Back to GetFilings.com
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, 2003, 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 2-35669
Southern Security Life Insurance Company
(Exact name of registrant as specified in its Charter)
FLORIDA 59-1231733
------------- -------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
755 Rinehart Road, Lake Mary, Florida 32746
- ------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (407) 321-7113
---------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each Class Name of each exchange on which registered
---------------------------- ------------------------------------------
Common Stock, $1.00 Par Value Nasdaq National Market
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 the filing
requirements for the past 90 days.
X Yes No
------- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Company'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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of the last business day of Registrant's most recently completed
second fiscal quarter was $7,137,000, based on the closing price on that date on
the Nasdaq National Market. There were 2,103,600 shares of voting common stock
outstanding at March 25, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant's 2004 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
===============================================================================
PART I
Item 1. Business.
- -----------------
Southern Security Life Insurance Company (the "Company") is a legal reserve life
insurance company authorized to transact business in the states of Alabama,
Florida, Georgia, Hawaii, Indiana, Illinois, Kentucky, Louisiana, Michigan,
Missouri, Oklahoma, South Carolina, Tennessee and Texas. It was incorporated
under Florida law in 1966 and was licensed and commenced business in 1969.
During 2003 approximately 43% of the premium income of the Company was from
business in force in Florida, its state of domicile. The Company's only industry
segment is the ordinary life, accident and health, and annuity business.
Effective December 17, 1998, Security National Financial Corporation ("SNFC"),
an SEC registrant, acquired through its wholly owned subsidiary Security
National Life Insurance Company, 100% of the assets of Consolidare Enterprises,
Inc. ("Consolidare"), which owned 57.4% of the outstanding shares of the
Company. During March 1999, SNFC changed Consolidare's name to SSLIC Holding
Company, Inc. Subsequent to the acquisition, SNFC has increased its ownership of
the Company to 77%.
The Company at present sells traditional life and annuity policies as well as
universal life policies with various companion riders. The Company's accident
and health insurance business has never been a significant portion of the
Company's business. It does not presently sell industrial life or group life
insurance other than through its participation as a reinsurer in the
Servicemen's Group Life Insurance Program ("SGLI").
The major product currently sold in the Company's traditional line of life
insurance is 10-Pay Whole Life with an Annuity Rider. The savings aspect of the
Annuity Rider is marketed as a tool for parents to help fund their children's
higher education. The product is offered to parents who have children under the
age of 25. This represented 77% and 64% of the first year premiums collected in
2003 and 2002, respectively.
The Company introduced in 1996 a new series of products designed for the seniors
market. This new series targets the needs of senior citizens especially as they
plan for their final expenses. These new policies are traditional endowment type
policies. Because they are written to a senior market they are designed to
accommodate adverse health conditions. Because of the size of the policies they
are usually issued with only limited underwriting. The coverage size of the
policy is roughly equivalent to the insured's anticipated funeral costs. This
new series represented 12% and 29% of the first year premiums collected in 2003
and 2002, respectively.
The Company introduced its first universal life product in 1986 and currently
has two principal universal life products in force. These universal life
products offer flexibility to the client as well as tax advantages, both
currently and upon the death of the insured. These products allow the Company to
better compete in the current market environment. In excess of 6% and 3% of the
first year premiums collected by the Company in 2003 and 2002, respectively,
were universal life products.
The following table provides information (on a statutory basis) concerning the
amount and percentage of premium income resulting from the principal lines of
insurance written by the Company during the periods indicated:
2003 2002 2001
---- ---- ----
Amount Percentage Amount Percentage Amount Percentage
Life Insurance-
Ordinary (1) $7,561,359 158% $7,882,752 94% $7,873,378 98
Plus Reinsurance
Assumed 50,392 1 70,483 1 125,137 1
Less Reinsurance
Ceded(2) (4,431,483) (92) (794,539) (10) (831,358) (10)
Individual
Annuities (1) 666,740 14 396,352 5 149,424 2
Life Insurance-
Group (SGLI) 835,162 17 735,987 9 589,779 7
2003 2002 2001
---- ---- ----
Amount Percentage Amount Percentage Amount Percentage
Other -
Accident & Health 110,606 2 123,042 1 145,134 2
------------ - ------------ - ------------- -
Total Premium Income $4,792,776 100% $8,414,077 100% $8,051,494 100%
========== === ========== === ========== ===
(1) A portion of each of the deposit term policies previously sold by the
Company represents ordinary life insurance and the balance represents
an individual annuity.
(2) Includes ceded premiums paid to Security National Life Insurance
Company in the amount of $3,656,949 for 2003 and to other companies,
including Mega Life, in the amounts of $429,799, $491,002, and
$549,886 for 2003, 2002 and 2001, respectively.
The following table gives information according to accounting principles
generally accepted in the United States of America concerning operating ratios
of the Company for the years indicated:
2003 2002 2001
---- ---- ----
Total Net Insurance Revenues $7,334,707 $7,075,257 $6,736,027
Benefit Costs Paid or Provided:
Amount $5,599,434 $5,343,573 $4,482,588
Ratio to Net Insurance Revenue 76.3% 75.5% 66.6%
Amortization of Deferred Policy
Acquisition Costs:
Amount $2,039,459 $1,969,966 $2,197,399
Ratio to Net Insurance Revenue 27.8% 27.8% 32.6%
General Insurance Expenses:
Amount $3,871,302 $3,678,920 $3,835,165
Ratio to Net Insurance Revenue 52.8% 52.0% 56.9%
Income (loss) before Income Taxes:
Amount $(170,359) $(82,820) $87,841
Ratio to Net Insurance Revenue (2.3)% (1.2)% 1.3%
Ratio to Total Revenue and
Investment Income (1.5)% (.8)% .8%
Ratio to Equity (1.0)% (.5)% .5%
The following table provides information about the Company concerning changes in
life insurance in force during the periods indicated (exclusive of accidental
death benefits):
2003 2002 2001
---- ---- ----
(In thousands except lapse ratios)
Total life insurance in force
at beginning of period:
Ordinary Whole Life and
Endowment-Participating $2,205 $180 $30
Ordinary Whole Life and
Endowment-Non-Participating 659,718 708,789 732,433
Term 69,135 72,752 78,770
Reinsurance Assumed 795,720 786,273 558,575
----------- ---------- -----------
Total $1,526,778 $1,567,994 $1,369,808
----------- ---------- -----------
Additions (including reinsurance
assumed):
Ordinary Whole Life and
Endowment-Participating $ -- $ -- $ --
Ordinary Whole Life and
Endowment-Non-Participating 62,004 52,633 55,785
Term 3,208 1,390 2,487
Reinsurance Assumed 6,008 10,352 250,240
----------- ----------- -----------
Total $71,220 $64,375 $308,512
----------- ----------- -----------
Terminations:
Death $3,642 $3,550 $2,822
Lapse and Expiry 17,777 17,888 21,875
Surrender 70,897 83,064 97,483
Other 4,147 1,089 (11,854)
----------- ----------- -----------
Total $96,463 $105,591 $110,326
----------- ----------- -----------
Life Insurance in force at end of period:
Ordinary Whole Life and
Endowment-Participating $679 $2,205 $180
Ordinary Whole Life and
Endowment-Non-Participating 633,620 659,718 708,789
Term 66,813 69,135 72,752
Reinsurance Assumed 800,423 795,720 786,273
----------- ----------- -----------
Total 1,501,535 1,526,778 1,567,994
Reinsurance Ceded (401,148) (164,248) (179,242)
----------- ----------- -----------
Total after Reinsurance Ceded $1,100,387 $1,362,530 $1,388,752
=========== =========== ===========
Lapse Ratio (Reflecting termina-
tion by surrender and lapse;
ordinary life insurance only): 10.7% 11.9% 13.8%
The Company invests and reinvests portions of its funds in securities,
which are permitted investments under the laws of the State of Florida, and
part of its revenue is derived from this source. Generally, securities
comprising permitted investments include obligations of Federal, state and
local governments; corporate bonds and preferred and common stocks; real
estate mortgages and certain leases. The following table summarizes certain
information regarding the Company's investment activities:
Average Gross Net
Fiscal Investment Investment Investment Net
Year Assets (1) Income(2) Income (3) Yield (4)
----- ---------- ---------- ---------- --------
2003 $52,794,223 $4,012,470 $4,005,129 7.59%
2002 $51,758,382 $3,846,090 $3,835,420 7.41%
2001 $50,560,334 $3,876,422 $3,866,966 7.65%
(1) Computed by summing the beginning and ending investment and cash balances
and dividing by 2.
(2) Excludes investment gains and losses.
(3) Net of investment expense and before income taxes.
(4) Computed on an annualized basis. Represents ratio of net investment income
to average invested assets.
The Company continues its activities as a qualified lender under the Federal
Family Educational Loan Program. Through this program the Company makes various
types of student and parent loans available. All student loans made by the
Company are guaranteed by the Federal Government. As it has in the past, the
Company sells these student loans on a periodic basis to the Student Loan
Marketing Association ("SLMA") thereby keeping these funds liquid.
The Company presently sells its policies on a general agency basis through a
field force consisting of approximately 256 agents. All such agents are licensed
as agents of, and sell for, the Company and are independent contractors who are
paid exclusively on a commission basis for sales of the Company's policies. Some
of the Company's agents are part-time insurance agents. Most of the Company's
agents are associated with Insuradyne Corporation, a wholly-owned subsidiary of
Security National Financial Corporation. See "Certain Relationships and Related
Transactions" in item 13, Part III of this Report.
Effective January 1, 1999, the Company entered into an Administrative Services
Agreement with its ultimate parent SNFC. Under the terms of the Administrative
Services Agreement, all of the Company's employees became employees of SNFC.
Administrative functions previously performed by the Company are now being
furnished to the Company under this Agreement. The Company pays SNFC $250,000
per month or $3 million per year for the Administrative services.
Section 624.408 of the Florida Statutes requires a stock life insurance company
to maintain minimum surplus on a statutory basis at the greater of $1,500,000 or
four percent of total liabilities. The Company's required statutory minimum
surplus calculated in accordance with this section is approximately $1,799,000.
If the capital and surplus of the Company computed on such basis should fall
below that amount, then the Company's license to transact insurance business in
the State of Florida, the Company's most significant market, could be revoked
unless the deficiency is promptly corrected. As of December 31, 2003, the
Company had statutory capital and surplus of $11,443,488 well in excess of the
required minimum.
The Risk-Based Capital for Life and/or Health Insurers Model Act (the "Model
Act") was adopted by the National Association of Insurance Commissioners (NAIC)
in 1992. The main purpose of the Model Act is to provide a tool for insurance
regulators to evaluate the capital resources of insurers as related to the
specific risks, which they have incurred and is used to determine whether there
is a need for possible corrective action. The Model Act or similar regulations
may have been or may be enacted by the various states.
The Model Act provides for four different levels of regulatory action, each of
which may be triggered if an insurer's Total Adjusted Capital is less than a
corresponding "level" of Risk-Based Capital ("RBC").
The "Company Action Level" is triggered if an insurer's Total Adjusted
Capital is less than 200% of its "Authorized Control Level RBC" (as
defined in the Model Act), or less than 250% of its Authorized Control
Level RBC and the insurer has a negative trend ("the Company Action
Level"). At the Company Action Level, the insurer must submit a
comprehensive plan to the regulatory authority of its state of
domicile, which discusses proposed corrective actions to improve its
capital position.
The "Regulatory Action Level" is triggered if an insurer's Total
Adjusted Capital is less than 150% of its Authorized Control Level
RBC. At the Regulatory Action Level, the regulatory authority will
perform a special examination of the insurer and issue an order
specifying corrective actions that must be followed.
The "Authorized Control Level" is triggered if an insurer's Total
Adjusted Capital is less than 100% of its Authorized Control Level
RBC, and at that level the regulatory authority is authorized
(although not mandated) to take regulatory control of the insurer.
The "Mandatory Control Level" is triggered if an insurer's Total
Adjusted Capital is less than 70% of its Authorized Control level RBC,
and at that level the regulatory authority must take regulatory
control of the insurer. Regulatory control may lead to rehabilitation
or liquidation of an insurer.
Based on calculations using the NAIC formula as of December 31, 2003, the
Company was well in excess of all four of the control levels listed.
The industry in which the Company is engaged is highly competitive. There are in
excess of 544 life insurance companies licensed in Florida, where a substantial
amount of the Company's premium income is produced, and there are comparable
numbers of insurance companies licensed in Alabama, Georgia, Hawaii, Illinois,
Indiana, Kentucky, Louisiana, Michigan, Missouri, Oklahoma, South Carolina,
Tennessee and Texas. Many of the Company's competitors have been in business for
longer periods of time, have substantially greater financial resources, larger
sales organizations, and have broader diversification of risks. A large number
of the Company's competitors engage in business in many states and advertise
nationally while the Company conducts its business on a regional basis. The
Company is not a significant factor in the life insurance business in any state
where the Company does business.
The states of Alabama, Florida, Georgia, Hawaii, Illinois, Indiana, Kentucky,
Louisiana, Michigan, Missouri, Oklahoma, South Carolina, Tennessee and Texas
require that insurers secure and retain a license or a certificate of authority
based on compliance with established standards of solvency and demonstration of
managerial competence. The Company, like other life insurers, is subject to
extensive regulation and supervision by state insurance regulatory authorities.
Such regulation relates generally to such matters as minimum capitalization, the
nature of and limitations on investments, the licensing of insurers and their
agents, deposits of securities for the benefit and protection of policyholders,
the approval of policy forms and premium rates, periodic examination of the
affairs of insurance companies, the requirement of filing annual reports on a
specified form and the provision for various reserves and accounting standards.
The Company reinsures or places a portion of its insured risks with other
insurers. Reinsurance reduces the amount of risk retained on any particular
policy and, correspondingly, reduces the risk of loss to the Company, thus
giving it greater financial stability. Reinsurance also enables the Company to
write more policies and policies in larger amounts than it would otherwise
consider prudent. On the other hand, reinsurance potentially reduces earnings,
since a portion of the premiums received must be paid to the insurers assuming
the reinsured portion of the risk.
The Company currently cedes its new reinsurance to Businessmen's Assurance
Company ("BMA") and the Reinsurance Company of Hannover, both of which are
unaffiliated reinsurers. Under the terms of the reinsurance agreements, the
Company cedes all risks in excess of the Company's current retention limits.
The Company currently retains a maximum of $75,000 on any one life and lesser
amounts on substandard risks.
Reinsurance for policy amounts in excess of the Company's retention limits is
ceded on a renewable term basis, under which the amount reinsured normally
decreases annually by the amount of increase in the policy reserve. In addition,
the Company has coinsurance agreements with several insurers, under which
premiums are shared based upon the share of the risk assumed.
The Company remains directly liable to policyholders for the full amount of all
insurance directly written by it, even though all or a portion of the risk is
reinsured. Reinsurers, however, are obligated to reimburse the Company for the
reinsured portion of any claims paid. Consequently, if any reinsurer becomes
insolvent or is otherwise unable to make such reimbursement, the Company would
suffer an unexpected loss. The Company has no reason to believe that any of its
reinsurers will be unable to perform their obligations under existing
reinsurance agreements.
On December 31, 1992, the Company entered into a Coinsurance Reinsurance
Agreement with United Group Insurance Company ("UGIC"), now Mega Life. In this
agreement, UGIC agreed to indemnify and the Company agreed to transfer risk to
UGIC in the amount of 18% of all universal life premium paying polices which
were in force on December 31, 1992. Mega Life is an A- rated company with A.M.
Best and is an authorized reinsurer in the State of Florida.
As a result of the 1992 agreement, the Company will continue to pay reinsurance
premiums to Mega Life while receiving ceding commissions. As a part of the
coinsurance agreement, Mega Life agreed to share in the expenses of death
claims, surrenders, commissions, taxes and the funding of policy loans.
On December 26, 2003, the Company entered into a partially Coinsurance and a
partially Modified Coinsurance Agreement (CoModco Agreement) with Security
National Life Insurance Company (Security National Life) effective September 30,
2003. The Company ceded 50% of certain blocks of its universal life business to
Security National Life. The total liabilities reinsured for this business on
October 1, 2003 were $22,195,259. The Company received a ceding commission from
Security National Life of $3,200,000 and will pay a risk charge to Security
National Life of 1% of the outstanding Coinsurance per calendar quarter. The
Company put into a bank trust investment grade bonds, which equal the
outstanding liabilities ceded to Security National Life. Security National Life
is named as a beneficiary of the trust and the terms of the trust are such that
the Company will maintain investment grade bonds in the trust to equal the
outstanding liabilities ceded to Security National Life. Under the CoModco
Agreement the Coinsurance and the decrease in reserves are equal. Under U. S.
GAAP the Coinsurance and the reserve decreases are netted since these are
non-cash items, and the Company expects to recapture the Coinsurance from future
profits of the reinsured business. The Company has the right to recapture the
business at any time after September 30, 2004 upon 90 days advance notice. As of
December 31, 2003 the outstanding Coinsurance amount was $3,075,137. The Company
recorded as an expense the risk charge of $32,000 for the fourth quarter.
The Company does not assume any reinsurance at the present time other than its
minor participation in Servicemembers' Group Life Insurance and other small
blocks of business.
For reporting to state regulatory authorities the Company is required to
establish policy benefit and other reserves that are calculated in accordance
with statutory requirements and standards of actuarial practice and established
at amounts which, with additions from premiums to be received and assumed
interest on policy reserves compounded annually, are believed to be sufficient
to meet policy obligations as they mature. Life reserves for the Company are
based upon the Commissioner's 1958 and 1980 Standard Ordinary Table of
Mortality, with interest on policies computed at 3%, 3 1/2%, 4 1/2%, or 5%.
Annuity reserves are based on the 1983 and 2000 Individual Annuity Mortality
Tables, with interest on policies computed at 6 1/2%, 6 3/4%, 7%, 7 3/4%, or 8
1/4%. Reserves on the annuity portion of the Company's deposit term policies are
computed on the accumulation method. Reserves for universal life policies, which
comprise most of the Company's insurance in force, have been valued by using the
CRVM method.
In preparing financial statements in accordance with U.S. generally accepted
accounting principles, the cost of insurance, expense charges and surrender
charges on universal life products are recognized as revenue. For "Annuity
Contracts" with flexible terms, amounts received from policyholders are not
recognized as revenue but are recorded as deposits in a manner similar to
interest-bearing instruments. Accumulations on these universal life and annuity
contracts are held as "Policyholders' Account Balances." For all other policies
(primarily whole-life) premiums are recorded as revenue and reserves are
calculated using the net level premium method. Accumulation values for these
types of policies are held as benefit reserves. See "Future Policy Benefits" in
Note 1 of the Notes to Financial Statements included in this report.
The Company maintains its own policy files, prepares its own policy forms (with
the assistance of its consulting actuaries), selects risks, calculates premiums,
prepares premium notices, preauthorized checks and commission statements, and
maintains all of its accounting records.
The Company is not affected by Federal, state or local provisions relating to
discharge of materials into the environment. The Company has not spent a
material amount of money during the last three fiscal years on research and
development activities. The business of the Company is not seasonal in nature
and is not dependent on the sources and availability of raw materials. The
business of the Company is not dependent upon a single customer or a few
customers, and no material portion of the Company's business is subject to
renegotiation of profits or termination at the election of the Government.
Item 2. Properties.
- -------------------
The Company's corporate headquarters is located in a two story office building
in Lake Mary, Florida, which is owned by the Company. The Company and an
affiliated company occupy the second floor of the building. One hundred percent
of the remaining rentable space was leased as of December 31, 2003.
Item 3. Legal Proceedings.
- --------------------------
An action was brought against Southern Security Life Insurance Company by
National Group Underwriters, Inc. ("NGU") in state court in the State of Texas.
The case was removed by the Company to the United States District Court for the
Northern District of Texas, Fort Worth Division, with Civil No. 4:01-CV-403-E.
An amended complaint was filed on or about July
18, 2001. The amended complaint asserted that NGU had a contract with the
Company wherein NGU would submit applications for certain policies of insurance
to be issued by the Company. It is alleged that disputes have arisen between NGU
and the Company with regard to the calculation and payment of certain
commissions as well as certain production bonuses.
NGU alleged that it had been damaged far in excess of the $75,000 minimum
jurisdictional limits of the federal court. NGU also sought attorney's fees and
costs as well as prejudgment and postjudgment interest. A second amended
complaint and a third amended complaint, which included a fraud claim, were
filed. A motion was filed by the Company to dismiss the third amended complaint,
including the fraud claim. The court denied the motion. The Company
counterclaimed for what it claimed to be a debit balance owing to it pursuant to
the relationship between the parties (the amount subject to reduction as
premiums are received). The Company also sought to recover attorney's fees and
costs, as well as punitive damages on three of its causes of action.
Certain discovery took place. The federal case was dismissed by stipulation. The
matter was refiled in Texas state court, Tarrant County, Case No. 348 195490 02.
The claims of the respective parties are essentially the same as those in
federal court, which claims include fraudulent inducement relative to entering
into a contract, fraud, breach of contract, breach of duty of good faith and
fair dealing, attorney's fees and exemplary damages as well as seeking an
accounting and contesting the interest charges. Certain depositions have been
taken since the filing again in state court and further discovery is
anticipated. The Company filed a motion for partial summary judgment with
respect to certain items. The court has yet to rule on the motion. A trial is
presently set for October 2004. The Company intends to vigorously defend the
matter as well as prosecute its counterclaim.
The Company is not a party to any other legal proceedings outside the ordinary
course of the Company's business or to any other legal proceedings, which, if
adversely determined, would have a material adverse effect on the Company or its
business.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------------------------------------------------------------
No matters were submitted to a vote of the Company's shareholders during the
quarter ended December 31, 2003.
PART II
Item 5. Market for the Company's Common Stock and Related Stockholder Matters.
- ------------------------------------------------------------------------------
(a) Principal Market and Stock Price. The principal market on which the
Company's common stock is traded is the over-the-counter market. Trading
information with respect to the Company's shares is available through the
National Association of Securities Dealers Automated Quotation (Nasdaq) System
under the symbol SSLI.
The table below presents the high and low market closed prices for the Company's
common stock during the calendar quarters indicated, as quoted in the Nasdaq
system. The quotations represent prices between dealers in securities and do not
include retail markups, markdowns or commissions and do not necessarily
represent actual transactions.
Period (Calendar Year) Price Range
High Low
2002
First Quarter 3.50 3.01
Second Quarter 3.30 3.15
Third Quarter 3.65 3.19
Fourth Quarter 4.25 3.21
2003
First Quarter 6.50 3.48
Second Quarter 4.47 3.41
Third Quarter 3.70 3.10
Fourth Quarter 4.70 3.11
2004
First Quarter (through March 25, 2004) 4.75 3.22
The above prices have been adjusted for the effect of annual stock dividends.
Approximate Number of Holders of Common Stock. There were 1,254 holders of
record of the Company's common stock at December 31, 2003.
(b) Dividends. The Company has paid no cash dividends to stockholders
during the past two years, and it is not anticipated that any cash dividends
will be paid at any time in the foreseeable future. The payment of dividends by
the Company is subject to the regulation of the State of Florida Department of
Insurance. Under such regulation an insurance company may pay dividends, without
prior approval of the State of Florida Department of Insurance, equal to or less
than the greater of (a) 10% of its accumulated capital gains (losses) and
accumulated operating income (losses) (i.e. unassigned surplus) or (b) certain
net operating profits (losses) and realized capital gains (losses) of the
Company, as defined in the applicable insurance statutes. In no case can such
dividends be paid if the Company will have less than 115% of the minimum
required statutory surplus as to policyholders after the dividend is paid. The
maximum amount that the Company could pay as a dividend during 2004 pursuant to
such regulation is $376,000.
Item 6. Selected Financial Data.
- --------------------------------
The following table presents selected financial data (on a GAAP basis)
concerning the Company and its financial results during the periods indicated.
YEARS ENDED DECEMBER 31,
2003 2002 2001 2000 1999
---- ---- ------ ------ ------
Revenues:
Net insurance revenues $ 7,334,707 $ 7,075,257 $ 6,736,027 $ 6,698,869 $ 6,901,546
Net investment income 4,005,129 3,835,420 3,866,966 3,935,607 3,909,373
Realized gain (loss)
on investments -- (1,038) -- -- --
Other revenue, net -- -- -- -- 715,128
--------------- --------------- --------------- --------------- ---------------
Total Revenue 11,339,836 10,909,639 10,602,993 10,634,476 11,526,047
Benefits, Losses & Expenses:
Insurance living benefits 1,909,198 2,144,629 2,186,664 2,243,331 2,614,754
Insurance death benefits 2,928,436 2,583,062 2,360,265 1,549,116 1,917,134
Increase (decrease)
in policy reserves 761,800 615,882 (64,341) 1,316,964 (78,324)
Amortization of deferred
policy acquisition costs 2,039,459 1,969,966 2,197,399 1,797,320 3,029,223
Operating expenses 3,871,302 3,678,920 3,835,165 3,529,380 3,261,134
--------------- --------------- --------------- --------------- ---------------
Total expenses 11,510,195 10,992,459 10,515,152 10,436,111 10,743,921
Income (loss) before income
Taxes (170,359) (82,820) 87,841 198,365 782,126
Income tax expense (benefit) (74,488) (12,254) 16,865 38,105 150,168
--------------- --------------- --------------- --------------- ---------------
Net Income (loss) $ (95,871) $ (70,566) $ 70,976 $ 160,260 $ 631,958
=============== =============== =============== =============== ===============
Weighted average number of
shares outstanding
(basic and diluted) 2,078,548 1,979,291 1,907,989 1,907,989 1,907,989
--------------- --------------- --------------- --------------- ---------------
Basic income (loss)
per common share $.05) $(.04) $.04 $.08 $.33
====== ===== ==== ==== ====
Diluted income (loss)
per common share $(.05) $(.04) $.04 $.08 $.33
===== ===== ==== ==== ====
Shareholders' Equity $ 17,014,486 $ 17,145,770 $ 16,903,270 $ 16,198,535 $ 15,637,320
=============== =============== =============== =============== ===============
Shareholders' equity per
common share $8.09 $8.56 $8.86 $8.49 $8.20
===== ===== ===== ===== =====
Assets $ 77,664,439 $ 77,264,997 $ 77,479,328 $ 77,125,931 $ 77,208,941
--------------- --------------- --------------- --------------- ---------------
Life Insurance:
Insurance in force $ 1,501,535,000 $ 1,526,778,000 $ 1,567,994,000 $ 1,369,808,000 $ 1,455,417,000
--------------- --------------- --------------- --------------- ---------------
Individual insurance
issued during current
year $ 65,212,000 $ 54,023,000 $ 58,272,000 $ 60,589,000 $ 66,591,000
--------------- --------------- --------------- --------------- ---------------
Long term obligation $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000
--------------- --------------- --------------- --------------- ---------------
Cash dividends declared per
common share $.00 $.00 $.00 $.00 $.00
==== ==== ==== ==== ====
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
Overview
This analysis of the results of operations and financial condition of the
Company should be read in conjunction with the Selected Financial Data and
Financial Statements and Notes to the Financial Statements included in this
report.
The Company has primarily issued three types of insurance products: 10-Pay Whole
Life with an Annuity Rider, final expense products, and universal life. The
10-Pay Whole Life with an Annuity Rider product is designed for the higher
education market. The savings aspect of the Annuity Rider is marketed as a tool
for parents to help fund their children's higher education. The product is
offered to parents who have children under the age of 25.
Final expense products are traditional endowment type insurance policies written
for the senior market. Because the products are written to a senior market they
are designed to accommodate adverse health conditions. Because of the size of
the policies, the products are usually issued with only limited underwriting.
The coverage size of the policy is roughly equivalent to the insured's
anticipated funeral costs.
Universal life provides insurance coverage with flexible premiums, within
limits, which allow policyholders to accumulate cash values. The accumulated
cash values are credited with tax-deferred interest, as adjusted by the Company
on a periodic basis. Deducted from the cash accumulations are administrative
charges and mortality costs. Should a policy surrender in its early years, the
Company assesses a surrender fee against the cash value accumulations based on a
graded formula.
In connection with its higher education sales, the Company established a lead
generation program that has been coupled with a recruiting program for new sales
agents to help generate new business.
An additional source of income to the Company is investment income. The Company
invests those funds deposited by policyholders in debt and equity securities,
mortgage loans, and warehouse mortgage loans in accordance with the requirements
and laws governing life insurance companies, in order to earn interest and
dividend income, a portion of which is credited back to the policyholders.
Interest rates and maturities of the Company's investment portfolio play an
important part in determining the interest rates credited to policyholders.
Product profitability is affected by several different factors, such as
mortality experience (actual versus expected), interest rate spreads (excess
interest earned over interest credited to policyholders) and controlling policy
acquisition costs and other costs of operation. The results of any one reporting
period may be significantly affected by the level of death claims or other
policyholder benefits incurred due to the Company's relatively small size.
Significant Accounting Policies and Estimates
The following is a brief summary of our significant accounting policies and a
review of our most critical accounting estimates. For a complete description of
our significant accounting policies, see Note 1 to our financial statements.
In accordance with accounting principles generally accepted in the United States
(GAAP), premiums and considerations received for interest sensitive products
such as universal life insurance and ordinary annuities are reflected as
increases in liabilities for policyholder account balances and not as revenues.
Revenues reported for these products consist of policy charges for the cost of
insurance, administration charges, amortization of policy initiation fees and
surrender charges assessed against policyholder account balances. Surrender
benefits paid relating to these products are reflected as decreases in
liabilities for policyholder account balances and not as expenses. The Company
receives investment income earned from the funds deposited into account
balances, a portion of which is passed through to the policyholders in the form
of interest credited. Interest credited to policyholder account balances and
benefit claims in excess of policyholder account balances are reported as
expenses in the financial statements.
Premium revenues reported for traditional life insurance products are recognized
as revenues when due. Future policy benefits are recognized as expenses over the
life of the policy by means of the provision for future policy benefits.
The costs related to acquiring new business, including certain costs of issuing
policies and other variable selling expenses (principally commissions), defined
as deferred policy acquisition costs, are capitalized and amortized into
expense. For traditional life products, these costs are amortized over the
premium-paying period of the related policies, in proportion to the ratio of
annual premium revenues to total anticipated premium revenues. Such anticipated
premium revenues are estimated using the same assumption used for computing
liabilities for future policy benefits and are generally "locked in" at the date
the policies are issued. For interest sensitive products, these costs are
amortized generally in proportion to expected gross profits from surrender
charges and investment, mortality and expense margins. This amortization is
adjusted when the Company revises the estimate of current or future gross
profits or margins. For example, deferred policy acquisition costs are amortized
earlier than originally estimated when policy terminations are higher than
originally estimated or when investments backing the related policyholder
liabilities are sold at a gain prior to their anticipated maturity.
Death and other policyholder benefits reflect exposure to mortality risk and
fluctuate from year to year on the level of claims incurred under insurance
retention limits. The profitability of the Company is primarily affected by
fluctuations in mortality, other policyholder benefits, expense levels, interest
spreads (i.e., the difference between interest earned on investments and
interest credited to policyholders) and persistency. The Company has the ability
to mitigate adverse fluctuations through adjustments to credited interest rates,
policyholder dividends or cost of insurance charges.
The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses and the disclosure of contingent
assets and liabilities. It is reasonably possible that actual experience could
differ from the estimates and assumptions utilized which could have a material
impact on the financial statements. The following is a summary of our
significant accounting estimates, and critical issues that impact them:
Fixed Maturities Available for Sale
Securities available-for-sale are carried at fair value, with unrealized holding
gains and losses reported in accumulated other comprehensive income which is
included in stockholders' equity after adjustment for deferred income taxes and
deferred acquisition costs related to universal life products.
The Company uses fair market values based on National Association of Insurance
Commissioners (NAIC) values, versus values associated with normal marketing
pricing services. The Company considers the difference to be immaterial.
The Company is required to exercise judgment to determine when a decline in the
value of a security is other than temporary. When the value of a security
declines and the decline is determined to be other than temporary, the carrying
value of the investment is reduced to its fair value and a realized loss is
recorded to the extent of the decline.
Deferred Acquisition Costs
Amortization of deferred policy acquisition costs for interest sensitive
products is dependent upon estimates of current and future gross profits or
margins on this business. Key assumptions used include the following:
o Yield on investments supporting the liabilities
o Amount of interest or dividends credited to the policies
o Amount of policy fees and charges
o Amount of expenses necessary to maintain the policies, and
o Amount of death and surrender benefits and the length of time the
policies will stay in force.
These estimates, which are revised periodically, are based on historical results
and our best estimate of future expenses.
Future Policy Benefits
Reserves for future policy benefits for traditional life insurance products
requires the use of many assumptions, including the duration of the policies,
mortality experience, expenses, investment yield, lapse rates, surrender rates,
and dividend crediting rates.
These assumptions are made based upon historical experience, industry standards
and a best estimate of future results and, for traditional life products,
include a provision for adverse deviation. For traditional life insurance, once
established for a particular series of products, these assumptions are generally
held constant.
Unearned Revenue
The universal life products the Company sells have significant policy initiation
fees (front-end load), which are deferred and amortized into revenues in
proportion to the estimated expected gross profits from surrender charges and
investment, mortality and expense margins. The same assumptions that impact
deferred acquisition costs would apply to unearned revenue.
Results of Operations
2003 Compared to 2002
Total revenues increased by $430,000, or 3.9%, to $11,340,000 for fiscal year
2003 from $10,910,000 for fiscal year 2002. Increases occurred in both net
insurance revenues and net investment income.
Net insurance revenues increased by $260,000, or 3.7%, to $7,335,000, for fiscal
year 2003 from $7,075,000 for fiscal year 2002. This increase was primarily the
result of an increase in traditional life sales.
Net investment income increased by $170,000, or 4.4%, to $4,005,000 for fiscal
year 2003 from $3,835,000 for fiscal year 2002. Investment yield increased to
7.59% in fiscal year 2003 from 7.41%, in 2002.
Benefits and claims increased by $255,000, or 4.8%, to $5,599,000 for fiscal
year 2003 from $5,344,000 for the comparable period in 2002. The increase was
primarily due to an increase in traditional life reserves and death claims.
The amortization of deferred policy acquisition costs increased by $69,000, or
3.5%, to $2,039,000 for fiscal year 2003, from $1,970,000 for the comparable
period in 2002. The increase in amortization expense was in line with actuarial
assumptions.
Operating expenses increased by $192,000, or 5.2%, to $3,871,000 for fiscal year
2003 from $3,679,000 for the same period in 2002. The increase was primarily due
to increased marketing expenses offset by a reduction of legal expenses.
2002 Compared to 2001
Total revenues increased by $307,000, or 2.9%, to $10,910,000 for fiscal year
2002 from $10,603,000 for fiscal year 2001. Offsetting some of the increase in
total revenues was a $32,000 reduction in net investment income.
Net insurance revenues increased by $339,000, or 5.0%, to $7,075,000 for fiscal
year 2002 from $6,736,000 for fiscal year 2001. This increase was primarily the
result of an increase in traditional life sales.
Net investment income decreased by $32,000, or .8%, to $3,835,000 for fiscal
year 2002 from $3,867,000 for fiscal year 2001. Investment yield decreased to
7.41% in fiscal year 2002 from 7.65% in fiscal year 2001.
Benefits and claims increased by $861,000, or 19.2%, to $5,344,000 for fiscal
year 2002 from $4,483,000 for the comparable period in 2001. The increase was
primarily due to an increase in traditional life reserves and death claims.
The amortization of deferred policy acquisition costs decreased by $227,000, or
10.3%, to $1,970,000 for fiscal year 2002 from $2,197,000 for the comparable
period in 2001. The decrease in amortization expense was in line with actuarial
assumptions.
Operating expenses decreased by $156,000, or 4.1%, to $3,679,000 for fiscal year
2002 from $3,835,000 for the same period in 2001. The decrease was primarily due
to a reduction in general office expenses.
Liquidity and Capital Resources
The Company attempts to match the duration of invested assets with its
policyholder liabilities. The Company may sell investments other than those
held-to-maturity in the portfolio to help in this timing; however, to date, that
has not been necessary. The Company purchases short-term investments on a
temporary basis to meet the expectations of short-term requirements of the
Company's products. The Company's investment philosophy is intended to provide a
rate of return which will persist during the expected duration of policyholder
liabilities regardless of future interest rate movements.
The Company invests predominantly in fixed maturity securities, mortgage loans,
and warehouse mortgage loans on a short-term basis before selling the loans to
investors in accordance with the requirements and laws governing life insurance
companies. Bonds owned by the Company amounted to $17,904,000 as of December 31,
2003 as compared to $22,412,000 as of December 31, 2002. This represents 38.8%
and 45.5% of the total investments as of December 31, 2003 and December 31,
2002, respectively. Generally, all bonds owned by the Company are rated by the
National Association of Insurance Commissioners. Under this rating system, there
are nine categories used for rating bonds. At December 31, 2003, and at December
31, 2002, the Company had investments in bonds in rating categories three
through six, which are considered non-investment grade of $488,000 and $485,000,
respectively.
If market conditions were to cause interest rates to change, the market value of
the fixed income portfolio (approximately $20.454 million) could change by the
following amounts based on the respective basis point swing (the change in
market values were calculated using a modeling technique):
(in millions of dollars) -200bps -100bps +100bps +200bps
- ------------------------ ------- ------- ------- -------
Change in Market Value $1.127 $.543 $(.504) $(.974)
The Company has no other financial instruments that would be materially
susceptible to market risk.
The Company's insurance operations have historically provided adequate positive
cash flow enabling the Company to continue to meet operational needs as well as
increase its investment-grade securities to provide ample protection for
policyholders.
The Company has classified certain of its fixed income securities as available
for sale, with the remainder classified as held to maturity. However, in
accordance with Company policy, any such securities purchased in the future will
be classified as held to maturity. Business conditions, however, may develop in
the future which may indicate a need for a higher level of liquidity in the
investment portfolio. In that event the Company believes it could sell
short-term investment grade securities before liquidating higher-yielding
longer-term securities.
The Company is subject to risk based capital guidelines established by statutory
regulators requiring minimum capital levels based on the perceived risk of
assets, liabilities, disintermediation, and business risk. At December 31, 2003
and December 31, 2002, the Company exceeded the regulatory criteria.
Lapse rates measure the amount of insurance terminated during a particular
period. The Company's lapse rate for life insurance in 2003 was 10.7% as
compared to a rate of 11.9% for 2002.
Effective December 17, 1998, the Company entered into an Administrative Services
Agreement with Security National Financial Corporation ("SNFC"). Under the terms
of the agreement, SNFC has agreed to provide the Company with certain defined
administrative and financial services, including accounting services, financial
reports and statements, actuarial, policyholder services, underwriting, data
processing, legal, building management, marketing advisory services and
investment services. In consideration for the services provided by SNFC, the
Company pays SNFC an administrative services fee of $250,000 per month,
provided, however, that such fee shall be reduced to zero for so long as the
capital and surplus of the Company is less than or equal to $6,000,000, unless
the Company and SNFC otherwise agree in writing and such agreement is approved
by the Florida Department of Insurance.
The administrative services fee may be increased, beginning on January 1, 2001,
to reflect increases in the Consumer Price Index, over the index amount as of
January 1, 2000. The Administrative Services Agreement shall remain in effect
for an initial term expiring on December 16, 2003. The term of the agreement may
be automatically extended for additional one-year terms unless either the
Company or SNFC shall deliver a written notice on or before September 30, of any
year stating to the other its desire not to extend the term of the agreement.
However, in no event can the agreement be terminated prior to December 16, 2003.
Student loans are a service the Company has historically made available to the
public as well as an investment. While the Company anticipates the seasonal
demand for student loan funds and the subsequent sale of such loans to the
Student Loan Marketing Association (SLMA), there are times when additional funds
are required to meet demand for student loans until such time as the sale
thereof to SLMA can be completed. In 1997, the Company renewed its $5,000,000
line of credit with SLMA until 2007 in order to meet these seasonal borrowing
requirements. The Company made no draws against this line of credit through
December 31, 2003.
The Company began a new association with USA Group, CAP Program in 1996, for the
purpose of making more student loan funds available without increased costs to
the Company. This association aided in eliminating borrowings for 2003 and 2002.
The Company has leased approximately 100% of the available rental space in its
principal office building and does not anticipate significant capital
expenditures to the rental space.
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements to encourage companies to provide prospective
information about their businesses without fear of litigation so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those projected in such statements. The
Company desires to take advantage of the "safe harbor" provisions of the act.
This Annual Report of Form 10-K contains forward-looking statements, together
with related data and projections, about the Company's projected financial
results and its future plans and strategies. However, actual results and needs
of the Company may vary materially from forward-looking statements and
projections made from time to time by the Company on the basis of management's
then-current expectations. The business in which the Company is engaged involves
changing and competitive markets, which may involve a high degree of risk, and
there can be no assurance that forward-looking statements and projections will
prove accurate.
Factors that may cause the Company's actual results to differ materially from
those contemplated or projected, forecast, estimated or budgeted in such forward
looking statements include among others, the following possibilities: (i)
heightened competition, including the intensification of price competition, the
entry of new competitors, and the introduction of new products by new and
existing competitors; (ii) adverse state and federal legislation or regulation,
including decreases in rates, limitations on premium levels, increases in
minimum capital and reserve requirements, benefit mandates and tax treatment of
insurance products; (iii) fluctuations in interest rates causing a reduction of
investment income or increase in interest expense and in the market value of
interest rate sensitive investment; (iv) failure to obtain new customer, retain
existing customers or reductions in policies in force by existing customers; (v)
higher service, administrative, or general expense due to the need for
additional advertising, marketing, administrative or management information
systems expenditures; (vi) loss or retirement of key executives or employees;
(vii) increases in medical costs; (viii) changes in the Company's liquidity due
to changes in asset and liability matching; (ix) restrictions on insurance
underwriting based on genetic testing and other criteria; (x) adverse changes in
the ratings obtained by independent rating agencies; (xi) failure to maintain
adequate reinsurance; (xii) possible claims relating to sales practices for
insurance products and claim denials and (xiii) adverse trends in mortality and
morbidity.
Off-Balance Sheet Arrangements
The Company has not entered into any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on its financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures, or capital resources that are
material to investors.
Recent Accounting Pronouncements
In April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
Under historical guidance, all gains and losses resulting from the
extinguishment of debt were required to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. SFAS No.
145 rescinds that guidance and requires that gains and losses from
extinguishments of debt be classified as extraordinary items only if they are
both unusual and infrequent in occurrence. SFAS No. 145 also amends SFAS No. 13,
"Accounting for Leases" for the required accounting treatment of certain lease
modifications that have economic effects similar to sale-leaseback transactions.
SFAS No. 145 requires that those lease modifications be accounted for in the
same manner as sale-leaseback transactions. The provisions of SFAS No. 145
related to SFAS No. 13 are effective for transactions occurring after May 15,
2002. Adoption of the provisions of SFAS No. 145 related to SFAS No. 13 did not
have a material impact on the Company's financial condition or results of
operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Action (including Certain Costs Incurred in
a Restructuring)" ("Issue 94-3"). The principal difference between SFAS No. 146
and Issue 94-3 is that SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred, rather than at the date of an entity's commitment to an exit plan.
SFAS No. 146 is effective for exit or disposal activities after December 31,
2002. The adoption of SFAS No. 146 did not have a material impact on the
Company's financial condition or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 requires certain guarantees to be
recorded at fair value and also requires a guarantor to make new disclosures,
even when the likelihood of making payments under the guarantee is remote. In
general, the interpretation applies to contracts or indemnification agreements
that contingently require the guarantor to make payments to the guaranteed party
based on changes in an underlying that is related to an asset, liability, or an
equity security of the guaranteed party. The recognition provisions of FIN 45
are effective on a prospective basis for guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective for financial
statements of interim and annual periods ending after December 15, 2002. The
adoption of FIN 45 did not have a material impact on the Company's financial
condition or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure and Amendment to FASB No. 123", which
provides three optional transition methods for entities that decide to
voluntarily adopt the fair value recognition principles of SFAS No. 123,
"Accounting for Stock Issued to Employees", and modifies the disclosure
requirements of that Statement. Under the prospective method, stock-based
compensation expense is recognized for awards granted after the beginning of the
fiscal year in which the change is made. The modified prospective method
recognizes stock-based compensation expense related to new and unvested awards
in the year of change equal to that which would have been recognized had SFAS
No. 123 been adopted as of its effective date, for fiscal years beginning after
December 15, 1994. The retrospective restatement method recognizes stock
compensation costs for the year of change and restates financial statements for
all prior periods presented as though the fair value recognition provisions of
SFAS No. 123 had been adopted as of its effective date. Since the Company does
not intend to voluntarily adopt the fair value provisions of FASB 123, adoption
of SFAS 148 did not have a material effect on the financial condition or results
of operations of the Company. However, pro forma disclosures required by SFAS
148 are included in the Company's interim financial statements, as required.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This Statement is effective for
contracts entered into or modified after June 30, 2003, with certain exceptions,
and for hedging relationships designated after September 30, 2003. The adoption
of SFAS No. 149 did not have a material effect on the Company's results of
operations and financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
requires that certain financial instruments, which under previous guidance may
have been accounted for as equity, must now be accounted for as liabilities (or
an asset in some circumstances). The financial
instruments affected include mandatory redeemable stock, certain financial
instruments that require or may require the issuer to buy back some of its
shares in exchange for cash or other assets and certain obligations that can be
settled with shares of stock. This Statement is effective for all such financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS No. 150 did not have a material effect on the
Company's financial position or results of operations.
Effective December 31, 2003, the Company adopted EITF Issue No. 03-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments ("EITF 03-1"). EITF 03-1 provides guidance on the disclosure
requirements for other-than-temporary Impairments of debt and marketable equity
investments that are accounted for under Statement of Financial Accounting
Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and
Equity Securities. The adoption of EITF 03-1 requires the Company to include
certain quantitative and qualitative disclosures for debt and marketable equity
securities classified as available-for-sale or held-to-maturity under SFAS 115
that are impaired at the balance sheet date but for which an
other-than-temporary impairment has not been recognized. The adoption of EITF
03-1 did not have a material impact on the Company's financial position or
results of operations.
In April 2003, the FASB cleared Statement 133 Implementation Issue No. B36,
Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments
That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially
Related to the Creditworthiness of the Obligor under Those Instruments ("Issue
B36"). Issue B36 concluded that (i) a company's funds withheld payable and/or
receivable under certain reinsurance arrangements, and (ii) a debt instrument
that incorporates credit risk exposures that are unrelated or only partially
related to the creditworthiness of the obligor include an embedded derivative
feature that is not clearly and closely related to the host contract. Therefore,
the embedded derivative feature must be measured at fair value on the balance
sheet and changes in fair value reported in income. Issue B36 became effective
on October 1, 2003. The adoption of Issue No. B36 did not have a material impact
on the Company's financial position or results of operations.
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51", and subsequently issued a revision to this
Interpretation in December 2003. This Interpretation addresses the consolidation
by business enterprises of variable interest entities as defined in the
Interpretation. The Interpretation applies to those variable interest entities
considered to be special-purpose entities no later than December 31, 2003. The
Interpretation must also be applied to all other variable interest entities no
later than March 31, 2004. The adoption of Interpretation No. 46 did not have a
material effect on the financial position or results of operations of the
Company because no variable interest entities were required to be consolidated.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company has no activities in derivative financial or commodity instruments.
The Company's exposure to market risks (i.e., interest rate risk, foreign
currency exchange rate risk and equity price risk) through other financial
instruments, including cash equivalents, accounts receivable and lines of
credit, is not material.
Item 8. Financial Statements and Supplementary Data.
The following financial statements of Southern Security Life Insurance Company
are included in Part II, Item 8:
Page
Number
Independent Auditors' Report........................................19
Balance Sheet-December 31, 2003 and 2002............................20
Statement of Operations - years ended
December 31, 2003, 2002 and 2001....................................22
Statement of Shareholders' Equity-years
ended December 31, 2003, 2002 and 2001..............................23
Statement of Cash Flows - years ended
December 31, 2003, 2002 and 2001....................................24
Notes to Financial Statements.......................................26
Report of Independent Auditors
Board of Directors and Shareholders
Southern Security Life Insurance Company
We have audited the accompanying balance sheet of Southern Security Life
Insurance Company as of December 31, 2003 and 2002 and the related statements of
operations, shareholders' equity, and cash flows for the three years in the
period ended December 31, 2003. In connection with our audits of the financial
statements, we have also audited the amounts included in the financial statement
schedules as listed in the accompanying index under Item 15(a). These financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 Southern Security Life
Insurance Company as of December 31, 2003 and 2002, and the results of its
operations and its cash flows for the three years in the period ended December
31, 2003, in conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the related financial statement
schedules, when considered in relation to the basic financial statements taken
as a whole, present fairly, in all material respects, the information set forth
therein.
/s/ Tanner + Co.
Salt Lake City, Utah
March 19, 2004
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Balance Sheet
December 31, 2003 and 2002
Assets 2003 2002
- ------ ---- ----
Investments (note 3):
Fixed maturities held-to-maturity
(fair value, $4,029,488 and
$4,167,028 at December 31,
2003 and 2002, respectively) $ 3,691,064 $ 3,971,539
Securities available-for-sale,
at fair value:
Fixed maturities (cost of
$13,157,337 at December 31,
2003 and $17,078,241 at
December 31, 2002) 14,213,317 18,439,961
Equity securities
(cost, $316,293 and
$316,293 at December 31,
2003 and 2002, respectively) 424,165 309,218
Mortgage loans 2,211,183 2,244,597
Policy and student loans 8,131,980 8,027,736
Short-term investments (note 11) 17,497,249 16,283,759
----------- -----------
Total Investments 46,168,958 49,276,810
----------- -----------
Cash and cash equivalents (note 3) 7,075,394 3,067,284
Accrued investment income 462,846 473,789
Deferred policy acquisition costs
(note 4) 13,624,107 13,391,535
Policyholders' account balances on
deposit with reinsurer (note 7) 6,795,983 6,955,691
Reinsurance receivable (note 7) 442,574 279,090
Receivables:
Agent balances, net 461,133 776,244
Other 320,325 614,150
Property and equipment, net,
at cost (note 5) 2,313,119 2,430,404
----------- -----------
Total Assets $77,664,439 $77,264,997
=========== ===========
See accompanying notes to financial statements.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Balance Sheet (continued)
December 31, 2003 and 2002
Liabilities and Shareholders' Equity 2003 2002
- ------------------------------------ ---- ----
Liabilities:
Future policy benefits (note 6) $ 4,279,281 $ 3,517,481
Policyholders' account balances 46,887,592 47,222,857
Unearned revenue 4,334,299 4,551,265
Other policy claims and benefits payable 798,050 701,312
Other policyholders' funds, dividend
and endowment accumulations 98,071 78,811
Funds held related to reinsurance
treaties (note 7) 1,294,589 1,334,963
Notes payable to related parties
(note 9) 1,433,100 1,000,000
Due to affiliated insurance
agency (note 11) 57,065 83,941
General expenses accrued 81,942 98,480
Unearned investment income 355,650 355,529
Other liabilities 62,798 111,786
Income taxes (note 10) 967,516 1,062,802
----------- -----------
Total liabilities 60,649,953 60,119,227
----------- -----------
Commitments and contingencies
(notes 7 and 15) -- --
Shareholders' equity (notes 2,3 and 12):
Common stock, $1 par, authorized
3,000,000 shares; issued and out-
standing, 2,103,600 shares in 2003
and 2,003,388 in 2002 2,103,600 2,003,388
Capital in excess of par 4,614,925 4,267,189
Accumulated other comprehensive
income 835,784 871,197
Retained earnings 9,460,177 10,003,996
----------- -----------
Total shareholders' equity 17,014,486 17,145,770
----------- -----------
Total liabilities and shareholders' equity $77,664,439 $77,264,997
=========== ===========
See accompanying notes to financial statements.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statement of Operations
Years ended December 31, 2003, 2002 and 2001
2003 2002 2001
---- ---- ----
Revenues:
Net insurance revenues $ 7,334,707 $ 7,075,257 $ 6,736,027
Net investment income
(notes 3 and 11) 4,005,129 3,835,420 3,866,966
Realized loss on investments -- (1,038) --
------------ ------------ ------------
Total revenues 11,339,836 10,909,639 10,602,993
------------ ------------ ------------
Benefits, claims and expenses:
Benefits and claims 5,599,434 5,343,573 4,482,588
Amortization of deferred
policy acquisition costs (note 4) 2,039,459 1,969,966 2,197,399
Operating expenses 3,871,302 3,678,920 3,835,165
------------ ------------ ------------
Total benefits, claims and expenses 11,510,195 10,992,459 10,515,152
------------ ------------ ------------
Income (loss) before
income taxes (170,359) (82,820) 87,841
Income tax (benefit) expense (note 10) (74,488) (12,254) 16,865
------------ ------------ ------------
Net income (loss) $ (95,871) $ (70,566) $ 70,976
============ ============ ============
Basic and diluted net income
(loss) per share
of common stock (note 12) $(.05) $(.04) $.04
===== ===== =====
See accompanying notes to financial statements.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statement of Shareholders' Equity
Years ended December 31, 2003, 2002 and 2001
Accumulated
Capital other
Common Stock in excess comprehensive Retained
Shares Amount of par income (loss) earnings Total
--------- ---------- --------- ------------- -------- -----
Balances, January 1, 2001 1,907,989 $ 1,907,989 $ 4,011,519 $ (75,628) $ 10,354,655 $ 16,198,535
------------ ------------ ------------ ------------- ------------- ------------
Comprehensive Income (loss):
Net income for the year -- -- -- -- 70,976 70,976
Unrealized appreciation of
securities available for sale -- -- -- 633,759 633,759
----------- ------------ ------------ ------------ ------------ ------------
Total comprehensive income 704,735
------------
Balances, December 31, 2001 1,907,989 1,907,989 4,011,519 558,131 10,425,631 16,903,270
------------ ------------ ------------ ----------- ------------ ------------
Comprehensive Income (loss):
Net loss for the year -- -- -- -- (70,566) (70,566)
Unrealized appreciation of
securities available for sale -- -- -- 313,066 -- 313,066
------------ ------------ ------------ ---------- ------------ ------------
Total comprehensive income 242,500
------------
Stock Dividend 95,399 95,399 255,670 -- (351,069) --
------------ ------------ ------------- ----------- ------------ ------------
Balances, December 31, 2002 2,003,388 2,003,388 4,267,189 871,197 10,003,996 17,145,770
------------ ------------ ------------ ---------- ------------ ------------
Comprehensive Income (loss):
Net (loss) for the year -- -- -- -- (95,871) (95,871)
Unrealized depreciation of
securities available for sale -- -- -- (35,413) -- (35,413)
------------ ------------ ----------- ---------- ------------- ----------
Total comprehensive loss (131,284)
-----------
Stock dividend 100,212 100,212 347,736 -- (447,948) --
------------ ------------ ------------ ----------- ------------ ------------
Balances, December 31, 2003 2,103,600 $ 2,103,600 $ 4,614,925 $ 835,784 $ 9,460,177 $ 17,014,486
============ ============ ============ ========== ============ ============
See accompanying notes to financial statements.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statement of Cash Flows
Years ended December 31, 2003, 2002 and 2001
2003 2002 2001
---- ---- ----
Cash flows provided by (used in)
operating activities:
Net income (loss) $ (95,871) $ (70,566) $ 70,976
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 165,905 196,497 270,792
Net realized loss -- 1,038 --
Deferred income taxes (benefit) (93,073) (16,500) 22,623
Amortization of deferred
policy acquisition costs 2,039,459 1,969,966 2,197,399
Acquisition costs deferred (1,935,573) (2,129,428) (1,898,971)
Change in assets and liabilities
affecting cash provided by operations:
Accrued investment income 10,943 139,491 (2,806)
Accounts receivable 608,936 337,216 (239,665)
Reinsurance receivable (163,484) 290,073 (244,370)
Other policy claims and
future benefits payable 858,538 169,791 502,866
Policyholders' account balances 1,976,831 2,107,681 2,119,312
Funds held under reinsurance (40,374) (44,677) (37,576)
Unearned premiums (418,840) (297,910) (291,269)
Dividend and endowment accumulations 19,260 14,766 (8,845)
Payable to affiliated insurance agent (26,876) (109,748) 47,894
Income taxes payable 18,585 -- (57,470)
Other liabilities 367,695 (132,625) 182,378
----------- ----------- -----------
Net cash provided by operating activities $ 3,292,061 $ 2,425,065 $ 2,633,268
----------- ----------- -----------
Cash flows provided by (used in) investing activities:
Purchase of investments:
Purchase of investments held-to-maturity $ -- $(1,784,283) $ --
Proceeds from maturity of
held-to maturity securities 302,185 983,820 2,220,802
Proceeds from maturity of
available-for-sale securities 3,860,000 3,300,000 2,814,816
Proceeds from sale of available-
for-sale securities (equity and
fixed maturity) -- 782,048 794,356
Repayment of mortgage loans 33,414 23,695 29,871
Net change in short-term investments (1,213,490) (2,423,225) (6,045,721)
Net change in policy and student loans (104,244) 153,487 39,513
Acquisition of property and equipment (9,428) (68,672) (78,009)
----------- ----------- -----------
Net cash provided by (used in)
investing activities $ 2,868,437 $ 966,870 $ (224,372)
----------- ----------- -----------
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Statement of Cash Flows
Years ended December 31, 2003, 2002 and 2001
2003 2002 2001
---- ---- ----
Cash flows from financing activities:
Receipts from universal life and
certain annuity policies
credited to policyholder
account balances $ 4,425,663 $ 4,816,639 $5,037,521
Return of policyholder account
balances on universal life
and certain annuity policies (6,578,051) (7,110,345) (7,991,030)
------------ ----------- ------------
Net cash used in financing
Activities $(2,152,388) $(2,293,706) $ (2,953,509)
----------- ----------- ------------
Increase (decrease) in cash and
cash equivalents 4,008,110 1,098,229 (544,613)
Cash and cash equivalents at
beginning of year 3,067,284 1,969,055 2,513,668
------------ ----------- -----------
Cash and cash equivalents at
end of year $ 7,075,394 $ 3,067,284 $ 1,969,055
=========== =========== ===========
Supplemental schedule of cash flow information:
Interest paid during the year $ 90,000 $ 90,000 $ 97,240
=========== =========== ===========
Income taxes paid during the year $ 785 $ 4,246 $ 57,470
=========== =========== ===========
Change in market value adjustments- investments
available-for-sale:
Fixed maturities $ (305,741) $ 456,823 $ 956,773
Equity securities 114,947 (62,965) 24,632
Change in deferred acquisition costs 336,457 257,686 61,405
Change in premium deposit funds (201,874) (154,613) (36,843)
Deferred income tax asset (liability) 20,798 (183,865) (372,208)
-------------- ------------ -----------
Accumulated comprehensive income
Net change in unrealized appreciation
(depreciation) $ (35,413) $ 313,066 $ 633,759
============= ============= ===========
See accompanying notes to financial statements.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements
December 31, 2003, 2002 and 2001
1. Nature of business and summary of significant accounting policies:
(a) Nature of business
The primary business of Southern Security Life Insurance Company
(the "Company") is the issuance of long duration universal life
insurance contracts. The majority of the Company's business is
conducted in the states of Alabama (10%), Florida (43%), and
Georgia (12%). None of the remaining eleven states in which the
Company is licensed to conduct business account for over 10%
individually of the Company's total business.
Prior to December 17, 1998, certain executive officers and
directors of the Company were shareholders of approximately 60
percent of the shares of SSLIC Holding Company, Inc., (formerly
Consolidare Enterprises, Inc.). SSLIC Holding Company, Inc. owns
77% of the Company's voting securities at December 31, 2003.
Effective December 17, 1998, 100% of the common stock of SSLIC
Holding Company, Inc. was acquired by Security National Life
Insurance Company ("SNLIC"). Accordingly, from December 17, 1998,
the Company is a 77.0% owned, indirect subsidiary of SNLIC.
The following is a description of the most significant risks
facing life and health insurers and how the Company mitigates
those risks:
Legal/regulatory risk is the risk that changes in the legal or
regulatory environment in which the Company operates will create
additional expenses not anticipated by the Company in pricing its
products. That is, regulatory initiatives designed to reduce
insurer profits, new legal theories, or insurance company
insolvencies through guaranty fund assessments, may create costs
for the Company beyond those recorded in the financial
statements. The Company seeks to mitigate this risk through
geographic marketing of these insurance products.
Credit risk is the risk that issuers of securities owned by the
Company will default or that other parties, including reinsurers,
which owe the Company money, will not pay. The Company attempts
to mitigate this risk by adhering to a conservative investment
strategy, by maintaining sound reinsurance and by providing for
any amounts deemed uncollectible.
Interest rate risk is the risk that interest rates will change
and cause a decrease in the value of the Company's investments.
This change in rates may cause certain interest-sensitive
products to become uncompetitive, may cause disintermediation, or
may cause the Company to not achieve its target interest margins
between interest earned on invested assets and interest required
to be credited to policyholder account balances. The Company
mitigates this risk by charging fees for nonconformance with
certain policy provisions, by offering products that transfer
this risk to the purchaser, and/or by attempting to match the
maturity schedule of its assets with the expected payouts of its
liabilities. To the extent that liabilities come due more quickly
than assets mature, the Company would have to sell assets prior
to maturity and potentially recognize a gain or loss.
(b) Basis of financial statements
The presentation of financial statements have been prepared in
conformity with U.S. generally accepted accounting principles
("GAAP"), which vary from reporting practices prescribed or
permitted by regulatory authorities.
The accompanying financial statements have been prepared using
the historic cost basis of accounting and do not reflect any
adjustments related to allocation of the purchase price of the
Company's parent, SSLIC Holding (Formerly Consolidare) by
Security National Life Insurance Company at December 17, 1998.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (Continued)
(c) Use of estimates
In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts
of assets and liabilities. Actual results could differ
significantly from those estimates.
The estimates susceptible to significant change are those used in
determining the liability for future policy benefits and claims,
deferred income taxes and deferred policy acquisition costs.
Although some variability is inherent in these estimates,
management believes that the amounts provided are adequate.
(d) Investments
Investments in all debt securities and those equity securities
with readily determinable market values are classified into one
of three categories: held-to-maturity, trading or
available-for-sale. Classification of investments is based upon
management's current intent. Debt securities which management has
a positive intent and ability to hold until maturity are
classified as securities held-to-maturity and are carried at
amortized cost. Unrealized holding gains and losses on securities
held-to-maturity are not reflected in the financial statements.
Debt and equity securities that are purchased for short-term
resale would be classified as trading securities. Trading
securities would be carried at fair value, with unrealized
holding gains and losses included in earnings; the Company has no
securities classified as trading securities. All other debt and
equity securities not included in the above two categories are
classified as securities available-for-sale. Securities
available-for-sale are carried at fair value, with unrealized
holding gains and losses reported in accumulated other
comprehensive income which is included in shareholders' equity
after adjustment for deferred income taxes and deferred
acquisition costs related to universal life products.
The Company's carrying value for investments in the
held-to-maturity and available-for-sale categories is reduced to
its estimated realizable value if a decline in the market value
is deemed other than temporary. Such reductions in carrying
values are recognized as realized losses and charged to income.
Interest on fixed maturities and short-term investments is
recognized to income as it accrues on the principal amounts
outstanding adjusted for amortization of premiums and discounts
computed by the scientific method which approximates the
effective yield method. Realized gains and losses on disposition
of investments are included in net income. The cost of
investments sold is determined on the specific identification
method. Dividends are recorded as income on the ex-dividend
dates.
Mortgage loans on real estate and mortgage loans held as short
term investments are reported at the unpaid principal balances,
adjusted for amortization of premium or accretion of discount,
less allowance for possible losses.
Policy loans and student loans are carried at the unpaid
principal balance, less any amounts deemed to be uncollectible.
The Company's policy is that policy loans are not made for
amounts in excess of the cash surrender value of the related
policy. Accordingly, policy loans are fully collateralized by the
related liability for future policy benefits for traditional
insurance policies and by the policyholders' account balance for
interest sensitive policies.
(e) Cash and cash equivalents
For purposes of the statements of cash flows, the Company
considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (Continued)
(f) Deferred policy acquisition costs
The costs of acquiring new business, net of the effects of
reinsurance, principally commissions and those home office
expenses that tend to vary with and are primarily related to the
production of new business, have been deferred to the extent
recoverable from future profit margins. Deferred policy
acquisition costs applicable to traditional life policies are
being amortized over the premium-paying period of the related
policies in a manner that will charge each year's operations in
direct proportion to the estimated premium revenue over the life
of the policies. Premium revenue estimates are made using the
same interest, mortality and withdrawal assumptions as are used
for computing liabilities for future policy benefits. Acquisition
costs relating to universal life policies are being amortized in
relation to the incidence of expected gross profits over the life
of the policies. Gross profits for universal life contracts
consist of revenue representing policy charges for the cost of
insurance, administration of the contracts and surrender charges
plus investment income less expenses for interest credited to
policyholder account balances, policy administrative expenses and
expected benefit payments in excess of policy account balances.
Deferred policy acquisition costs are adjusted to reflect the
impact of unrealized gains and losses on fixed maturity
securities available for sale.
The Company has performed tests concerning the recoverability of
deferred acquisition costs. These methods include those typically
used by many companies in the life insurance industry. Further,
the Company conducts a sensitivity analysis of its assumptions
that are used to estimate the future expected gross profits,
which management has used to determine the future recoverability
of the deferred acquisition costs.
(g) Property and equipment
Property and equipment are recorded at cost, less accumulated
depreciation. Depreciation and amortization on capital leases and
property and equipment are determined using the straight-line
method over the estimated useful lives of the assets or terms of
the lease. Expenditures for maintenance and repairs are expensed
when incurred and betterments are capitalized. Gains and losses
on sale of property and equipment are reflected in operations.
(h) Future policy benefits
The liability for future policy benefits for traditional life
policies has been provided on a net level premium basis based
upon estimated investment yields, withdrawals, mortality and
other assumptions that were appropriate at the time the policies
were issued. Such estimates are based upon industry data and the
Company's past experience as adjusted to provide for possible
adverse deviation from the estimates.
(i) Policyholders' account balances
Insurance reserves for universal life policies are determined
following the retrospective deposit method and consist of policy
values that accrue to the benefit of the policyholder, unreduced
by surrender charges.
(j) Recognition of premium revenue and related costs
Premiums are recognized as revenue as follows:
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
Universal life policies - premiums received from policyholders
are reported as deposits. Cost of insurance, policy
administration and surrender charges which are charged against
the policyholder account balance during the period, are
recognized as revenue as earned. Amounts assessed against the
policyholder account balance that represent compensation to the
Company for services to be provided in future periods are
reported as unearned revenue and recognized in income using the
same assumptions and factors used to amortize acquisition costs
capitalized.
Annuity contracts with flexible terms - premiums received from
policyholders are reported as deposits.
All other policies - recognized as revenue over the premium
paying period.
(k) Income taxes
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment
date.
(l) Impairment of long-lived assets
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable through undiscounted
future cash flows. If it is determined that an impairment loss
has occurred based on expected cash flows, such loss is
recognized in the statement of operations.
(m) Earnings (loss) per common share
The computation of basic earnings (loss) per common share is
based on the weighted average number of shares outstanding during
each year.
The computation of diluted earnings per common share is based on
the weighted average number of shares outstanding during the
year, plus the common stock equivalents that would arise from the
exercise of stock options outstanding, using the treasury stock
method and the average market price per share during the year.
There were no common stock equivalents outstanding during the
years ended December 31, 2003, 2002 and 2001. Common stock
equivalents are not included in the diluted earnings (loss) per
share calculation when their effect is antidilutive.
(n) Stock-based compensation
The Company measures expense for stock-based employee
compensation using the intrinsic value method and provides
pro-forma disclosures of net income (loss) and net income (loss)
per common share as if the fair value method had been applied in
measuring compensation expense. For the years ended December 31,
2003, 2002, and 2001, there was no stock-based employee
compensation expense or pro-forma expense.
(o) Concentration of credit risk
The Company maintains its cash in bank deposit accounts, which at
times may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not
exposed to any significant credit risk on cash and cash
equivalents.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
(p) Reclassification
Certain amounts presented in the 2002 and 2001 financial
statements have been reclassified to conform to the 2003
presentation.
(q) Recent accounting pronouncements
In April 2002, FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections". Under historical guidance, all gains
and losses resulting from the extinguishment of debt were
required to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. SFAS No.
145 rescinds that guidance and requires that gains and losses
from extinguishments of debt be classified as extraordinary items
only if they are both unusual and infrequent in occurrence. SFAS
No. 145 also amends SFAS No. 13, "Accounting for Leases" for the
required accounting treatment of certain lease modifications that
have economic effects similar to sale-leaseback transactions.
SFAS No. 145 requires that those lease modifications be accounted
for in the same manner as sale-leaseback transactions. The
provisions of SFAS No. 145 related to SFAS No. 13 are effective
for transactions occurring after May 15, 2002. Adoption of the
provisions of SFAS No. 145 related to SFAS No. 13 did not have a
material impact on the Company's financial condition or results
of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses
financial accounting and reporting for costs associated with exit
or disposal activities and nullifies EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Action (including Certain Costs
Incurred in a Restructuring)" ("Issue 94-3"). The principal
difference between SFAS No. 146 and Issue 94-3 is that SFAS No.
146 requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is
incurred, rather than at the date of an entity's commitment to an
exit plan. SFAS No. 146 is effective for exit or disposal
activities after December 31, 2002. The adoption of SFAS No. 146
did not have a material impact on the Company's financial
condition or results of operations.
In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others" ("FIN 45"). FIN 45 requires certain guarantees to be
recorded at fair value and also requires a guarantor to make new
disclosures, even when the likelihood of making payments under
the guarantee is remote. In general, the Interpretation applies
to contracts or indemnification agreements that contingently
require the guarantor to make payments to the guaranteed party
based on changes in an underlying that is related to an asset,
liability, or an equity security of the guaranteed party. The
recognition provisions of FIN 45 are effective on a prospective
basis for guarantees issued or modified after December 31, 2002.
The disclosure requirements are effective for financial
statements of interim and annual periods ending after December
15, 2002. The adoption of FIN 45 did not have a material impact
on the Company's financial condition or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure and
Amendment to FASB No. 123", which provides three optional
transition methods for entities that decide to voluntarily adopt
the fair value recognition principles of SFAS No. 123,
"Accounting for Stock Issued to Employees", and modifies the
disclosure requirements of that Statement. Under the prospective
method, stock-based compensation expense is recognized for awards
granted after the beginning of the fiscal year in which the
change is made. The modified prospective method recognizes
stock-based compensation expense related to new and unvested
awards in the year of change equal to that which would have been
recognized had SFAS No. 123 been adopted as of its effective
date, for fiscal years beginning after December 15, 1994. The
retrospective restatement method recognizes stock compensation
costs for the year of change and restates financial statements
for all prior periods presented as though the fair value
recognition provisions of SFAS No. 123 had been adopted as of its
effective date. Since the Company does not
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
intend to voluntarily adopt the fair value provisions of FASB
123, adoption of SFAS 148 did not have a material effect on the
financial condition or results of operations of the Company.
However, pro forma disclosures required by SFAS 148 are included
in the Company's interim financial statements, as required.
In April 2003, the FASB issued SFAS No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities.
SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities under SFAS
No. 133, Accounting for Derivative Instruments and Hedging
Activities. This Statement is effective for contracts entered
into or modified after June 30, 2003, with certain exceptions,
and for hedging relationships designated after September 30,
2003. The adoption of SFAS No. 149 did not have a material effect
on the Company's results of operations and financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity." SFAS No. 150 requires that certain
financial instruments, which under previous guidance may have
been accounted for as equity, must now be accounted for as
liabilities (or an asset in some circumstances). The financial
instruments affected include mandatory redeemable stock, certain
financial instruments that require or may require the issuer to
buy back some of its shares in exchange for cash or other assets
and certain obligations that can be settled with shares of stock.
This Statement is effective for all such financial instruments
entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of SFAS No. 150 did not have a
material effect on the Company's financial position or results of
operations.
Effective December 31, 2003, the Company adopted EITF Issue No.
03-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments ("EITF 03-1"). EITF 03-1
provides guidance on the disclosure requirements for
other-than-temporary Impairments of debt and marketable equity
investments that are accounted for under Statement of Financial
Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities. The adoption of EITF
03-1 requires the Company to include certain quantitative and
qualitative disclosures for debt and marketable equity securities
classified as available-for-sale or held-to-maturity under SFAS
115 that are impaired at the balance sheet date but for which an
other-than-temporary impairment has not been recognized. The
adoption of EITF 03-1 did not have a material impact on the
Company's financial position or results of operations.
In April 2003, the FASB cleared Statement 133 Implementation
Issue No. B36, Embedded Derivatives: Modified Coinsurance
Arrangements and Debt Instruments That Incorporate Credit Risk
Exposures That Are Unrelated or Only Partially Related to the
Creditworthiness of the Obligor under Those Instruments ("Issue
B36"). Issue B36 concluded that (i) a company's funds withheld
payable and/or receivable under certain reinsurance arrangements,
and (ii) a debt instrument that incorporates credit risk
exposures that are unrelated or only partially related to the
creditworthiness of the obligor include an embedded derivative
feature that is not clearly and closely related to the host
contract. Therefore, the embedded derivative feature must be
measured at fair value on the balance sheet and changes in fair
value reported in income. Issue B36 became effective on October
1, 2003. The adoption of Issue No. B36 did not have a material
impact on the Company's financial position or results of
operations.
In January 2003, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51", and subsequently
issued a revision to this Interpretation in December 2003. This
Interpretation addresses the consolidation by business
enterprises of variable interest entities as defined in the
Interpretation. The Interpretation applies to those variable
interest entities considered to be special-purpose entities no
later than December 31, 2003. The Interpretation must also be
applied to all other variable interest entities no later than
March 31, 2004. The adoption of Interpretation No. 46 did not
have a material effect on the financial position or results of
operations of the Company because no variable interest entities
were required to be consolidated.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
2. Basis of financial statements
The more significant U.S. generally accepted accounting principles applied in
the preparation of financial statements that differ from life insurance
statutory accounting practices prescribed or permitted by regulatory authorities
are as follows:
a. Costs of acquiring new business are deferred and amortized, rather than
being charged to operations as incurred.
b. The liability for future policy benefits and expenses is based on
reasonable estimates of expected mortality, morbidity, interest,
withdrawals and future maintenance and settlement expenses, rather than on
statutory rates for mortality and interest.
c. The liability for policyholder funds associated with universal
life and certain annuity contracts is based on the provisions of
Statement of Financial Accounting Standards No. 97, rather than
on the statutory rates for mortality and interest.
d. Investments in securities are reported as described in Note 1.(d), rather
than in accordance with valuations established by the National Association
of Insurance Commissioners ("NAIC"). Pursuant to NAIC valuations, bonds
eligible for amortization are reported at amortized value; other securities
are carried at values prescribed by or deemed acceptable by NAIC.
e. Deferred income taxes, if applicable, are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases.
f. The statutory liabilities for the asset valuation reserve and interest
maintenance reserve have not been provided in the financial statements.
g. Certain assets, principally receivables from agents and equipment, are
reported as assets rather than being charged directly to surplus.
h. Costs attributable to the public offering of the common shares have been
reclassified from accumulated surplus to capital in excess of par.
i. Realized gains or losses on the sale or maturity of investments are
included in the statement of income and not recorded net of taxes and
amounts transferred to the interest maintenance reserve as required by
statutory accounting practices.
j. Certain proceeds from a note payable (note 9) that are treated as
shareholders' equity for statutory purposes are treated as a liability
under U.S. generally accepted accounting principles.
Reinsurance assets and liabilities are reported on a gross basis rather than
shown on a net basis as permitted by statutory accounting practices.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
A reconciliation of net income (loss) for the years ended December 31, 2003,
2002, 2001 and shareholders' equity as of December 31, 2003 and 2002 between the
amounts reported on a statutory basis and the related amounts presented on the
basis of U.S. generally accepted accounting principles is as follows:
Net Income (loss) Shareholders' Equity
Years Ended December 31, December 31,
------------------------ --------------
2003 2002 2001 2003 2002
---- ---- ---- ---- ----
As reported on a
Statutory basis $ 2,431,499 $ (427,439) $ (429,143) $ 11,443,488 $ 8,582,968
------------ ------------ ------------ ------------ ------------
Adjustments:
Deferred policy acquisition
costs, net (83,886) 159,459 (298,428) 13,624,107 13,391,535
Future policy benefits, un-
earned premiums
and policyholders' funds (2,460,967) 291,503 1,191,046 (7,727,500) (5,064,659)
Deferred income taxes 246,309 16,500 (159,189) (751,620) (878,152)
Asset valuation reserve -- -- -- 431,305 471,993
Interest maintenance
reserve (42,006) (34,476) (34,017) 388,601 430,606
Non-admitted assets -- -- (100,000) 617,221 859,361
Unrealized gains
-SFAS 115 -- -- -- 580,481 795,097
Capital and surplus note -- -- -- (1,000,000) (1,000,000)
Other adjustments, net (186,820) (76,113) (99,293) (591,597) (442,979)
------------ ------------ ------------ ------------ ------------
Net difference (2,527,370) 356,873 500,119 5,570,998 8,562,802
------------ ------------ ------------ ------------ ------------
As reported on a
GAAP basis $ (95,871) $ (70,566) $ 70,976 $ 17,014,486 $ 17,145,770
============ ============ ============ ============ ============
Under applicable laws and regulations, the Company is required to maintain
minimum surplus as to policyholders, determined in accordance with regulatory
accounting practices, in the aggregate amount of approximately $1,799,000.
The payment of dividends by the Company is subject to the regulation of the
State of Florida Department of Insurance.
The Insurance Commissioner's approval is not required if the dividend is equal
to or less than the greater of: (a) 10% of the Company's surplus as to
policyholders' derived from realized net operating profits on its business and
net realized capital gains; or (b) the Company's entire net operating profits
and realized net capital gains derived during the immediately preceding calendar
year, if the Company will have surplus as to policyholders equal to or exceeding
115% of the minimum required statutory surplus as to policyholders after the
dividend is declared and paid. As a result of such restrictions, the maximum
dividend, which may be paid by the Company during 2004 without prior approval,
is approximately $376,000. Accordingly, GAAP excess earnings over a statutory
basis are not available for dividends.
The Risk-Based Capital ("RBC") for Life and/or Health Insurers Model Act (the
"Model Act") was adopted by the National Association of Insurance Commissioners
(NAIC) in 1992. The main purpose of the Model Act is to provide a tool for
insurance regulators to evaluate the capital of insurers. Based on calculations
using the appropriate NAIC formula, the Company exceeded the RBC requirements at
December 31, 2003.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
3. Investments
(a) Equity securities and fixed maturities
Equity securities consist of $424,165 and $309,218 of common stock at fair
value at December 31, 2003 and 2002 respectively.
Unrealized (depreciation) appreciation in investments in equity securities
for the years ended December 31, 2003, 2002, and 2001 is $114,947,
$(62,965) and $24,632, respectively.
At December 31, 2003, investments in debt securities at fair value and cash
totaling $21,983,142 were restricted under the terms of a reinsurance
agreement with Security National Life Insurance Company. See note 7.
The amortized cost and estimated fair values of investments in debt
securities are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
December 31, 2003:
Held-to-maturity:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies (guaranteed) $ -- $ -- $ -- $ --
Corporate securities 3,691,064 348,794 10,370 4,029,488
Mortgage-backed securities -- -- -- --
----------- ----------- ----------- -----------
3,691,064 348,794 10,370 4,029,488
----------- ----------- ----------- -----------
Available-for-sale:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies (guaranteed) 596,430 81,604 -- 678,034
Corporate securities 12,560,907 974,376 -- 13,535,283
Mortgage-backed securities -- -- -- --
----------- ----------- ----------- -----------
13,157,337 1,055,980 -- 14,213,317
----------- ----------- ----------- -----------
$16,848,401 $ 1,404.774 $ 10,370 $18,242,805
=========== =========== =========== ===========
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- --------- ---------- ---------
December 31, 2002:
Held-to-maturity:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies (guaranteed) $ -- $ -- $ -- $ --
Corporate securities 3,690,569 201,213 12,837 3,878,945
Mortgage-backed securities 280,970 7,113 -- 288,083
----------- ----------- ----------- -----------
3,971,539 208,326 12,837 4,167,028
----------- ----------- ----------- -----------
Available-for-sale:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies (guaranteed) 595,993 103,697 -- 699,690
Corporate securities 16,482,248 1,258,023 -- 17,740,271
Mortgage-backed securities -- -- -- --
----------- ----------- ----------- -----------
17,078,241 1,361,720 -- 18,439,961
----------- ----------- ----------- -----------
$21,049,780 $ 1,570,046 $ 12,837 $22,606,989
=========== =========== =========== ===========
Fair values reflected in available-for-sale and held-to-maturity categories
are based on NAIC values, versus values associated with normal market
pricing services. The estimated difference for both categories was
immaterial for all years presented.
Unrealized appreciation (depreciation) of fixed maturities for years ending
December 31, 2003, 2002 and 2001 is $(162,806), $558,067, and $1,152,189,
respectively.
The amortized cost and estimated fair value of fixed maturities at December
31, 2003, by contractual maturity, are summarized below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
Fixed maturity securities held-to-maturity:
Estimatd
Amortized Cost Fair Value
Due in 2004 $ -- $ --
Due in 2005 through 2008 1,101,703 1,240,126
Due in 2009 through 2013 2,043,405 2,241,130
Due after 2013 545,956 548,232
Mortgage-backed securities -- --
---------- ----------
$3,691,064 $4,029,488
========== ==========
Fixed maturity securities available-for-sale:
Due in 2004 $ 2,668,412 $ 2,734,176
Due in 2005 through 2008 9,242,775 10,044,656
Due in 2009 through 2013 1,148,267 1,320,516
Due after 2013 97,883 113,969
Mortgage-backed securities -- --
----------- -----------
$13,157,337 $14,213,317
=========== ===========
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
Proceeds from the sale of equity securities and fixed maturities available for
sale and the related realized gains and losses are summarized as follows:
2003 2002 2001
---------- ---------- ----------
Proceeds from sale of
equity securities $ -- $ 782,048 $ 794,356
=========== =========== ==========
Proceeds from sale of
fixed maturities
available-for-sale $ 3,860,000 $ 3,300,000 $ 2,814,816
=========== =========== ===========
Realized gains (losses)
Fixed maturities:
Gross realized gains $ -- $ -- $ --
Gross realized (losses) -- -- --
Equity securities:
Gross realized gains -- -- --
Gross realized (losses) -- (1,038) --
----------- ----------- -----------
$ -- $ (1,038) $ --
=========== =========== ===========
There were no realized gains and losses for fixed maturity securities classified
as available-for-sale and held-to-maturity that were called during the year
ended December 31, 2003, 2002 and 2001.
Investments, aggregated by issuer, in excess of 10% of shareholders' equity
(before net unrealized gains and losses on available-for-sale securities) at
December 31, 2003 and 2002, other than investments issued or guaranteed by the
United States government are as follows:
2003 Carrying Amount
---- ---------------
Dean Witter Discover $4,023,115
Philip Morris, Inc. 2,021,684
2002
----
Dean Witter Discover $4,049,379
Philip Morris Inc. 5,529,454
(b) Concentrations of credit risk
At December 31, 2003 and 2002, the Company owned $488,000 and
$485,000, respectively, of less-than-investment grade corporate debt
securities. The Company also invests in subsidized and unsubsidized
student loans totaling $320,746, and $97,671 at December 31, 2003 and
2002, respectively, which are guaranteed by the U.S. government.
Subsequent to December 31, 2003, all of these loans were sold at their
unpaid principal balance.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
(c) Investment income
Net investment income for the years ended December 31, 2003, 2002, and
2001 consists of the following:
2003 2002 2001
---- ---- ----
Interest:
Fixed maturities $1,429,502 $1,526,706 $1,790,992
Policy and student loans 496,142 515,141 468,904
Short-term investments 1,538,540 1,235,823 1,105,434
Mortgage loans 170,982 179,193 206,212
Rental income 376,613 388,843 304,879
Dividends on equity securities
common stock, including
mutual fund 691 384 --
---------- ---------- ----------
4,012,470 3,846,090 3,876,421
Less investment expenses 7,341 10,670 9,455
---------- ---------- ----------
$4,005,129 $3,835,420 $3,866,966
========== ========== ==========
(d) Investments on deposit
In order to comply with statutory regulations, investments were on
deposit with the Insurance Departments of certain states as follows:
2003 2002 2001
---- ---- ----
Florida $1,703,992 $1,702,867 $1,707,042
Alabama 100,526 100,634 100,737
South Carolina 301,577 301,903 302,210
Georgia 251,488 252,233 252,933
Indiana 216,096 201,787 202,347
---------- ---------- ----------
$2,573,679 $2,559,424 $2,565,269
========== ========== ==========
Certain of these assets, totaling approximately $850,000 for each of
the years ended December 31, 2003 and 2002, are restricted for the
future benefit of policyholders in a particular state.
4. Deferred policy acquisition costs
Deferred policy acquisition costs at December 31, 2003, 2002 and 2001 consist of
the following:
2003 2002 2001
---- ---- ----
Deferred policy acquisition
costs at beginning of year $ 13,391,535 $ 12,974,390 $ 13,211,413
------------ ------------ ------------
Policy acquisition costs deferred:
Commissions 1,339,106 1,544,860 1,249,453
Underwriting & issue costs 422,744 242,162 269,070
Other 173,724 342,403 380,448
Change in unrealized appreciation
(depreciation) 336,457 257,686 61,405
------------ ------------ ------------
2,272,031 2,387,111 1,960,376
Amortization of deferred policy
acquisition costs (2,039,459) (1,969,966) (2,197,399)
------------ ------------ ------------
Deferred policy acquisition
Costs at end of year $ 13,624,107 $ 13,391,535 $ 12,974,390
============ ============ ============
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
5. Property and equipment
Property and equipment consists of the following:
December 31, December 31,
2003 2002
------------- -----------
Land $ 982,027 $ 982,027
Building and improvements 2,445,931 2,441,849
Furniture and equipment 954,954 968,761
----------- -----------
4,382,912 4,392,637
Less accumulated depreciation (2,069,793) (1,962,233)
----------- -----------
$ 2,313,119 $ 2,430,404
=========== ===========
Depreciation expense for the years ended December 31, 2003, 2002, 2001 totaled
$126,712, $129,330, and $129,330, respectively.
6. Future policy benefits
At December 31, 2003 and 2002, future policy benefits, exclusive of universal
life and flexible term annuities consist of the following:
December 31, December 31,
2003 2002
------------- -----------
Life insurance $4,006,528 $3,291,275
Annuities 68,357 64,738
Accident & health insurance 204,396 161,468
---------- ----------
Total life & health
future policy benefits $4,279,281 $3,517,481
========== ==========
Life insurance in-force aggregated approximately $1.5 billion at December 31,
2003, and 2002. Mortality and withdrawal assumptions are based upon the
Company's experience and actuarial judgment with an allowance for possible
unfavorable deviations from the expected experience.
The mortality tables used in calculating benefit reserves for non universal life
contracts are the 1975-1980 Basic Tables and the 1980 U.S. Population mortality
table modified for company expected experience.
For the principal non-universal life policies an interest rate beginning at
6.75% net of investment expenses was used. For universal life policies, spreads
between 1.25% and 1.50% were used in developing the FAS 97 amortization
schedules.
7. Reinsurance
The Company routinely cedes and, to a limited extent, assumes reinsurance
to limit its exposure to loss on any single insured. Ceded insurance is
treated as a risk and liability of the assuming companies.
As of December 31, 2003, ordinary insurance coverage in excess of $75,000
is reinsured; however for some policies previously issued, the first
$30,000, $40,000 or $50,000 was retained and the excess ceded. The
retention limit for some substandard risks is less than $75,000. Reinsured
risks would give rise to liability to the Company in the event that the
reinsuring company was unable to meet its obligations under the reinsurance
agreement in force, as the Company remains primarily liable for such
obligations.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
Under reinsurance agreements exclusive of the MEGA and SNLIC agreements
discussed below, the Company has ceded premium of $344,736, $303,536, and
$278,828 included in reinsurance premiums ceded, and received recoveries of
$663,595, $286,817 and $624,314, included in annuity, death and other
benefits for the years ended December 31, 2003, 2002, 2001, respectively.
On December 31, 1992, the Company entered into a reinsurance agreement with
The MEGA Life and Health Insurance Company ("MEGA"), ceding an 18% share of
all universal life policies in force at December 31, 1992 as a measure to
manage the future needs of the Company. The reinsurance agreement is a
co-insurance treaty entitling the assuming company to 18% of all future
premiums, while making them responsible for 18% of all future claims and
policyholder loans relating to the ceded policies. In addition, the Company
receives certain commission and expense reimbursements.
For the years ended December 31, 2003, 2002, 2001, the Company ceded
premiums to MEGA of $311,623, $344,981 and $365,247, included in
reinsurance ceded, and received recoveries of $530,063, $496,751 and
$494,683, included in annuity, death and other benefits, respectively. The
funds held related to reinsurance treaties of $1,294,589, and $1,334,963
represent the 18% share of policy loans ceded to the reinsurer at December
31, 2003 and 2002, respectively.
On December 26, 2003, the Company entered into a partially Coinsurance and
a partially Modified Coinsurance Agreement (CoModco Agreement) with
Security National Life Insurance Company (Security National Life) effective
September 30, 2003. The Company ceded 50% of certain blocks of its
universal life business to Security National Life. The total liabilities
reinsured for this business on October 1, 2003 were $22,195,259. The
Company received a ceding commission from Security National Life of
$3,200,000 and will pay a risk charge to Security National Life of 1% of
the outstanding Coinsurance per calendar quarter. The Company put into a
bank trust investment grade bonds, which equal the outstanding liabilities
ceded to Security National Life. Security National Life is named as a
beneficiary of the trust and the terms of the trust are such that the
Company will maintain investment grade bonds in the trust to equal the
outstanding liabilities ceded to Security National Life. Under the CoModco
Agreement the Coinsurance and the decrease in reserves are equal. Under U.
S. GAAP the Coinsurance and the reserve decreases are netted since these
are non-cash items, and the Company expects to recapture the Coinsurance
from future profits of the reinsured business. The Company has the right to
recapture the business at any time after September 30, 2004 upon 90 days
advance notice. As of December 31, 2003 the outstanding Coinsurance amount
was $3,075,137. The Company recorded as an expense the risk charge of
$32,000 for the fourth quarter.
8. Notes payable
As of December 31, 2003, the Company had an unused line of credit of
$5,000,000, which is secured by student loans equaling 115% of the unpaid
principal balance. The facility bears interest at a variable rate per annum
payable monthly and expires on April 30, 2007.
9. Notes payable to related parties
A note payable to a related party consists of $1,000,000 due on demand to
Security National Life Insurance Company. The note qualifies as
shareholders' equity for statutory accounting purposes in accordance with
Section 628.401 of the Florida Statutes. At December 31, 2003 and 2002, the
note bears interest at 9.0% (payable monthly); principal repayment is
contingent upon the Company maintaining statutory surplus in excess of
$1,799,000 and obtaining approval in advance by the Florida Department of
Insurance. Interest expense relating to the balance of the note payable to
the related party during 2003, 2002, and 2001 aggregated $90,000, $90,000,
and $97,000, respectively. Also, at December 31, 2003, the Company owed
$433,100 as a short-term borrowing from Security National Financial
Corporation.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
10. Income taxes
The Company's income tax liability at December 31 is summarized as follows:
2003 2002
---- ----
Current $ 18,585 --
Deferred 948,931 1,062,802
---------- ----------
Total $ 967,516 $1,062,802
========== ==========
Total income taxes, including taxes on the change in the value of
investments for the years ended December 31, 2003, 2002, and 2001 were as
follows:
2003 2002 2001
---- ---- ----
Tax expense (benefit) in operations $ (74,488) $ (12,254) $ 16,865
Tax on unrealized appreciation
(depreciation) of investments (20,798) 183,865 372,208
--------- --------- ---------
$ (95,286) $ 171,611 $ 389,073
========= ========= =========
Income tax expense (benefit) for the years ended December 31, 2003, 2002,
2001 is summarized as follows:
2003 2002 2001
---- ---- ----
Current:
Federal $ 8,923 $ 4,246 $ (5,758)
State 9,662 -- --
-------- -------- --------
18,585 4,246 (5,758)
-------- -------- --------
Deferred:
Federal (79,680) (14,678) 20,691
State (13,393) (1,822) 1,932
-------- -------- --------
(93,073) (16,500) 22,623
-------- -------- --------
$(74,488) $(12,254) $ 16,865
======== ======== ========
Income tax expense (benefit) for the years ended December 31, 2003, 2002,
2001 differs from "expected" tax (computed by applying the U.S. federal
income tax rate to pretax income) as a result of the following:
2003 2002 2001
---- ---- ----
Computed "expected" tax expense
(benefit) $(59,351) $(28,158) $ 29,866
Increase (reduction) in income
taxes resulting from:
Small life insurance
company deduction 30,523 17,107 (7,162)
Changes in the valuation allowance
for deferred tax assets,
allocated to
income tax expense (41,929) -- (7,115)
State taxes, net of federal
income tax benefit (3,731) (1,203) 1,276
--------- -------- --------
$(74,488) $(12,254) $ 16,865
======== ======== ========
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
Under tax laws in effect prior to 1984, a portion of a life insurance company's
gain from operations was not currently taxed but was accumulated in a memorandum
"Policyholders' Surplus Account." As a result of the Tax Reform Act of 1984, the
balance of the Policyholders' Surplus Account has been frozen as of December 31,
1983 and no additional amounts will be accumulated in this account. However,
distributions from the account will continue to be taxed, as under previous law,
if any of the following conditions occur:
a. The Policyholders' Surplus exceeds a prescribed maximum, or;
b. Distributions, other than stock dividends, are made to shareholders in
excess of Shareholders' Surplus, as defined by prior law, or;
c. The entity ceases to qualify for taxation as a life insurance company,
or;
d. The tax-deferred status of the Policyholder's Surplus Account is
modified by future tax legislation.
At December 31, 2003, the balance of the Policyholders' Surplus account
aggregated approximately $236,000. The Company has not recorded deferred income
taxes totaling approximately $80,000 relating to this amount as it has no plan
to distribute the amounts in Policyholders' Surplus in the foreseeable future.
The Tax Reform Act of 1986 enacted a new separate parallel tax system referred
to as the Alternative Minimum Tax (AMT) system. AMT is based on a flat rate
applied to a broader tax base. It is calculated separately from the regular
federal income tax and the higher of the two taxes is paid. The excess of the
AMT over regular tax is a tax credit, which can be carried forward indefinitely
to reduce regular tax liabilities of future years. In 2003, 2002, 2001, AMT
exceeded regular tax by $8,758, $-0-, and $-0-, respectively. At December 31,
2003, the AMT tax credit available to reduce future regular tax totaled
$227,714.
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2003 and
2002 are presented below:
2003 2002
---- ----
Deferred tax assets:
Unearned revenue, due to deferral of
"front-end" fee $ 1,635,912 $ 1,717,492
Policy liabilities and accruals,
principally due to adjustments to
reserves for tax purposes 2,107,516 1,718,852
Deferred policy acquisition costs
related to unrealized
appreciation (depreciation) 89,609 89,390
Alternative minimum tax credit
carry forwards 227,715 269,643
----------- -----------
Total gross deferred tax assets 4,060,752 3,795,377
Less valuation allowance (227,714) (269,643)
----------- -----------
Net deferred tax assets 3,833,038 3,525,734
----------- -----------
Deferred tax liabilities:
Deferred policy acquisition costs (4,756,712) (4,544,629)
Other 412,351 465,440
Unrealized (appreciation) depreciation
of securities (437,608) (509,347)
----------- -----------
Total gross deferred tax liabilities (4,781,969) (4,588,536)
----------- -----------
Net deferred tax (liability) $ (948,931) $(1,062,802)
=========== ===========
The net change in the total valuation allowance for the years ended December 31,
2003 and 2002, was a (decrease) increase of $(41,929), and $-0-, respectively.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, management believes it is
more likely than not the Company will realize the benefits of these deductible
differences, net of the existing valuation allowances at December 31, 2003.
11. Related party transactions
The Company's general agent, Insuradyne Corporation, is a wholly-owned
subsidiary of Security National Financial Corporation. The balances due to
an affiliated insurance agency reflected in the accompanying balance sheets
principally represent earned commission due to Insuradyne. The Company
incurred commission expense to Insuradyne aggregating $97,124, $109,268 and
$122,787, in 2003, 2002, and 2001, respectively. These amounts are included
as components of acquisition costs deferred and related amortization.
Insuradyne incurred insurance-related expenses aggregating $83, $206, and
$77 in 2003, 2002, 2001, respectively. The amount due to Insuradyne at
December 31,2003 and 2002 was $57,065 and $83,941, respectively.
Effective December 31, 1998, the Company entered into an Administrative
Services Agreement with its ultimate parent Security National Financial
Corporation (Security National). Under the terms of the Administrative
Services Agreement, all of the Company's employees became employees of
Security National. Administrative functions previously performed by the
Company are now being furnished to the Company under the Agreement. The
Company pays to Security National $250,000 per month or $3 million per year
for these administrative services.
On December 28, 1998 the Company entered into a Loan Funding and Fee
Agreement and Agency Agreement (the "Agreement") with Security National
Mortgage Company ("SNMC"), a subsidiary of Security National. Under the
terms of the Agreement, SNMC assigns its interest in residential mortgage
loans that have been pre-sold to third party investors to the Company. The
Company purchases these loans and holds them as short-term investments
until it receives the proceeds from the third party investors. The Company
receives interest income from SNMC based upon how long the loans are
outstanding. At December 31, 2003 and 2002 the Company had outstanding loan
purchases of $17,497,249, and $16,283,759, respectively. Included in
investment income is $1,478,281, $1,130,231 and $984,872 for the years
ended December 31, 2003, 2002, and 2001, respectively.
The Company received for the years ended December 31, 2003, 2002 and 2001,
$167,349, $168,933, and $132,141, respectively, as rental income from
Security National for a lease of office space in the Company's building
under the terms of the Administrative Services Agreement.
The Company received for the years ended December 31, 2003, 2002, and 2001,
$33,767, $75,622, and $77,394, respectively, in interest income from
Security National for short-term loans of which $28,091 and $113,707 were
outstanding as of December 31, 2003 and 2002, respectively.
12. Earnings (loss) per share
The following table sets forth the computation of basic and diluted
earnings per share:
2003 2002 2001
---- ---- ----
Numerator for basic and diluted
Earnings per share:
Net income (loss) $ (95,871) (70,566) $ 70,976
Denominator:
Denominator for basic earnings
per share weighted average shares 2,078,548 1,979,291 1,907,989
Effective dilutive securities:
Agent stock options -- -- --
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
2003 2002 2001
---- ---- ----
Dilutive potential common shares -- -- --
Denominator for diluted earnings
per share weighted average
shares and assumed conversions 2,078,548 1,979,291 1,907,989
Basic earnings (loss) per share $(.05) $(.04) $.04
Diluted earnings (loss) per share $(.05) $(.04) $.04
13. Agents' incentive stock bonus plan
The Company has an incentive bonus plan for agents that was adopted January
1, 1995 by the Company's Board of Directors and effective through December
31, 2001. Agents that qualified under the plan had the option to purchase
shares of common stock. The number of shares of common stock was determined
on the date of the award as the number of whole shares equal to the award
based on the applicable stock price on December 31 of the year the agent
had qualified for the bonus. For each share of common stock purchased by
the agent, the Company will concurrently award an equivalent number of
shares (this is the Company's matching contribution). In 2003 the Company
incurred $1,354 relating to the Company's matching number of shares. There
were no awards granted in 2003, 2002, and 2001. If the agent does not
purchase the shares within the designated period, then the agent forfeits
their rights to purchase the shares of common stock as well as the matching
number of shares to be contributed by the Company.
14. Disclosures about fair value of financial instruments
Statement of Financial Accounting Standards No. 107 Disclosures About Fair
Value of Financial Instruments (SFAS 107) requires the Company to disclose
estimated fair value information. The following methods and assumptions
were used by the Company in estimating fair values of financial instruments
as disclosed herein:
Cash and cash equivalents, short-term investments and policy and student
loans: The carrying amounts reported in the balance sheet for these
instruments approximate their fair value.
Investment securities available-for-sale and held-to-maturity: Fair value
for fixed maturity and equity securities is based on quoted market prices
at the reporting date for those or similar investments.
Policyholders' account balances: The fair values for policyholder account
balances are based on their approximate surrender values.
The following table presents the carrying amounts and estimated fair values
of financial instruments held at December 31, 2003 and 2002. The fair value
of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties.
2003 2002
---------------------- ----------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------- ---------- -------- ----------
Financial assets:
Fixed maturities held-to-maturity
(see note 3) $ 3,691,064 $ 4,029,488 $ 3,971,539 $ 4,167,028
Fixed maturities available-for-
sale (see note 3) 14,213,317 14,213,317 18,439,961 18,439,961
Equity securities available-for-sale 424,165 424,165 309,218 309,218
Mortgage loans 2,211,183 2,211,183 2,244,597 2,244,597
Policy and student loans 8,131,980 8,131,980 8,027,736 8,027,736
Short-term investments 17,497,249 17,497,249 16,283,759 16,283,759
Cash and cash equivalents 7,075,394 7,075,394 3,067,284 3,067,284
Financial liabilities:
Policy liabilities policyholders'
account balances $46,887,592 $44,348,824 $47,222,857 $44,593,662
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Notes to Financial Statements (continued)
15. Legal proceedings
An action was brought against Southern Security Life Insurance Company by
National Group Underwriters, Inc. ("NGU") in state court in the State of
Texas. The case was removed by the Company to the United States District
Court for the Northern District of Texas, Fort Worth Division, with Civil
No. 4:01-CV-403-E. An amended complaint was filed on or about July 18,
2001. The amended complaint asserted that NGU had a contract with the
Company wherein NGU would submit applications for certain policies of
insurance to be issued by the Company. It is alleged that disputes have
arisen between NGU and the Company with regard to the calculation and
payment of certain commissions as well as certain production bonuses.
NGU alleged that it had been damaged far in excess of the $75,000 minimum
jurisdictional limits of the federal court. NGU also sought attorney's fees
and costs as well as prejudgment and post judgment interest. A second
amended complaint and a third amended complaint, which included a fraud
claim, were filed. A motion was filed by the Company to dismiss the third
amended complaint, including the fraud claim. The court denied the motion.
The Company counterclaimed for what it claimed to be a debit balance owing
to it pursuant to the relationship between the parties (the amount subject
to reduction as premiums are received). The Company also sought to recover
attorney's fees and costs, as well as punitive damages on three of its
causes of action.
Certain discovery took place. The federal case was dismissed by
stipulation. The matter was refiled in Texas state court, Tarrant County,
Case No. 348 195490 02. The claims of the respective parties are
essentially the same as those in federal court, which claims include
fraudulent inducement relative to entering into a contract, fraud, breach
of contract, breach of duty of good faith and fair dealing, attorney's fees
and exemplary damages as well as seeking an accounting and contesting the
interest charges. Certain depositions have been taken since the filing
again in state court and further discovery is anticipated. The Company
filed a motion for partial summary judgment with respect to certain items.
The court has yet to rule on the motion. A trial is presently set for
October 2004. The Company intends to vigorously defend the matter as well
as prosecute its counterclaim.
Lawsuits against the Company have arisen in the normal course of the
Company's business. However, contingent liabilities arising from litigation
and other matters are not considered material in relation to the financial
position of the Company.
To the best of the Company's knowledge, it has no potential or pending
contingent liabilities that might be material to the Company's financial
condition, results of operations or liquidity pursuant to product and
environmental liabilities.
Schedule I
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Summary of Investments Other Than Investments in Related Parties
December 31, 2003
Number of shares or Amount at
units-principal which shown
amounts of Fair in the
Type of investment bonds or notes Cost value balance sheet
- ------------------ -------------- ---- ----- -------------
Fixed maturities held to maturity:
U.S. Government and government agencies and authorities -- $ -- $ -- $ --
Public utilities -- -- -- --
Industrial and miscellaneous 3,684,773 3,691,064 4,029,488 3,691,064
Special revenue and special assessment of agencies and
authorities of governments and political subdivisions -- -- -- --
----------- ----------- ----------- -----------
Total fixed maturities held to maturity 3,684,773 3,691,064 4,029,488 3,691,064
Fixed maturities available-for-sale:
U.S. Government and government agencies and authorities 600,000 596,430 678,034 678,034
Public utilities 655,000 657,200 665,238 665,238
Industrial and miscellaneous 11,700,000 11,903,707 12,870,045 12,870,045
Special revenue and special assessment of agencies and
authorities of governments and political subdivisions -- -- -- --
----------- ----------- ----------- -----------
Total fixed maturities available for sale 12,955,000 13,157,337 14,213,317 14,213,317
----------- ----------- ----------- -----------
16,639,773 $16,848,401 $18,242,805 $17,904,381
=========== ----------- =========== -----------
Equity securities:
Common, including investments in mutual funds 44,602 316,293 $ 424,165 424,165
=========== ===========
Mortgage loans 2,211,183 2,211,183
Policy loans 7,811,234 7,811,234
Student loans 320,746 320,746
Short-term investments 17,497,249 17,497,249
----------- -----------
Total investments $45,005,106 $46,168,958
=========== ===========
See accompanying auditors' report
Schedule III
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Supplementary Insurance Information
December 31, 2003, 2002, 2001
Future policyn Other
Deferred benefits, Policy- policy
policy loss claims holders' claims & Netr
acquisition and loss account Unearned benefits Premium investmentg
cost expenses balances premiums payable revenue incomes
----------- ------------- -------- -------- -------- ------- -------
2003 Life
and
annuities $13,624,107 4,279,281 46,887,592 4,334,299 798,050 7,334,707 4,005,129 5,599,434
=========== =========== =========== =========== =========== =========== =========== ===========
2002 Life
and
annuities $13,391,535 3,517,481 47,222,857 4,551,265 701,312 7,075,257 3,835,420 5,343,573
=========== =========== =========== =========== =========== =========== =========== ===========
2001 Life
and
annuities $12,974,390 2,901,599 47,601,259 4,694,563 1,147,403 6,736,027 3,866,966 4,482,588
=========== =========== =========== =========== =========== =========== =========== ===========
See accompanying auditors' report.
Schedule III
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Supplementary Insurance Information
December 31, 2003, 2002, 2001
Benefits Amortization
claims of deferred
losses & policy Other
settlement acquisition operating
expenses costs expenses
----------- ------------- --------
2003 Life
and
annuities 5,599,434 2,039,459 3,871,302
=========== =========== ===========
2002 Life
and
annuities 5,343,573 1,969,966 3,678,920
=========== =========== ===========
2001 Life
and
annuities 4,482,588 2,197,399 3,835,165
=========== =========== ===========
See accompanying auditors' report.
Schedule IV
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Reinsurance
December 31, 2003, 2002, 2001
Ceded to Assumed Percentage
other from other of amount
Direct amount companies companies Net amount assumed to net
------------- --------- --------- ---------- --------------
December 31, 2003:
Life insurance in force $ 675,447,000 $ 401,148,000 $ 826,088,000 $1,100,387,000 75%
============== ============== ============== ============== ==
Premiums:
Life insurance $ 7,013,496 $ 656,359 $ 867,200 $ 7,224,337 12%
Accident & health insurance 110,370 -- -- 110,370 --
-------------- -------------- -------------- -------------- --------------
Total Premiums $ 7,123,866 $ 656,359 $ 867,200 $ 7,334,707 12%
============== ============== ============== ============== ==============
December 31, 2002:
Life insurance in force $ 702,535,000 $ 164,248,000 $ 824,243,000 $1,362,530,000 60%
============== ============== ============== ============== ==============
Premiums:
Life insurance $ 6,812,419 $ 648,517 $ 789,453 $ 6,953,355 11%
Accident & health insurance 121,902 -- -- 121,902 --
-------------- -------------- -------------- -------------- --------------
Total Premiums $ 6,934,321 $ 648,517 $ 789,453 $ 7,075,257 11%
============== ============== ============== ============== ==============
December 31, 2001:
Life insurance in force $ 750,557,000 $ 179,242,000 $ 817,437,000 $1,388,752,000 59%
============== ============== ============== ============== ==============
Premiums:
Life insurance $ 6,579,409 $ 635,733 $ 649,916 $ 6,593,592 10%
Accident & health insurance 150,777 8,342 -- 142,435 --
-------------- -------------- -------------- -------------- --------------
Total Premiums $ 6,730,186 $ 644,075 $ 649,916 $ 6,736,027 10%
============== ============== ============== ============== ==============
See accompanying auditor's report.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
- ---------------------------------------------------------------------------
None
Item 9A. Controls and Procedures
(a) Evaluation of disclosure controls and procedures - The Company's
principal executive officer and principal financial officer have reviewed and
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Rules 240.13a-14(c) and 15d-14(c) under the Securities Exchange
Act of 1934 (the "Exchange Act") as of the end of the period covered by this
annual report. Based on that evaluation, the principal executive officer and the
principal financial officer have concluded that the Company's disclosure
controls and procedures are effective, providing them with material information
relating to the Company as required to be disclosed in the reports the Company
files or submits under the Exchange Act on a timely basis.
(b) Changes in internal controls - There were no significant changes in the
Company's internal controls over financial reporting or in other factors that
could significantly affect the Company's internal controls and procedures
subsequent to the date of their most recent evaluation, nor were there any
significant deficiencies or material weaknesses in the Company's internal
controls. As a result, no corrective actions were required or undertaken.
PART III
Item 10. Directors and executive officers of the Company.
- ----------------------------------------------------------
The Company's Board of Directors consists of eight persons, four of whom are not
employees of the Company. There is no family relationship between or among any
of the directors, except that Scott M. Quist and G. Robert Quist are the sons of
George R. Quist. The following table sets forth certain information with respect
to the directors and executive officers of the Company.
Director/Officer
Name Age Since Position(s) with the Company
- ---- --- ---------------- ----------------------------
George R. Quist 83 December 1998 Chairman of the Board and
Chief Executive Officer
Scott M. Quist 50 December 1998 President, General Counsel,
Chief Operating Officer and
Director
G. Robert Quist 52 April 1999 Vice President, Secretary
and Director
J. Lynn Beckstead, Jr. 50 March 2002 Vice President and Director
Charles L. Crittenden 83 December 1998 Director
Robert G. Hunter 44 December 1998 Director
H. Craig Moody 52 December 1998 Director
Norman G. Wilbur 65 December 1998 Director
Stephen M. Sill 58 March 2002 Vice President, Treasurer
and Chief Financial Officer
Committees of the Board of Directors include an executive committee, on which
Messrs. George Quist, Scott Quist, and Moody serve; an audit committee, on which
Messrs. Crittenden, Moody, and Wilbur serve; and a compensation committee, on
which Messrs. Crittenden, Wilbur and George Quist serve.
The audit committee is composed of directors who are, in the opinion of the
Board of Directors, free from any relationship which would interfere with the
exercise of independent judgment and who possess an understanding of financial
statements and generally accepted accounting principles. Thus, each member is an
"independent" director as that term is defined by the regulations of the
Security Exchange Act of 1934. The Board of Directors has determined that Norman
G. Wilbur, who currently serves as a director of the Company as well as a member
of its audit committee, is an independent audit committee financial expert.
The following is a description of the business experience of each of the
directors and executive officers.
George R. Quist has been Chairman of the Board and Chief Executive Officer of
the Company since December 1998. He has served as President of the Company from
December 1998 until July 2002. Mr. Quist has also served as Chairman of the
Board and Chief Executive Office of Security National Financial Corporation
since October 1979, and its President from October 1979 until July 2002. From
1960 to 1964, he was Executive Vice President and Treasurer of Pacific Guardian
Life Insurance Company. From 1946 to 1960, he was an agent, District Manager and
Associate General Agent for various insurance companies. Mr. Quist also served
from 1981 to 1982 as the President of The National Association of Life
Companies, a trade association of 642 life insurance companies, and from 1982 to
1983 as its Chairman of the Board.
Scott M. Quist has been President of the Company since July 2002, its Chief
Operating Officer since October 2001, and as its General Counsel and a director
since December 1998. In addition, Mr. Quist served as First Vice President of
the Company from December 1998 to July 2002. Mr. Quist has also served as
President of Security National Financial Corporation since July 2002, as its
Chief Operating Officer since October 2001, and its General Counsel and a
director since May 1986. From 1980 to 1982, Mr. Quist was a tax specialist with
Peat, Marwick, Mitchell, & Co., in Dallas, Texas. From 1986 to 1991, he was
Treasurer and a director of The National Association of Life Companies, a trade
association of 642 insurance companies until its merger with the American
Council of Life Companies. Mr. Quist has been a member of the Board of Governors
of the Forum 500 Section (representing small insurance companies) of the
American Council of Life Insurance. He has also served as regional director of
Key Bank of Utah since November 1993. Mr. Quist is currently a director and
immediate past president of the National Alliance of Life Companies, a trade
association of over 200 life companies.
G. Robert Quist has been a director of the Company since April 1999 and its
First Vice President and Secretary since March 2002. Mr. Quist has also served
as First Vice President and Secretary of Security National Financial Corporation
since March 2002. He has served as President and a director of Big Willow Water
Company since 1987 and a director of Investors Equity Life Insurance Company of
Hawaii from 1987 to 1992. He has also served as Secretary-Treasurer and a
director of the Utah Cemetery Association since 1987.
J. Lynn Beckstead Jr. has been a director of the Company since March 2002. Mr.
Beckstead has also served as Vice President and a director of Security National
Financial Corporation since March 2002. In addition, he is President of Security
National Mortgage Company, an affiliate of the Company, and has served in this
position since July 1993. From 1990 to 1993, Mr. Beckstead was Vice President
and a director of Republic Mortgage Corporation. From 1983 to 1990, Mr.
Beckstead was Vice President and a director of Richards Woodbury Mortgage
Corporation. From 1980 to 1983, he was a principal broker for Boardwalk
Properties. From 1978 to 1980, Mr. Beckstead was a residential loan officer for
Medallion Mortgage Company. From 1977 to 1978, he was a residential construction
loan manager of Citizens Bank.
Charles L. Crittenden has been a director of the Company since December 1998.
Mr. Crittenden is also a director of Security National Financial Corporation and
has served in this position since October 1979. Mr. Crittenden has been sole
stockholder of Crittenden Paint & Glass Company since 1958. He is also an owner
of Crittenden Enterprises, a real estate development company, and Chairman of
the Board of Linco, Inc.
Robert G. Hunter, M.D. has been a director of the Company since December 1998.
Dr. Hunter is also a director of Security National Financial Corporation and has
served in this position since October 1998. Dr. Hunter is currently a practicing
physician in private practice. Dr. Hunter created the State Wide E.N.T.
Organization (Rocky Mountain E.N.T., Inc.) where he is currently a member of the
Executive Committee. He is Chairman of Surgery at Cottonwood Hospital, a
delegate to the Utah Medical Association and a delegate representing Utah to the
American Medical Association, and a member of several medical advisory boards.
H. Craig Moody has been a director of the Company since December 1998. Mr. Moody
is also a director of Security National Financial Corporation and has served in
this position since September 1995. Mr. Moody is owner of Moody & Associates, a
political consulting and real estate company. He is a former Speaker and House
Majority Leader of the House of Representatives of the State of Utah.
Norman G. Wilbur has been a director of the Company since December 1998. Mr.
Wilbur is also a director of Security National Financial Corporation and has
served in this position since October 1998. Mr. Wilbur worked for J.C. Penny's
regional offices in budget and analysis. His final position was Manager of
Planning and Reporting for J.C. Penney's stores. After 36 years with J.C.
Penny's, he took an option of an early retirement in 1997. Mr. Wilbur is a past
board member of a homeless organization in Plano, Texas.
Stephen M. Sill has been Vice President, Treasurer and Chief Financial Officer
of the Company since March 2002. From 1998 to 2002, Mr. Sill was Vice President
and Controller of the Company. He has also served as Vice President, Treasurer
and Chief Financial Officer of Security National Financial Corporation since
March 2002. From 1997 to 2002, Mr. Sill was Vice President and Controller of
Security National Financial Corporation. From 1994 to 2002, Mr. Sill was Vice
President and Controller of Security National Life Insurance Company. From 1989
to 1993, he was Controller of Flying J, Inc. From 1978 to 1989, Mr. Sill was
Senior Vice President and Controller of Surety Life Insurance Company. From 1975
to 1978, he was Vice President and Controller of Sambo's Restaurant, Inc. From
1974 to 1975, Mr. Sill was Director of Reporting of Northwest Pipeline
Corporation. From 1970 to 1974, he was an auditor with Arthur Andersen & Co. Mr.
Sill is a director and immediate past president of the Insurance Accounting and
Systems Association (IASA), a national association of over 1,300 insurance
companies and associate members.
Executive Officers
The following table sets forth certain information with respect to the executive
officers of the Company (the business biographies set forth above):
Name Age Title
George R. Quist (1) 83 Chairman of the Board and Chief Executive
Officer
Scott M. Quist (1) 50 President, General Counsel and Chief
Operating Officer
G. Robert Quist (1) 52 Vice President and Secretary
Stephen M. Sill 58 Vice President, Treasurer and
Chief Financial Officer
(1) George R. Quist is the father of Scott M. Quist and G. Robert Quist.
The Board of Directors of the Company has a written procedure which requires
disclosure to the board of any material interest or any affiliation on the part
of any of its officers, directors or employees which is in conflict or may be in
conflict with the interests of the Company.
No director, officer or 5% stockholder of the Company or its subsidiaries, or
any affiliate thereof has had any transactions with the Company or its
subsidiaries during 2003 or 2002.
Each of the directors are board members of Security National Financial
Corporation (the ultimate parent of the Company) with the exception of G. Robert
Quist, which has a class of equity securities registered under the Securities
Exchange Act of 1934, as amended. In addition, Scott M. Quist is a regional
director of Key Bank of Utah. All directors of the Company hold office until the
next annual meeting of stockholders, until their successors have been elected
and qualified, or until their earlier resignation or removal.
Pursuant to Item 406 of Regulation S-K under the Securities Exchange Act of
1934, the Company has not yet adopted a code of ethics that applies to its
principle executive officer, principal financial officer, controller or persons
performing similar functions. The Company is still in the process of studying
this issue and may adopt a code of ethics in the near future.
Item 11. Executive compensation.
- --------------------------------
(a) Summary compensation. The following table sets forth, for each of the
last three fiscal years, the compensation received by George R. Quist, Chairman
of the Board and Chief Executive Officer of the Company, and all other executive
officers at December 31, 2003, whose salary and bonus for all services in all
capacities exceed $100,000 for the fiscal year ended December 31, 2003.
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Awards Payouts
------------------------------------------------ ----------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restricted Securities All other
Name and Annual Stock Underlying LTIP Compen-
Principal Compensation Awards Options/ Payouts sation
Position Year Salary($) Bonus($) ($) ($) SARs(#) ($) $
- --------------------------------------------------------------------------------------------------------------------------
Chief
Executive
Officer
George R. Quist(1) 2003 $0 $0 $0 $0 N/A N/A N/A
George R. Quist(1) 2002 $0 $0 $0 $0 N/A N/A N/A
George R. Quist(1) 2001 $0 $0 $0 $0 N/A N/A N/A
(1) Effective January 1, 1999, the Company entered into an Administrative
Services Agreement with its ultimate parent Security National Financial
Corporation (Security National). Under the terms of the Administrative Services
Agreement, all of the Company's employees became employees of Security National.
Administrative functions previously performed by the Company are now being
furnished to the Company under this Agreement. The Company pays to Security
National $250,000 per month or $3 million per year for the Administrative
services.
(b) Perquisites. The Company does not have a pension, retirement or other
deferred compensation plan, or any other similar arrangement.
(c) Director's fees and other fees. Directors did not receive any
compensation in 2003, 2002 or 2001.
(d) Compensation committee interlocks and insider participation. The
Executive Committee of the Company's Board of Directors makes
recommendation to the board concerning the compensation of the
Company's executive officers. Subsequently, the board makes all final
decisions concerning such compensation.
(e) Employee contracts. The Company does not have any employee contracts.
Item 12. Security ownership of certain beneficial owners and management.
The following table sets forth, as of December 31, 2003, information with
respect to the only persons known by the Company to be the beneficial owner of
more than 5% of the Company's outstanding voting securities:
Number of Shares Percent
Title of Name and Address of and Nature of Beneficial of
Class Beneficial Owner Ownership Class
--------- --------------------- ------------------------- ------
Common Shares SSLIC Holding Company Inc.,
formerly Consolidare Enterprises, Inc. 1,207,784 57.4%
c/o Security National Life Ins. Co.
5300 S 360 W, Suite 200
Salt Lake City, UT 84123
Common Shares Security National Life Insurance Company 406,635 19.3%
5300 South 360 West, Suite 200
Salt Lake City, Utah 84123
Item 13. Certain relationships and related transactions.
- --------------------------------------------------------
Insuradyne Corporation, a wholly owned subsidiary of Security National Financial
Corporation, serves as general agent for the Company, pursuant to a general
agency agreement, which is terminable by either party with 30 days notice. In
such capacity, Insuradyne receives a commission on the first year commissionable
premium on certain of the Company's policies as well as a small renewal
commission on certain other policies. In accordance with the Florida Insurance
Code, a copy of the Company's General Agency Agreement with Insuradyne
Corporation was filed with and approved by the Florida Department of Insurance.
Management of the Company believes that the terms of its General Agency
Agreement with Insuradyne are as favorable to the Company as terms which could
be obtained from independent third parties.
During 2003 and 2002, gross commissions in the amounts of $97,124, and $109,268,
respectively, were earned by Insuradyne Corporation. At December 31, 2003, the
Company owed $57,064 to Insuradyne as a result of commissions earned by
Insuradyne but for which Insuradyne has not yet requested payment.
No director or officer of the Company or any associates of any director or
officer of the Company was indebted to the Company at December 31, 2003.
The Company continues to be indebted to its parent, Security National Life
Insurance Company (SNLIC), in the amount of $1,000,000, pursuant to a promissory
note dated December 1988, which bears interest at the annual rate of interest
equal to the prime rate (as hereinafter defined) plus 2%, with such interest
rate not to be less than 9% nor in excess of 11%. For purposes of this
promissory note, prime rate is defined to mean the prime rate as announced by
Compass Bank, Birmingham, Alabama, from time to time, as its prime rate (which
interest rate is only a bench mark, is purely discretionary and is not
necessarily the best or lowest rate charged borrowing customers). This
promissory note is due on demand and is payable out of capital surplus in excess
of $1,799,000, pursuant to Florida Statutes ss.628.401 (1990). Interest and
principal can only be repaid upon the express written approval of the Florida
Department of Insurance.
The Company entered into an Administrative Services Agreement dated December 17,
1998 with SNFC. Under the terms of the agreement, SNFC has agreed to provide the
Company with certain defined administrative and financial services,
underwriting, data processing, legal, building management, marketing advisory
services and investment services. In consideration for the services to be
provided by SNFC, the Company shall pay SNFC an administrative services fee of
$250,000 per month, which may be increased, beginning on January 1, 2001, to
reflect increases in Consumer Price Index, over the index amount as of January
1, 2000.
The Administrative Services Agreement shall remain in effect for an initial term
expiring on December 16, 2003. However, the term of the agreement may be
automatically extended for an additional one-year term unless either the Company
or SNFC shall deliver a written notice on or before September 30 of any year
stating to the other its desire not to extend the term of the agreement. SSLIC
Holding Company, a wholly owned subsidiary of SNLIC, owns 77% of the outstanding
shares of common stock of the Company. SNLIC is a wholly owned subsidiary of
SNFC. In addition, George R. Quist, the Company's Chief Executive Officer is the
Chief Executive Officer of SNFC; Scott M. Quist, the Company's President,
General Counsel and Chief Operating Officer, is the President, General Counsel
and Chief Operating Officer of SNFC; G. Robert Quist, the Company's Vice
President and Secretary, is the Vice President and Secretary of SNFC; Stephen M.
Sill, the Company's Vice President, Treasurer and Chief Financial Officer, is
the Vice President, Treasurer and Chief Financial Officer of SNFC. Finally, the
directors of the Company, with the exception of G. Robert Quist, also serve as
the directors of SNFC. See Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation.
On December 28, 1998 the Company entered into a Loan Funding and Fee Agreement
and Agency Agreement (the "Agreement") with Security National Mortgage Company
("SNMC"), a subsidiary of SNFC. Under the terms of the Agreement, SNMC assigns
its interest in residential mortgage loans that have been pre-sold to third
party investors to the Company. The Company purchases these loans and holds them
as short-term investments until it receives the proceeds from the third-party
investors. The Company receives fee income from SNMC based upon how long the
loans were outstanding. At December 31, 2003 and 2002, the Company had
outstanding loan purchases of $17,497,249 and $16,283,759, respectively.
Included in investment income are $1,478,281 and $1,130,231 for the years ended
December 31, 2003 and 2002, respectively.
The Company received for the years ended December 31, 2003 and 2002, $167,349
and $168,933, respectively, as rental income from SNFC for a lease of office
space in the Company's building under the terms of the Administrative Services
Agreement.
The Company received for the year ended December 31, 2003 and 2002, $33,767 and
$75,622, respectively, in interest income from SNFC for short-term loans of
which $28,091 and $113,707 were outstanding as of December 31, 2003 and 2002,
respectively.
Item 14. Principal accounting fees and services
Fees for the 2003 annual audit and related quarterly reviews were approximately
$55,000. There were no other fees during 2003.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on 8-K.
Page Number
(a) 1. See item 8 -----------
2. Supplemental Schedules
Required Financial Data - for the years ended December 31,
2003, 2002 and 2001 - included in Part II, Item 8:
Schedule I - Summary of Investments -
Other than Investments in Related
Parties .......................................................45
Schedule III - Supplementary Insurance
Information.....................................................46
Schedule IV - Reinsurance.......................................47
Schedules other than those listed above have been omitted because they are not
applicable or because the required information is included in the financial
statements and notes thereto or in Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of Operations.
3. Exhibits
3.1 Articles of Incorporation, as amended, and Bylaws, as amended, dated
September 1994, incorporated by reference from the Annual Report filed
on Form 10-K for fiscal year ended December 31, 1994.
10.1 Revolving Financing Agreement between the Company and the Student Loan
Marketing Association, dated September 19, 1996, incorporated by
reference from Annual Report on Form 10-K for fiscal year ended
December 31, 1997.
10.2 Reinsurance Agreement between the Company and United Group Insurance
Company, dated as of December 31, 1992 incorporated by reference from
Annual Report on Form 10-K for fiscal year ended December 31, 1992.
10.3 Agency Agreement between the Company and Insuradyne Corporation
incorporated by reference from Annual Report on Form 10-K for fiscal
year ended December 31, 1993.
10.4 Administrative Services Agreement between the Company and Security
National Financial Corporation effective December 17, 1998,
incorporated by reference from Annual Report on Form 10-K for fiscal
year ended December 31, 1998.
10.5 Agency Agreement between the Company and Security National Mortgage
Company dated December 28, 1998 incorporated by reference from Annual
Report on Form 10-K for fiscal year ended December 31, 1999.
10.6 Loan Funding and Fee Agreement between the Company and Security
National Mortgage Company dated December 28, 1998, incorporated by
reference from Annual Report on Form 10-K for fiscal year ended
December 31, 1999.
10.7 Reinsurance Agreement between the Company and Security National Life
Insurance Company dated December 26, 2003.
11.1 Statement Re Computation of Net Income per Common Share.
31.1 Certification pursuant to 18 U.S.C. Section 1350 as enacted by Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification pursuant to 18 U.S.C. Section 1350 as enacted by Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
Dated: March 29, 2004 By: George R. Quist
----------------
George R. Quist
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934 as amended,
this report has been signed by the following persons in counterpart on behalf of
the Company on the dates indicated:
Signature Title Date
- --------- ----- ----
George R. Quist Chairman of the March 29, 2004
Board and Chief Executive
Officer (Principal Executive
Officer)
Scott M. Quist President, General Counsel, March 29, 2004
Chief Operating Officer and
Director
Stephen M. Sill Vice President, Treasurer and
Chief Financial Officer (Principal
Financial and Accounting
Officer) March 29, 2004
G. Robert Quist Vice President, Secretary
and Director March 29, 2004
J. Lynn Beckstead, Jr. Director March 29, 2004
Charles L. Crittenden Director March 29, 2004
Robert G. Hunter Director March 29, 2004
H. Craig Moody Director March 29, 2004
Norman G. Wilbur Director March 29, 2004
Exhibit 31.1
CERTIFICATIONS
I, George R. Quist, certify that:
1. I have reviewed this annual report on Form 10-K of Southern Security Life
Insurance Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaing disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant to have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectivness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls over
financial reporting.
Date: March 29, 2004
By: George R. Quist
Chairman of the Board,
Chief Executive Officer
Exhibit 31.2
CERTIFICATIONS
I, Stephen M. Sill, certify that:
1. I have reviewed this annual report on Form 10-K of Southern Security Life
Insurance Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaing disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant to have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectivness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls over
financial reporting.
Date: March 29, 2004
By: Stephen M. Sill
Vice President, Treasurer and
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Southern Security Life Insurance Company
(the "Company") on Form 10K for the period ending December 31, 2003, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, George R. Quist, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that, to the best of my knowledge and belief:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
George R. Quist
Chief Executive Officer
March 29, 2004
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Southern Security Life Insurance Company
(the "Company") on Form 10K for the period ending December 31, 2003, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Stephen M. Sill, Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that, to the best of my knowledge and belief:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
Stephen M. Sill
Chief Financial Officer
March 29, 2004
SOUTHERN SECURITY LIFE INSURANCE COMPANY
EXHIBIT 11
COMPUTATION OF NET INCOME
PER COMMON SHARE
2003 2002 2001
---- ---- ----
Weighted Average Shares
Outstanding 2,078,548 1,979,291 1,907,989
Net Income (Loss) $ (95,871) $ (70,566) $ 70,976
Per Share Amount $ (.05) $ (.04) $ .04