-----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, CUl1FGTPRfUQ/xan0CEvzwvYvHsPkG+FxOGzUIu+tAYer2H2e1CxaGmEtpjM3uEf bQdqyoFOM1ywzucIKk3Zng== 0000038723-99-000015.txt : 19990331 0000038723-99-000015.hdr.sgml : 19990331 ACCESSION NUMBER: 0000038723-99-000015 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 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: 99577419 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, 1998 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 28, 1999 ------------------------------------- -------------------------------- 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, 1998 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, 1998, the ("Annual Report"), are incorporated herein by reference. Item 2. ROPERTIES: 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: Two proceedings are pending against 1st Franklin Financial Corporation ("the Company") in Alabama alleging violations of consumer lending laws. Management believes that the Company's operations are in compliance with the applicable regulations and that the actions are without merit, and the Company is diligently contesting these remaining complaints. Based upon current information currently available to the Company, the Company does not believe that the current pending legal proceedings would, individually or in the aggregate, have a material adverse effect upon the Company, although there can be no assurance thereof. 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, 1998. 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. 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA: Pages 19 - 35 of Company's Annual Report are incorporated herein by reference. -2- 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) 62 Since 1967; Chairman of When successor Board elected and qualified Lorene M. Cheek (2)(4)(6) 89 Since 1946; None When successor elected and qualified Jack D. Stovall (1)(2) 63 Since 1983; None When successor elected and qualified Robert E. Thompson (1)(2) 67 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, 61 Joined the Company in 1961 as attorney and became Chairman of Board Vice President in 1962, President in 1972 and Chairman of Board in 1989. T. Bruce Childs, 61 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, 40 Joined the Company in 1983 and became Secretary Secretary in 1989. No Family Relationship A. Roger Guimond, 43 Joined the Company in 1976 as an accountant and Vice President and became Chief Accounting Officer in 1978, Chief Chief Financial Officer Financial Officer in 1991 and Vice President No Family Relationship in 1992. Linda L. Sessa, 43 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 1998 264,000 171,893 2,852 251,638 Chairman and 1997 264,000 210,081 3,044 181,504 CEO 1996 252,000 217,932 3,431 98,336 T. Bruce Childs 1998 282,000 172,613 4,066 228,281 President 1997 264,000 210,081 3,459 163,878 1996 246,000 217,692 3,179 87,633 A. Roger Guimond 1998 152,400 59,717 1,650 80,978 Vice President 1997 142,200 72,001 1,650 54,647 and CFO 1996 132,000 74,362 1,650 29,589 * 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 $6,842 for 1998, $5,931 for 1997 and $4,931 for 1996. 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, 1998: 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, 1998: 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 f Class ---- -------------- ---------- --------- Ben F. Cheek, III Voting Common Stock 1,160 Shares-Direct 68.24% Non-Voting Common Stock 114,840 Shares (1) 68.24% T. Bruce Childs Voting Common Stock None None Non-Voting Common Stock None None A. Roger Guimond Voting Common Stock None None Non-Voting Common Stock None None __________________________________________ All Directors and Executive Officers as a Group Voting Common Stock 1,160 Shares-Direct 68.24% Non-Voting Common Stock 114,840 Shares (1) 68.24% (1) Effective January 1, 1997, the Company elected S Corporation status for income tax reporting purposes. Because partnerships are ineligible to be S Corporation shareholders, Cheek Investments, L.P. -7- 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 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 during the three year period ended December 31, 1998 related to these agreements was $63,800, 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, 1998, the Company maintained $2,100,000 of certificates of deposit with Liberty at market rates and terms. The Company also had $2,356,345 in demand deposits with Liberty at December 31, 1998. During 1998, 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 owns less than 5% of the Company's stock. The balance on this commercial loan was $1,498,502 at December 31, 1998. -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, 1998: Report of Independent Public Accountants. Consolidated Statements of Financial Position at December 31, 1998 and 1997. Consolidated Statements of Income for the three years ended December 31, 1998. Consolidated Statements of Stockholders' Equity for the three years ended December 31, 1998. Consolidated Statements of Cash Flows for the three years ended December 31, 1998. Notes to Consolidated Financial Statements. 2. Financial Statement Schedules: None - Financial statement schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto. 3. Exhibits: 2. (a) Articles of Merger of 1st Franklin Corporation with and into 1st Franklin Financial Corporation dated December 31, 1994 (incorporated herein by reference to Exhibit 3(2)(a) from Form 10-K for the fiscal year ended December 31, 1994). 3. (a) Restated Articles of Incorporation as amended January 26, 1996 (incorporated herein by reference to Exhibit 3(3)(a) from Form 10-K for the fiscal year ended December 31, 1995). (b) Bylaws (incorporated herein by reference to Exhibit 3(3)(b) from Form 10-K for the fiscal year ended December 31, 1995). 4. (a) Executed copy of Indenture dated October 31, 1984, covering the Variable Rate Subordinated Debentures - Series 1 (incorporated herein by reference from Registration Statement No. 2-94191, Exhibit 4a). (b) Modification of Indenture dated March 29, 1995 (incorporated herein by reference to Exhibit 3(4)(b) from Form 10-K for the fiscal year ended December 31, 1994). 9. Not applicable. 10. (a) Credit Agreement dated May, 1993 between the registrant and SouthTrust Bank of Georgia, N.A.. (Incorporated herein by reference from Form 10-K for the fiscal year ended December 31, 1993.) -9- (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. 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, 1998, 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, 1998. 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, 1998. -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 By s/Ben F. Cheek, III Date: March 30, 1999 ------------------- -------------- Ben F. Cheek, III Chairman of Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacity and on the dates indicated: Signatures Title Date ---------- ----- ---- s/ Ben F, Cheek, III Chairman of Board; March 30, 1999 - ----------------------- Chief Executive -------------- (Ben F. Cheek, III) Officer s/ T. Bruce Childs President March 30, 1999 - ----------------------- -------------- (T. Bruce Childs) s/ A. Roger Guimond Vice President; March 30, 1999 - ----------------------- Principal Financial -------------- (A. Roger Guimond) Officer Principal Accounting Officer s/ Lorene M. Cheek Director March 30, 1999 - ----------------------- -------------- (Lorene M. Cheek) s/ Jack D. Stovall Director March 30, 1999 - ----------------------- -------------- (Jack D. Stovall) s/ Robert E. Thompson Director March 30, 1999 - ----------------------- -------------- (Robert E. Thompson) Supplemental Information to be Furnished with Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act. (a) Except to the extent that the materials enumerated in (1) and/or (2) below are specifically incorporated into this Form by reference (in which case see Rule 12b-23b), every registrant which files an annual report on this Form pursuant to Section 15(d) of the Act shall furnish to the Commission for its information, at the time of filing its report on this Form, four copies of the following: (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, 1998, 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-10 2 EXHIBIT 10I Exhibit 10(i) May 27, 1998 CoreStates Bank Mr. Roger Guimond, Vice President and CFO 1st Franklin Financial Corporation 213 E. Tugalo Street P.O. Box 880 Toccoa, GA 30577 Re: Eleventh Amendment of Section 6.14 of Revolving Credit and Term Loan Agreement Dear Roger: Reference is hereby made to that certain Revolving Credit and Term Loan Agreement dated October 1, 1985, as amended from time to time (all of which are hereinafter collectively referred to as the "Credit Agreement") by and among 1st Franklin Financial Corporation ("Company"), CoreStates Bank, N.A., Fleet Bank, N.A., SouthTrust Bank of Georgia, N.A. and Harris Trust and Savings Bank, as lenders (collectively, the "Banks") and CoreStates Bank, N.A. as Agent for the Banks (in such capacity, the "Agent"). All capitalized terms not otherwise defined herein shall have the meanings respectively ascribed to them in the Credit Agreement. The Borrower, the Banks and the Agent hereby agree to amend the Agreement as follows: 1. Section 5.08(b)(v) is deleted in its entirety This letter may be executed in counterparts, all of which taken together shall constitute one and the same agreement, and any of the parties hereto may execute this letter agreement by signing any such counterpart. The Credit Agreement, as amended hereby and as previously amended, remains in full force and effect. Each of the undersigned, by its signature hereto, hereby evidences its consent to the terms and conditions of this letter to be effective only upon the Agent's receipt of an executed counterpart or facsimile by Company and Banks and delivery thereof to the Borrower. Agreed to this 28th day of May, 1998 1st Franklin Financial Corporation CoreStates Bank, N.A., as Agent and Bank By: s/ A. Roger Guimond By: s/ Robert S. Ritter; ------------------------ -------------------------------- A. Roger Guimond; VP/CFO Robert S. Ritter; Vice President Print Name and Title Print Name and Title Harris Trust and Savings Bank Attest: s/ Judy Sheriff By: s/ Jerome P. Crokin --------------- -------------------------------- Judy Sheriff Jerome P. Crokin; Vice President Print Name and Title Southtrust Bank of Georgia, N.A Fleet Bank, N.A. By: s/ Robert S. Lockett By: s/ Robert Kruger ---------------------------- ------------------------------- Robert S. Lockett; Vice Pres. Robert Kruger; Print Name and Title Assist. Vice President Print Name and Title EX-12 3 EXHIBIT 12 Exhibit 12 RATIO OF EARNINGS TO FIXED CHARGES Year Ended December 31 ------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In thousands, except ratio data) Income Before Income Taxes . . . $ 8,859 $ 6,744 $ 8,418 $ 8,969 $10,319 Interest on Indebtedness . . . . 8,723 8,801 8,312 8,048 5,556 Portion of rents representative of the interest factor. . . . . . . . 665 603 518 449 419 ------- ------- ------- ------- ------- Earnings as adjusted . . . . $18,247 $16,148 $17,248 $17,466 $16,294 ======= ======= ======= ======= ======= Fixed Charges: Interest on Indebtedness . . . . $ 8,723 $ 8,801 $ 8,312 $ 8,048 $ 5,556 Portion of rents representative of the interest factor. . . . . . . . 665 603 518 449 419 ------- ------- ------- ------- ------- Fixed Charges . . . . . . . $ 9,388 $ 9,404 $ 8,830 $ 8,497 $ 5,975 ======= ======= ======= ======= ======= Ratio of Earnings to Fixed Charges. . . . . . 1.94 1.72 1.95 2.06 2.73 ==== ==== ==== ==== ==== EX-13 4 EXHIBIT 13 Exhibit 13 1st FRANKLIN FINANCIAL CORPORATION ANNUAL REPORT DECEMBER 31, 1998 FRONT COVER AND BACK COVER (Individual Photos of the 25 "Circle of Diamonds" Branch Managers) 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 Birmingham Enterprise Hamilton Muscle Shoals Scottsboro Andalusia Clanton Fayette Huntsville Opp Selma Arab Cullman Florence Jasper Ozark Sylacaug Athens Decatur Gadsden Madison Prattville Troy Bessemer Dothan Geneva Moulton Russellville (2) Tuscaloosa GEORGIA ------- Adel Calhoun Covington Greensboro Manchester Savannah Albany Canton Cumming Griffin McDonough Statesboro Alma Carrollton Dallas Hartwell McRae Swainsboro Americus Cartersville Dalton Hawkinsville Milledgeville Sylvania Arlington Cedartown Dawson Hazlehurst Monroe Sylvester Athens (2) Chatsworth Douglas Hinesville Montezuma Thomaston Bainbridge Clarkesville Douglasville(2) Hogansville Monticello Thomson Barnesville Claxton East Ellijay Jackson Moultrie Tifton Baxley Clayton Eastman Jasper Nashville Toccoa Blakely Cleveland Elberton Jefferson Newnan Valdosta Blue Ridge Cochran Forsyth Jesup Perry Vidalia Bremen Commerce Fort Valley LaGrange Richmond Hill Warner Robins Brunswick Conyers Gainesville Lavonia Rome Washington Buford Cordele Garden City Lawrenceville Royston Waycross Butler Cornelia Georgetown Madison Sandersville Winder Cairo LOUISIANA --------- Alexandria Leesville Jena Marksville Natchitoches New Iberia ** Pineville DeRidder MISSISSIPPI ----------- Bay St. Louis Columbia Gulfport Jackson McComb Picayune Carthage Grenada Hattiesburg Kosciusko Pearl 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 1999 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 93 branch offices in Georgia, 31 in Alabama, 22 in South Carolina, 11 in Mississippi, 7 in Louisiana and 2 in North Carolina. At December 31, 1998, the Company had 628 employees. As of December 31, 1998, the resources of the Company were invested principally in loans which comprised 64% 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- JASPER, GEORGIA 1998 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 Jasper Staff for this significant achievement. The Friendly Franklin Folks salute you! -2- TO OUR INVESTORS, EMPLOYEES AND FRIENDS: It is with a great deal of pleasure and enthusiasm that we at 1st Franklin Financial present this our 1998 Annual Report. We believe that a great deal was accomplished during the year and are pleased to share these results with you. We intend to build on these accomplishments as we move into the new millennium by continuing to improve in the delivery of our traditional products and services as well as exploring new opportunities in the ever expanding consumer finance industry. While I hope you will read the entire Annual Report, please allow me to point out a few of the year's highlights in this letter. Our pre-tax earnings for the year increased by 31% over 1997 and our finance receivables grew by 5%. This represented solid growth in our receivables portfolio but was not as much as we have seen in the past few years. Competition for business from the borrowing public continues to be very strong but we recognize this to be an opportunity to improve our skills in the areas of product innovation and customer service. In fact, we are already developing new ideas to assist in this effort. The addition of 9 new offices during the year certainly helped in our efforts to keep our receivables growing by adding a number of new customers in new places. We opened 2 new offices in Mississippi; 2 in Louisiana; 1 in South Carolina; 2 in Georgia; and 2 in North Carolina. These new locations join the efforts of our older offices to build a high quality portfolio of receivables. We will continue to seek out new office opportunities during the coming year. I am pleased to report that our Investment Center continues to provide all of the funding needed to meet our lending needs. During the year the Investment Center enjoyed a 5% growth. Our investors have been and continue to be a vital part of the 1st Franklin team and their confidence and support in the years ahead is what will allow our growth to continue. Many thanks to all of you. In the section of this Annual Report entitled "Managements Discussion of Operations" you will find a complete update on our preparations for what is known as the Year 2000 issue ("Y2K"). I urge you to read this update and I invite any questions you might have as we move toward the year 2000. Let me just say that I am very pleased and proud of the work that has been done over the last number of months by our co-workers who have been preparing and testing all of our systems. We will complete our preparation and testing by June 1, 1999. We will be ready for Y2K seven months ahead of time. Finally, I always like to end my letter with a word of thanks to all of you who help to make our company the premier consumer finance company in the southeastern United States. To my co-workers, our investors, customers, bankers and our many friends in the 166 locations in which we are allowed to serve, a heartfelt thank you. Without you 1st Franklin Financial can do nothing. With you, I feel we can do anything we set our mind to. 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 ------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In 000's, except ratio data) Selected Income Statement Data: - ------------------------------ Revenues . . . . . . . . . . $ 65,683 $ 61,498 $ 58,415 $ 55,157 $ 49,334 Net Interest Income. . . . . 37,289 34,470 32,534 30,147 28,111 Interest Expense . . . . . . 8,723 8,801 8,312 8,048 5,556 Provision for Loan Losses. . . . . . . . 7,031 6,916 6,266 4,631 3,238 Income Before Income Taxes . . . . . . . 8,859 6,744 8,418 8,969 10,319 Net Income . . . . . . . . . 7,268 1,816 6,238 6,507 7,165 Ratio of Earnings to Fixed Charges. . . . . . . 1.94 1.72 1.95 2.06 2.73 Selected Balance Sheet Data: - --------------------------- Loans, Net . . . . . . . . . $138,548 $132,701 $129,684 $120,763 $108,667 Total Assets . . . . . . . . 216,675 201,166 191,904 182,084 136,468 Senior Debt. . . . . . . . . 104,446 98,930 94,740 95,541 66,677 Subordinated Debt. . . . . . 38,961 37,247 34,942 30,617 21,603 Stockholders' Equity . . . . 61,364 54,734 53,414 47,747 40,605 Ratio of Total Liabilities to Stockholders' Equity. . 2.53 2.68 2.59 2.81 2.36 -4- BUSINESS The Company 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. The Company also purchases sales finance contracts from various retail dealers. At December 31, 1998, direct cash loans comprised 75% of the Company's outstanding loans, real estate loans 19% and sales finance contracts 6%. In connection with this business, the Company writes credit insurance as an agent for a nonaffiliated company specializing in such insurance. Two wholly owned subsidiaries, Frandisco Life Insurance Company and Frandisco Property and Casualty Insurance Company, reinsure the life, the accident and health and the property insurance so written. The following table shows the sources of the Company's earned finance charges over each of the past five periods: Year Ended December 31 -------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In Thousands) Direct Cash Loans . . . . $33,579 $30,566 $28,440 $25,898 $22,962 Real Estate Loans . . . . 7,112 7,196 7,238 7,058 7,284 Sales Finance Contracts . 1,998 2,268 2,417 2,757 2,472 ------- ------- ------- ------- ------- Total Finance Charges . $42,689 $40,030 $38,095 $35,713 $32,718 ======= ======= ======= ======= ======= Direct cash loans are made primarily to people who need money for some unusual or unforeseen expense or for the purpose of paying off an accumulation of small debts or 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. Interest and fees charged on these loans are in compliance with applicable federal and state laws. First and second mortgage loans on real estate are made to homeowners who wish to improve their property or who wish to restructure their financial obligations. They are generally made in amounts from $3,000 to $50,000 on maturities of 35 to 180 months. Interest and fees charged 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. The interest rates charged on these contracts are in compliance with applicable federal and state laws. Prior to the making of a loan, a credit investigation is undertaken to determine the income, existing indebtedness, length and stability of employment, and other relevant information concerning the customer. In granting the loan, the Company is granted a security interest in real or personal property of the borrower. In making direct cash loans, emphasis is placed upon the customer's ability to repay rather than upon the potential resale value of the underlying security. In making real estate and sales finance loans, however, more emphasis is placed upon the marketability and value of the underlying collateral. -5- The Company competes with several national and regional finance companies, as well as a variety of local finance companies in the communities which it serves. The Company believes it competes effectively in the market place primarily based on its emphasis on customer service. The business of the Company consists mainly of the making of loans to salaried people and wage earners who depend on their earnings to make their repayments. The continued profitable operation of the Company will therefore depend to a large extent on the continued employment of these people and their ability to meet their obligations as they become due. In the event of a sustained recession or a significant downturn in business with consequent unemployment or continued increases in the number of personal bankruptcies among the Company's typical customer base, the Company's collection ratios and profitability could be detrimentally affected. The average annual yield on loans made by the Company (the % of finance charges earned to average net outstanding balance) has been as follows: Year Ended December 31 ---------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Direct Cash Loans. . . . . . . . 30.07% 30.25% 30.75% 31.26% 31.76% Real Estate Loans. . . . . . . . 20.59 21.76 21.53 22.73 24.37 Sales Finance Contracts. . . . . 19.70 20.97 20.77 22.28 21.27 Information regarding the Company's operations: As of December 31 ------------------------------------ 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Number of Branch Offices . . . . 166 157 144 128 117 Number of Employees . . . . . . 628 596 575 527 473 Average Total Loans Outstanding Per Branch ( in 000's) . . . . . . $1,060 $1,064 $1,138 $1,208 $1,202 Average Number of Loans Outstanding Per Branch . . . . 624 644 701 765 814 -6- DESCRIPTION OF LOANS
Year Ended December 31 ---------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- DIRECT CASH LOANS: - ----------------- Number of Loans Made to New Borrowers . . . . . 30,282 28,656 27,636 25,840 26,616 Number of Loans Made to Former Borrowers. . . . 16,083 14,626 14,410 14,740 13,185 Number of Loans Made to Present Borrowers . . . 69,712 65,096 63,329 61,304 60,014 Total Number of Loans Made . . . . . . . . . . . 116,077 108,378 105,375 101,884 99,815 Total Volume of Loans Made (in 000's). . . . . . $196,401 $180,541 $173,196 $164,034 $150,658 Average Size of Loans Made . . . . . . . . $ 1,692 $ 1,666 $ 1,644 $ 1,610 $ 1,509 Number of Loans Outstanding. . . . . . . . 86,819 83,264 80,733 76,549 72,993 Total of Loans Outstanding (in 000's) . . $131,636 $123,039 $117,141 $107,960 $ 96,620 Percent of Total Loans . . . 75% 74% 72% 70% 69% Average Balance on Outstanding Loans. . . . . $ 1,516 $ 1,478 $ 1,451 $ 1,410 $ 1,324 REAL ESTATE LOANS: - ----------------- Total Number of Loans Made . . . . . . . . . . . 2,226 2,155 2,240 2,674 2,264 Total Volume of Loans Made (in 000's). . . . . . $ 20,669 $ 22,921 $ 22,398 $ 22,379 $ 18,755 Average Size of Loans Made . . . . . . . . $ 9,285 $ 10,636 $ 9,999 $ 8,369 $ 8,284 Number of Loans Outstanding. . . . . . . . 4,105 4,101 4,214 4,188 3,811 Total of Loans Outstanding (in 000's) . . $ 33,465 $ 32,630 $ 33,507 $ 32,653 $ 29,150 Percent of Total Loans . . . 19% 19% 20% 21% 21% Average Balance on Outstanding Loans. . . . . $ 8,152 $ 7,957 $ 7,951 $ 7,797 $ 7,649 SALES FINANCE CONTRACTS: - ----------------------- Number of Contracts Purchased. . . . . . . . . 13,490 14,662 17,499 19,195 21,744 Total Volume of Contracts Purchased (in 000's) . . . $ 14,612 $ 15,034 $ 17,150 $ 18,885 $ 20,489 Average Size of Contracts Purchased. . . . . . . . . $ 1,083 $ 1,025 $ 980 $ 984 $ 942 Number of Contracts Outstanding. . . . . . . . 12,710 13,801 15,941 17,151 18,395 Total of Contracts Outstanding (in 000's) . . $ 10,882 $ 11,334 $ 13,201 $ 13,955 $ 14,806 Percent of Total Loans . . . 6% 7% 8% 9% 10% Average Balance on Outstanding Contracts. . . $ 856 $ 821 $ 828 $ 814 $ 805
-7- LOANS ACQUIRED, LIQUIDATED AND OUTSTANDING Year Ended December 31 ---------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (in thousands) LOANS ACQUIRED -------------- DIRECT CASH LOANS. . . . .$195,634 $177,844 $169,825 $164,034 $150,217 REAL ESTATE LOANS. . . . . 20,317 21,532 20,971 22,000 17,916 SALES FINANCE CONTRACTS. . 14,360 13,943 16,131 17,676 19,386 NET BULK PURCHASES . . . . 1,371 5,177 5,818 1,588 2,383 -------- -------- -------- -------- -------- TOTAL LOANS ACQUIRED . .$231,682 $218,496 $212,745 $205,298 $189,902 ======== ======== ======== ======== ======== LOANS LIQUIDATED ---------------- DIRECT CASH LOANS. . . . .$187,804 $174,643 $164,016 $152,694 $136,633 REAL ESTATE LOANS. . . . . 19,833 23,798 21,544 18,876 19,779 SALES FINANCE CONTRACTS. . 15,065 16,901 17,904 19,736 18,782 -------- -------- -------- -------- -------- TOTAL LOANS LIQUIDATED .$222,702 $215,342 $203,464 $191,306 $175,194 ======== ======== ======== ======== ======== LOANS OUTSTANDING ----------------- DIRECT CASH LOANS. . . . . $131,636 $123,039 $117,141 $107,960 $ 96,620 REAL ESTATE LOANS. . . . . 33,465 32,630 33,507 32,653 29,150 SALES FINANCE CONTRACTS. . 10,882 11,334 13,201 13,955 14,806 -------- -------- -------- -------- -------- TOTAL LOANS OUTSTANDING. $175,983 $167,003 $163,849 $154,568 $140,576 ======== ======== ======== ======== ======== UNEARNED FINANCE CHARGES ------------------------ DIRECT CASH LOANS. . . . . $ 17,573 $ 16,062 $ 16,270 $ 17,030 $ 16,114 REAL ESTATE LOANS. . . . . 345 84 12 43 -- SALES FINANCE CONTRACTS. . 1,416 1,504 1,829 2,007 2,140 -------- -------- -------- -------- -------- TOTAL UNEARNED FINANCE CHARGES . . . . $ 19,334 $ 17,650 $ 18,099 $ 19,049 $ 18,297 ======== ======== ======== ======== ======== -8- DELINQUENCIES Delinquent accounts are classified at the end of each month according to the number of installments past due at that time, based on the original or extended terms of the contract. When 80% of an installment has been paid, it is not considered delinquent for the purpose of this classification. When three installments are past due, the account is classified as being 60-89 days past due; when four or more installments are past due the account is classified as being 90 days or more past due. The table below shows the amount of certain classifications of delinquencies and the ratio such delinquencies bear to related outstanding loans. Year Ended December 31 --------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In thousands, except % data) DIRECT CASH LOANS: - ----------------- 60-89 Days Past Due. . . . . $2,631 $2,593 $2,404 $1,914 $1,353 Percentage of Outstanding. . 2.00% 2.11% 2.05% 1.77% 1.40% 90 Days or More Past Due . . $6,358 $5,137 $5,419 $3,286 $2,482 Percentage of Outstanding. . 4.83% 4.18% 4.63% 3.04% 2.57% REAL ESTATE LOANS: - ----------------- 60-89 Days Past Due. . . . . $ 335 $ 432 $ 426 $ 254 $ 299 Percentage of Outstanding. . 1.00% 1.33% 1.27% .78% 1.03% 90 Days or More Past Due . . $ 879 $ 932 $1,334 $1,196 $ 919 Percentage of Outstanding. . 2.63% 2.86% 3.98% 3.66% 3.15% SALES FINANCE CONTRACTS: - ----------------------- 60-89 Days Past Due. . . . . $ 187 $ 285 $ 339 $ 295 $ 281 Percentage of Outstanding. . 1.72% 2.52% 2.57% 2.11% 1.90% 90 Days or More Past Due . . $ 413 $ 439 $ 602 $ 463 $ 293 Percentage of Outstanding. . 3.80% 3.87% 4.56% 3.32% 1.98% -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 ----------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In thousands, except % data) DIRECT CASH LOANS ----------------- Average Net Loans. . . . . . $106,502 $101,051 $ 92,489 $ 82,847 $ 72,298 Liquidations . . . . . . . . $187,804 $174,643 $164,016 $152,694 $136,633 Net Losses . . . . . . . . . $ 5,879 $ 5,992 $ 4,617 $ 3,753 $ 2,475 Net Losses as % of Average Net Loans. . . . . . . . . 5.52% 5.93% 4.99% 4.53% 3.42% Net Losses as % of Liquidations . . . . . . . 3.13% 3.43% 2.81% 2.46% 1.81% REAL ESTATE LOANS ----------------- Average Net Loans. . . . . . $ 32,587 $ 33,066 $ 33,614 $ 31,050 $ 29,889 Liquidations . . . . . . . . $ 19,833 $ 23,798 $ 21,544 $ 18,876 $ 19,779 Net Losses . . . . . . . . . $ 94 $ 141 $ 49 $ 22 $ 43 Net Losses as % of Average Net Loans. . . . . . . . . .29% .43% .15% .07% .14% Net Losses as % of Liquidations . . . . . . . .47% .59% .23% .12% .22% SALES FINANCE CONTRACTS ----------------------- Average Net Loans. . . . . . $ 9,514 $ 10,817 $ 11,640 $ 12,377 $ 11,623 Liquidations . . . . . . . . $ 15,065 $ 16,901 $ 17,904 $ 19,736 $ 18,782 Net Losses . . . . . . . . . $ 398 $ 714 $ 478 $ 434 $ 353 Net Losses as % of Average Net Loans. . . . . . . . . 4.18% 6.60% 4.11% 3.51% 3.04% Net Losses as % of Liquidations . . . . . . . 2.64% 4.22% 2.67% 2.20% 1.88% ALLOWANCE FOR LOAN LOSSES The Allowance for Loan Losses is determined 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 change in the composition of the Company's loan portfolio. Such allowance is, in the opinion of management, 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 authorized to do so by the borrowers, the Company writes various credit insurance products in connection with its loans. The Company writes such insurance as an agent for a non-affiliated insurance company. Frandisco Life Insurance Company and Frandisco Property and Casualty Insurance Company, wholly owned subsidiaries of the Company, reinsure the insurance written from the non-affiliated insurance company. REGULATION AND SUPERVISION - -------------------------- State laws require that each office in which a small loan business is conducted be licensed by the state and that 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 compliance with the law and regulations issued pursuant thereto. The Company has never had any of its licenses revoked. All lending operations are carried on under the provisions of the Federal Consumer Credit Protection Act ("Truth-in-Lending Act"), the Fair Credit Reporting Act and the Federal Real Estate Settlement Procedures Act. The Truth-in-Lending Act requires disclosure to the customer of the finance charge, the annual percentage rate, the total of payments and other information on all loans. A Federal Trade Commission ruling prevents the Company and other consumer lenders from using certain household goods as collateral on direct cash loans. The Company collateralizes such loans with non-household goods such as automobiles, boats and other exempt items. The Company is also subject to state regulations governing insurance agents in the states in which it sells credit insurance. State insurance regulations require that insurance agents be licensed and limit the premium amount charged for such insurance. -11- SOURCE OF FUNDS - --------------- The sources of the Company's funds stated as a % of total liabilities and stockholder's equity and the number of persons investing in the Company's debt securities is as follows: Year Ended December 31 ------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Bank Borrowings. . . . . . . . . -% -% -% -% 1% Public Senior Debt . . . . . . . 48 49 49 52 48 Public Subordinated Debt . . . . 18 19 18 17 16 Other Liabilities. . . . . . . . 6 5 5 5 5 Stockholders' Equity . . . . . . 28 27 28 26 30 --- --- --- --- --- Total. . . . . . . . . . . . . 100% 100% 100% 100% 100% === === === === === Number of Investors. . . . . . . 6,871 6,732 6,333 5,925 5,486 All of the Company's outstanding common stock is held by five related individuals and is not traded in an established public trading market. The Company's average interest rate on borrowings, computed by dividing the interest paid by the average indebtedness outstanding, has been as follows: Year Ended December 31 --------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Senior Borrowings. . . . . . . . 6.09% 6.12% 6.29% 6.97% 6.26% Subordinated Borrowings. . . . . 6.23 6.58 6.86 6.92 6.14 All Borrowings . . . . . . . . . 6.13 6.25 6.67 6.96 6.25 The Company's financial ratios relating to debt are as follows: At December 31 --------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Total Liabilities to Stockholders' Equity . . . . . 2.53 2.68 2.59 2.81 2.36 Unsubordinated Debt to Subordinated Debt plus Stockholders' Equity . . . . . 1.16 1.19 1.17 1.32 1.19 -12- MANAGEMENT'S DISCUSSION OF OPERATIONS Financial Condition: - ------------------- The Company's asset base grew $15.5 million or 8% during 1998 with total assets reaching $216.7 million at December 31, 1998 as compared to $201.2 million at December 31, 1997. Geographic expansion of the branch office network continued with the opening of nine new branch offices two of which were in the state of North Carolina. Entry into North Carolina adds a sixth state to the Company's regional operation base and the overall expansion brings the total number of loan offices to 166. Growth in the asset base occurred primarily in the Company's investment portfolio which increased $14.2 million (43%) during the year. The Company's principal sources of working capital to fund operations and expansion have been cash generated from current operations and the sale of its debt securities. During 1998, these funding sources outpaced the working capital required for ongoing daily operations, thereby creating a surplus of cash. In an attempt to maximize yields, Management invested the cash surplus in the Company's investment portfolio. The Company's investment portfolio consists mainly of U.S. Treasury bonds, Government Agency bonds and various Georgia municipal bonds. Management has designated a significant portion of these investment securities as "available for sale" with any unrealized gain or loss accounted for in the Company's equity section, net of deferred taxes for those investments held by the Company's insurance subsidiaries. Rising bond market values during the current year also contributed to the increase in the investment portfolio. Increases in bond market values resulted in a $.3 million increase, net of deferred taxes for those investments held by the insurance subsidiaries, in the portfolio's fair market value during the year. The remainder of the investment portfolio represents securities carried at amortized cost and designated "held to maturity," as Management has both the ability and intent to hold these securities to maturity. A strong fourth quarter resulted in net receivables (gross receivables less unearned finance charges) increasing $7.3 million (5%) overall for the year, compared to an increase of only $.6 million during the first nine months. Business generated by new locations opened during the previous 24 months and the seasonal upswing in business activity due to the holiday season is attributed with the increase in net loans. This gain in net loans also contributed to the growth in total assets. The aforementioned increases in sales of the Company's public debt securities caused senior debt to increase $5.5 million (6%) and subordinated debt to increase $1.7 million (5%) during 1998 as compared to 1997. Results of Operations: - --------------------- Gross revenues for the three years ended December 31, 1998 were $65.7 million, $61.5 million and $58.4 million, respectively. The upward trend in revenues is directly attributable to a continued growth in the Company's average net receivables and the income associated therewith. During 1998, average net receivables rose $3.7 million (3%) to $148.6 million as compared to $144.9 million during 1997. Average net receivables increased $3.6 million (2%) during 1997 as compared to 1996. Pre-tax profits were $8.9 million during the current year as compared to $6.7 million during 1997 and $8.4 million during 1996. The aforementioned higher revenues and improvement in the Company's cost efficiency ratio were responsible for the higher profits during the year just ended. During 1998, low inflation and the low interest rate environment enabled Management to reduce the Company's cost efficiency ratio to 70.0% as compared to 71.9% during 1997 and 68.3% during 1996. The cost efficiency ratio measures operating expenses against total revenues net of interest and insurance expenses. Pre-tax profits declined during 1997 as compared to 1996 as the ratio increased during the comparable periods. Net Interest Income Net interest income represents the margin by which interest income on earning assets (loans and investment securities) exceeds interest expense on its interest-bearing debt. The Company's principal source of -13- earnings revolves around its net interest margin. Net interest income increased $2.8 million (8%) during 1998 as compared to 1997 and $1.9 million (6%) during 1997 as compared to 1996. These increases in the margin spreads were primarily due to the interest income earned on the aforementioned higher levels of average net outstanding receivables and due to higher investment income. Average senior and subordinated debt outstanding increased $3.3 million (2%) during 1998 as compared to 1997 and $9.8 million (8%) during 1997 as compared to 1996. Although average borrowings increased, lower market rates of interest enabled the Company to reduce average borrowing costs resulting in a slight decline in interest expense for the current year. Interest expense during 1997 increased 6% as compared to 1996. The Company's average interest rate on borrowings declined to 6.13% during 1998 as compared to 6.25% and 6.67% during 1997 and 1996, respectively. Net Insurance Income A $1.4 million (10%) increase in net insurance income during 1998 made a significant contribution in the aforementioned growth in revenues and pre-tax profits. 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. Claims and insurance commissions approximated those experienced in 1997. Net insurance income during 1997 was only marginally higher than 1996. Provision for Loan Losses Net charge-offs were $6.4 million, $6.8 million and $5.1 million during the three years ended December 31, 1998, respectively. Higher recovery rates on loans previously charged off resulted in the decline in net charge-offs during the current year as compared to 1997. Write- offs during 1997 were substantially higher than those in 1996 causing a significant increase in net charge-offs during the comparable periods. Although net losses were lower during the year just ended, rising bankruptcy filings and problem delinquencies continue to have a deteriorating impact on the credit quality of the Company's loan receivables. Accounts 60 days or more delinquent increased to 6.1% of net receivables during 1998 as compared to 5.9% during the previous year. Management is carefully monitoring the credit worthiness of its loan portfolio and historically has been conservative in regards to the amount of the Company's loan loss allowance. See Note 2 to the Notes to Consolidated Financial Statements on page 28 for additional discussion. In order to provide adequate protection against probable losses in the current portfolio, Management raised the loan loss reserve during 1998 as it had done during each of the previous two years. The increase in the reserve led to a slight increase (2%) in the provision for loan losses during the year ended December 31, 1998 as compared to the prior year. Increases in loan losses and an increase in the reserve during 1997 caused a $.6 million (10%) increase in the provision for loan losses as compared to 1996. Also contributing to the increases in the provision during the three year period was the growth in the loan portfolio. Other Operating Expenses Merit salary increases and additional employees required to staff 22 new locations opened since the beginning of 1997 caused personnel expense to increase $1.6 million (8%) during the current year as compared to 1997 and $1.5 million (8%) during 1997 as compared to 1996. Higher profits during 1998 resulted in higher accruals for incentive bonuses and profit sharing expenses, which also contributed to the overall increase in personnel expense during the current year. Start-up cost and additional overhead associated with the expansion of operations were the primary factors responsible for the increase in occupancy expenses and other operating expenses during the two years ended December 31, 1998. Occupancy expenses rose $.3 million (7%) during 1998 as compared to 1997 and $.6 million (12%) during 1997 as compared to 1996. Other operating expenses increased $.1 million (1%) and $1.3 million (16%) during the period ended December 31, 1998 and 1997, respectively. Major advertising expenditures during each period were a key factor for the increases. Other factors adding to the increase in other operating -14- expenses were increases in computer expenses, supervision expenses and taxes and licenses. The increase in other operating expenses during 1998 was much lower than the prior year 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, 1998, 1997 and 1996 were 18.0%, 73.1% and 25.9%, respectively. 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 life insurance subsidiary's effective tax rate and thus decreases the Company's overall tax rate below statutory rates. Investments in tax-exempt securities also allowed the property and casualty insurance company 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 and the sale of debt securities that meet the investment requirements of the public and the continued availability of unused bank credit from its lenders. The previously discussed increases in net cash flows during the current year provided a positive effect on liquidity. Most of the Company's loan portfolio is financed through public debt securities which, because of redemption features, have a shorter average maturity than the loan portfolio. The difference in maturities may adversely affect liquidity if the Company does not continue to sell debt securities at interest rates and terms that are responsive to the demands of the marketplace or maintain sufficient unused bank borrowings. In addition to the debt securities program, the Company has two external sources of funds through its credit agreements. One agreement provides for available borrowings of $21.0 million (all of which was available at December 31, 1998 and 1997) and the Company has an additional $2.0 million credit agreement (all of which was available at December 31, 1998 and 1997). Liquidity was not adversely affected during the current year 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, earnings could be further impacted if loss rates increase. 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 affect 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, 1998. 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 to 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 -------------------------------------------------------- 2004 & Fair 1999 2000 2001 2002 2003 More Total Value ---- ---- ---- ---- ---- ---- ----- ----- (In millions) Assets: Marketable debt securities. $2 $6 $7 $6 $6 $19 $46 $47 Average Interest Rate . . . 5.8% 5.3% 5.5% 5.1% 5.2% 5.3% 5.3% Liabilities: Senior Debt: Senior Notes. . . . . . . $55 - - - - - $55 $55 Average Interest Rate . . 5.1% - - - - - 5.1% Commercial Paper. . . . . $50 - - - - - $50 $50 Average Interest Rate . . 6.2% - - - - - 6.2% Subordinated Debentures . . $10 $7 $10 $12 - - $39 $39 Average Interest Rate . . . 6.7% 6.3% 6.3% 6.2% - - 6.4%
Legal Proceedings: - ----------------- Two legal proceedings remain pending against the Company in Alabama alleging violations of consumer lending laws. Based on current information, the Company does not believe the financial condition and operating results of the Company would be materially affected in the event of an unfavorable outcome, although there can be no assurance thereof. However, Management believes that the Company's operations are in compliance with applicable regulations and that the actions are without merit. The Company is diligently contesting these proceedings. Year 2000 Issues: - ---------------- The inability of computers, software and other equipment utilizing microprocessors to recognize and properly process date fields containing a two-digit year is commonly referred to as the Year 2000 Compliance issue or "Y2K". There has been an increasing amount of public attention lately concerning the impact that the Y2K date change could have on businesses, utilities and other organizations that rely on computerized systems to help run their operations. Prior to the invention of the computer chip, cost and storage problems associated with the limited computer memory -16- available pressured programmers to conserve computer memory by abbreviating calendar dates as two-digits rather than four-digit numbers. Even after the invention of computer chips and declines in the cost of computer memory, the practice of abbreviating the year to two-digits remained common practice. Software programs using this technique record the year 1998 as "98". This approach will work until the Year 2000 when the "00" may be read as 1900 instead of 2000, which could result in major system failures or miscalculations. Although the Company is not a banking institution, it does provide data processing services to Liberty Bank & Trust, a state chartered community bank located in Toccoa, Georgia. As a service provider, the Company is adhering to the Interagency Guidelines Establishing Year 2000 Standards for Safety and Soundness (Guidelines) which set forth safety and soundness standards pursuant to the Federal Financial Institutions Examination Council ("FFIEC"). During the last two years the Company has been identifying and evaluating the impact of the Year 2000 issue. In 1998, the Company officially created a Year 2000 Committee ("Y2K Committee") to oversee compliance with respect to both information technology ("IT") systems and non-IT systems. The Y2K Committee is comprised of upper level mangement of both the Company and the bank for which it provides data processing services. Individuals serving on the committee have a wide range of expertise regarding the operations and technological aspects of the business. Assessments have been made regarding all areas of Company operations. Each area was classified as "mission critical", "mission necessary" or "mission desirable". Testing plans were formalized and the testing of the majority of systems was completed by December 31, 1998. All remaining systems will be tested prior to June 1, 1999. Principal emphasis was placed on testing procedures with the Company's principal outside vendor for loan processing operations and the Company's principal outside vendor for software used to provide banking services to Liberty Bank & Trust. The banking software package is also used to administer the Company's debt securities. The Y2K Committee is communicating with major software vendors, utilities suppliers and other service providers to ensure compliance issues are resolved. During the first quarter of 1999, the Y2K Committee began remediation contingency planning in the unlikely event a system does fail, particularly a "mission critical" area. All plans will be completed and tested by mid- year. Compliance has not had a material affect on the Company's operating results, nor does Management expect it to in the year 1999 or 2000. During technology upgrades made in 1997, the Company was careful to ensure Year 2000 compliance. Costs associated with education and testing in connection with Y2K compliance has been approximately $5,000 during 1998. Expenses during 1999 are budgeted at $20,000. Management does not foresee any problems associated with Year 2000 compliance. However, disruptions in service with respect to the computer systems of vendors and/or suppliers, which are outside the control of the Company, could impair the ability of the Company to obtain necessary services. Examples of critical services would be in the utilities and telecommunications areas. New Accounting Standards: - ------------------------ In June 1997, the FASB issued Financial Accounting Standard Number 130 (SFAS 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. SFAS 130 was adopted during 1998. Also in June 1997, the FASB issued Financial Accounting Standard Number 131 (SFAS 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 footnote 10 of Notes to Consolidated Financial Statements. -17- During the first quarter of 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use." SOP 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 98-1 effective January 1, 1999. SOP 98-1 is not expected to 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 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. The Company does not expect the adoption of this statement to have a material impact on the financial statements or results of operations of the Company. 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 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, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of 1st Franklin Financial Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. s\ ARTHUR ANDERSEN LLP Atlanta, Georgia February 26, 1999 -19- 1st FRANKLIN FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF FINANCIAL POSITION DECEMBER 31, 1998 AND 1997 ASSETS 1998 1997 ---- ---- CASH AND CASH EQUIVALENTS: Cash and Due From Banks. . . . . . . . . . $ 2,408,142 $ 1,894,366 Short-term Investments, $300,000 in trust in 1998 and 1997 (Note 4). . . . . . . . . . . . 17,703,536 23,227,711 ---------- ---------- 20,111,678 25,122,077 ---------- ---------- LOANS (Note 2): Direct Cash Loans. . . . . . . . . . . . . 131,635,924 123,038,889 First Mortgage Real Estate Loans . . . . . 27,852,628 26,730,352 Second Mortgage Real Estate Loans. . . . . 5,612,540 5,899,901 Sales Finance Contracts. . . . . . . . . . 10,881,849 11,333,638 ------------ ------------ 175,982,941 167,002,780 Less: Unearned Finance Charges . . . . . 19,334,116 17,649,653 Unearned Insurance Premiums and Commissions. . . . . . . . . 11,446,901 10,683,061 Allowance for Loan Losses. . . . . 6,653,763 5,968,818 ------------ ------------ Net Loans . . . . . . . . . . 138,548,161 132,701,248 ------------ ------------ MARKETABLE DEBT SECURITIES (Note 3): Available for Sale, at fair market value. 39,938,412 31,688,998 Held to Maturity, at amortized cost . . . 7,205,113 1,252,757 ------------ ------------ 47,143,525 32,941,755 ------------ ------------ OTHER ASSETS: Land, Buildings, Equipment and Leasehold Improvements, less accumulated depreciation and amortization of $8,382,863 and $7,427,927 in 1998 and 1997, respectively (Note 5) . . 4,687,343 4,888,671 Due from Nonaffiliated Insurance Company . 1,038,554 915,387 Miscellaneous. . . . . . . . . . . . . . . 5,145,649 4,596,434 ------------ ------------ 10,871,546 10,400,492 ------------ ------------ TOTAL ASSETS . . . . . . . . . $216,674,910 $201,165,572 ============ ============ 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, 1998 AND 1997 LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 ---- ---- SENIOR DEBT (Note 5): Senior Demand Notes, including accrued interest . . . . . . . . . . . . $ 54,819,670 $ 50,877,380 Commercial Paper . . . . . . . . . . . . . 49,626,360 47,860,445 Notes Payable to Banks . . . . . . . . . . -- 191,762 ------------ ------------ 104,446,030 98,929,587 ------------ ------------ ACCOUNTS PAYABLE AND ACCRUED EXPENSES. . . . 11,904,342 10,255,315 ------------ ------------ SUBORDINATED DEBT (Note 6) . . . . . . . . . 38,960,747 37,246,521 ------------ ------------ Total Liabilities . . . . . . . . . . . . 155,311,119 146,431,423 ------------ ------------ 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, 1998 and 1997 . . . . . . -- -- Accumulated Other Comprehensive Income . . 556,423 342,810 Retained Earnings. . . . . . . . . . . . . 60,637,368 54,221,339 ------------ ------------ Total Stockholders' Equity. . . . . . . 61,363,791 54,734,149 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. . . . . . $216,674,910 $201,165,572 ============ ============ 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, 1998, 1997 AND 1996 1998 1997 1996 ---- ---- ---- INTEREST INCOME: Finance Charges . . . . . . . . . $42,688,691 $40,030,163 $38,094,669 Investment Income . . . . . . . . 3,323,660 3,241,054 2,751,712 ----------- ----------- ----------- 46,012,351 43,271,217 40,846,381 INTEREST EXPENSE: ----------- ----------- ----------- Senior Debt . . . . . . . . . . . 5,966,615 6,128,495 5,774,336 Subordinated Debt . . . . . . . . 2,756,586 2,672,987 2,537,655 ----------- ----------- ----------- 8,723,201 8,801,482 8,311,991 ----------- ----------- ----------- NET INTEREST INCOME . . . . . . . . 37,289,150 34,469,735 32,534,390 PROVISION FOR LOAN LOSSES (Note 2). . . . . . . 7,031,251 6,915,794 6,266,201 ----------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES . . . . 30,257,899 27,553,941 26,268,189 ----------- ----------- ----------- NET INSURANCE INCOME: Premiums and Commissions. . . . . 19,080,146 17,655,350 17,078,994 Insurance Claims and Expenses . . (4,079,280) (4,077,775) (3,816,991) ----------- ----------- ----------- 15,000,866 13,577,575 13,262,003 ----------- ----------- ----------- OTHER REVENUE (Note 8). . . . . . . 590,924 571,837 490,078 ----------- ----------- ----------- OPERATING EXPENSES (Note 8): Personnel Expense . . . . . . . . 21,884,828 20,330,220 18,850,308 Occupancy Expense . . . . . . . . 5,424,248 5,084,344 4,519,937 Other Expense . . . . . . . . . . 9,682,014 9,544,449 8,231,915 ----------- ----------- ----------- 36,991,090 34,959,013 31,602,160 ----------- ----------- ----------- INCOME BEFORE INCOME TAXES. . . . . 8,858,599 6,744,340 8,418,110 PROVISION FOR INCOME TAXES (Note 9) . . . . . . 1,590,814 4,928,030 2,180,358 ----------- ----------- ----------- NET INCOME. . . . . . . . . . . . . $ 7,267,785 $ 1,816,310 $ 6,237,752 =========== =========== =========== EARNINGS PER SHARE Voting Common Stock; 1,700 Shares Outstanding all periods . $42.75 $10.68 $36.69 ====== ====== ====== Non-Voting Common Stock; 168,300 Shares Outstanding all periods . $42.75 $10.68 $36.69 ====== ====== ====== 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
Accumulated Common Stock Other ------------------ Retained Comprehensive Shares Amount Earnings Income Total ------- -------- ----------- ------ ----- Balance at December 31, 1995. . . . . . 170,000 $170,000 $47,325,758 $251,145 $47,746,903 Comprehensive Income: Net Income for 1996 . . . . . . . . -- -- 6,237,752 -- Net change in unrealized gain on. . available-for-sale securities . . -- -- -- (207,857) Total Comprehensive Income. . . . . -- -- -- -- 6,029,895 Cash distributions paid . . . . . . -- -- (362,742) -- (362,742) ------- -------- ----------- -------- ----------- 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 ======= ======== =========== ======== ===========
1998 1997 1996 ---- ---- ---- Disclosure of reclassification amount: - ------------------------------------- Unrealized holding gains (losses) arising during period, net of applicable income taxes . . . . . . . . . . . . . . $224,200 $299,636 $(211,545) Less: Reclassification adjustment for (gains) losses included in income, net of applicable income taxes . . . . . . . . . . . . . . . . . . (10,587) (114) 3,688 -------- -------- --------- Net unrealized gains (losses) on securities, net of applicable income taxes . . . . . . . . . . . . . . $213,613 $299,522 $(207,857) ======== ======== =========
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, 1998, 1997 AND 1996 Increase (Decrease) in Cash and Cash Equivalents
1998 1997 1996 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income. . . . . . . . . . . . . . . . . . . $ 7,267,785 $ 1,816,310 $ 6,237,752 Adjustments to reconcile net income to net cash provided by operating activities: Provision for Loan Losses. . . . . . . . . 7,031,251 6,915,794 6,266,201 Depreciation and Amortization . . . . . . 1,253,361 1,202,836 1,126,296 Provision (Benefit) for Deferred Taxes . . 115,929 3,661,156 (364,809) Gain (Loss) on sale of marketable securities and equipment and premium amortization on securities . . . . . . . 41,872 (12,492) (22,711) Increase in Miscellaneous Assets . . . . . (672,382) (285,244) (1,591,088) Increase in Other Liabilities. . . . . . . 1,484,998 67,560 628,484 ------------ ------------ ------------ Net Cash Provided. . . . . . . . . . . 16,522,814 13,365,920 12,280,125 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Loans originated or purchased . . . . . . . . . (118,900,788) (114,175,268) (110,117,402) Loan payments . . . . . . . . . . . . . . . . . 106,022,624 104,242,345 94,929,949 Purchases of marketable securities. . . . . . . (32,709,322) (28,845,752) (12,339,320) Sales of marketable securities. . . . . . . . . 66,658 -- 3,251,608 Redemptions of marketable securities. . . . . . 18,235,000 19,645,000 7,000,000 Principal payments on marketable securities . . 411,562 365,678 472,366 Capital expenditures. . . . . . . . . . . . . . (1,063,006) (2,677,986) (1,759,762) Proceeds from sale of equipment . . . . . . . . 25,146 71,370 39,565 ------------ ------------ ------------ Net Cash Used. . . . . . . . . . . . . (27,912,126) (21,374,613) (18,522,996) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in Notes Payable to Banks and Senior Demand Notes . . . . . . . . . 3,750,528 5,291,424 3,181,177 Commercial Paper issued . . . . . . . . . . . . 25,385,223 29,816,406 25,319,703 Commercial Paper redeemed . . . . . . . . . . . (23,619,308) (30,918,084) (29,301,703) Subordinated Debt issued. . . . . . . . . . . . 6,841,431 6,877,593 7,999,461 Subordinated Debt redeemed. . . . . . . . . . . (5,127,205) (4,573,535) (3,673,913) Dividends / Distributions Paid. . . . . . . . . (851,756) (795,739) (362,742) ------------ ------------ ------------ Net Cash Provided. . . . . . . . . . . 6,378,913 5,698,065 3,161,983 ------------ ------------ ------------ NET DECREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . (5,010,399) (2,310,628) (3,080,888) CASH AND CASH EQUIVALENTS, beginning. . . . . . . 25,122,077 27,432,705 30,513,593 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, ending . . . . . . . . $ 20,111,678 $ 25,122,077 $ 27,432,705 ============ ============ ============ Cash paid during the year for: Interest. . . . . $ 8,837,764 $ 8,670,194 $ 8,343,828 Income Taxes . . . . . . $ 1,391,790 $ 1,550,958 $ 2,344,697
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, 1998, 1997 AND 1996 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 166 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. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary from these estimates, however, in the opinion of Management, such variances would not be material. -25- 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 deferred 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, 1998 and 1997 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 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 There were $10,804,227 and $9,819,348 of loans in a non-accrual status at December 31, 1998 and 1997, 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, 1998 is as follows: 1st Mortgage 2nd Mortgage Sales Due In Direct Cash Real Estate Real Estate Finance Calendar Year Loans Loans Loans Contracts ----- ----- ----- --------- 1999. . . . . 72.84% 19.83% 19.76% 75.45% 2000. . . . . 23.96 18.48 19.92 20.78 2001. . . . . 2.19 16.56 18.02 3.24 2002. . . . . .52 12.64 14.11 .29 2003. . . . . .19 9.14 9.98 .14 2004 & later. .30 23.35 18.21 .10 ------ ------ ------ ------ 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, 1998 and 1997, cash collections applied to principal of loans totaled $106,022,624 and $104,242,345, respectively, and the ratios of these cash collections to average net -27- receivables were 71.35% and 71.92%, respectively. 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, 1998, 1997 and 1996 is shown in the following table: 1998 1997 1996 ---- ---- ---- Beginning Balance. . . . . . . . $5,968,818 $5,753,221 $4,511,826 Provision for Loan Losses. . . 7,031,251 6,915,794 6,266,201 Bulk Purchase Accounts . . . . 24,663 146,606 118,365 Charge-Offs. . . . . . . . . . (8,503,698) (8,257,856) (6,348,280) Recoveries . . . . . . . . . . 2,132,729 1,411,053 1,205,109 ---------- ---------- ---------- Ending Balance . . . . . . . . . $6,653,763 $5,968,818 $5,753,221 ========== ========== ========== 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, 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 =========== ======== ======== =========== December 31, 1997: - ----------------- U.S. Treasury Securities and obligations of U.S. government corporations and agencies . . . . . . . . . $16,905,147 $ 48,754 $(21,016) $16,932,885 Obligations of states and political subdivisions . . . . 13,372,979 430,307 (105) 13,803,181 Corporate Securities . . . . . . 945,263 9,358 (1,689) 952,932 ----------- -------- -------- ----------- $31,223,389 $488,419 $(22,810) $31,688,998 =========== ======== ======== =========== -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, 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 =========== ======== ======== =========== December 31, 1997: - ----------------- U.S. Treasury Securities and obligations of U.S. government corporations and agencies . . . . . . . . . $ 495,537 $ 4,072 $ -- $ 499,609 Obligations of states and political subdivisions . . . . 757,220 8,225 -- 765,445 ----------- -------- -------- ----------- $ 1,252,757 $ 12,297 $ -- $ 1,265,054 =========== ======== ======== =========== The amortized cost and estimated fair market values of marketable debt securities at December 31, 1998, 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 . . $ 1,791,022 $ 1,801,383 $ 249,922 $ 251,953 Due after one year through five years. . . . 24,121,390 24,413,653 3,774,068 3,809,029 Due after five years through ten years 11,299,131 11,627,811 3,181,123 3,253,849 Due after ten years . . . . 1,999,548 2,095,565 -- -- ----------- ----------- ---------- ---------- $39,211,091 $39,938,412 $7,205,113 $7,314,831 =========== =========== ========== ========== 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 redemptions of investment securities due to call provisions and redemptions due to regular scheduled maturities during 1997 were $19,645,000. Gross gains of $2,837 and gross losses of $(3,782) 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 1996 were $3,251,608. Gross gains of $13,473 and gross losses of $(14,544) were realized on these sales. -29- 4. PLEDGED ASSETS At December 31, 1998, 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 four major banks which provides for maximum borrowings of $21,000,000. All borrowings are on an unsecured basis at 1/4% above the prime rate of interest. An annual facility fee is paid quarterly based on 5/8% of the available line less the average borrowings during the quarter. In addition, an agent fee equal to 1/8% per annum of the total loan commitment is paid quarterly. The Credit Agreement has a commitment termination date of June 30 in any year in which written notice of termination is given by the banks. If written notice is given in accordance with the agreement, the outstanding balance of the loans shall be paid in full on the date which is three and one half years after the commitment termination date. The banks also may terminate the agreement upon the violation of any of the financial ratio requirements or covenants contained in the agreement or in June of any calendar year if the financial condition of the Company becomes unsatisfactory to the banks. Such financial ratio requirements include a minimum equity requirement, an interest expense coverage ratio and a minimum debt to equity ratio. The Company has an additional Credit Agreement for $2,000,000 which is used for general operating purposes. This agreement provides for borrowings on an unsecured basis at 1/8% above the prime rate of interest and has a termination date of July 1, 1999. A bank loan was entered into in 1986, which carried an interest rate of 70% of the prime rate of interest repayable in 180 monthly installments. This loan was collateralized by land and a building. The Company paid off this loan in December, 1998. 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) 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 1996: - ---- Bank. . . . . . . . . 5.95% $ 291 $ 267 5.98% Senior Notes. . . . . 5.92 49,406 42,836 5.92 Commercial Paper. . . 6.51 52,944 48,432 6.60 All Categories. . 6.22 95,541 91,535 6.28 -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 ------------------------ --------------------- 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- 6.39% 6.61% 6.81% 6.52% 6.68% 7.03% Maturity information on the Company's Subordinated Debt at December 31, 1998 is as follows: Amount Maturing ------------------------------------- Based on Maturity Based on Interest Date Adjustment Period ----------------- ----------------- 1999. . . . . . $10,234,604 $31,089,437 2000. . . . . . 7,248,982 6,784,484 2001. . . . . . 9,581,125 486,398 2002. . . . . . 11,896,036 600,428 ----------- ----------- $38,960,747 $38,960,747 =========== =========== 7. COMMITMENTS AND CONTINGENCIES The Company's operations are carried on in locations which are occupied under lease agreements. The lease agreements usually provide for a lease term of five years with a renewal option for an additional five years. Rent expense was $1,996,393, $1,807,899 and $1,531,183 for the years ended December 31, 1998, 1997 and 1996, respectively. Under the existing noncancelable leases, the Company's minimum aggregate rental commitment at December 31, 1998, amounts to $1,882,582 for 1999, $1,563,603 for 2000, $1,117,797 for 2001, $685,072 for 2002, $345,718 for 2003 and $5,700 for the year 2004 and beyond. The total commitment is $5,600,472. The Company is defendant in several lawsuits arising in the course of its normal business activities in the state of Alabama. Each of the complaints seek compensatory and punitive damages. During the current year, the Company reached settlement agreements with certain borrowers -31- who had previously asserted claims or had stated their intention to file claims against the Company. All remaining actions are still in their early stages and their outcome currently is not determinable. Management is vigorously defending these actions. The financial condition and operating results of the Company could be materially affected in the event of an unfavorable outcome. However, Management believes that the Company's Alabama operations are in compliance with applicable regulations, and therefore that the suits are without merit and that the resolutions of the suits should not have a material effect on the Company. 8. RELATED PARTY TRANSACTIONS Beneficial owners of the Company are also beneficial owners of Liberty Bank & Trust ("Liberty"). The Company and Liberty have management and data processing agreements whereby the Company provides certain administrative and data processing services to Liberty for a fee. Income recorded by the Company in 1998, 1997 and 1996 related to these agreements was $63,800 each year, which in Management's opinion approximates the Company's actual cost of these services. Liberty leases its office space and equipment from the Company for $5,000 per month, which in Management's opinion is at a rate which approximates that obtainable from independent third parties. At December 31, 1998, the Company maintained $2,100,000 of certificates of deposit with Liberty at market rates and terms. The Company also had $2,356,345 in demand deposits with Liberty at December 31, 1998. 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 1998, a loan was extended to a real estate development partnership of which one of the Company's shareholders is a partner. The balance on this commercial loan was $1,498,502 at December 31, 1998. 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, 1998, 1997 and 1996 is made up of the following components: 1998 1997 1996 ---- ---- ---- Current - Federal . . . . . . . . $1,453,990 $1,251,503 $2,353,773 Current - State . . . . . . . . . 21,040 15,371 191,394 ---------- ---------- ---------- Total Current. . . . . . . . . 1,475,030 1,266,874 2,545,167 ---------- ---------- ---------- Prepaid - Federal . . . . . . . . 115,929 3,343,020 (309,371) Prepaid - State . . . . . . . . . -- 318,136 (55,438) Total Prepaid. . . . . . . . . 115,929 3,661,156 (364,809) ---------- ---------- ---------- Total Provision. . . . . . $1,590,814 $4,928,030 $2,180,358 ========== ========== ========== -32- Temporary differences create deferred federal tax assets and liabilities which are detailed below for December 31, 1998 and 1997: Deferred Tax Assets (Liabilities) --------------------------- 1998 1997 ---- ---- Insurance Commissions . . . . . . $(2,111,122) $(1,960,573) Unearned Premium Reserves. . . . . 573,841 523,446 Unrealized Gains on Marketable Debt Securities . . . (170,898) (122,799) Other. . . . . . . . . . . . . . . (34,880) (19,104) ----------- ----------- $(1,743,059) $(1,579,030) =========== =========== The Company's effective tax rate for the years ended December 31, 1998, 1997 and 1996 is analyzed as follows: 1998 1997 1996 ---- ---- ---- Statutory Federal income tax rate. . . 34.0% 34.0% 34.0% State income tax, net of Federal tax effect . . . . . . . . . . . . . .2 3.3 1.1 Net tax effect of IRS regulations on life insurance subsidiary . . . . (6.8) (8.9) (7.9) Tax effect of S Corporation status . . (6.9) 53.7 -- Other items. . . . . . . . . . . . . . (2.5) (9.0) (1.3) ---- ---- ---- Effective Tax Rate . . . . . . . . 18.0% 73.1% 27.9% ==== ==== ==== 10. SEGMENT FINANCIAL INFORMATION: In June 1997, the Financial Accounting Standards Board issued Financial Accounting Standard Number 131 (SFAS 131) "Disclosure about Segments of an Enterprise and Related Information," which the Company adopted in 1998. SFAS 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 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, 1998 followed by a reconcilement to consolidated Company data:
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 5,130,705 15,369,580 Other. . . . . . . . . . . 92,156 116,311 154,960 363,427 ----------- ----------- ----------- ------------ 18,087,779 20,129,240 20,147,626 58,364,645 ----------- ----------- ----------- ------------ 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 1,884,195 6,033,082 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 14,385,145 39,510,573 ----------- ----------- ----------- ------------ 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 =========== =========== =========== ============ Division I Division II Division III Total Segments Year 1997: ---------- ----------- ------------ -------------- - --------- Revenues: 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 =========== =========== =========== ============
-34-
Division I Division II Division III Total Segments Year 1996: ---------- ----------- ------------ -------------- - --------- Revenue: Finance Charges Earned . . $13,373,935 $13,496,647 $11,206,962 $ 38,077,544 Insurance Income . . . . . 4,732,061 5,444,964 4,214,140 14,391,165 Other. . . . . . . . . . . 76,925 95,745 122,148 294,818 ----------- ----------- ----------- ------------ 18,182,921 19,037,356 15,543,250 52,763,527 ----------- ----------- ----------- ------------ Expenses: Interest Cost. . . . . . . 2,337,307 2,547,835 2,088,450 6,973,592 Provision for Loan Losses. 1,885,839 1,745,410 1,511,922 5,143,171 Depreciation . . . . . . . 288,205 246,696 332,116 867,017 Other. . . . . . . . . . . 6,991,762 6,965,187 6,944,069 20,901,018 ----------- ----------- ----------- ------------ 11,503,113 11,505,128 10,876,557 33,884,798 ----------- ----------- ----------- ------------ Segment Profit . . . . . . . $ 6,679,808 $ 7,532,228 $ 4,666,693 $ 18,878,729 =========== =========== =========== ============ Segment Assets: Net Receivables. . . . . . $43,780,639 $49,508,726 $44,286,661 $137,576,026 Cash . . . . . . . . . . 33,184 45,826 50,188 129,198 Other Assets . . . . . . . 452,620 323,423 507,636 1,283,679 ----------- ----------- ----------- ------------ Total Segment Assets . . $44,266,443 $49,877,975 $44,844,485 $138,988,903 =========== =========== =========== ============
RECONCILEMENT: 1998 1997 1996 - ------------- ---- ---- ---- Revenues: Total revenues from reportable segments. . . . . . . . . $ 58,364,645 $ 54,936,019 $ 52,763,527 Corporate finance charges earned not allocated to segments. . . . . . 57,053 (33,114) 17,126 Reclass of investment income net against interest cost. . . . . . . . 1,791,207 1,895,684 1,256,385 Reclass of insurance expense against insurance income . . . . . . 4,694,936 4,563,973 4,267,132 Timing difference of insurance income allocation to segments. . . . 548,083 (75,457) (83,977) Other revenues not allocated to segments. . . . . . . . . . . . . 227,497 211,299 195,260 ------------ ------------ ------------ Consolidated Revenues. . . . . . . $ 65,683,421 $ 61,498,404 $ 58,415,453 ============ ============ ============ Profit or Loss: Total profit or loss for reportable segments. . . . . . . . . $ 18,854,072 $ 16,527,967 $ 18,878,729 Corporate earnings not allocated . . . 832,632 102,728 128,409 Corporate expenses not allocated . . . (10,828,106) (9,886,355) (10,589,028) Income taxes not allocated . . . . . . (1,590,814) (4,928,030) (2,180,358) ------------ ------------ ------------ Consolidated Profit. . . . . . . . $ 7,267,784 $ 1,816,310 $ 6,237,752 ============ ============ ============ Assets: Total assets for reportable segments . $150,230,331 $145,091,734 $138,988,903 Reclass accrued interest receivable on loans. . . . . . . . . 912,684 915,538 729,246 Loans held at corporate home office level. . . . . . . . . . 2,293,491 947,36 1,559,800 Unearn insurance at corporate level. . (5,016,709) (4,730,626) (4,436,105) Allowance for loan losses at corporate level. . . . . . . . . . . (6,653,763) (5,968,818) (5,753,221) Cash and cash equivalents held at corporate level. . . . . . . 19,944,849 24,960,776 27,303,507 Investment securities at corporate level. . . . . . . . . . . 47,143,525 32,941,755 23,729,982 Fixed assets at corporate level. . . . 3,004,062 3,053,193 3,457,902 Other assets at corporate level. . . . 4,816,440 3,954,653 6,324,336 ------------ ------------ ------------ Consolidated Assets. . . . . . . . . $216,674,910 $201,165,572 $191,904,350 ============ ============ ============
-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 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 Youngblood, Senior ----------------------------------- Vice President Jack R. Coker, Vice President Ronald F. Morrow, Area Robert J. Canfield, Area Vice President Vice President Regina K. Bond, Supervisor J. Michael Culpepper, Area Vice K. Donald Floyd, Supervisor Vice President Michael D. Lyles, Supervisor Ronald E. Byerly, Supervisor Brian L. McSwain, Supervisor Susan C. Cantrell, Supervisor Harriet H. Moss, Supervisor Anne Renee Hebert, Supervisor Melvin L. Osley, Supervisor Jack L. Hobgood, Supervisor Virginia K. Palmer, Supervisor Bruce S. Hooper, Supervisor Timothy M. Schmotz, Supervisor Janice B. Hyde, Supervisor Tami D. Settlemyer, Supervisor H. Timothy Love, Supervisor Johnny M. McEntyre, 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 Linda L. Sessa, Data Processing EX-21 5 EXHIBIT 21 Exhibit 21 SUBSIDIARIES OF REGISTRANT Franklin Securities, Inc., a Georgia company, was incorporated on May 4, 1982, as a wholly owned subsidiary to handle securities transactions. The subsidiary is currently in an inactive status. Frandisco Property and Casualty Insurance Company, a Georgia company, was incorporated on August 7, 1989, as a wholly owned subsidiary to reinsure the property and casualty insurance policies written by the Company in connection with its credit transactions. Frandisco Life Insurance Company of Georgia was incorporated on August 7, 1989, as a wholly owned subsidiary to reinsure the life and the accident and health insurance policies written by the Company in connection with its credit transactions. Effective December 27, 1990, Frandisco Life Insurance Company of Georgia was merged with Frandisco Life Insurance Company of Arizona (incorporated on August 16, 1978 as a wholly owned subsidiary) with Frandisco Life Insurance Company of Georgia becoming the surviving Company. T & T Corporation, a Georgia company, is 50% owned subsidiary of the Company. This corporation owns a building adjacent to the Company's headquarters which the Company leases. EX-23 6 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. 333-01007. s/Arthur Andersen LLP Atlanta, Georgia March 30, 1999 EX-27 7 ART. 5 FDS FOR 1998 FORM 10-K
5 1 YEAR DEC-31-1998 DEC-31-1998 20,111,678 47,143,525 145,201,924 6,653,763 0 0 13,070,206 8,382,863 216,674,910 116,350,372 143,406,777 170,000 0 0 61,193,791 216,674,910 0 65,683,421 0 0 41,070,370 7,031,251 8,723,201 8,858,599 1,590,814 7,267,785 0 0 0 7,267,785 42.75 42.75
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