<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, 1996
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 non-
affiliated 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, 1997
------------------------------------- --------------------------------
Common Stock, $100 Par Value 1,700 shares
Non-Voting Common Stock, No Par Value 168,300 Shares
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Annual Report to security holders for the
fiscal year ended December 31, 1996 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 17-30 of Registrant's Annual Report to security holders for the
fiscal year ended December 31, 1996 are incorporated herein by
reference.
Item 2. PROPERTIES:
Map on inside front cover; paragraph 1 of The Company, Page 1;
Footnote 7 (Commitments) of Notes to Consolidated Financial
Statements, Page 28 of Registrant's Annual Report to security holders
for the fiscal year ended December 31, 1996 are incorporated herein by
reference.
Item 3. LEGAL PROCEEDINGS:
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:
Carl J. White v. 1st Franklin Financial, et al.; Filed in the Circuit
Court of Talladega County, Alabama, Civil Action No. CV-94-374;
previously disclosed in the Company's Form 10-K for the period ended
December 31, 1994. The case was settled on November 26, 1996.
Princess Nobels, et al. v. 1st Franklin , et al.; Filed in the United
States District Court for the Middle District of Alabama, Southern
Division; Civil Action No. CV-94-T-699-N; previously disclosed in the
Company's Form 10-K for the period ended December 31, 1994. The case
was settled during February 1997.
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; previously disclosed in the
Company's Form 10-K for the period ended December 31, 1995. The case
was settled during March 1997.
Timothy Anthony and Sandrea M. Anthony vs 1st Franklin Financial
Corporation,et al.; Filed in the United States District Court for
the Middle District of Alabama, Northern Division, Civil Action No.
CV-95-D-479-N; previously reported in the Company's Form 10-Q for the
period ended September 30, 1995. The case was settled during March
1997.
Dorothy McCurdy vs American General Finance, Inc.; et al. Filed in
the U.S. District Court for the Middle District of Alabama, Northern
Division, Civil Action No. 95-D-1291-N; previously reported in the
Company's Form 10-Q for the period ended September 30, 1995. The case
was settled during March 1997.
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, 1996 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, 1996 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 - 16 of Registrant's
Annual Report to security holders for the fiscal year ended December
31, 1996 is incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
Pages 17 - 30 of Registrant's Annual Report to security holders for
the fiscal year ended December 31, 1996 are incorporated herein by
reference.
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE:
Not applicable.
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Forward Looking Statements:
The statements contained herein under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Market for the
Registrant's Common Stock and Related Stockholders' Matters" and elsewhere in
this Annual Report on Form 10-K constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance, or achievements
of the Company to be materially different from any future results,
performance, or materially different from any future results, performance, or
achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, business the ability to manage cash flow
and working capital, and other factors referenced elsewhere herein.
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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) 69 Since 1970; None
When successor
elected and qualified
Ben F. Cheek, III (3)(4)(5) 60 Since 1967; Chairman of
When successor Board
elected and qualified
Lorene M. Cheek (2)(4)(6) 87 Since 1946; None
When successor
elected and qualified
Jack D. Stovall (1)(2) 61 Since 1983; None
When successor
elected and qualified
Robert E. Thompson (1)(2) 65 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, 60 Joined the Company in 1961 as attorney and became
Chairman of Board Vice President in 1962, President in 1972 and
Chairman of Board in 1989.
T. Bruce Childs, 60 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, 39 Joined the Company in 1983 and became Secretary
Secretary in 1989.
No Family Relationship
A. Roger Guimond, 42 Joined the Company in 1976 as an accountant and
Vice President and became Chief Accounting Officer in 1978, Chief
Chief Financial Officer Financial Chief Financial Officer Officer in 1991
No Family Relationship and Vice President in 1992.
Linda L. Sessa, 42 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 1996 252,000 217,932 3,431 98,366
Chairman and 1995 240,000 220,466 3,033 146,114
CEO 1994 228,000 189,693 2,760 34,268
T. Bruce Childs 1996 246,000 217,692 3,179 87,633
President 1995 228,000 219,986 4,236 130,447
1994 210,000 188,973 4,682 31,071
A. Roger Guimond 1996 132,000 74,362 1,650 29,589
Vice President 1995 120,000 74,816 1,650 40,959
and CFO 1994 108,000 62,174 1,650 17,945
* 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 $4,931 for 1996, $4,425 for 1995 and
$3,816 for 1994. 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 January 1, 1997:
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 January 1, 1997:
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 (1) 68.24%
(1) Effective January 1, 1997, the Company elected S Corporation status for
income tax reporting purposes for the Company. Because partnerships are
ineligible as S Corporation shareholders, Cheek Investments, L.P.
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distributed its shares of the Company to its eight partners (six trusts,
Ben F. Cheek, III and Elizabeth Cheek, wife of Ben F. Cheek,III). Ben
F. Cheek, III and Elizabeth Cheek are grantors of the trust. Below is a
recap of ownership in non-voting common stock attributable to Ben F.
Cheek, III:
No Of
Name Shares Percentage
---- ------ ----------
Ben F. Cheek, III 574 .34%
Elizabeth Cheek 574 .34%
Ben Cheek Trust A (f/b/o Ben F. Cheek, IV) 18,949 11.26%
Ben Cheek Trust B (f/b/o Virginia C. Herring) 18,949 11.26%
Ben Cheek Trust C (f/b/o David W. Herring) 18,949 11.26%
Elizabeth Cheek Trust A (f/b/o Ben F. Cheek, IV) 18,949 11.26%
Elizabeth Cheek Trust B (f/b/o Virginia C. Herring) 18,948 11.26%
Elizabeth Cheek Trust C (f/b/o David W. Cheek) 18,948 11.26%
------- -----
114,840 68.24%
======= =====
(c) The Company knows of no contractual arrangements which may at a
subsequent date result in a change in control of the Company.
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, 1996 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, 1996, the Company maintained $2,300,000 of
certificates of deposit with Liberty at market rates and terms. The
Company also had $1,609,087 in demand deposits with Liberty at
December 31, 1996.
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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, 1996:
Report of Independent Public Accountants.
Consolidated Statements of Financial Position at
December 31, 1996 and 1995.
Consolidated Statements of Income and Retained Earnings for the
three years ended December 31, 1996.
Consolidated Statements of Cash Flows for the three years ended
December 31, 1996.
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 (incorporated herein by reference to Exhibit 3(3)(a)
from Form 10-K for the fiscal year ended December 31, 1995).
(b) Bylaws (incorporated herein by reference to Exhibit 3(3)(b)
from Form 10-K for the fiscal year ended December 31, 1995).
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
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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.)
(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.)
(g) Ninth Amendment to Revolving Credit Agreement and Term
Loan Agreement dated June 20, 1996.
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, 1996, 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, 1996.
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, 1996.
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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 27, 1997 By: s/Ben F. Cheek, III
-------------- ---------------------------
Date Ben F. Cheek, III
Chairman of Board
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 27, 1997
- ---------------------- Chief Executive --------------
Ben F. Cheek, III Officer
s/(T. Bruce Childs) President March 27, 1997
- ---------------------- --------------
T. Bruch Childs
s/(A. Roger Guimond) Vice President; March 27, 1997
- ---------------------- Chief Financial --------------
A. Roger Guimond Officer
s/(W. Richard Acree) Director March 27, 1997
- ---------------------- --------------
W. Richard Acree
s/(Lorene M. Cheek) Director March 27, 1997
- ---------------------- --------------
Lorene M. Cheek
s/(Jack D. Stovall) Director March 27, 1997
- ---------------------- --------------
Jack D. Stovall
s/(Robert E. Thompson) Director March 27, 1997
- ---------------------- --------------
Robert E. Thompson
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, 1996, 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 10(g)
NINTH AMENDMENT TO REVOLVING CREDIT
AND TERM LOAN AGREEMENT
THIS NINTH AMENDMENT TO REVOLVING CREDIT AND TERM LOAN AGREEMENT ("Ninth
Amendment"), dated as of June 20, 1996, among 1st FRANKLIN FINANCIAL
CORPORATION (formerly called "FRANKLIN DISCOUNT COMPANY"), a Georgia
corporation, as Borrower (the "Company"), CORESTATES BANK, N.A.*, a national
banking association (formerly called the Philadephia National Bank) ("PNB"),
FLEET BANK, N.A. (formerly called National Westminster Bank USA), a national
banking association ("Fleet"), SOUTHTRUST BANK OF GEORGIA, N.A., a national
banking association , as assignee of First American Bank of Georgia, N.A.
("SouthTrust"), and HARRIS TRUST AND SAVINGS BANK, an Illinois banking
corporation ("Harris"), as lenders (collectively, the "Banks"), and CORESTATES
BANK, N.A., a national banking association, as Agent for the Banks (in such
capacity, the "Agent"),
W I T N E S S E T H:
WHEREAS the Company, PNB, Fleet, United States Trust Company of New York, a
New York banking corporation ("U.S. Trust") and the Agent entered into a
Revolving Credit and Term Loan Agreement dated as of October 1, 1985, as
amended, by an Amendment to Revolving Credit and Term Loan Agreement dated as
of November 10, 1986 pursuant to which each said bank agreed to make Loans to
the Company as set forth therein; and
WHEREAS, U.S. Trust sold and assigned all of its right, title and interest in
and to its Loans under said Credit Agreement as so amended to Dai-Ichi Kangyo
Bank, Ltd. which, pursuant to the Second Amendment, Assignment and Assumption
Agreement dated March 1, 1988 to said Revolving Credit and Term Loan
Agreement, sold, assigned and transferred all of its right, title and interest
in its Loans under said Revolving Credit and Term Loan Agreement to First
American Bank of Georgia, N.A. ("FAB Georgia"); and
WHEREAS, SouthTrust is the assignee of FAB Georgia's right, title and interest
in its Loans under said Revolving Credit and Term Loan Agreement; and
WHEREAS, said Revolving Credit and Term Loan Agreement was further amended and
extended by a Third Amendment to Revolving Credit and Term Loan Agreement
dated as of August 31, 1989, a Fourth Amendment to Revolving Credit and Term
Loan Agreement dated as of May 1, 1990, a Fifth Amendment and Extension
Agreement dated as of April 23, 1992 and a Sixth Amendment to Revolving Credit
and Term Loan Agreement dated as of July 20, 1992 (the "Sixth Amendment"); and
WHEREAS, Harris was added as a lender under said Revolving Credit and Term
Loan Agreement pursuant to the Sixth Amendment (said Revolving Credit and Term
Loan Agreement as amended and extended, being referred to herein as the
"Credit Agreement"); and
<PAGE>
WHEREAS, the Company, the Banks and the Agent desire to make certain
amendments to the Credit Agreement to extend the final termination date of the
Credit Agreement and the Banks' Commitments all as more particularly set forth
herein;
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained, the Company, the Banks and the Agent hereby agree as follows:
1. All capitalized terms used herein and not otherwise defined herein
shall have the meanings given such terms in the Credit Agreement.
2. The Company, the Banks and the Agent agree that, unless the Banks'
Commitments are terminated sooner in accordance with Section 2.07
or Section 7.01 of the Credit Agreement, the termination date of
the Credit Agreement and of all of the Banks' Commitments
thereunder is hereby extended to the date which is three and one
half years after the June 30 on which the majority in interest of
the Banks exercise their option to terminate the Commitments of
all the Banks pursuant to Section 2.07(a). To that end, the
Credit Agreement is hereby amended as follows:
(a) The defined term "Commitment Termination Date" set forth in
Section 1.01 of the Credit Agreement, relating to Certain
Defined Terms, is hereby amended to read in its entirety as
follows:
"Commitment Termination Date" shall mean June 30 in
any year in which a written notice of termination is
given as provided in Section 2.07.
(b) Section 2.07(c) of the Credit Agreement is hereby amended to
read in its entirety as follows:
(c) Final Payment. Notwithstanding anything herein contained to
the contrary, unless a Bank has exercised its right to
withdraw from the credit pursuant to Section 2.07(b) or the
Banks and the Company otherwise agree in writing, the
outstanding balance of the Loans shall be paid in full on
the date which is three and one half years after the
Commitment Termination Date established pursuant to Section
2.07(a).
3. The Company hereby agrees to execute and deliver to the Agent a
Fourth Amended and Restated Revolving Credit Note substantially in
the form of Exhibit A-1 hereto payable to the order of each of
PNB, Fleet and SouthTrust and a Second Amended and Restated
Revolving Credit Note substantially in the form of Exhibit A-2
hereto payable to the order of Harris, evidencing the Loans to be
made by the Banks to the Company in the amount of the Commitment
of each Bank and Harris, as amended hereby. The term "Notes" as
defined and used in the Agreement and as used herein shall, from
and after the date hereof, mean said Fourth Amended and Restated
Revolving Credit Notes and said Second Amended and Restated
Revolving Credit Note, as said Notes may from time to time be
issued, amended, extended or supplemented.
<PAGE>
4. To induce the Banks and the Agent to enter into this Ninth
Amendment, the Company represents and warrants to each Bank and to
the Agent as follows:
(a) The Company has taken all corporate action necessary to
authorize the execution, delivery and performance of this
Ninth Amendment, the Fourth Amended Revolving Credit Notes
payable to the order of PNB, Fleet and SouthTrust and the
Second Amended and Restated Revolving Credit Note payable to
the order of Harris. This Ninth Amendment and said Notes
are, or when executed by the Company and delivered to the
Agent will be, duly executed and constitute the valid and
legally binding obligations of the Company, enforceable
against the Company in accordance with their respective
terms. The Company hereby ratifies and confirms the
representations and warranties of the Company set forth in
Article 3 of the Credit Agreement as being true and correct
on the date hereof, as brought current pursuant to Section
10(a) of the Sixth Amendment; provided that the
representations and warranties which refer to the Form 10-K
shall be deemed to refer to the Company's most recent Form
10-K filed by the Company with the Security and Exchange
Commission and the representations and warranties which
refer to financial statements of the Company shall be deemed
to refer to the most recent financial statements furnished
by the Company to the Banks.
5. The effectiveness of this Ninth Amendment is subject to the
fulfillment of the conditions precedent to all Loans set forth in
Section 4.02 of the Credit Agreement and to the following
conditions precedent:
(a) The Agent shall have received from Messrs. Jones, Day,
Reavis and Pogue, counsel to the Company, five executed
copies of their opinion dated the date of this Ninth
Amendment, addressed to each of the Banks in care of the
Agent and substantially in the form annexed hereto as
Exhibit B;
(b) The Agent shall have received one Note (in the form of
Exhibit A-1 hereto annexed) for each Bank except Harris and
one Note (in the form of Exhibit A-2 hereto annexed) for
Harris, all dated the date of this Ninth Amendment and duly
executed by the Company;
(c) The Agent shall have received five certified copies of
resolutions of the Boards of Directors of the Company,
respectively, authorizing the execution, delivery and
performance by the Company of this Ninth Amendment and the
Notes and the borrowings hereunder, which certificates shall
state that said resolutions are in full force and effect
without modification on the date of such certification.
6. All other terms and conditions of the Credit Agreement shall
remain unchanged and are hereby ratified and confirmed.
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Ninth Amendment to be
executed by their respective officers thereunto duly authorized as of the date
first above written in several counterparts, each of which is an original and
all of which are identical, and each of the counterparts hereof so executed
shall for all purposes be deemed to be an original.
1st FRANKLIN FINANCIAL CORPORATION
By: s/A. Roger Guimond
----------------------
Vice President and CFO
CORESTATES BANK, N.A. as SOUTHTRUST BANK OF GEORGIA, N.A.
a Bank and as Agent
By: s/William E. Musselman By: William E. Reid III
---------------------- -------------------
V.P V.P.
FLEET BANK, N.A. HARRIS TRUST AND SAVINGS BANK
By: s/Christine Montagna By: s/Jerome P. Crokin
-------------------- -------------------
V.P V.P.
<PAGE>
EXHIBIT A-1
Fourth Amended and Restated
Revolving Credit Note
$___________________ Philadelphia, Pennsylvania
June 20, 1996
FOR VALUE RECEIVED, 1st FRANKLIN FINANCIAL CORPORATION, a Georgia corporation
(the "Company"), promises to pay to the order of [_______________________]
(the "Bank"), at the office of CoreStates Bank, N.A., as Agent, at 1345
Chestnut Street, Philadelphia, Pennsylvania 19107 in lawful money of the
United States of America, in immediately available funds, on the January 1
following a "Commitment Termination Date" as defined in the Agreement
hereinafter referred to, the sum of ____________ Million Dollars
($______________) or the amount outstanding on said date of all Loans made by
the Bank to the Company pursuant to Section 2.01 of the Agreement hereinafter
referred to, as conclusively evidenced by written endorsement with respect
thereto by an officer of the Bank upon the Schedule hereto annexed, whichever
is less.
The Company shall also pay to the Bank interest (computed on the basis of the
actual number of days elapsed in a year of 360 days) on the unpaid principal
amount hereof in like money, on the last business day of each June, September,
December and March, in each year, commencing on the first of such dates after
the date hereof, and at maturity until payment in full at a rate per annum,
determined daily, equal to one quarter of one percentage point above the rate
of interest for loans established and publicly announced in Philadelphia from
time to time by CoreStates Bank, N.A. as its "Prime Rate" (the "Prime Rate").
Interest shall be payable on any overdue amount of principal at a rate per
annum equal to two percentage points above the Prime Rate. Each change in the
rate of interest hereon due to a change in the Prime Rate shall be effective
on the effective date of such change in the Prime Rate, but in no event shall
interest be payable at a rate higher than that permitted by applicable law.
The undersigned also agrees to pay the Facility Service Fee and the Agents's
fee described in the Agreement hereinafter referred to.
The outstanding principal balance of this Note may be prepaid by the Company,
in whole or in part, at any time or from time to time, but any partial
prepayment shall not be less than the minimum amount provided in Section
2.01(a) of the Agreement hereinafter referred to.
As used herein, the term "business day" shall mean a day other than a
Saturday, Sunday or legal bank holiday under the laws of the States of
Pennsylvania or New York, and the term "Immediately Available Funds" shall
mean funds which are available for immediate use by the Bank at the Bank's
office hereinabove set forth not later that the due date of such payment.
<PAGE>
This Note is one of the Notes issued pursuant to Paragraph 3 of a certain
Ninth Amendment to Revolving Credit and Term Loan Agreement dated as of June
20, 1996 among the Company, CoreStates Bank, N.A., Fleet Bank, N.A. (formerly
called National Westminster Bank USA), SouthTrust Bank of Georgia, N.A.,
Harris Trust and Savings Bank and CoreStates Bank, N.A., as Agent, which
amends a certain Credit Agreement dated as of October 1, 1985 among the
Company, CoreStates Bank, N.A., Fleet Bank, N.A. (formerly called National
Westminster Bank USA), United States Trust Company of New York (predecessor by
way of assignment to SouthTrust Bank of Georgia, N.A.) and CoreStates Bank,
N.A., as Agent, as amended (herein, together with said Ninth Amendment, all
other prior amendments thereto and any amendments which may hereafter be made
thereto, called the "Agreement"). Upon the occurrence of any one or more of
the Events of Default specified in the Agreement, the amounts then remaining
unpaid on this Note may be declared to be immediately due and payable without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by the Company, and the Company shall be further obligated to
reimburse the holder hereof for all reasonable out-of-pocket expenses of the
holder in enforcing or attempting to enforce this Note, all as provided in the
Agreement.
This Note replaces and supersedes but does not extinguish the Company's
liabilities and outstanding obligations under the Company's
$_______________________ Third Amended and Restated Revolving Credit Note
dated July 20, 1994 to the order of the Bank.
This Note and all rights and obligations hereunder shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania.
1st FRANKLIN FINANCIAL CORPORATION
By ______________________________
Title
<PAGE>
Schedule of Loans and Principal Payments
----------------------------------------
Name of
Unpaid Person
Amount of Amount of Principal Making
Date Loan Principal Paid Balance Notation
---- ---- -------------- ------- --------
<PAGE>
EXHIBIT A-2
Second Amended and Restated Revolving Credit Note
$5,000,000 Philadelphia, Pennsylvania
June 20, 1996
FOR VALUE RECEIVED, 1st FRANKLIN FINANCIAL CORPORATION, a Georgia corporation
(the "Company"), promises to pay to the order of HARRIS TRUST AND SAVINGS
BANK, an Illinois banking corporation (the "Bank"), at the office of
CoreStates Bank, N.A., as Agent, at 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107 in lawful money of the United States of America, in
Immediately Available Funds, on the January 1 following a "Commitment
Termination Date" as defined in the Agreement hereinafter referred to, the sum
of Five Million Dollars ($5,000,000) or the amount outstanding on said date of
all Loans made by the Bank to the Company pursuant to Section 2.01 of the
Agreement hereinafter referred to, as conclusively evidenced by written
endorsement with respect thereto by an officer of the Bank upon the Schedule
hereto annexed, whichever is less.
The Company shall also pay to the Bank interest (computed on the basis of the
actual number of days elapsed in a year of 360 days) on the unpaid principal
amount hereof in like money, on the last business day of each June, September,
December and March, in each year, commencing on the first of such dates after
the date hereof, and at maturity until payment in full at a rate per annum,
determined daily, equal to one quarter of one percentage point above the rate
of interest for loans established and publicly announced in Philadelphia from
time to time by CoreStates Bank, N.A. as its "Prime Rate" (the "Prime Rate").
Interest shall be payable on any overdue amount of principal at a rate per
annum equal to two percentage points above the Prime Rate. Each change in the
rate of interest hereon due to a change in the Prime Rate shall be effective
on the effective date of such change in the Prime Rate, but in no event shall
interest be payable at a rate higher than that permitted by applicable law.
The undersigned also agrees to pay the Facility Service Fee and the Agents's
fee described in the Agreement hereinafter referred to.
The outstanding principal balance of this Note may be prepaid by the Company,
in whole or in part, at any time or from time to time, but any partial
prepayment shall not be less than the minimum amount provided in Section
2.01(a) of the Agreement hereinafter referred to.
As used herein, the term "business day" shall mean a day other than a
Saturday, Sunday or legal bank holiday under the laws of the States of
Pennsylvania or New York, and the term "Immediately Available Funds" shall
mean funds which are available for immediate use by the Bank at the Bank's
office hereinabove set forth not later that the due date of such payment.
<PAGE>
This Note is one of the Notes issued pursuant to Paragraph 3 of a certain
Ninth Amendment to Revolving Credit and Term Loan Agreement dated as of June
20, 1996 among the Company, CoreStates Bank, N.A., Fleet Bank, N.A. (formerly
called National Westminster Bank USA), SouthTrust Bank of Georgia, N.A.,
Harris Trust and Savings Bank and CoreStates Bank, N.A., as Agent, which
amends a certain Credit Agreement dated as of October 1, 1985 among the
Company, CoreStates Bank, N.A., Fleet Bank, N.A. (formerly called National
Westminster Bank USA), United States Trust Company of New York (predecessor by
way of assignment to SouthTrust Bank of Georgia, N.A.) and CoreStates Bank,
N.A., as Agent, as amended (herein, together with said Seventh Amendment, all
other prior amendments thereto and any amendments which may hereafter be made
thereto, called the "Agreement"). Upon the occurrence of any one or more of
the Events of Default specified in the Agreement, the amounts then remaining
unpaid on this Note may be declared to be immediately due and payable without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by the Company, and the Company shall be further obligated to
reimburse the holder hereof for all reasonable out-of-pocket expenses of the
holder in enforcing or attempting to enforce this Note, all as provided in the
Agreement.
This Note replaces and supersedes but does not extinguish the Company's
liabilities and outstanding obligations under the Company's $5,000,000
Revolving Credit Note dated July 20, 1992 to the order of the Bank.
This Note and all rights and obligations hereunder shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania.
1st FRANKLIN FINANCIAL CORPORATION
By ______________________________
Title
<PAGE>
Schedule of Loans and Principal Payments
----------------------------------------
Name of
Unpaid Person
Amount of Amount of Principal Making
Date Loan Principal Paid Balance Notation
---- ---- -------------- ------- --------
<PAGE>
Fourth Amended and Restated
Revolving Credit Note
$6,000,000 Philadelphia, Pennsylvania
June 20, 1996
FOR VALUE RECEIVED, 1st FRANKLIN FINANCIAL CORPORATION, a Georgia corporation
(the "Company"), promises to pay to the order of CORESTATES BANK, N.A., a
national banking association (the "Bank"), at the office of CoreStates Bank,
N.A., as Agent, 1345 Chestnut Street, Philadelphia, Pennsylvania 19107 in
lawful money of the United States of America, in Immediately Available Funds,
on the January 1 following a "Commitment Termination Date" as defined in the
Agreement hereinafter referred to, the sum of Six Million Dollars ($6,000,000)
or the amount outstanding on said date of all Loans made by the Bank to the
Company pursuant to Section 2.01 of the Agreement hereinafter referred to, as
conclusively evidenced by written endorsement with respect thereto by an
officer of the Bank upon the Schedule hereto annexed, whichever is less.
The Company shall also pay to the Bank interest (computed on the basis of the
actual number of days elapsed in a year of 360 days) on the unpaid principal
amount hereof in like money, on the last business day of each June, September,
December and March, in each year, commencing on the first of such dates after
the date hereof, and at maturity until payment in full at a rate per annum,
determined daily, equal to one quarter of one percentage point above the rate
of interest for loans established and publicly announced in Philadelphia from
time to time by CoreStates Bank, N.A. as its "Prime Rate" (the "Prime Rate").
Interest shall be payable on any overdue amount of principal at a rate per
annum equal to two percentage points above the Prime Rate. Each change in the
rate of interest hereon due to a change in the Prime Rate shall be effective
on the effective date of such change in the Prime Rate, but in no event shall
interest be payable at a rate higher than that permitted by applicable law.
The undersigned also agrees to pay the Facility Service Fee and the Agents's
fee described in the Agreement hereinafter referred to.
The outstanding principal balance of this Note may be prepaid by the Company,
in whole or in part, at any time or from time to time, but any partial
prepayment shall not be less than the minimum amount provided in Section
2.01(a) of the Agreement hereinafter referred to.
As used herein, the term "business day" shall mean a day other than a
Saturday, Sunday or legal bank holiday under the laws of the States of
Pennsylvania or New York, and the term "Immediately Available Funds" shall
mean funds which are available for immediate use by the Bank at the Bank's
office hereinabove set forth not later that the due date of such payment.
<PAGE>
This Note is one of the Notes issued pursuant to Paragraph 3 of a certain
Ninth Amendment to Revolving Credit and Term Loan Agreement dated as of June
20, 1996 among the Company, CoreStates Bank, N.A., Fleet Bank, N.A. (formerly
called National Westminster Bank USA), SouthTrust Bank of Georgia, N.A.,
Harris Trust and Savings Bank and CoreStates Bank, N.A., as Agent, which
amends a certain Credit Agreement dated as of October 1, 1985 among the
Company, CoreStates Bank, N.A.,Fleet Bank, N.A. (formerly called National
Westminster Bank USA), United States Trust Company of New York (predecessor by
way of assignment to SouthTrust Bank of Georgia, N.A.) and CoreStates Bank,
N.A., as Agent, as amended (herein, together with said Seventh Amendment, all
other prior amendments thereto and any amendments which may hereafter be made
thereto, called the "Agreement"). Upon the occurrence of any one or more of
the Events of Default specified in the Agreement, the amounts then remaining
unpaid on this Note may be declared to be immediately due and payable without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by the Company, and the Company shall be further obligated to
reimburse the holder hereof for all reasonable out-of-pocket expenses of the
holder in enforcing or attempting to enforce this Note, all as provided in the
Agreement.
This Note replaces and supersedes but does not extinguish the Company's
liabilities and outstanding obligations under the Company's $6,000,000
Revolving Credit Note dated July 20, 1992 to the order of the Bank.
This Note and all rights and obligations hereunder shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania.
1st FRANKLIN FINANCIAL CORPORATION
By: s/A. Roger Guimond
------------------------
Vice President and CFO
<PAGE>
Schedule of Loans and Principal Payments
----------------------------------------
Name of
Unpaid Person
Amount of Amount of Principal Making
Date Loan Principal Paid Balance Notation
---- ---- -------------- ------- --------
<PAGE>
Fourth Amended and Restated
Revolving Credit Note
$5,000,000 Philadelphia, Pennsylvania
June 20, 1996
FOR VALUE RECEIVED, 1st FRANKLIN FINANCIAL CORPORATION, a Georgia corporation
(the "Company"), promises to pay to the order of SOUTHTRUST BANK OF GEORGIA,
N.A., a national banking association (as assignee of First American Bank of
Georgia, N.A.)(the "Bank"), at the office of CoreStates Bank, N.A., as Agent,
at 1345 Chestnut Street, Philadelphia, Pennsylvania 19107 in lawful money of
the United States of America, in Immediately Available Funds, on the January 1
following a "Commitment Termination Date" as defined in the Agreement
hereinafter referred to, the sum of Five Million Dollars ($5,000,000) or the
amount outstanding on said date of all Loans made by the Bank to the Company
pursuant to Section 2.01 of the Agreement hereinafter referred to, as
conclusively evidenced by written endorsement with respect thereto by an
officer of the Bank upon the Schedule hereto annexed, whichever is less.
The Company shall also pay to the Bank interest (computed on the basis of the
actual number of days elapsed in a year of 360 days) on the unpaid principal
amount hereof in like money, on the last business day of each June, September,
December and March, in each year, commencing on the first of such dates after
the date hereof, and at maturity until payment in full at a rate per annum,
determined daily, equal to one quarter of one percentage point above the rate
of interest for loans established and publicly announced in Philadelphia from
time to time by CoreStates Bank, N.A. as its "Prime Rate" (the "Prime Rate").
Interest shall be payable on any overdue amount of principal at a rate per
annum equal to two percentage points above the Prime Rate. Each change in the
rate of interest hereon due to a change in the Prime Rate shall be effective
on the effective date of such change in the Prime Rate, but in no event shall
interest be payable at a rate higher than that permitted by applicable law.
The undersigned also agrees to pay the Facility Service Fee and the Agents's
fee described in the Agreement hereinafter referred to.
The outstanding principal balance of this Note may be prepaid by the Company,
in whole or in part, at any time or from time to time, but any partial
prepayment shall not be less than the minimum amount provided in Section
2.01(a) of the Agreement hereinafter referred to.
As used herein, the term "business day" shall mean a day other than a
Saturday, Sunday or legal bank holiday under the laws of the States of
Pennsylvania or New York, and the term "Immediately Available Funds" shall
mean funds which are available for immediate use by the Bank at the Bank's
office hereinabove set forth not later that the due date of such payment.
<PAGE>
This Note is one of the Notes issued pursuant to Paragraph 3 of a certain
Ninth Amendment to Revolving Credit and Term Loan Agreement dated as of June
20, 1996 among the Company, CoreStates Bank, N.A.,Fleet Bank, N.A. (formerly
called National Westminster Bank USA), SouthTrust Bank of Georgia, N.A.,
Harris Trust and Savings Bank and CoreStates Bank, N.A., as Agent, which
amends a certain Credit Agreement dated as of October 1, 1985 among the
Company, CoreStates Bank, N.A.,Fleet Bank, N.A. (formerly called National
Westminster Bank USA), United States Trust Company of New York (predecessor by
way of assignment to SouthTrust Bank of Georgia, N.A.) and CoreStates Bank,
N.A., as Agent, as amended (herein, together with said Ninth Amendment, all
other prior amendments thereto and any amendments which may hereafter be made
thereto, called the "Agreement"). Upon the occurrence of any one or more of
the Events of Default specified in the Agreement, the amounts then remaining
unpaid on this Note may be declared to be immediately due and payable without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by the Company, and the Company shall be further obligated to
reimburse the holder hereof for all reasonable out-of-pocket expenses of the
holder in enforcing or attempting to enforce this Note, all as provided in the
Agreement.
This Note replaces and supersedes but does not extinguish the Company's
liabilities and outstanding obligations under the Company's $5,000,000
Revolving Credit Note dated July 20, 1992 to the order of the Bank.
This Note and all rights and obligations hereunder shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania.
1st FRANKLIN FINANCIAL CORPORATION
By: s/ A. Roger Guimond
------------------------
Vice President and CFO
<PAGE>
Schedule of Loans and Principal Payments
----------------------------------------
Name of
Unpaid Person
Amount of Amount of Principal Making
Date Loan Principal Paid Balance Notation
---- ---- -------------- ------- --------
<PAGE>
Fourth Amended and Restated
Revolving Credit Note
$5,000,000 Philadelphia, Pennsylvania
June 20, 1996
FOR VALUE RECEIVED, 1st FRANKLIN FINANCIAL CORPORATION, a Georgia corporation
(the "Company"), promises to pay to the order of FLEET BANK, N.A.(the "Bank"),
at the office of CoreStates Bank, N.A., as Agent, at 1345 Chestnut Street,
Philadelphia, Pennsylvania 19107 in lawful money of the United States of
America, in Immediately Available Funds, on the January 1 following a
"Commitment Termination Date" as defined in the Agreement hereinafter referred
to, the sum of Five Million Dollars ($5,000,000) or the amount outstanding on
said date of all Loans made by the Bank to the Company pursuant to Section
2.01 of the Agreement hereinafter referred to, as conclusively evidenced by
written endorsement with respect thereto by an officer of the Bank upon the
Schedule hereto annexed, whichever is less.
The Company shall also pay to the Bank interest (computed on the basis of the
actual number of days elapsed in a year of 360 days) on the unpaid principal
amount hereof in like money, on the last business day of each June, September,
December and March, in each year, commencing on the first of such dates after
the date hereof, and at maturity until payment in full at a rate per annum,
determined daily, equal to one quarter of one percentage point above the rate
of interest for loans established and publicly announced in Philadelphia from
time to time by CoreStates Bank, N.A. as its "Prime Rate" (the "Prime Rate").
Interest shall be payable on any overdue amount of principal at a rate per
annum equal to two percentage points above the Prime Rate. Each change in the
rate of interest hereon due to a change in the Prime Rate shall be effective
on the effective date of such change in the Prime Rate, but in no event shall
interest be payable at a rate higher than that permitted by applicable law.
The undersigned also agrees to pay the Facility Service Fee and the Agents's
fee described in the Agreement hereinafter referred to.
The outstanding principal balance of this Note may be prepaid by the Company,
in whole or in part, at any time or from time to time, but any partial
prepayment shall not be less than the minimum amount provided in Section
2.01(a) of the Agreement hereinafter referred to.
As used herein, the term "business day" shall mean a day other than a
Saturday, Sunday or legal bank holiday under the laws of the States of
Pennsylvania or New York, and the term "Immediately Available Funds" shall
mean funds which are available for immediate use by the Bank at the Bank's
office hereinabove set forth not later that the due date of such payment.
<PAGE>
This Note is one of the Notes issued pursuant to Paragraph 3 of a certain
Ninth Amendment to Revolving Credit and Term Loan Agreement dated as of June
20, 1996 among the Company, CoreStates Bank, N.A.,Fleet Bank, N.A. (formerly
called National Westminster Bank USA), SouthTrust Bank of Georgia, N.A.,
Harris Trust and Savings Bank and CoreStates Bank, N.A., as Agent, which
amends a certain Credit Agreement dated as of October 1, 1985 among the
Company, CoreStates Bank, N.A.,Fleet Bank, N.A. (formerly called National
Westminster Bank USA), United States Trust Company of New York (predecessor by
way of assignment to SouthTrust Bank of Georgia, N.A.) and CoreStates Bank,
N.A., as Agent, as amended (herein, together with said Ninth Amendment, all
other prior amendments thereto and any amendments which may hereafter be made
thereto, called the "Agreement"). Upon the occurrence of any one or more of
the Events of Default specified in the Agreement, the amounts then remaining
unpaid on this Note may be declared to be immediately due and payable without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by the Company, and the Company shall be further obligated to
reimburse the holder hereof for all reasonable out-of-pocket expenses of the
holder in enforcing or attempting to enforce this Note, all as provided in the
Agreement.
This Note replaces and supersedes but does not extinguish the Company's
liabilities and outstanding obligations under the Company's $5,000,000
Revolving Credit Note dated July 20, 1992 to the order of the Bank.
This Note and all rights and obligations hereunder shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania.
1st FRANKLIN FINANCIAL CORPORATION
By: s/ A. Roger Guimond
----------------------
Vice President and CFO
<PAGE>
Schedule of Loans and Principal Payments
----------------------------------------
Name of
Unpaid Person
Amount of Amount of Principal Making
Date Loan Principal Paid Balance Notation
---- ---- -------------- ------- --------
<PAGE>
Second Amended and Restated Revolving Credit Note
$5,000,000 Philadelphia, Pennsylvania
June 20, 1996
FOR VALUE RECEIVED, 1st FRANKLIN FINANCIAL CORPORATION, a Georgia corporation
(the "Company"), promises to pay to the order of HARRIS TRUST AND SAVINGS
BANK, an Illinois banking corporation (the "Bank"), at the office of
CoreStates Bank, N.A., as Agent, at 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107 in lawful money of the United States of America, in
Immediately Available Funds, on the first to occur of December 31, 1999 or the
January 1 following a "Commitment Termination Date" as defined in the
Agreement hereinafter referred to, the sum of Five Million Dollars
($5,000,000) or the amount outstanding on said date of all Loans made by the
Bank to the Company pursuant to Section 2.01 of the Agreement hereinafter
referred to, as conclusively evidenced by written endorsement with respect
thereto by an officer of the Bank upon the Schedule hereto annexed, whichever
is less.
The Company shall also pay to the Bank interest (computed on the basis of the
actual number of days elapsed in a year of 360 days) on the unpaid principal
amount hereof in like money, on the last business day of each June, September,
December and March, in each year, commencing on the first of such dates after
the date hereof, and at maturity until payment in full at a rate per annum,
determined daily, equal to one quarter of one percentage point above the rate
of interest for loans established and publicly announced in Philadelphia from
time to time by CoreStates Bank, N.A. as its "Prime Rate" (the "Prime Rate").
Interest shall be payable on any overdue amount of principal at a rate per
annum equal to two percentage points above the Prime Rate. Each change in the
rate of interest hereon due to a change in the Prime Rate shall be effective
on the effective date of such change in the Prime Rate, but in no event shall
interest be payable at a rate higher than that permitted by applicable law.
The undersigned also agrees to pay the Facility Service Fee and the Agents's
fee described in the Agreement hereinafter referred to.
The outstanding principal balance of this Note may be prepaid by the Company,
in whole or in part, at any time or from time to time, but any partial
prepayment shall not be less than the minimum amount provided in Section
2.01(a) of the Agreement hereinafter referred to.
As used herein, the term "business day" shall mean a day other than a
Saturday, Sunday or legal bank holiday under the laws of the States of
Pennsylvania or New York, and the term "Immediately Available Funds" shall
mean funds which are available for immediate use by the Bank at the Bank's
office hereinabove set forth not later that the due date of such payment.
<PAGE>
This Note is one of the Notes issued pursuant to Paragraph 3 of a certain
Ninth Amendment to Revolving Credit and Term Loan Agreement dated as of June
20, 1996 among the Company, CoreStates Bank, N.A.,Fleet Bank, N.A. (formerly
called National Westminster Bank USA), SouthTrust Bank of Georgia, N.A.,
Harris Trust and Savings Bank and CoreStates Bank, N.A., as Agent, which
amends a certain Credit Agreement dated as of October 1, 1985 among the
Company, CoreStates Bank, N.A.,Fleet Bank, N.A. (formerly called National
Westminster Bank USA), United States Trust Company of New York (predecessor by
way of assignment to SouthTrust Bank of Georgia, N.A.) and CoreStates Bank,
N.A., as Agent, as amended (herein, together with said Ninth Amendment, all
other prior amendments thereto and any amendments which may hereafter be made
thereto, called the "Agreement"). Upon the occurrence of any one or more of
the Events of Default specified in the Agreement, the amounts then remaining
unpaid on this Note may be declared to be immediately due and payable without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by the Company, and the Company shall be further obligated to
reimburse the holder hereof for all reasonable out-of-pocket expenses of the
holder in enforcing or attempting to enforce this Note, all as provided in the
Agreement.
This Note replaces and supersedes but does not extinguish the Company's
liabilities and outstanding obligations under the Company's $5,000,000
Revolving Credit Note dated July 20, 1992 to the order of the Bank.
This Note and all rights and obligations hereunder shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania.
1st FRANKLIN FINANCIAL CORPORATION
By: s/ A. Roger Guimond
----------------------
Vice President and CFO
<PAGE>
Schedule of Loans and Principal Payments
----------------------------------------
Name of
Unpaid Person
Amount of Amount of Principal Making
Date Loan Principal Paid Balance Notation
---- ---- -------------- ------- --------
<PAGE>
<PAGE>
Exhibit 12
RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31
-------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except ratio data)
Income Before Income Taxes . . $ 8,418 $ 8,969 $10,319 $ 8,322 $ 6,177
Interest on Indebtedness . . . 8,312 8,048 5,556 4,910 4,423
Portion of rents representative
of the interest factor. . 518 449 419 362 304
------- ------- ------- ------- -------
Earnings as adjusted. . . . $17,248 $17,466 $16,294 $13,594 $10,904
======= ======= ======= ======= =======
Fixed Charges:
Interest on Indebtedness . . . $ 8,312 $ 8,048 $ 5,556 $ 4,910 $ 4,423
Portion of rents representative
of the interest factor. . 518 449 419 362 304
------- ------- ------- ------- -------
Fixed Charges. . . . . . . $ 8,830 $ 8,497 $ 5,975 $ 5,272 $ 4,727
======= ======= ======= ======= =======
Ratio of Earnings
to Fixed Charges. . . . . 1.95 2.06 2.73 2.58 2.31
==== ==== ==== ==== ====
<PAGE>
<PAGE>
Exhibit 13
1st FRANKLIN FINANCIAL CORPORATION
ANNUAL REPORT
DECEMBER 31, 1996
Photo of the Park in front of the Corporate Office.
(Park in foreground and building in background)
<PAGE>
INSIDE FRONT COVER PAGE OF ANNUAL REPORT
(Graphic showing state maps of Alabama, Georgia, Louisiana, Mississippi and
South Carolina which is regional operating territory of Company and listing of
branch offices)
1st FRANKLIN FINANCIAL CORPORATION BRANCH OFFICES
Alabama Offices: Georgia Offices: Georgia Offices:
--------------- --------------- ---------------
Alexander City Chatsworth Rome
Andalusia Clarkesville Royston
Arab Claxton Sandersville
Athens Clayton Savannah
Bessemer Cleveland Statesboro
Birmingham Cochran Swainsboro
Clanton Commerce Sylvania
Cullman Conyers Sylvester
Decatur Cordele Thomaston
Dothan Cornelia Thomson
Enterprise Covington Tifton
Fayette Cumming Toccoa
Florence Dallas Valdosta
Gadsden Dalton Vidalia
Geneva Dawson Warner Robins
Hamilton Douglas Washington
Huntsville Douglasville Waycross
Jasper East Ellijay Winder
Moulton Eastman
Muscle Shoals Elberton Louisiana Office:
Opp Forsyth ----------------
Ozark Fort Valley Pineville
Prattville Gainesville
Russellville Garden City Mississippi Offices:
Scottsboro Georgetown -------------------
Selma Greensboro Grenada
Sylacauga Griffin Gulfport
Troy Hartwell Hattiesburg
Tuscaloosa Hawkinsville Jackson
Hazlehurst Pearl
Georgia Offices: Hinesville
--------------- Hogansville South Carolina Offices:
Adel Jackson ----------------------
Albany Jasper Aiken
Alma Jefferson Anderson
Americus Jesup Cayce
Athens Lagrange Clemson
Bainbridge Lavonia Columbia
Barnesville Lawrenceville Easley
Baxley Madison Florence
Blakely Manchester Gaffney
Blue Ridge McDonough Greenville
Bremen McRae Greenwood
Brunswick Milledgeville Lancaster
Buford Monroe Laurens
Butler Montezuma Orangeburg
Cairo Monticello Rock Hill
Calhoun Moultrie Seneca
Canton Nashville Union
Carrollton Newnan York
Cartersville Perry
Cedartown Richmond Hill
<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 Executive Officers. . . . . . . . . . . . . . . . 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 91 branch offices in Georgia, 30 in Alabama,
17 in South Carolina, 5 in Mississippi and 1 in Louisiana.
As of December 31, 1996, the resources of the Company were invested
principally in loans which comprise 68% 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 70th
largest finance company in the United States.
-1-
<PAGE>
ADEL, GEORGIA
1996 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 Adel Staff for this significant achievement. The Friendly Franklin
Folks salute you!
-2-
<PAGE>
TO OUR INVESTORS, EMPLOYEES AND FRIENDS:
With the economy in the southeastern United States in good condition and
with inflation fairly stable at 2 1/2% - 3%, our company decided early in 1996
that the time for new branch office expansion was now. We realized that the
start-up costs of the new branches would be rather substantial but we felt
better now than when the economy begins to slow. So during the year, we
opened 16 new offices with 6 of the offices in states new to 1st Franklin - -
Mississippi and Louisiana. With these additional offices, our 1st Franklin
family is now composed of 575 men and women working in 145 offices including
our Home Office and we are in 5 southeastern states.
While growing in number of branch offices, we also continued our growth in
net loan and sales finance receivables. You will notice in the financial
information that follows, that over $10 million was added during the year
which represented an 8% increase over year-end 1995. This pushed our year-end
assets to almost $192 million leaving us only $8 million dollars short of our
goal of $200 million in assets by the year 2000. Hopefully, our growth in
1997 will allow us to reach our goal three years ahead of schedule.
Our Investment Center had another excellent year during 1996 and continues
to be the primary source for funding our receivables growth. We now have
6,333 investors and supporters that provide our company with almost $130
million with which to build and grow. None of what we have been able to
accomplish could have been done without them and we will always be grateful
for their support and encouragement.
The nationwide epidemic of personal bankruptcies impacted our company's
earnings just as it did many other finance and credit card companies. Since
this problem doesn't appear to have an immediate solution in the form of
legislation making bankruptcy less attractive, we are trying to find ways to
improve the work we do prior to granting a request for credit. Hopefully, by
working closely with our customers that become overextended, we can reduce the
impact that this growing national problem is having on all of us.
I am always grateful that this letter in our Annual Report gives me the
chance to express my heartfelt thanks to all of the people that contribute to
the success of 1st Franklin Financial. To our employees, our investors, our
bankers, our customers and our many friends - - - THANKS! Thanks for your
help and support in the past and thanks in advance for your continued interest
and confidence in our company in the future as we strive to continue our
efforts to build the premier consumer finance company in the Southeast.
Very sincerely yours,
s/Ben F. Cheek, III
---------------------
Chairman of the Board
-3-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
Set forth below is selected financial data of the Company. This
information should be read in conjunction with the more detailed financial
statements and notes thereto included elsewhere herein.
Year Ended December 31
--------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In 000's, except ratio data)
Selected Income Statement Data:
Revenues . . . . . . . . . . .$ 58,415 $ 55,157 $ 49,334 $ 41,625 $ 34,613
Net Interest Income. . . . . . 32,534 30,147 28,111 23,449 19,461
Interest Expense . . . . . . . 8,312 8,048 5,556 4,910 4,423
Provision for
Loan Losses. . . . . . . . . 6,266 4,631 3,238 2,407 2,209
Income Before
Income Taxes . . . . . . . . 8,418 8,969 10,319 8,322 6,177
Net Income . . . . . . . . . . 6,238 6,507 7,165 5,891 4,498
Ratio of Earnings to
Fixed Charges. . . . . . . . 1.95 2.06 2.73 2.58 2.31
Selected Balance Sheet Data:
Loans, Net . . . . . . . . . .$129,684 $120,763 $108,667 $ 97,485 $ 82,820
Total Assets . . . . . . . . . 191,904 182,084 136,468 123,661 105,812
Senior Debt. . . . . . . . . . 94,740 95,541 66,677 60,540 47,822
Subordinated Debt. . . . . . . 34,942 30,617 21,603 20,875 21,455
Stockholders' Equity . . . . . 53,414 47,747 40,605 34,678 28,718
Ratio of Total Liabilities
to Stockholders' Equity. . . 2.59 2.81 2.36 2.57 2.68
-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, 1996 direct
cash loans comprised 72% of the Company's outstanding loans, real estate
loans 20% and sales finance contracts 8%.
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
-------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands)
Direct Cash Loans. . . . . . . $28,440 $25,898 $22,962 $18,618 $14,669
Real Estate Loans . . . . . . 7,238 7,058 7,284 6,722 6,587
Sales Finance Contracts . . . 2,417 2,757 2,472 2,249 1,825
------- ------- ------- ------- -------
Total Finance Charges. . . . $38,095 $35,713 $32,718 $27,589 $23,081
======= ======= ======= ======= =======
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 or the purchase of furniture and appliances.
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 180 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
------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Direct Cash Loans. . . . . . . . 30.75% 31.26% 31.76% 31.81% 31.87%
Real Estate Loans. . . . . . . . 21.53 22.73 24.37 22.70 23.42
Sales Finance Contracts. . . . . 20.77 22.28 21.27 20.47 20.66
Information regarding the Company's operations:
As of December 31
------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Number of Branch Offices . . . . 144 128 117 112 102
Number of Employees . . . . . . 575 527 473 456 390
Average Total Loans
Outstanding Per
Branch ( in 000's) . . . . . . $1,138 $1,208 $1,202 $1,124 $1,037
Average Number of Loans
Outstanding Per Branch . . . . 701 765 814 778 761
-6-
<PAGE>
DESCRIPTION OF LOANS
Year Ended December 31
------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
DIRECT CASH LOANS:
- -----------------
Number of Loans Made
to New Borrowers . . . . . 27,636 25,840 26,616 24,978 23,479
Number of Loans Made
to Former Borrowers. . . . 14,410 14,740 13,185 11,710 9,639
Number of Loans Made
to Present Borrowers . . . 63,329 61,304 60,014 54,311 44,866
Total Number of Loans
Made . . . . . . . . . . . 105,375 101,884 99,815 90,999 77,984
Total Volume of Loans
Made (in 000's) . . . . . $173,196 $164,034 $150,658 $127,103 $100,176
Average Size of
Loans Made . . . . . . . . $ 1,644 $ 1,610 $ 1,509 $ 1,397 $ 1,285
Number of Loans
Outstanding. . . . . . . . 80,733 76,549 72,993 66,209 57,458
Total of Loans
Outstanding (in 000's) . . $117,141 $107,960 $ 96,620 $ 82,595 $ 65,560
Percent of Total Loans . . . 72% 70% 69% 66% 62%
Average Balance on
Outstanding Loans. . . . . $ 1,451 $ 1,410 $ 1,324 $ 1,247 $ 1,141
REAL ESTATE LOANS:
- -----------------
Total Number of Loans
Made . . . . . . . . . . . 2,240 2,674 2,264 2,315 1,886
Total Volume of Loans
Made (in 000's). . . . . . $ 22,398 $ 22,379 $ 18,755 $ 20,330 $ 15,366
Average Size of
Loans Made . . . . . . . . $ 9,999 $ 8,369 $ 8,284 $ 8,782 $ 8,147
Number of Loans
Outstanding. . . . . . . . 4,214 4,188 3,811 3,930 3,796
Total of Loans
Outstanding (in 000's) . . $ 33,507 $ 32,653 $ 29,150 $ 30,174 $ 28,171
Percent of Total Loans . . . 20% 21% 21% 24% 27%
Average Balance on
Outstanding Loans. . . . . $ 7,951 $ 7,797 $ 7,649 $ 7,678 $ 7,421
SALES FINANCE CONTRACTS:
- -----------------------
Number of Contracts
Purchased. . . . . . . . . 17,499 19,195 21,744 20,726 20,507
Total Volume of Contracts
Purchased (in 000's) . . . $ 17,150 $ 18,885 $ 20,489 $ 18,770 $ 17,512
Average Size of Contracts
Purchased. . . . . . . . . $ 980 $ 984 $ 942 $ 906 $ 854
Number of Contracts
Outstanding. . . . . . . . 15,941 17,151 18,395 17,020 16,405
Total of Contracts
Outstanding (in 000's) . . $ 13,201 $ 13,955 $ 14,806 $ 13,099 $ 12,053
Percent of Total Loans . . . 8% 9% 10% 10% 11%
Average Balance on
Outstanding Contracts. . . $ 828 $ 814 $ 805 $ 770 $ 735
-7-
<PAGE>
LOANS ACQUIRED, LIQUIDATED AND OUTSTANDING
Year Ended December 31
------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands)
LOANS ACQUIRED
DIRECT CASH LOANS. . . . . $169,825 $164,034 $150,217 $127,084 $ 98,488
REAL ESTATE LOANS. . . . . 20,971 22,000 17,916 19,485 13,779
SALES FINANCE CONTRACTS. . 16,131 17,676 19,386 17,759 15,814
NET BULK PURCHASES . . . . 5,818 1,588 2,383 1,875 4,973
-------- -------- -------- -------- --------
TOTAL LOANS ACQUIRED . . $212,745 $205,298 $189,902 $166,203 $133,054
======== ======== ======== ======== ========
LOANS LIQUIDATED
DIRECT CASH LOANS. . . . . $164,016 $152,694 $136,633 $110,068 $ 85,643
REAL ESTATE LOANS. . . . . 21,544 18,876 19,779 18,327 15,583
SALES FINANCE CONTRACTS. . 17,904 19,736 18,782 17,724 14,555
-------- -------- -------- -------- --------
TOTAL LOANS LIQUIDATED . $203,464 $191,306 $175,194 $146,119 $115,781
======== ======== ======== ======== ========
LOANS OUTSTANDING
DIRECT CASH LOANS. . . . . $117,141 $107,960 $ 96,620 $ 82,595 $ 65,560
REAL ESTATE LOANS. . . . . 33,507 32,653 29,150 30,174 28,171
SALES FINANCE CONTRACTS. . 13,201 13,955 14,806 13,099 12,053
-------- -------- -------- -------- --------
TOTAL LOANS OUTSTANDING. $163,849 $154,568 $140,576 $125,868 $105,784
======== ======== ======== ======== ========
UNEARNED FINANCE CHARGES
DIRECT CASH LOANS. . . . . $ 16,270 $ 17,030 $ 16,114 $ 14,125 $ 10,959
REAL ESTATE LOANS. . . . . -- 12 43 65 133
SALES FINANCE CONTRACTS. . 1,829 2,007 2,140 1,832 1,691
-------- -------- -------- -------- --------
TOTAL UNEARNED
FINANCE CHARGES . . . . $ 18,099 $ 19,049 $ 18,297 $ 16,022 $ 12,783
======== ======== ======== ======== ========
-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
-------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands, except % data)
DIRECT CASH LOANS:
60-89 Days Past Due. . . . . . $ 2,404 $ 1,914 $ 1,353 $ 1,120 $ 850
Percentage of Outstanding. . . 2.05% 1.77% 1.40% 1.36% 1.30%
90 Days or More Past Due . . . $ 5,419 $ 3,286 $ 2,482 $ 1,781 $ 1,524
Percentage of Outstanding. . . 4.63% 3.04% 2.57% 2.16% 2.32%
REAL ESTATE LOANS:
60-89 Days Past Due. . . . . . $ 426 $ 254 $ 299 $ 439 $ 364
Percentage of Outstanding. . . 1.27% .78% 1.03% 1.46% 1.29%
90 Days or More Past Due . . . $ 1,334 $ 1,196 $ 919 $ 1,206 $ 1,551
Percentage of Outstanding. . . 3.98% 3.66% 3.15% 4.00% 5.51%
SALES FINANCE CONTRACTS:
60-89 Days Past Due. . . . . . $ 339 $ 295 $ 281 $ 195 $ 165
Percentage of Outstanding. . . 2.57% 2.11% 1.90% 1.49% 1.37%
90 Days or More Past Due . . . $ 602 $ 463 $ 293 $ 298 $ 265
Percentage of Outstanding. . . 4.56% 3.32% 1.98% 2.27% 2.20%
-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
--------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands, except % data)
DIRECT CASH LOANS
Average Net Loans. . . . . . $ 92,489 $ 82,847 $ 72,298 $ 58,538 $ 46,026
Liquidations . . . . . . . . $164,016 $152,694 $136,633 $110,068 $ 85,643
Net Losses . . . . . . . . . $ 4,617 $ 3,753 $ 2,475 $ 1,582 $ 1,388
Net Losses as % of Average
Net Loans . . . . . . . . . 4.99% 4.53% 3.42% 2.70% 3.02%
Net Losses as % of
Liquidations. . . . . . . . 2.81% 2.46% 1.81% 1.44% 1.62%
REAL ESTATE LOANS
Average Net Loans. . . . . . $ 33,614 $ 31,050 $ 29,889 $ 29,608 $ 28,124
Liquidations . . . . . . . . $ 21,544 $ 18,876 $ 19,779 $ 18,327 $ 15,583
Net Losses . . . . . . . . . $ 49 $ 22 $ 43 $ 20 $ 7
Net Losses as % of Average
Net Loans . . . . . . . . . .15% .07% .14% .07% .02%
Net Losses as % of
Liquidations. . . . . . . . .23% .12% .22% .11% .04%
SALES FINANCE CONTRACTS
Average Net Loans. . . . . . $ 11,640 $ 12,377 $ 11,623 $ 10,984 $ 8,833
Liquidations . . . . . . . . $ 17,904 $ 19,736 $ 18,782 $ 17,724 $ 14,555
Net Losses . . . . . . . . . $ 478 $ 434 $ 353 $ 272 $ 196
Net Losses as % of Average
Net Loans . . . . . . . . . 4.11% 3.51% 3.04% 2.48% 2.22%
Net Losses as % of
Liquidations. . . . . . . . 2.67% 2.20% 1.88% 1.53% 1.35%
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 in States where this is permitted. 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
- --------------------------
State laws require that each office in which a small loan business is
conducted be licensed by the state and that business be conducted according to
the applicable statutes and regulations. 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
-------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Bank Borrowings. . . . . . . . . -% -% 1% 10% 12%
Public Senior Debt . . . . . . . 49 52 48 39 33
Public Subordinated Debt . . . . 18 17 16 17 20
Other Liabilities. . . . . . . . 5 5 5 6 7
Stockholders' Equity . . . . . . 28 26 30 28 28
--- --- --- --- ---
Total . . . . . . . . . . . . . 100% 100% 100% 100% 100%
=== === === === ===
Number of Investors. . . . . . . 6,333 5,925 5,486 4,400 4,195
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
-------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Senior Borrowings. . . . . . . . 6.29% 6.97% 6.26% 6.24% 6.52%
Subordinated Borrowings. . . . . 6.86 6.92 6.14 6.37 7.25
All Borrowings . . . . . . . . . 6.67 6.96 6.25 6.29 6.82
The Company's financial ratios relating to debt are as follows:
At December 31
-------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Total Liabilities to
Stockholders' Equity . . . . . 2.59 2.81 2.36 2.57 2.68
Unsubordinated Debt to
Subordinated Debt plus
Stockholders' Equity . . . . . 1.17 1.32 1.19 1.23 1.11
-12-
<PAGE>
MANAGEMENT'S DISCUSSION OF OPERATIONS
Financial Condition:
- -------------------
The Company continued on its goal of reaching $200 million in assets on
or before the year 2000 with the addition of $9.8 million in assets during
1996. Net receivables (gross receivables less unearned finance charges) was
the predominate area of asset growth increasing $10.2 million (8%) to $145.7
million outstanding at December 31, 1996 from $135.5 million outstanding at
December 31, 1995. Geographic expansion of the Company's operational base
also continued with the opening of 16 new branch offices during the year, 6
of which were in new states. During the fourth quarter of 1996, Louisiana
and Mississippi were added to the states of Alabama, Georgia and South
Carolina as the Company's regional operating territory.
Funding of the aforementioned increases in the loan portfolio and branch
office expansion resulted in a $3.1 million (10%) decrease in cash and cash
equivalents. Management's effort to transfer surplus funds from cash and
cash equivalents into higher yielding bonds in order to maximize yields also
contributed to the decrease in the Company's cash position. This portion of
the decrease however, was offset by a $1.3 million (6%) increase in the
Company's investment portfolio.
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. Declining bond
market values during the current year offset a portion of the aforementioned
increase in the investment portfolio. Volatility in bond market values
resulted in a $.2 million decrease, net of deferred taxes, in the portfolio's
fair market value during the 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.
Increases in sales of the Company's public debt securities caused
subordinated debt to increase $4.3 million (14%) during the year just ended
as compared to the prior year.
Results of Operations:
- ---------------------
Gross revenues were $58.4 million during 1996 as compared to $55.2
million and $49.3 million during 1995 and 1994, respectively. This upward
trend is primarily due to earnings generated from higher levels of average
net outstanding receivables. Average net receivables increased $11.5 million
(9%) to $137.7 million at December 31, 1996 as compared to $126.3 at December
31, 1995 due to increased consumer loan demand and the contribution from new
branch offices opened during the prior two years. Although revenues
increased, profit declined during the last two fiscal years as a result of
higher loan loss provisions and increased costs associated with expansion of
branch office locations.
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 $2.4 million (8%) during 1996 as
compared to 1995 and $2.0 million (7%) during 1995 as compared to 1994. 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 lesser affect on the current year's margin as
compared to the prior year. Although average senior and subordinated debt
outstanding increased $14.1 million (12%) during the current year, lower
-13-
<PAGE>
market rates of interest enabled the Company to reduce average borrowing cost
to 6.67% as compared to 6.96% during 1995. During 1995, average senior and
subordinated debt outstanding increased $26.9 million (31%) as compared to
1994 and average borrowing cost increased approximately .71% resulting in a
much higher increase in interest expense.
Net Insurance Income
Net insurance income increased $.3 million (2%) and $1.2 million (10%)
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 previous 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 prior years.
An increase in claims during 1996 also had a negative impact on the
current year's insurance income.
Provision for Loan Losses
Rising loan delinquencies and increases in personal bankruptcy filings
continue to have a deteriorating impact on the credit quality of the
Company's loan receivables. Net charge-offs increased $.9 million (22%)
during 1996 as compared to 1995 and $1.3 million (47%) during 1995 as
compared to 1994. Management is carefully monitoring the upward trend in
delinquencies and bankruptcy filings and historically has been conservative
in regards to the amount of the Company's loan loss reserve. As a result,
the Company increased the reserve during the year just ended. This increase
and the increases in net charge-offs led to the $1.6 million (35%) increase
in the Company's Provision for Loan Losses during 1996. Increases in net
charge-offs during 1995 also caused the $1.4 million (43%) increase in the
Company's Provision for Loan Losses during that year. Higher levels of
average net outstanding receivables also contributed to the increases.
Other Operating Expenses
Start-up cost and additional overhead incurred from the expansion of
branch operations were major factors responsible for general operating
expenses increasing $1.7 million (6%) and $3.2 million (12%) during 1996 and
1995, respectively. Other factors which contributed were increases in
employee compensation based on cost-of-living and/or merit salary raises,
increases in other accrued employee benefits, higher computer expenses,
higher collection expenses and increased supervision expenses.
During 1996, Management implemented a new marketing program which
assists in expanding the customer base in existing locations and development
of future markets. The initial setup cost of this program and the ongoing
cost to maintain was also a significant factor contributing to the increase
in general operating expenses during the current year.
Other miscellaneous expenses decreased during the current year as
compared to the prior year mainly due to a decrease in legal fees. Legal
expenses incurred with the Alabama lawsuits (see legal proceedings) during
1995 was a significant factor contributing to the increase in miscellaneous
expenses during that year as compared to 1994.
-14-
<PAGE>
Income Taxes
Effective income tax rates for the years ended December 31, 1996, 1995
and 1994 were 25.9%, 27.5% and 30.6%, 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. Rates have declined during the two
year period ended December 31, 1996 due to the fact that the Company's
insurance subsidiary earned a higher portion of the consolidated taxable
income.
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 at December 31, 1996 and 1995 relating to this agreement. The
Company has an additional $2.0 million credit agreement (all of which was
available at December 31, 1996 and 1995) 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 6.4% of receivables at December 31, 1996 from 4.8% at December 31, 1995.
Management continually reviews potentially uncollectible loans and evaluates
the inherent risks and change in the composition of the Company's loan
portfolio. Loss rates during 1996 indicated a need to increase the allowance
for loan losses to provide adequate protection against increasing loan
losses. The increase in the allowance did not affect liquidity as the
allowance is maintained out of income, however, earnings could further be
impacted if loss rates continue at the current level.
Legal Proceedings:
- -----------------
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 1995 and 1996, the Company reached settlement
agreements with certain borrowers who had previously asserted claims or had
stated their intention to file claims against the Company. The Company
reached settlement agreements on four additional proceedings during the first
quarter of 1997 and has begun accruing for disbursement thereof during said
quarter. 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
and recognition of the expense and uncertainty of litigation, Management felt
it was in the best interest of the Company to dispose of those 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 remaining actions are
without merit. The Company is diligently contesting the remaining
complaints.
-15-
<PAGE>
Other:
- -----
Management is aggressively seeking and evaluating potential new market
areas as part of its expansion plans. The Company plans to open ten to
twelve new offices during 1997. These openings will not have an adverse
affect on liquidity, however, expansion could have a impact on earnings.
Subsequent Event:
- ----------------
Effective January 1, 1997, the Company elected S Corporation status for
income tax reporting purposes for the parent company (the "Parent"). The
taxable income or loss of an S Corporation is includable in the individual
tax returns of the stockholders of the Company. Over the years the Parent
has prepaid federal and state income taxes due to certain temporary
differences between reported income and expenses for financial statement
purposes and for income tax purposes. The payment of these prepaid taxes has
resulted in an accumulation of net deferred tax assets of approximately $3.6
million on the Company's balance sheet. Election of S Corporation status
requires elimination of all such accumulated prepaid/deferred tax assets and
liabilities. Accordingly, deferred income tax assets and liabilities will be
eliminated and no provisions for current and deferred income taxes will be
made by the Parent other than amounts related to prior years when the Parent
was a taxable entity. Deferred income tax assets and liabilities will
continue to be recognized and provisions for current and deferred income
taxes will be made by the Company's subsidiaries. The Company will take a
one-time charge of approximately $3.6 million during the first quarter of
1997 to expense the previously paid income taxes which it was not permitted
to expense prior to election of becoming an S Corporation. No cash
transaction is involved, however the Company's income will be negatively
impacted.
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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
s/ Arthur Andersen LLP
----------------------
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 21, 1997
-17-
<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1996 AND 1995
ASSETS
1996 1995
------------ ------------
CASH AND CASH EQUIVALENTS:
Cash and Due From Banks. . . . . . . . . . . . $ 1,795,448 $ 1,453,244
Short-term Investments,
$300,000 in trust in 1996
and 1995 (Note 4) . . . . . . . . . . . . . 25,637,257 29,060,349
------------ ------------
27,432,705 30,513,593
------------ ------------
LOANS (Note 2):
Direct Cash Loans. . . . . . . . . . . . . . . 117,140,840 107,960,069
First Mortgage Real Estate Loans . . . . . . . 27,037,348 25,738,140
Second Mortgage Real Estate Loans. . . . . . . 6,469,154 6,914,255
Sales Finance Contracts. . . . . . . . . . . . 13,201,453 13,955,296
------------ ------------
163,848,795 154,567,760
Less: Unearned Finance Charges . . . . . . . . 18,099,070 19,049,034
Unearned Insurance Premiums
and Commissions. . . . . . . . . . . 10,312,385 10,244,033
Allowance for Loan Losses. . . . . . . . 5,753,221 4,511,826
------------ ------------
Net Loans . . . . . . . . . . . . 129,684,119 120,762,867
------------ ------------
MARKETABLE DEBT SECURITIES (Note 3):
Available for Sale, at fair market value . . . 20,783,883 17,194,375
Held to Maturity, at amortized cost. . . . . . 2,946,099 5,186,492
------------ ------------
23,729,982 22,380,867
------------ ------------
OTHER ASSETS:
Land, Buildings, Equipment and Leasehold
Improvements, less accumulated depreciation
and amortization of $6,480,263 and
$5,668,721 in 1996 and 1995,
respectively (Note 5) . . . . . . . . . . . 3,457,902 2,828,801
Prepaid Income Taxes, net (Note 9) . . . . . . 2,173,802 1,763,108
Due from Nonaffiliated Insurance Company . . . 710,752 827,908
Miscellaneous. . . . . . . . . . . . . . . . . 4,715,088 3,006,844
------------ ------------
11,057,544 8,426,661
------------ ------------
TOTAL ASSETS . . . . . . . . . . . . . . $191,904,350 $182,083,988
============ ============
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, 1996 AND 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995
------------ ------------
SENIOR DEBT (Note 5):
Senior Demand Notes, including
accrued interest . . . . . . . . . . . . $ 45,535,956 $ 42,304,779
Commercial Paper. . . . . . . . . . . . . . 48,962,123 52,944,123
Notes Payable to Banks. . . . . . . . . . . 241,762 291,762
------------ ------------
94,739,841 95,540,664
------------ ------------
ACCOUNTS PAYABLE AND ACCRUED EXPENSES . . . . 8,807,990 8,179,506
------------ ------------
SUBORDINATED DEBT (Note 6). . . . . . . . . . 34,942,463 30,616,915
------------ ------------
Total Liabilities. . . . . . . . . . . . . 138,490,294 134,337,085
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY:
Preferred Stock; $100 par value;
6,000 shares authorized; no
shares outstanding. . . . . . . . . . . . -- --
Common Stock:
Voting Shares; $100 par value;
2,000 shares authorized;
1,700 shares outstanding. . . . . . . . 170,000 170,000
Non-Voting Shares; no par value;
198,000 shares authorized; 168,300
shares outstanding as of
December 31, 1996; no shares
outstanding as of December 31, 1995 . . -- --
Net Unrealized Gains (Losses) on
Marketable Debt Securities
Available for Sale. . . . . . . . . . . . 43,288 251,145
Retained Earnings . . . . . . . . . . . . . 53,200,768 47,325,758
------------ ------------
Total Stockholders' Equity . . . . . 53,414,056 47,746,903
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY . . . . . . . . . . $191,904,350 $182,083,988
============ ============
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, 1996, 1995 AND 1994
1996 1995 1994
INTEREST INCOME: ---- ---- ----
Finance Charges. . . . . . . . $ 38,094,669 $ 35,713,283 $ 32,718,152
Investment Income. . . . . . . 2,751,712 2,481,604 949,404
------------ ------------ ------------
40,846,381 38,194,887 33,667,556
------------ ------------ ------------
INTEREST EXPENSE:
Senior Debt. . . . . . . . . . 5,774,336 5,915,519 4,057,682
Subordinated Debt. . . . . . . 2,537,655 2,132,393 1,498,616
------------ ------------ ------------
8,311,991 8,047,912 5,556,298
------------ ------------ ------------
NET INTEREST INCOME. . . . . . . 32,534,390 30,146,975 28,111,258
PROVISION FOR
LOAN LOSSES (Note 2) . . . . . 6,266,201 4,630,853 3,238,479
------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES. . . 26,268,189 25,516,122 24,872,779
------------ ------------ ------------
NET INSURANCE INCOME:
Premiums and Commissions . . . 17,078,994 16,533,388 15,262,466
Insurance Claims and Expenses. (3,816,991) (3,584,222) (3,518,988)
------------ ------------ ------------
13,262,003 12,949,166 11,743,478
------------ ------------ ------------
OTHER REVENUE (Note 8) . . . . . 490,078 428,959 404,477
------------ ------------ ------------
OPERATING EXPENSES (Note 8):
Personnel Expense. . . . . . . 18,850,308 17,299,383 16,147,362
Occupancy Expense. . . . . . . 4,519,937 3,981,624 3,705,288
Other Expense. . . . . . . . . 8,231,915 8,644,323 6,849,283
------------ ------------ ------------
31,602,160 29,925,330 26,701,933
------------ ------------ ------------
INCOME BEFORE INCOME TAXES . . . 8,418,110 8,968,917 10,318,801
PROVISION FOR
INCOME TAXES (Note 9). . . . . 2,180,358 2,462,307 3,154,184
------------ ------------ ------------
NET INCOME . . . . . . . . . . . 6,237,752 6,506,610 7,164,617
RETAINED EARNINGS, beginning . . 47,325,758 41,128,936 34,220,868
Dividends on Common Stock. . . (362,742) (309,788) (256,549)
------------ ------------ ------------
RETAINED EARNINGS, ending. . . . $ 53,200,768 $ 47,325,758 $ 41,128,936
============ ============ ============
EARNINGS PER SHARE
Voting Common Stock; 1,700
Shares Outstanding all
periods. . . . . . . . . . $ 36.69 $ 38.27 $ 42.14
Non-Voting Common Stock; ========= ========= =========
168,300 Shares
Outstanding
December 31, 1996. . . . . $ 36.69 $ 38.27 $ 42.14
========= ========= =========
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, 1996, 1995 AND 1994
Increase (Decrease) in Cash and Cash Equivalents
1996 1995 1994
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . $ 6,237,752 $ 6,506,610 $ 7,164,617
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for Loan Losses. . . . . 6,266,201 4,630,853 3,238,479
Depreciation and Amortization. . . 1,126,296 1,074,992 994,896
Prepaid Income Taxes . . . . . . . (364,809) (275,826) (10,925)
Gain on sale of marketable
securities and equipment. . . . (22,711) (86,366) (47,754)
Increase in Miscellaneous Assets . (1,591,088) (616,373) (95,653)
Increase in Other Liabilities. . . 628,484 596,673 13,737
------------ ------------ -----------
Net Cash Provided . . . . . . 12,280,125 11,830,563 11,257,397
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated or purchased. . . (110,117,402) (104,735,608) (96,816,742)
Loan payments. . . . . . . . . . . 94,929,949 88,009,063 82,396,258
Purchases of marketable securities (12,339,320) (8,981,373) (2,162,283)
Sales of marketable securities . . 3,251,608 510,000 103,897
Redemptions of
marketable securities. . . . . . 7,000,000 725,000 300,000
Principal payments on
marketable securities. . . . . . 472,366 -- --
Capital expenditures . . . . . . . (1,759,762) (1,159,373) (851,351)
Proceeds from sale of equipment. . 39,565 57,931 25,568
------------ ------------ -----------
Net Cash Used . . . . . . . . (18,522,996) (25,574,360) (17,004,653)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in Notes
Payable to Banks and
Senior Demand Notes. . . . . . . 3,181,177 8,693,829 (5,497,262)
Commercial Paper issued. . . . . . 25,319,703 44,230,224 24,041,798
Commercial Paper redeemed. . . . . (29,301,703) (24,060,678) (12,406,886)
Subordinated Debt issued . . . . . 7,999,461 12,877,336 5,175,292
Subordinated Debt redeemed . . . . (3,673,913) (3,863,077) (4,447,341)
Dividends Paid . . . . . . . . . . (362,742) (309,788) (256,549)
------------ ------------ -----------
Net Cash Provided . . . . . . 3,161,983 37,567,846 6,609,052
------------ ------------ -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS. . . . (3,080,888) 23,824,049 861,796
CASH AND CASH EQUIVALENTS, beginning 30,513,593 6,689,544 5,827,748
------------ ------------ -----------
CASH AND CASH EQUIVALENTS, ending. . $ 27,432,705 $ 30,513,593 $ 6,689,544
============ ============ ===========
Cash paid during the year for:
Interest. . . . . . . . . . . . . $ 8,343,828 $ 7,965,756 $ 5,488,335
Income Taxes. . . . . . . . . . . $ 2,344,697 $ 2,682,221 $ 3,301,461
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, 1996, 1995 AND 1994
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 144 branch offices.
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:
The following methods and assumptions are used by the Company in
estimating fair values 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 to 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 financial
instruments and for which fair values have not been estimated, include premise
and equipment and deferred taxes.
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.
-22-
<PAGE>
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
certain 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 direct cash loans and 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.
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.
-23-
<PAGE>
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, 1996 and
1995 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 as 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.
Stock Dividend:
On January 26, 1996, the Company paid a stock dividend of 99 shares of
Non-Voting Common Stock for each outstanding share of Voting Common Stock.
The Non-Voting Common Stock has terms similar to the Company's Voting Common
Stock, other that its non-voting status. The consolidated financial
statements for prior periods have been adjusted to reflect the effect of this
dividend. All references to common shares and per share information have been
restated to reflect the stock dividend.
2. LOANS
There were $10,523,911 and $7,408,981 of loans in a non-accrual status
at December 31, 1996 and 1995, 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,
1996 is as follows:
1st Mortgage 2nd Mortgage Sales
Due In Direct Cash Real Estate Real Estate Finance
Calendar Year Loans Loans Loans Contracts
------------- ----- ----- ----- ---------
1997. . . . . . 72.17% 19.67% 17.96% 73.62%
1998. . . . . . 24.56 17.28 18.66 21.46
1999. . . . . . 2.26 15.97 18.02 4.35
2000. . . . . . .42 12.52 15.16 .31
2001. . . . . . .19 9.31 10.31 .26
2002 & later .40 25.25 19.89 --
------ ------ ------ ------
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.
Cash Collections on Principal:
During the years ended December 31, 1996 and 1995, cash collections
applied to principal of loans totaled $94,929,949 and $88,009,063,
respectively, and the ratios of these cash collections to average net
receivables were 68.92% and 69.70%, respectively.
-24-
<PAGE>
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. Specific provision for loan
losses is made for impaired loans based on a comparison of the recorded
carrying value in the loan to either the present value of the loan's expected
cash flow, the loan's estimated market price or the estimated fair value of
the underlying collateral.
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, 1996, 1995
and 1994 is shown in the following table:
1996 1995 1994
---------- ---------- ----------
Beginning Balance. . . . . . . $4,511,826 $4,069,881 $3,653,121
Provision for Loan Losses . . 6,266,201 4,630,853 3,238,479
Bulk Purchase Accounts. . . . 118,365 20,317 49,120
Charge-Offs . . . . . . . . . (6,348,280) (5,085,216) (3,648,948)
Recoveries . . . . . . . . . . 1,205,109 875,991 778,109
---------- ---------- ----------
Ending Balance . . . . . . . . $5,753,221 $4,511,826 $4,069,881
========== ========== ==========
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, 1996: ----------- -------- --------- -----------
U.S. Treasury Securities
and obligations of
U.S. government
corporations and agencies . . $ 9,946,819 $ 17,969 $(106,576) $ 9,858,212
Obligations of states and
political subdivisions. . . . 10,236,993 191,644 (30,399) 10,398,238
Corporate Securities. . . . . . 525,659 10,289 (8,515) 527,433
----------- -------- --------- -----------
$20,709,471 $219,902 $(145,490) $20,783,883
=========== ======== ========= ===========
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
=========== ======== ========= ===========
-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, 1996: ----------- --------- --------- -----------
U.S. Treasury Securities
and obligations of
U.S. government
corporations and agencies . $ 2,490,068 $ 23,057 $ -- $ 2,513,125
Obligations of states and
political subdivisions. . . 456,031 12,457 -- 468,488
----------- --------- ------- -----------
$ 2,946,099 $ 35,514 $ -- $ 2,981,613
=========== ========= ======= ===========
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
=========== ========= ======= ===========
The amortized cost and estimated fair market values of marketable debt
securities at December 31, 1996, 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 . . $ 324,991 $ 325,763 $ 2,248,602 $ 2,267,266
Due after one year
through five years. . . . 4,831,973 4,862,807 697,497 714,347
Due after five years
through ten years . . . . 12,490,908 12,542,207 -- --
Due after ten years . . . . 3,061,599 3,053,106 -- --
----------- ----------- ----------- -----------
$20,709,471 $20,783,883 $ 2,946,099 $ 2,981,613
=========== =========== =========== ===========
Proceeds from sales of investments in debt securities available for sale
during 1996 were $3,251,608. Gross gains of $13,473 and gross losses of
$(14,544) were realized on these sales.
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.
4. PLEDGED ASSETS
At December 31, 1996, 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 commitment termination date of June 30 in any
year in which written notice of termination is given by the banks. If
written notice is given in accordance with the agreement, the outstanding
balance of the loans shall be paid in full on the date which is three and one
half years after the commitment termination date. The banks also may
terminate the agreement upon the violation of any of the financial ratio
requirements or covenants contained in the agreement or in June 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 a
termination date of July 1, 1997.
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
----------- ------- ----------- ----------- -----------
1996 (In thousands, except % data)
----
Bank. . . . . . . . . 5.95% $ 291 $ 267 5.98%
Senior Notes. . . . . 5.92 49,406 42,836 5.92
Commercial Paper. . . 6.51 52,944 48,432 6.60
All Categories. . . 6.22 95,541 91,535 6.28
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
-27-
<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
------------------------ ------------------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
6.81% 7.41% 6.54% 7.03% 7.28% 6.36%
Maturity information on the Company's Subordinated Debt at
December 31, 1996 is as follows:
Amount Maturing
---------------------------------------
Based on Maturity Based on Interest
Date Adjustment Period
----------------- -----------------
1997 . . . . . . . . . . $ 4,449,800 $27,405,943
1998 . . . . . . . . . . 5,169,534 4,145,510
1999 . . . . . . . . . . 13,824,734 2,508,637
2000 . . . . . . . . . . 11,498,395 882,373
----------- -----------
$34,942,463 $34,942,463
=========== ===========
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 $1,531,183, $1,346,606 and $1,257,977 for the years ended
December 31, 1996, 1995 and 1994, respectively. Under the existing
noncancelable leases, the Company's minimum aggregate rental commitment at
December 31, 1996, amounts to $1,597,157 for 1997, $1,364,880 for 1998,
$1,013,396 for 1999, $728,645 for 2000, $406,263 for 2001 and $567,217 for
the year 2002 and beyond. The total commitment is $5,677,558.
The Company is defendant in several lawsuits arising in the course of
its normal business activities in the state of Alabama. Each of the
-28-
<PAGE>
complaints seek compensatory and punitive damages. During the current 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. 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 1996, 1995 and 1994 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, 1996, the Company maintained $2,300,000 of certificates
of deposit with Liberty at market rates and terms. The Company also had
$1,609,087 in demand deposits with Liberty at December 31, 1996.
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, 1996,
1995 and 1994 is made up of the following components:
1996 1995 1994
---- ---- ----
Current - Federal . . . . $ 2,353,773 $ 2,481,300 $ 2,786,238
Current - State . . . . . 191,394 256,833 378,871
----------- ----------- -----------
Total Current . . . . . 2,545,167 2,738,133 3,165,109
----------- ----------- -----------
Prepaid - Federal . . . . (309,371) (226,199) 38,652
Prepaid - State . . . . . (55,438) (49,627) (49,577)
----------- ----------- -----------
Total Prepaid . . . . . (364,809) (275,826) (10,925)
----------- ----------- -----------
Total Provision. . . $ 2,180,358 $ 2,462,307 $ 3,154,184
=========== =========== ===========
-29-
<PAGE>
Temporary differences create deferred federal tax assets and
liabilities which are detailed below for December 31, 1996 and 1995:
Deferred Tax
Assets (Liabilities)
-------------------
1996 1995
----- ----
Depreciation . . . . . . . . . . $ (69,428) $ (113,895)
Provision for Loan Losses. . . . 2,141,474 1,701,311
Insurance Commissions . . . . . (596,196) (639,585)
Unearned Premium Reserves. . . . 489,892 616,758
Unrealized Gains on
Marketable Debt Securities . . (31,124) (77,009)
Other. . . . . . . . . . . . . . 239,184 275,528
---------- ----------
$2,173,802 $1,763,108
========== ==========
The Company's effective tax rate for the years ended December 31, 1996,
1995 and 1994 is analyzed as follows:
1996 1995 1994
---- ---- ----
Statutory Federal income tax rate . . . 34.0% 34.0% 34.0%
State income tax, net of Federal
tax effect. . . . . . . . . . . . . . 1.1 1.5 2.1
Net tax effect of IRS regulations
on life insurance subsidiary. . . . . (7.9) (6.8) (4.9)
Other items . . . . . . . . . . . . . . (1.3) (1.2) (.6)
---- ---- ----
Effective Tax Rate . . . . . . . . . 25.9% 27.5% 30.6%
==== ==== ====
10. SUBSEQUENT EVENT
Effective January 1, 1997, the Company elected S Corporation status for
income tax reporting purposes for the parent company (the "Parent"). The
taxable income or loss of an S Corporation is includable in the individual
tax returns of the stockholders of the Company. Accordingly, deferred
income tax assets and liabilities will be eliminated and no provisions for
current and deferred income taxes will be made by the Parent other than
amounts related to prior years when the Parent was a taxable entity.
Deferred income tax assets and liabilities will continue to be recognized
and provisions for current and deferred income taxes will be made by the
Company's subsidiaries. The Company estimates that a charge of
approximately $3.6 million will be required to recognize the effect of the S
Corporation election during the year ending December 31, 1997.
-30-
<PAGE>
1st FRANKLIN FINANCIAL CORPORATION
***********
PHOTO
***********
(Two children wearing FirsTimers Club baseball caps)
Saving money is fun, just ask our FirsTimers Club members!
-31-
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
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>
INSIDE BACK COVER PAGE OF ANNUAL REPORT
BRANCH OPERATIONS
Division I Division III
- ---------- ------------
Northeast Georgia & South Carolina: Alabama, Louisiana, Mississippi and
Isabel S. Vickery, Senior Vice President Northeast Georgia:
Ronald F. Morrow, Area Vice President Jack R. Coker, Vice President
Regina K. Bond, Supervisor Robert J. Canfield, Area Vice
K. Donald Floyd, Supervisor President
Michael D. Lyles, Supervisor J. Michael Culpepper, Area Vice
Melvin L. Osley, Supervisor President
Virginia K. Palmer, Supervisor Susan C. Cantrell, Supervisor
Edward T. Pulsifer, Supervisor Tony E. Ellison, Supervisor
Timothy M. Schmotz, Supervisor Jack L. Hobgood, Supervisor
Barbara W. Sims, Supervisor Terry E. Honeycutt, Supervisor
Stewart C. York, Supervisor Johnny M. McEntyre, Supervisor
Barbara W. Sims, Supervisor R. Darryl Parker, Supervisor
Stewart C. York, Supervisor Julia A. Paul, Supervisor
Henrietta R. Reathford, Supervisor
Division II David N. Reynolds, Supervisor
- ----------- Bobby T. Seawright, Supervisor
Central & South Georgia: R. Gaines Snow, Supervisor
A. Jarrell Coffee, Vice President
Donald C. Carter, Supervisor
James E. Davis, Supervisor ADMINISTRATION
Judy A. Landon, Supervisor --------------
Jeffrey C. Lee, Supervisor Ben F. Cheek, IV, Statistics &
Thomas C. Lennon, Supervisor Planning
Dianne H. Moore, Supervisor Lynn E. Cox, Investment Center
Marcus C. Thomas, Supervisor Samuel P. Greer, Internal Audit
Phoebe P. Martin, Human Resources &
Marketing
Pamela S. Rickman, Operations
Coordinator
Linda L. Sessa, Data Processing
<PAGE>
<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>
<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. 333-01007.
s/ Arthur Andersen LLP
----------------------
Arthur Andersen LLP
Atlanta, Georgia
March 27, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 27,432,705
<SECURITIES> 23,729,982
<RECEIVABLES> 135,437,340
<ALLOWANCES> 5,753,221
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 9,938,165
<DEPRECIATION> 6,480,263
<TOTAL-ASSETS> 191,904,350
<CURRENT-LIABILITIES> 103,547,831
<BONDS> 129,440,542
<COMMON> 170,000
0
0
<OTHER-SE> 53,244,056
<TOTAL-LIABILITY-AND-EQUITY> 191,904,350
<SALES> 0
<TOTAL-REVENUES> 58,415,453
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 31,602,160
<LOSS-PROVISION> 6,266,201
<INTEREST-EXPENSE> 8,311,991
<INCOME-PRETAX> 8,418,110
<INCOME-TAX> 2,180,358
<INCOME-CONTINUING> 6,237,752
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,237,752
<EPS-PRIMARY> 36.69
<EPS-DILUTED> 0
</TABLE>
