-----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, BL3Q3ERgCf+lcSYiH211fM8FD6CmcaY9J2vmQ59n7iB+uTbWPrcOSznA5izSKgnz t4Nw4paoju3QwtnJkSyR0Q== 0000038723-00-000012.txt : 20000411 0000038723-00-000012.hdr.sgml : 20000411 ACCESSION NUMBER: 0000038723-00-000012 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 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: SEC FILE NUMBER: 002-27985 FILM NUMBER: 582124 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, 1999 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) (Zip Code) 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 (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant: Not Applicable. (Cover page 1 of 2 pages) 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 29, 2000 ------------------------------------- -------------------------------- Common Stock, $100 Par Value 1,700 shares Non-Voting Common Stock, No Par Value 168,300 Shares DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Annual Report to security holders for the fiscal year ended December 31, 1999 are incorporated by reference into Parts I, II and IV of this Form 10-K. 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 2 of 2 pages) PART I Item 1. BUSINESS: The Company, Page 1; Business, Pages 5 - 12; and Financial Statements, Pages 19 - 35 of Registrant's Annual Report to security holders for the fiscal year ended December 31, 1999, the ("Annual Report"), are incorporated herein by reference. Item 2. PROPERTIES: Map on inside front cover page; paragraph 1 of The Company, Page 1; and Footnote 7 (Commitments) of Notes to Consolidated Financial Statements, Page 31 of Registrant's Annual Report are incorporated herein by reference. Item 3. LEGAL PROCEEDINGS: There is a legal proceeding pending against the Company in Alabama alleging that the Company's practice of inserting dispute resolution provisions into its consumer lending documents and requiring consumers to abide by such provisions violates the Equal Credit Opportunity Act. Plaintiffs are seeking declaratory relief that they cannot be compelled to forfeit their statutorily granted rights under the Truth-in-Lending Act and other consumer protection laws. Management believes that the Company's operations are in compliance with applicable laws and regulations and that the action is without merit. The Company is diligently contesting and defending against this proceeding. Based on current information available, Management is unable to predict the potential outcome of this matter or its impact on the Company's financial condition or business operations. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: No matters were submitted to a vote of security holders during the quarter ended December 31, 1999. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS: Source of Funds, Page 12 of the Company's Annual Report is incorporated herein by reference. Item 6. SELECTED FINANCIAL DATA: Selected Consolidated Financial Information, Page 4 of Company's Annual Report is incorporated herein by reference. -2- Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: Management's Discussion of Operations, Pages 13 - 18 of Company's Annual Report is incorporated herein by reference. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK: Management's Discussion of Operations, Market Risk sub-heading, Page 16 of Company's Annual Report is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA: Pages 19 - 35 of Company's Annual Report are incorporated herein by reference. Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE: The Company has neither had any disagreements on accounting or financial disclosures with its accountants nor changed such accountants. Forward Looking Statements: Certain statements contained or incorporated by reference herein under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Market for Registrant's Common Stock and Related Stockholder Matters" and elsewhere in this Annual Report on Form 10-K may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance, or materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the ability to manage cash flow and working capital, adverse economic conditions including the interest rate environment, federal and state regulatory changes and other factors referenced elsewhere herein. -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 ---------------- --- --------------------- ------------ Ben F. Cheek, III (3)(4)(5) 63 Since 1967; Chairman of When successor Board elected and qualified Lorene M. Cheek (2)(4)(6) 90 Since 1946; None When successor elected and qualified Jack Stoval (1)(2) 64 Since 1983 None When successor elected and qualified Robert E. Thompson (1)(2) 68 Since 1970; None When successor elected and qualified ______________________________________________________________________ (1) Member of Audit Committee. (2) 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 "Executive Officers" for a discussion of Ben F. Cheek, III's business experience. (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, 63 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, 63 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, 42 Joined the Company in 1983 and became Secretary Secretary in 1989. No Family Relationship A. Roger Guimond, 45 Joined the Company in 1976 as an accountant Vice President and and became Chief Accounting Officer in 1978, Chief Financial Officer Chief Financial Officer in 1991 and Vice No Family Relationship President in 1992. Linda L. Sessa, 45 Joined the Company in 1984 and became Treasurer in Treasurer 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 a bankruptcy, criminal 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 1999 264,000 204,652 4,760 69,537 Chairman and 1998 264,000 171,893 2,852 67,745 CEO 1997 264,000 210,081 3,044 69,944 T. Bruce Childs 1999 300,000 206,092 5,717 62,476 President 1998 282,000 172,613 4,066 58,967 1997 264,000 210,081 3,459 61,334 A. Roger Guimond 1999 162,600 71,013 1,650 20,805 Vice President 1998 152,400 59,717 1,650 20,524 1997 142,200 72,001 1,650 19,420 * 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 $7,393 for 1999, $6,842 for 1998 and $5,931 for 1997. Includes Company contributions to profit-sharing plan for the benefit of T. Bruce Childs and A. Roger Guimond. (g) Compensation of Directors: Directors who are not employees of the Company receive $2,000 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 December 31, 1999: Ownership listed below represents ownership in the Company with respect to any person (including any "group" as that term is used in Section 13(d)(3) of the Exchange Act) who is known to the Company to be the beneficial owner of more than five percent of any class of the Company's voting securities. 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 Stock Toccoa, Georgia 30577 John Russell Cheek Voting Common 441 Shares - Direct 25.94% 181 Garland Road Stock Toccoa, Georgia 30577 (b) Security Ownership of Management as of December 31, 1999: Ownership listed below represents ownership in the Company, of (i) Directors and named Executive Officers of the Company and (ii) all Directors and Executive Officers of the Company as a group: Amount and Nature of Percent Name Title of Class Beneficial Ownership Of Class ---- -------------- -------------------- -------- Ben F. Cheek, III Voting Common Stock 1,160 Shares - Direct 68.24% Non-Voting Common Stock 114,840 Shares (1) 68.24% T. Bruce Childs Voting Common Stock None None Non-Voting Common Stock None None A. Roger Guimond Voting Common Stock None None Non-Voting Common Stock None None __________________________________________ All Directors and Executive Officers as a Group Voting Common Stock 1,160 Shares - Direct 68.24% Non-Voting Common Stock 114,840 Shares (1) 68.24% (1) Effective January 1, 1997, the Company elected S Corporation status -7- for income tax reporting purposes. Because partnerships are ineligible to be S Corporation shareholders, Cheek Investments, L.P. distributed its shares of the Company to its eight partners (six trusts, Ben F. Cheek, III and Elizabeth Cheek, wife of Ben F. Cheek, III). Ben F. Cheek, III and Elizabeth Cheek are grantors of the trusts. Below is a table of ownership of non-voting common stock attributable to Ben F. Cheek, III: No. of Name Shares Percentage --------------------------------------------- ------- ----------- Ben F. Cheek, III 574 .34% Elizabeth Cheek 574 .34% Ben Cheek Trust A (f/b/o Ben F. Cheek, IV) 18,949 11.26% Ben Cheek Trust B (f/b/o Virginia C. Herring) 18,949 11.26% Ben Cheek Trust C (f/b/o David W. Cheek) 18,949 11.26% Elizabeth Cheek Trust A (f/b/o Ben F. Cheek, IV) 18,949 11.26% Elizabeth Cheek Trust B (f/b/o Virginia C. Herring) 18,948 11.26% Elizabeth Cheek Trust C (f/b/o David W. Cheek) 18,948 11.26% ------- ----- 114,840 68.24% ======= ===== (c) The Company knows of no contractual arrangements which may at a subsequent date result in a change in control of the Company. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS: The Company leases its Home Office building and print shop for a total of $12,600 per month from Franklin Enterprises, Inc. under leases which expire December 31, 2004. Franklin Enterprises, Inc. is 66.67% owned by Ben F. Cheek, III, a Director and Executive Officer of the Company. In Management's opinion, these leases are at rates which approximate those obtainable from independent third parties. The Company leases its Hartwell branch office for a total of $300 per month from John R. Cheek. John R. Cheek (brother of Ben F. Cheek, III) owns 25.94% of the Company's voting shares of common stock. Rent is also paid to Cheek Investments, Inc. in the amount of $350 per month for the Clarkesville branch office. Cheek Investments is owned by Ben F. Cheek, III. 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 certain management and data processing agreements whereby the Company provides certain administrative and data processing services to Liberty for a fee. Annual income recorded by the Company from these services during the year ended December 31, 1999 was $67,800 and during the two year period ended period ended December 31, 1998 income was $63,800 per year. Management believes these amounts approximate the Company's actual cost of these services. Liberty leases its office space and equipment from the Company for $60,000 per month, which in Management's opinion is at a rate which pproximates that obtainable from independent third parties. At December 31, 1999, the Company maintained $1,000,000 of certificates of deposit with Liberty at market rates and terms. The Company also had $1,851,894 in demand deposits with Liberty at December 31, 1999. During 1999, a loan was extended to a real estate development partnership of which one of the Company's beneficial owners (David Cheek) is a partner. David Cheek (son of Ben F. Cheek, III) owns less than 5% of the Company's stock. The balance on this commercial loan (including accrued interest) was $1,672,179 at December 31, 1999. -8- PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K: (a) 1. Financial Statements: Incorporated by reference from Registrant's Annual Report to security holders for the fiscal year ended December 31, 1999: Report of Independent Public Accountants. Consolidated Statements of Financial Position at December 31, 1999 and 1998. Consolidated Statements of Income for the three years ended December 31, 1999. Consolidated Statements of Stockholders' Equity for the three years ended December 31, 1999. Consolidated Statements of Cash Flows for the three years ended December 31, 1999. Notes to Consolidated Financial Statements. 2. Financial Statement Schedules: None - Financial statement schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto. 3. Exhibits: 2. (a) Articles of Merger of 1st Franklin Corporation with and into 1st Franklin Financial Corporation dated December 31, 1994 (incorporated herein by reference to Exhibit 3(2)(a) from Form 10-K for the fiscal year ended December 31, 1994). 3. (a) Restated Articles of Incorporation as amended January 26, 1996 (incorporated herein by reference to Exhibit 3(3)(a) from Form 10-K for the fiscal year ended December 31, 1995). (b) Bylaws (incorporated herein by reference to Exhibit 3(3)(b) from Form 10-K for the fiscal year ended December 31, 1995). 4. (a) Executed copy of Indenture dated October 31, 1984, covering the Variable Rate Subordinated Debentures - Series 1 (incorporated herein by reference from Registration Statement No. 2-94191, Exhibit 4a). (b) Modification of Indenture dated March 29, 1995 (incorporated herein by reference to Exhibit 3(4)(b) from Form 10-K for the fiscal year ended December 31, 1994). 9. Not applicable. -9- 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.) (c) Fifth Amendment to Revolving Credit Agreement dated April 23, 1992. (Incorporated by reference to Exhibit 10(c) to the Registrant's Form SE dated November 5, 1992.) (d) Sixth Amendment to Revolving Credit Agreement dated July 20, 1992. (Incorporated by reference to Exhibit 10(d) to the Registrant's Form SE dated November 5, 1992.) (e) Seventh Amendment to Revolving Credit Agreement dated June 20, 1994. (Incorporated by reference to Exhibit 10(e) from Form 10-K for the fiscal year ended December 31, 1994.) (f) Merger of 1st Franklin Corporation with 1st Franklin Financial Corporation Consent, Waiver and Eighth Amendment to Revolving Credit and Term Loan Agreement. (Incorporated herein by reference to Exhibit 10(f) from Form 10-K for the fiscal year ended December 31, 1994.) (g) Ninth Amendment to Revolving Credit Agreement and Term Loan Agreement dated June 20, 1996. (Incorporated herein by reference to Exhibit 10(g) from Form 10-K for the fiscal year ended December 31, 1996.) (h) Tenth Amendment to Revolving Credit Agreement and Term Loan Agreement dated January 23, 1998. (Incorporated herein by reference to Exhibit 10(h) from the registrant's Form S-2 Registration dated March 6, 1998.) (i) Eleventh Amendment to Revolving Credit Agreement and Term Loan Agreement dated May 27, 1998. (Incorporated herein by reference to Exhibit 10(i) from Form 10-K for the fiscal year ended December 31, 1998.) 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, 1999, 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, 1999. 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. -10- (b) Reports on Form 8-K: No reports on Form 8-K were filed by the Registrant during the quarter ended December 31, 1999. -11- 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, 2000 By s/Ben F. Cheek, III -------------- -------------------- Date Ben F. Cheek, III Chairman of Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacity and on the dates indicated: Signatures Title Date ---------- ----- ---- s/ Ben F. Cheek, III - -------------------------- (Ben F. Cheek, III) Chairman of Board; March 29, 2000 Chief Executive -------------- Officer s/ T. Bruce Childs - -------------------------- (T. Bruce Childs) President March 29, 2000 -------------- s/ A. Roger Guimond - -------------------------- (A. Roger Guimond) Vice President; March 29, 2000 Principal Financial Officer -------------- Principal Accounting Officer s/ Lorene M. Cheek - -------------------------- (Lorene M. Cheek) Director March 29, 2000 -------------- s/ Jack D. Stovall - -------------------------- (Jack D. Stovall) Director March 29, 2000 -------------- s/ Robert E. Thompson - -------------------------- (Robert E. Thompson) Director March 29, 2000 -------------- 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: (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. -12- (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, 1999, which is filed as Exhibit 13 hereto. The Registrant is a privately held corporation and therefore does not distribute proxy statements or information statements. -13- EX-12 2 EXHIBIT 12 Exhibit 12 RATIO OF EARNINGS TO FIXED CHARGES Year Ended December 31 ----------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (In thousands, except ratio data) Income Before Income Taxes . . . $ 9,663 $ 8,859 $ 6,744 $ 8,418 $ 8,969 Interest on Indebtedness . . . . 8,920 8,723 8,801 8,312 8,048 Portion of rents representative of the interest factor . . . . 746 665 603 518 449 ------- ------- ------- ------- ------- Earnings as adjusted. . . . $19,329 $18,247 $16,148 $17,248 $17,466 ======= ======= ======= ======= ======= Fixed Charges: Interest on Indebtedness . . . . $ 8,920 $ 8,723 $ 8,801 $ 8,312 $ 8,048 Portion of rents representative of the interest factor . . . . 746 665 603 518 449 ------- ------- ------- ------- ------- Fixed Charges. . . . . . . $ 9,666 $ 9,388 $ 9,404 $ 8,830 $ 8,497 ======= ======= ======= ======= ======= Ratio of Earnings to Fixed Charges. . . . . . 2.00 1.94 1.72 1.95 2.06 ==== ==== ==== ==== ==== EX-13 3 EXHIBIT 13 Exhibit 13 1st FRANKLIN FINANCIAL CORPORATION ANNUAL REPORT DECEMBER 31, 1999 FRONT and BACK COVER (Collage of Photos from Annual Managers' Meeting) INSIDE FRONT COVER PAGE OF ANNUAL REPORT (Graphic showing state maps of Alabama, Georgia, Louisiana, Mississippi, North Carolina and South Carolina which is regional operating territory of Company and listing of branch offices)
1st FRANKLIN FINANCIAL CORPORATION BRANCH OFFICES ALABAMA ------- Alexander City Clanton Florence Jasper Ozark Selma Andalusia Cullman Gadsden Madison Pelham Sylacauga Arab Decatur Geneva Moulton Prattville Troy Athens Dothan Hamilton Muscle Shoals Russellville(2) Tuscaloosa Bessemer Enterprise Huntsville Opp Scottsboro Wetumpka Birmingham Fayette GEORGIA ------- Adel Calhoun Cumming Griffin McRae Statesboro Albany Canton Dallas Hartwell Milledgeville Swainsboro Alma Carrollton Dalton Hawkinsville Monroe Sylvania Americus Cartersville Dawson Hazlehurst Montezuma Sylvester Arlington Cedartown Douglas Hinesville Monticello Thomaston Athens (2) Chatsworth Douglasville(2) Hogansville Moultrie Thomson Bainbridge Clarkesville East Ellijay Jackson Nashville Tifton Barnesville Claxton Eastman Jasper Newnan Toccoa Baxley Clayton Elberton Jefferson Perry Valdosta (2) Blakely Cleveland Forsyth Jesup Pooler ** Vidalia Blue Ridge Cochran Fort Valley LaGrange Richmond Hill Warner Robins Bremen Commerce Gainesville Lavonia Rome Washington Brunswick Conyers Garden City Lawrenceville Royston Waycross Buford Cordele Georgetown Madison Sandersville Waynesboro Butler Cornelia Glennville Manchester Savannah Winder Cairo Covington Greensboro McDonough LOUISIANA --------- Alexandria DeRidder Jena Leesville Natchitoches Pineville Crowley Franklin Lafayette Marksville New Iberia MISSISSIPPI ----------- Bay St. Louis Grenada Hattiesburg Jackson Magee Pearl Carthage Gulfport Hazlehurst Kosciusko McComb Picayune Columbia NORTH CAROLINA -------------- Monroe Pineville SOUTH CAROLINA -------------- Aiken Columbia Gaffney Lancaster Orangeburg Union Anderson Conway Greenville Laurens Rock Hill York Cayce Easley Greenwood Marion Seneca Clemson Florence Greer Newberry Spartanburg
- ---------------------------- ** Opened first quarter 2000 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 . . . . . . . . . . . . . . . . . . . . . . 18 Report of Independent Public Accountants. . . . . . . . . . . . 19 Financial Statements. . . . . . . . . . . . . . . . . . . . . . 20 Directors and Executive Officers. . . . . . . . . . . . . . . . 36 Corporate Information . . . . . . . . . . . . . . . . . . . . . 36 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 97 branch offices in Georgia, 33 in Alabama, 22 in South Carolina, 13 in Mississippi, 11 in Louisiana and 2 in North Carolina. At December 31, 1999, the Company had 682 employees. As of December 31, 1999, the resources of the Company were invested principally in loans which comprised 69% 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. -1- CHATSWORTH, GEORGIA 1999 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 Chatsworth Staff for this significant achievement. The Friendly Franklin Folks salute you! -2- TO OUR INVESTORS, EMPLOYEES AND FRIENDS: I am very pleased to report to you that 1st Franklin Financial Corporation closed out the 1900's in excellent condition. We are now looking forward to the many opportunities that a new century will offer us. Before leaving the 1900's completely however, I want to acknowledge and recognize the hard work and preparation by our Y2K committee and data processing staff. Their efforts paid off handsomely when all of our systems operated properly on January 1. We had every confidence that the results would be just that and I am very grateful to them for their planning and execution during the many months of work that preceded Y2K. Now may I call your attention to a few of the highlights of our 1999 year which you will find in this Annual Report. Naturally, as you have time, I hope you will read the entire report in order to get a full and complete picture of the year's results. One of our goals for 1999 was to increase our gross receivables by approximately 15% in order to top $200,000,000. You might recall that we had a long-standing goal of reaching $200,000,000 in assets by the year 2000. We reached that goal in 1997, three years ahead of schedule, so having completed the initial goal, we felt that achieving $200,000,000 in gross loan receivables by the end of 1999 would be a challenging and worthy goal. You will note from our balance sheet on page 20 that we made it - - $200,468,312. With growth in receivables you always look for a nice growth in net income. Fortunately, that is exactly what occurred when our net income increased by 6.6% over 1998 reaching an all-time high of $7.7 million. This occurred even with the additional expense associated with new branch office openings. During the year, eleven new branches were opened - - 2 in Alabama, 3 in Georgia, 4 in Louisiana and 2 in Mississippi. These new offices brought the total number of branches to 177 in six southeastern states and our plan is to continue this growth as we enter 2000. The 1st Franklin Investment Center continues to grow and support the growth of our branch system. With the total of our investments approaching $150 million and the number of our investors standing at 6,133 one can readily see the vital part that each of our investors plays in the everyday success of our company. Hopefully, they and others will join with us now and in the years ahead as we continue to strive to carry out our mission of being a major provider of credit to individuals and families in the Southeastern United States. In an effort to support one of our company's Core Values which is Open, Honest Communication, we had a company-wide employee survey in early 1999. The response to the survey was excellent - 72% of our employees completed and returned the survey and from the results of the survey came some important changes which we hope will translate into happy and highly motivated co-workers. We intend to keep the communication lines open. 1st Franklin Financial had a good 1999 and we are excited about the prospects for a repeat in 2000. Many people were responsible for another successful year for our company. Certain groups standout, such as my co-workers, our investors, our bankers and our customers. These people deserve a special salute and thank you for their year-long encouragement and support. Hopefully, we will continue to earn your confidence and support in 2000 and for many years to come. Very sincerely yours, s/ Ben F. Cheek, III ----------------------------- Chairman of the Board and CEO -3- SELECTED CONSOLIDATED FINANCIAL INFORMATION Set forth below is selected consolidated financial data of the Company. This information should be read in conjunction with "Management's Discussion of Operations" and the more detailed financial statements and notes thereto included herein. Year Ended December 31 ------------------------------------------------ 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (In 000's, except ratio data) Selected Income Statement Data: Revenues . . . . . . . . . . $ 72,641 $ 65,683 $ 61,498 $ 58,415 $ 55,157 Net Interest Income. . . . . 41,731 37,289 34,470 32,534 30,147 Interest Expense . . . . . . 8,920 8,723 8,801 8,312 8,048 Provision for Loan Losses. . . . . . . . 8,523 7,031 6,916 6,266 4,631 Income Before Income Taxes . . . . . . . 9,663 8,859 6,744 8,418 8,969 Net Income . . . . . . . . . 7,748 7,268 1,816 6,238 6,507 Ratio of Earnings to Fixed Charges. . . . . . . 2.00 1.94 1.72 1.95 2.06 Selected Balance Sheet Data: Loans, Net . . . . . . . . . $156,124 $138,548 $132,701 $129,684 $120,763 Total Assets . . . . . . . . 227,138 216,675 201,166 191,904 182,084 Senior Debt. . . . . . . . . 113,890 104,446 98,930 94,740 95,541 Subordinated Debt. . . . . . 35,247 38,961 37,247 34,942 30,617 Stockholders' Equity . . . . 64,540 61,364 54,734 53,414 47,747 Ratio of Total Liabilities to Stockholders' Equity. . 2.52 2.53 2.68 2.59 2.81 -4- BUSINESS References in this Annual Report to "1st Franklin", "we", "our" and "us" refers to 1st Franklin Financial Corporation. 1st Franklin is engaged in the consumer finance business, particularly in making consumer loans to individuals in relatively small amounts 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. We also purchase sales finance contracts from various retail dealers. At December 31, 1999, direct cash loans comprised 76% of our outstanding loans, real estate loans comprised 17% and sales finance contracts comprised 7%. In connection with this business, we write credit insurance as an agent for a nonaffiliated company specializing in such insurance. Two of our 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 our earned finance charges over each of the past five periods: Year Ended December 31 ------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (In Thousands) Direct Cash Loans . . . . $37,813 $33,579 $30,566 $28,440 $25,898 Real Estate Loans . . . . 7,181 7,112 7,196 7,238 7,058 Sales Finance Contracts . 2,222 1,998 2,268 2,417 2,757 ------- ------- ------- ------- ------- Total Finance Charges . $47,216 $42,689 $40,030 $38,095 $35,713 ======= ======= ======= ======= ======= We make direct cash loans primarily to people who need money for some unusual or unforeseen expense or for the purpose of paying off an accumulation of small debts or for the purchase of furniture and appliances. These loans are repayable in 6 to 48 monthly installments and generally do not exceed $10,000 in principal amount. The loans are generally secured by personal property, motor vehicles and/or real estate. We believe that the interest and fees we charge 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. We generally make the loans in amounts from $3,000 to $50,000 on maturities of 35 to 180 months. We believe that the interest and fees we charge 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 $7,500 in principal amount. We believe that the interest rates we charge on these contracts are in compliance with applicable federal and state laws. Prior to the making of a loan, we complete a credit investigation to determine the income, existing indebtedness, length and stability of employment, and other relevant information concerning the customer. In granting the loan, we receive a security interest in the real or personal property of the borrower. In making direct cash loans, we focus on the customer's ability to repay his or her loan to us rather than on the potential resale value of the underlying security. In making real estate and sales finance loans, however, we focus instead on the marketability and value of the underlying collateral. -5- 1st Franklin competes with several national and regional finance companies, as well as a variety of local finance companies in the communities which we serve. We believe that our emphasis on customer service helps us compete effectively in the markets we serve. Our business consists mainly of the making of loans to salaried people and wage earners who depend on their earnings to make their repayments. Our ability to continue the profitable operation of our business 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. Therefore, a sustained recession or a significant downturn in business with consequent unemployment or continued increases in the number of personal bankruptcies among our typical customer base may have a material adverse effect on our collection ratios and profitability. The average annual yield on loans we make (the % of finance charges earned to average net outstanding balance) has been as follows: Year Ended December 31 -------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Direct Cash Loans. . . . . . . . 31.92% 31.53% 30.25% 30.75% 31.26% Real Estate Loans. . . . . . . . 21.55 21.82 21.76 21.53 22.73 Sales Finance Contracts. . . . . 20.94 21.00 20.97 20.77 22.28 The following table contains information about our operations: As of December 31 ------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Number of Branch Offices . . . . 177 166 157 144 128 Number of Employees. . . . . . . 682 628 596 575 527 Average Total Loans Outstanding Per Branch ( in 000's) . . . . . . $1,133 $1,060 $1,064 $1,138 $1,208 Average Number of Loans Outstanding Per Branch . . . . 639 624 644 701 765 -6- DESCRIPTION OF LOANS
Year Ended December 31 --------------------------------------------------- 1999 1998 1997 1996 1995 DIRECT CASH LOANS: ---- ---- ---- ---- ---- - ----------------- Number of Loans Made to New Borrowers. . . . . 34,595 30,282 28,656 27,636 25,840 Number of Loans Made to Former Borrowers . . . 17,498 16,083 14,626 14,410 14,740 Number of Loans Made to Present Borrowers. . . 80,695 69,712 65,096 63,329 61,304 Total Number of Loans Made. . . . . . . . . . . 132,788 116,077 108,378 105,375 101,884 Total Volume of Loans Made (in 000's). . . . . . $234,172 $196,401 $180,541 $173,196 $164,034 Average Size of Loans Made. . . . . . . . $ 1,764 $ 1,692 $ 1,666 $ 1,644 $ 1,610 Number of Loans Outstanding . . . . . . . 95,509 86,819 83,264 80,733 76,549 Total of Loans Outstanding (in 000's). . $153,170 $131,636 $123,039 $117,141 $107,960 Percent of Total Loans. . . 76% 75% 74% 72% 70% Average Balance on Outstanding Loans . . . . $ 1,604 $ 1,516 $ 1,478 $ 1,451 $ 1,410 REAL ESTATE LOANS: - ----------------- Total Number of Loans Made. . . . . . . . . . . 2,045 2,226 2,155 2,240 2,674 Total Volume of Loans Made (in 000's) . . . . . $ 19,439 $ 20,669 $ 22,921 $ 22,398 $ 22,379 Average Size of Loans Made. . . . . . . . $ 9,105 $ 9,285 $ 10,636 $ 9,999 $ 8,369 Number of Loans Outstanding . . . . . . . 4,054 4,105 4,101 4,214 4,188 Total of Loans Outstanding (in 000's). . $ 33,946 $ 33,465 $ 32,630 $ 33,507 $ 32,653 Percent of Total Loans. . . 17% 19% 19% 20% 21% Average Balance on Outstanding Loans . . . . $ 8,374 $ 8,152 $ 7,957 $ 7,951 $ 7,797 SALES FINANCE CONTRACTS: - ----------------------- Number of Contracts Purchased . . . . . . . . 15,601 13,490 14,662 17,499 19,195 Total Volume of Contracts Purchased (in 000's). . . $ 19,019 $ 14,612 $ 15,034 $ 17,150 $ 18,885 Average Size of Contracts Purchased . . . . . . . . $ 1,219 $ 1,083 $ 1,025 $ 980 $ 984 Number of Contracts Outstanding . . . . . . . 13,531 12,710 13,801 15,941 17,151 Total of Contracts Outstanding (in 000's). . $ 13,352 $ 10,882 $ 11,334 $ 13,201 $ 13,955 Percent of Total Loans. . . 7% 6% 7% 8% 9% Average Balance on Outstanding Contracts . . $ 987 $ 856 $ 821 $ 828 $ 814
-7- LOANS ACQUIRED, LIQUIDATED AND OUTSTANDING Year Ended December 31 ------------------------------------------------ 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (in thousands) LOANS ACQUIRED -------------- DIRECT CASH LOANS. . . . . . $233,445 $195,634 $177,844 $169,825 $164,034 REAL ESTATE LOANS. . . . . . 18,654 20,317 21,532 20,971 22,000 SALES FINANCE CONTRACTS. . . 16,910 14,360 13,943 16,131 17,676 NET BULK PURCHASES . . . . . 3,622 1,371 5,177 5,818 1,588 -------- -------- -------- -------- -------- TOTAL LOANS ACQUIRED . . . $272,631 $231,682 $218,496 $212,745 $205,298 ======== ======== ======== ======== ======== LOANS LIQUIDATED ---------------- DIRECT CASH LOANS. . . . . . $212,638 $187,804 $174,643 $164,016 $152,694 REAL ESTATE LOANS. . . . . . 18,959 19,833 23,798 21,544 18,876 SALES FINANCE CONTRACTS. . . 16,549 15,065 16,901 17,904 19,736 -------- -------- -------- -------- -------- TOTAL LOANS LIQUIDATED . . $248,146 $222,702 $215,342 $203,464 $191,306 ======== ======== ======== ======== ======== LOANS OUTSTANDING ----------------- DIRECT CASH LOANS. . . . . . $153,170 $131,636 $123,039 $117,141 $107,960 REAL ESTATE LOANS. . . . . . 33,946 33,465 32,630 33,507 32,653 SALES FINANCE CONTRACTS. . . 13,352 10,882 11,334 13,201 13,955 -------- -------- -------- -------- -------- TOTAL LOANS OUTSTANDING. . $200,468 $175,983 $167,003 $163,849 $154,568 ======== ======== ======== ======== ======== UNEARNED FINANCE CHARGES ------------------------ DIRECT CASH LOANS. . . . . . $ 20,281 $ 17,573 $ 16,062 $ 16,270 $ 17,030 REAL ESTATE LOANS. . . . . . 604 345 84 -- 12 SALES FINANCE CONTRACTS. . . 1,816 1,416 1,504 1,829 2,007 -------- -------- -------- -------- -------- TOTAL UNEARNED FINANCE CHARGES. . . . . $ 22,701 $ 19,334 $ 17,650 $ 18,099 $ 19,049 ======== ======== ======== ======== ======== -8- DELINQUENCIES We classify delinquent accounts 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, we do not consider the account delinquent for the purpose of this classification. When three installments are past due, we classify the account as being 60-89 days past due; when four or more installments are past due we classify the account as being 90 days or more past due. The following table shows the amount of certain classifications of delinquencies and the ratio such delinquencies bear to related outstanding loans: Year Ended December 31 -------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (In thousands, except % data) DIRECT CASH LOANS: 60-89 Days Past Due. . . . . $3,161 $2,631 $2,593 $2,404 $1,914 Percentage of Outstanding. . 2.06% 2.00% 2.11% 2.05% 1.77% 90 Days or More Past Due . . $7,358 $6,358 $5,137 $5,419 $3,286 Percentage of Outstanding. . 4.80% 4.83% 4.18% 4.63% 3.04% REAL ESTATE LOANS: 60-89 Days Past Due. . . . . $ 437 $ 335 $ 432 $ 426 $ 254 Percentage of Outstanding. . 1.29% 1.00% 1.33% 1.27% .78% 90 Days or More Past Due . . $1,343 $ 879 $ 932 $1,334 $1,196 Percentage of Outstanding. . 3.96% 2.63% 2.86% 3.98% 3.66% SALES FINANCE CONTRACTS: 60-89 Days Past Due. . . . . $ 318 $ 187 $ 285 $ 339 $ 295 Percentage of Outstanding. . 2.38% 1.72% 2.52% 2.57% 2.11% 90 Days or More Past Due . . $ 554 $ 413 $ 439 $ 602 $ 463 Percentage of Outstanding. . 4.15% 3.80% 3.87% 4.56% 3.32% -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 ----------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (In thousands, except % data) DIRECT CASH LOANS ----------------- Average Net Loans. . . . $118,444 $106,502 $101,051 $ 92,489 $ 82,847 Liquidations . . . . . . $212,638 $187,804 $174,643 $164,016 $152,694 Net Losses . . . . . . . $ 6,800 $ 5,879 $ 5,992 $ 4,617 $ 3,753 Net Losses as % of Average Net Loans. . . 5.74% 5.52% 5.93% 4.99% 4.53% Net Losses as % of Liquidations . . . . . 3.20% 3.13% 3.43% 2.81% 2.46% REAL ESTATE LOANS ----------------- Average Net Loans. . . . $ 33,315 $ 32,587 $ 33,066 $ 33,614 $ 31,050 Liquidations . . . . . . $ 18,959 $ 19,833 $ 23,798 $ 21,544 $ 18,876 Net Losses . . . . . . . $ 150 $ 94 $ 141 $ 49 $ 22 Net Losses as % of Average Net Loans. . . .45% .29% .43% .15% .07% Net Losses as % of Liquidations . . . . . .79% .47% .59% .23% .12% SALES FINANCE CONTRACTS ----------------------- Average Net Loans. . . . $ 10,612 $ 9,514 $ 10,817 $ 11,640 $ 12,377 Liquidations . . . . . . $ 16,549 $ 15,065 $ 16,901 $ 17,904 $ 19,736 Net Losses . . . . . . . $ 347 $ 398 $ 714 $ 478 $ 434 Net Losses as % of Average Net Loans. . . 3.27% 4.18% 6.60% 4.11% 3.51% Net Losses as % of Liquidations . . . . . 2.10% 2.64% 4.22% 2.67% 2.20% ALLOWANCE FOR LOAN LOSSES We determine the allowance for loan losses by reviewing our previous loss experience, reviewing of specifically identified loans where collection is doubtful and evaluating the inherent risks and change in the composition of our loan portfolio. Such allowance is, in our opinion, sufficient to provide adequate protection against probable 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 a borrower authorizes us to so, we write various credit insurance products in connection with the borrower's loan. We write such insurance as an agent for a non-affiliated insurance company. Frandisco Life Insurance Company and Frandisco Property and Casualty Insurance Company, which are wholly owned subsidiaries of 1st Franklin, reinsure the insurance written from the non-affiliated insurance company. REGULATION AND SUPERVISION - -------------------------- State laws require that each office in which a small loan business is conducted be licensed by the state and that the business be conducted according to the applicable statutes and regulations. The granting of a license depends on the financial responsibility, character and fitness of the applicant, and, where applicable, the applicant must show finding of a need through convenience and advantage documentation. As a condition to obtaining such license, the applicant must consent to state regulation and examination and to the making of periodic reports to the appropriate governing agencies. Licenses are revocable for cause, and their continuance depends upon applicant's compliance with the laws and regulations that are applicable to the applicant in connection with its receipt of a license. The Company has never had any of its licenses revoked. We conduct all of our lending operations 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 us to disclose to our customers the finance charge, the annual percentage rate, the total of payments and other information on all loans. A Federal Trade Commission ruling prevents us and other consumer lenders from using certain household goods as collateral on direct cash loans. We collateralize such loans with non-household goods such as automobiles, boats and other exempt items. We are also subject to state regulations governing insurance agents in the states in which we sell credit insurance. State insurance regulations require that insurance agents be licensed and limit the premium amount insurance agents can charge. -11- SOURCE OF FUNDS - --------------- Our sources of 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 ------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Bank Borrowings. . . . . . . . . -% -% -% -% -% Public Senior Debt . . . . . . . 50 48 49 49 52 Public Subordinated Debt . . . . 16 18 19 18 17 Other Liabilities. . . . . . . . 6 6 5 5 5 Stockholders' Equity . . . . . . 28 28 27 28 26 --- --- --- --- --- Total. . . . . . . . . . . . . 100% 100% 100% 100% 100% === === === === === Number of Investors. . . . . . . 6,133 6,116 5,983 5,668 5,575 All of our common stock is held by five related individuals and is not traded in an established public trading market. The average interest rate we charge on borrowings, computed by dividing the interest paid by the average indebtedness outstanding, has been as follows: Year Ended December 31 --------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Senior Borrowings. . . . . . . . 5.62% 6.09% 6.12% 6.29% 6.97% Subordinated Borrowings. . . . . 6.25 6.23 6.58 6.86 6.92 All Borrowings . . . . . . . . . 5.79 6.13 6.25 6.67 6.96 Our financial ratios relating to debt are as follows: At December 31 --------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Total Liabilities to Stockholders' Equity . . . . 2.52 2.53 2.68 2.59 2.81 Unsubordinated Debt to Subordinated Debt plus Stockholders' Equity . . . . 1.28 1.16 1.19 1.17 1.32 -12- MANAGEMENT'S DISCUSSION OF OPERATIONS Financial Condition: - ------------------- The Company ended the 20th century with a record year! At the close of 1999, total assets of the Company were $227.1 million as compared to $216.7 million at the beginning of the year. Gross revenues reached $72.6 million and net income from these revenues amounted to $7.7 million for the year. Expansion of branch operations continued with the opening of eleven new locations during the year, bringing the total to 177 offices. Being a financial institution, the primary earning assets of the Company are its loan receivables. Substantial growth occurred in the Company's loan portfolio during the year just ended due to strong consumer demand. Net receivables (gross receivables less unearned finance charges) increased $21.1 million during 1999, which was the primary factor driving the increase in overall assets. Total number of loans being serviced at December 31, 1999 was 113,094 as compared to 103,634 at December 31, 1998, the majority of which are small consumer loans with an average balance of $1,604. The Company's goal is to be a major provider of credit to individuals and families in the Southeastern United States. Management believes this is the niche market for the services provided by the Company. No commercial loans are extended in the normal course of business. Also contributing to the increase in overall assets was a $6.7 million (14%) growth in the Company's investment portfolio. Cash flows generated by operations and from sales of Company debt securities outpaced funds required for daily operations during 1999, thereby creating a surplus of cash. In an attempt to maximize yield, Management invested the cash surplus in its investment portfolio. Management maintains a conservative approach when formulating its investment strategy. The Company does not participate in hedging programs, interest rate swaps or other activities involving the use of off-balance sheet derivative financial instruments. The investment portfolio consists mainly of U.S. Treasury bonds, Government Agency bonds and various municipal bonds. A significant portion of these investment securities have been designated as "available for sale" with any unrealized gain or loss accounted for in the Company's equity section, net of deferred income taxes for those investments held by the insurance subsidiaries. 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. Management had previously reported a higher increase in investment securities in its report for the nine months ended September 30, 1999. However, volatility in the bond market during the current year negatively impacted the investment portfolio as bond market values declined $1.3 million, net of deferred taxes for those investments held by the Company's insurance subsidiaries. Also, the Company liquidated certain investments during the fourth quarter just ended to supplement financing of the increase in the loan portfolio. Cash and cash equivalents declined $14.2 million (71%) during 1999 mainly due to funds required to finance the aforementioned increase in the loan portfolio. At year end, the Company also used an alternative source of working capital by drawing on its credit line to help finance the loan activity. Results of Operations: - --------------------- As previously mentioned, gross revenues and net income reached record levels during the year just ended. The higher lending activity during 1999 resulted in average net receivables increasing $13.8 million (9%) to $162.4 million during 1999 as compared to $148.6 million during 1998. Average net receivables increased $3.7 million (3%) during 1998 as compared to 1997. Revenues rose in each of the comparable periods as a direct result of the higher levels of average net loans outstanding. The rise in revenues and an improvement in the Company's cost efficiency ratio were responsible for the increase in profits during the last two years. During 1999, the cost efficiency ratio declined to 69.4% as compared to 70.0% -13- during 1998 and 71.9% during 1997. Low inflation and the low interest rate environment during the last two years enabled Management to reduce the ratio. The cost efficiency ratio measures operating expenses against total revenues net of interest and insurance expenses. Net Interest Income Net interest income is the principal component in the composition of the Company's net income. It represents the margin by which interest income on earning assets (loans and investment securities) exceeds interest expense on its interest-bearing debt. The margin increased $4.4 million (12%) during 1999 as compared to 1998 and $2.8 million (8%) during 1998 as compared to 1997. These increases in margin spreads were primarily due to the interest income earned on the aforementioned higher levels of net receivables outstanding and due to higher investment income. Variations in interest expense were insignificant during the three-year period ended December 31, 1999. Lower market rates of interest enabled the Company to reduce average borrowing costs during the comparable periods even though average senior and subordinated debt outstanding increased $11.4 million (8%) during 1999 as compared to 1998 and $3.3 million (2%) during 1998 as compared to 1997. Average interest rates on borrowings were 5.79%, 6.13% and 6.25% during the years ended December 31, 1999, 1998 and 1997, respectively. Net Insurance Income The Company's insurance business plays an integral roll in the overall income producing operations of the Company, second only to finance charges earned. 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 generally results in higher insurance income. Net insurance income rose $2.0 million (13%) during 1999 as compared to 1998 and $1.4 million (10%) during 1998 as compared to 1997. Claims and insurance commissions were slightly higher in 1999 as compared to 1998 and 1997. Provision for Loan Losses The provision for loan losses increased $1.5 million (21%) to $8.5 million for the year just ended as compared to $7.0 million during 1998 and $6.9 million in 1997. At December 31, 1999, the allowance for loan losses was 4.50% of net receivables, up from 4.25% and 4.00% at December 31, 1998 and 1997, respectively. Management carefully monitors the credit worthiness of its loan portfolio considering factors such as previous loss experience, delinquency status, bankruptcy trends, the ability of the borrower to repay, underlying collateral and changes in the size of the loan portfolio. Additions are made to the loss allowance when Management deems it is appropriate to protect against probable losses in the current portfolio. During 1999, the increase in the provision and resulting increase in the allowance for loan losses was attributable to a 15% increase in net charge- offs, the substandial growth in the loan portfolio and an increase in loans in non-accrual status. Loans in non-accrual status represent loans 60 days or more deliquent and on which earnings no longer are accrued. At December 31, 1999, there were $13.2 million of loans in non-accrual status compared to $10.8 million and $9.8 million at December 31, 1998 and 1997, respectively. Higher recovery rates on loans previously charged off resulted in a decline in net charge-offs during 1998 as compared to 1997. Although net losses were lower, rising bankruptcies and problem delinquencies induced Management to raise the loss allowance to provide for likely losses, which resulted in a slight increase in the provision for loan losses when compared to 1997. Currently, Management believes the allowance for loan losses is adequate to absorb losses. However, if conditions were to change, future additions to the allowance may be necessary in order to provide adequate protection against probable losses in the current portfolio. Other Operating Expenses The largest expense category the Company has is personnel expense, which represented 46% of all expenses during 1999 and 44% in 1998. Increases in the employee base required to staff the new locations and merit salary -14- increases caused personel expense to increase $3.2 million (15%) during the year just ended as compared to 1998. During 1998 the same expense increased $1.6 million (8%) as compared to 1997. Higher profits during each of the last two years resulted in higher accruals for incentive bonuses and profit sharing expenses, which also contributed to the overall increase in personnel expense. Medical claims incurred by Company's employees health insurance plan was another factor contributing to the increase in personnel expense in 1999 as compared to 1998. Medical claims increased 65% to $1.6 million during the year just ended. Claims declined during the same period a year ago compared to 1997. Occupancy expenses increased approximately $.4 million or 7% in both 1999 and 1998 mainly due to start-up costs and additional overhead associated with the expansion of branch operations. Increased rent expense on leases renewed in existing offices was an additional contributing factor. During 1999, other operating expenses rose $.7 million (7%) as compared to 1998 mainly due to increases in advertising, collection expense, insurance premiums, computer expenses, supplies, training and development and taxes and licenses. These same categories (with the exception of training and development) were also primarily responsible for the $.1 million (1%) increase in other operating expenses during 1998 as compared to 1997. The increase was much lower during 1998 due to a decline in legal expenses. Legal expenses incurred in connection with the Alabama lawsuits added to the increase in other operating expenses during 1997. Settlement agreements were reached 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 any wrongdoing or any breach of a legal obligation or duty to the claimants, Management, in recognition of the expense and uncertainty of litigation, felt it was in the best interest of the Company to dispose of those cases. Income Taxes Effective income tax rates for the years ended December 31, 1999, 1998 and 1997 were 19.8%, 18.0% and 73.1%, respectively. Rates rose slightly during 1999 as a result of higher earnings by the insurance subsidiaries. The rate was higher during 1997 as a result of the Company electing S Corporation status for income tax reporting purposes effective January 1, 1997. The taxable income or loss of an S Corporation is includable in the individual tax returns of the stockholders of the Company. Over the years the Company had prepaid federal and state income taxes due to certain temporary differences between reported income and expenses for financial statement purposes and for income tax purposes. Election of S Corporation status required elimination of all accumulated prepaid/deferred tax assets and liabilities. Accordingly, deferred income tax assets and liabilities were eliminated and no provisions for current and deferred income taxes were made by the Company other than amounts related to prior years when the Company was a taxable entity. Deferred income tax assets and liabilities continue to be recognized and provisions for current and deferred income taxes continue to be made by the Company's subsidiaries. The Company took a one-time charge of approximately $3.6 million during the first quarter of 1997 to expense the previously deferred income tax asset which it was not permitted to expense prior to election of becoming an S Corporation. Certain tax benefits provided by law to life insurance companies substantially reduce the effective tax rate of the Company's life insurance subsidiary and thus decreases the Company's overall tax rate below statutory rates. Investments in tax-exempt securities also allowed the Company's property and casualty insurance subsidiary to reduce its effective tax rate below statutory rates. 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, the sale of debt securities that meet the investment requirements of the public and the continued availability of unused bank credit from the Company's lenders. The previously discussed increases in net cash flows during the year just ended provided a positive effect on the Company's 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 as a whole. 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. -15- In addition to the debt securities program, the Company has two external sources of funds through its credit agreements. One agreement provides for available borrowings of $21.0 million. At the end of 1999, the Company used a portion of the credit line leaving approximately $20.0 million available as compared to $21.0 million available at the end of 1998. The Company has an additional $2.0 million credit agreement (all of which was available at December 31, 1999 and 1998). Liquidity was not adversely affected during the year just ended by the aforementioned increase in accounts classified as 60 days or more delinquent. The increase in the loan loss allowance also did not affect liquidity as the allowance is maintained out of income; however, an increase in the loss rate may have a material adverse effect on the Company's earnings. Market Risk: - ----------- Volatility of market rates of interest can impact the Company's investment portfolio and the interest rates paid on its debt securities. These exposures are monitored and managed by the Company as an integral part of its overall cash management program. It is Management's goal to mitigate any adverse effect movements in interest rates may have on the financial condition and operations of the Company. The information in the table below sumarizes the Company's risk associated with marketable debt securities and debt obligations as of December 31, 1999. Rates associated with the marketable debt securities represent weighted averages based on the coupon rate of each individual security. No adjustment has been made to yield, even though many of the investments are tax-exempt. For debt obligations, the table presents principal cash flows and related weighted average interest rates by contractual maturity dates. The structure of subordinated debenture debt incorporates various interest adjustment periods which allows the holder to redeem prior to the contractual maturity without penalty. It is expected that actual maturities on certain debentures will be prior to the contractual maturity. Management estimates the carrying value of senior and subordinated debt approximates their fair values when compared to instruments of similar type, terms and maturity. Loans are excluded from the information below since interest rates charged on loans are based on rates allowable under federal and state guidelines. Management does not believe that changes in market interest rates will significantly impact rates charged on loans. The Company has no exposure to foreign currency risk. Expected Fiscal Year of Maturity ----------------------------------------------- 2005 & Fair 2000 2001 2002 2003 2004 More Total Value ---- ---- ---- ---- ---- ---- ---- ----- (In millions) Assets: Marketable debt securities. . $ 4 $ 8 $ 8 $ 9 $ 7 $19 $55 $54 Average Interest Rate . . . . 5.3% 5.4% 5.2% 5.5% 5.7% 5.3% 5.4% Liabilities: Senior Debt: Senior Notes . . . . . . . $65 - - - - - $65 $65 Average Interest Rate. . . 5.6% - - - - - 5.6% Commercial Paper . . . . . $48 - - - - - $48 $48 Average Interest Rate. . . 6.3% - - - - - 6.3% Notes Payable to Banks . . $ 1 - - - - - $ 1 $ 1 Average Interest Rate. . . 8.8% - - - - - 8.8% Subordinated Debentures. . . $ 6 $ 8 $ 9 $12 - - $35 $35 Average Interest Rate. . 6.1% 5.9% 6.1% 6.0% - - 6.0% Legal Proceedings: - ----------------- There is a legal proceeding pending against the Company in Alabama alleging that the Company's practice of inserting dispute resolution provisions into its consumer lending documents and requiring consumers to -16- abide by such provisions violates the Equal Credit Opportunity Act. Plaintiffs are seeking declaratory relief that they cannot be compelled to forfeit their statutorily granted rights under the Truth-in-Lending Act and other consumer protection laws. Management believes that the Company's operations are in compliance with applicable laws and regulations and that the action is without merit. The Company is diligently contesting and defending against this proceeding. Based on current information available, Management is unable to predict the potential outcome of this matter or its impact on the Company's financial condition or business operations. Year 2000 Issues: - ---------------- In the Company's 1998 Annual Report and subsequent 1999 quarterly reports to investors, Management discussed preparations being undertaken to insure the Company was Year 2000 compliant. Management closely adhered to the Interagency Guidelines Establishing Year 2000 Standards for Safety and Soundness which set forth safety and soundness standards pursuant to the Federal Financial Institutions Examination Council ("FFIEC"). All information technology ("IT") systems and non-IT systems were tested prior to the end of 1999. In addition, contingency plans were formulated as a safeguard in the event of system failures. The Company did not experience any significant malfunctions or errors in its operations or business systems when the date changed from 1999 to 2000. Based on operations since January 1, 2000, the Company does not expect any significant impact on its on-going business as a result of the "Year 2000 issue". However, it is possible that the full impact of the date change, which was of concern due to computer programs that use two digits instead of four digits to define years, has not been fully recognized. For example, it is possible that Year 2000 or similiar issues such as leap year related problems may occur with billing, payroll or financial closings at month, quarterly or year end. The Company believes that any such problems are likely to be minor and correctible. In addition, the Company could still be negatively impacted if its third party suppliers are adversely affected by the Year 2000 or similar problems that have arisen for its third party suppliers. The Company will continue to monitor Mission Critical applications of the Company and third party suppliers throughout the current year. The Company expended $28,214 on Year 2000 readiness efforts in 1999. Management projects expenditures of an additional $10,000 for such efforts during 2000. New Accounting Standards: - ------------------------ In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income", effective for fiscal years beginning after December 15, 1997. This statement establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The Company adopted SFAS 130 during 1998. Also in June 1997, the FASB issued SFAS No. 131 "Disclosure about Segments of an Enterprise and Related Information," effective for financial statements beginning after December 15, 1997. This statement requires companies to determine segments based on how management makes decisions about allocating resources to segments and measuring their performance. Disclosures for each segment are similar to those required under current standards, with the addition of certain quarterly disclosure requirements. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company adopted this accounting standard in 1998 and disclosure is provided in Note 10 of Notes to Consolidated Financial Statements. During the first quarter of 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") No. 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use." SOP No. 98-1 requires capitalization of computer software costs that meet certain criteria. The statement is effective for fiscal years beginning after December 15, 1998. The Company adopted SOP No. 98-1 effective January 1, 1999. SOP No. 98-1 did not have a material impact on the Company's financial position or results of operations. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective for fiscal years beginning after June 15, 1999. The Statement requires companies to record derivatives -17- on the balance sheet as assets and liabilities at fair value. The Statement also requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. In June 1999, the FASB issued SFAS No. 137 whereby the adoption of SFAS No. 133 was deferred to fiscal years beginning after June 15, 2000. The Company is evaluating the impact of FASB No. 133 on the Company's future earnings and financial position but does not expect it to be material. Forward Looking Statements: - -------------------------- Certain information in the previous discussion and other statements contained in this annual report which are not historical facts may be forward-looking statements that involve risks and uncertainties. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein. Possible factors which could cause future results to differ from expectations are, but are not limited to, adverse economic conditions including the interest rate environment, federal and state regulatory changes, unfavorable outcome of litigation, Year 2000 issues and other factors referenced elsewhere. MANAGEMENT'S REPORT The accompanying financial statements were prepared in accordance with generally accepted accounting principles by the management of the Company 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 Company's 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. -18- 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, 1999 and 1998, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted in the United States. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. s/ ARTHUR ANDERSEN LLP Atlanta, Georgia February 29, 2000 -19- 1st FRANKLIN FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF FINANCIAL POSITION DECEMBER 31, 1999 AND 1998 ASSETS 1999 1998 ---- ---- CASH AND CASH EQUIVALENTS: Cash and Due From Banks. . . . . . . . . . $ 2,176,494 $ 2,408,142 Short-term Investments, $300,000 in trust in 1999 and 1998 (Note 4). . . . . . . . . . . . 3,738,041 17,703,536 ------------ ------------ 5,914,535 20,111,678 ------------ ------------ LOANS (Note 2): Direct Cash Loans. . . . . . . . . . . . . 153,169,782 131,635,924 First Mortgage Real Estate Loans . . . . . 28,453,054 27,852,628 Second Mortgage Real Estate Loans. . . . . 5,493,409 5,612,540 Sales Finance Contracts. . . . . . . . . . 13,352,067 10,881,849 ------------ ------------ 200,468,312 175,982,941 Less: Unearned Finance Charges . . . . . . 22,701,162 19,334,116 Unearned Insurance Premiums and Commissions. . . . . . . . . . 13,648,715 11,446,901 Allowance for Loan Losses. . . . . . 7,994,102 6,653,763 ------------ ------------ Net Loans. . . . . . . . . . . . 156,124,333 138,548,161 ------------ ------------ MARKETABLE DEBT SECURITIES (Note 3): Available for Sale, at fair market value . 47,127,780 39,938,412 Held to Maturity, at amortized cost. . . . 6,734,286 7,205,113 ------------ ------------ 53,862,066 47,143,525 ------------ ------------ OTHER ASSETS: Land, Buildings, Equipment and Leasehold Improvements, less accumulated depreciation and amortization of $9,155,863 and $8,382,863 in 1999 and 1998, respectively . . . . . . . . . . . 4,556,988 4,687,343 Due from Nonaffiliated Insurance Company . 1,205,895 1,038,554 Miscellaneous. . . . . . . . . . . . . . . 5,474,243 5,145,649 ------------ ------------ 11,237,126 10,871,546 ------------ ------------ TOTAL ASSETS . . . . . . . $227,138,060 $216,674,910 ============ ============ The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. -20- 1st FRANKLIN FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF FINANCIAL POSITION DECEMBER 31, 1999 AND 1998 LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998 ---- ---- SENIOR DEBT (Note 5): Senior Demand Notes, including accrued interest . . . . . . . . . . . . $ 64,930,179 $ 54,819,670 Commercial Paper . . . . . . . . . . . . . 47,994,462 49,626,360 Notes Payable to Banks . . . . . . . . . . 965,000 -- ------------- ------------ 113,889,641 104,446,030 ------------- ------------ ACCOUNTS PAYABLE AND ACCRUED EXPENSES. . . . 13,461,731 11,904,342 ------------- ------------ SUBORDINATED DEBT (Note 6) . . . . . . . . . 35,246,639 38,960,747 ------------- ------------ Total Liabilities . . . . . . . 162,598,011 155,311,119 ------------- ----------- COMMITMENTS AND CONTINGENCIES (Note 7) STOCKHOLDERS' EQUITY: Preferred Stock; $100 par value 6,000 shares authorized; no shares outstanding. . . . . . . . . . . . . . -- -- Common Stock: Voting Shares; $100 par value; 2,000 shares authorized; 1,700 shares outstanding . . . . . . . . . . 170,000 170,000 Non-Voting Shares; no par value; 198,000 shares authorized; 168,300 shares outstanding as of December 31, 1999 and 1998. . . . . -- -- Accumulated Other Comprehensive (Loss) Income . . . . . . (780,772) 556,423 Retained Earnings . . . . . . . . . . . . 65,150,821 60,637,368 ------------ ------------ Total Stockholders' Equity. . . 64,540,049 61,363,791 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. . . $227,138,060 $216,674,910 ============ ============ The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. -21- 1st FRANKLIN FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 1999 1998 1997 ---- ---- ---- INTEREST INCOME: Finance Charges . . . . . . . . $47,215,543 $42,688,691 $40,030,163 Investment Income . . . . . . . 3,436,214 3,323,660 3,241,054 ----------- ----------- ----------- 50,651,757 46,012,351 43,271,217 INTEREST EXPENSE: ----------- ----------- ----------- Senior Debt . . . . . . . . . . 6,353,046 5,966,615 6,128,495 Subordinated Debt . . . . . . . 2,567,428 2,756,586 2,672,987 ----------- ----------- ----------- 8,920,474 8,723,201 8,801,482 ----------- ----------- ----------- NET INTEREST INCOME . . . . . . . 41,731,283 37,289,150 34,469,735 PROVISION FOR LOAN LOSSES (Note 2). . . . . . 8,523,311 7,031,251 6,915,794 ----------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES . . . 33,207,972 30,257,899 27,553,941 ----------- ----------- ----------- NET INSURANCE INCOME: Premiums and Commissions. . . . 21,323,182 19,080,146 17,655,350 Insurance Claims and Expenses . (4,305,860) (4,079,280) (4,077,775) ----------- ----------- ----------- 17,017,322 15,000,866 13,577,575 ----------- ----------- ----------- OTHER REVENUE (Note 8). . . . . . 666,289 590,924 571,837 ----------- ----------- ----------- OPERATING EXPENSES (Note 8): Personnel Expense . . . . . . . 25,091,643 21,884,828 20,330,220 Occupancy Expense . . . . . . . 5,787,269 5,424,248 5,084,344 Other Expense . . . . . . . . . 10,349,695 9,682,014 9,544,449 ----------- ----------- ----------- 41,228,607 36,991,090 34,959,013 ----------- ----------- ----------- INCOME BEFORE INCOME TAXES. . . . 9,662,959 8,858,599 6,744,340 PROVISION FOR INCOME TAXES (Note 9) . . . . . 1,915,456 1,590,814 4,928,030 ----------- ----------- ----------- NET INCOME. . . . . . . . . . . . $ 7,747,503 $ 7,267,785 $ 1,816,310 =========== =========== =========== EARNINGS PER SHARE Voting Common Stock; 1,700 Shares Outstanding all periods . . . . . . . . . $45.57 $42.75 $10.68 Non-Voting Common Stock; ====== ====== ====== 168,300 Shares Outstanding all periods . . . . . . . . . $45.57 $42.75 $10.68 ====== ====== ====== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. -22- 1st FRANKLIN FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Accumulated Common Stock Other ----------------- Retained Comprehensive Shares Amount Earnings Income Total ------- -------- ----------- ------------ ----------- Balance at December 31, 1996. . . . . . 170,000 $170,000 $53,200,768 $ 43,288 $53,414,056 Comprehensive Income: Net Income for 1997 . . . . . . . . -- -- 1,816,310 -- Net change in unrealized gain on available-for-sale securities . . -- -- -- 299,522 Total Comprehensive Income. . . . . . -- -- -- -- 2,115,832 Cash distributions paid . . . . . . . -- -- (795,739) -- (795,739) ------- -------- ----------- ---------- ----------- Balance at December 31, 1997. . . . . . 170,000 170,000 54,221,339 342,810 54,734,149 Comprehensive Income: Net Income for 1998 . . . . . . . . . -- -- 7,267,785 -- Net change in unrealized gain on available-for-sale securities . . . -- -- -- 213,613 Total Comprehensive Income. . . . . . -- -- -- -- 7,481,398 Cash distributions paid . . . . . . . -- -- (851,756) -- (851,756) ------- -------- ----------- ---------- ----------- Balance at December 31, 1998. . . . . . 170,000 170,000 60,637,368 556,423 61,363,791 Comprehensive Income: Net Income for 1999 . . . . . . . . . -- -- 7,747,503 -- Net change in unrealized gain on available-for-sale securities . . . -- -- -- (1,337,195) Total Comprehensive Income. . . . . . -- -- -- -- 6,410,308 Cash distributions paid . . . . . . . -- -- (3,234,050) -- (3,234,050) ------- -------- ----------- --------- ----------- Balance at December 31, 1999. . . . . . 170,000 $170,000 $65,150,821 $(780,772) $64,540,049 ======= ======== =========== ========= ===========
1999 1998 1997 ---- ---- ---- Disclosure of reclassification amount: - ------------------------------------- Unrealized holding gains (losses) arising during period, net of applicable income taxes. . . . . . . . . . . . . $(1,337,804) $ 224,200 $ 299,636 Less: Reclassification adjustment for (gains) losses included in income, net of applicable income taxes. . . . . . . . . . . . . . . . . . . . (609) (10,587) (114) ----------- --------- ----------- Net unrealized gains (losses) on securities, net of applicable income taxes. . . . . . . . . . . . . $(1,337,195) $ 213,613 $ 299,522 =========== ========= ===========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. -23- 1st FRANKLIN FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income. . . . . . . . . . . . . . . . . . . $ 7,747,503 $ 7,267,785 $ 1,816,310 Adjustments to reconcile net income to net cash provided by operating activities: Provision for Loan Losses . . . . . . . . . 8,523,311 7,031,251 6,915,794 Depreciation and Amortization . . . . . . . 1,231,641 1,253,361 1,202,836 Provision for Deferred Taxes. . . . . . . . 267,506 115,929 3,661,156 Gain (Loss) on sale of marketable securities and equipment and premium amortization on securities. . . . . . . . 177,891 41,872 (12,492) Increase in Miscellaneous Assets. . . . . . (495,935) (672,382) (285,244) Increase in Other Liabilities . . . . . . . 1,577,374 1,484,998 67,560 ------------ ------------ ------------ Net Cash Provided . . . . . . . . . . . 19,029,291 16,522,814 13,365,920 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Loans originated or purchased . . . . . . . . . (137,821,710) (118,900,788) (114,175,268) Loan payments . . . . . . . . . . . . . . . . . 111,722,227 106,022,624 104,242,345 Purchases of marketable securities. . . . . . . (21,998,803) (32,709,322) (28,845,752) Sales of marketable securities. . . . . . . . . 7,047,365 66,658 -- Redemptions of marketable securities. . . . . . 5,790,000 18,235,000 19,645,000 Principal payments on marketable securities . . 630,367 411,562 365,678 Capital expenditures. . . . . . . . . . . . . . (1,137,906) (1,063,006) (2,677,986) Proceeds from sale of equipment . . . . . . . . 46,573 25,146 71,370 ------------ ------------ ------------ Net Cash Used . . . . . . . . . . . . . (35,721,887) (27,912,126) (21,374,613) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in Notes Payable to Banks and Senior Demand Notes . . . . . . . . 11,075,509 3,750,528 5,291,424 Commercial Paper issued . . . . . . . . . . . . 26,284,371 25,385,223 29,816,406 Commercial Paper redeemed . . . . . . . . . . . (27,916,269) (23,619,308) (30,918,084) Subordinated Debt issued. . . . . . . . . . . . 5,215,536 6,841,431 6,877,593 Subordinated Debt redeemed. . . . . . . . . . . (8,929,644) (5,127,205) (4,573,535) Dividends / Distributions Paid. . . . . . . . . (3,234,050) (851,756) (795,739) ------------ ------------ ------------ Net Cash Provided . . . . . . . . . . . 2,495,453 6,378,913 5,698,065 ------------ ------------ ------------ NET DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . (14,197,143) (5,010,399) (2,310,628) CASH AND CASH EQUIVALENTS, beginning. . . . . . . 20,111,678 25,122,077 27,432,705 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, ending . . . . . . . . $ 5,914,535 $ 20,111,678 $ 25,122,077 ============ ============ ============ Cash paid during the year for: Interest . . . . . $ 8,894,887 $ 8,837,764 $ 8,670,194 Income Taxes . . . $ 1,650,743 $ 1,391,790 $ 1,550,958
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. -24- 1st FRANKLIN FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 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 177 branch offices. (See inside front cover for branch office locations.) Basis of Consolidation: The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Fair Values of Financial Instruments: The following methods and assumptions are used by the Company in estimating fair values for financial instruments: Cash and Cash Equivalents. The carrying value of cash and cash equivalents approximates fair value due to the relatively short period of time between the origination of the instruments and their expected realization. Loans. The fair value of the Company's direct cash loans and sales finance contracts approximate the carrying value since the estimated life, assuming prepayments, is short-term in nature. The fair value of the Company's real estate loans approximate the carrying value since the rate charged by the Company approximates market. Marketable Debt Securities. The fair values for marketable debt securities are based on quoted market prices. If a quoted market price is not available, fair value is estimated using market prices for similar securities. See Note 3 for the fair value of marketable debt securities. Senior Debt. The carrying value of the Company's senior debt approximates fair value due to the relatively short period of time between the origination of the instruments and their expected payment. Subordinated Debt. The carrying value of the Company's subordinated debt approximates fair value due to the repricing frequency of the debt. Other significant assets and liabilities, which are not considered financial instruments and for which fair values have not been estimated, include premises and equipment and deferred taxes. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective for fiscal years beginning after June 15, 1999. The Statement requires companies to record derivatives on the balance sheet as assets and liabilities at fair value. The Statement also requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. In June 1999, the FASB issued SFAS No. 137 whereby the adoption of SFAS No. 133 was deferred to fiscal years beginning after June 15, 2000. The Company is evaluating the impact of FASB No. 133 on the Company's future earnings and financial position but does not expect it to be material. 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 -25- 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. Income Recognition: Although generally accepted accounting principles require other methods to be used for income recognition, the Company uses the Rule of 78's method to recognize interest and insurance income on loans which have precomputed charges. Since the majority of these loans are paid off or renewed in less than one year and because the interest and insurance charges are contractually rebated using the Rule of 78's method, the results obtained by using the Rule of 78's closely approximate those that would be obtained if other generally accepted methods were used. Finance charges are precomputed and included in the gross amount of certain direct cash loans, sales finance contracts and certain real estate loans. These precomputed charges are deferred and recognized as income on an accrual basis using the Rule of 78's (which approximates the interest method). Finance charges on the other direct cash loans and real estate loans are recognized as income on a simple interest accrual basis. Income is not accrued on a loan that is more than 60 days past due. When material, the Company defers loan fees and recognizes them as an adjustment to yield over the contractual life of the related loan. The Company's method of accounting for such fees does not materially differ from generally accepted accounting principles for such fees. The property and casualty credit insurance policies written by the Company are reinsured by the property and casualty insurance subsidiary. The premiums are deferred and earned on a Rule of 78's basis (which approximates the pro-rata method). The credit life and accident and health policies written by the Company are reinsured by the life insurance subsidiary. The premiums are deferred and earned using the pro-rata method for level-term life policies, the Rule of 78's (which approximates the pro-rata method) for decreasing-term life policies and an average of the pro-rata method and Rule of 78's for accident and health policies. Claims of the insurance subsidiaries are expensed as incurred and reserves are established for incurred but not reported (IBNR) claims. Policy acquisition costs of the insurance subsidiaries are deferred and amortized to expense over the life of the policies on the same methods used to recognize premium income. Depreciation and Amortization: Office machines, equipment and company automobiles are recorded at cost and depreciated on a straight-line basis over a period of three to ten years. Leasehold improvements are amortized over seven years using the double declining method for book and tax. Income Taxes: No provision for income taxes has been made for the Company since it elected S Corporation status in 1997. The Company's insurance subsidiaries remain taxable and income taxes are provided where applicable (Note 9). 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. -26- 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 estimated 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, 1999 and 1998 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, net of taxes, in accumulated other comprehensive income which is a separate component of stockholders' equity. The remainder of the investment portfolio is carried at amortized cost and designated as held-to-maturity as Management has both the ability and intent to hold these securities to maturity. Stock Dividend: On January 26, 1996, the Company paid a stock dividend of 99 shares of Non-Voting Common Stock for each outstanding share of Voting Common Stock. The Non-Voting Common Stock has terms similar to the Company's Voting Common Stock, other than its non-voting status. The consolidated financial statements for prior periods have been adjusted to reflect the effect of this dividend. All references to common shares and per share information have been restated to reflect the stock dividend. Earnings per Share Information: In February 1997, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Standard ("SFAS") No. 128, "Earnings per Share", that specifies the computation, presentation and disclosure requirements for earnings per share. The Company adopted the new Standard in the quarter ended December 31, 1997. The Company has no contingently issuable common shares, thus basic and diluted share amounts are the same. 2. LOANS The Company held $13,169,809 and $10,804,227 of loans in a non-accrual status at December 31, 1999 and 1998, 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, 1999 is as follows: Direct 1st Mortgage 2nd Mortgage Sales Due In Cash Real Estate Real Estate Finance Calendar Year Loans Loans Loans Contracts ------------- ----- ----- ----- --------- 2000. . . . . . 72.11% 19.25% 19.87% 72.87% 2001. . . . . . 24.84 18.75 20.35 22.29 2002. . . . . . 2.23 16.54 18.31 4.36 2003. . . . . . .46 12.71 14.89 .40 2004. . . . . . .13 9.50 10.46 .06 2005 & later. . .23 23.25 16.12 .02 ------ ------ ------ ------- 100.00% 100.00% 100.00% 100.00% ====== ====== ====== ====== Experience of the Company has shown that a majority of its loans will be renewed many months prior to their final contractual maturity dates. Accordingly, the above contractual maturities should not be regarded as a forecast of future cash collections. Cash Collections on Principal: During the years ended December 31, 1999 and 1998, cash collections applied to principal of loans totaled $111,722,227 and $106,022,624, respectively, and the ratios of these cash collections to average net receivables were 68.81% and 71.35%, respectively. -27- Allowance for Loan Losses: The Allowance for Loan Losses is based on the Company's previous loss experience, a review of specifically identified loans where collection is doubtful 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 probable losses in the current loan portfolio. Specific provision for loan losses is made for impaired loans based on a comparison of the recorded carrying value in the loan to either the present value of the loan's expected cash flow, the loan's estimated market price or the estimated fair value of the underlying collateral. When a loan becomes five installments past due, it is charged off unless management directs that it be retained as an active loan. In making this charge off evaluation, no installment is counted as being past due if at least 80% of the contractual payment has been paid. The amount charged off is the unpaid balance less the unearned finance charges and the unearned insurance premiums. An analysis of the allowance for the years ended December 31, 1999, 1998 and 1997 is shown in the following table: 1999 1998 1997 ---- ---- ---- Beginning Balance . . . . . . . $6,653,763 $5,968,818 $5,753,221 Provision for Loan Losses . . 8,523,311 7,031,251 6,915,794 Bulk Purchase Accounts. . . . 114,326 24,663 146,606 Charge-Offs . . . . . . . . . (9,699,044) (8,503,698) (8,257,856) Recoveries. . . . . . . . . . 2,401,746 2,132,729 1,411,053 ---------- ---------- ---------- Ending Balance. . . . . . . . . $7,994,102 $6,653,763 $5,968,818 ========== ========== ========== 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, 1999: ---- ----- ------ ----- U.S. Treasury Securities and obligations of U.S. government corporations and agencies . $15,171,646 $ 8,237 $ (315,592) $14,864,291 Obligations of states and political subdivisions. . . 30,818,183 125,416 (612,731) 30,330,868 Corporate Securities. . . . . 2,035,316 -- (102,695) 1,932,621 ----------- -------- ----------- ----------- $48,025,145 $133,653 $(1,031,018) $47,127,780 =========== ======== =========== =========== December 31, 1998: U.S. Treasury Securities and obligations of U.S. government corporations and agencies . $ 9,423,166 $106,662 $ (6,110) $ 9,523,718 Obligations of states and political subdivisions. . . 28,321,157 641,761 (35,788) 28,927,130 Corporate Securities. . . . . 1,466,768 21,421 (625) 1,487,564 ----------- -------- ----------- ----------- $39,211,091 $769,844 $ (42,523) $39,938,412 =========== ======== =========== =========== -28- 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, 1999: ---- ----- ------ ----- U.S. Treasury Securities and obligations of U.S. government corporations and agencies . $ 1,505,311 $ -- $ (42,342) $ 1,462,969 Obligations of states and political subdivisions. . . 4,449,031 11 (121,598) 4,327,444 Corporate Securities. . . . . 779,944 -- (34,240) 745,704 ----------- ------- ---------- ----------- $ 6,734,286 $ 11 $ (198,180) $ 6,536,117 =========== ======= ========== =========== December 31, 1998: U.S. Treasury Securities and obligations of U.S. government corporations and agencies . $ 2,756,782 $ 33,843 $ -- $ 2,790,625 Obligations of states and political subdivisions. . . 3,663,617 52,835 -- 3,716,452 Corporate Securities. . . . . 784,714 25,470 (2,430) 807,754 ----------- -------- ---------- ----------- $ 7,205,113 $112,148 $ (2,430) $ 7,314,831 =========== ======== ========== =========== The amortized cost and estimated fair market values of marketable debt securities at December 31, 1999, 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 . . $ 4,788,827 $ 4,767,860 $1,631,148 $1,621,874 Due after one year through five years. . . . 30,906,278 30,349,864 1,645,142 1,606,509 Due after five years through ten years . . . . 11,543,415 11,227,190 2,860,706 2,753,477 Due after ten years . . . . 786,625 782,866 597,290 554,256 ----------- ----------- ---------- ---------- $48,025,145 $47,127,780 $6,734,286 $6,536,116 =========== =========== ========== ========== Sales of investments in debt securities available-for-sale during 1999 generated proceeds of $7,047,366. Gross gains of $7,882 and gross losses of $(7,946) were realized on these sales. Proceeds from redemptions of investment securities due to call provisions and redemptions due to regular scheduled maturities during 1999 were $6,420,368. Gross gains of $904 were realized on these redemptions. There were no proceeds generated due to sales of investment securities. Sales of investments in debt securities available-for-sale during 1998 generated proceeds of $66,658 and a gain of $977. Proceeds from redemptions of investment securities due to call provisions and redemptions due to regular scheduled maturities during 1998 were $18,235,000. Gross gains of $13,278 and gross losses of $(2,258) were realized on these redemptions. There were no proceeds generated due to sales of investment securities. Proceeds from sales of investments in debt securities available for sale during 1997 were $19,645,000. Gross gains of $2,837 and gross losses of $(3,782) were realized on these sales. -29- 4. PLEDGED ASSETS At December 31, 1999, 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. 5. SENIOR DEBT The Company has a Credit Agreement with three 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. Borrowings against the credit line were $965,000 at December 31, 1999. The Credit Agreement has a commitment termination date of June 30 in any year in which written notice of termination is given by the banks. If written notice is given in accordance with the agreement, the outstanding balance of the loans shall be paid in full on the date which is three and one half years after the commitment termination date. The banks also may terminate the agreement upon the violation of any of the financial ratio requirements or covenants contained in the agreement or in June of any calendar year if the financial condition of the Company becomes unsatisfactory to the banks. Such financial ratio requirements include a minimum equity requirement, an interest expense coverage ratio and a minimum debt to equity ratio. The Company has an additional Credit Agreement for $2,000,000 which is used for general operating purposes. This agreement provides for borrowings on an unsecured basis at 1/8% above the prime rate of interest and has a termination date of July 1, 2000. 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) 1999: Bank . . . . . . . . . 8.75% $ 1,350 $ 25 8.75% Senior Notes . . . . . 5.59 64,930 58,366 5.21 Commercial Paper . . . 6.32 56,997 53,615 6.10 All Categories . . . 5.92 116,603 112,055 5.64 1998: Bank . . . . . . . . . .--% $ 192 $ 156 5.95% Senior Notes . . . . . 5.13 54,820 52,801 5.61 Commercial Paper . . . 6.18 49,626 46,725 6.37 All Categories . . . 5.63 104,446 99,682 5.97 1997: Bank . . . . . . . . . 5.95% $ 241 $ 217 5.95% Senior Notes . . . . . 5.92 52,383 47,814 5.92 Commercial Paper . . . 6.52 53,372 50,164 6.52 All Categories . . . 6.21 101,302 98,195 6.23 -30- 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 ------------------------ --------------------- 1999 1998 1997 1998 1998 1997 6.01% 6.39% 6.61% 6.10% 6.52% 6.68% Maturity information on the Company's Subordinated Debt at December 31, 1999 is as follows: Amount Maturing --------------------------------------- Based on Maturity Based on Interest Date Adjustment Period ----------------- ----------------- 2000. . . . . . . $ 6,059,083 $25,291,269 2001. . . . . . . 7,597,108 8,444,898 2002. . . . . . . 9,107,490 559,516 2003. . . . . . . 12,482,958 950,956 ----------- ----------- $35,246,639 $35,246,639 =========== =========== 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 $2,236,708, $1,996,393 and $1,807,899 for the years ended December 31, 1999, 1998 and 1997, respectively. Under the existing noncancelable leases, the Company's minimum aggregate rental commitment at December 31, 1999, amounts to $2,233,302 for 2000, $1,783,112 for 2001, $1,253,371 for 2002, $806,746 for 2003, $647,778 for 2004 and $49,290 for the year 2005 and beyond. The total commitment is $6,773,599. There is a legal proceeding pending against the Company in Alabama alleging that the Company's practice of inserting dispute resolution provisions into its consumer lending documents and requiring consumers to abide by such provisions violates the Equal Credit Opportunity Act. Plaintiffs re seeking declaratory relief that they cannot be compelled to forfeit their statutorily granted rights under the Truth-in-Lending Act and other consumer protection laws. Management believes that the Company's operations are in compliance with applicable laws and regulations and that the action is without merit. The Company is diligently contesting and defending against this proceeding. Management is unable to predict the potential outcome of this matter or its impact on the Company's financial condition or business operations. -31- 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 1999, 1998 and 1997 related to these agreements was $67,800, $63,800 and $63,800, respectively, 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 $5,000 per month, which in Management's opinion is at a rate which approximates that obtainable from independent third parties. At December 31, 1999, the Company maintained $1,000,000 of certificates of deposit with Liberty at market rates and terms. The Company also had $1,851,894 in demand deposits with Liberty at December 31, 1999. 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. During 1999, a loan was extended to a real estate development partnership of which one of the Company's stockholders is a partner. The balance on this commercial loan (including accrued interest) was $1,672,179 at December 31, 1999. 9. INCOME TAXES Effective January 1, 1997, the Company elected S Corporation status for income tax reporting purposes for the parent company (the "Parent"). The taxable income or loss of an S Corporation is includable in the individual tax returns of the stockholders of the Company. Accordingly, deferred income tax assets and liabilities were eliminated and no provisions for current and deferred income taxes were made by the Parent other than amounts related to prior years when the Parent was a taxable entity and for amounts attributable to state income taxes for the state of Louisiana, which does not recognize S Corporation status for income tax reporting purposes. Deferred income tax assets and liabilities will continue to be recognized and provisions for current and deferred income taxes will be made by the Company's subsidiaries. The Company took a one-time charge of $3.6 million during 1997 in order to recognize the effect of the S Corporation election. The Provision for Income Taxes for the years ended December 31, 1999, 1998 and 1997 is made up of the following components: 1999 1998 1997 ---------- ---------- ---------- Current - Federal . . . . . . . . $1,619,207 $1,453,990 $1,251,503 Current - State . . . . . . . . . 28,743 21,040 15,371 ---------- ---------- ---------- Total Current . . . . . . . . . 1,647,950 1,475,030 1,266,874 ---------- ---------- ---------- Prepaid - Federal . . . . . . . . 267,506 115,929 3,343,020 Prepaid - State . . . . . . . . . -- -- 318,136 ---------- ---------- ---------- Total Prepaid . . . . . . . . . 267,506 115,929 3,661,156 ---------- ---------- ---------- Total Provision. . . . . . $1,915,456 $1,590,814 $4,928,030 ========== ========== ========== -32- Temporary differences create deferred federal tax assets and liabilities which are detailed below for December 31, 1999 and 1998: Deferred Tax Assets (Liabilities) --------------------------- 1999 1998 ---- ---- Insurance Commissions . . . . . . $(2,468,129) $(2,111,122) Unearned Premium Reserves. . . . . 704,844 573,841 Unrealized Loss (Gain) on Marketable Debt Securities . . . 116,592 (170,898) Other. . . . . . . . . . . . . . . (76,381) (34,880) ----------- ----------- $(1,723,074) $(1,743,059) =========== =========== The Company's effective tax rate for the years ended December 31, 1998, 1997 and 1996 is analyzed as follows: 1999 1998 1997 ---- ---- ---- Statutory Federal income tax rate. . . 34.0% 34.0% 34.0% State income tax, net of Federal tax effect . . . . . . . . . . . . . .2 .2 3.3 Net tax effect of IRS regulations on life insurance subsidiary . . . . (5.9) (6.8) (8.9) Tax effect of S Corporation status . . (6.3) (6.9) 53.7 Other items. . . . . . . . . . . . . . (2.2) (2.5) (9.0) ---- ---- ---- Effective Tax Rate . . . . . . . . 19.8% 18.0% 73.1% ==== ==== ==== 10. SEGMENT FINANCIAL INFORMATION: In June 1997, the FASB issued SFAS No. 131 "Disclosure about Segments of an Enterprise and Related Information," which the Company adopted in 1998. SFAS No. 131 requires companies to determine segments based on how management makes decisions about allocating resources to segments and measuring their performance. The Company has three reportable segments: Division I, Division II and Division III. Each segment is comprised of a number of branch offices that are aggregated based on vice president responsibility and geographical location. Division I is comprised of offices located in Northeast Georgia, South Carolina and North Carolina. Offices in Central and South Georgia comprise Divison II. Divison III is comprised of branch offices in Alabama, Louisiana, Mississippi and West Georgia. Accounting policies of the segments are the same as those described in the summary of significant accounting policies. Performance is measured based on objectives set at the beginning of each year and include various factors such as segment profit, growth in earning assets and delinquency and loan loss management. All segment revenues result from transactions with third parties. The Company does not allocate income taxes or corporate headquarter expenses to the segments. -33- Below is a performance recap of each of the Company's reportable segments for the three years ended December 31, 1999 followed by a reconcilement to consolidated Company data:
Division I Division II Division III Total Segments Year 1999: ---------- ----------- ------------ -------------- - --------- Revenues: Finance Charges Earned . . $15,309,451 $14,907,510 $16,908,738 $ 47,125,699 Insurance Income . . . . . 4,880,948 6,848,336 6,279,717 18,009,001 Other. . . . . . . . . . . 107,558 132,796 176,254 416,608 ----------- ----------- ----------- ------------- 20,297,957 21,888,642 23,364,709 65,551.308 Expenses: Interest Cost. . . . . . . 2,204,738 2,461,241 2,504,427 7,170,406 Provision for Loan Losses. 1,917,042 2,470,140 2,910,116 7,297,298 Depreciation . . . . . . . 254,577 169,085 377,009 800,671 Other. . . . . . . . . . . 9,006,569 8,439,147 11,031,780 28,477,496 ----------- ----------- ----------- ------------ 13,382,926 13,539,613 16,823,332 43,745,871 ----------- ----------- ----------- ------------ Segment Profit . . . . . . . $ 6,915,031 $ 8,349,029 $ 6,541,377 $ 21,805,437 =========== =========== =========== ============ Segment Assets: Net Receivables. . . . . . $50,671,432 $55,941,619 $60,053,102 $166,666,153 Cash . . . . . . . . . . 55,609 58,222 70,139 183,970 Net Fixed Assets . . . . . 518,232 297,094 863,735 1,679,061 Other Assets . . . . . . . 377,459 331,798 703,297 1,412,554 ----------- ----------- ----------- ------------ Total Segment Assets . . $51,622,732 $56,628,733 $61,690,273 $169,941,738 =========== =========== =========== ============ Division I Division II Division III Total Segments Year 1998: ---------- ----------- ------------ -------------- - --------- Revenues: Finance Charges Earned . . $13,668,361 $14,101,316 $14,861,961 $ 42,631,638 Insurance Income . . . . . 4,327,262 5,911,613 5,468,594 15,707,469 Other. . . . . . . . . . . 92,156 116,311 154,960 363,427 ----------- ----------- ----------- ------------ 18,087,779 20,129,240 20,485,515 58,702,533 ----------- ------------ ----------- ------------ Expenses: Interest Cost. . . . . . . 2,082,298 2,439,714 2,336,803 6,858,815 Provision for Loan Losses. 2,008,540 2,140,347 2,222,083 6,370,970 Depreciation . . . . . . . 246,633 187,281 376,404 810,318 Other. . . . . . . . . . . 8,242,026 7,778,589 9,787,743 25,808,358 ----------- ----------- ----------- ------------ 12,579,497 12,545,931 14,723,033 39,848,461 ----------- ----------- ----------- ------------ Segment Profit . . . . . . . $ 5,508,282 $ 7,583,309 $ 5,762,481 $ 18,854,072 =========== =========== =========== ============ Segment Assets: Net Receivables. . . . . . $44,690,958 $50,874,052 $51,447,448 $147,012,458 Cash . . . . . . . . . . 53,502 49,830 63,497 166,829 Net Fixed Assets . . . . . 568,992 326,368 787,921 1,683,281 Other Assets . . . . . . . 318,517 417,648 631,598 1,367,763 ----------- ----------- ----------- ------------ Total Segment Assets . . $45,631,969 $51,667,898 $52,930,464 $150,230,331 =========== =========== =========== ============
-34-
Division I Division II Division III Total Segments Year 1997: ---------- ----------- ------------ -------------- - --------- Revenue: Finance Charges Earned . . $13,254,994 $13,780,391 $13,027,893 $ 40,063,278 Insurance Income . . . . . 4,434,218 5,378,050 4,699,936 14,512,204 Other. . . . . . . . . . . 95,694 111,584 153,259 360,537 ----------- ----------- ----------- ------------ 17,784,906 19,270,025 17,881,088 54,936,019 =========== =========== =========== ============ Expenses: Interest Cost. . . . . . . 2,146,429 2,450,451 2,251,674 6,848,554 Provision for Loan Losses. 1,997,027 2,186,624 2,663,151 6,846,802 Depreciation . . . . . . . 258,989 213,026 410,537 882,552 Other. . . . . . . . . . . 7,602,911 7,452,571 8,774,662 23,830,144 ----------- ----------- ----------- ------------ 12,005,356 12,302,672 14,100,024 38,408,052 ----------- ----------- ----------- ------------ Segment Profit . . . . . . . $ 5,779,550 $ 6,967,353 $ 3,781,064 $ 16,527,967 =========== =========== =========== ============ Segment Assets: Net Receivables. . . . . . $42,960,935 $49,709,002 $48,867,850 $141,537,787 Cash . . . . . . . . . . . 52,601 46,532 62,168 161,301 Net Fixed Assets . . . . . 527,464 408,556 899,458 1,835,478 Other Assets . . . . . . . 459,098 418,820 679,250 1,557,168 ----------- ----------- ----------- ------------ Total Segment Assets . . $44,000,098 $50,582,910 $50,508,726 $145,091,734 =========== =========== =========== ============
RECONCILEMENT: 1999 1998 1997 ---- ---- ---- Revenues: Total revenues from reportable segments . . . $ 65,551,308 $ 58,364,645 $ 54,936,019 Corporate finance charges earned not allocated to segments . . . . . . . . . 89,844 57,053 (33,114) Reclass of investment income net against interest cost . . . . . . . . . . . 1,654,922 1,791,207 1,895,684 Reclass of insurance expense against insurance income. . . . . . . . . . 4,846,498 4,694,936 4,563,973 Timing difference of insurance income allocation to segments . . . . . . . 248,958 548,083 (75,457) Other revenues not allocated to segments. . . 249,681 227 497 211,299 ------------ ------------ ------------ Consolidated Revenues . . . . . . . . . . $ 72,641,211 $ 65,683,421 $ 61,498,404 ============ ============ ============ Profit or Loss: Total profit or loss for reportable segments. $ 21,805,437 $ 18,854,072 $ 16,527,967 Corporate earnings not allocated. . . . . . . 4,058,739 832,632 102,728 Corporate expenses not allocated. . . . . . . (14,926,521) (10,828,106) (9,886,355) Income taxes not allocated. . . . . . . . . . (1,274,696) (1,590,814) (4,928,030) ------------ ------------ ------------ Consolidated Profit . . . . . . . . . . . $ 9,662,959 $ 7,267,784 $ 1,816,310 ============ ============ ============ Assets: Total assets for reportable segments. . . . . $169,941,738 $150,230,331 $145,091,734 Reclass accrued interest receivable on loans . . . . . . . . . . . . 1,181,899 912,684 915,538 Loans held at corporate home office level . . 2,123,633 2,293,491 947,367 Unearn insurance at corporate level . . . . . (5,823,249) (5,016,709) (4,730,626) Allowance for loan losses at corporate level. (7,994,102) (6,653,763) (5,968,818) Cash and cash equivalents held at corporate level . . . . . . . . . . 5,730,565 19,944,849 24,960,776 Investment securities at corporate level. . . 53,862,066 47,143,525 32,941,755 Fixed assets at corporate level . . . . . . . 2,877,927 3,004,062 3,053,193 Other assets at corporate level . . . . . . . 5,267,583 4,816,440 3,954,653 ------------ ------------ ------------ Consolidated Assets . . . . . . . . . . . $227,138,060 $216,674,910 $201,165,572 ============ ============ ============
-35- DIRECTORS AND EXECUTIVE OFFICERS Directors - -------- Principal Occupation, Has Served as a Name Title and Company Director Since ---- ----------------- -------------- 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 and CEO 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. -36- INSIDE BACK COVER PAGE OF ANNUAL REPORT BRANCH OPERATIONS Division I Division III Northeast Georgia & South Carolina: Alabama, Louisiana, Mississippi and - ---------------------------------- Northeast Georgia: Isabel Vickery Youngblood, Senior ----------------------------------- Vice President Jack R. Coker, Vice President Ronald F. Morrow, Area Vice President Robert J. Canfield, Area Vice Regina K. Bond, Supervisor President K. Donald Floyd, Supervisor J. Michael Culpepper, Area Vice Michael D. Lyles, Supervisor President Brian L. McSwain, Supervisor Ronald E. Byerly, Supervisor Harriet H. Moss, Supervisor Bryan W. Cook, Supervisor Melvin L. Osley, Supervisor Anne Renee Hebert, Supervisor Virginia K. Palmer, Supervisor Jack L. Hobgood, Supervisor Timothy M. Schmotz, Supervisor Bruce S. Hooper, Supervisor Timothy M. Schmotz, Supervisor Janice B. Hyde, Supervisor Tami D. Settlemyer, Supervisor H. Timothy Love, Supervisor Johnny M. Olive, Supervisor R. Darryl Parker, Supervisor Henrietta R. Reathford, Supervisor R. Gaines Snow, Supervisor Division II ADMINISTRATION - ----------- -------------- Central & South Georgia: Ben F. Cheek, IV, Statistics & A. Jarrell Coffee, Vice President Planning Donald C. Carter, Supervisor Lynn E. Cox, Investment Center Judy A. Landon, Supervisor Samuel P. Greer, Internal Audit Jeffrey C. Lee, Supervisor Phoebe P. Martin, Human Resources & Thomas C. Lennon, Supervisor Marketing Dianne H. Moore, Supervisor Pamela S. Rickman, Operations Marcus C. Thomas, Supervisor Coordinator Angela C. Brock, System Support Manager Linda L. Sessa, Data Processing EX-21 4 EXHIBIT 21 Exhibit 21 SUBSIDIARIES OF REGISTRANT Franklin Securities, Inc., a Georgia corporation, 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 corporation, 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, a Georgia corporation, 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. T & T Corporation, a Georgia corporation, is a 50% owned subsidiary of the Company. This corporation owns a building adjacent to the Company's headquarters which the Company leases. EX-23 5 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. 333-47515. s/ Arthur Andersen LLP Atlanta, Georgia March 29, 2000 EX-27 6 ART. 5 FDS FOR 1999 FORM 10-K
5 1 YEAR DEC-31-1999 DEC-31-1999 5,915,535 53,862,066 164,118,435 7,994,102 0 0 13,712,851 9,155,863 227,138,060 127,351,372 148,171,280 170,000 0 0 64,540,049 227,138,060 0 72,641,228 0 0 45,534,467 8,523,311 8,920,474 9,662,959 1,915,456 7,747,503 0 0 0 7,747,503 45.57 45.57
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