-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BDf+I7/b/ACSo4YJi8EG719tD6RTzt5+GCxMWtaRzYvSNDTAK1lK5Ll9IKbDP2Z8 g/DO6E/DoF3+uTEec8Zz8g== 0000038723-96-000019.txt : 19960402 0000038723-96-000019.hdr.sgml : 19960402 ACCESSION NUMBER: 0000038723-96-000019 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST FRANKLIN FINANCIAL CORP CENTRAL INDEX KEY: 0000038723 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 580521233 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 002-27985 FILM NUMBER: 96542282 BUSINESS ADDRESS: STREET 1: 213 E TUGALO ST STREET 2: P O BOX 880 CITY: TOCCOA STATE: GA ZIP: 30577 BUSINESS PHONE: 4048867571 FORMER COMPANY: FORMER CONFORMED NAME: FRANKLIN DISCOUNT CO DATE OF NAME CHANGE: 19840115 10-K 1 FORM 10-K PART I THRU SIGNATURE SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ------------------------------ (X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________to _________ ------------------------------ 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) State the aggregate market value of the voting stock held by nonaffiliated of the Registrant: Not Applicable. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Class Outstanding at February 28, 1996 ------------------------------------- -------------------------------- Voting Common Stock, $100 Par Value 1,700 shares Non-Voting Common Stock, No Par Value 168,201 shares DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Annual Report to security holders for the fiscal year ended December 31, 1995 are incorporated by reference into Parts I, II and IV of this Form 10-K. (Cover page 2 of 2 pages) PART I Item 1. BUSINESS: The Company, Page 1; Business, Pages 5 - 12; and Financial Statements, Pages 18-30 of Registrant's Annual Report to security holders for the fiscal year ended December 31, 1995 are incorporated herein by reference. Item 2. PROPERTIES: Paragraph 1 of The Company, Page 1; Footnote 7 (Commitments) of Notes to Consolidated Financial Statements, Page 28; and map on back cover of Registrant's Annual Report to security holders for the fiscal year ended December 31, 1995 are incorporated herein by reference. Item 3. LEGAL PROCEEDINGS: The Company has been named as defendant in the following legal proceedings in the state of Alabama: Debra Underwood v. 1st Franklin Financial Corporation, et al.; Filed in the Court of Chilton County, Alabama; Civil Action No. CV-96-001-R. This lawsuit was filed in January 1, 1996. The plaintiffs allege that the Company required them to purchase credit life insurance before extending a loan to them. The plaintiffs allege that, in so requiring, the Company violated the Alabama Mini-Code, committed fraudulent misrepresentation and suppression, and engaged in a conspiracy. Plaintiffs also allege that the Company and the other defendants fraudulently suppressed the costs of refinancing their existing loan. At the present, it is too early to reach any type of informed assessment of the liability of the case. The case is being vigorously defended. Annie Liptrot, et al. v 1st Franklin Financial Corporation, et al.; Filed in the United States District Court for the Middle District of Alabama; Civil Action No. CV-95-T-1656-N. This lawsuit was filed November 28, 1995 as a putative statewide class action, in which the plaintiff alleges that the Company has violated the Alabama Mini-Code and committed fraud arising out of the sale of credit life insurance. At the present, it is too early to reach any type of informed assessment of the liability of the case. The case is being vigorously defended. Earnestine B. Simmons v. 1st Franklin Financial, et al.; Filed January, 1996 in Superior Court for Dougherty County, Georgia; Civil Action No. 96-CV-020 This class action case seeks recovery for alleged violations of fraud and deceit, breach of contract and violations under the Georgia RICO act arising out of the sale of non-filing and personal property insurance. At the present, it is too early to reach any type of informed assessment of the liability of the case. The case is being vigorously defended. -1- During recent months, the Company entered into settlement agreements with certain borrowers who had previously asserted claims against the Company. Although the Company and its employees deny that they are guilty of any wrongdoing or any breach of any legal obligation or duty to the Claimants, in recognition of the expense and uncertainty of litigation, Management felt it was in the best interest of the Company to dispose of these cases. The following cases previously reported have been disposed of: Mose Burks v. 1st Franklin, et al.; Filed May, 1994, in the Circuit Court of Barbour County, Alabama, Clayton Division; Civil Action No. CV-94-084; previously disclosed in the Company's Form 10-K for the period ended December 31, 1994. The case was settled on December 29, 1995. Karen Hilliary v. 1st Franklin Financial, et al.; Filed September, 1994 in the Circuit Court of Bullock County, Alabama; Civil Action No. CV-94-92; previously disclosed in the Company's Form 10-K for the period ended December 31, 1994. The case was settled on December 29, 1995. Vicie Davis v. 1st Franklin Financial Corporation, et al.; Originally filed on May 11, 1995 in Circuit Court of Barbour County, Alabama; Civil Action No. CV-95-0139; previously disclosed in the Company's Form 10-Q for the period ended June 30, 1995. The case was settled during February, 1996. Corinthia Holman v. 1st Franklin Financial Corporation, et al.; Filed May 11, 1995 in the Circuit Court of Barbour County, Alabama; Civil Action No. CV-95-0142; previously disclosed in the Company's Form 10-Q for the period ended June 30, 1995. The case was settled during February, 1996. Teri Foster v. 1st Franklin Financial Corporation, et al.; Filed May 11, 1995 in the Circuit Court of Barbour County, Alabama; Civil Action No. CV-95-0123; previously disclosed in the Company's Form 10-Q for the period ended June 30, 1995. The case was settled during February, 1996. Nine other cases in Alabama, similar in nature to the aforementioned, were filed during January and February, 1996. The Company settled all of these during the first quarter of 1996. Other than ordinary routine litigation incidental to the finance business, there are no other material pending legal proceedings. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: Not applicable. -2- PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS: Source of Funds, Page 12 of Registrant's Annual Report to security holders for the fiscal year ended December 31, 1995 is incorporated herein by reference. Item 6. SELECTED FINANCIAL DATA: Selected Consolidated Financial Information, Page 4 of Registrant's Annual Report to security holders for the fiscal year ended December 31, 1995 is incorporated herein by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: Management's Discussion of Operations, Pages 13 - 15 of Registrant's Annual Report to security holders for the fiscal year ended December 31, 1995 is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA: Pages 18 - 30 of Registrant's Annual Report to security holders for the fiscal year ended December 31, 1995 are incorporated herein by reference. Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE: Not applicable. -3- PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT: DIRECTORS Director Since and Date on Which Position Name of Director Age Term Will Expire With Company ---------------- --- ---------------- ------------ W. Richard Acree (1)(2) 68 Since 1970; None When successor elected and qualified Ben F. Cheek, III (3)(4)(5) 59 Since 1967; Chairman of When successor Board elected and qualified Lorene M. Cheek (2)(4)(6) 86 Since 1946; None When successor elected and qualified Jack D. Stovall (1)(2) 60 Since 1983; None When successor elected and qualified Robert E. Thompson (1)(2) 64 Since 1970; None When successor elected and qualified _______________________________________________________________________ (1) Member of Audit Committee. (2) Mr. Acree is President of Acree Oil Company, a distributor of petroleum products in Northeast Georgia; Mrs. Cheek is an honorary member of the Board of Trustees of Tallulah Falls School; Dr. Thompson is a physician at Toccoa Clinic; and Mr. Stovall is President of Stovall Building Supplies, Inc. These positions have been held by each respective Director for more than five years. (3) Reference is made to the business experience of executive officers of the Company as detailed below. (4) Member of Executive Committee. (5) Son of Lorene M. Cheek. (6) Mother of Ben F. Cheek, III. -4- EXECUTIVE OFFICERS Name, Age, Position and Family Relationship Business Experience - ----------------------- ---------------------------------------------- Ben F. Cheek, III, 59 Joined the Company in 1961 as attorney and Chairman of Board became Vice President in 1962, President in 1972 and Chairman of Board in 1989. T. Bruce Childs, 59 Joined the Company in 1958 and was named Vice President President in charge of Operations in 1973 and No Family Relationship President in 1989. Lynn E. Cox, 38 Joined the Company in 1983 and became Secretary Secretary in 1989. No Family Relationship A. Roger Guimond, 41 Joined the Company in 1976 as an accountant and Vice President and became Chief Accounting Officer in 1978, Chief Chief Financial Officer Financial Officer in 1991 and Vice President in No Family Relationship 1992. Linda L. Sessa, 41 Joined the Company in 1984 and became Treasurer Treasurer in 1989. No Family Relationship The term of office of each Executive Officer expires when a successor is elected and qualified. There was no, nor is there presently any arrangement or understanding between any officer and any other person (except directors or officers of the registrant acting solely in their capacities as such) pursuant to which the officer was selected. No event such as bankruptcy, criminal proceedings or securities violation proceeding has occurred within the past 5 years with regard to any Director or Executive Officer of the Company. -5- Item 11. EXECUTIVE COMPENSATION: (b) Summary Compensation Table: Other All Name Annual Other and Compen- Compen- Principal Salary Bonus sation sation Position Year $ $ $ $ * -------- ---- ------- ------- ------ ------- Ben F. Cheek, III 1995 240,000 220,466 3,033 146,114 Chairman and 1994 228,000 189,693 2,760 38,594 CEO 1993 216,000 154,653 2,867 44,268 T. Bruce Childs 1995 228,000 219,986 4,236 130,447 President 1993 210,000 188,973 4,682 31,071 1992 194,000 153,773 7,179 38,574 A. Roger Guimond 1995 120,000 74,816 1,650 40,959 Vice President 1994 108,000 62,174 1,650 17,945 and CFO 1993 96,000 36,790 1,650 15,354 * Represents Company contributions to profit-sharing plan, and reported compensation from premiums on life insurance policies for the benefit of Ben F. Cheek, III in the amount of $4,425 for 1995, $3,816 for 1994 and $5,984 for 1993. Includes Company contributions to profit-sharing plan for the benefit of T. Bruce Childs. Also represents contributions to profit-sharing plan, and reported compensation from premiums on a life insurance policy for the benefit of A. Roger Guimond in the amount of $574 for 1995. (g) Compensation of Directors: Directors who are not employees of the Company receive $1,000 per year for attending scheduled board meetings. (k) Board Compensation Committee Report on Executive Compensation: The Company has no official executive compensation committee. Ben F. Cheek, III (Chairman of the Company) establishes the bases for all executive compensation. The Company is a family owned business with Ben F. Cheek, III being the majority stockholder. -6- Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT: (a) Security Ownership of Certain Beneficial Owners as of March 26, 1996: Name and Address of Amount and Nature of Percent Beneficial Owner Title of Class Beneficial Ownership Of Class ------------------- -------------- --------------------- -------- Ben F. Cheek, III Voting Common 1,160 Shares - Direct 68.24% 225 Valley Drive Toccoa, Georgia 30577 John Russell Cheek Voting Common 441 Shares - Direct 25.94% 181 Garland Road Toccoa, Georgia 30577 (b) Security Ownership of Management as of March 26, 1996: Ownership listed below represents ownership in 1st Franklin Financial Corporation, of (i) Directors and named Executive Officers of the Company and (ii) all Directors and Executive Officers as a group: Amount and Nature of Percent Name Title of Class Beneficial Ownership Of Class ---- -------------- -------------------- ------- Ben F. Cheek, III Voting Common Stock 1,160 Shares - Direct 68.24% Non-Voting Common Stock 114,840 Shares (1) 68.24% T. Bruce Childs Voting Common Stock None None Non-Voting Common Stock None None A. Roger Guimond Voting Common Stock None None Non-Voting Common Stock None None __________________________________________ All Directors and Executive Officers as a Group Voting Common Stock 1,160 Shares - Direct 68.24% Non-Voting Common Stock 114,840 Shares 68.24% (1) Such shares are owned by Cheek Investments, L.P., of which Ben F. Cheek, III and his wife are the general partners. (c) The Company knows of no contractual arrangements which may at a subsequent date result in a change in control of the Company. -7- Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS: The Company leases its Home Office building and print shop for a total of $12,600 per month from Franklin Enterprises, Inc. under leases which expire December 31, 2004. Franklin Enterprises, Inc. is 66.67% owned by Ben F. Cheek, III, a director and executive officer of the Company. In Management's opinion, these leases are at rates which approximate those obtainable from independent third parties. Beneficial owners of the Company are also beneficial owners of Liberty Bank & Trust ("Liberty"). The Company and Liberty have management and data processing agreements whereby the Company provides certain administrative and data processing services to Liberty for a fee. Income recorded by the Company during the three year period ended December 31, 1995 related to these agreements was $63,800 per year which in Management's opinion approximates the Company's actual cost of these services. Liberty leases its office space and equipment from the Company for $4,200 per month, which in Management's opinion is at a rate which approximates that obtainable from independent third parties. At December 31, 1995, the Company maintained $2,300,000 of certificates of deposit and $2,360 in a money market account with Liberty at market rates and terms. The Company also had $1,431,090 in demand deposits with Liberty at December 31, 1995. -8- PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K: (a) 1. Financial Statements: Incorporated by reference from the Registrant's Annual Report to security holders for the fiscal year ended December 31, 1995: Report of Independent Public Accountants. Consolidated Statements of Financial Position at December 31, 1995 and 1994. Consolidated Statements of Income and Retained Earnings for the three years ended December 31, 1995. Consolidated Statements of Cash Flows for the three years ended December 31, 1995. Notes to Consolidated Financial Statements. 2. Financial Statement Schedules: None - Financial statement schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto. 3. Exhibits: 2. (a) Articles of Merger of 1st Franklin Corporation with and into 1st Franklin Financial Corporation dated December 31, 1994 (incorporated herein by reference to Exhibit 3(2)(a) from Form 10-K for the fiscal year ended December 31, 1994). 3. (a) Restated Articles of Incorporation as amended January 26, 1996. (b) Bylaws 4. (a) Executed copy of Indenture dated October 31, 1984, covering the Variable Rate Subordinated Debentures - Series 1 (incorporated herein by reference from Registration Statement No. 2-94191, Exhibit 4a). (b) Modification of Indenture dated March 29, 1995 (incorporated herein by reference to Exhibit 3(4)(b) from Form 10-K for the fiscal year ended December 31, 1994). 9. Not applicable. 10. (a) Credit Agreement dated May, 1993 between the registrant and SouthTrust Bank of Georgia, N.A.. (Incorporated herein by reference from Form 10-K for the fiscal year ended December 31, 1993.) (b) Revolving Credit Agreement dated October 1, 1985 as amended November 10, 1986; March 1, 1988; August 31, 1989 and May 1, 1990, among the registrant and the banks named therein (Incorporated by reference to Exhibit 10 to the registrant's Form SE dated November 9, 1990.) -9- (c) Fifth Amendment to Revolving Credit Agreement dated April 23, 1992. (Incorporated by reference to Exhibit 10(c) to the Registrant's Form SE dated November 5, 1992.) (d) Sixth Amendment to Revolving Credit Agreement dated July 20, 1992. (Incorporated by reference to Exhibit 10(d) to the Registrant's Form SE dated November 5, 1992.) (e) Seventh Amendment to Revolving Credit Agreement dated June 20, 1994. (Incorporated by reference to Exhibit 10(e) from Form 10-K for the fiscal year ended December 31, 1994.) (f) Merger of 1st Franklin Corporation with 1st Franklin Financial Corporation Consent, Waiver and Eighth Amendment to Revolving Credit and Term Loan Agreement. (Incorporated herein by reference to Exhibit 10(f) from Form 10-K for the fiscal year ended December 31, 1994.) 11. Computation of Earnings per Share is self-evident from the Consolidated Statement of Income and Retained Earnings in the Registrant's Annual Report to Security Holders for the fiscal year ended December 31, 1995, incorporated by reference herein. 12. Ratio of Earnings to Fixed Charges. 13. Registrant's Annual Report to security holders for fiscal year ended December 31, 1995. 18. Not applicable. 19. Not applicable. 21. Subsidiaries of Registrant. 22. Not applicable. 23. Consent of Independent Public Accountants. 24. Not applicable. 27. Financial Data Schedule 28. Not applicable. (b) Reports on Form 8-K: No reports on Form 8-K were filed by the Registrant during the quarter ended December 31, 1995. -10- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized: 1st FRANKLIN FINANCIAL CORPORATION March 29, 1996 By: s/ Ben F. Cheek, III -------------- -------------------- Date Chairman of Boad Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacity and on the dates indicated: Signatures Title Date s/ Ben F. Cheek, III Chairman of Board; March 29, 1996 - --------------------- Chief Executive -------------- Officer s/ T. Bruce Childs President March 29, 1996 - --------------------- -------------- s/ A. Roger Guimond Vice President; March 29, 1996 - --------------------- Chief Financial -------------- Officer s/ W. Richard Acree Director March 29, 1996 - --------------------- -------------- s/ Lorene M. Cheek Director March 29, 1996 - --------------------- -------------- s/ Jack D. Stovall Director March 29, 1996 - --------------------- -------------- s/ Robert E. Thompson Director March 29, 1996 - --------------------- -------------- Supplemental Information to be Furnished with Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act. (a) Except to the extent that the materials enumerated in (1) and/or (2) below are specifically incorporated into this Form by reference (in which case see Rule 12b-23b), every registrant which files an annual report on this Form pursuant to Section 15(d) of the Act shall furnish to the Commission for its information, at the time of filing its report on this Form, four copies of the following: -11- (1) Any annual report to security holders covering the registrant's last fiscal year and (2) Every proxy statement, form of proxy or other proxy soliciting material sent to more than ten of the registrant's security holders with respect to any annual or other meeting of security holders. (b) The foregoing material shall not be deemed to be "filed" with the Commission or otherwise subject to the liabilities of Section 18 of the Act, except to the extent that the registrant specifically incorporates it in its annual report on this Form by reference. (c) This Annual Report on Form 10-K incorporates by reference portions of the Registrant's Annual Report to security holders for the fiscal year ended December 31, 1995, which is filed as Exhibit 13 hereto. The Registrant is a privately held corporation and therefore does not distribute proxy statements or information statements. -12- EX-3 2 EXHIBIT 3(A) Exhibit 3(a) RESTATED ARTICLES OF INCORPORATION OF FRANKLIN DISCOUNT COMPANY Pursuant to the provisions of Section 22-907 of the Georgia Business Corporation Code, the undersigned corporation, pursuant to a resolution duly adopted by the stockholders, hereby adopts the following Restated Articles of Incorporation: 1. The name of the Corporation is FRANKLIN DISCOUNT COMPANY. 2. The corporation is organized pursuant to the provisions of the Georgia Business Corporation Code. 3. The corporation shall have perpetual duration. 4. The purposes for which the corporation is organized are: (a) to carry on the business of a finance company, lending money on the security of real estate or personal property, financing the sale thereof, and leasing items or parcels thereof; (b) to carry on the business of a mortgage broker, acquiring, holding and selling mortgages on real estate and/or personal property; (c) to carry on the business of an insurance broker, agent, and/or adjuster for insurance companies of all kinds; (d) to provide means by which investors may invest their money and secure an adequate return thereon; (e) to buy, acquire, own, hold, manage and control real and personal property of every description, including its own stock and stock in any other corporation, to sell, convey, mortgage, pledge, lease and otherwise dispose of such property or any part thereof, to lend money in connection therewith either with or without security; and (f) to engage in other lawful businesses from time to time without limitation. 5. The aggregate number of shares which the corporation shall have authority to issue shall be 8,000 shares, such shares to consist of 2,000 shares of common stock, par value $100 per share, and 6,000 shares of preferred stock, par value $100 per share. This class of preferred stock shall have the designation, preferences, limitations, and rights relative to the common stock set forth in paragraph 6 of these Restated Articles of Incorporation. 6. The 6,000 shares of preferred stock, $100 par value, shall be designated as "10% Mandatory Cumulative Preferred Stock" (hereinafter referred to as the "Preferred Stock") and shall have the following preferences, limitations and rights relative to the common stock: (a) The Preferred Stock shall be transferable or redeemable only in person or by a duly authorized attorney on the books of the corporation upon surrender of the stock certificates properly endorsed. (b) The holders of Preferred Stock shall be entitled to receive dividends thereon at the rate of ten percent (10%) per annum, payable in semiannual installments of five percent (5%) each on March 15 and September 15 of each year, before any dividends are paid to the common stockholders. These dividends shall be payable from the corporation's earned surplus and net earnings. Should these be insufficient to pay any dividend, then such dividend will become a charge against future net earnings of the corporation, and shall be paid in full out of future net earnings before any dividends are paid to the common stockholders. (c) If the corporation becomes in arrears in the payment of two consecutive 5% dividends, the holders of the Preferred Stock shall have the right to elect two additional directors, and the corporation will, within 15 days after such default, call a meeting of the holders of Preferred Stock for the purpose of electing two additional directors, who will thereupon be seated on the corporation's Board of Directors. Upon timely payment of dividends for one year following the date of payment of all dividends in arrears, the holders of Preferred Stock shall no longer have the right to elect two directors. Once the holders of Preferred Stock have lost this right, however, the directors who were elected by the holders of the Preferred Stock shall continue to serve as directors until the next annual meeting of the stockholders at which directors are elected. (d) In the event of liquidation, dissolution, or winding up of the corporation, holders of Preferred Stock shall be entitled to receive the par value of their shares plus all accrued dividends, before anything is paid to the common stockholders, and no more. (e) Except as otherwise expressly provided herein, the holders of Preferred Stock shall not be entitled to vote at meetings of the stockholders of the corporation, nor to participate in its profits. When voting as a class, the holders of Preferred Stock shall be entitled to one vote per share. (f) The holders of Preferred Stock will not be subject to further calls nor assessments by the corporation, and their rights as such holders may not be modified except by a majority vote of the shares of the Preferred Stock outstanding, voting as a class. In particular, but without limiting the generality of the previous sentence, while any shares of Preferred Stock shall be outstanding, the number of directors of the corporation may not be increased without the consent of a majority of the shares of Preferred Stock outstanding, voting as a class. The corporation will, upon the request of any stockholder, furnish a full statement of the designations, preferences, and rights of the holders of all classes of the corporation's capital stock. (g) The corporation reserves the right to redeem any of its shares of Preferred Stock on March 15 or September 15 of any year for a redemption price of dividends accrued to date of redemption plus $104 per share. Notice of redemption shall be given by certified mail to the holder not less than thirty nor more than sixty days prior to the date fixed for redemption. In the event some portion, but not the entire issue, is called for redemption, then the redemption call shall be made in the inverse order of issue, the last shares issued to be the first called for redemption. (h) Except as may be prohibited by law, when requested to do so by the holder, the corporation will redeem shares of Preferred Stock for a redemption price of dividends accrued to date of redemption plus $100 per share; provided, however, that the corporation shall not be obligated to redeem these shares if at the time of the request (i) the corporation is in default on any of its debt obligations, or is in arrears in the payment of any Preferred Stock dividend, or (ii) the effect of such redemption would be to reduce the corporation's remaining outstanding Preferred Stock to an amount less than 90% of the amount of such stock outstanding on the preceding September 16. 7. The holders of the common stock of the corporation shall have the preemptive right to acquire unissued shares of the common stock of the corporation set forth in the Georgia Business Corporation Code. 8. These Restated Articles of Incorporation substantially amend the Articles of Incorporation in certain respects, and they purport merely to restate all those provisions of the Articles of Incorporation not being amended. 9. These Restated Articles of Incorporation supersede the original Articles of Incorporation as heretofore amended. 10. These Restated Articles of Incorporation were authorized at a special called meeting of the shareholders June 3, 1981, by the unanimous affirmative vote of the holders of all 1700 shares of the common stock of the corporation outstanding and entitled to vote thereon. The affirmative vote of 851 shares of such common stock was the minimum required to adopt these Restated Articles of Incorporation. IN WITNESS WHEREOF, Franklin Discount Company has caused these Restated Articles of Incorporation to be executed and its corporate seal to be affixed and has caused the foregoing to be attested, all by its duly authorized officers, this June 22, 1981. FRANKLIN DISCOUNT COMPANY By: s/Ben F. Cheek, III, President ------------------------------ Attest: s/Hazel Henderson, Secretary ------------------------------ ARTICLES OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION OF FRANKLIN DISCOUNT COMPANY I. The name of the corporation is: Franklin Discount Company. II. These Articles of Amendment relate amendments to the Restated Articles of Incorporation of Franklin Discount Company which delete Articles 6(g) and 6(h) and in lieu thereof add a new Article 6(g) which reads as follows: "(g) The Corporation shall have the right to redeem on September 15, 1982 all of its shares of outstanding Preferred Stock. The Corporation shall effect the redemption by exchanging its Series D Variable Rate Subordinated Debentures for the shares of Preferred Stock in such a manner that each holder of Preferred Stock as of such date shall receive a Series D Variable Rate Subordinated Debenture having a face value equivalent to the aggregate number of shares of Preferred Stock held by such holder multiplied by $100 per share (the par value of a share). The Series D Variable Rate Subordinated Debentures issued by the Corporation in exchange for the Preferred Stock shall be redeemable by the holders thereof on September 15, 1984. In the event a holder of Preferred Stock has an aggregate number of shares which when multiplied by $100 per share yields an amount less than $500 (the minimum denomination of a Series D Variable Rate Subordinated Debenture), such holder shall receive cash in an amount equal to the amount so determined. The shares of Preferred Stock redeemed by the Corporation shall be cancelled and shall have the status of treasury shares." III. The affirmative vote of the holders of a majority of the outstanding shares of common stock as well as a majority of the outstanding shares of preferred stock of the Corporation voting as a class were required to adopt the amendments. On the date of the submission of the amendments to a vote of the holders of such shares, 1,700 shares of common stock and 3,835 shares of preferred stock were outstanding and entitled to vote on the amendments. By the affirmative vote of the holders of all shares of common stock and the holders of more than 2,193 shares of preferred stock, the holders of the issued stock of Franklin Discount Company approved the amendments. IV. The amendments do not provide for an exchange and subsequent cancellation of issued shares of preferred stock of Franklin Discount Company. The manner in which such shall be effected is set forth in the amendment. V. The amendments do not effect a change in the amount of stated capital. WITNESS the execution and attestation of these Articles of Amendment by duly authorized officers of Franklin Discount Company as of this 11th day of September, 1982. FRANKLIN DISCOUNT COMPANY By: s/Ben F. Cheek, III, President ------------------------------ Attest: s/Hazel Henderson, Secretary ------------------------------ (CORPORATE SEAL) ARTICLES OF AMENDMENT OF FRANKLIN DISCOUNT COMPANY 1. The name of the Corporation is: FRANKLIN DISCOUNT COMPANY 2. The name of the Corporation shall be changed from FRANKLIN DISCOUNT COMPANY to: 1ST FRANKLIN FINANCIAL CORPORATION The foregoing Articles of Amendment were adopted by the Shareholders of the Corporation as of the 14th day of December, 1983. The amendment was adopted by the unanimous vote of all shareholders. WITNESS the execution and attestation of these Articles of Amendment by duly authorized officers of Franklin Discount Company, as of the 28th day of December, 1983. FRANKLIN DISCOUNT COMPANY BY: s/Ben F. Cheek, III, President ------------------------------ ATTEST: s/Hazel Henderson, Secretary ------------------------------ (CORPORATE SEAL) ARTICLES OF AMENDMENT OF RESTATED ARTICLES OF INCORPORATION OF 1ST FRANKLIN FINANCIAL CORPORATION 1. The name of the Corporation is 1st Franklin Financial Corporation. 2. Article 5 of the Corporation's Restated Articles of Incorporation is hereby amended and restated so that it shall read in its entirety as follows: "5. The aggregated number of shares which the corporation shall have authority to issue shall be 206,000 shares, such shares to consist of 2,000 shares of common stock, par value $100 per share, 198,000 shares of non-voting common stock, no par value, and 6,000 shares of preferred stock, par value $100 per share. This class of preferred stock shall have the designation, preferences, limitations, and rights relative to the common stock set forth in paragraph 6 of these Restated Articles of Incorporation. I. COMMON STOCK 1. Dividends. The holders of shares of Common Stock shall be entitled to receive such dividends as from time to time may be declared by the Board of Directors of the Corporation, subject to the rights of holders of Non-Voting Common Stock provided for herein. 2. Liquidation. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of Common Stock and the holders of Non-Voting Common Stock shall be entitled to share ratably based upon the number of shares held by them in all assets of the Corporation available for distribution to its shareholders. 3. Voting Rights. All shares of Common Stock shall be identical with each other in every respect. The shares of Common Stock shall entitle the holders thereof to one vote for each share upon all matters upon which shareholders have the right to vote. II. NON-VOTING COMMON STOCK 1. Dividends. The holders of shares of Non-Voting Common Stock shall be entitled to receive such dividends as from time to time may be declared by the Board of Directors of the Corporation. No dividend will be declared or paid on Common Stock unless and equivalent per share dividend is declared and paid on the Non-Voting Common Stock. In the event that the holders of Common Stock receive a dividend payable in shares of Common Stock, then holders of Non-Voting Common Stock shall receive an equivalent dividend, payable in shares of Non-Voting Common Stock. 2. Liquidation. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of Common Stock and the holders of Non-Voting Common Stock shall be entitled to share ratably based upon the number of shares held by them in all assets of the Corporation available for distribution to its shareholders. 3. Voting Rights. Holders of Non-Voting Common Stock shall have no rights to vote except as provided by law." 4. This amendment was adopted on January 26, 1996. 5. This amendment was adopted by the unanimous vote of all directors and all shareholders. 6. No approval of this amendment by any person or persons other than the Board of Directors or shareholders is required pursuant to O.C.G.A. Section 14-3-1030 or 14-3-1041. IN WITNESS WHEREOF, 1st Franklin Financial Corporation has caused these Articles of Amendment to be executed, its corporate seal to be affixed, and its seal and the execution hereof to be attested, all by its duly authorized officers, this 26 of January, 1996. 1st Franklin Financial Corporation By: s/T. Bruce Childs, President ---------------------------- Attest: s/Lynn Evans Cox, Secretary ---------------------------- (CORPORATE SEAL) EX-3 3 EXHIBIT 3(B) Exhibit 3(b) BY-LAWS of Franklin Discount Company NAME The name of this corporation shall be FRANKLIN DISCOUNT COMPANY. OFFICES The principal office of the corporation shall be in Toccoa, Georgia, but the corporation may have offices at such other places as the business of the corporation may require. SEAL The corporate seal shall have inscribed thereon the words "Franklin Discount Company, Toccoa, Georgia Seal" to be impressed. An impression of said seal is impressed on the margin of this page. MEETINGS OF STOCKHOLDERS All meetings of stockholders shall be held at the office of the corporation in Toccoa, Georgia. The annual meeting of the stockholders shall be held on the second Tuesday in September of each year at eight o'clock in the evening at which time the stockholders shall elect a board of directors and transact such other business as may properly be brought before the meeting. The holders of a majority of the common stock issued and outstanding, present in person or represented by proxy, shall be requisite and shall constitute a quorum at all meetings of stockholders for the transaction of business. Each stockholder shall have one vote for each share of stock registered in his name on the book of the corporation. Written notice of the annual meeting shall be mailed to each stockholder at such address as appears on the stock book of the corporation at least ten days prior to the meeting. Special meetings of the stockholders for any purpose or purposes may be called by the President, and shall be called by the President or Secretary at the request in writing of a majority of the board of directors, or at the request in writing of stockholders owning a majority in amount of the entire capital stock of the corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. Business transacted at all special meetings shall be confined to the objects stated in the call. Written notice of a special meeting of stockholders stating the time, place, and object thereof, shall be mailed at least ten days before such meeting to each stockholder at such address as appears on the books of the corporation. DIRECTORS The business of this corporation shall be directed by the board of directors, a minimum of three and a maximum of fifteen in number. Directors need not be stockholders. They shall be elected at the annual meeting of the stockholders and each director shall be elected to serve until his successor shall be elected and shall qualify. The board of directors shall have all such powers as may be exercised by the corporation subject to the provisions of the statute, the certificate of incorporation and the by-laws, it being intended specifically to incorporate herein the powers expressly conferred upon the board of directors in the certificate of incorporation. All such powers as are expressly conferred upon the board of directors shall be construed to be in furtherance and not in limitation of the powers conferred by law. All meetings of the directors shall be held at the office of the corporation in Toccoa, Georgia. If the office of any director or directors shall become vacant by reason of death, resignation, retirement, removal from office, or otherwise, the remaining directors, though less than a quorum, shall choose a successor or successors who shall hold office until the next annual meeting of the stockholder, unless sooner displaced. COMPENSATION OF DIRECTORS Directors, as such, shall not receive any stated salary for their service, but by resolution of the board a fixed sum for expenses of attendance may be allowed; provided that nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefor. MEETINGS OF DIRECTORS Immediately after each annual election of directors, the newly- elected directors shall meet for the purpose of organizing and election of officers, and the transaction of other business. If a majority of the directors shall be present at such time no prior notice of such meeting shall be required to be given to the directors; or they may meet at such time as shall be fixed by the consent in writing of all the directors. Special meetings of the board may be called by the president on two days' notice to each director, either personally or by mail. Special meetings shall be called by the president or secretary in like manner on the written request of a majority of the directors. At all meetings of the board, a majority of the directors shall be necessary and sufficient to constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise provided by statute or by these by-laws. OFFICERS The officers of the corporation shall be chosen by the directors, and shall be a President, a Vice President, and a Secretary-Treasurer. The board of directors may choose a Secretary and a Treasurer instead of one person as Secretary-Treasurer. They may also choose other Vice Presidents, Assistant Secretaries and Assistant Treasurers. It is not required that any officer of this corporation be a director or a stockholder. The board may appoint or choose such other officers and agents as it shall deem necessary, and all officers chosen by the board shall hold office for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the board. The salaries of all officers of the corporation shall be fixed by the board of directors. The officers of the corporation shall hold office until their successors are chosen and qualify in their stead. PRESIDENT AND VICE PRESIDENT The president shall preside at all meetings of the stockholders and of the board of directors. He shall sign all certificates of stock and all notes, debentures, and obligations of the corporation unless otherwise directed by the board of directors. He shall sign all contracts and instruments authorized by the board of directors, and generally shall perform all duties usually incumbent upon the president of a corporation. He shall make annual reports of the condition of the company to the stockholders and to the directors at their annual meetings. The vice president shall perform all the duties of the president in his absence, and such other duties as may be required of him by the board of directors. SECRETARY-TREASURER The Board of Directors may choose one person to perform the duties of the Secretary and of the Treasurer, or it may choose one person to serve as Secretary and another as Treasurer. In the event it is one person, then that person may be referred to as Secretary, or as Treasurer, or as Secretary-Treasurer. The secretary shall have care and custody of the books of the corporation, give the necessary notices of all meetings of the stockholders and directors, and keep the minutes of such meetings. He shall have custody of the seal of the corporation and shall affix it to all instruments requiring a seal, when authorized by the board of directors. He shall keep such other books and minutes and perform all such other duties as may be assigned to him by the board of directors or the president. The treasurer shall receive and have custody of all moneys and securities of the corporation, shall pay such dividends as may be declared from time to time by the board of directors, and do and perform all such other duties as may be required of him by the board of directors, and such other duties as usually devolve upon such officers. He shall deposit funds to the credit of the company in such banks as the board of directors shall direct, and shall disburse said funds under the direction of the president. He shall sign all stock certificates and evidences of indebtedness when signed by the president. The Board may elect an assistant secretary, assistant treasurer, or assistant secretary-treasurer, in which event he shall be authorized to perform any of the duties or responsibilities set forth above for the officer he is assistant to. CAPITAL STOCK Certificates of stock shall be issued, in the manner prescribed by law, to each stockholder showing the number of shares to which he is entitled. Each certificate shall be signed by the president or vice president and by the treasurer or an assistant treasurer, and shall have the corporate seal impressed thereon. Stock shall be transferable only by entry upon the books of the corporation upon surrender of the outstanding certificate with the assignment thereof duly recorded and executed. DIVIDENDS Dividends may be declared and paid out of the profits of the corporation as often and at such times as the directors may determine. These dividends may be paid out of the surplus of earnings retained from previous years. PURPOSES The purpose of the corporation is to engage in the consumer finance business and such other businesses as the board of directors may from time to time determine, for the pecuniary gain of its stockholders. AMENDMENTS These by-laws may be amended or additional by-laws adopted by a majority vote at any meeting of the stockholders in the notice of which the proposed amendment or new by-laws shall be set forth at large. (Adopted by Stockholders November 8, 1967) AMENDMENT TO BY-LAWS 1. Amend Section of By-Laws entitled "DIRECTORS" by adding the following paragraph: "The directors shall elect a Chairman from among their membership who shall preside at all meetings of the Board of Directors." 2. Amend Section of By-Laws entitled "PRESIDENT AND VICE PRESIDENT" by placing a period after the word "stockholders" and deleting the words "and of the Board of Directors" in the first sentence. (Adopted by Stockholders February 23, 1972) AMENDMENT 2 Strike and revoke Amendment 1 which was adopted on February 23, 1972, and substitute in its stead the following: 1. Amend the section entitled "OFFICERS" by striking the first paragraph in its entirety and putting in place thereof the following paragraph, to-wit: OFFICERS The officers of the Corporation shall consist of a Chairman of the Board, a President, an Executive Vice President, one or more Vice Presidents, a Secretary and a Treasurer. The offices of Secretary and Treasurer may be held by one person. The officers shall be elected by the Directors and each officer shall hold office for the term to which he is elected and until his successor has been elected or appointed or until his earlier resignation, removal from office, death or incapacity to serve. 2. Amend the By-Laws by adding a new section entitled "CHAIRMAN OF THE BOARD" following the section on "OFFICERS" which will read as follows: CHAIRMAN OF THE BOARD The Directors shall elect a Chairman from among their membership and the Chairman of the Board shall preside at all meetings of the Board of Directors and of the Shareholders, and shall be an ex-officio member of all standing committees and shall preside at meetings of such committees unless the Board of Directors, in constituting such committees, shall designate or elect some other person to be the chairman thereof. The Chairman of the Board shall also have such other duties and exercise such other powers as the Board of Directors shall designate. 3. Amend section entitled "PRESIDENT AND VICE PRESIDENT" by removing both paragraphs and placing in their stead the following: PRESIDENT, EXECUTIVE VICE PRESIDENT AND VICE PRESIDENT The President, Executive Vice President and Vice Presidents shall have such duties as the Board of Directors shall designate from time to time. The President, Executive Vice President or a Vice President may sign notes, debentures, contracts or other obligations of the Corporation when required to carry out their duties as designated by the Board of Directors. EX-10 4 EXHIBIT 12 Exhibit 12 RATIO OF EARNINGS TO FIXED CHARGES Year Ended December 31 ------------------------------------------ 1995 1994 1993 1992 1991 (In thousands, except ratio data) Income Before Income Taxes . . $ 8,969 $10,319 $ 8,322 $ 6,177 $ 5,199 Interest on Indebtedness . . . 8,048 5,556 4,910 4,423 4,733 Portion of rents representative of the interest factor . . 449 419 362 304 257 ------- ------- ------- ------- ------- Earnings as adjusted . . $17,466 $16,294 $13,594 $10,904 $10,189 ======= ======= ======= ======= ======= Fixed Charges: Interest on Indebtedness . . . $ 8,048 $ 5,556 $ 4,910 $ 4,423 $ 4,733 Portion of rents representative of the interest factor. . 449 419 362 304 257 ------- ------- ------- ------- ------- Fixed Charges. . . $ 8,497 $ 5,975 $ 5,272 $ 4,727 $ 4,990 ======= ======= ======= ======= ======= Ratio of Earnings to Fixed Charges. . . . . 2.06 2.73 2.58 2.31 2.04 ==== ==== ==== ==== ==== EX-13 5 EXHIBIT 13 Exhibit 13 1st FRANKLIN FINANCIAL CORPORATION ANNUAL REPORT DECEMBER 31, 1995 TABLE OF CONTENTS The Company. . . . . . . . . . . . . . . . . . . . . . . . . 1 Ben F. Cheek, Jr. Office of the Year. . . . . . . . . . . . 2 Chairman's Letter. . . . . . . . . . . . . . . . . . . . . . 3 Selected Consolidated Financial Information. . . . . . . . . 4 Business . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Management's Discussion of Operations. . . . . . . . . . . . 13 Management's Report. . . . . . . . . . . . . . . . . . . . . 16 Report of Independent Public Accountants . . . . . . . . . . 17 Financial Statements . . . . . . . . . . . . . . . . . . . . 18 Directors and Management . . . . . . . . . . . . . . . . . . 32 Corporate Information. . . . . . . . . . . . . . . . . . . . 32 THE COMPANY 1st Franklin Financial Corporation has been engaged in the consumer finance business since 1941, particularly in direct cash loans and real estate loans. The business is operated through 89 branch offices in Georgia, 24 in Alabama and 15 in South Carolina. As of December 31, 1995, the resources of the Company were invested principally in loans which comprise 66% of the Company's assets. The majority of the Company's revenues are derived from finance charges earned on loans and other outstanding receivables. Remaining revenues are derived from earnings on investment securities, insurance income and other miscellaneous income. On the basis of total capital funds employed (common stockholder's equity and subordinated debt), American Banker recently ranked the Company as the 52nd largest finance company in the United States. -1- DOUGLAS, GEORGIA 1995 BEN F. CHEEK, JR. "OFFICE OF THE YEAR" ********************* ** PICTURE OF EMPLOYEES ** ********************* This award is presented annually in recognition of the office that represents the highest overall performance within the Company. Congratulations to the entire Hazlehurst Staff for this significant achievement. The Friendly Franklin Folks salute you! -2- TO OUR INVESTORS, EMPLOYEES AND FRIENDS: The "Friendly Franklin Folks" made a giant stride in 1995 toward reaching our goal of $200 million in assets. With a growth of 33% during the year we are now within $18 million of reaching our goal and we are running considerably ahead of our target year 2000. A number of factors played an important part in this growth with the two most important being the addition of 11 new branch offices and a 44% growth in our investment center. New offices were opened in Andalusia and Opp, Alabama; Columbia, Gaffney, Greenville and Lancaster, South Carolina; Blakely, Dalton, Dawson, LaGrange and Sandersville, Georgia. The addition of these new offices put our total number of branches at 128 employing over 500 people. We expect to continue this pattern in 1996 as the opportunities become available. With the addition of our new branch offices came an increase in our net loan and sales finance receivables. Let me quickly add however, that the new branches were not the only source of this growth. The older branches made their contribution also. Over the year, we saw an increase of 11% in our net receivables and for the first time ever our loan volume topped $200 million. The number of outstanding accounts is now approaching 100,000. Naturally, we are honored that this large number of our friends and neighbors have chosen 1st Franklin as their source for additional family financing. I mentioned above the important role that the Investment Center played in our asset growth this year. None of our growth would be possible without the funding provided by our 5,925 investors. Each of you are truly "partners" with us and we will always be grateful for the confidence and support you give 1st Franklin Financial. In addition to the funding provided by our investors, we made another significant addition to our capital base in 1995 showing a 15% growth in our retained earnings. This strong foundation will give us the support we will need to continue our growth in the years ahead. Everyone at 1st Franklin Financial is looking forward to an exciting 1996. Our goals are set and we are determined to reach them. We invite each of you, our investors, bankers and other friends to join us as we continue to build toward the new millennium. Certainly we want to express a heartfelt thanks for your invaluable support and encouragement in the past. Very sincerely yours, s/ Ben F. Cheek, III --------------------- Chairman of the Board -3- SELECTED CONSOLIDATED FINANCIAL INFORMATION Set forth below is selected financial data of the Company. This information should be read in conjunction with the more detailed financial statements and notes thereto included elsewhere herein. Year Ended December 31 ------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (In 000's, except ratio data) Selected Income Statement Data: - ------------------------------ Revenues . . . . . . . . . . . $ 55,157 $ 49,334 $ 41,625 $ 34,613 $30,730 Net Interest Income. . . . . . 30,147 28,111 23,449 19,461 16,760 Interest Expense . . . . . . . 8,048 5,556 4,910 4,423 4,733 Provision for Loan Losses. . . 4,631 3,238 2,407 2,209 2,137 Income Before Income Taxes . . 8,969 10,319 8,322 6,177 5,199 Net Income . . . . . . . . . . 6,507 7,165 5,891 4,498 3,748 Ratio of Earnings to Fixed Charges . . . . . . . 2.06 2.73 2.58 2.31 2.04 Selected Balance Sheet Data: - --------------------------- Loans, Net . . . . . . . . . . $120,763 $108,667 $ 97,485 $ 82,820 $70,748 Total Assets . . . . . . . . . 182,084 136,468 123,661 105,812 88,823 Senior Debt. . . . . . . . . . 95,541 66,677 60,540 47,822 34,603 Subordinated Debt. . . . . . . 30,617 21,603 20,875 21,455 22,312 Stockholder's Equity . . . . . 47,747 40,605 34,678 28,718 24,406 Ratio of Total Liabilities to Stockholders' Equity . . 2.81 2.36 2.57 2.68 2.64 -4- BUSINESS The Company is engaged in the business of making consumer loans to individuals in relatively small amounts and for relatively short periods of time and in making first and second mortgage loans on real estate in larger amounts and for longer periods of time. The Company also purchases sales finance contracts from various retail dealers. At December 31, 1995 direct cash loans comprised 70% of the Company's outstanding loans, real estate loans 21% and sales finance contracts 9%. In connection with this business, the Company writes credit insurance as an agent for a nonaffiliated company specializing in such insurance. Two wholly owned subsidiaries, Frandisco Life Insurance Company and Frandisco Property and Casualty Insurance Company, reinsure the life, the accident and health and the property insurance so written. The following table shows the sources of the Company's earned finance charges over each of the past five periods: Year Ended December 31 ------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (In thousands) Direct Cash Loans. . . . . . . $25,898 $22,962 $18,618 $14,669 $12,624 Real Estate Loans . . . . . . 7,058 7,284 6,722 6,587 6,454 Sales Finance Contracts . . . 2,757 2,472 2,249 1,825 1,523 ------- ------- ------- ------- ------- Total Finance Charges. . . . $35,713 $32,718 $27,589 $23,081 $20,601 ======= ======= ======= ======= ======= Direct cash loans are made primarily to people who need money for some unusual or unforeseen expense or for the purpose of paying off an accumulation of small debts. These loans are repayable in 6 to 48 monthly installments and generally do not exceed $5,000 in principal amount. The loans are generally secured by personal property, motor vehicles and/or real estate. Interest and fees charged on these loans are in compliance with applicable federal and state laws. First and second mortgage loans on real estate are made to homeowners who wish to improve their property or who wish to restructure their financial obligations. They are generally made in amounts from $3,000 to $50,000 on maturities of 35 to 120 months. Interest and fees on these loans are in compliance with applicable federal and state laws. Sales finance contracts are purchased from retail dealers. These contracts have maturities that range from 3 to 48 months and generally do not individually exceed $5,000 in principal amount. The interest rates charged on these contracts are in compliance with applicable federal and state laws. Prior to the making of a loan, a credit investigation is undertaken to determine the income, existing indebtedness, length and stability of employment, and other relevant information concerning the customer. In granting the loan, the Company takes a security interest in real or personal property of the borrower. In making direct cash loans, emphasis is placed upon the customer's ability to repay rather than upon the potential resale value of the underlying security. In making real estate and sales finance loans, however, more emphasis is placed upon the marketability and value of the underlying collateral. -5- The Company is in competition with several national and regional finance companies, as well as a variety of local finance companies in the communities which it serves. The Company competes effectively in the market place primarily based on its emphasis on customer service. The business of the Company consists mainly of the making of loans to salaried people and wage earners who depend on their earnings to make their repayments. The continued profitable operation of the Company will therefore depend to a large extent on the continued employment of these people and their ability to meet their obligations as they become due. In the event of a sustained recession or a significant downturn in business with consequent unemployment, the Company's collection ratios and profitability could be detrimentally affected. The average annual yield on loans made by the Company (the % of finance charges earned to average net outstanding balance) has been as follows: Year Ended December 31 ----------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Direct Cash Loans. . . . . 31.26% 31.76% 31.81% 31.87% 32.55% Real Estate Loans. . . . . 22.73 24.37 22.70 23.42 23.70 Sales Finance Contracts. . 22.28 21.27 20.47 20.66 20.94 Information regarding the Company's operations: As of December 31 ------------------------------------------ 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Number of Branch Offices. . 128 117 112 102 85 Number of Employees . . . . 527 473 456 390 346 Average Total Loans Outstanding Per Branch ( in 000's). . . $1,208 $1,202 $1,124 $1,037 $1,041 Average Number of Loans Outstanding Per Branch. 765 814 778 761 772 -6- DESCRIPTION OF LOANS Year Ended December 31 --------------------------------------------- 1995 1994 1993 1992 1991 DIRECT CASH LOANS: ---- ---- ---- ---- ---- - ------------------ Number of Loans Made to New Borrowers. . . . 25,840 26,616 24,978 23,479 17,779 Number of Loans Made to Former Borrowers . . 14,740 13,185 11,710 9,639 7,901 Number of Loans Made to Present Borrowers. . 61,304 60,014 54,311 44,866 37,708 Total Number of Loans Made. . . . . . . . . . 101,884 99,815 90,999 77,984 63,388 Total Volume of Loans Made (in 000's) . . . . $164,034 $150,658 $127,103 $100,176 $ 77,111 Average Size of Loans Made. . . . . . . $ 1,610 $ 1,509 $ 1,397 $ 1,285 $ 1,216 Number of Loans Outstanding . . . . . . 76,549 72,993 66,209 57,458 47,489 Total of Loans Outstanding (in 000's). $107,960 $ 96,620 $ 82,595 $ 65,560 $ 51,027 Percent of Total Loans. . 70% 69% 66% 62% 58% Average Balance on Outstanding Loans . . . $ 1,410 $ 1,324 $ 1,247 $ 1,141 $ 1,075 REAL ESTATE LOANS: - ------------------ Total Number of Loans Made. . . . . . . . . . 2,674 2,264 2,315 1,886 3,345 Total Volume of Loans Made (in 000's) . . . . $ 22,379 $ 18,755 $ 20,330 $ 15,366 $ 15,693 Average Size of Loans Made. . . . . . . $ 8,369 $ 8,284 $ 8,782 $ 8,147 $ 4,692 Number of Loans Outstanding . . . . . . 4,188 3,811 3,930 3,796 3,836 Total of Loans Outstanding (in 000's). $ 32,653 $ 29,150 $ 30,174 $ 28,171 $ 28,388 Percent of Total Loans. . 21% 21% 24% 27% 32% Average Balance on Outstanding Loans . . . $ 7,797 $ 7,649 $ 7,678 $ 7,421 $ 7,401 SALES FINANCE CONTRACTS: - ----------------------- Number of Contracts Purchased . . . . . . . 19,195 21,744 20,726 20,507 17,463 Total Volume of Contracts Purchased (in 000's). . $ 18,885 $ 20,489 $18,770 $17,512 $13,160 Average Size of Contracts Purchased . . . . . . . $ 984 $ 942 $ 906 $ 854 $ 754 Number of Contracts Outstanding . . . . . . 17,151 18,395 17,020 16,405 14,303 Total of Contracts Outstanding (in 000's). $ 13,955 $ 14,806 $13,099 $12,053 $ 9,096 Percent of Total Loans. . 9% 10% 10% 11% 10% Average Balance on Outstanding Contracts . $ 814 $ 805 $ 770 $ 735 $ 636 -7- LOANS ACQUIRED, LIQUIDATED AND OUTSTANDING Year Ended December 31 ------------------------------------------------ 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (in thousands) LOANS ACQUIRED DIRECT CASH LOANS . . . . $164,034 $150,217 $127,084 $ 98,488 $ 74,672 REAL ESTATE LOANS . . . . 22,000 17,916 19,485 13,779 11,195 SALES FINANCE CONTRACTS . 17,676 19,386 17,759 15,814 11,694 NET BULK PURCHASES. . . . 1,588 2,383 1,875 4,973 8,403 -------- -------- -------- -------- -------- TOTAL LOANS ACQUIRED. . . $205,298 $189,902 $166,203 $133,054 $105,964 ======== ======== ======== ======== ======== LOANS LIQUIDATED DIRECT CASH LOANS . . . . $152,694 $136,633 $110,068 $ 85,643 $ 71,602 REAL ESTATE LOANS . . . . 18,876 19,779 18,327 15,583 13,699 SALES FINANCE CONTRACTS . 19,736 18,782 17,724 14,555 11,808 -------- -------- -------- -------- -------- TOTAL LOANS LIQUIDATED. . $191,306 $175,194 $146,119 $115,781 $ 97,109 ======== ======== ======== ======== ======== LOANS OUTSTANDING DIRECT CASH LOANS . . . . $107,960 $ 96,620 $ 82,595 $ 65,560 $ 51,027 REAL ESTATE LOANS . . . . 32,653 29,150 30,174 28,171 28,388 SALES FINANCE CONTRACTS . 13,955 14,806 13,099 12,053 9,096 -------- -------- -------- -------- -------- TOTAL LOANS OUTSTANDING . $154,568 $140,576 $125,868 $105,784 $ 88,511 ======== ======== ======== ======== ======== UNEARNED FINANCE CHARGES DIRECT CASH LOANS . . . . $ 17,030 $ 16,114 $ 14,125 $ 10.959 $ 8,340 REAL ESTATE LOANS . . . . 12 43 65 133 176 SALES FINANCE CONTRACTS . 2,007 2,140 1,832 1,691 1,212 -------- -------- -------- -------- -------- TOTAL UNEARNED FINANCE CHARGES. . . . $ 19,049 $ 18,297 $ 16,022 $ 12,783 $ 9,728 ======== ======== ======== ======== ======== -8- DELINQUENCIES Delinquent accounts are classified at the end of each month according to the number of installments past due at that time based on the original or extended terms of the contract. When 80% of an installment has been paid, it is not considered delinquent for the purpose of this classification. When three installments are past due, the account is classified as being 60-89 days past due; when four or more installments are past due the account is classified as being 90 days or more past due. The table below shows the amount of certain classifications of delinquencies and the ratio such delinquencies bear to related outstanding loans. As of December 31 ------------------------------------------ 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (in thousands, except % data) DIRECT CASH LOANS: 60-89 Days Past Due. . . . . $1,914 $1,353 $1,120 $ 850 $ 819 Percentage of Outstanding. . 1.77% 1.40% 1.36% 1.30% 1.61% 90 Days or More Past Due . . $3,286 $2,482 $1,781 $1,524 $1,643 Percentage of Outstanding. . 3.04% 2.57% 2.16% 2.32% 3.22% REAL ESTATE LOANS: 60-89 Days Past Due. . . . . $ 254 $ 299 $ 439 $ 364 $ 627 Percentage of Outstanding. . 78% 1.03% 1.46% 1.29% 2.21% 90 Days or More Past Due . . $1,196 $ 919 $1,206 $1,551 $1,796 Percentage of Outstanding. . 3.66% 3.15% 4.00% 5.51% 6.33% SALES FINANCE CONTRACTS: 60-89 Days Past Due. . . . . $ 295 $ 281 $ 195 $ 165 $ 140 Percentage of Outstanding. . 2.11% 1.90% 1.49% 1.37% 1.54% 90 Days or More Past Due . . $ 463 $ 293 $ 298 $ 265 $ 261 Percentage of Outstanding. . 3.32% 1.98% 2.27% 2.20% 2.87% -9- LOSS EXPERIENCE Net losses (charge-offs less recoveries) and their percentage to the average net loans (loans less unearned finance charges) and to the liquidations (payments, refunds, renewals and charge-offs of customer's loans) are shown in the following table: Year Ended December 31 ----------------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (in thousands, except % data) DIRECT CASH LOANS Average Net Loans . . $ 82,847 $ 72,298 $ 58,538 $ 46,026 $ 38,786 Liquidations. . . . . $ 152,694 $ 136,633 $ 110,068 $ 85,643 $ 71,602 Net Losses. . . . $ 3,753 $ 2,475 $ 1,582 $ 1,388 $ 1,788 Net Losses as % of Average Net Loans . 4.53% 3.42% 2.70% 3.02% 4.61% Net Losses as % of Liquidations. . . . 2.46% 1.81% 1.44% 1.62% 2.50% REAL ESTATE LOANS Average Net Loans . . $ 31,050 $ 29,889 $ 29,608 $ 28,124 $ 27,235 Liquidations. . . . . $ 18,876 $ 19,779 $ 18,327 $ 15,583 $ 13,699 Net Losses. . . . . . $ 22 $ 43 $ 20 $ 7 $ 63 Net Losses as % of Average Net Loans . .07% .14% .07% .02% .23% Net Losses as % of Liquidations. . . . .12% .22% .11% .04% .46% SALES FINANCE CONTRACTS Average Net Loans . . $ 12,377 $ 11,623 $ 10,984 $ 8,833 $ 7,274 Liquidations. . . . . $ 19,736 $ 18,782 $ 17,724 $ 14,555 $ 11,808 Net Losses. . . . . . $ 434 $ 353 $ 272 $ 196 $ 223 Net Losses as % of Average Net Loans . 3.51% 3.04% 2.48% 2.22% 3.06% Net Losses as % of Liquidations. . . . 2.20% 1.88% 1.53% 1.35% 1.89% ALLOWANCE FOR LOAN LOSSES The Allowance for Loan Losses is determined based on the Company's previous loss experience, a review of specifically identified potentially uncollectible loans and management's evaluation of the inherent risks and change in the composition of the Company's loan portfolio. Such allowance is, in the opinion of management, sufficient to provide adequate protection against possible loan losses on the current loan portfolio. The allowance is maintained out of income except in the case of bulk purchases when it is provided in the allocation of the purchase price. -10- CREDIT INSURANCE When authorized to do so by the borrowers, the Company writes life, accident and health, property and automobile insurance in connection with its loans. Non-filing insurance is written on direct cash loans where the security instrument is not recorded. The Company writes such insurance as an agent for a non-affiliated insurance company. Frandisco Life Insurance Company and Frandisco Property and Casualty Insurance Company, wholly owned subsidiaries of the Company, reinsure the insurance written from the non-affiliated insurance company. REGULATION AND SUPERVISION In Georgia, direct cash loans of less than $3,000 in principal amount are made under the Georgia Industrial Loan Act. Direct cash loans in excess of $3,000 and the larger first and second mortgage real estate loans are not subject to the Georgia Industrial Loan Act and the rates are negotiable subject to State Usury Laws. First and second mortgage real estate loans are made in compliance with the Georgia Residential Mortgage Act. Sales finance contracts are made under the Georgia Retail Installment and Home Solicitation Sales Act. All loans and sales finance contracts in South Carolina are made under the South Carolina Consumer Protection Code. Rates are negotiable. Maximum rates are filed with the Department of Consumer Affairs and posted in each location. In Alabama, direct cash loans of less than $750 in principal amount are made under the Alabama Small Loan Act. Direct cash loans in excess of $750 in principal amount are made under the Alabama Consumer Finance Law, with a negotiable rate allowed on loans in excess of $2,000 in principal amount. The larger first and second mortgage real estate loans are made under the Alabama Consumer Finance Law at a negotiable rate. Sales finance contracts are made under the Alabama Consumer Finance Law. State laws require that each office in which a small loan business is conducted be licensed by the state. Georgia law also requires a license for conducting mortgage loan business in the state. The granting of a license depends on the financial responsibility, character and fitness of the applicant, and where applicable, the applicant must show finding of a need through convenience and advantage documentation. As a condition to obtaining such license, the applicant must consent to state regulation and examination and to the making of periodic reports to the appropriate governing agencies. Licenses are revocable for cause, and their continuance depends upon compliance with the law and regulations issued pursuant thereto. The Company has never had any of its licenses revoked. All lending operations are carried on under the provisions of the Federal Consumer Credit Protection Act ("Truth-in-Lending Act"), the Fair Credit Reporting Act and the Federal Real Estate Settlement Procedures Act. The Truth-in-Lending Act requires disclosure to the customer of the finance charge, the annual percentage rate, the total of payments and other information on all loans. On real estate secured loans, the Truth-in-Lending Act requires that customers be provided a three-day right of rescission and certain disclosures. A Federal Trade Commission ruling prevents the Company and other consumer lenders from using household goods as collateral on direct cash loans. The Company collateralizes such loans with non-household goods such as automobiles, boats and other exempt items. The Company is also subject to state regulations governing insurance agents in the states in which it sells credit insurance. State insurance regulations require that insurance agents be licensed and limit the premium amount charged for such insurance. -11- SOURCE OF FUNDS The sources of the Company's funds stated as a % of total liabilities and stockholder's equity and the number of persons investing in the Company's debt securities is as follows: Year Ended December 31 ------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Bank Borrowings . . . . . . -% 1% 10% 12% 14% Public Senior Debt. . . . . 52 48 39 33 25 Public Subordinated Debt. . 17 16 17 20 25 Other Liabilities . . . . . 5 5 6 8 8 Stockholder's Equity. . . . 26 30 28 28 28 --- --- --- --- --- Total. . . . . . . . 100% 100% 100% 100% 100% Number of Investors . . . . 5,925 5,486 4,400 4,195 3,964 All of the Company's outstanding common stock is held by five related individuals and is not traded in an established public trading market. The Company's average interest rate on borrowings, computed by dividing the interest paid by the average indebtedness outstanding, has been as follows: Year Ended December 31 --------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Senior Borrowings . . . . 6.97% 6.26% 6.24% 6.52% 8.09% Subordinated Borrowings . 6.92 6.14 6.37 7.25 8.43 All Borrowings. . . . . . 6.96 6.25 6.29 6.82 8.24 The Company's financial ratios relating to debt are as follows: At December 31 --------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Total Liabilities to Stockholder's Equity. . 2.81 2.36 2.57 2.68 2.64 Unsubordinated Debt to Subordinated Debt plus Stockholder's Equity. . 1.32 1.19 1.23 1.11 .90 -12- MANAGEMENT'S DISCUSSION OF OPERATIONS Financial Condition: - ------------------- Total assets of the Company grew $45.6 million (33%) during 1995 and gross revenues reached a record $55.2 million. Although gross revenues achieved a record amount, net earnings declined $.7 million (9%) mainly due to increases in interest expense and other operating expenses. Expansion of the Company's operations continued during the year with the opening of eleven new branch offices, bringing the total number of branches to 128. The predominate area of growth in assets occurred in the Company's cash position. Cash generated from increases in sales of the Company's debt securities and increases in loan payments created $23.8 million (356% increase) in surplus cash reserves during the period. The Company has not been able to absorb these funds into the loan operations at the same level as the funds have been generated, therefore Management has placed the funds in short-term investments. Increases in funds invested by the Company's insurance subsidiaries resulted in the Company's investment portfolio increasing $9.0 million (68%) during 1995. The Company's investment portfolio consists mainly of U.S. Treasury bonds, Government Agency bonds and various Georgia municipal bonds. Management has designated a significant portion of these investment securities as "available for sale" with any unrealized gain or loss accounted for in the Company's equity section, net of deferred taxes. Improved bond market values during the current year also contributed to the increase in the investment portfolio. Volatility in bond market values during 1994 resulted in a $.9 million decrease, net of deferred taxes, in the portfolio's fair market value during that year. The remainder of the investment portfolio represents securities carried at amortized cost and designated "held to maturity," as Management has both the ability and intent to hold these securities to maturity. Average net outstanding receivables (gross receivables less unearned finance charges) increased $12.5 million (11%) to $126.3 at December 31, 1995 from $113.8 at December 31, 1994 due to increases in consumer loan demand. The expansion of operations during the last two years has allowed the Company to penetrate new market areas that have also contributed to the increase in average net receivables. The aforementioned increase in sales of the Company's public debt securities caused senior debt and subordinated debt to increase $37.9 million (43%) during the year just ended as compared to the prior year. Net Interest Income: - ------------------- The Company's net interest margin (the margin between the amount the Company earns on loans and investments and the amount the Company pays on securities and other borrowings) increased $2.0 million (7%) during 1995 as compared to 1994 and $4.7 million (20%) during 1994 as compared to 1993. These increases in the margin spreads were primarily due to the interest income earned on the aforementioned higher levels of average net outstanding receivables and due to higher investment income. Interest expense had a major affect on the current year's margin as compared to the prior year. The higher levels of senior and subordinated debt outstanding caused interest expense to increase $2.5 million (45%) during 1995 as compared to 1994. Interest expense increased $.6 million (13%) during 1994 as compared to 1993. Higher average borrowing cost also contributed to the increase in interest expense. The Company's average borrowing cost increased to 6.99% during 1995 as compared to 6.36% during 1994. -13- Net Insurance Income: - -------------------- Net insurance income increased $1.2 million (10%) and $1.5 million (15%) during the comparable periods mainly due to the aforementioned increase in average net receivables. Changes in net insurance income generally correspond to changes in the level of average net outstanding receivables. As average net receivables increase, the Company typically sees an increase in the number of loan customers requesting credit insurance, thereby leading to higher levels of insurance in-force. Higher levels of insurance in-force results in higher insurance income. Premium rates charged on the credit insurance offered by the Company, as agent for a non-affiliated insurance company, are governed by the insurance departments in the various states in which the Company operates. Rate reductions and term restrictions adopted by some states on various credit insurance products during the last two years have affected the Company's insurance income. These rate reductions and term restrictions were significant factors in the current year's percentage increase in insurance income being lower than the prior year's. Provision for Loan Losses: - ------------------------- Increases in bankruptcy filings continue to have a negative impact on the Company's operating results. Bankruptcies were a dominant factor in the $1.3 million increase in net charge-offs during the year just ended as compared to the prior year and the $1.0 million increase during 1994 as compared to 1993. The increases in net charge-offs in turn led to the $1.3 million (43%) and $.8 million (35%) increase in the Company's Provision for Loan Losses during the two years ended December 31, 1995 and 1994, respectively. Higher levels of average net receivables also contributed to the increases. Other Operating Expenses: - ------------------------ General operating expenses increased $3.2 million (12%) and $3.4 million (14%) during 1995 and 1994, respectively, mainly because of increases in personnel expense and other miscellaneous expenses. Additional employees hired to staff the sixteen new branch offices opened during the last two years and increases in employee compensation based on cost-of-living and/or merit salary raises caused Personnel Expense to increase $1.2 million (7%) and $1.9 million (14%) during 1995 and 1994, respectively. Increases in other accrued employee benefits also contributed to the increase in Personnel Expense. Increases in advertising expenses, computer expenses, collection expenses, legal and audit expenses, supervision expenses, taxes and licenses, postage and supplies caused other expenses to increase $1.8 million (26%) during 1995 and $1.1 million (18%) during 1994. Legal expenses incurred with the Alabama lawsuits (see liquidity section) were also significant factors in the 1995 increase in other expenses.. Income Taxes: - ------------ Effective income tax rates for the years ended December 31, 1995, 1994 and 1993 were 27.5%, 30.6% and 29.2%, respectively. Certain tax benefits provided by law to life insurance companies substantially reduce the life insurance subsidiary's effective tax rate and thus decreases the Company's overall tax rate below statutory rates. The increase in the effective rate for 1994 was mainly due to the Company and its property insurance subsidiary, which are taxed at higher rates, earning a larger portion of the pretax income as compared to 1993. -14- Liquidity: - --------- Liquidity is the ability of the Company to meet short-term financial obligations, either through the collection of receivables or by generating additional funds through liability management. Continued liquidity of the Company is therefore dependent on the collection of its receivables and the sale of debt securities that meet the investment requirements of the public and the continued availability of unused bank credit from its lenders. The previously discussed increases in net cash flows during the current year provided a positive effect on liquidity. Most of the Company's loan portfolio is financed through public debt securities which, because of redemption features, have a shorter average maturity than the loan portfolio. The difference in maturities may adversely affect liquidity if the Company does not continue to sell debt securities at interest rates and terms that are responsive to the demands of the marketplace or maintain sufficient unused bank borrowings. In addition to the debt securities program, the Company has two external sources of funds through the use of two Credit Agreements. One agreement provides for available borrowings of $21.0 million. Available borrowings were $21.0 million and $20.6 million at December 31, 1995 and 1994, respectively, relating to this agreement. The Company has an additional $2.0 million credit agreement (all of which was available at December 31, 1995 and 1994) for general operating purposes. Liquidity was not adversely affected by delinquent accounts even though the percentage of outstanding receivables 60 days or more past due increased to 4.8% of receivables at December 31, 1995 from 4.0% at December 31, 1994. The litigious legal environment in the State of Alabama continues to be a challenge for the Company. Various legal proceedings are pending against the Company in Alabama alleging different violations of Alabama consumer lending laws and violations in connection with the sale of credit insurance and loan refinancing. During the year, the Company reached settlement agreements with certain borrowers who had previously asserted claims or had stated their intention to file claims against the Company. Although the Company and its employees deny that they are guilty of any wrongdoing or any breach of any legal obligation or duty to the claimants, in recognition of the expense and uncertainty of litigation, Management felt it was in the best interest of the Company to dispose of these cases. All remaining actions are still in their early stages and their outcome is not determinable. The financial condition and operating results of the Company could be materially affected in the event of an unfavorable outcome. However, Management believes that the Company's Alabama operations are in compliance with applicable regulations and that the actions are without merit. The Company is diligently contesting the remaining complaints. Beginning January 1, 1995, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 114 -- "Accounting by Creditors for Impairment of a Loan," subsequently amended by SFAS No. 118 -- "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures". These standards require that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, at the loan's observable market price, or at the fair value of the collateral if the loan is collateral dependent. The adoption of these two accounting pronouncements did not have a material impact on the Company's financial condition or results of operations. Management continues to explore and evaluate potential new market areas as part of its expansion plans. The Company plans to open six to ten new offices during 1996. These openings will not have an adverse affect on liquidity. -15- 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- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO 1st FRANKLIN FINANCIAL CORPORATION: We have audited the accompanying Consolidated Statements of Financial Position of 1ST FRANKLIN FINANCIAL CORPORATION (a Georgia corporation) AND SUBSIDIARIES as of December 31, 1995 and 1994, and the related Consolidated Statements of Income and Retained Earnings and Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of 1st Franklin Financial Corporation and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Atlanta, Georgia February 21, 1996 -17- 1st FRANKLIN FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF FINANCIAL POSITION DECEMBER 31, 1995 AND 1994 ASSETS 1995 1994 ------------ ------------ CASH AND CASH EQUIVALENTS: Cash and Due From Banks. . . . . . . . $ 1,453,244 $ 1,589,320 Short-term Investments, $300,000 in trust in 1995 and 1994 (Note 4) . . . . . . . . . 29,060,349 5,100,224 ------------ ------------ 30,513,593 6,689,544 ------------ ------------ LOANS (Note 2): Direct Cash Loans. . . . . . . . . . . 107,960,069 96,620,653 First Mortgage Real Estate Loans . . . 25,738,140 23,385,188 Second Mortgage Real Estate Loans. . . 6,914,255 5,764,579 Sales Finance Contracts. . . . . . . . 13,955,296 14,805,644 ------------ ------------ 154,567,760 140,576,064 Less: Unearned Finance Charges . . . . 19,049,034 18,296,608 Unearned Insurance Premiums and Commissions. . . . . . . 10,244,033 9,542,400 Allowance for Loan Losses. . . . 4,511,826 4,069,881 ------------ ------------ Net Loans . . . . . . . . 120,762,867 108,667,175 ------------ ------------ MARKETABLE DEBT SECURITIES (Note 3): Available for Sale, at fair market value . . . . . . . . . 17,194,375 12,651,527 Held to Maturity, at amortized cost. . 5,186,492 697,144 ------------ ------------ 22,380,867 13,348,671 ------------ ------------ OTHER ASSETS: Land, Buildings, Equipment and Leasehold Improvements, less accumulated depreciation and amortization of $5,668,721 and $4,936,692 in 1995 and 1994, respectively (Note 5) . . . . . . . 2,828,801 2,798,250 Prepaid Income Taxes, net (Note 9) . . 1,763,108 1,746,241 Due from Nonaffiliated Insurance Company . . . . . . . . . 827,908 746,747 Miscellaneous. . . . . . . . . . . . . 3,006,844 2,471,629 ------------ ------------ 8,426,661 7,762,867 ------------ ------------ TOTAL ASSETS . . . . . . . . . . $182,083,988 $136,468,257 ============ ============ The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. -18- 1st FRANKLIN FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF FINANCIAL POSITION DECEMBER 31, 1995 AND 1994 LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994 ------------ ------------ SENIOR DEBT (Note 5): Senior Demand Notes, including accrued interest. . . . . . . . . . $ 42,304,779 $ 33,186,950 Commercial Paper. . . . . . . . . . . 52,944,123 32,774,577 Notes Payable to Banks. . . . . . . . 291,762 715,762 ------------ ------------ 95,540,664 66,677,289 ------------ ------------ ACCOUNTS PAYABLE AND ACCRUED EXPENSES. 8,179,506 7,582,833 ------------ ------------ SUBORDINATED DEBT (Note 6) . . . . . . 30,616,915 21,602,656 ------------ ------------ Total Liabilities . . . . . . . . . 134,337,085 95,862,778 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Note 7) STOCKHOLDERS' EQUITY: Common stock; par value $100 per share; 2,000 shares authorized; 1,700 shares outstanding. . . . . . 170,000 170,000 Net Unrealized Gains (Losses) on Investment Securities Available for Sale. . . . . . . . . 251,145 (693,457) Retained Earnings . . . . . . . . . . 47,325,758 41,128,936 ------------ ------------ Total Stockholders' Equity. . . . . 47,746,903 40,605,479 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. . . . . . . . $182,083,988 $136,468,257 ============ ============ The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. -19- 1st FRANKLIN FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 1995 1994 1993 ------------ ------------ ------------ INTEREST INCOME: Finance Charges. . . . . . . . $ 35,713,283 $ 32,718,152 $ 27,589,389 Investment Income. . . . . . . 2,481,604 949,404 769,959 ------------ ------------ ------------ 38,194,887 33,667,556 28,359,348 ------------ ------------ ------------ INTEREST EXPENSE: Senior Debt. . . . . . . . . . 5,915,519 4,057,682 3,282,791 Subordinated Debt. . . . . . . 2,132,393 1,498,616 1,627,662 ------------ ------------ ------------ 8,047,912 5,556,298 4,910,453 ------------ ------------ ------------ NET INTEREST INCOME. . . . . . . 30,146,975 28,111,258 23,448,895 PROVISION FOR LOAN LOSSES (Note 2) . . . . . 4,630,853 3,238,479 2,406,512 ------------ ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES. . . 25,516,122 24,872,779 21,042,383 ------------ ------------ ------------ NET INSURANCE INCOME: Premiums and Commissions . . . 16,533,388 15,262,466 12,893,679 Insurance Claims and Expenses. (3,584,222) (3,518,988) (2,649,444) ------------ ------------ ------------ 12,949,166 11,743,478 10,244,235 ------------ ------------ ------------ OTHER REVENUE (Note 8) . . . . . 428,959 404,477 371,734 ------------ ------------ ------------ OPERATING EXPENSES (Note 8): Personnel Expense. . . . . . . 17,299,383 16,147,362 14,207,265 Occupancy Expense. . . . . . . 3,981,624 3,705,288 3,336,025 Other Expense. . . . . . . . . 8,644,323 6,849,283 5,793,011 ------------ ------------ ------------ 29,925,330 26,701,933 23,336,301 ------------ ------------ ------------ INCOME BEFORE INCOME TAXES . . . 8,968,917 10,318,801 8,322,051 PROVISION FOR INCOME TAXES (Note 9). . . . . 2,462,307 3,154,184 2,431,373 ------------ ------------ ------------ NET INCOME . . . . . . . . . . . 6,506,610 7,164,617 5,890,678 RETAINED EARNINGS, beginning . . 41,128,936 34,220,868 28,548,219 Dividends on Common Stock. . . (309,788) (256,549) (218,029) ------------ ------------ ------------ RETAINED EARNINGS, ending. . . . $ 47,325,758 $ 41,128,936 $ 34,220,868 ============ ============ ============ EARNINGS PER SHARE (1,700 shares outstanding all years) . . . . $3,827.42 $4,214.48 $3,465.10 ========= ========= ========= The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. -20- 1st FRANKLIN FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 Increase (Decrease) in Cash and Cash Equivalents 1995 1994 1993 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . $ 6,506,610 $ 7,164,617 $ 5,890,678 Adjustments to reconcile net income to net cash provided by operating activities: Provision for Loan Losses. . . . . 4,630,853 3,238,479 2,406,512 Depreciation and Amortization. . . 1,074,992 994,896 922,132 Prepaid Income Taxes . . . . . . . (275,826) (10,925) (321,968) Gain on sale of marketable securities and equipment. . . . . (86,366) (47,754) (234,507) Increase in Miscellaneous Assets . (616,373) (95,653) (189,214) Increase (Decrease) in Other Liabilities . . . . . . . . 596,673 13,737 (248,172) ------------ ------------ ------------ Net Cash Provided. . . . . 11,830,563 11,257,397 8,225,461 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Loans originated or purchased. . . (104,735,608) (96,816,742) (85,431,146) Loan payments. . . . . . . . . . . 88,009,063 82,396,258 68,359,815 Purchases of marketable securities (8,981,373) (2,162,283) (11,543,876) Sales of marketable securities . . 510,000 103,897 6,151,337 Redemptions of marketable securities 725,000 300,000 300,000 Principal payments on marketable securities . . . . . . -- -- 47,660 Capital expenditures . . . . . . . (1,159,373) (851,351) (806,101) Proceeds from sale of equipment. . 57,931 25,568 25,395 ------------ ------------ ------------ Net Cash Used. . . . . . . (25,574,360) (17,004,653) (22,896,916) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in Notes Payable to Banks and Senior Demand Notes. . 8,693,829 (5,497,262) 5,497,844 Commercial Paper issued. . . . . . 44,230,224 24,041,798 12,038,076 Commercial Paper redeemed. . . . . (24,060,678) (12,406,886) (4,818,161) Subordinated Debt issued . . . . . 12,877,336 5,175,292 4,843,874 Subordinated Debt redeemed . . . . (3,863,077) (4,447,341) (5,423,774) Dividends Paid . . . . . . . . . . ( 309,788) (256,549) (218,029) ------------ ------------ ----------- Net Cash Provided . . . . 37,567,846 6,609,052 11,919,830 ------------ ------------ ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . 23,824,049 861,796 (2,751,625) CASH AND CASH EQUIVALENTS, beginning 6,689,544 5,827,748 8,579,373 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, ending. $ 30,513,593 $ 6,689,544 $ 5,827,748 ============ ============ ============ Cash paid during the year for: Interest . . . . . . . . $ 7,965,756 $ 5,488,335 $ 4,875,340 Income Taxes . . . . . . $ 2,682,221 $ 3,301,461 $ 2,490,673 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. -21- 1st FRANKLIN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business: 1st Franklin Financial Corporation (the "Company") is a consumer finance company which acquires and services direct cash loans, real estate loans and sales finance contracts through 128 branch offices. Effective December 31, 1994, 1st Franklin Corporation (the "Parent") was merged into the Company, with the Company being the surviving corporation. The merger was accounted for as a downstream pooling transaction and was done to increase corporate efficiency and eliminate unnecessary corporate entities. Prior to the merger the Company was a wholly owned subsidiary of the Parent. All financial data for prior years have been restated to reflect results of the merger. Basis of Consolidation: The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Fair Values of Financial Instruments: Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" ("FAS 107") requires the disclosure of estimated fair values of all asset, liability and off-balance sheet financial instruments. FAS 107 also allows the disclosure of estimated fair values of non-financial instruments. Fair value estimates under FAS 107 are determined as of a specific point in time utilizing various assumptions and estimates. The following methods and assumptions are used by the Company in estimating its fair value disclosures for financial instruments: Cash and Cash Equivalents. The carrying value of cash and cash equivalents approximates fair value due to the relatively short period of time between the origination of the instruments and their expected realization. Loans. The fair value of the Company's direct cash loans and sales finance contracts have been reported at book value since the estimated life, assuming prepayments, is short-term in nature. The fair value of the Company's real estate loans have been reported at book value since the rate charged by the Company approximates market. Marketable Debt Securities. The fair values for marketable debt securities are based on quoted market prices. If a quoted market price is not available, fair value is estimated using market prices for similar securities. See Note 3 for the fair value of marketable debt securities. Senior Debt. The carrying value of the Company's senior debt approximates fair value due the relatively short period of time between the origination of the instruments and their expected payment. Subordinated Debt. The carrying value of the Company's subordinated debt approximates fair value due to the repricing frequency of the debt. Other significant assets and liabilities, which are not considered assets or liabilities and for which fair values have not been estimated, include premise and equipment and deferred taxes. -22- Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary from these estimates, however, in the opinion of Management, such variances would not be material. Loans: Statement of Financial Accounting Standards ("SFAS") No. 114 -- "Accounting by Creditors for Impairment of a Loan", subsequently amended by SFAS No. 118 -- "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures", requires impaired loans to be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, at the loan's observable market price, or at the fair value of the collateral if the loan is collateral dependent. These two accounting pronouncements were adopted on a prospective basis on January 1, 1995. Because a substantial portion of the Company's receivables are smaller- balance homogenous loans, these pronouncements did not have a material impact on the Company's financial condition or results of operations. Income Recognition: Although generally accepted accounting principles require other methods to be used for income recognition, the Company uses the Rule of 78's method to recognize interest and insurance income on loans which have precomputed charges. Since the majority of these loans are paid off or renewed in less than one year and because the interest and insurance charges are contractually rebated using the Rule of 78's method, the results obtained by using the Rule of 78's closely approximate those that would be obtained if other generally accepted methods were used. Finance charges are precomputed and included in the gross amount of all direct cash loans, sales finance contracts and certain real estate loans. These precomputed charges are deferred and recognized as income on an accrual basis using the Rule of 78's (which approximates the interest method). Finance charges on the other real estate loans are recognized as income on a simple interest accrual basis. Income is not accrued on a loan that is more than 60 days past due. When material, the Company defers loan fees and recognizes them as an adjustment to yield over the contractual life of the related loan. The Company's method of accounting for such fees does not materially differ from generally accepted accounting principles for such fees. The property and casualty credit insurance policies written by the Company are reinsured by the property insurance subsidiary. The premiums are deferred and earned on a Rule of 78's basis (which approximates the pro-rata method). The credit life and accident and health policies written by the Company are reinsured by the life insurance subsidiary. The premiums are deferred and earned using the pro-rata method for level-term life policies, the Rule of 78's (which approximates the pro-rata method) for decreasing-term life policies and an average of the pro-rata method and Rule of 78's for accident and health policies. Claims of the insurance subsidiaries are expensed as incurred and reserves are established for incurred but not reported (IBNR) claims. Policy acquisition costs of the insurance subsidiaries are deferred and amortized to expense over the life of the policies on the same methods used to recognize premium income. Depreciation and Amortization: Office machines, equipment and company automobiles are recorded at cost and depreciated on a straight-line basis over a period of three to ten years. Leasehold improvements are amortized over seven years using the double declining method for book and tax. -23- Income Taxes: The Company and its insurance subsidiaries have certain temporary differences between reported income and expenses for financial statement purposes and for income tax purposes. Deferred income taxes are provided where applicable. Collateral Held for Resale: When the Company takes possession of the collateral which secures a loan, the collateral is recorded at the lower of its estimated resale value or the loan balance. Any losses incurred at that time are charged against the Allowance for Loan Losses. Bulk Purchases: A bulk purchase is a group of loans purchased by the Company from another lender. Bulk purchases are recorded at the outstanding loan balance and an allowance for losses is established in accordance with management's evaluation of the specific loans purchased and their comparability to similar type loans in the Company's existing portfolio. For loans with precomputed charges, unearned finance charges are also recorded based on the Rule of 78's (which approximates the interest method). Any difference between the purchase price of the loans and their net balance (outstanding balance less allowance for losses and unearned finance charges) is amortized or accreted to income over the average life of the loans purchased. Marketable Debt Securities: Management has designated a significant portion of the marketable debt securities held in the Company's investment portfolio at December 31, 1995 and 1994 as being available-for-sale. This portion of the investment portfolio is reported at fair market value with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders' equity, net of taxes. The remainder of the investment portfolio is carried at amortized cost and designated as held-to-maturity as Management has both the ability and intent to hold these securities to maturity. 2. LOANS There were $7,408,981 and $5,097,961 of loans in a non-accrual status at December 31, 1995 and 1994, respectively. Contractual Maturities of Loans: An estimate of contractual maturities stated as a percentage of the loan balances based upon an analysis of the Company's portfolio as of December 31, 1995 is as follows: 1st Mortgage 2nd Mortgage Sales Due In Direct Cash Real Estate Real Estate Finance Calendar Year Loans Loans Loans Contracts ------------ ----------- ------------ ------------ --------- 1996. . . . . . 71.35% 17.69% 15.97% 72.11% 1997. . . . . . 25.38 17.93 17.58 21.97 1998. . . . . . 2.70 16.32 18.03 5.09 1999. . . . . . .34 13.10 14.88 .64 2000. . . . . . .09 9.56 11.24 .19 2001 & later. . .14 25.40 22.30 -- ------ ------ ------ ------ 100.00% 100.00% 100.00% 100.00% ====== ====== ====== ====== Experience of the Company has shown that a majority of its loans will be renewed many months prior to their final contractual maturity dates. Accordingly, the above contractual maturities should not be regarded as a forecast of future cash collections. -24- Cash Collections on Principal: During the years ended December 31, 1995 and 1994, cash collections applied to principal of loans totaled $88,009,063 and $82,396,258, respectively, and the ratios of these cash collections to average net receivables were 69.70% and 72.40%, respectively. Allowance for Loan Losses: The Allowance for Loan Losses is based on the Company's previous loss experience, a review of specifically identified potentially uncollectible loans and Management's evaluation of the inherent risks and changes in the composition of the Company's loan portfolio. Such allowance is, in the opinion of management, sufficient to provide adequate protection against possible losses in the current loan portfolio. When a loan becomes five installments past due, it is charged off unless management directs that it be retained as an active loan. In making this charge off evaluation, no installment is counted as being past due if at least 80% of the contractual payment has been paid. The amount charged off is the unpaid balance less the unearned finance charges and the unearned insurance premiums. An analysis of the allowance for the years ended December 31, 1995, 1994 and 1993 is shown in the following table: 1995 1994 1993 ---- ---- ---- Beginning Balance . . . . . . . $4,069,881 $3,653,121 $3,091,983 Provision for Loan Losses . . 4,630,853 3,238,479 2,406,512 Bulk Purchase Accounts. . . . 20,317 49,120 28,704 Charge-Offs . . . . . . . . . (5,085,216) (3,648,948) (2,523,801) Recoveries. . . . . . . . . . 875,991 778,109 649,723 ---------- ---------- ---------- Ending Balance. . . . . . . . . $4,511,826 $4,069,881 $3,653,121 ========== ========== ========== 3. MARKETABLE DEBT SECURITIES Debt securities available for sale are carried at estimated fair market value. The amortized cost and estimated fair market values of these debt securities are as follows: Gross Gross Estimated Amortized Unrealized Unrealized Fair Market Cost Gains Losses Value December 31, 1995: ----------- -------- ---------- ----------- U.S. Treasury Securities and obligations of U.S. government corporations and agencies . $ 7,872,928 $ 86,713 $ (2,481) $ 7,957,160 Obligations of states and political subdivisions. . . 8,467,242 233,751 (6,373) 8,694,620 Corporate Securities. . . . . 526,051 19,413 (2,869) 542,595 ----------- -------- --------- ----------- $16,866,221 $339,877 $ (11,723) $17,194,375 =========== ======== ========= =========== December 31, 1994: U.S. Treasury Securities and obligations of U.S. government corporations and agencies . $ 4,327,088 $ 1,193 $(375,154) $ 3,953,127 Obligations of states and political subdivisions. . . 8,673,401 -- (465,380) 8,208,021 Corporate Securities . . . . 526,441 690 (36,752) 490,379 ----------- -------- --------- ----------- $13,526,930 $ 1,883 $(877,286) $12,651,527 =========== ======== ========= =========== -25- Debt securities designated as "Held to Maturity" are carried at amortized cost based on Management's intent to hold such securities to maturity. The amortized cost and estimated fair market values of these debt securities are as follows: Gross Gross Estimated Amortized Unrealized Unrealized Fair Market Cost Gains Losses Value December 31, 1995: ----------- -------- ---------- ----------- U.S. Treasury Securities and obligations of U.S. government corporations and agencies . $ 4,731,712 $ 94,860 $ (2,666) $ 4,823,906 Obligations of states and political subdivisions. . . 454,780 17,197 -- 471,977 ----------- -------- --------- ----------- $ 5,186,492 $112,057 $ (2,666) $ 5,295,883 =========== ======== ========= =========== December 31, 1994: U.S. Treasury Securities and obligations of U.S. government corporations and agencies . $ 493,963 $ -- $ (5,368) $ 488,595 Obligations of states and political subdivisions. . . 203,181 4,359 -- 207,540 ----------- -------- --------- ---------- $ 697,144 $ 4,359 $ (5,368) $ 696,135 =========== ======== ========= ========== The amortized cost and estimated fair market values of marketable debt securities at December 31, 1995, by contractual maturity, are shown below: Available for Sale Held to Maturity ------------------------- ---------------------- Estimated Estimated Amortized Fair Market Amortized Fair Market Cost Value Cost Value ----------- ----------- ---------- ---------- Due in one year or less. . $ 952,662 $ 954,648 $ 493,895 $ 499,453 Due after one year through five years . . . 4,849,416 4,938,622 4,442,597 4,549,008 Due after five years through ten years. . . . 9,361,187 9,557,510 250,000 247,422 Due after ten years. . . . 1,702,956 1,743,595 -- -- ----------- ----------- ---------- ---------- $16,866,221 $17,194,375 $5,186,492 $5,295,883 =========== =========== ========== ========== Proceeds from sales of investments in debt securities available for sale during 1995 were $510,000. Gross gains of $16,240 and gross losses of $(-0-) were realized on these sales. Proceeds from sales of investments in debt securities available for sale during 1994 were $103,897. Gross gains of $6,630 and gross losses of $(-0-) were realized on these sales. 4. PLEDGED ASSETS At December 31, 1995, certain Short-term Investments of the insurance subsidiaries were on deposit with the Georgia Insurance Commissioner to meet the deposit requirements of Georgia insurance laws. -26- 5. SENIOR DEBT The Company has a Credit Agreement with four major banks which provides for maximum borrowings of $21,000,000. All borrowings are on an unsecured basis at 1/4% above the prime rate of interest. An annual facility fee is paid quarterly based on 5/8% of the available line less the average borrowings during the quarter. In addition, an agent fee equal to 1/8% per annum of the total loan commitment is paid quarterly. The Credit Agreement has a termination date of December 31, 1999. The banks may, however, terminate the agreement upon the violation of any of the financial ratio requirements or covenants contained in the agreement or in May of any calendar year if the financial condition of the Company becomes unsatisfactory to the banks. Such financial ratio requirements include a minimum equity requirement, an interest expense coverage ratio and a minimum debt to equity ratio. The Company has an additional Credit Agreement for $2,000,000 which is used for general operating purposes. This agreement provides for borrowings on an unsecured basis at 1/8% above the prime rate of interest and has termination date of July 1, 1996. A bank loan was entered into in 1986, which carries an interest rate of 70% of the prime rate of interest repayable in 180 monthly installments. This loan is collateralized by land and a building. The Senior Demand Notes are unsecured obligations which are payable on demand. The interest rate payable on any Senior Demand Note is a variable rate, compounded daily, established from time to time by the Company. Commercial Paper is issued by the Company in amounts in excess of $50,000, with maturities of less than 270 days and at negotiable interest rates. Additional data related to the Company's Senior Debt is as follows: Weighted Average Maximum Average Weighted Interest Amount Amount Average Year Ended Rate at end Outstanding Outstanding Interest Rate December 31 of Year During Year During Year During Year ----------- ------- ----------- ----------- ----------- (In thousands, except % data) 1995: ---- Bank. . . . . . . . . . 6.30% $ 716 $ 346 6.32% Senior Notes. . . . . . 5.92 47,068 37,661 6.14 Commercial Paper. . . . 6.80 57,175 46,022 7.50 All Categories. . . 6.41 96,006 84,029 6.89 1994: ---- Bank. . . . . . . . . . 7.41% $12,714 $ 4,966 6.56% Senior Notes. . . . . . 6.28 34,595 31,930 6.07 Commercial Paper. . . . 7.39 33,095 26,454 6.67 All Categories. . . 6.84 67,650 63,350 6.36 1993: ---- Bank. . . . . . . . . . 6.19% $13,061 $11,054 6.17% Senior Notes. . . . . . 6.02 26,967 23,602 6.03 Commercial Paper. . . . 6.49 21,270 17,729 6.50 All Categories. . . 6.22 60,540 52,385 6.22 -27- 6. SUBORDINATED DEBT The payment of the principal and interest on the subordinated debt is subordinate and junior in right of payment to all unsubordinated indebtedness of the Company. Subordinated debt consists of Variable Rate Subordinated Debentures which mature four years after date of issue. The maturity date is automatically extended for an additional four years unless the holder or the Company redeems the debenture on its original maturity date. The debentures have various minimum purchase amounts with varying interest rates and interest adjustment periods for each respective minimum purchase amount. Interest rates on the debentures are adjusted at the end of each adjustment period. The debentures may be redeemed by the holder at the applicable interest adjustment date without penalty. Redemptions at any other time are subject to an interest penalty. The Company may redeem the debentures for a price equal to 100% of the principal. Interest rate information on the Subordinated Debt at December 31 is as follows: Weighted Average Rate at Weighted Average Rate End of Year During Year ------------------------ --------------------- 1995 1994 1993 1995 1994 1993 ---- ---- ---- ---- ---- ---- 7.41% 6.54% 6.42% 7.28% 6.36% 6.63% Maturity information on the Company's Subordinated Debt at December 31, 1995 is as follows: Amount Maturing -------------------------------------- Based on Maturity Based on Interest Date Adjustment Period ----------------- ----------------- 1996 . . . . . . $ 3,233,032 $20,391,080 1997 . . . . . . 4,716,142 7,550,366 1998 . . . . . . 6,287,348 134,333 1999 . . . . . . 16,380,393 2,541,136 ----------- ----------- $30,616,915 $30,616,915 =========== =========== 7. COMMITMENTS AND CONTINGENCIES The Company's operations are carried on in locations which are occupied under lease agreements. The lease agreements usually provide for a lease term of five years with a renewal option for an additional five years. Rent expense was $1,346,606, $1,257,977 and $1,085,694 for the years ended December 31, 1995, 1994 and 1993, respectively. Under the existing noncancelable leases, the Company's minimum aggregate rental commitment at December 31, 1995, amounts to $1,297,295 for 1996, $1,043,107 for 1997, $808,402 for 1998, $505,686 for 1999, $295,309 for 2000 and $607,265 for the year 2001 and beyond. The total commitment is $4,557,064. The Company is defendant in several lawsuits arising in the course of its normal business activities in the state of Alabama. Each of the complaints seek compensatory and punitive damages. During the current year, the Company reached settlement agreements with certain borrowers who had -28- previously asserted claims or had stated their intention to file claims against the Company. All remaining actions are still in their early stages and their outcome currently is not determinable. Management is vigorously defending these actions. The financial condition and operating results of the Company could be materially affected in the event of an unfavorable outcome. However, Management believes that the Company's Alabama operations are in compliance with applicable regulations, and therefore that the suits are without merit and that the resolutions of the suits should not have a material effect on the Company. 8. RELATED PARTY TRANSACTIONS Beneficial owners of the Company are also beneficial owners of Liberty Bank & Trust ("Liberty"). The Company and Liberty have management and data processing agreements whereby the Company provides certain administrative and data processing services to Liberty for a fee. Income recorded by the Company in 1995, 1994 and 1993 related to these agreements was $63,800 each year, which in Management's opinion approximates the Company's actual cost of these services. Liberty leases its office space and equipment from the Company for $4,200 per month, which in Management's opinion is at a rate which approximates that obtainable from independent third parties. At December 31, 1995, the Company maintained $2,300,000 of certificates of deposit and $2,360 in a money market account with Liberty at market rates and terms. The Company also had $1,431,090 in demand deposits with Liberty at December 31, 1995. The Company leases a portion of its properties (see Note 7) for an aggregate of $13,250 per month from certain officers or stockholders. In Management's opinion, these leases are at rates which approximate those obtainable from independent third parties. 9. INCOME TAXES The Provision for Income Taxes for the years ended December 31, 1995, 1994 and 1993 is made up of the following components: 1995 1994 1993 ----------- ----------- ----------- Current - Federal . . . $ 2,481,300 $ 2,786,238 $ 2,393,351 Current - State . . . . 256,833 378,871 359,990 ----------- ----------- ----------- Total Current. . . . 2,738,133 3,165,109 2,753,341 ----------- ----------- ----------- Prepaid - Federal . . . (226,199) 38,652 (250,984) Prepaid - State . . . . (49,627) (49,577) (70,984) ----------- ----------- ----------- Total Prepaid. . . . (275,826) (10,925) (321,968) ----------- ----------- ----------- Total Provision. . $ 2,462,307 $ 3,154,184 $ 2,431,373 =========== =========== =========== -29- Temporary differences create deferred federal tax assets and liabilities which are detailed below for December 31, 1995 and 1994: Deferred Tax Assets (Liabilities) ------------------------- 1995 1994 ---- ---- Depreciation . . . . . . . . . . $ (113,895) $ (131,037) Provision for Loan Losses. . . . 1,701,311 1,521,999 Insurance Commissions. . . . . . (639,585) (565,330) Unearned Premium Reserves. . . . 616,758 576,141 Unrealized Gains (Losses) on Investment Securities. . . . . (77,009) 181,950 Other. . . . . . . . . . . . . . 275,528 162,518 ---------- ---------- $1,763,108 $1,746,241 ========== ========== The Company's effective tax rate for the years ended December 31, 1995, 1994 and 1993 is analyzed as follows: 1995 1994 1993 ---- ---- ---- Statutory Federal income tax rate . . 34.0% 34.0% 34.0% State income tax, net of Federal tax effect . . . . . . . . . . . . 1.5 2.1 2.3 Net tax effect of IRS regulations on life insurance subsidiary . . . (6.8) (4.9) (6.9) Other items . . . . . . . . . . . . . (1.2) ( .6) (.2) ---- ---- ---- Effective Tax Rate. . . . . . . 27.5% 30.6% 29.2% ==== ==== ==== -30- 1st FRANKLIN FINANCIAL CORPORATION ** A SALUTE TO THE CIRCLE OF DIAMONDS ** *********** PHOTO The Circle of Diamonds is named annually in recognition of the fifteen offices that earn the highest dollar amount of profit for the year. With 128 branches striving towards this goal, the Company salutes these 15 offices for their significant achievement. Congratulations to each staff member, manager and supervisor in these branches for an outstanding job: Douglas, Baxley, Jesup, Chatsworth, Gainesville, Moultrie, Hinesville, McDonough, Statesboro, Hazlehurst, Sylvania, Toccoa, Canton, Adel and Lavonia. -31- DIRECTORS AND MANAGEMENT Directors Principal Occupation, Has Served as a Name Title and Company Director Since ---- ----------------- -------------- W. Richard Acree President, Acree Oil Company, 1970 Toccoa, Georgia Ben F. Cheek, III Chairman of Board, 1967 1st Franklin Financial Corporation Lorene M. Cheek Housewife 1946 Jack D. Stovall President, 1983 Stovall Building Supplies, Inc. Robert E. Thompson Physician, Toccoa Clinic 1970 Executive Officers Served in this Name Position with Company Position Since ---- --------------------- -------------- Ben F. Cheek, III Chairman of Board 1989 T. Bruce Childs President 1989 Lynn E. Cox Secretary 1989 A. Roger Guimond Vice President and Chief Financial Officer 1991 Linda L. Sessa Treasurer 1989 CORPORATE INFORMATION Corporate Offices General Counsel Independent Accountants ----------------- --------------- ----------------------- P.O. Box 880 Jones, Day, Reavis & Pogue Arthur Andersen LLP 213 East Tugalo Street Atlanta, Georgia Atlanta, Georgia Toccoa, Georgia 30577 (706) 886-7571 Information Informational inquiries, including requests for a Prospectus describing the Company's current securities offering or the Form 10-K annual report filed with the Securities and Exchange Commission should be addressed to the Company's Secretary. -32- BACK COVER PAGE OF ANNUAL REPORT (A map showing the locations of the following offices:) 1st FRANKLIN FINANCIAL CORPORATION BRANCH OFFICES Alabama Offices: Georgia Offices: Georgia Offices: --------------- --------------- --------------- Alexander City Cartersville McRae Andalusia Cedartown Milledgeville Arab Chatsworth Monroe Athens Clarkesville Montezuma Bessemer Claxton Monticello Birmingham Clayton Moultrie Clanton Cleveland Nashville Cullman Cochran Newnan Decatur Commerce Perry Dothan Conyers Richmond Hill Enterprise Cordele Rome Florence Cornelia Royston Gadsden Covington Sandersville Huntsville Cumming Savannah Jasper Dallas Statesboro Opp Dalton Swainsboro Ozark Dawson Sylvania Prattville Douglas Sylvester Russellville Douglasville Thomaston Scottsboro Eastman Thomson Selma Elberton Tifton Sylacauga Ellijay Toccoa Troy Forsyth Valdosta Tuscaloosa Fort Valley Vidalia Gainesville Warner Robins Georgia Offices: Garden City Washington --------------- Georgetown Winder Adel Greensboro Albany Griffin South Carolina Offices: Alma Hartwell ---------------------- Americus Hawkinsville Aiken Athens Hazlehurst Anderson Barnesville Hinesville Cayce Baxley Hogansville Clemson Blakely Jackson Columbia Blue Ridge Jasper Easley Bremen Jefferson Gaffney Brunswick Jesup Greenwood Buford Lagrange Greenville Butler Lavonia Lancaster Cairo Lawrenceville Laurens Calhoun Madison Orangeburg Canton Manchester Seneca Carrollton McDonough Union York EX-21 6 EXHIBIT 21 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. EX-23 7 EXHIBIT 23 Exhibit 23 Consent of Independent Public Accountants As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statement File No. 33-56299. Arthur Andersen LLP Atlanta, Georgia March 29, 1996 EX-27 8 ART. 5 FDS FOR 1995 FORM 10-K
5 1 YEAR DEC-31-1995 DEC-31-1995 30,513,593 22,380,867 154,567,760 4,511,826 0 0 8,497,522 5,668,721 182,083,988 103,720,170 125,865,817 170,000 0 0 47,576,903 182,083,988 0 55,157,234 0 0 29,925,330 4,630,853 8,047,912 8,968,917 2,462,307 6,506,610 0 0 0 6,506,610 3,827.42 0
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