $ 9,728
======== ======== ======== ======== ========
-8-
<PAGE>
DELINQUENCIES
Delinquent accounts are classified at the end of each month according
to the number of installments past due at that time based on the original
or extended terms of the contract. When 80% of an installment has been
paid, it is not considered delinquent for the purpose of this classification.
When three installments are past due, the account is classified as being
60-89 days past due; when four or more installments are past due the account
is classified as being 90 days or more past due.
The table below shows the amount of certain classifications of
delinquencies and the ratio such delinquencies bear to related outstanding
loans.
As of December 31
------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(in thousands, except % data)
DIRECT CASH LOANS:
60-89 Days Past Due. . . . . $1,914 $1,353 $1,120 $ 850 $ 819
Percentage of Outstanding. . 1.77% 1.40% 1.36% 1.30% 1.61%
90 Days or More Past Due . . $3,286 $2,482 $1,781 $1,524 $1,643
Percentage of Outstanding. . 3.04% 2.57% 2.16% 2.32% 3.22%
REAL ESTATE LOANS:
60-89 Days Past Due. . . . . $ 254 $ 299 $ 439 $ 364 $ 627
Percentage of Outstanding. . 78% 1.03% 1.46% 1.29% 2.21%
90 Days or More Past Due . . $1,196 $ 919 $1,206 $1,551 $1,796
Percentage of Outstanding. . 3.66% 3.15% 4.00% 5.51% 6.33%
SALES FINANCE CONTRACTS:
60-89 Days Past Due. . . . . $ 295 $ 281 $ 195 $ 165 $ 140
Percentage of Outstanding. . 2.11% 1.90% 1.49% 1.37% 1.54%
90 Days or More Past Due . . $ 463 $ 293 $ 298 $ 265 $ 261
Percentage of Outstanding. . 3.32% 1.98% 2.27% 2.20% 2.87%
-9-
<PAGE>
LOSS EXPERIENCE
Net losses (charge-offs less recoveries) and their percentage to the
average net loans (loans less unearned finance charges) and to the
liquidations (payments, refunds, renewals and charge-offs of customer's
loans) are shown in the following table:
Year Ended December 31
-----------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(in thousands, except % data)
DIRECT CASH LOANS
Average Net Loans . . $ 82,847 $ 72,298 $ 58,538 $ 46,026 $ 38,786
Liquidations. . . . . $ 152,694 $ 136,633 $ 110,068 $ 85,643 $ 71,602
Net Losses. . . . $ 3,753 $ 2,475 $ 1,582 $ 1,388 $ 1,788
Net Losses as % of
Average Net Loans . 4.53% 3.42% 2.70% 3.02% 4.61%
Net Losses as % of
Liquidations. . . . 2.46% 1.81% 1.44% 1.62% 2.50%
REAL ESTATE LOANS
Average Net Loans . . $ 31,050 $ 29,889 $ 29,608 $ 28,124 $ 27,235
Liquidations. . . . . $ 18,876 $ 19,779 $ 18,327 $ 15,583 $ 13,699
Net Losses. . . . . . $ 22 $ 43 $ 20 $ 7 $ 63
Net Losses as % of
Average Net Loans . .07% .14% .07% .02% .23%
Net Losses as % of
Liquidations. . . . .12% .22% .11% .04% .46%
SALES FINANCE CONTRACTS
Average Net Loans . . $ 12,377 $ 11,623 $ 10,984 $ 8,833 $ 7,274
Liquidations. . . . . $ 19,736 $ 18,782 $ 17,724 $ 14,555 $ 11,808
Net Losses. . . . . . $ 434 $ 353 $ 272 $ 196 $ 223
Net Losses as % of
Average Net Loans . 3.51% 3.04% 2.48% 2.22% 3.06%
Net Losses as % of
Liquidations. . . . 2.20% 1.88% 1.53% 1.35% 1.89%
ALLOWANCE FOR LOAN LOSSES
The Allowance for Loan Losses is determined based on the Company's
previous loss experience, a review of specifically identified potentially
uncollectible loans and management's evaluation of the inherent risks and
change in the composition of the Company's loan portfolio. Such allowance
is, in the opinion of management, sufficient to provide adequate protection
against possible loan losses on the current loan portfolio. The allowance
is maintained out of income except in the case of bulk purchases when it is
provided in the allocation of the purchase price.
-10-
<PAGE>
CREDIT INSURANCE
When authorized to do so by the borrowers, the Company writes life,
accident and health, property and automobile insurance in connection with its
loans. Non-filing insurance is written on direct cash loans where the
security instrument is not recorded. The Company writes such insurance as an
agent for a non-affiliated insurance company.
Frandisco Life Insurance Company and Frandisco Property and Casualty
Insurance Company, wholly owned subsidiaries of the Company, reinsure the
insurance written from the non-affiliated insurance company.
REGULATION AND SUPERVISION
In Georgia, direct cash loans of less than $3,000 in principal amount are
made under the Georgia Industrial Loan Act. Direct cash loans in excess of
$3,000 and the larger first and second mortgage real estate loans are not
subject to the Georgia Industrial Loan Act and the rates are negotiable
subject to State Usury Laws. First and second mortgage real estate loans are
made in compliance with the Georgia Residential Mortgage Act. Sales finance
contracts are made under the Georgia Retail Installment and Home Solicitation
Sales Act.
All loans and sales finance contracts in South Carolina are made under
the South Carolina Consumer Protection Code. Rates are negotiable. Maximum
rates are filed with the Department of Consumer Affairs and posted in each
location.
In Alabama, direct cash loans of less than $750 in principal amount are
made under the Alabama Small Loan Act. Direct cash loans in excess of $750 in
principal amount are made under the Alabama Consumer Finance Law, with a
negotiable rate allowed on loans in excess of $2,000 in principal amount. The
larger first and second mortgage real estate loans are made under the Alabama
Consumer Finance Law at a negotiable rate. Sales finance contracts are made
under the Alabama Consumer Finance Law.
State laws require that each office in which a small loan business is
conducted be licensed by the state. Georgia law also requires a license for
conducting mortgage loan business in the state. The granting of a license
depends on the financial responsibility, character and fitness of the
applicant, and where applicable, the applicant must show finding of a need
through convenience and advantage documentation. As a condition to obtaining
such license, the applicant must consent to state regulation and examination
and to the making of periodic reports to the appropriate governing agencies.
Licenses are revocable for cause, and their continuance depends upon
compliance with the law and regulations issued pursuant thereto. The Company
has never had any of its licenses revoked.
All lending operations are carried on under the provisions of the Federal
Consumer Credit Protection Act ("Truth-in-Lending Act"), the Fair Credit
Reporting Act and the Federal Real Estate Settlement Procedures Act. The
Truth-in-Lending Act requires disclosure to the customer of the finance
charge, the annual percentage rate, the total of payments and other
information on all loans. On real estate secured loans, the Truth-in-Lending
Act requires that customers be provided a three-day right of rescission and
certain disclosures.
A Federal Trade Commission ruling prevents the Company and other consumer
lenders from using household goods as collateral on direct cash loans. The
Company collateralizes such loans with non-household goods such as
automobiles, boats and other exempt items.
The Company is also subject to state regulations governing insurance
agents in the states in which it sells credit insurance. State insurance
regulations require that insurance agents be licensed and limit the premium
amount charged for such insurance.
-11-
<PAGE>
SOURCE OF FUNDS
The sources of the Company's funds stated as a % of total liabilities
and stockholder's equity and the number of persons investing in the Company's
debt securities is as follows:
Year Ended December 31
-------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Bank Borrowings . . . . . . -% 1% 10% 12% 14%
Public Senior Debt. . . . . 52 48 39 33 25
Public Subordinated Debt. . 17 16 17 20 25
Other Liabilities . . . . . 5 5 6 8 8
Stockholder's Equity. . . . 26 30 28 28 28
--- --- --- --- ---
Total. . . . . . . . 100% 100% 100% 100% 100%
Number of Investors . . . . 5,925 5,486 4,400 4,195 3,964
All of the Company's outstanding common stock is held by five related
individuals and is not traded in an established public trading market.
The Company's average interest rate on borrowings, computed by dividing
the interest paid by the average indebtedness outstanding, has been as
follows:
Year Ended December 31
---------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Senior Borrowings . . . . 6.97% 6.26% 6.24% 6.52% 8.09%
Subordinated Borrowings . 6.92 6.14 6.37 7.25 8.43
All Borrowings. . . . . . 6.96 6.25 6.29 6.82 8.24
The Company's financial ratios relating to debt are as follows:
At December 31
---------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Total Liabilities to
Stockholder's Equity. . 2.81 2.36 2.57 2.68 2.64
Unsubordinated Debt to
Subordinated Debt plus
Stockholder's Equity. . 1.32 1.19 1.23 1.11 .90
-12-
<PAGE>
MANAGEMENT'S DISCUSSION OF OPERATIONS
Financial Condition:
- -------------------
Total assets of the Company grew $45.6 million (33%) during 1995 and
gross revenues reached a record $55.2 million. Although gross revenues
achieved a record amount, net earnings declined $.7 million (9%) mainly due
to increases in interest expense and other operating expenses. Expansion of
the Company's operations continued during the year with the opening of eleven
new branch offices, bringing the total number of branches to 128.
The predominate area of growth in assets occurred in the Company's cash
position. Cash generated from increases in sales of the Company's debt
securities and increases in loan payments created $23.8 million (356%
increase) in surplus cash reserves during the period. The Company has not
been able to absorb these funds into the loan operations at the same level as
the funds have been generated, therefore Management has placed the funds in
short-term investments.
Increases in funds invested by the Company's insurance subsidiaries
resulted in the Company's investment portfolio increasing $9.0 million (68%)
during 1995. The Company's investment portfolio consists mainly of U.S.
Treasury bonds, Government Agency bonds and various Georgia municipal bonds.
Management has designated a significant portion of these investment
securities as "available for sale" with any unrealized gain or loss accounted
for in the Company's equity section, net of deferred taxes. Improved bond
market values during the current year also contributed to the increase in the
investment portfolio. Volatility in bond market values during 1994 resulted
in a $.9 million decrease, net of deferred taxes, in the portfolio's fair
market value during that year. The remainder of the investment portfolio
represents securities carried at amortized cost and designated "held to
maturity," as Management has both the ability and intent to hold these
securities to maturity.
Average net outstanding receivables (gross receivables less unearned
finance charges) increased $12.5 million (11%) to $126.3 at December 31, 1995
from $113.8 at December 31, 1994 due to increases in consumer loan demand.
The expansion of operations during the last two years has allowed the Company
to penetrate new market areas that have also contributed to the increase in
average net receivables.
The aforementioned increase in sales of the Company's public debt
securities caused senior debt and subordinated debt to increase $37.9 million
(43%) during the year just ended as compared to the prior year.
Net Interest Income:
- -------------------
The Company's net interest margin (the margin between the amount the
Company earns on loans and investments and the amount the Company pays on
securities and other borrowings) increased $2.0 million (7%) during 1995 as
compared to 1994 and $4.7 million (20%) during 1994 as compared to 1993.
These increases in the margin spreads were primarily due to the interest
income earned on the aforementioned higher levels of average net outstanding
receivables and due to higher investment income.
Interest expense had a major affect on the current year's margin as
compared to the prior year. The higher levels of senior and subordinated
debt outstanding caused interest expense to increase $2.5 million (45%)
during 1995 as compared to 1994. Interest expense increased $.6 million
(13%) during 1994 as compared to 1993. Higher average borrowing cost also
contributed to the increase in interest expense. The Company's average
borrowing cost increased to 6.99% during 1995 as compared to 6.36% during
1994.
-13-
<PAGE>
Net Insurance Income:
- --------------------
Net insurance income increased $1.2 million (10%) and $1.5 million (15%)
during the comparable periods mainly due to the aforementioned increase in
average net receivables. Changes in net insurance income generally
correspond to changes in the level of average net outstanding receivables. As
average net receivables increase, the Company typically sees an increase in
the number of loan customers requesting credit insurance, thereby leading to
higher levels of insurance in-force. Higher levels of insurance in-force
results in higher insurance income.
Premium rates charged on the credit insurance offered by the Company, as
agent for a non-affiliated insurance company, are governed by the insurance
departments in the various states in which the Company operates. Rate
reductions and term restrictions adopted by some states on various credit
insurance products during the last two years have affected the Company's
insurance income. These rate reductions and term restrictions were
significant factors in the current year's percentage increase in insurance
income being lower than the prior year's.
Provision for Loan Losses:
- -------------------------
Increases in bankruptcy filings continue to have a negative impact on
the Company's operating results. Bankruptcies were a dominant factor in the
$1.3 million increase in net charge-offs during the year just ended as
compared to the prior year and the $1.0 million increase during 1994 as
compared to 1993. The increases in net charge-offs in turn led to the $1.3
million (43%) and $.8 million (35%) increase in the Company's Provision for
Loan Losses during the two years ended December 31, 1995 and 1994,
respectively. Higher levels of average net receivables also contributed to
the increases.
Other Operating Expenses:
- ------------------------
General operating expenses increased $3.2 million (12%) and $3.4 million
(14%) during 1995 and 1994, respectively, mainly because of increases in
personnel expense and other miscellaneous expenses. Additional employees
hired to staff the sixteen new branch offices opened during the last two
years and increases in employee compensation based on cost-of-living and/or
merit salary raises caused Personnel Expense to increase $1.2 million (7%)
and $1.9 million (14%) during 1995 and 1994, respectively. Increases in
other accrued employee benefits also contributed to the increase in Personnel
Expense.
Increases in advertising expenses, computer expenses, collection
expenses, legal and audit expenses, supervision expenses, taxes and licenses,
postage and supplies caused other expenses to increase $1.8 million (26%)
during 1995 and $1.1 million (18%) during 1994. Legal expenses incurred with
the Alabama lawsuits (see liquidity section) were also significant factors in
the 1995 increase in other expenses..
Income Taxes:
- ------------
Effective income tax rates for the years ended December 31, 1995, 1994
and 1993 were 27.5%, 30.6% and 29.2%, respectively. Certain tax benefits
provided by law to life insurance companies substantially reduce the life
insurance subsidiary's effective tax rate and thus decreases the Company's
overall tax rate below statutory rates.
The increase in the effective rate for 1994 was mainly due to the
Company and its property insurance subsidiary, which are taxed at higher
rates, earning a larger portion of the pretax income as compared to 1993.
-14-
<PAGE>
Liquidity:
- ---------
Liquidity is the ability of the Company to meet short-term financial
obligations, either through the collection of receivables or by generating
additional funds through liability management. Continued liquidity of the
Company is therefore dependent on the collection of its receivables and the
sale of debt securities that meet the investment requirements of the public
and the continued availability of unused bank credit from its lenders. The
previously discussed increases in net cash flows during the current year
provided a positive effect on liquidity.
Most of the Company's loan portfolio is financed through public debt
securities which, because of redemption features, have a shorter average
maturity than the loan portfolio. The difference in maturities may adversely
affect liquidity if the Company does not continue to sell debt securities at
interest rates and terms that are responsive to the demands of the
marketplace or maintain sufficient unused bank borrowings.
In addition to the debt securities program, the Company has two external
sources of funds through the use of two Credit Agreements. One agreement
provides for available borrowings of $21.0 million. Available borrowings were
$21.0 million and $20.6 million at December 31, 1995 and 1994, respectively,
relating to this agreement. The Company has an additional $2.0 million credit
agreement (all of which was available at December 31, 1995 and 1994) for
general operating purposes.
Liquidity was not adversely affected by delinquent accounts even though
the percentage of outstanding receivables 60 days or more past due increased
to 4.8% of receivables at December 31, 1995 from 4.0% at December 31, 1994.
The litigious legal environment in the State of Alabama continues to be
a challenge for the Company. Various legal proceedings are pending against
the Company in Alabama alleging different violations of Alabama consumer
lending laws and violations in connection with the sale of credit insurance
and loan refinancing. During the year, the Company reached settlement
agreements with certain borrowers who had previously asserted claims or had
stated their intention to file claims against the Company. Although the
Company and its employees deny that they are guilty of any wrongdoing or any
breach of any legal obligation or duty to the claimants, in recognition of
the expense and uncertainty of litigation, Management felt it was in the best
interest of the Company to dispose of these cases. All remaining actions are
still in their early stages and their outcome is not determinable. The
financial condition and operating results of the Company could be materially
affected in the event of an unfavorable outcome. However, Management
believes that the Company's Alabama operations are in compliance with
applicable regulations and that the actions are without merit. The Company
is diligently contesting the remaining complaints.
Beginning January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 114 -- "Accounting by Creditors for
Impairment of a Loan," subsequently amended by SFAS No. 118 -- "Accounting by
Creditors for Impairment of a Loan -- Income Recognition and Disclosures".
These standards require that impaired loans be measured based on the present
value of expected future cash flows discounted at the loan's effective
interest rate, at the loan's observable market price, or at the fair value of
the collateral if the loan is collateral dependent. The adoption of these
two accounting pronouncements did not have a material impact on the Company's
financial condition or results of operations.
Management continues to explore and evaluate potential new market areas
as part of its expansion plans. The Company plans to open six to ten new
offices during 1996. These openings will not have an adverse affect on
liquidity.
-15-
<PAGE>
MANAGEMENT'S REPORT
The accompanying financial statements were prepared in accordance with
generally accepted accounting principles by the management of 1st Franklin
Financial Corporation who assumes responsibility for their integrity and
reliability.
The Company maintains a system of internal accounting controls which is
supported by a program of internal audits with appropriate management follow-
up action. The integrity of the financial accounting system is based on
careful selection and training of qualified personnel, on organizational
arrangements which provide for appropriate division of responsibilities and
on the communication of established written policies and procedures.
The financial statements of the Company have been audited by Arthur
Andersen LLP, independent public accountants. Their report expresses their
opinion as to the fair presentation of the financial statements and is based
upon their independent audit conducted in accordance with generally accepted
auditing standards.
The Audit Committee, comprised solely of outside directors, meets
periodically with the independent public accountants, the internal auditors
and representatives of management to discuss auditing and financial reporting
matters. The independent public accountants have free access to meet with the
Audit Committee without management representatives present to discuss the
scope and results of their audit and their opinions on the quality of
financial reporting.
-16-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO 1st FRANKLIN FINANCIAL CORPORATION:
We have audited the accompanying Consolidated Statements of Financial
Position of 1ST FRANKLIN FINANCIAL CORPORATION (a Georgia corporation) AND
SUBSIDIARIES as of December 31, 1995 and 1994, and the related Consolidated
Statements of Income and Retained Earnings and Consolidated Statements of Cash
Flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
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 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 financial statements referred to above present
fairly, in all material respects, the financial position of 1st Franklin
Financial Corporation and subsidiaries as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 21, 1996
-17-
<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1995 AND 1994
ASSETS
1995 1994
------------ ------------
CASH AND CASH EQUIVALENTS:
Cash and Due From Banks. . . . . . . . $ 1,453,244 $ 1,589,320
Short-term Investments,
$300,000 in trust in 1995
and 1994 (Note 4) . . . . . . . . . 29,060,349 5,100,224
------------ ------------
30,513,593 6,689,544
------------ ------------
LOANS (Note 2):
Direct Cash Loans. . . . . . . . . . . 107,960,069 96,620,653
First Mortgage Real Estate Loans . . . 25,738,140 23,385,188
Second Mortgage Real Estate Loans. . . 6,914,255 5,764,579
Sales Finance Contracts. . . . . . . . 13,955,296 14,805,644
------------ ------------
154,567,760 140,576,064
Less: Unearned Finance Charges . . . . 19,049,034 18,296,608
Unearned Insurance Premiums
and Commissions. . . . . . . 10,244,033 9,542,400
Allowance for Loan Losses. . . . 4,511,826 4,069,881
------------ ------------
Net Loans . . . . . . . . 120,762,867 108,667,175
------------ ------------
MARKETABLE DEBT SECURITIES (Note 3):
Available for Sale, at
fair market value . . . . . . . . . 17,194,375 12,651,527
Held to Maturity, at amortized cost. . 5,186,492 697,144
------------ ------------
22,380,867 13,348,671
------------ ------------
OTHER ASSETS:
Land, Buildings, Equipment and
Leasehold Improvements, less
accumulated depreciation and
amortization of $5,668,721 and
$4,936,692 in 1995 and 1994,
respectively (Note 5) . . . . . . . 2,828,801 2,798,250
Prepaid Income Taxes, net (Note 9) . . 1,763,108 1,746,241
Due from Nonaffiliated
Insurance Company . . . . . . . . . 827,908 746,747
Miscellaneous. . . . . . . . . . . . . 3,006,844 2,471,629
------------ ------------
8,426,661 7,762,867
------------ ------------
TOTAL ASSETS . . . . . . . . . . $182,083,988 $136,468,257
============ ============
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
-18-
<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1995 AND 1994
LIABILITIES AND STOCKHOLDERS' EQUITY
1995 1994
------------ ------------
SENIOR DEBT (Note 5):
Senior Demand Notes, including
accrued interest. . . . . . . . . . $ 42,304,779 $ 33,186,950
Commercial Paper. . . . . . . . . . . 52,944,123 32,774,577
Notes Payable to Banks. . . . . . . . 291,762 715,762
------------ ------------
95,540,664 66,677,289
------------ ------------
ACCOUNTS PAYABLE AND ACCRUED EXPENSES. 8,179,506 7,582,833
------------ ------------
SUBORDINATED DEBT (Note 6) . . . . . . 30,616,915 21,602,656
------------ ------------
Total Liabilities . . . . . . . . . 134,337,085 95,862,778
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY:
Common stock; par value $100 per share;
2,000 shares authorized;
1,700 shares outstanding. . . . . . 170,000 170,000
Net Unrealized Gains (Losses)
on Investment Securities
Available for Sale. . . . . . . . . 251,145 (693,457)
Retained Earnings . . . . . . . . . . 47,325,758 41,128,936
------------ ------------
Total Stockholders' Equity. . . . . 47,746,903 40,605,479
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY. . . . . . . . $182,083,988 $136,468,257
============ ============
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
-19-
<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
------------ ------------ ------------
INTEREST INCOME:
Finance Charges. . . . . . . . $ 35,713,283 $ 32,718,152 $ 27,589,389
Investment Income. . . . . . . 2,481,604 949,404 769,959
------------ ------------ ------------
38,194,887 33,667,556 28,359,348
------------ ------------ ------------
INTEREST EXPENSE:
Senior Debt. . . . . . . . . . 5,915,519 4,057,682 3,282,791
Subordinated Debt. . . . . . . 2,132,393 1,498,616 1,627,662
------------ ------------ ------------
8,047,912 5,556,298 4,910,453
------------ ------------ ------------
NET INTEREST INCOME. . . . . . . 30,146,975 28,111,258 23,448,895
PROVISION FOR
LOAN LOSSES (Note 2) . . . . . 4,630,853 3,238,479 2,406,512
------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES. . . 25,516,122 24,872,779 21,042,383
------------ ------------ ------------
NET INSURANCE INCOME:
Premiums and Commissions . . . 16,533,388 15,262,466 12,893,679
Insurance Claims and Expenses. (3,584,222) (3,518,988) (2,649,444)
------------ ------------ ------------
12,949,166 11,743,478 10,244,235
------------ ------------ ------------
OTHER REVENUE (Note 8) . . . . . 428,959 404,477 371,734
------------ ------------ ------------
OPERATING EXPENSES (Note 8):
Personnel Expense. . . . . . . 17,299,383 16,147,362 14,207,265
Occupancy Expense. . . . . . . 3,981,624 3,705,288 3,336,025
Other Expense. . . . . . . . . 8,644,323 6,849,283 5,793,011
------------ ------------ ------------
29,925,330 26,701,933 23,336,301
------------ ------------ ------------
INCOME BEFORE INCOME TAXES . . . 8,968,917 10,318,801 8,322,051
PROVISION FOR
INCOME TAXES (Note 9). . . . . 2,462,307 3,154,184 2,431,373
------------ ------------ ------------
NET INCOME . . . . . . . . . . . 6,506,610 7,164,617 5,890,678
RETAINED EARNINGS, beginning . . 41,128,936 34,220,868 28,548,219
Dividends on Common Stock. . . (309,788) (256,549) (218,029)
------------ ------------ ------------
RETAINED EARNINGS, ending. . . . $ 47,325,758 $ 41,128,936 $ 34,220,868
============ ============ ============
EARNINGS PER SHARE (1,700 shares
outstanding all years) . . . . $3,827.42 $4,214.48 $3,465.10
========= ========= =========
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
-20-
<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Increase (Decrease) in Cash and Cash Equivalents
1995 1994 1993
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . $ 6,506,610 $ 7,164,617 $ 5,890,678
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for Loan Losses. . . . . 4,630,853 3,238,479 2,406,512
Depreciation and Amortization. . . 1,074,992 994,896 922,132
Prepaid Income Taxes . . . . . . . (275,826) (10,925) (321,968)
Gain on sale of marketable
securities and equipment. . . . . (86,366) (47,754) (234,507)
Increase in Miscellaneous Assets . (616,373) (95,653) (189,214)
Increase (Decrease) in
Other Liabilities . . . . . . . . 596,673 13,737 (248,172)
------------ ------------ ------------
Net Cash Provided. . . . . 11,830,563 11,257,397 8,225,461
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated or purchased. . . (104,735,608) (96,816,742) (85,431,146)
Loan payments. . . . . . . . . . . 88,009,063 82,396,258 68,359,815
Purchases of marketable securities (8,981,373) (2,162,283) (11,543,876)
Sales of marketable securities . . 510,000 103,897 6,151,337
Redemptions of marketable securities 725,000 300,000 300,000
Principal payments on
marketable securities . . . . . . -- -- 47,660
Capital expenditures . . . . . . . (1,159,373) (851,351) (806,101)
Proceeds from sale of equipment. . 57,931 25,568 25,395
------------ ------------ ------------
Net Cash Used. . . . . . . (25,574,360) (17,004,653) (22,896,916)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in Notes Payable to
Banks and Senior Demand Notes. . 8,693,829 (5,497,262) 5,497,844
Commercial Paper issued. . . . . . 44,230,224 24,041,798 12,038,076
Commercial Paper redeemed. . . . . (24,060,678) (12,406,886) (4,818,161)
Subordinated Debt issued . . . . . 12,877,336 5,175,292 4,843,874
Subordinated Debt redeemed . . . . (3,863,077) (4,447,341) (5,423,774)
Dividends Paid . . . . . . . . . . ( 309,788) (256,549) (218,029)
------------ ------------ -----------
Net Cash Provided . . . . 37,567,846 6,609,052 11,919,830
------------ ------------ -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS. . . . 23,824,049 861,796 (2,751,625)
CASH AND CASH EQUIVALENTS, beginning 6,689,544 5,827,748 8,579,373
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, ending. $ 30,513,593 $ 6,689,544 $ 5,827,748
============ ============ ============
Cash paid during the year for:
Interest . . . . . . . . $ 7,965,756 $ 5,488,335 $ 4,875,340
Income Taxes . . . . . . $ 2,682,221 $ 3,301,461 $ 2,490,673
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
-21-
<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business:
1st Franklin Financial Corporation (the "Company") is a consumer finance
company which acquires and services direct cash loans, real estate loans and
sales finance contracts through 128 branch offices. Effective December 31,
1994, 1st Franklin Corporation (the "Parent") was merged into the Company,
with the Company being the surviving corporation. The merger was accounted for
as a downstream pooling transaction and was done to increase corporate
efficiency and eliminate unnecessary corporate entities. Prior to the merger
the Company was a wholly owned subsidiary of the Parent. All financial data
for prior years have been restated to reflect results of the merger.
Basis of Consolidation:
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Fair Values of Financial Instruments:
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" ("FAS 107") requires the disclosure of
estimated fair values of all asset, liability and off-balance sheet financial
instruments. FAS 107 also allows the disclosure of estimated fair values of
non-financial instruments. Fair value estimates under FAS 107 are determined
as of a specific point in time utilizing various assumptions and estimates.
The following methods and assumptions are used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents. The carrying value of cash and cash
equivalents approximates fair value due to the relatively short period
of time between the origination of the instruments and their expected
realization.
Loans. The fair value of the Company's direct cash loans and sales
finance contracts have been reported at book value since the estimated
life, assuming prepayments, is short-term in nature. The fair value
of the Company's real estate loans have been reported at book value
since the rate charged by the Company approximates market.
Marketable Debt Securities. The fair values for marketable debt
securities are based on quoted market prices. If a quoted market
price is not available, fair value is estimated using market prices
for similar securities. See Note 3 for the fair value of marketable
debt securities.
Senior Debt. The carrying value of the Company's senior debt
approximates fair value due the relatively short period of time
between the origination of the instruments and their expected payment.
Subordinated Debt. The carrying value of the Company's subordinated
debt approximates fair value due to the repricing frequency of the
debt.
Other significant assets and liabilities, which are not considered assets or
liabilities and for which fair values have not been estimated, include
premise and equipment and deferred taxes.
-22-
<PAGE>
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 at the
date of financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could vary from these estimates,
however, in the opinion of Management, such variances would not be material.
Loans:
Statement of Financial Accounting Standards ("SFAS") No. 114 --
"Accounting by Creditors for Impairment of a Loan", subsequently amended by
SFAS No. 118 -- "Accounting by Creditors for Impairment of a Loan -- Income
Recognition and Disclosures", requires impaired loans to be measured based on
the present value of expected future cash flows discounted at the loan's
effective interest rate, at the loan's observable market price, or at the fair
value of the collateral if the loan is collateral dependent. These two
accounting pronouncements were adopted on a prospective basis on January 1,
1995. Because a substantial portion of the Company's receivables are smaller-
balance homogenous loans, these pronouncements did not have a material impact
on the Company's financial condition or results of operations.
Income Recognition:
Although generally accepted accounting principles require other methods
to be used for income recognition, the Company uses the Rule of 78's method to
recognize interest and insurance income on loans which have precomputed
charges. Since the majority of these loans are paid off or renewed in less
than one year and because the interest and insurance charges are contractually
rebated using the Rule of 78's method, the results obtained by using the Rule
of 78's closely approximate those that would be obtained if other generally
accepted methods were used.
Finance charges are precomputed and included in the gross amount of all
direct cash loans, sales finance contracts and certain real estate loans.
These precomputed charges are deferred and recognized as income on an accrual
basis using the Rule of 78's (which approximates the interest method).
Finance charges on the other real estate loans are recognized as income on a
simple interest accrual basis. Income is not accrued on a loan that is more
than 60 days past due.
When material, the Company defers loan fees and recognizes them as an
adjustment to yield over the contractual life of the related loan. The
Company's method of accounting for such fees does not materially differ from
generally accepted accounting principles for such fees.
The property and casualty credit insurance policies written by the
Company are reinsured by the property insurance subsidiary. The premiums are
deferred and earned on a Rule of 78's basis (which approximates the pro-rata
method).
The credit life and accident and health policies written by the Company
are reinsured by the life insurance subsidiary. The premiums are deferred and
earned using the pro-rata method for level-term life policies, the Rule of
78's (which approximates the pro-rata method) for decreasing-term life
policies and an average of the pro-rata method and Rule of 78's for accident
and health policies.
Claims of the insurance subsidiaries are expensed as incurred and
reserves are established for incurred but not reported (IBNR) claims.
Policy acquisition costs of the insurance subsidiaries are deferred and
amortized to expense over the life of the policies on the same methods used to
recognize premium income.
Depreciation and Amortization:
Office machines, equipment and company automobiles are recorded at cost
and depreciated on a straight-line basis over a period of three to ten years.
Leasehold improvements are amortized over seven years using the double
declining method for book and tax.
-23-
<PAGE>
Income Taxes:
The Company and its insurance subsidiaries have certain temporary
differences between reported income and expenses for financial statement
purposes and for income tax purposes. Deferred income taxes are provided
where applicable.
Collateral Held for Resale:
When the Company takes possession of the collateral which secures a
loan, the collateral is recorded at the lower of its estimated resale value or
the loan balance. Any losses incurred at that time are charged against the
Allowance for Loan Losses.
Bulk Purchases:
A bulk purchase is a group of loans purchased by the Company from
another lender. Bulk purchases are recorded at the outstanding loan balance
and an allowance for losses is established in accordance with management's
evaluation of the specific loans purchased and their comparability to similar
type loans in the Company's existing portfolio.
For loans with precomputed charges, unearned finance charges are also
recorded based on the Rule of 78's (which approximates the interest method).
Any difference between the purchase price of the loans and their net balance
(outstanding balance less allowance for losses and unearned finance charges)
is amortized or accreted to income over the average life of the loans
purchased.
Marketable Debt Securities:
Management has designated a significant portion of the marketable debt
securities held in the Company's investment portfolio at December 31, 1995 and
1994 as being available-for-sale. This portion of the investment portfolio is
reported at fair market value with unrealized gains and losses excluded from
earnings and reported in a separate component of stockholders' equity, net of
taxes. The remainder of the investment portfolio is carried at amortized cost
and designated as held-to-maturity as Management has both the ability and
intent to hold these securities to maturity.
2. LOANS
There were $7,408,981 and $5,097,961 of loans in a non-accrual status at
December 31, 1995 and 1994, respectively.
Contractual Maturities of Loans:
An estimate of contractual maturities stated as a percentage of the loan
balances based upon an analysis of the Company's portfolio as of December 31,
1995 is as follows:
1st Mortgage 2nd Mortgage Sales
Due In Direct Cash Real Estate Real Estate Finance
Calendar Year Loans Loans Loans Contracts
------------ ----------- ------------ ------------ ---------
1996. . . . . . 71.35% 17.69% 15.97% 72.11%
1997. . . . . . 25.38 17.93 17.58 21.97
1998. . . . . . 2.70 16.32 18.03 5.09
1999. . . . . . .34 13.10 14.88 .64
2000. . . . . . .09 9.56 11.24 .19
2001 & later. . .14 25.40 22.30 --
------ ------ ------ ------
100.00% 100.00% 100.00% 100.00%
====== ====== ====== ======
Experience of the Company has shown that a majority of its loans will be
renewed many months prior to their final contractual maturity dates.
Accordingly, the above contractual maturities should not be regarded as a
forecast of future cash collections.
-24-
<PAGE>
Cash Collections on Principal:
During the years ended December 31, 1995 and 1994, cash collections
applied to principal of loans totaled $88,009,063 and $82,396,258,
respectively, and the ratios of these cash collections to average net
receivables were 69.70% and 72.40%, respectively.
Allowance for Loan Losses:
The Allowance for Loan Losses is based on the Company's previous loss
experience, a review of specifically identified potentially uncollectible
loans and Management's evaluation of the inherent risks and changes in the
composition of the Company's loan portfolio. Such allowance is, in the
opinion of management, sufficient to provide adequate protection against
possible losses in the current loan portfolio.
When a loan becomes five installments past due, it is charged off unless
management directs that it be retained as an active loan. In making this
charge off evaluation, no installment is counted as being past due if at least
80% of the contractual payment has been paid. The amount charged off is the
unpaid balance less the unearned finance charges and the unearned insurance
premiums.
An analysis of the allowance for the years ended December 31, 1995, 1994
and 1993 is shown in the following table:
1995 1994 1993
---- ---- ----
Beginning Balance . . . . . . . $4,069,881 $3,653,121 $3,091,983
Provision for Loan Losses . . 4,630,853 3,238,479 2,406,512
Bulk Purchase Accounts. . . . 20,317 49,120 28,704
Charge-Offs . . . . . . . . . (5,085,216) (3,648,948) (2,523,801)
Recoveries. . . . . . . . . . 875,991 778,109 649,723
---------- ---------- ----------
Ending Balance. . . . . . . . . $4,511,826 $4,069,881 $3,653,121
========== ========== ==========
3. MARKETABLE DEBT SECURITIES
Debt securities available for sale are carried at estimated fair market
value. The amortized cost and estimated fair market values of these debt
securities are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gains Losses Value
December 31, 1995: ----------- -------- ---------- -----------
U.S. Treasury Securities
and obligations of
U.S. government
corporations and agencies . $ 7,872,928 $ 86,713 $ (2,481) $ 7,957,160
Obligations of states and
political subdivisions. . . 8,467,242 233,751 (6,373) 8,694,620
Corporate Securities. . . . . 526,051 19,413 (2,869) 542,595
----------- -------- --------- -----------
$16,866,221 $339,877 $ (11,723) $17,194,375
=========== ======== ========= ===========
December 31, 1994:
U.S. Treasury Securities
and obligations of
U.S. government
corporations and agencies . $ 4,327,088 $ 1,193 $(375,154) $ 3,953,127
Obligations of states and
political subdivisions. . . 8,673,401 -- (465,380) 8,208,021
Corporate Securities . . . . 526,441 690 (36,752) 490,379
----------- -------- --------- -----------
$13,526,930 $ 1,883 $(877,286) $12,651,527
=========== ======== ========= ===========
-25-
<PAGE>
Debt securities designated as "Held to Maturity" are carried at
amortized cost based on Management's intent to hold such securities to
maturity. The amortized cost and estimated fair market values of these debt
securities are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gains Losses Value
December 31, 1995: ----------- -------- ---------- -----------
U.S. Treasury Securities
and obligations of
U.S. government
corporations and agencies . $ 4,731,712 $ 94,860 $ (2,666) $ 4,823,906
Obligations of states and
political subdivisions. . . 454,780 17,197 -- 471,977
----------- -------- --------- -----------
$ 5,186,492 $112,057 $ (2,666) $ 5,295,883
=========== ======== ========= ===========
December 31, 1994:
U.S. Treasury Securities
and obligations of
U.S. government
corporations and agencies . $ 493,963 $ -- $ (5,368) $ 488,595
Obligations of states and
political subdivisions. . . 203,181 4,359 -- 207,540
----------- -------- --------- ----------
$ 697,144 $ 4,359 $ (5,368) $ 696,135
=========== ======== ========= ==========
The amortized cost and estimated fair market values of marketable debt
securities at December 31, 1995, by contractual maturity, are shown below:
Available for Sale Held to Maturity
------------------------- ----------------------
Estimated Estimated
Amortized Fair Market Amortized Fair Market
Cost Value Cost Value
----------- ----------- ---------- ----------
Due in one year or less. . $ 952,662 $ 954,648 $ 493,895 $ 499,453
Due after one year
through five years . . . 4,849,416 4,938,622 4,442,597 4,549,008
Due after five years
through ten years. . . . 9,361,187 9,557,510 250,000 247,422
Due after ten years. . . . 1,702,956 1,743,595 -- --
----------- ----------- ---------- ----------
$16,866,221 $17,194,375 $5,186,492 $5,295,883
=========== =========== ========== ==========
Proceeds from sales of investments in debt securities available for sale
during 1995 were $510,000. Gross gains of $16,240 and gross losses of $(-0-)
were realized on these sales.
Proceeds from sales of investments in debt securities available for sale
during 1994 were $103,897. Gross gains of $6,630 and gross losses of $(-0-)
were realized on these sales.
4. PLEDGED ASSETS
At December 31, 1995, certain Short-term Investments of the insurance
subsidiaries were on deposit with the Georgia Insurance Commissioner to meet
the deposit requirements of Georgia insurance laws.
-26-
<PAGE>
5. SENIOR DEBT
The Company has a Credit Agreement with four major banks which provides
for maximum borrowings of $21,000,000. All borrowings are on an unsecured
basis at 1/4% above the prime rate of interest. An annual facility fee is paid
quarterly based on 5/8% of the available line less the average borrowings
during the quarter. In addition, an agent fee equal to 1/8% per annum of the
total loan commitment is paid quarterly.
The Credit Agreement has a termination date of December 31, 1999. The
banks may, however, terminate the agreement upon the violation of any of the
financial ratio requirements or covenants contained in the agreement or in
May of any calendar year if the financial condition of the Company becomes
unsatisfactory to the banks. Such financial ratio requirements include a
minimum equity requirement, an interest expense coverage ratio and a minimum
debt to equity ratio.
The Company has an additional Credit Agreement for $2,000,000 which is
used for general operating purposes. This agreement provides for borrowings
on an unsecured basis at 1/8% above the prime rate of interest and has
termination date of July 1, 1996.
A bank loan was entered into in 1986, which carries an interest rate of
70% of the prime rate of interest repayable in 180 monthly installments.
This loan is collateralized by land and a building.
The Senior Demand Notes are unsecured obligations which are payable on
demand. The interest rate payable on any Senior Demand Note is a variable
rate, compounded daily, established from time to time by the Company.
Commercial Paper is issued by the Company in amounts in excess of
$50,000, with maturities of less than 270 days and at negotiable interest
rates.
Additional data related to the Company's Senior Debt is as follows:
Weighted
Average Maximum Average Weighted
Interest Amount Amount Average
Year Ended Rate at end Outstanding Outstanding Interest Rate
December 31 of Year During Year During Year During Year
----------- ------- ----------- ----------- -----------
(In thousands, except % data)
1995:
----
Bank. . . . . . . . . . 6.30% $ 716 $ 346 6.32%
Senior Notes. . . . . . 5.92 47,068 37,661 6.14
Commercial Paper. . . . 6.80 57,175 46,022 7.50
All Categories. . . 6.41 96,006 84,029 6.89
1994:
----
Bank. . . . . . . . . . 7.41% $12,714 $ 4,966 6.56%
Senior Notes. . . . . . 6.28 34,595 31,930 6.07
Commercial Paper. . . . 7.39 33,095 26,454 6.67
All Categories. . . 6.84 67,650 63,350 6.36
1993:
----
Bank. . . . . . . . . . 6.19% $13,061 $11,054 6.17%
Senior Notes. . . . . . 6.02 26,967 23,602 6.03
Commercial Paper. . . . 6.49 21,270 17,729 6.50
All Categories. . . 6.22 60,540 52,385 6.22
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<PAGE>
6. SUBORDINATED DEBT
The payment of the principal and interest on the subordinated debt is
subordinate and junior in right of payment to all unsubordinated indebtedness
of the Company.
Subordinated debt consists of Variable Rate Subordinated Debentures
which mature four years after date of issue. The maturity date is
automatically extended for an additional four years unless the holder or the
Company redeems the debenture on its original maturity date. The debentures
have various minimum purchase amounts with varying interest rates and
interest adjustment periods for each respective minimum purchase amount.
Interest rates on the debentures are adjusted at the end of each adjustment
period. The debentures may be redeemed by the holder at the applicable
interest adjustment date without penalty. Redemptions at any other time are
subject to an interest penalty. The Company may redeem the debentures for a
price equal to 100% of the principal.
Interest rate information on the Subordinated Debt at December 31 is as
follows:
Weighted Average Rate at Weighted Average Rate
End of Year During Year
------------------------ ---------------------
1995 1994 1993 1995 1994 1993
---- ---- ---- ---- ---- ----
7.41% 6.54% 6.42% 7.28% 6.36% 6.63%
Maturity information on the Company's Subordinated Debt at
December 31, 1995 is as follows:
Amount Maturing
--------------------------------------
Based on Maturity Based on Interest
Date Adjustment Period
----------------- -----------------
1996 . . . . . . $ 3,233,032 $20,391,080
1997 . . . . . . 4,716,142 7,550,366
1998 . . . . . . 6,287,348 134,333
1999 . . . . . . 16,380,393 2,541,136
----------- -----------
$30,616,915 $30,616,915
=========== ===========
7. COMMITMENTS AND CONTINGENCIES
The Company's operations are carried on in locations which are occupied
under lease agreements. The lease agreements usually provide for a lease
term of five years with a renewal option for an additional five years. Rent
expense was $1,346,606, $1,257,977 and $1,085,694 for the years ended
December 31, 1995, 1994 and 1993, respectively. Under the existing
noncancelable leases, the Company's minimum aggregate rental commitment at
December 31, 1995, amounts to $1,297,295 for 1996, $1,043,107 for 1997,
$808,402 for 1998, $505,686 for 1999, $295,309 for 2000 and $607,265 for the
year 2001 and beyond. The total commitment is $4,557,064.
The Company is defendant in several lawsuits arising in the course of
its normal business activities in the state of Alabama. Each of the
complaints seek compensatory and punitive damages. During the current year,
the Company reached settlement agreements with certain borrowers who had
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<PAGE>
previously asserted claims or had stated their intention to file claims
against the Company. All remaining actions are still in their early stages
and their outcome currently is not determinable. Management is vigorously
defending these actions. The financial condition and operating results of
the Company could be materially affected in the event of an unfavorable
outcome. However, Management believes that the Company's Alabama operations
are in compliance with applicable regulations, and therefore that the suits
are without merit and that the resolutions of the suits should not have a
material effect on the Company.
8. RELATED PARTY TRANSACTIONS
Beneficial owners of the Company are also beneficial owners of Liberty
Bank & Trust ("Liberty"). The Company and Liberty have management and data
processing agreements whereby the Company provides certain administrative and
data processing services to Liberty for a fee. Income recorded by the Company
in 1995, 1994 and 1993 related to these agreements was $63,800 each year,
which in Management's opinion approximates the Company's actual cost of these
services.
Liberty leases its office space and equipment from the Company for
$4,200 per month, which in Management's opinion is at a rate which
approximates that obtainable from independent third parties.
At December 31, 1995, the Company maintained $2,300,000 of certificates
of deposit and $2,360 in a money market account with Liberty at market rates
and terms. The Company also had $1,431,090 in demand deposits with Liberty
at December 31, 1995.
The Company leases a portion of its properties (see Note 7) for an
aggregate of $13,250 per month from certain officers or stockholders. In
Management's opinion, these leases are at rates which approximate those
obtainable from independent third parties.
9. INCOME TAXES
The Provision for Income Taxes for the years ended December 31, 1995,
1994 and 1993 is made up of the following components:
1995 1994 1993
----------- ----------- -----------
Current - Federal . . . $ 2,481,300 $ 2,786,238 $ 2,393,351
Current - State . . . . 256,833 378,871 359,990
----------- ----------- -----------
Total Current. . . . 2,738,133 3,165,109 2,753,341
----------- ----------- -----------
Prepaid - Federal . . . (226,199) 38,652 (250,984)
Prepaid - State . . . . (49,627) (49,577) (70,984)
----------- ----------- -----------
Total Prepaid. . . . (275,826) (10,925) (321,968)
----------- ----------- -----------
Total Provision. . $ 2,462,307 $ 3,154,184 $ 2,431,373
=========== =========== ===========
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<PAGE>
Temporary differences create deferred federal tax assets and
liabilities which are detailed below for December 31, 1995 and 1994:
Deferred Tax
Assets (Liabilities)
-------------------------
1995 1994
---- ----
Depreciation . . . . . . . . . . $ (113,895) $ (131,037)
Provision for Loan Losses. . . . 1,701,311 1,521,999
Insurance Commissions. . . . . . (639,585) (565,330)
Unearned Premium Reserves. . . . 616,758 576,141
Unrealized Gains (Losses) on
Investment Securities. . . . . (77,009) 181,950
Other. . . . . . . . . . . . . . 275,528 162,518
---------- ----------
$1,763,108 $1,746,241
========== ==========
The Company's effective tax rate for the years ended December 31, 1995,
1994 and 1993 is analyzed as follows:
1995 1994 1993
---- ---- ----
Statutory Federal income tax rate . . 34.0% 34.0% 34.0%
State income tax, net of Federal
tax effect . . . . . . . . . . . . 1.5 2.1 2.3
Net tax effect of IRS regulations
on life insurance subsidiary . . . (6.8) (4.9) (6.9)
Other items . . . . . . . . . . . . . (1.2) ( .6) (.2)
---- ---- ----
Effective Tax Rate. . . . . . . 27.5% 30.6% 29.2%
==== ==== ====
-30-
<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
** A SALUTE TO THE CIRCLE OF DIAMONDS **
***********
PHOTO
The Circle of Diamonds is named annually in recognition of the fifteen
offices that earn the highest dollar amount of profit for the year. With 128
branches striving towards this goal, the Company salutes these 15 offices for
their significant achievement. Congratulations to each staff member, manager
and supervisor in these branches for an outstanding job: Douglas, Baxley,
Jesup, Chatsworth, Gainesville, Moultrie, Hinesville, McDonough, Statesboro,
Hazlehurst, Sylvania, Toccoa, Canton, Adel and Lavonia.
-31-
<PAGE>
DIRECTORS AND MANAGEMENT
Directors
Principal Occupation, Has Served as a
Name Title and Company Director Since
---- ----------------- --------------
W. Richard Acree President, Acree Oil Company, 1970
Toccoa, Georgia
Ben F. Cheek, III Chairman of Board, 1967
1st Franklin Financial Corporation
Lorene M. Cheek Housewife 1946
Jack D. Stovall President, 1983
Stovall Building Supplies, Inc.
Robert E. Thompson Physician, Toccoa Clinic 1970
Executive Officers
Served in this
Name Position with Company Position Since
---- --------------------- --------------
Ben F. Cheek, III Chairman of Board 1989
T. Bruce Childs President 1989
Lynn E. Cox Secretary 1989
A. Roger Guimond Vice President
and Chief Financial Officer 1991
Linda L. Sessa Treasurer 1989
CORPORATE INFORMATION
Corporate Offices General Counsel Independent Accountants
----------------- --------------- -----------------------
P.O. Box 880 Jones, Day, Reavis & Pogue Arthur Andersen LLP
213 East Tugalo Street Atlanta, Georgia Atlanta, Georgia
Toccoa, Georgia 30577
(706) 886-7571
Information
Informational inquiries, including requests for a Prospectus describing
the Company's current securities offering or the Form 10-K annual report
filed with the Securities and Exchange Commission should be addressed to
the Company's Secretary.
-32-
<PAGE>
BACK COVER PAGE OF ANNUAL REPORT
(A map showing the locations of the
following offices:)
1st FRANKLIN FINANCIAL CORPORATION BRANCH OFFICES
Alabama Offices: Georgia Offices: Georgia Offices:
--------------- --------------- ---------------
Alexander City Cartersville McRae
Andalusia Cedartown Milledgeville
Arab Chatsworth Monroe
Athens Clarkesville Montezuma
Bessemer Claxton Monticello
Birmingham Clayton Moultrie
Clanton Cleveland Nashville
Cullman Cochran Newnan
Decatur Commerce Perry
Dothan Conyers Richmond Hill
Enterprise Cordele Rome
Florence Cornelia Royston
Gadsden Covington Sandersville
Huntsville Cumming Savannah
Jasper Dallas Statesboro
Opp Dalton Swainsboro
Ozark Dawson Sylvania
Prattville Douglas Sylvester
Russellville Douglasville Thomaston
Scottsboro Eastman Thomson
Selma Elberton Tifton
Sylacauga Ellijay Toccoa
Troy Forsyth Valdosta
Tuscaloosa Fort Valley Vidalia
Gainesville Warner Robins
Georgia Offices: Garden City Washington
--------------- Georgetown Winder
Adel Greensboro
Albany Griffin South Carolina Offices:
Alma Hartwell ----------------------
Americus Hawkinsville Aiken
Athens Hazlehurst Anderson
Barnesville Hinesville Cayce
Baxley Hogansville Clemson
Blakely Jackson Columbia
Blue Ridge Jasper Easley
Bremen Jefferson Gaffney
Brunswick Jesup Greenwood
Buford Lagrange Greenville
Butler Lavonia Lancaster
Cairo Lawrenceville Laurens
Calhoun Madison Orangeburg
Canton Manchester Seneca
Carrollton McDonough Union
York
<PAGE>
Exhibit 21
SUBSIDIARIES OF REGISTRANT
Franklin Securities, Inc., a Georgia company, was incorporated on
May 4, 1982, as a wholly owned subsidiary to handle securities transactions.
The subsidiary is currently in an inactive status.
Frandisco Property and Casualty Insurance Company, a Georgia company,
was incorporated on August 7, 1989, as a wholly owned subsidiary to reinsure
the property and casualty insurance policies written by the Company in
connection with its credit transactions.
Frandisco Life Insurance Company of Georgia was incorporated on
August 7, 1989, as a wholly owned subsidiary to reinsure the life and the
accident and health insurance policies written by the Company in connection
with its credit transactions. Effective December 27, 1990, Frandisco Life
Insurance Company of Georgia was merged with Frandisco Life Insurance Company
of Arizona (incorporated on August 16, 1978 as a wholly owned subsidiary)
with Frandisco Life Insurance Company of Georgia becoming the surviving
Company.
<PAGE>
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 33-56299.
Arthur Andersen LLP
Atlanta, Georgia
March 29, 1996
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 30,513,593
<SECURITIES> 22,380,867
<RECEIVABLES> 154,567,760
<ALLOWANCES> 4,511,826
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 8,497,522
<DEPRECIATION> 5,668,721
<TOTAL-ASSETS> 182,083,988
<CURRENT-LIABILITIES> 103,720,170
<BONDS> 125,865,817
<COMMON> 170,000
0
0
<OTHER-SE> 47,576,903
<TOTAL-LIABILITY-AND-EQUITY> 182,083,988
<SALES> 0
<TOTAL-REVENUES> 55,157,234
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 29,925,330
<LOSS-PROVISION> 4,630,853
<INTEREST-EXPENSE> 8,047,912
<INCOME-PRETAX> 8,968,917
<INCOME-TAX> 2,462,307
<INCOME-CONTINUING> 6,506,610
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,506,610
<EPS-PRIMARY> 3,827.42
<EPS-DILUTED> 0
</TABLE>
