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, 2001, 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 0-9341
Security National Financial Corporation
(Exact name of registrant as specified in its Charter)
UTAH 87-0345941
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
5300 South 360 West, Suite 250 84123
Salt Lake City, Utah (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (801) 264-1060
Securities registered pursuant to Section 12(d) of the Act:
Name of each exchange
Title of each Class on which registered
- ------------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $2.00 Par Value
-------------------------------------
(Title of Class)
Class C Common Stock, $0.20 Par Value
-------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 28, 2002 was approximately $10,335,000.
As of March 31, 2002, registrant had issued and outstanding 4,068,875 shares of
Class A Common Stock and 6,045,098 shares of Class C Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the registrant's 2002 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
PART I
Item 1. Business
Security National Financial Corporation (the "Company") operates in three main
business segments: life insurance, cemetery and mortuary, and mortgage loans.
The life insurance segment is engaged in the business of selling and servicing
selected lines of life insurance, annuity products and accident and health
insurance. These products are marketed in 34 states through a commissioned sales
force of independent licensed insurance agents who may also sell insurance
products of other companies. The cemetery and mortuary segment of the Company
consists of five cemeteries in the state of Utah and one in the state of
California and eight mortuaries in the state of Utah and five in the state of
Arizona. The Company also engages in pre-need selling of funeral, cemetery and
cremation services through its Utah operations. Many of the insurance agents
also sell pre-need funeral, cemetery and cremation services. The mortgage loan
segment is an approved governmental and conventional lender that originates and
underwrites residential and commercial loans for new construction and existing
homes and real estate projects.
The design and structure of the Company is that each segment is related to the
others and contributes to the profitability of the other segments of the
Company. Because of the increasing cemetery and mortuary operations in Utah,
California and Arizona, the Company enjoys a level of public awareness that
assists in the sales and marketing of insurance and pre-need cemetery and
funeral products. Security National Life Insurance Company ("Security National
Life") invests its assets (representing in part the pre-paid funerals) in
investments authorized by the Insurance Departments of the States of Florida and
Utah. One such investment authorized by the Insurance Departments is high
quality mortgage loans. Thus, while each segment is a profit center on a
stand-alone basis, this horizontal integration of each segment will lead to
improved profitability of the Company. The Company is also pursuing growth
through acquisitions of both life insurance companies and cemeteries and
mortuaries. The Company's acquisition business plan is based on reducing
overhead cost of the acquired company by utilizing existing personnel,
management, and technology while still providing quality service to the
customers and policyholders.
The Company was organized as a holding company in 1979 when Security National
Life became a wholly owned subsidiary of the Company and the former stockholders
of Security National Life became stockholders of the Company. Security National
Life was formed in 1965 and has grown through the direct sale of life insurance
and annuities and through the acquisition of other insurance companies,
including the acquisitions of Capital Investors Life Insurance Company in
December 1994, Civil Service Employees Life Insurance Company in December 1995
and Southern Security Life Insurance Company in December 1998. Memorial Estates,
Inc. and Memorial Mortuary became direct subsidiaries of the Company in the 1979
when the Company was organized as a holding company. These companies were
acquired by Security National Life in 1973. The cemetery and mortuary operations
have also grown through the acquisition of other cemetery and mortuary
companies, including the acquisitions of Paradise Chapel Funeral Home, Inc. in
1989, Holladay Memorial Park, Inc., Cottonwood Mortuary, Inc. and Deseret
Memorial, Inc. in 1991, Sunset Funeral Home in January 1994, Greer-Wilson
Funeral Home, Inc. in April 1995 and Crystal Rose Funeral Home in February 1997.
In July 1993, the Company formed Security National Mortgage Company ("Security
National Mortgage") to originate and refinance mortgage loans. See Notes to
Consolidated Financial Statements for additional disclosure and discussion
regarding segments of the business.
Life Insurance
Products
The Company, through its insurance subsidiaries, Security National Life and
Southern Security Life Insurance Company, issues and distributes selected lines
of life insurance and annuities. The Company's life insurance business includes
funeral plans and interest-sensitive whole life insurance, as well as other
traditional life and accident and health insurance products but places specific
marketing emphasis on funeral plans.
1
A funeral plan is a small face value life insurance policy that generally has a
face coverage of up to $5,000. The Company believes that funeral plans represent
a marketing niche that has lower competition since most insurance companies do
not offer similar coverages. The purpose of the funeral plan policy is to pay
the costs and expenses incurred at the time of a person's death. On a per
thousand dollar cost of insurance basis, these policies are more expensive to
the policyholder than many types of non-burial insurance due to their low face
amount, requiring the fixed cost of the policy to be distributed over a smaller
policy size, and due to the simplified underwriting practices resulting in
higher mortality costs.
Markets and Distribution
The Company is licensed to sell insurance in 34 states. The Company, in
marketing its life insurance products, seeks to locate, develop and service
specific "niche" markets. A "niche" market is an identifiable market which the
Company believes is not emphasized by most insurers. The Company generally sells
its life insurance products to people of all ages who have a need for insurance
to protect the income of the wage earner of the family, to pay off debts at the
time of death and for other estate planning purposes. Funeral plan policies are
sold primarily to persons who range in age from 45 to 75. Even though people of
all ages and income levels purchase funeral plans, the Company believes that the
highest percentage of funeral plan purchasers are individuals who are older than
45 and have low to moderate income. A majority of the Company's funeral plan
premiums come from the states of Arizona, Colorado, Idaho, Nevada, Oklahoma,
Texas and Utah, and a majority of the Company's non-funeral plan life insurance
premiums come from the states of Alabama, California, Florida, Georgia,
Louisiana, New Mexico, South Carolina and Utah.
The Company sells its life insurance products through direct agents and brokers
and independent licensed agents who may also sell insurance products of other
companies. The commissions on life insurance products range from approximately
10% to 90% of first year premiums. In those cases where the Company utilizes its
direct agents in selling such policies, those agents customarily receive
advances against future commissions.
In some instances, funeral plan insurance is marketed in conjunction with the
Company's cemetery and mortuary sales force. When it is marketed by that group,
the beneficiary is usually the Company. Thus, death benefits that become payable
under the policy are paid to the Company's cemetery and mortuary subsidiaries to
the extent of services performed and products purchased.
In marketing the funeral plan insurance, the Company also seeks and obtains
third-party endorsements from other cemeteries and mortuaries within its
marketing areas. Typically, these cemeteries and mortuaries will provide letters
of endorsement and may share in mailing and other lead-generating costs. The
incentive for such businesses to share the costs is that these businesses are
usually made the beneficiary of the policy. The following table summarizes the
life insurance business for the five years ended December 31, 2001:
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Life Insurance
Policy/Cert
Count as of
December 31 74,335(1) 71,178(1) 75,808(1) 69,895(1) 43,213
Insurance
in force
as of December 31
(omitted 000) $2,425,557(1) $2,049,789(1) $2,113,893(1) $2,123,734(1) $648,906
Premiums
Collected
(omitted 000) $14,860(1) $14,959(1) $15,261(1) $5,718 $5,732
(1) Includes acquisition of Southern Security Life Insurance Company on
December 17, 1998.
2
Underwriting
Factors considered in evaluating an application for insurance coverage (except
final expense insurance) include the applicant's age, occupation, general health
and medical history. Upon receipt of a satisfactory application, which contains
pertinent medical questions, the Company writes insurance that is based on its
medical limits and requirements on a basis satisfactory to the reinsuring
company (or companies, if submitted facultatively), subject to the following
general non-medical limits:
Age Nearest Non-Medical
Birthday Limits
0-50 $75,000
51-up Exam Required
When underwriting life insurance, the Company will sometimes issue policies with
higher premium rates for substandard risks.
The Company also sells final expense insurance. This insurance is a small face
amount, with a maximum issue of $10,000. It is written on a simplified medical
application with underwriting requirements being a completed application, a
phone inspection on each applicant and a Medical Information Bureau inquiry.
There are several underwriting classes in which an applicant can be placed. If
the Company receives conflicting or incomplete underwriting information, an
attending physician's statement can be ordered to insure the applicant is placed
in the correct underwriting class.
Annuities
Products
The Company's annuity business includes single premium deferred annuities,
flexible premium deferred annuities and immediate annuities. A single premium
deferred annuity is a contract where the individual remits a sum of money to the
Company, which is retained on deposit until such time as the individual may wish
to purchase an immediate annuity or surrender the contract for cash. A flexible
premium deferred annuity gives the contract holder the right to make premium
payments of varying amounts or to make no further premium payments after his
initial payment. These single and flexible premium deferred annuities can have
initial surrender charges. The surrender charges act as a deterrent to
individuals who may wish to surrender their annuity contracts. These types of
annuities have guaranteed interest rates of 4% to 4 1/2% per annum. Above that,
the interest rate credited is periodically determined by the Board of Directors
at their discretion. An immediate annuity is a contract in which the individual
remits to the Company a sum of money in return for the Company's obligation to
pay a series of payments on a periodic basis over a designated period of time,
such as an individual's life, or for such other period as may be designated.
Holders of annuities enjoy a significant benefit under the current federal
income tax law in that interest accretions that are credited to the annuities do
not incur current income tax expense on the part of the contract holder.
Instead, the interest income is tax deferred until such time as it is paid out
to the contract holder. In order for the Company to realize a profit on an
annuity product, the Company must maintain an interest rate spread between its
investment income and the interest rate credited to the annuities. From that
spread must be deducted commissions, issuance expenses and general and
administrative expenses. The Company's annuities currently have credited
interest rates ranging from 4% to 6 1/2%.
3
Markets and Distribution
The general market for all of the Company's annuities is middle to older age
individuals who wish to save or invest their money in a tax deferred
environment, having relatively high yields. The Company currently markets its
annuities primarily in the states of Arizona, New Mexico, Oklahoma, Texas and
Utah.
The major source of annuity considerations comes from direct agents. Annuities
can be sold as a by-product of other insurance sales. This is particularly true
in the funeral planning area. If an individual does not qualify for a funeral
plan due to health considerations, the agent will often sell that individual an
annuity to take care of those final expenses. The commission rates on annuities
range from 2% to 10%.
The following table summarizes the annuity business for the five years ended
December 31, 2001:
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Annuities
Policy/Cert
Count as of
December 31 8,012(1) 8,443(1) 8,369(1) 7,890(1) 7,434
Deposits Collected
(omitted 000) $2,550(1) $3,039(1) $3,906(1) $2,770 $2,521
(1) Includes acquisition of Southern Security Life Insurance Company on December
17, 1998.
Accident and Health
Products
Prior to the acquisition of Capital Investors Life in December 1994, the Company
did not actively market accident and health products. With the acquisition of
Capital Investors Life, the Company acquired a block of accident and health
policies which pay limited benefits to policyholders. The Company is currently
offering a low-cost comprehensive diver's accident policy and a limited cancer
benefit policy. The diver's policy provides world-wide coverage for medical
expense reimbursement and life insurance in the event of diving or water sports
accidents. The cancer policy provides a lump sum payment for the occurrence of
cancer.
Markets and Distribution
The Company currently markets its diver's policy through water sports magazine
advertising and dive shops throughout the world. The Company pays direct
commissions ranging from 15% to 30% for new business generated.
The following table summarizes the accident and health business for the five
years ended December 31, 2001:
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Accident
and Health
Policy/Cert. Count
as of December 31 19,343(1) 21,454(1) 24,078(1) 27,201(1) 30,250
Premiums Collected
(omitted 000) $413(1) $464(1) $549(1) $375 $430
(1) Includes acquisition of Southern Security Life Insurance Company on
December 17, 1998.
4
Reinsurance
The Company reinsures with other companies portions of the individual life
insurance and accident and health policies it has underwritten. The primary
purpose of reinsurance is to enable an insurance company to write a policy in an
amount larger than the risk it is willing to assume for itself. No other
liabilities or guarantees by the Company exist on business ceded through
reinsurance treaties; however, the Company remains obligated for amounts ceded
in the event the reinsurers do not meet their obligations. There is no assurance
that the reinsurer will be able to meet the obligations assumed by it under the
reinsurance agreement.
The Company's policy is to retain no more than $75,000 of ordinary insurance per
insured life. Excess risk is reinsured. The total amount of life insurance in
force at December 31, 2001, reinsured by other companies aggregated
$216,369,000, representing approximately 9.8% of the Company's life insurance in
force on that date.
The Company currently cedes and assumes certain risks with various authorized
unaffiliated reinsurers pursuant to reinsurance treaties which are renewable
annually. The premiums paid by the Company are based on a number of factors,
primarily including the age of the insured and the risk ceded to the reinsurer.
Investments
The investments that support the Company's life insurance and annuity
obligations are determined by the Investment Committee of the Board of Directors
of the various subsidiaries and ratified by the full Board of Directors of the
respective subsidiaries. A significant portion of the investments must meet
statutory requirements governing the nature and quality of permitted investments
by insurance companies. The Company's interest-sensitive type products,
primarily annuities and interest-sensitive whole life, compete with other
financial products such as bank certificates of deposit, brokerage sponsored
money market funds as well as competing life insurance company products. While
it is not the Company's policy to offer the highest yield in this climate, in
order to offer what the Company considers to be a competitive yield, it
maintains a diversified portfolio consisting of common stocks, preferred stocks,
municipal bonds, investment and non-investment grade bonds including high-yield
issues, mortgage loans, real estate, short-term and other securities and
investments.
See "Management's Discussion and Analysis of Results of Operations and Financial
Condition" and "Notes to Consolidated Financial Statements" for additional
disclosure and discussion regarding investments.
Cemetery and Mortuary
Products
The Company has six wholly-owned cemeteries and thirteen wholly-owned
mortuaries. The cemeteries are non-denominational. Through its cemetery and
mortuary operations, the Company markets a variety of products and services both
on a pre- need basis (prior to death) and an at-need basis (at the time of
death). The products include grave spaces, interment vaults, mausoleum crypts
and niches, markers, caskets, flowers and other related products. The services
include professional services of funeral directors, opening and closing of
graves, use of chapels and viewing rooms, and use of automobiles and clothing.
The Company has a funeral chapel at each of its cemeteries other than Holladay
Memorial Park and Singing Hills Memorial Park and has ten separate stand-alone
mortuary facilities. The Company's cemetery and mortuary business increased with
the acquisition of Holladay Memorial Park, Inc., Cottonwood Mortuary, Inc. and
Deseret Memorial, Inc. in September 1991, the acquisition of Sunset Funeral
Home, Inc. in January 1994, the acquisition of Greer-Wilson Funeral Home, Inc.
in April 1995, and the acquisition of Crystal Rose Funeral Home in February
1997.
5
Markets and Distribution
The Company's pre-need cemetery and mortuary sales are marketed to persons of
all ages but are generally purchased by persons 45 years of age and older. The
Company also markets its mortuary and cemetery products on an at-need basis. The
Company is limited in its geographic distribution of these products to areas
lying within an approximate 20 mile radius of its mortuaries and cemeteries. The
Company's at-need sales are similarly limited in geographic area.
The Company actively seeks to sell its cemetery and funeral products to
customers on a pre-need basis. The Company employs cemetery sales
representatives on a commission basis to sell these products. Many of these
pre-need cemetery and mortuary sales representatives are also licensed insurance
salesmen and sell funeral plan insurance. In many instances, the Company's
cemetery and mortuary facilities are the named beneficiary of the funeral plan
policies.
The sales representatives of the Company's cemetery and mortuary operations are
commissioned and receive no salary. The sales commissions range from 10% to 22%
for cemetery products and services and 10% to 90% of first year premiums for
funeral plan insurance. Potential customers are located via telephone sales
prospecting, responses to letters mailed by the sales representatives, newspaper
inserts, referrals, contacts made at funeral services, and door to door
canvassing. The Company trains its sales representatives and generates leads for
them. If a customer comes to one of the Company's cemeteries on an at-need
basis, the sales representatives are compensated on a commission basis.
Mortgage Loans
Products
The Company, through its mortgage subsidiary, Security National Mortgage
Company, originates and underwrites residential and commercial loans for new
construction and existing homes and real estate projects. The Company is an
approved government guaranteed and conventional lender and processes government
guaranteed and conventional loans. Most of the loans are sold directly to
investors. The Company has available warehouse lines of credit with affiliated
companies and unaffiliated financial institutions to fund mortgage loans prior
to the purchase by investors.
Markets and Distribution
The Company's mortgage lending services are marketed primarily to individual
homeowners and businesses who are located in the area known as the "Wasatch
Front," covering approximately 100 miles between Provo, Salt Lake City and
Ogden, Utah, with the greatest concentration of sales being in the greater Salt
Lake City area and in Valencia and Sacramento, California, Orlando, Florida,
Colorado Springs, Colorado, Phoenix, Arizona and Houston, Texas. The typical
loan size for residential loans ranges from $40,000 to $300,000, and for
commercial loans from $200,000 to $1,500,000.
The Company's mortgage loan originations are through full time mortgage loan
officers and wholesale brokers who are paid a sales commission ranging between
.70% to 3.0% of the loan amount. Prospective customers are located through
contacts with builders, real estate agents, and door-to-door canvassing.
Recent Acquisitions and Other Business Activities
Menlo Life Insurance Company
On June 30, 1999 the Company entered into a Coinsurance and Assumption Agreement
(the "Agreement") with Menlo Life Insurance Company ("Menlo Life"), wherein the
Company has assumed 100% of the policies in force of Menlo Life. The Agreement
was not in effect until it was approved by Menlo Life's domiciled state of
Arizona and the state of California. These approvals were obtained on September
9, 1999 for the Arizona Insurance Department, and on December 9, 1999 for the
California Insurance Department.
6
SSLIC Holding Company
On December 17, 1998, the Company completed the acquisition of SSLIC Holding
Company, (formerly Consolidare Enterprises, Inc.), a Florida corporation ("SSLIC
Holding") pursuant to the terms of the Acquisition Agreement which the Company
entered into on April 17, 1998 with SSLIC Holding and certain shareholders of
SSLIC Holding for the purchase of all of the outstanding shares of common stock
of SSLIC Holding and all of the outstanding shares of stock of Insuradyne Corp.,
a Florida Corporation ("Insuradyne"). As of December 31, 2001, SSLIC Holding
owns approximately 75% of the outstanding shares of common stock of Southern
Security Life Insurance Company, a Florida corporation ("Southern Security").
Southern Security is a Florida domiciled insurance company with total assets as
of December 31, 2001, of approximately $77.5 million. Southern Security is
currently licensed to transact business in 14 states. Southern Security is also
a reporting company under Section 13 of the Securities Exchange Act of 1934.
Reference is made to Southern Security's annual report on Form 10-K for the year
ended December 31, 2001, which was filed with the Securities Exchange Commission
on March 29, 2002, Commission File No. 2-35669.
Crystal Rose Funeral Home
In February 1997, the Company purchased all of the outstanding shares of common
stock of Crystal Rose Funeral Home, Inc. ("Crystal Rose"), an Arizona
corporation. In connection with this transaction, the Company also acquired
certain real estate and other assets related to the business of Crystal Rose
from the sole stockholder of Crystal Rose. The Company continues to operate
Crystal Rose, which is located in Tolleson, Arizona, as a funeral home and
mortuary.
Regulation
The Company's insurance subsidiaries, Security National Life and Southern
Security, are subject to comprehensive regulation in the jurisdictions in which
they do business under statutes and regulations administered by state insurance
commissioners. Such regulation relates to, among other things, prior approval of
the acquisition of a controlling interest in an insurance company; standards of
solvency which must be met and maintained; licensing of insurers and their
agents; nature of and limitations on investments; deposits of securities for the
benefit of policyholders; approval of policy forms and premium rates; periodic
examinations of the affairs of insurance companies; annual and other reports
required to be filed on the financial condition of insurers or for other
purposes; and requirements regarding aggregate reserves for life policies and
annuity contracts, policy claims, unearned premiums, and other matters. The
Company's insurance subsidiaries are subject to this type of regulation in any
state in which they are licensed to do business. Such regulation could involve
additional costs, restrict operations or delay implementation of the Company's
business plans.
The Company is currently subject to regulation in Utah and Florida under
insurance holding company legislation, and other states where applicable.
Intercorporate transfers of assets and dividend payments from its insurance
subsidiaries are subject to prior notice of approval from the State Insurance
Department, if they are deemed "extraordinary" under these statutes. The
insurance subsidiaries are required, under state insurance laws, to file
detailed annual reports with the supervisory agencies in each of the states in
which they do business. Their business and accounts are also subject to
examination by these agencies.
The Company's cemetery and mortuary subsidiaries are subject to the Federal
Trade Commission's comprehensive funeral industry rules and are subject to state
regulations in the various states where such operations are domiciled. The
morticians must be licensed by the respective state in which they provide their
services. Similarly, the mortuaries are governed by state statutes and city
7
ordinances in Utah, Arizona and California. Reports are required to be kept on
file on a yearly basis which include financial information concerning the number
of spaces sold and, where applicable, funds provided to the Endowment Care Trust
Fund. Licenses are issued annually on the basis of such reports. The cemeteries
maintain city or county licenses where they conduct business.
The Company's mortgage loan subsidiary, Security National Mortgage, is subject
to the rules and regulations of the U.S. Department of Housing and Urban
Development. These regulations among other things specify the procedures for the
origination, the underwriting, the licensing of wholesale brokers, quality
review audits and the amounts that can be charged to borrowers for all FHA and
VA loans. Each year the Company must have an audit by an independent CPA firm to
verify compliance under these regulations. In addition to the government
regulations, the Company must meet loan requirements of various investors who
purchase the loans before the loans can be sold to the investors.
Income Taxes
The Company's insurance subsidiaries, Security National Life and Southern
Security, are taxed under the Life Insurance Company Tax Act of 1984. Pursuant
thereto, life insurance companies are taxed at standard corporate rates on life
insurance company taxable income. Life insurance company taxable income is gross
income less general business deductions, reserves for future policyholder
benefits (with modifications), and a small life insurance company deduction (up
to 60% of life insurance company taxable income). The Company may be subject to
the corporate Alternative Minimum Tax (AMT). The exposure to AMT is primarily a
result of the small life insurance company deduction. Also, under the Tax Reform
Act of 1986, distributions in excess of stockholder's surplus account or
significant decrease in life reserves will result in taxable income.
Security National Life and Southern Security may continue to receive the benefit
of the small life insurance company deduction. In order to qualify for the small
company deduction, the combined assets of the Company must be less than
$500,000,000 and the taxable income of the life insurance companies must be less
than $3,000,000. To the extent that the net income limitation is exceeded, then
the small life insurance company deduction is phased out over the next
$12,000,000 of life insurance company taxable income.
Since 1990, Security National Life and Southern Security have computed their
life insurance taxable income after establishing a provision representing a
portion of the costs of acquisition of such life insurance business. The effect
of the provision is that a certain percentage of the Company's premium income is
characterized as deferred expenses and recognized over a five to ten year
period.
The Company's non-life insurance company subsidiaries are taxed in general under
the regular corporate tax provisions. For taxable years beginning January 1,
1987, the Company may be subject to the Corporate Alternative Minimum Tax and
the proportionate disallowance rules for installment sales under the Tax Reform
Act of 1986.
Competition
The life insurance industry is highly competitive. There are approximately 2,000
legal reserve life insurance companies in business in the United States. These
insurance companies differentiate themselves through marketing techniques,
product features, price and customer service. The Company's insurance
subsidiaries compete with a large number of insurance companies, many of which
have greater financial resources, a longer business history, and a more
diversified line of insurance coverage than the Company. In addition, such
companies generally have a larger sales force. Further, many of the companies
with which the Company competes are mutual companies which may have a
competitive advantage because all profits accrue to policyholders. Because the
Company is
8
small by industry standards and lacks broad diversification of risk, it may be
more vulnerable to losses than larger, better established companies. The Company
believes that its policies and rates for the markets it serves are generally
competitive.
The cemetery and mortuary industry is also highly competitive. In the Salt Lake
City, Phoenix and San Diego areas in which the Company competes, there are a
number of cemeteries and mortuaries which have longer business histories, more
established positions in the community and stronger financial positions than the
Company. In addition, some of the cemeteries with which the Company must compete
for sales are owned by municipalities and, as a result, can offer lower prices
than can the Company. The Company bears the cost of a pre-need sales program
that is not incurred by those competitors that do not have a pre-need sales
force. The Company believes that its products and prices are generally
competitive with those in the industry.
The mortgage loan industry is highly competitive with several mortgage companies
and banks in the same geographic area in which the Company is operating which
have longer business histories and more established positions in the community.
The refinancing market is particularly vulnerable to changes in interest rates.
Employees
As of December 31, 2001, the Company employed 270 full-time and 53 part-time
employees.
Item 2. Properties
The following table sets forth the location of the Company's office facilities
and certain other information relating to these properties.
Approximate
Owned Square
Location Function Leased Footage
-------- -------- ------ -------
5300 So. 360 West Corporate
Salt Lake City, UT Headquarters Owned(1) 33,000
1603 Thirteenth St. District
Lubbock, TX Sales Office Owned(2) 10,000
755 Rinehart Rd. Subsidiary
Lake Mary, FL Headquarters Owned(3) 27,000
(1) The Company leases an additional 8,858 square feet of the facility to
unrelated third parties for approximately $142,000 per year, under
leases which expire at various dates after 2001.
(2) The Company leases an additional 8,459 square feet of the facility to
unrelated third parties for approximately $33,000 per year, under
leases which expire at various dates after 2001.
(3) The Company leases an additional 12,245 square feet of the facility to
unrelated third parties for approximately $165,000 per year, under
leases which expire at various dates after 2001.
The Company believes the office facilities it occupies are in good operating
condition, are adequate for current operations and has no plan to build or
acquire additional office facilities. The Company believes its office facilities
are adequate for handling business in the foreseeable future.
9
The following table summarizes the location and acreage of the six Company owned
cemeteries:
Net Saleable Acreage
Acres
Sold as Total
Name of Date Developed Total Cemetery Available
Cemetery Location Acquired Acreage(1) Acreage(1) Spaces(2) Acreage(1)
- ------------ -------- --------- ---------- ---------- --------- ----------
Memorial Estates, Inc.:
Lakeview
Cemetery(3) 1700 E. Lakeview Dr.
Bountiful, UT 1973 7 40 7 33
Mountain View
Cemetery(3) 3115 E. 7800 So.
Salt Lake City, UT 1973 26 54 17 37
Redwood
Cemetery(3)(5) 6500 So. Redwood Rd.
West Jordan, UT 1973 40 78 35 43
Holladay Memorial
Park(4)(5) 4800 So. Memory Lane
Holladay, UT 1991 6 14 6 8
Lakehills
Cemetery(4) 10055 So. State
Sandy, UT 1991 12 44 6 38
Singing Hills
Memorial Park(6) 2798 Dehesa Rd.
El Cajon, CA 1995 6 35 2 33
10
(1) The acreage represents estimates of acres that are based upon survey
reports, title reports, appraisal reports or the Company's inspection
of the cemeteries.
(2) Includes spaces sold for cash and installment contract sales.
(3) As of December 31, 2001, there were mortgages of approximately $52,000
collateralized by the property and facilities at Memorial Estates
Lakeview, Mountain View and Redwood Cemeteries.
(4) As of December 31, 2001, there were mortgages of approximately
$1,747,000 collateralized by the property and facilities at Deseret
Mortuary, Cottonwood Mortuary, Holladay Memorial Park, Lakehills
Cemetery and Colonial Mortuary.
(5) These cemeteries include two granite mausoleums.
(6) As of December 31, 2001, there was a mortgage of approximately
$603,000 collateralized by the property.
11
The following table summarizes the location, square footage and the number of
viewing rooms and chapels of the thirteen Company owned mortuaries:
Name of Date Viewing Square
Mortuary Location Acquired Room(s) Chapel(s) Footage
- ------------ ----------- ---------- -------- --------- --------
Memorial Mortuary 5850 South 900 East
Salt Lake City, UT 1973 3 1 20,000
Memorial Estates, Inc.:
Redwood Mortuary 6500 South Redwood Rd.
West Jordan, UT 1973 2 1 10,000
Mountain View
Mortuary 3115 East 7800 South
Salt Lake City, UT 1973 2 1 16,000
Lakeview
Mortuary 1700 East Lakeview Dr.
Bountiful, UT 1973 0 1 5,500
Paradise Chapel
Funeral Home 3934 East Indian
School Road
Phoenix, AZ 1989 2 1 9,800
Deseret Memorial, Inc.:
Colonial
Mortuary(2) 2128 South State St.
Salt Lake City, UT 1991 1 1 14,500
Deseret
Mortuary(2) 36 East 700 South
Salt Lake City, UT 1991 2 2 36,300
Lakehills
Mortuary 10055 South State St.
Sandy, UT 1991 2 1 18,000
Cottonwood
Mortuary(2) 4670 South Highland Dr.
Salt Lake City, UT 1991 2 1 14,500
Camelback Sunset
Funeral Home(1) 301 West Camelback Rd.
Phoenix, AZ 1994 2 1 11,000
12
Name of Date Viewing Square
Mortuary Location Acquired Room(s) Chapel(s) Footage
- --------- ---------- ---------- --------- --------- ---------
Greer-Wilson:
Greer-Wilson
Funeral Home 5921 West Thomas Road
Phoenix, AZ 1995 2 2 25,000
Avondale
Funeral Home 218 North Central
Avondale, AZ 1995 1 1 1,850
Crystal Rose
Funeral Home(3 9155 W. VanBuren
Tolleson, AZ 1997 0 1 9,000
13
(1) As of December 31, 2001 there were mortgages of approximately $255,000
collateralized by the property and facilities of Camelback Sunset
Funeral Home.
(2) As of December 31, 2001, there were mortgages of approximately
$1,747,000 collateralized by the property and facilities at Deseret
Mortuary, Cottonwood Mortuary, Holladay Memorial Park, Lakehills
Cemetery and Colonial Mortuary.
(3) As of December 31, 2001, there was a mortgage of approximately
$209,000, collateralized by the property and facilities of Crystal
Rose Funeral Home.
Item 3. Legal Proceedings
An action was brought against the Company in July 1999 by Dorothy Ruth
Campbell in the Circuit Court of Escambia County, Alabama. The action
arises out of a denial of coverage under a $10,000 insurance policy.
The claims are for breach of contract, bad faith and fraudulent
misrepresentation. In the action, Campbell seeks compensatory and
punitive damages plus interest. The Company has filed its response to
the complaint and certain discovery has taken place. The Company
intends to vigorously defend the matter.
An action was brought against the Company in May 2001, by Glenna Brown
Thomas individually and as personal representative of the Estate of
Lynn W. Brown (Third Judicial Court, Salt Lake County, State of Utah,
010904432). The action asserts that Memorial Estates delivered to Lynn
W. Brown three stock certificates representing 2,000 shares in 1970
and 1971. Mr. Brown died in 1972. It is asserted that at the time the
2,000 shares were issued and outstanding, such represented a 2%
ownership of Memorial Estates. It is alleged Mr. Brown was entitled to
preemptive rights and that after the issuance of the stock to Mr.
Brown there were further issuances of stock without providing written
notice to Mr. Brown or his estate with respect to an opportunity to
purchase more stock. It is asserted among the other things that the
plaintiff "has the right to a transfer of Brown's shares to Thomas on
Defendants' (which includes Security National Financial Corporation as
well as Memorial Estates, Inc.) books and to restoration of Brown's
proportion of share ownership in Memorial at the time of his death by
issuance and delivery to Thomas of sufficient shares of Defendant's
publicly traded and unrestricted stock in exchange for the 2,000
shares of Memorial stock and payment of all dividends from the date of
Thomas's demand, as required by Article XV of the Articles of
Incorporation." Based on present information, the Company intends to
vigorously defend the matter, including an assertion that the statute
of limitations bars the claims.
An action was brought against the 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 asserts 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 advanced commissions as well as certain
production bonuses.
NGU alleges that it "has been damaged far in excess of the $75,000
minimum jurisdictional limits of this Court." NGU also seeks
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
14
the third amended complaint, including the fraud claim. The court
denied the motion. The Company has counterclaimed for what it claims
to be aparties with the counterclaim seeking an amount in excess
of$411,000 (said amount potentially subject to reduction as premiums
are received). The Company is also seeking to recover attorney's fees
and costs, as well punitive damages on two of its causes of action.
NGU has filed a motion to dismiss certain claims in the counterclaim,
which the court granted in part and denied in part. Discovery is
currently taking place. 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
- ------------------------------------------------------------
At the annual stockholders meeting held on October 4, 2001, the following
matters were acted upon: (i) seven directors consisting of George R. Quist,
William C. Sargent, Scott M. Quist, Charles L. Crittenden, Dr. Robert G. Hunter,
H. Craig Moody and Norman G. Wilbur were elected to serve until the next annual
stockholders meeting or until their respective successors are elected and
qualified (for George R. Quist, Class A and Class C shares, 8,171,518 votes were
cast in favor of election, 26,349 votes were cast against election and there
were no abstentions; for William C. Sargent, Class A and Class C shares,
8,173,339 votes were cast in favor of election, 24,528 votes were cast against
election and there were no abstentions; for Scott M. Quist, Class A shares only,
2,937,835 votes were cast in favor of election, 23,179 votes were cast against
election and there were no abstentions; for Charles L. Crittenden, Class A and
Class C shares, 8,185,497 votes were cast in favor of election and 12,370 votes
were cast against election and there were no abstentions; for Dr. Robert G.
Hunter, Class A and Class C shares, 8,187,539 votes were cast in favor of
election, 10,328 votes cast against election and there were no abstentions; for
H. Craig Moody, Class A shares only, 2,951,294 votes were cast in favor of
election, 9,720 votes cast against election and there were no abstentions; for
Norman G. Wilbur, Class A and Class C shares, 8,187,497 votes were cast in favor
of election, 10,367 votes were cast against election and there were no
abstentions; and (ii) the appointment of Tanner + Co., as the Company's
independent accountants for the fiscal year ended December 31, 2001, was
ratified (with 8,195,172 votes cast for appointment, 10,800 votes against
appointment and 74 abstentions).
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
The Company's Class A Common Stock trades on the Nasdaq National Market under
the symbol "SNFCA." Prior to August 13, 1987, there was no active public market
for the Class A and Class C Common Stock. During recent years there has been
occasional trading of Class A and Class C Common Stock by brokerage firms in the
over-the-counter market. The following are the high and low sales prices for
Class A Common Stock as reported by Nasdaq:
Period (Calendar Year) Price Range
- ---------------------- -----------------
High Low
------ -----
2000
First Quarter...............................$4.29 $2.74
Second Quarter...............................3.33 2.56
Third Quarter................................3.10 2.41
Fourth Quarter...............................2.86 2.02
2001
First Quarter................................2.44 1.91
Second Quarter...............................2.38 1.91
Third Quarter................................2.76 2.10
Fourth Quarter...............................2.76 2.19
2002
First Quarter................................2.95 2.31
15
The above sales prices have been adjusted for the effect of annual stock
dividends.
The Class C Common Stock is not actively traded, although there are occasional
transactions in such stock by brokerage firms. (See Note 11 to the Consolidated
Financial Statements.)
The Company has never paid a cash dividend on its Class A or Class C Common
Stock. The Company currently anticipates that all of its earnings will be
retained for use in the operation and expansion of its business and does not
intend to pay any cash dividends on its Class A or Class C Common Stock in the
foreseeable future. Any future determination as to cash dividends will depend
upon the earnings and financial position of the Company and such other factors
as the Board of Directors may deem appropriate. A 5% stock dividend on Class A
and Class C Common Stock has been paid each year from 1989 through 2001.
As of December 31, 2001, there were 4,629 record holders of Class A Common Stock
and 143 record holders of Class C Common Stock.
16
Item 6. Selected Financial Data - The Company and Subsidiaries (Consolidated)
- ------------------------------------------------------------------------------
The following selected financial data for each of the five years in the period
ended December 31, 2001, are derived from the audited consolidated financial
statements. The data as of December 31, 2001 and 2000, and for the three years
ended December 31, 2001, should be read in conjunction with the consolidated
financial statements, related notes and other financial information included
herein.
Consolidated Statement of Earnings Data:
Year Ended December 31,
----------------------------------------------------------------------
2001 2000(3) 1999(2)(3) 1998(3) 1997(1)(3)
---- ---- ---- ---- ----
Revenue
Premiums $13,151,000 $12,876,000 $13,176,000 $5,916,000 $6,141,000
Net investment income 12,947,000 12,136,000 10,631,000 7,459,000 7,140,000
Net mortuary and cemetery income 10,603,000 9,417,000 10,178,000 9,226,000 9,231,000
Realized gains on investments 10,000 424,000 313,000 74,000 253,000
Mortgage fee income 40,086,000 22,922,000 14,503,000 10,082,000 5,662,000
Other 152,000 305,000 856,000 63,000 48,000
------------ ------------ ------------ ------------ ------------
Total revenue 76,949,000 58,080,000 49,657,000 32,820,000 28,475,000
------------ ------------ ------------ ------------ ------------
Expenses
Policyholder benefits 11,775,000 12,931,000 11,976,000 6,932,000 6,669,000
Amortization of deferred
policy acquisition costs 3,870,000 3,189,000 4,858,000 1,274,000 1,132,000
General and administrative expenses 52,247,000 35,959,000 26,959,000 19,649,000 15,361,000
Interest expense 2,791,000 2,126,000 1,119,000 999,000 948,000
Cost of goods & services of
the mortuaries & cemeteries 2,494,000 2,628,000 3,295,000 2,940,000 2,696,000
------------ ------------ ------------ ------------ ------------
Total benefits & expenses 73,177,000 56,833,000 48,207,000 31,794,000 26,806,000
------------ ------------ ------------ ------------ ------------
Income before
income tax expense 3,772,000 1,247,000 1,450,000 1,026,000 1,669,000
Income tax expense (913,000) (305,000) (230,000) (255,000) (360,000)
Minority interest in (income)
loss of subsidiary (18,000) (46,000) (244,000) -- --
------------ ------------ ------------ ------------ ------------
Net earnings $2,841,000 $896,000 $976,000 $771,000 $1,309,000
============ ============ ============ ============ ============
Net earnings per common share(3) $.63 $.21 $.22 $.18 $.33
============ ============ ============ ============ ============
Weighted average outstanding
common shares 4,506,000 4,318,000 4,397,000 4,273,000 3,988,000
Net earnings per common
share-assuming dilution(3) $.63 $.21 $.22 $.18 $.32
============ ============ ============ ============ ============
Weighted average outstanding
common shares-assuming dilution 4,507,000 4,335,000 4,397,000 4,273,000 4,093,000
18
Item 6. Selected Financial Data - The Company and Subsidiaries (Consolidated)
- ------------------------------------------------------------------------------
Balance Sheet Data:
Year Ended December 31,
--------------------------------------------------------------------------
2001 2000(3) 1999(3) 1998(2)(3) 1997(1)(3)
---- ---- ---- ---- ----
Assets
Investments and restricted assets $94,514,000 $108,810,000 $113,208,000 $126,332,000 $81,039,000
Cash 8,757,000 11,275,000 12,423,000 6,671,000 3,408,000
Receivables 58,701,000 36,413,000 38,074,000 28,309,000 15,224,000
Other assets 51,088,000 52,249,000 50,593,000 51,953,000 25,781,000
------------ ------------ ------------ ------------ ------------
Total assets $213,060,000 $208,747,000 $214,298,000 $213,265,000 $125,452,000
============ ============ ============ ============ ============
Liabilities
Policyholder benefits $142,291,000 $141,755,000 $140,368,000 137,466,000 $77,890,000
Notes & contracts payable 12,098,000 14,046,000 23,341,000 22,887,000 9,981,000
Cemetery & mortuary liabilities 9,344,000 8,659,000 6,638,000 6,917,000 6,116,000
Other liabilities 15,121,000 12,921,000 11,415,000 12,536,000 6,070,000
------------ ------------ ------------ ------------ ------------
Total liabilities 178,854,000 177,381,000 181,762,000 179,806,000 100,057,000
------------ ------------ ------------ ------------ ------------
Minority interest 4,237,000 4,625,000 6,046,000 6,779,000 --
Stockholders' equity 29,969,000 26,741,000 26,490,000 26,680,000 25,395,000
------------ ------------ ------------ ------------ ------------
Total liabilities and
stockholders' equity $213,060,000 $208,747,000 $214,298,000 $213,265,000 $125,452,000
============ ============ ============ ============ ============
(1) Reflects the acquisition of Crystal Rose Funeral Home as of February
1997.
(2) Reflects the acquisition of SSLIC Holding Company and subsidiaries as
of December 17, 1998.
(3) Reflects the implementation on January 1, 2000 of SAB No. 101,
"Revenue recognition in Financial Statements" which changes the
Company's accounting policies regarding the manner in which the
Company records pre-need sales. The implementation of SAB No. 101 did
not have a material effect on the consolidated financial condition,
results of operation or cash flows of the Company. The change in the
Company's accounting policies resulting from implementation of SAB No.
101 has been treated as a change in accounting principle effective as
of January 1, 2000. The cumulative effect of the accounting change
through December 31, 1999 was negligible. The following table shows
the unaudited proforma effects of retroactive application using the
newly adopted accounting policies compared to historical results for
the years ended December 31, 1999 and 1998. It was impractical for the
Company to obtain the amounts on a pro-forma basis prior to 1998.
There were no changes in net earnings or net earnings per common share
for those periods since the Company's previous accounting practice did
not recognize any significant profits on pre-need sales. The Company's
previous accounting practice recorded pre-need sales as revenue but
also recorded approximately an equal amount for the sum of the future
merchandise cost and sales expense. Implementing SAB 101 changed this
practice to defer these pre-need sales and costs to when the
merchandise is delivered or the services are performed.
1999 1998
------- ---------
Proforma Historical Proforma Historical
------------ ----------- ----------- ------------
Revenues $48,632,0000 $49,657,000 $31,939,000 $32,820,000
Total benefits
and expenses 47,181,000 48,207,000 30,912,000 31,794,000
19
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company's operations over the last several years generally reflect three
trends or events which the Company expects to continue: (i) increased attention
to "niche" insurance products, such as the Company's funeral plan policies and
interest sensitive products; (ii) emphasis on cemetery and mortuary business;
and (iii) capitalizing on lower interest rates by originating and refinancing
mortgage loans.
During the years ending December 31, 2001 and 2000, Security National Mortgage
Company (SNMC) experienced increases in revenue and expenses due to the increase
in loan volume of its operations. SNMC is a mortgage lender incorporated under
the laws of the State of Utah. SNMC is approved and regulated by the Federal
Housing Administration (FHA), a department of the U.S. Department of Housing and
Urban Development (HUD), to originate mortgage loans that qualify for government
insurance in the event of default by the borrower. SNMC obtains loans primarily
from independent brokers and correspondents. SNMC funds the loans from internal
cash flows and lines of credit from financial institutions. SNMC receives fees
from origination points paid by the borrowers and service and release premiums
received from third party investors who purchase the loans from SNMC. SNMC sales
all of its loans to third party investors and does not retain servicing to these
loans. SNMC pays the brokers and correspondents a commission for loans that are
brokered through SNMC. In 1999 SNMC opened new wholesale branches in Sacramento,
California and Valencia, California. In 2000 SNMC opened new wholesale branches
in Orlando, Florida, Colorado Springs, Colorado and Provo, Utah. In 2001, SNMC
opened two wholesale branches in Phoenix, Arizona and Houston, Texas. SNMC
originated and sold 8,738 ($1,268,000,000), 4,845 ($652,000,000) and 3,526
($453,000,000) loans, respectively, in 2001, 2000 and 1999.
On December 17, 1998, the Company purchased all of the outstanding shares of
common stock of SSLIC Holding Company ("SSLIC Holding") (formerly "Consolidare
Enterprises, Inc.") and Insuradyne Corporation ("Insuradyne") for a total cost
of $12,248,194. As of December 31, 2001, SSLIC Holding held approximately 75% of
the outstanding shares of common stock of Southern Security Life Insurance
Company ("Southern Security").
Results of Operations
2001 Compared to 2000
Total revenues increased by $18,870,000, or 32.5%, from $58,079,000 for fiscal
year 2000 to $76,949,000 for fiscal year 2001. Contributing to this increase in
total revenues was a $17,165,000 increase in mortgage fee income, an $810,000
increase in net investment income, a $1,187,000 increase in net mortuary and
cemetery sales and a $275,000 increase in insurance premiums and other
considerations.
Insurance premiums and other considerations increased by $275,000, from
$12,876,000 in 2000 to $13,151,000 in 2001. This increase was primarily due to
the additional premiums from increased sales of the Company's traditional life
products.
Net investment income increased by $810,000, from $12,136,000 in 2000 to
$12,946,000 in 2001. This increase was primarily attributable to additional
interest earned as a result of a greater number of loan originations during
2001.
Net mortuary and cemetery sales increased by $1,187,000, from $9,417,000 in 2000
to $10,603,000 in 2001. This increase was primarily due to additional at-need
cemetery and mortuary sales.
Mortgage fee income increased by $17,165,000, from $22,921,000 in 2000 to
$40,086,000 in 2001. This increase was primarily attributable to a greater
number of loan originations during 2001 due to lower interest rates, resulting
in more borrowers refinancing their mortgage loans.
20
Total benefits and expenses were $73,177,000 for 2001, which constituted 95.1%
of the Company's total revenues, as compared to $56,832,000, or 97.9% of the
Company's total revenues for 2000.
During 2001, there was a net increase of $1,160,000 in death benefits, surrender
and other policy benefits, and a decrease of $2,316,000 in future policy
benefits from $12,931,000 in 2000 to $11,775,000 in 2001. This net decrease was
primarily the result of a decrease in traditional life reserves.
Amortization of deferred policy and pre-need acquisition costs and cost of
insurance acquired increased by $681,000, from $3,189,000 in 2000 to $3,870,000
in 2001. This increase was reasonable based on the underlying actuarial
assumptions.
General and administrative expenses increased by $16,288,000, from $35,959,000
in 2000 to $52,247,000 in 2001. Contributing to this increase was an $11,458,000
increase in commission expenses, from $18,401,000 in 2000 to $29,859,000 in
2001. Salaries increased $1,360,000, from $7,667,000 in 2000 to $9,028,000 in
2001. Other expenses increased $3,470,000, from $9,890,000 in 2000 to
$13,360,000 in 2001. These increases were primarily the result of an increased
number of loan originations made by the Company's mortgage subsidiary in 2001.
Interest expense increased by $665,000, from $2,126,000 in 2000 to $2,791,000 in
2001. This increase was primarily due to more loan originations from the
Company's mortgage subsidiary being funded by third parties in 2001.
Cost of the mortuary and cemetery goods and services sold decreased by $134,000,
from $2,628,000 in 2000 to $2,494,000 in 2001. This decrease was primarily due
to greater sales of cemetery burial property sales in 2001, which have a lower
cost of goods sold than other funeral products.
2000 Compared to 1999
Total revenues increased by $8,422,000, or 17.0%, from $49,657,000 for fiscal
year 1999 to $58,079,000 for fiscal year 2000. Contributing to this increase in
total revenues was a $1,505,000 increase in net investment income, an $8,418,000
increase in mortgage fee income, and a $111,000 increase in realized gains on
investments and other assets.
Insurance premiums and other considerations decreased by $300,000, from
$13,176,000 in 1999 to $12,876,000 in 2000. This reduction was primarily the
result of a change in the sales mix of the Company's insurance subsidiary,
Southern Security. Since March 1998, Southern Security has sold more final
expense policies, which have lower face amounts, than universal life products,
which have larger face amounts. Consequently, the insurance revenues from final
expense products were less than those from universal life products.
Net investment income increased by $1,505,000 from $10,631,000 in 1999 to
$12,136,000 in 2000. This increase was primarily attributable to more loan
originations made by the Company's mortgage subsidiary in 2000 due to the
expansion of business activities in new geographic markets.
Net mortuary and cemetery sales decreased by $761,000 from $10,178,000 in 1999
to $9,417,000 in 2000. This decrease was primarily due to the change in
accounting principles for pre-need funeral and cemetery contract revenues. See
Note 1 "Recent Accounting Pronouncements".
Mortgage fee income increased by $8,418,000, from $14,504,000 in 1999 to
$22,922,000 in 2000. This increase was primarily the result of an increased
number of loan originations made by the Company's mortgage subsidiary in 2000.
Other revenue decreased by $551,000, from $856,000 in 1999 to $305,000 in 2000.
This reduction was primarily the result of having received proceeds in 1999 from
insurance claims filed for the recovery of the costs to litigate a case against
a former officer of the Company's insurance subsidiary, Southern Security.
Total benefits and expenses were $56,833,000 for 2000, which constituted 97.9%
of the Company's total revenues, as compared to $48,207,000, or 97.1% of the
Company's total revenues for 1999.
21
During 2000, there was a net increase of $955,000 in death benefits, surrender
and other policy benefits, and an increase in future policy benefits from
$11,976,000 in 1999 to $12,931,000 in 2000. This increase was primarily due to
additional interest credited on annuities and reserve increases on traditional
products. This increase was reasonable based on the underlying actuarial
assumptions.
Amortization of deferred policy and pre-need acquisition costs and cost of
insurance acquired decreased by $1,669,000 from $4,858,000 in 1999 to $3,189,000
in 2000. This decrease was primarily due to adjusting the amortization rate to
current assumptions at the Company's insurance subsidiary, Southern Security.
General and administrative expenses increased by $9,000,000, from $26,959,000 in
1999 to $35,959,000 in 2000. Contributing to this increase was a $6,550,000
increase in commission expenses from $11,851,000 in 1999 to $18,401,000 in 2000.
Salaries increased $258,000 from $7,409,000 in 1999 to $7,667,000 in 2000. Other
expenses increased $2,191,000, from $7,699,000 in 1999 to $9,890,000 in 2000.
These increases were primarily the result of an increased number of loan
originations made by the Company's mortgage subsidiary in 2000.
Interest expense increased by $1,007,000, from $1,119,000 in 1999 to $2,126,000
in 2000. This increase was primarily due to more loan originations from the
Company's mortgage subsidiary being funded by third parties in 2000.
Cost of the mortuary and cemetery goods and services sold decreased by $667,000,
from $3,295,000 in 1999 to $2,628,000 in 2000. This decrease was primarily due
to the change in accounting principles for pre-need funeral and cemetery
contract revenues. See Note 1, "Recent Accounting Pronouncements".
Liquidity and Capital Resources
The Company's life insurance subsidiaries and cemetery and mortuary subsidiaries
realize cash flow from premiums, contract payments and sales on personal
services rendered for cemetery and mortuary business, from interest and
dividends on invested assets, and from the proceeds from the maturity of
held-to-maturity investments or sale of other investments. The mortgage
subsidiary realizes cash flow from fees generated by originating and refinancing
mortgage loans and interest earned on mortgages sold to investors. The Company
considers these sources of cash flow to be adequate to fund future policyholder
and cemetery and mortuary liabilities, which generally are long-term, and
adequate to pay current policyholder claims, annuity payments, expenses on the
issuance of new policies, the maintenance of existing policies, debt service,
and to meet operating expenses.
The Company attempts to match the duration of invested assets with its
policyholder and cemetery and mortuary 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 and cemetery and
mortuary liabilities regardless of future interest rate movements.
The Company's investment policy is to invest predominately 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 the life insurance subsidiaries. Bonds owned by the insurance
subsidiaries amounted to $49,271,000 as of December 31, 2001 compared to
$62,889,000 as of December 31, 2000. This represents 55% of the total insurance
related investments in 2001 as compared to 60% in 2000. Generally, all bonds
owned by the life insurance subsidiaries are rated by the National Association
of Insurance Commissioners (NAIC). Under this rating system, there are six
categories used for rating bonds. At December 31, 2001, 5.0% ($2,438,000) and at
December 31, 2000, .68% ($429,000) of the Company's total bond investments were
invested in bonds in rating categories three through six which are considered
non-investment grade.
22
If market conditions were to cause interest rates to change, the market value of
the fixed income portfolio (approximately $65,676,000) could change by the
following amounts based on the respective basis point swing (the change in the
market values were calculated using a modeling technique):
-200 bps -100 bps +100 bps +200 bps
-------- -------- -------- --------
Change in
Market Value
(in thousands) $3,655 $2,413 $(3,194) $(7,558)
The Company has classified certain of its fixed income securities, including
high-yield securities, in its portfolio 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, 2001
and 2000, the life subsidiaries exceeded the regulatory criteria.
The Company's total capitalization of stockholders' equity and bank debt and
notes payable was $42,067,000 and $40,787,000 as of December 31, 2001 and 2000,
respectively. Stockholders' equity as a percent of total capitalization was 71%
and 66% as of December 31, 2001 and 2000, respectively.
Lapse rates measure the amount of insurance terminated during a particular
period. The Company's lapse rate for life insurance in 2001 was 13.2%, as
compared to a rate of 15% in 2000.
In February 1997, the Company purchased all of the outstanding shares of common
stock of Crystal Rose Funeral Home, Inc. for a total consideration of $382,000,
which included a note to the former owner in the amount of $297,000.
On December 17, 1998, the Company completed the acquisition of Consolidare
Enterprises, Inc., a Florida corporation ("Consolidare") pursuant to the terms
of the Acquisition Agreement which the Company entered into on April 17, 1998
with Consolidare and certain shareholders of Consolidare for the purchase of all
of the outstanding shares of common stock of Consolidare. Consolidare owns
approximately 75% of the outstanding shares of common stock of Southern Security
Life Insurance Company, a Florida corporation ("SSLIC"), and all of the
outstanding shares of stock of Insuradyne Corp., a Florida corporation
("Insuradyne").
As consideration for the purchase of the shares of Consolidare, the Company paid
to the stockholders of Consolidare at closing an aggregate of $12,248,194. In
order to pay the purchase consideration, the Company obtained $6,250,000 from
bank financing, with the balance of $5,998,194 obtained from funds then
currently held by the Company. In addition to the purchase consideration, the
Company caused SSLIC to pay, on the closing date, $1,050,000 to George Pihakis,
the President and Chief Executive Officer of SSLIC prior to closing, as a lump
sum settlement of the executive compensation agreement between SSLIC and Mr.
Pihakis.
In connection with the acquisition of Consolidare, the Company entered into an
Administrative Services Agreement dated December 17, 1998 with SSLIC. Under the
terms of the agreement, the Company has agreed to provide SSLIC 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 to be
provided by the Company, SSLIC shall pay the Company 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 SSLIC is less than or equal to
$6,000,000, unless SSLIC and the Company otherwise agree in writing and such
agreement is approved by the Florida Department of Insurance.
23
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 SSLIC 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.
On June 30, 1999 the Company entered into a Coinsurance and Assumption Agreement
(the "Agreement") with Menlo Life Insurance Company ("Menlo Life"), wherein the
Company has assumed 100% of the policies in force of Menlo Life. The Agreement
was not in effect until it was approved by Menlo Life's domiciled state of
Arizona and the state of California. These approvals were obtained on September
9, 1999 for the Arizona Insurance Department, and on December 9, 1999 for the
California Insurance Department. Menlo Life paid consideration to the Company in
the form of statutory admitted assets to equal the liabilities assumed. On
September 25, 2001, Menlo Life paid to the Company $308,978 in policy loans and
$2,269,403 in cash.
At December 31, 2001, $24,776,305 of the Company's consolidated stockholders'
equity represents the statutory stockholders' equity of the Company's insurance
subsidiaries. The life insurance subsidiaries cannot pay a dividend to its
parent company without the approval of insurance regulatory authorities.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations" (SFAS No. 141)
and No. 142, "Goodwill and Other Intangibles SFAS No. 142). SFAS No. 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. The statement also establishes
specific criteria for recognition of intangible assets separately from goodwill
and requires unallocated negative goodwill to be written off immediately as an
extraordinary gain. SFAS No. 142 primarily addresses the accounting for goodwill
and intangible assets subsequent to their acquisition. The statement requires
that goodwill and indefinite lived intangible assets no longer be amortized and
be tested for impairment at least annually. The amortization period of
intangible assets with finite lives will no longer be limited to forty years.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment of
Long-Lived Assets". This Statement addresses financial accounting and reporting
for the impairment of long- lived assets and for long-lived assets to be
disposed of. This Statement supersedes FASB Statement 121 and APB Opinion No.
30. However, this Statement retains certain fundamental provisions of Statement
121, namely; recognition and measurement of the impairment of long-lived assets
to be held and used, and measurement of long-lived assets to be disposed of by
sale. The Statement also retains the requirement of Opinion 30 to report
discontinued operations separately from continuing operations. This Statement
also Amends ARB No. 51 to eliminate the exception of consolidation for a
temporarily controlled subsidiary. The provisions of this statement are
effective for financial statements issued for fiscal years beginning after
December 15, 2001.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations". This Statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement is effective for financial
statement issued for fiscal years beginning after June 15, 2002.
The Company is evaluating the possible effects the adoption of these statements
may have on the Company's consolidated financial statements.
The Company adopted Statement of Financial Accounting Standards No. 140,
Accounting for Transfers and Servicing of Financing Assets and Extinguishments
of Liabilities - a replacement of FASB Statement No. 125 (FAS 140) on April 1,
2001. This standard revises the standards for accounting for securitizations and
other transfers of financial assets and collateral and requires certain
disclosures, but carries over most of FAS 125's provisions without
reconsideration. This Statement is effective for recognition and
reclassification of collateral and for disclosures relative to securitization
transactions and collateral for fiscal years ending after December 15, 2000. The
adoption of FAS 140 did not have a material impact on the Company's financial
position or results of operations.
24
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
Page No.
Financial Statements:
Report of Independent Auditors.................................26
Consolidated Balance Sheet, December 31,
2001 and 2000..................................................27
Consolidated Statement of Earnings,
Years Ended December 31, 2001, 2000,
and 1999.......................................................29
Consolidated Statement of Stockholders'
Equity, Years Ended December 31, 2001, 2000
and 1999. .....................................................30
Consolidated Statement of Cash Flows,
Years Ended December 31, 2001, 2000 and
1999 .......................................................31
Notes to Consolidated Financial
Statements.....................................................33
Financial Statement Schedules:
I. Summary of Investments -- Other than
Investments in Related Parties...............................63
II. Condensed Financial Information of
Registrant...................................................64
IV. Reinsurance..................................................70
V. Valuation and Qualifying Accounts............................71
All other schedules to the consolidated financial statements required by Article
7 of Regulation S-X are not required under the related instructions or are
inapplicable and therefore have been omitted.
25
REPORT OF INDEPENDENT AUDITORS
To The Board of Directors and Shareholders
of Security National Financial Corporation
We have audited the accompanying consolidated balance sheet of Security National
Financial Corporation and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for the three years in the period ended December 31, 2001. In connection
with our audits of the consolidated financial statements, we have also audited
the amounts included in the consolidated financial statement schedules as listed
in the accompanying index under Item 8. These consolidated financial statements
and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and 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 consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Security National Financial Corporation and subsidiaries at December 31, 2001
and 2000, and the consolidated results of their operations and their cash flows
for the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the related consolidated financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
TANNER + CO.
Salt Lake City, Utah
March 26, 2002
26
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheet
December 31,
Assets: 2001 2000
- ------- ---- ----
Insurance-related investments:
Fixed maturity securities
held to maturity, at amortized cost (market
$28,697,986 and $39,283,266 for 2001 and 2000) $27,799,909 $39,384,168
Fixed maturity securities available
for sale, at market (cost $20,565,833 in 2001
and 23,556,864 in 2000) 21,470,729 23,504,989
Equity securities available for sale,
at market (cost $1,605,980 and $1,617,363
for 2001 and 2000) 2,641,549 2,774,077
Mortgage loans on real estate 15,479,305 17,435,178
Real estate, net of accumulated
depreciation and allowances for
losses of $3,523,913 and $3,088,761
for 2001 and 2000 9,051,691 8,564,395
Policy, student and other loans 11,277,975 11,277,742
Short-term investments 1,453,644 1,027,927
------------- ------------
Total insurance-related investments 89,174,802 103,968,476
Restricted assets of cemeteries and mortuaries 5,339,436 4,841,819
Cash 8,757,246 11,275,030
Receivables:
Trade contracts 6,945,274 5,342,380
Mortgage loans sold to investors 50,695,073 26,886,162
Receivable from agents 2,061,541 2,225,784
Receivable from officers 102,200 111,500
Other 1,183,927 3,503,320
------------- -------------
Total receivables 60,988,015 38,069,146
Allowance for doubtful accounts (2,287,241) (1,656,223)
------------- -------------
Net receivables 58,700,774 36,412,923
Policyholder accounts on deposit
with reinsurer 7,148,068 7,434,750
Land and improvements held for sale 8,346,448 8,485,523
Accrued investment income 1,059,789 1,302,552
Deferred policy and pre-need
acquisition costs 14,453,023 13,603,182
Property, plant and equipment, net 10,802,387 10,824,700
Cost of insurance acquired 7,615,348 8,729,264
Excess of cost over net assets
of acquired subsidiaries 1,065,045 1,172,599
Other 597,209 695,683
------------- -------------
Total assets $213,059,575 $208,746,501
============= =============
See accompanying notes to consolidated financial statements.
27
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheet (Continued)
December 31,
------------
2001 2000
---- ----
Liabilities:
- ------------
Future life, annuity, and other
policy benefits $140,504,866 $140,000,344
Unearned premium reserve 1,785,977 1,754,980
Bank loans payable 8,461,900 9,805,118
Notes and contracts payable 3,635,776 4,240,830
Deferred pre-need cemetery and funeral
contracts revenues and estimated
future cost of pre-need sales 9,338,353 8,679,199
Accounts payable 1,319,319 1,242,407
Funds held under reinsurance treaties 1,379,640 1,417,216
Other liabilities and accrued expenses 5,552,799 4,115,920
Income taxes 6,874,597 6,124,512
------------- -------------
Total liabilities 178,853,227 177,380,526
Commitments and contingencies -- --
Minority interest 4,237,030 4,624,614
Stockholders' Equity:
- --------------------
Common stock:
Class A: $2 par value, authorized
10,000,000 shares, issued 5,363,591
shares in 2001 and 5,107,631 shares
in 2000 10,727,182 10,215,262
Class C: $0.20 par value, authorized
7,500,000 shares, issued 6,113,430
shares in 2001 and 5,827,805 shares
in 2000 1,222,686 1,165,561
------------- -------------
Total common stock 11,949,868 11,380,823
Additional paid-in capital 10,168,523 10,054,714
Accumulated other comprehensive income, net of
deferred taxes (benefit) of $212,734 and
$(66,043) for 2001 and 2000 1,223,930 836,751
Retained earnings 9,989,230 7,831,306
Treasury stock at cost (1,294,716 Class
A shares and 68,332 Class C shares in
2001; 1,233,064 Class A shares and
65,078 Class C shares in 2000, held
by affiliated companies) (3,362,233) (3,362,233)
------------- -------------
Total stockholders' equity 29,969,318 26,741,361
------------- -------------
Total liabilities and stockholders' equity $213,059,575 $208,746,501
============= =============
See accompanying notes to consolidated financial statements.
28
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Earnings
Years Ended December 31,
2001 2000 1999
---- ---- ----
Revenues:
- --------
Insurance premiums and
other considerations $13,150,875 $12,875,585 $13,175,825
Net investment income 12,946,499 12,136,072 10,631,302
Net mortuary and cemetery sales 10,603,451 9,416,927 10,178,246
Realized gains on
investments and other assets 10,428 423,805 313,013
Mortgage fee income 40,086,097 22,921,585 14,503,388
Other 151,945 304,886 855,604
------------ ------------ ------------
Total revenue 76,949,295 58,078,860 49,657,378
Benefits and expenses:
- ---------------------
Death benefits 5,354,522 3,959,811 4,780,063
Surrenders and other
policy benefits 1,467,323 1,702,251 1,494,863
Increase in future policy benefits 4,953,008 7,268,720 5,700,784
Amortization of deferred
policy and pre-need acquisition
costs and cost of insurance acquired 3,870,158 3,188,752 4,857,662
General and administrative expenses:
Commissions 29,859,295 18,401,314 11,850,763
Salaries 9,027,523 7,667,263 7,409,298
Other 13,360,362 9,890,197 7,698,779
Interest expense 2,790,627 2,126,169 1,119,402
Cost of goods and services
sold of the mortuaries
and cemeteries 2,494,367 2,628,260 3,294,983
------------ ------------ ------------
Total benefits and expenses 73,177,185 56,832,737 48,206,597
------------ ------------ ------------
Earnings before income taxes 3,772,110 1,246,123 1,450,781
Income tax expense (913,539) (304,640) (230,516)
Minority income (17,791) (45,754) (244,370)
------------ ------------ ------------
Net earnings $2,840,780 $895,729 $975,895
============ ============ ============
Net earnings per common share $.63 $.21 $.22
============ ============ ============
Weighted average
outstanding common shares 4,506,476 4,317,779 4,397,141
Net earnings per common share-
assuming dilution $.63 $.21 $.22
============ ============ ============
Weighted average
outstanding common shares
assuming-dilution 4,506,858 4,335,044 4,397,141
See accompanying notes to consolidated financial statements.
29
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Accumulated
Additional Other
Class Class Paid-in Comprehensive Retained Treasury
A C Capital Income Earnings Stock Total
-------- ------- --------- ------ -------- ------ -----
Balance at
December 31, 1998 $9,234,660 $1,089,319 $9,596,444 $1,081,113 $7,474,783 $(1,796,060) $26,680,259
Comprehensive income:
Net earnings -- -- -- -- 975,895 -- 975,895
Unrealized gain on securities -- -- -- (415,422) -- -- (415,422)
------------
Total comprehensive income -- -- -- -- -- -- 560,473
------------
Stock dividends 463,344 52,910 419,456 -- (935,710) -- --
Conversion Class C
to Class A 31,160 (31,159) (1) -- -- -- --
Stock issued (canceled) (1,702) -- 43 -- 1,672 -- 13
Purchase of treasury stock -- -- -- -- -- (751,052) (751,052)
------------ ------------ ------------ ------------ ----------- ------------ ------------
Balance at
December 31, 1999 9,727,462 1,111,070 10,015,942 665,691 7,516,640 (2,547,112) 26,489,693
------------ ------------ ------------ ------------ ----------- ------------ ------------
Comprehensive income:
Net earnings -- -- -- -- 895,729 -- 895,729
Unrealized gain on securities -- -- -- 171,060 -- -- 171,060
------------
Total comprehensive income -- -- -- -- -- -- 1,066,789
------------
Stock dividends 486,786 55,503 38,774 -- (581,063) -- --
Conversion Class C
to Class A 1,014 (1,012) (2) -- -- -- --
Purchase of treasury stock -- -- -- -- -- (815,121) (815,121)
------------ ------------ ------------ ----------- ---------- ------------ ------------
Balance at
December 31, 2000 10,215,262 1,165,561 10,054,714 836,751 7,831,306 (3,362,233) 26,741,361
------------ ------------ ------------ ----------- ---------- ------------ ------------
Comprehensive income:
Net earnings -- -- -- -- 2,840,780 -- 2,840,780
Unrealized gain on
securities -- -- -- 387,179 -- 387,179
------------
Total comprehensive income -- -- -- -- -- -- 3,227,959
------------
Stock dividends 510,826 58,221 113,809 -- (682,856) -- --
Conversion Class C
to Class A 1,094 (1,096) -- -- -- -- (2)
Purchase of treasury stock -- -- -- -- -- -- --
------------ ---------- ------------ ---------- ---------- ------------ ------------
Balance at
December 31, 2001 $10,727,182 $1,222,686 $10,168,523 $1,223,930 $9,989,230 $(3,362,233) $29,969,318
=========== ========== =========== ========== ========== ============ ============
See accompanying notes to consolidated financial statements.
30
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Year Ended December 31,
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net earnings $2,840,780 $895,729 $975,895
Adjustments to reconcile net earnings
to net cash provided by
operating activities:
Realized gains on investments
and other assets (10,428) (423,805) (313,013)
Depreciation 1,350,372 1,202,158 1,187,426
Provision for losses on real estate
accounts and loans receivable 793,194 219,269 150,981
Amortization of goodwill, premiums,
and discounts 197,793 214,355 263,572
Provision for deferred income taxes 522,047 259,952 228,464
Policy and pre-need acquisition
costs deferred (3,834,432) (5,365,417) (3,886,279)
Policy and pre-need acquisition costs
amortized 3,045,996 2,320,710 3,992,522
Cost of insurance acquired amortized 824,162 868,042 865,140
Change in assets and liabilities net of
effects from purchases and disposals of
subsidiaries:
Land and improvements held for sale 139,075 37,164 (116,962)
Future life and other benefits 5,734,205 7,023,493 5,012,923
Receivables for mortgage loans sold (24,786,179) 2,185,751 (7,890,885)
Other operating assets and liabilities 2,400,265 1,028,892 (959,832)
------------ ------------ ------------
Net cash provided by (used in)
operating activities (10,783,150) 10,466,293 (490,048)
Cash flows from investing activities:
Securities held to maturity:
Purchase - fixed maturity securities (402,995) (4,801,309) (1,207,177)
Calls and maturities - fixed
maturity securities 12,086,818 5,137,323 6,658,968
Securities available for sale:
Purchases - equity securities -- (418,365) (507,404)
Sales - equity securities 2,826,094 4,797,396 2,906,278
Purchases of short-term investments (14,301,717) (7,523,432) (9,131,204)
Sales of short-term investments 13,876,000 7,785,815 19,384,434
Purchases of restricted assets (497,617) (604,345) (119,479)
Mortgage, policy, and other loans made (3,114,060) (3,016,125) (10,891,562)
Payments received for mortgage,
policy, and other loans 5,626,747 4,782,778 4,770,423
Purchases of property, plant, and equipment (1,006,824) (1,719,120) (767,383)
Disposal of property and equipment -- 625,507 190,000
Purchases of real estate (784,677) (1,329,347) (421,230)
Sale of real estate 195,562 -- 334,500
------------ ------------ ------------
Net cash provided by
investing activities 14,503,331 3,716,776 11,199,164
31
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Cash Flows (Continued)
Year Ended December 31,
2001 2000 1999
---- ---- ----
Cash flows from financing activities:
Annuity and pre-need contract receipts 9,707,844 8,714,642 10,522,726
Annuity and pre-need contract withdrawals (13,997,537) (13,935,567) (15,183,240)
Repayment of bank loans and
notes and contracts payable (2,698,272) (1,652,036) (1,545,957)
Proceeds from borrowings on bank
loans and notes and contracts
payable 750,000 1,044,202 890,500
Purchase of treasury stock -- (815,121) (751,052)
Net change in line of credit
for financing of mortgage loans -- (8,687,023) 1,109,775
------------ ------------ ------------
Net cash used in financing activities (6,237,965) (15,330,903) (4,957,248)
------------ ------------ ------------
Net change in cash (2,517,784) (1,147,834) 5,751,868
Cash at beginning of year 11,275,030 12,422,864 6,670,996
------------ ------------ ------------
Cash at end of year $8,757,246 $11,275,030 $12,422,864
============ ============ ============
See accompanying notes to the consolidated financial statements.
32
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000, and 1999
1) Significant Accounting Principles
General Overview of Business
Security National Financial Corporation and its wholly-owned subsidiaries (the
"Company") operates in three main business segments; life insurance, cemetery
and mortuary, and mortgage loans. The life insurance segment is engaged in the
business of selling and servicing selected lines of life insurance, annuity
products and accident and health insurance marketed primarily in the
intermountain west, California, Florida, Oklahoma, and Texas. The cemetery and
mortuary segment of the Company consists of five cemeteries in Utah, one
cemetery in California, eight mortuaries in Utah and five mortuaries in Arizona.
The mortgage loan segment is an approved governmental and conventional lender
that originates and underwrites residential and commercial loans for new
construction, existing homes and real estate projects primarily in California,
Colorado, Florida, Utah, Arizona and Texas.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles which, for the
life insurance subsidiaries, differ from statutory accounting principles
prescribed or permitted by regulatory authorities.
Risks
The following is a description of the most significant risks facing the Company
and how it mitigates those risks:
Legal/Regulatory Risk - the risk that changes in the legal or regulatory
environment in which the Company operates will create additional expenses and/or
risks not anticipated by the Company in developing and 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 insurer beyond those recorded in the consolidated financial
statements. In addition, changes in tax law with respect to mortgage interest
deductions or other public policy or legislative changes may affect the
Company's mortgage sales. Also, the Company may be subject to further
regulations in the cemetery/mortuary business. The Company mitigates this risk
by offering a wide range of products and by diversifying its operations, thus
reducing its exposure to any single product or jurisdiction, and also by
employing underwriting practices which identify and minimize the adverse impact
of such risk.
Credit Risk - the risk that issuers of securities owned by the Company or
mortgagors of mortgage loans on real estate owned by the Company will default or
that other parties, including reinsurers and holders of cemetery/ mortuary
contracts which owe the Company money, will not pay. The Company minimizes this
risk by adhering to a conservative investment strategy, by maintaining sound
reinsurance and credit and collection policies and by providing for any amounts
deemed uncollectible.
Interest Rate Risk - the risk that interest rates will change which may cause a
decrease in the value of the Company's investments or impair the ability of the
Company to market its mortgage and cemetery/mortuary products. This change in
rates may cause certain interest- sensitive products to become uncompetitive or
may cause disintermediation. The Company mitigates this risk by charging fees
for non-conformance 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
might have to borrow funds or sell assets prior to maturity and potentially
recognize a gain or loss.
33
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000, and 1999
1) Significant Accounting Principles (Continued)
---------------------------------
Mortality/Morbidity Risk - the risk that the Company's actuarial assumptions may
differ from actual mortality/morbidity experience may cause the Company's
products to be underpriced, may cause the Company to liquidate insurance or
other claims earlier than anticipated and other potentially adverse consequences
to the business. The Company minimizes this risk through sound underwriting
practices, asset/liability duration matching, and sound actuarial practices.
Estimates The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
The estimates susceptible to significant change are those used in determining
the liability for future policy benefits and claims, those used in determining
valuation allowances for mortgage loans on real estate, and those used in
determining the estimated future costs for pre-need sales. Although some
variability is inherent in these estimates, management believes the amounts
provided are adequate.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts and
operations of the Company. The Company's subsidiaries at December 31, 2001, are
as follows:
Security National Life Insurance Company
Security National Mortgage Company
Memorial Estates, Inc.
Memorial Mortuary
Paradise Chapel Funeral Home
Singing Hills Memorial Park
Cottonwood Mortuary, Inc.
Deseret Memorial, Inc.
Holladay Cottonwood Memorial Foundation
Holladay Memorial Park
Camelback Sunset Funeral Home, Inc.
Greer-Wilson Funeral Home
Crystal Rose Funeral Home
Hawaiian Land Holdings
SSLIC Holding Company
Insuradyne Corporation
Southern Security Life Insurance Company (75%)
All significant intercompany transactions and accounts have been eliminated in
consolidation.
On December 17, 1998, the Company purchased all of the outstanding shares of
common stock of SSLIC Holding Company (formerly Consolidare Enterprises, Inc.),
(SSLIC Holding) and Insuradyne Corporation (Insuradyne) for a total cost of
$12,248,194. SSLIC Holding owns approximately 75% of the outstanding shares of
common stock of Southern Security Life Insurance Company (Southern Security).
The acquisition was accounted for using the purchase method.
34
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000, and 1999
1) Significant Accounting Principles (Continued)
---------------------------------
Investments
Investments are shown on the following basis:
Fixed maturity securities held to maturity - at cost, adjusted for amortization
of premium or accretion of discount. Although the Company has the ability and
intent to hold these investments to maturity, infrequent and unusual conditions
could occur under which it would sell certain of these securities. Those
conditions include unforeseen changes in asset quality, significant changes in
tax laws, and changes in regulatory capital requirements or permissible
investments.
Fixed maturity and equity securities available for sale - at fair value, which
is based upon quoted trading prices. Changes in fair values net of income taxes
are reported as unrealized appreciation or depreciation and recorded as an
adjustment directly to stockholders' equity and, accordingly, have no effect on
net income.
Mortgage loans on real estate - at unpaid principal balances, adjusted for
amortization of premium or accretion of discount, less allowance for possible
losses.
Real estate - at cost, less accumulated depreciation provided on a straight-line
basis over the estimated useful lives of the properties, and net of allowance
for impairment in value, if any.
Policy, student, and other loans - at the aggregate unpaid balances, less
allowances for possible losses.
Short-term investments - consists of certificates of deposit and commercial
paper with maturities of up to one year.
Restricted assets of cemeteries and mortuaries - consists of cash,
participations in mortgage loans with Security National Life Insurance Company,
and mutual funds carried at cost; fixed maturity securities carried at cost
adjusted for amortization of premium or accretion of discount; and equity
securities carried at fair market value.
Realized gains and losses on investments - realized gains and losses on
investments and declines in value considered to be other than temporary, are
recognized in operations on the specific identification basis.
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.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Depreciation is calculated
principally on the straight-line method over the estimated useful lives of the
assets which range from three to thirty years. Leasehold improvements are
amortized over the lesser of the useful life or remaining lease terms.
Recognition of Insurance Premiums and Other Considerations
Premiums for traditional life insurance products (which include those products
with fixed and guaranteed premiums and benefits and consist principally of whole
life insurance policies, limited-payment life insurance policies, and certain
annuities with life contingencies) are recognized as revenues when due from
policyholders. Revenues for interest-sensitive insurance policies (which include
universal life policies, interest-sensitive life policies, deferred annuities,
and annuities without life contingencies) consist of policy charges for the cost
of insurance, policy administration charges, and surrender charges assessed
against policyholder account balances during the period.
35
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000, and 1999
1) Significant Accounting Principles (Continued)
---------------------------------
Deferred Policy Acquisition Costs and Cost of Insurance Acquired
Commissions and other costs, net of commission and expense allowances for
reinsurance ceded, that vary with and are primarily related to the production of
new insurance business have been deferred. Deferred policy acquisition costs for
traditional life insurance are amortized over the premium-paying period of the
related policies using assumptions consistent with those used in computing
policy benefit reserves. For interest-sensitive insurance products, deferred
policy acquisition costs are amortized generally in proportion to the present
value of expected gross profits from surrender charges, investment, mortality
and expense margins. This amortization is adjusted when estimates of current or
future gross profits to be realized from a group of products are reevaluated.
Deferred acquisition costs are written off when policies lapse or are
surrendered.
Cost of insurance acquired is the present value of estimated future profits of
the acquired business and is amortized similar to deferred policy acquisition
costs.
Future Life, Annuity and Other Policy Benefits
Future policy benefit reserves for traditional life insurance are computed using
a net level method, including assumptions as to investment yields, mortality,
morbidity, withdrawals, and other assumptions based on the life insurance
subsidiaries experience, modified as necessary to give effect to anticipated
trends and to include provisions for possible unfavorable deviations. Such
liabilities are, for some plans, graded to equal statutory values or cash values
at or prior to maturity. The range of assumed interest rates for all traditional
life insurance policy reserves was 4.5% to 10.0% in 2001, 2000, and 1999.
Benefit reserves for traditional limited-payment life insurance policies include
the deferred portion of the premiums received during the premium-paying period.
Deferred premiums are recognized as income over the life of the policies. Policy
benefit claims are charged to expense in the period the claims are incurred.
Future policy benefit reserves for interest-sensitive insurance products are
computed under a retrospective deposit method and represent policy account
balances before applicable surrender charges. Policy benefits and claims that
are charged to expense include benefit claims incurred in the period in excess
of related policy account balances. Interest crediting rates for
interest-sensitive insurance products ranged from 4% to 6.5% in 2001, 2000 and
1999.
Participating Insurance
Participating business constitutes 6%, 6%, and 5% of insurance in force for
2001, 2000 and 1999, respectively. The provision for policyholders' dividends
included in policyholder obligations is based on dividend scales anticipated by
management. Amounts to be paid are determined by the Board of Directors.
Reinsurance
The Company follows the procedure of reinsuring risks in excess of $75,000 to
provide for greater diversification of business, allow management to control
exposure to potential losses arising from large risks, and provide additional
capacity for growth. The Company remains liable for amounts ceded in the event
the reinsurers are unable to meet their obligations.
The Company has entered into coinsurance agreements with unaffiliated insurance
companies under which the Company assumed 100% of the risk for certain life
insurance policies and certain other policy-related liabilities of the insurance
company.
36
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000, and 1999
1) Significant Accounting Principles (Continued)
---------------------------------
Reinsurance premiums, commissions, expense reimbursements, and reserves related
to reinsured business are accounted for on a basis consistent with those used in
accounting for the original policies issued and the terms of the reinsurance
contracts. Expense allowances received in connection with reinsurance ceded are
accounted for as a reduction of the related policy acquisition costs and are
deferred and amortized accordingly.
Cemetery and Mortuary Operations
Pre-need sales of funeral services and caskets - revenue and costs associated
with the sales of pre-need funeral services and caskets are deferred until the
services are performed.
Pre-need sales of cemetery interment rights (cemetery burial property) - revenue
and costs associated with the sales of pre-need cemetery interment rights are
recognized in accordance with the retail land sales provisions of Statement of
Financial Accounting Standards No. 66, "Accounting for the Sales of Real Estate"
(FAS No. 66). Under FAS 66, recognition of revenue and associated costs from
constructed cemetery property must be deferred until a minimum percentage of the
sales price has been collected. Revenues related to the pre-need sale of
unconstructed cemetery property will be deferred until such property is
constructed and meets the criteria of FAS No. 66 described above.
Pre-need sales of cemetery merchandise (primarily markers and vaults) - revenue
and costs associated with the sales of pre-need cemetery merchandise are
deferred until the merchandise is delivered.
Pre-need sales of cemetery services (primarily merchandise delivery and
installation fees and burial opening and closing fees) - revenue and costs
associated with the sales of pre-need cemetery services are deferred until the
services are performed.
Prearranged funeral and pre-need cemetery customer obtaining costs - costs
incurred related to obtaining new pre-need cemetery and prearranged funeral
business are accounted for under the guidance of the provisions of Statement of
Financial Accounting Standards No. 60 "Accounting and Reporting by Insurance
Enterprises" (FAS No. 60). Obtaining costs, which include only costs that vary
with and are primarily related to the acquisition of new pre- need cemetery and
prearranged funeral business, are deferred until the merchandise is delivered or
services are performed.
Cemetery merchandise and services trust investment earnings - investment
earnings generated by assets included in merchandise and services trusts are
deferred until the associated merchandise is delivered or services performed.
The Company is required to place specified amounts into restricted asset
accounts for products sold on a pre-need basis. Income from assets placed in
these restricted asset accounts are used to offset required increases to the
estimated future liability.
Revenues and costs for at-need sales are recorded when the services are
performed.
The Company, through its mortuary and cemetery operations, provides a guaranteed
funeral arrangement wherein a prospective customer can receive future goods and
services at guaranteed prices. To accomplish this, the Company, through its life
insurance operations, sells to the customer an increasing benefit life insurance
policy that is assigned to the mortuaries. If, at the time of need, the
policyholder/potential mortuary customer utilizes one of the Company's
facilities, the guaranteed funeral arrangement contract that has been assigned
will provide the funeral goods and services at the contracted price. The
increasing life insurance policy will cover the difference between the original
contract prices and current prices. Risks may arise if the difference cannot be
fully met by the life insurance policy. However, management believes that given
current inflation rates and related price increases of goods and services, the
risk of exposure is minimal.
37
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000, and 1999
1) Significant Accounting Principles (Continued)
---------------------------------
Mortgage Operations
Mortgage fee income is generated through the origination and refinancing of
mortgage loans and is deferred until such loans are determined to be sold in
accordance with FAS No. 140.
All loans are sold to third party investors and the Company does not retain
servicing rights. The amounts sold to investors are shown on the balance sheet
as mortgage loans sold to investors and are shown on the basis of the amount due
from the each investor. Any impairment to sold loans or possible loan losses are
included in the provision for doubtful accounts. At December 31, 2001 and 2000
the provision for doubtful loan losses was not significant.
Excess of Cost Over Net Assets of Acquired Businesses
Previous acquisitions have been accounted for as purchases under which assets
acquired and liabilities assumed were recorded at their fair values. The excess
of cost over net assets of acquired businesses is being amortized over a range
of fifteen to twenty years using the straight-line method. The Company
periodically evaluates the recoverability of amounts recorded. Accumulated
amortization was $1,269,816 and $1,162,262 at December 31, 2001 and 2000,
respectively.
Income Taxes
Income taxes include taxes currently payable plus deferred taxes related to the
tax effect of temporary differences in the financial reporting basis and tax
basis of assets and liabilities. Such temporary differences are related
principally to the deferral of policy acquisition costs and the provision for
future policy benefits in the insurance operations, and unrealized gains on
fixed maturity and equity securities available for sale.
Earnings Per Common Share
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". This
Standard requires presentation of two new amounts, basic and diluted earnings
per share. Basic earnings per share are computed by dividing net earnings by the
weighted average number of common shares outstanding during each year presented,
after the effect of the assumed conversion of Class C Common Stock to Class A
Common Stock, the acquisition of treasury stock, and the retroactive effect of
stock dividends declared. Diluted earnings per share is computed by dividing net
earnings by the weighted average number of common shares outstanding during the
year plus the incremental shares that would have been outstanding under certain
deferred compensation plans.
Stock Compensation
The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation".
In accordance with the provisions of SFAS 123, the Company has elected to
continue to apply Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB Opinion No. 25"), and related interpretations
in accounting for its stock option plans.
The Company has two fixed option plans (the "1993 Plan" and the "2000 Plan"). In
accordance with APB Opinion No. 25, no compensation cost has been recognized for
these plans. Had compensation cost for these plans been determined based upon
the fair value at the grant date consistent with the methodology prescribed
under SFAS No. 123, the Company's net income would have been reduced by
approximately $3,143, $0, and $203,000 in 2001, 2000, and 1999, respectively. As
a result, basic and diluted earnings per share would have been reduced by $0,
$0, and $0.05 in 2001, 2000, and 1999 respectively.
38
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000, and 1999
1) Significant Accounting Principles (Continued)
---------------------------------
The weighted average fair value of options granted in 2001 under the 1993 Plan
and the 2000 Plan is estimated at $1.25 as of the grant date using the Black
Scholes Option Pricing Model with the following assumptions: dividend yield of
0%, volatility of 31.8%, risk-free interest rate of 5.14%, and an expected life
of five to ten years.
The weighted average fair value of options granted in 2000 under the 1993 Plan
and the 2000 Plan is estimated at $1.50 as of the grant date using the Black
Scholes Option Pricing Model with the following assumptions: dividend yield of
0%, volatility of 30.8%, risk-free interest rate of 6.6%, and an expected life
of five to ten years.
The weighted average fair value of each option granted in 1999 under the 1993
Plan is estimated at $1.61 as of the grant date using the Black Scholes
option-pricing model with the following assumptions: dividend yield of 0%,
volatility of 28.83%, risk-free interest rate of 6.0%, and an expected life of
ten years.
The Company also has one variable option plan (the "1987 Plan"). In accordance
with APB Opinion No. 25, compensation cost related to options granted and
outstanding under these plans is estimated and recognized over the period of the
award based on changes in the current market price of the Company's stock over
the vesting period. Options granted under the 1987 Plan are exercisable for a
period of ten years from the date of grant.
Recent Accounting Pronouncement
The Company adopted Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" (SAB 101) which changes the Company's accounting policies
regarding the manner in which the Company records pre-need sales activities. The
implementation of SAB No. 101 did not have a material effect on the consolidated
financial condition, results of operations or cash flows of the Company.
The change in the Company's accounting policies resulting from implementation of
SAB No. 101 has been treated as a change in accounting principle effective as of
January 1, 2000. The cumulative effect of the accounting change through December
31, 1999 was negligible. The following table shows the unaudited proforma
effects of retroactive application using the newly adopted accounting policies
compared to historical results for the year ended December 31, 1999. There were
no changes in net earnings or net earnings per common share for this period
since the Company's previous accounting practice did not recognize any
significant profits on pre-need sales. The Company's previous accounting
practice recorded pre-need sales as revenue but also recorded approximately an
equal amount for the sum of the future merchandise cost and sales expense.
Implementing SAB 101 changed this practice to defer these pre-need sales and
costs to when the merchandise is delivered or the services are performed.
1999
-----
Proforma Historical
--------- -----------
Revenues $48,632,000 $49,657,000
Total benefits
and expenses 47,181,000 48,207,000
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations" (SFAS No. 141)
and No. 142, "Goodwill and Other Intangibles SFAS No. 142). SFAS No. 141 and No.
142 are effective for the Company on July 1, 2001. SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. The statement also establishes specific criteria
for recognition of intangible assets separately from goodwill and requires
unallocated negative goodwill to be written off immediately as an extraordinary
gain. SFAS No. 142 primarily addresses the accounting for goodwill and
intangible assets subsequent to their acquisition. The statement requires that
goodwill and indefinite lived intangible assets no longer be amortized and be
tested for impairment at least annually. The amortization period of intangible
assets with finite lives will no longer be limited to forty years.
39
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000, and 1999
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment of
Long-Lived Assets". This Statement addresses financial accounting and reporting
for the impairment of long-lived assets and for long-lived assets to be disposed
of. This Statement supersedes FASB Statement 121 and APB Opinion No. 30.
However, this Statement retains certain fundamental provisions of Statement 121,
namely; recognition and measurement of the impairment of long-lived assets to be
held and used, and measurement of long-lived assets to be disposed of by sale.
The Statement also retains the requirement of Opinion 30 to report discontinued
operations separately from continuing operations. This Statement also Amends ARB
No. 51 to eliminate the exception of consolidation for a temporarily controlled
subsidiary. The provisions of this statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations". This Statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002.
The Company is evaluating the possible effects the adoption of these statements
may have on the Company's consolidated financial statements.
The Company adopted Statement of Financial Accounting Standards No. 140,
Accounting for Transfers and Servicing of Financing Assets and Extinguishments
of Liabilities - a replacement of FASB Statement No. 125 (FAS 140) on April 1,
2001. This standard revises the standards for accounting for securitizations and
other transfers of financial assets and collateral and requires certain
disclosures, but carries over most of FAS 125's provisions without
reconsideration. This Statement is effective for recognition and
reclassification of collateral and for disclosures relative to securitization
transactions and collateral for fiscal years ending after December 15, 2000. The
adoption of FAS 140 did not have a material impact on the Company's financial
position or results of operations.
40
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000, and 1999
2) Investments
The Company's investments in fixed maturity securities held to maturity
and equity securities available for sale are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- --------- ---------- ---------
December 31, 2001:
Fixed maturity securities held to maturity:
Bonds:
U.S. Treasury securities
and obligations of U.S.
Government agencies $4,212,280 $227,447 $ -- $4,439,726
Obligations of states and
political subdivisions 180,660 12,507 (7,684) 185,484
Corporate securities
including public utilities 19,206,038 736,038 (168,158) 19,773,918
Mortgage-backed securities 4,172,926 98,203 (578) 4,270,550
Redeemable preferred stock 28,005 7,350 (7,047) 28,308
----------- ----------- ----------- -----------
Total fixed maturity
securities held to maturity $27,799,909 $1,081,545 $(183,467) $28,697,986
=========== =========== =========== ===========
Securities available for sale:
Bonds
U.S. Treasury securities
and obligations of U.S.
Government agencies $594,568 $58,415 $ -- $652,983
Corporate securities
including public utilities 19,971,265 846,481 -- 20,817,746
Nonredeemable preferred stock 56,031 32,150 (6,931) 81,250
Common stock 1,549,949 1,523,382 (513,032) 2,560,299
----------- ----------- ----------- -----------
Total securities
available for sale $22,171,813 $2,460,428 $(519,963) $24,112,278
=========== =========== =========== ===========
Restricted equity securities (note 7) $172,391 $275,920 $(5,602) $442,709
=========== =========== =========== ===========
41
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000, and 1999
2) Investments
The Company's investments in fixed maturity securities held to maturity and
equity securities available for sale are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- --------- ---------- ---------
December 31, 2000:
Fixed maturity securities held to maturity:
Bonds:
U.S. Treasury securities
and obligations of U.S.
Government agencies $12,900,371 $182,637 $(4,809) $13,078,199
Obligations of states and
political subdivisions 183,399 12,829 (7,903) 188,325
Corporate securities
including public utilities 20,951,532 322,660 (584,886) 20,689,306
Mortgage-backed securities 5,320,861 30,737 (55,620) 5,295,978
Redeemable preferred stock 28,005 10,500 (7,047) 31,458
----------- ----------- ----------- -----------
Total fixed maturity
securities held to maturity $39,384,168 $559,363 $(660,265) $39,283,266
=========== =========== =========== ===========
Securities available for sale:
Bonds
U.S. Treasury securities
and obligations of U.S.
Government agencies $3,367,096 $45,003 $(648) $3,411,451
Corporate securities
including public utilities 20,124,932 91,913 (188,214) 20,028,631
Mortgage-backed securities 64,836 71 -- 64,907
Nonredeemable preferred stock 56,031 29,750 (9,044) 76,737
Common stock 1,561,332 1,596,254 (460,246) 2,697,340
----------- ----------- ----------- -----------
Total securities
available for sale $25,174,227 $1,762,991 $(658,152) $26,279,066
=========== =========== =========== ===========
Restricted equity securities (note 7) $172,391 $215,410 $(3,019) $384,782
=========== =========== =========== ===========
42
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000, and 1999
2) Investments (Continued)
-----------
The fair values for fixed maturity securities are based on quoted market
prices, when available. For fixed maturity securities not actively traded,
fair values are estimated using values obtained from independent pricing
services, or in the case of private placements, are estimated by
discounting expected future cash flows using a current market value
applicable to the coupon rate, credit and maturity of the investments. The
fair values for equity securities are based on quoted market prices.
The amortized cost and estimated fair value of fixed maturity securities at
December 31, 2001, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because certain borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
Estimated
Amortized Fair
Held to Maturity: Cost Value
---------- ---------
Due in 2002 $5,524,410 $5,631,885
Due in 2003 through 2006 13,401,476 14,024,814
Due in 2007 through 2011 3,745,930 3,699,128
Due after 2011 927,162 1,043,301
Mortgage-backed securities 4,172,926 4,270,550
Redeemable preferred stock 28,005 28,308
----------- -----------
$27,799,909 $28,697,986
=========== ===========
Estimated
Amortized Fair
Available for Sale: Cost Value
---------- ---------
Due in 2002 $3,333,806 $3,371,856
Due in 2003 through 2006 13,382,582 14,043,241
Due in 2007 through 2011 3,751,727 3,949,820
Due after 2011 97,718 105,812
Mortgage-backed securities -- --
----------- -----------
$20,565,833 $21,470,729
=========== ===========
The Company's realized gains and losses in investments are summarized as
follows:
2001 2000 1999
---- ---- ----
Fixed maturity securities
held to maturity:
Gross realized gains $20,228 $3,125 $87,859
Gross realized losses (565) (53) (1,895)
Securities available
for sale:
Gross realized gains 6 884,199 14,138
Gross realized losses (111) (463,466) (12)
Other assets (9,130) -- 212,923
--------- --------- ---------
Total $10,428 $423,805 $313,013
========= ========= =========
43
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000, and 1999
2) Investments (Continued)
-----------
Generally gains and losses from held to maturity securities are a result of
early calls and related amortization of premiums or discounts.
Concentrations of credit risk arise when a number of mortgage loan debtors have
similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic
conditions. Although the Company has a diversified mortgage loan portfolio
consisting of residential and commercial loans and requires collateral on all
real estate exposures, a substantial portion of its debtors' ability to honor
obligations is reliant on the economic stability of the geographic region in
which the debtors do business. The Company has 65% of its mortgage loans in the
state of Utah.
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, 2001, other than investments issued or guaranteed by the United
States Government, are as follows:
Carrying Amount
---------------
Dean Witter Discover $4,352,714
Philip Morris, Inc. 6,013,232
Major categories of net investment income are as follows:
2001 2000 1999
---- ---- ----
Fixed maturity
securities $3,776,132 $4,629,916 $4,720,838
Equity securities 49,281 235,491 226,857
Mortgage loans
on real estate 1,570,478 1,735,590 1,451,214
Real estate 1,548,507 1,507,239 1,711,771
Policy loans 630,352 641,272 725,383
Short-term
investments 379,562 402,350 650,035
Other 5,973,092 3,962,362 2,142,527
------------ ------------ ------------
Gross investment
income 13,927,404 13,114,220 11,628,625
Investment expenses (980,905) (978,148) (997,323)
------------ ------------ ------------
Net investment
income $12,946,499 $12,136,072 $10,631,302
============ ============ ============
Net investment income includes net investment income earned by the restricted
assets of the cemeteries and mortuaries of approximately $872,000, $717,000 and
$733,000 for 2001, 2000, and 1999, respectively.
Investment expenses consist primarily of depreciation, property taxes and an
estimated portion of administrative expenses relating to investment activities.
Securities on deposit for regulatory authorities as required by law amounted to
$8,829,559 at December 31, 2001 and $8,815,733 at December 31, 2000.
44
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000, and 1999
3) Cost of Insurance Acquired
Information with regard to cost of insurance acquired is as follows:
2001 2000 1999
---- ---- ----
Balance at
beginning of year $8,729,264 $9,597,306 $10,462,446
Cost of insurance
acquired (289,754) -- --
Imputed interest at 7% 572,061 641,325 732,371
Amortization (1,396,223) (1,509,367) (1,597,511)
------------ ------------ ------------
Net amortization
charged to income (824,162) (868,042) (865,140)
------------ ------------ ------------
Balance at end
of year $7,615,348 $8,729,264 $9,597,306
============ ============ ============
Presuming no additional acquisitions, net amortization charged to income is
expected to approximate $737,000, $679,000, $626,000, $572,000, and $520,000 for
the years 2002 through 2006. Actual amortization may vary based on changes in
assumptions or experience.
4) Property, Plant and Equipment
The cost of property, plant and equipment is summarized below:
December 31,
------------
2001 2000
---- ----
Land and Buildings $10,930,790 $10,828,916
Furniture and equipment 7,557,210 6,694,925
------------ ------------
18,488,000 17,523,841
Less accumulated
depreciation (7,685,613) (6,699,141)
------------ ------------
Total $10,802,387 $10,824,700
============ ============
5) Bank Loans Payable and Lines of Credit
Bank loans payable are summarized as follows:
December 31,
------------
2001 2000
---- ----
6.59% note payable in monthly installments
of $34,680 including principal and
interest, collateralized by 15,000
shares of Security National Life stock,
due December 2004 $1,101,543 $1,425,967
10% note payable in monthly installments
of $8,444 including principal and
interest, collateralized by real property,
which book value is approximately
$1,013,000, due January 2013 680,020 711,608
45
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000, and 1999
5) Bank Loans Payable and Lines of Credit (Continued)
--------------------------------------
December 31,
------------
2001 2000
---- ----
One year treasury constant
maturity plus 2.75% (8.03%
at December 31, 2001) note
payable in monthly installments
of $6,000, including principal
and interest, collateralized by
real property, which book value
is approximately $332,000, due October 2002 $48,971 $120,824
6.93% note payable in monthly
installments of $20,836, including
principal and interest, collateralized
by real property, which book value is
approximately $991,000, due November 2007 1,590,487 1,662,768
$4,171,803 revolving line of credit at
6.15% interest payable monthly and a
reduction in principal due in semi-annual
installments collateralized by
15,000 shares of Security National
Life Insurance Company stock,
due December 2005 3,703,767 4,904,426
Bank prime rate plus 1/2% (5.25%
at December 31, 2001) note payable in
monthly installments of $7,235
including principal and interest,
collateralized by real property,
which book value is approximately
$812,000, due August 2004 235,450 301,516
Bank prime rate less 1.35% (3.40%
at December 31, 2001) note payable
in monthly installments of $2,736
including principal and interest,
collateralized by 15,000 shares
of Security National Life Insurance
Company stock, due December 2005 156,549 180,893
7.35% note payable in monthly
installments of $14,975 including
principal and interest collaterized
by 15,000 shares of Security National
Life Insurance Company stock, due December 2006 750,000 --
Other collateralized bank loans payable 195,113 497,116
---------- ----------
Total bank loans 8,461,900 9,805,118
Less current installments 1,677,683 1,596,600
---------- ----------
Bank loans, excluding
current installments $6,784,217 $8,208,518
========== ==========
46
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000, and 1999
5) Bank Loans Payable and Lines of Credit (Continued)
--------------------------------------
In addition to the lines of credit described above, the Company has line of
credit agreements with banks for $2,000,000 and $5,000,000, of which none were
outstanding at December 31, 2001 or 2000. The lines of credit are for general
operating purposes. The $2,000,000 line of credit bears interest at the bank's
prime rate and must be repaid every 30 days. The $5,000,000 line of credit bears
interest at a variable rate with interest payable monthly and is collateralized
by student loans equaling 115% of the unpaid principal balance.
See Note 6 for summary of maturities in subsequent years.
6) Notes and Contracts Payable
Notes and contracts payable are summarized as follows:
December 31,
------------
2001 2000
---- ----
Due to former stockholders of
Deseret Memorial, Inc. resulting
from the acquisition of such entity
Amount represents the present value
discounted at 8% of monthly annuity
payments ranging from $4,600 to $5,000
plus an index adjustment in the 7th
through the 12th years, due September 2011 $604,265 $628,802
Due to former stockholders of Greer
Wilson resulting from the acquisition
of such entity. Amount represents the
present value discounted at 10% of monthly
annuity payments of $7,000, due March 2005 232,259 289,865
Due to former stockholders of Civil Service
Employees Life Insurance Company
resulting from the acquisition of such
entity. 7% note payable in seven annual
installments with principal
payments of $151,857, due December 2002 151,857 303,714
Due to former stockholders of Crystal
Rose Funeral Home resulting from the
acquisition of such entity. Amount
represents the present value discounted at
9% of monthly annuity payments of $5,350
due February 2007 35,420 62,892
9% note payable in monthly installments
of $10,000 including principal and
interest collateralized by real property,
which book value is approximately
$2,908,000, due July 2008 602,653 665,318
Due to Memorial Estates Endowment Care
Trust Fund for the remodel of the
Cottonwood Funeral Home. 6% note
payable in monthly installments of $5,339
including principal and interest
collateralized by the Funeral Home,
which book value is approximately
$937,000 due March 2030 861,748 899,500
47
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000, and 1999
6) Notes and Contracts Payable (Continued)
---------------------------
December 31,
------------
2001 2000
---- ----
Due to former shareholders of
Southern Security Life Insurance
Company resulting from the acquisition
of such entity. 6.5% note payable in
five annual installments with principal
payments of $158,840 due April 2005 $635,361 $794,202
Other notes payable 512,213 596,537
---------- ----------
Total notes and contracts payable 3,635,776 4,240,830
Less current installments 600,894 615,291
---------- ----------
Notes and contracts, excluding
current installments $3,034,882 $3,625,539
========== ==========
The following tabulation shows the combined maturities of bank loans payable,
lines of credit and notes and contracts payable:
2002 $ 2,278,577
2003 2,199,069
2004 2,333,860
2005 1,427,640
2006 652,806
Thereafter 3,205,724
-----------
Total $12,097,676
===========
Interest paid approximated interest expense in 2001, 2000 and 1999.
7) Cemetery and Mortuary Endowment Care and Pre-need Merchandise Funds
-------------------------------------------------------------------
The Company owns and operates several endowment care cemeteries, for which it
has established and maintains an endowment care fund. The Company records a
liability to the fund for each space sold at current statutory rates. The
Company is not required to transfer assets to the fund until the spaces are
fully paid for. As of December 31, 2000 the Company had transferred $20,373 in
excess of the required contribution to the fund, and as of December 31, 2001,
owed the fund $5,586.
The Company has established and maintains certain restricted asset accounts to
provide for future merchandise obligations incurred in connection with its
pre-need sales. Such amounts are reported as restricted assets of cemeteries and
mortuaries in the accompanying balance sheet.
Assets in the restricted asset account are summarized as follows:
December 31,
------------
2001 2000
---- ----
Cash and cash equivalents $475,712 $385,659
Mutual funds 188,732 169,865
Fixed maturity securities 348,737 297,331
Equity securities 77,778 77,778
Participation in mortgage
loans with Security
National Life 4,214,781 3,877,490
Time certificate of deposit 33,696 33,696
---------- ----------
Total $5,339,436 $4,841,819
========== ==========
48
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000, and 1999
8) Income Taxes
The Company's income tax liability at December 31 is summarized as follows:
December 31,
------------
2001 2000
---- ----
Current $(86,569) $57,471
Deferred 6,961,166 6,067,041
----------- -----------
Total $6,874,597 $6,124,512
=========== ===========
Significant components of the Company's deferred tax assets and liabilities at
December 31 are approximately as follows:
2001 2000
---- ----
Assets
Future policy benefits $(1,727,742) $(2,021,798)
Unearned premium (1,829,505) (1,939,023)
Difference between book
and tax basis of bonds (43,176) (49,498)
Net operating loss
carryforwards expiring
in the years
2002 through 2010 (84,350) (210,848)
Other (631,375) (633,007)
------------ ------------
Total deferred
tax assets (4,316,148) (4,854,174)
Liabilities
Deferred policy
acquisition costs $5,140,228 $5,213,517
Cost of insurance acquired 1,553,301 1,714,724
Installment sales 1,838,465 1,658,016
Depreciation 643,243 653,192
Trusts 1,162,077 1,051,602
Tax on unrealized
appreciation 583,213 214,337
Other 356,789 415,827
------------ ------------
Total deferred
tax liabilities 11,277,316 10,921,215
------------ ------------
Net deferred tax liability $6,961,166 $6,067,041
============ ============
The Company paid $564,327 and $94,365 in income taxes for 2001 and 2000,
respectively, and did not pay any income taxes for 1999. The Company's income
tax expense (benefit) is summarized as follows:
2001 2000 1999
---- ---- ----
Current $391,492 $ 44,688 $2,052
Deferred 522,047 259,952 228,464
--------- --------- ---------
Total $913,539 $304,640 $230,516
========= ========= =========
49
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000, and 1999
8) Income Taxes (Continued)
------------
The reconciliation of income tax expense at the U.S. federal statutory rates is
as follows:
2001 2000 1999
---- ---- ----
Computed expense at
statutory rate $1,282,517 $423,682 $493,266
Special deductions allowed
small life insurance companies (356,734) (68,769) (122,204)
Dividends received deduction (6,405) (24,418) (24,401)
Minority interest taxes (7,466) (19,222) (102,828)
Other, net 1,627 (6,633) (13,317)
----------- ----------- -----------
Tax expense $913,539 $304,640 $230,516
=========== =========== ===========
A portion of the life insurance income earned prior to 1984 was not subject to
current taxation but was accumulated for tax purposes, in a "policyholders'
surplus account." Under provisions of the Internal Revenue Code, the
policyholders' surplus account was frozen at its December 31, 1983 balance and
will be taxed generally only when distributed. As of December 31, 2001, the
policyholders' surplus accounts approximated $4,500,000. Management does not
intend to take actions nor does management expect any events to occur that would
cause federal income taxes to become payable on that amount. However, if such
taxes were accrued, the amount of taxes payable would be approximately
$1,500,000.
The insurance companies have remaining loss carry forwards of approximately
$620,000, approximately $286,000 of which is subject to an annual limitation of
approximately $300,000.
9) Reinsurance, Commitments and Contingencies
The Company follows the procedure of reinsuring risks in excess of a specified
limit, which ranged from $30,000 to $75,000 at December 31, 2001 and 2000. The
Company is liable for these amounts in the event such reinsurers are unable to
pay their portion of the claims. The Company has also assumed insurance from
other companies having insurance in force amounting to $838,421,000 at December
31, 2001 and $580,287,000 at December 31, 2000.
As part of the acquisition of Southern Security, the Company has a co-insurance
agreement with The Mega Life and Health Insurance Company ("MEGA"). On December
31, 1992 Southern Security ceded to MEGA 18% of all universal life policies in
force at that date. MEGA is entitled to 18% of all future premiums, claims,
policyholder loans and surrenders relating to the ceded policies. In addition,
Southern Security receives certain commission and expense reimbursements. The
funds held related to reinsurance treaties of $1,379,640 and policyholders'
account balances on deposit with reinsurer of $7,148,068 represent the 18% share
of policy loans and policyholder account balances ceded to MEGA as of December
31, 2001.
Mortgage loans originated and sold to unaffiliated investors are sold subject to
certain recourse provisions.
The Company is a defendant in various other legal actions arising from the
normal conduct of business. Management believes that none of the actions will
have a material effect on the Company's financial position or results of
operations.
50
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000, and 1999
10) Retirement Plans
The Company and its subsidiaries have a noncontributory Employee Stock Ownership
Plan (ESOP) for all eligible employees. Eligible employees are primarily those
with more than one year of service, who work in excess of 1,040 hours per year.
Contributions, which may be in cash or stock of the Company, are determined
annually by the Board of Directors. The Company's contributions are allocated to
eligible employees based on the ratio of each eligible employee's compensation
to total compensation for all eligible employees during each year. ESOP
contribution expense totaled $191,557, $0, and $56,277 for 2001, 2000, and 1999,
respectively. At December 31, 2001 the ESOP held 577,402 shares of Class A and
1,341,575 shares of Class C common stock of the Company. All shares held by the
ESOP have been allocated to the participating employees and all shares held by
the ESOP are considered outstanding for purposes of computing earnings per
share.
The Company has a 401(k) savings plan covering all eligible employees, as
defined above, which includes employer participation in accordance with the
provisions of Section 401(k) of the Internal Revenue Code. The plan allows
participants to make pretax contributions up to the lesser of 15% of total
annual compensation or the statutory limits. The Company may match up to 50% of
each employee's investment in Company stock, up to 1/2% of the employee's total
annual compensation. The Company's match will be Company stock and the amount of
the match will be at the discretion of the Company's Board of Directors. The
Company's matching 401(k) contributions for 2001, 2000, and 1999 were
approximately $18,458, $0, and $3,858 respectively. Also, the Company may
contribute at the discretion of the Company's Board of Directors an Employer
Profit Sharing Contribution to the 401-K savings plan. The Employer Profit
Sharing Contribution shall be divided among three different classes of
participants in the plan based upon the participant's title in the Company. The
Company contribution for 2001, 2000 and 1999 were $260,350, $0, and $130,958,
respectively. All amounts contributed to the plan are deposited into a trust
fund administered by an independent trustee.
In 2001, the Company's Board of Directors adopted a Deferred Compensation Plan.
Under the terms of the Plan, the Company will provide deferred compensation for
a select group of management or highly compensated employees, within the meaning
of Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income
Security Act of 1974, as amended. The Board has appointed a Committee of the
Company to be the Plan Administrator and to determine the employees who are
eligible to participate in the plan. The employees who participate may elect to
defer a portion of their compensation into the plan. The Company may contribute
into the plan at the discretion of the Company's Board of Directors. The
Company's contribution for 2001 was $220,038.
The Company has Deferred Compensation Agreements with its Chief Executive
Officer and its recent Senior Vice President. The Deferred Compensation is
payable on the retirement or death of these individuals either in monthly
installments (120 months) or in a lump sum settlement, if approved by the Board
of Directors. The amount payable is $60,000 per year with cost of living
adjustments each anniversary. The Compensation Agreements also provides that any
remaining balance will be payable to their heirs in the event of their death. In
addition the Agreement provides that the Company will pay the Group Health
coverages for these individuals and/or their spouses. In 2001 the Company
increased its liability for these future obligations by $483,080. The current
balance as of December 31, 2001 is $671,000.
51
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000, and 1999
11) Capital Stock
The following table summarizes the activity in shares of capital stock for the
three year period ended December 31, 2001:
Class A Class C
------- -------
Balance at December 31, 1998 4,617,330 5,446,595
Stock Dividends 231,672 264,550
Conversion of Class C to Class A 15,580 (155,795)
Stock Issued (canceled) (851) --
---------- ----------
Balance at December 31, 1999 4,863,731 5,555,350
Stock Dividends 243,393 277,515
Conversion of Class C to Class A 507 (5,060)
---------- ----------
Balance at December 31, 2000 5,107,631 5,827,805
Stock Dividends 255,413 291,104
Conversion of Class C to Class A 547 (5,479)
---------- ----------
Balance at December 31, 2001 5,363,591 6,113,430
========== ==========
52
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000, and 1999
11) Capital Stock (Continued)
-------------
The Company has two classes of common stock with shares outstanding, Class A and
Class C. Class C shares vote share for share with the Class A shares on all
matters except election of one-third of the directors who are elected solely by
the Class A shares, but generally are entitled to a lower dividend participation
rate. Class C shares are convertible into Class A shares at any time on a ten to
one ratio. Also Class A shares can be converted into Class C shares, but the
conversion rights have numerous restrictions.
Stockholders of both classes of common stock have received 5% stock dividends in
the years 1989 through 2001, as authorized by the Company's Board of Directors.
The Company has Class B Common Stock of $1.00 par value, 5,000,000 shares
authorized, of which none are issued. Class B shares are non-voting stock except
to any proposed amendment to the Articles of Incorporation which would affect
Class B Common Stock.
In accordance with SFAS 128, the basic and diluted earnings per share amounts
were calculated as follows:
2001 2000 1999
---- ---- ----
Numerator:
Net income $2,840,780 $895,729 $975,895
========== ========== ==========
Denominator:
Denominator for basic
earnings per share-
weighted-average
shares 4,506,476 4,317,779 4,397,141
Effect of
dilutive securities:
Employee stock
options 382 17,265 --
Stock appreciation
rights -- -- --
---------- ---------- ----------
Dilutive potential
common shares 382 17,265 --
---------- ---------- ----------
Denominator
for diluted earnings per
share-adjusted
weighted-average
shares and assumed
conversions 4,506,858 4,335,044 4,397,141
========== ========== ==========
Basic earnings per share $.63 $.21 $.22
========== ========== ==========
Diluted earnings per share $.63 $.21 $.22
========== ========== ==========
There are no dilutive effects on net income for purpose of this calculation.
53
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000, and 1999
12) Deferred Compensation Plans
In 1987, the Company adopted the 1987 Incentive Stock Option Plan (the 1987
Plan). The 1987 Plan provides that shares of the Class A Common Stock of the
Company may be optioned to certain officers and key employees of the Company.
The 1987 Plan establishes a Stock Option Plan Committee which selects the
employees to whom the options will be granted and determines the price of the
stock. The 1987 Plan establishes the minimum purchase price of the stock at an
amount which is not less than 100% of the fair market value of the stock (110%
for employees owning more than 10% of the total combined voting power of all
classes of stock).
The 1987 Plan provides that if additional shares of Class A Common Stock are
issued pursuant to a stock split or a stock dividend, the number of shares of
Class A Common Stock then covered by each outstanding option granted hereunder
shall be increased proportionately with no increase in the total purchase price
of the shares then covered, and the number of shares of Class A Common Stock
reserved for the purpose of the 1987 Plan shall be increased by the same
proportion.
In the event that the shares of Class A Common Stock of the Company from time to
time issued and outstanding are reduced by a combination of shares, the number
of shares of Class A Common Stock then covered by each outstanding option
granted hereunder shall be reduced proportionately with no reduction in the
total price of the shares then so covered, and the number of shares of Class A
Common Stock reserved for the purposes of the 1987 Plan shall be reduced by the
same proportion.
The 1987 Plan terminated in 1997 and options granted are non-transferable.
Options granted and outstanding under the 1987 Plan include Stock Appreciation
Rights which permit the holder of the option to elect to receive cash, amounting
to the difference between the option price and the fair market value of the
stock at the time of the exercise, or a lesser amount of stock without payment,
upon exercise of the option.
Activity of the 1987 Plan is summarized as follows:
Number Option
of Shares Price
---------- -----------
Outstanding at December 31, 1998 163,170 $4.08 - $4.49
Dividend 8,159
Exercised --
-------------
Outstanding at December 31, 1999 171,329 $3.89 - $4.28
Dividend 8,566
Exercised --
-------------
Outstanding at December 31, 2000 179,895 $3.70 - $4.07
-------------
Dividend 8,995
Exercised --
-------------
Outstanding at December 31, 2001 188,890 $3.53 - $3.88
=============
Exercisable at end of year 188,890
=============
Available options for future grant
1987 Stock Incentive Plan -0-
=============
On June 21, 1993, the Company adopted the Security National Financial
Corporation 1993 Stock Incentive Plan (the "1993 Plan"), which reserved 300,000
shares of Class A Common Stock for issuance thereunder.
54
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000, and 1999
12) Deferred Compensation Plans (Continued)
---------------------------
The 1993 Plan allows the Company to grant options and issue shares as a means of
providing equity incentives to key personnel, giving them a proprietary interest
in the Company and its success and progress.
The 1993 Plan provides for the grant of options and the award or sale of stock
to officers, directors, and employees of the Company. Both "incentive stock
options," as defined under Section 422A of the Internal Revenue Code of 1986
(the "Code"), and "non- qualified options" may be granted pursuant to the 1993
Plan. Options intended as incentive stock options may be issued only to
employees, and must meet certain conditions imposed by the Code, including a
requirement that the option exercise price be not less than the fair market
value of the option shares on the date of grant. The 1993 Plan provides that the
exercise price for non-qualified options will be not less than at least 50% of
the fair market value of the stock subject to such option as of the date of
grant of such options, as determined by the Company's Board of Directors.
The options were granted to reward certain officers and key employees who have
been employed by the Company for a number of years and to help the Company
retain these officers by providing them with an additional incentive to
contribute to the success of the Company.
The 1993 Plan is administered by the Board of Directors or by a committee
designated by the Board. The 1993 Plan provides that if the shares of Common
Stock shall be subdivided or combined into a greater or smaller number of shares
or if the Company shall issue any shares of Common Stock as a stock dividend on
its outstanding Common Stock, the number of shares of Common Stock deliverable
upon the exercise of options shall be increased or decreased proportionately,
and appropriate adjustments shall be made in the purchase price per share to
reflect such subdivision, combination or stock dividend. No options may be
exercised for a term of more than ten years from the date of grant.
The 1993 Plan has a term of ten years. The Board of Directors may amend or
terminate the 1993 Plan at any time, subject to approval of certain
modifications to the 1993 Plan by the shareholders of the Company as may be
required by law or the 1993 Plan.
On November 7, 1996 the Company amended the Articles of Incorporation as
follows: (i) to increase the number of shares of Class A Common Stock reserved
for issuance under the plan from 300,000 Class A shares to 600,000 Class A
shares; and (ii) to provide that the stock subject to options, awards and
purchases may include Class C common stock.
On October 14, 1999, the Company amended the 1993 Plan to increase the number of
shares of Class A Common Stock reserved for issuance under the plan from 746,126
Class A shares to 1,046,126 Class A shares.
55
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000, and 1999
12) Deferred Compensation Plans (Continued)
---------------------------
Activity of the 1993 Plan is summarized as follows:
Number Option
of Shares Price
----------- -------------
Outstanding at December 31, 1998 407,339 $2.34 - $4.16
Dividend 24,762
Granted 190,000
Expired (102,103)
-------------
Outstanding at December 31, 1999 519,998 $2.22 - $3.96
Dividend 27,313
Granted 26,000
-------------
Outstanding at December 31, 2000 573,311 $2.12 - $3.77
Dividend 36,765
Granted 172,500
Expired (10,513)
-------------
Outstanding at December 31, 2001 772,063 $2.02 - $3.59
=============
Exercisable at end of year 573,298
=============
Available options for future grant
1993 Stock Incentive Plan 365,099
=============
On October 16, 2000, the Company adopted the Security National Financial
Corporation 2000 Director Stock Option Plan (the "2000 Plan"), which reserved
50,000 shares of Class A Common Stock for issuance thereunder. Effective
November 1, 2000, and on each anniversary date thereof during the term of the
2000 Plan, each outside Director who shall first join the Board after the
effective date shall be granted an option to purchase 1,000 shares upon the date
which such person first becomes an outside Director and an annual grant of an
option to purchase 1,000 shares on each anniversary date thereof during the term
of the 2000 Plan. The options granted to outside Directors shall vest in their
entirety on the first anniversary date of the grant.
The primary purposes of the 2000 Plan are to enhance the Company's ability to
attract and retain well-qualified persons for service as directors and to
provide incentives to such directors to continue their association with the
Company.
The 2000 Plan provides that if the shares of Common Stock shall be subdivided or
combined into a greater or smaller number of shares or if the Company shall
issue any shares of Common Stock as a stock dividend on its outstanding Common
Stock, the number of shares of Common Stock deliverable upon the exercise of
options shall be increased or decreased proportionately, and appropriate
adjustments shall be made in the purchase price per share to reflect such
subdivisions, combination or stock dividend.
56
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000, and 1999
12) Deferred Compensation Plans (Continued)
---------------------------
The term of the 2000 Plan will be five years.
Activity of the 2000 Plan is summarized as follows:
Number Option
of Shares Price
--------- -------
Outstanding at
December 31, 1999 0
Dividend 200
Granted 4,000
-----
Outstanding at
December 31, 2000 4,200 $2.14
Dividend 410
Granted 4,000
-----
Outstanding at
December 31, 2001 8,610 $2.04 - $2.43
=====
Exercisable at
end of year 4,412
=====
Available options for
future grant 2000
Director Plan 46,515
======
13) Statutory-Basis Financial Information
The Company's life insurance subsidiaries are domiciled in Utah and Florida and
prepare their statutory-basis financial statements in accordance with accounting
practices prescribed or permitted by the Utah and Florida Insurance Departments.
"Prescribed" or "Permitted" statutory accounting practices are interspersed
throughout state insurance laws and regulations. The National Association of
Insurance Commissioners ("NAIC") Accounting Practices and Procedures Manual
version effective January 1, 2001, has been adopted as a prescribed or permitted
practices by the States of Utah and Florida.
Statutory net income and statutory stockholder's equity for the life
subsidiaries as reported to state regulatory authorities, is presented below:
Statutory Net Income (Loss)
December 31,
2001 2000 1999
---- ---- ----
Security National Life $1,732,018 $796,047 $628,538
Southern Security Life (429,143) 80,477 533,233
Statutory Stockholders' Equity
December 31,
2001 2000 1999
---- ---- ----
Security National Life $16,316,605 $14,309,515 $12,089,618
Southern Security Life 8,459,700 8,405,211 8,976,516
57
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000, and 1999
13) Statutory-Basis Financial Information (Continued)
-------------------------------------
Generally, the net assets of the life insurance subsidiaries available for
transfer to the Company are limited to the amounts that the life insurance
subsidiaries net assets, as determined in accordance with statutory accounting
practices, exceed minimum statutory capital requirements; however, payments of
such amounts as dividends are subject to approval by regulatory authorities.
The Utah and Florida Insurance Departments impose minimum risk-based capital
requirements that were developed by the NAIC on insurance enterprises. The
formulas for determining the risk-based capital ("RBC") specify various factors
that are applied to financial balances or various levels of activity based on
the perceived degree of risk. Regulatory compliance is determined by a ratio
(the "Ratio") of the enterprise's regulatory total adjusted capital, as defined
by the NAIC, to its authorized control level, as defined by the NAIC.
Enterprises below specific trigger points or ratios are classified within
certain levels, each of which requires specified corrective action. The life
insurance subsidiaries have a Ratio that is greater than 690% of the first level
of regulatory action.
14) Business Segment Information
Description of Products and Services by Segment
The Company has three reportable segments: life insurance, cemetery and
mortuary, and mortgage loans. The Company's life insurance segment consists of
life insurance premiums and operating expenses from the sale of insurance
products sold by the Company's independent agency force and net investment
income derived from investing policyholder and segment surplus funds. The
Company's cemetery and mortuary segment consists of revenues and operating
expenses from the sale of at-need cemetery and mortuary merchandise and services
at its mortuaries and cemeteries and the net investment income from investing
segment surplus funds. The Company's mortgage loan segment consists of loan
originations fee income and expenses from the originations of residential
mortgage loans and interest earned and interest expenses from warehousing
pre-sold loans before the funds are received from financial institutional
investors.
Measurement of Segment Profit or Loss and Segment Assets
The accounting policies of the reportable segments are the same as those
described in the Significant Accounting Principles. Intersegment revenues are
recorded at cost plus an agreed upon intercompany profit.
Factors Management Used to Identify the Enterprise's Reportable Segments
The Company's reportable segments are business units that offer different
products and are managed separately due to the different products and the need
to report to the various regulatory jurisdictions.
58
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000, and 1999
14) Business Segment Information
2001
Life Cemetery/ Reconciling
Insurance Mortuary Mortgage Items Consolidated
--------- -------- -------- ----- ------------
Revenues:
From external sources:
Revenue from customers $13,150,875 $10,603,451 $40,086,097 $ -- $63,840,423
Net investment income 7,018,047 959,655 4,968,797 -- 12,946,499
Realized gains
on investments 10,428 -- -- -- 10,428
Other revenues 53,053 42,356 56,536 -- 151,945
Intersegment revenues:
Net investment income 3,679,133 -- -- (3,679,133) --
------------ ------------ ------------ ------------ ------------
23,911,536 11,605,462 45,111,430 (3,679,133) 76,949,295
------------ ------------ ------------ ------------ ------------
Expenses:
Death and other
policy benefits 6,821,845 -- -- -- 6,821,845
Increase in future
policy benefits 4,953,008 -- -- -- 4,953,008
Amortization of
deferred policy
and pre-need
acquisition costs
and cost of
insurance acquired 3,561,895 308,263 -- -- 3,870,158
Depreciation 330,892 595,082 103,162 -- 1,029,136
General, administrative
and other costs:
Intersegment -- 36,672 136,867 (173,539) --
Other 7,035,455 9,396,691 37,280,266 -- 53,712,412
Interest expense:
Intersegment 98,095 243,732 3,163,767 (3,505,594) --
Other 317,988 418,489 2,054,150 -- 2,790,627
------------ ------------ ------------ ------------ ------------
23,119,178 10,998,929 42,738,212 (3,679,133) 73,177,186
------------ ============ ------------ ------------ ------------
Earnings (losses)
before income taxes $792,358 $606,533 $2,373,218 $ -- $3,772,109
============ ============ ============ ============ ============
Identifiable
assets $201,193,249 $38,915,291 $6,411,222 $(33,460,187) $213,059,575
============ ============ ============ ============ ============
Expenditures for
long-lived assets $219,762 $505,045 $323,014 $ -- $1,047,821
============ ============ ============ ============ ============
59
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000, and 1999
14) Business Segment Information
2000
Life Cemetery/ Reconciling
Insurance Mortuary Mortgage Items Consolidated
--------- -------- -------- ----- ------------
Revenues:
From external sources:
Revenue from customers $12,875,585 $9,416,927 $22,921,585 $ -- $45,214,097
Net investment income 8,222,688 716,813 3,196,571 -- 12,136,072
Realized gains
on investments 423,805 -- -- -- 423,805
Other revenues 85,927 23,479 195,480 -- 304,886
Intersegment revenues:
Net investment income 2,551,644 -- -- (2,551,644) --
------------ ------------ ------------ ------------ ------------
24,159,649 10,157,219 26,313,636 (2,551,644) 58,078,860
------------ ------------ ------------ ------------ ------------
Expenses:
Death and other
policy benefits 5,662,062 -- -- -- 5,662,062
Increase in future
policy benefits 7,268,720 -- -- -- 7,268,720
Amortization of
deferred policy
acquisition costs
and cost of
insurance acquired 3,188,752 -- -- -- 3,188,752
Depreciation 322,418 451,259 61,744 -- 835,421
General, administrative
and other costs:
Intersegment -- 36,672 101,288 (137,960) --
Other 5,585,178 9,369,839 22,796,596 -- 37,751,613
Interest expense:
Intersegment -- 210,984 2,202,700 (2,413,684) --
Other 394,868 518,845 1,212,456 -- 2,126,169
------------ ------------ ------------ ------------ ------------
22,421,998 10,587,599 26,374,784 (2,551,644) 56,832,737
------------ ------------ ------------ ------------ ------------
Earnings (losses)
before income taxes $1,737,651 $(430,380) $(61,148) $ -- $1,246,123
============ ============ ============ ============ ============
Identifiable
assets $199,694,971 $36,704,436 $3,495,907 $(31,148,813) $208,746,501
============ ============ ============ ============ ============
Expenditures for
long-lived assets $260,836 $680,626 $220,856 $ -- $1,162,318
============ ============ ============ ============ ============
60
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000, and 1999
14) Business Segment Information (Continued)
----------------------------
1999
Life Cemetery/ Reconciling
Insurance Mortuary Mortgage Items Consolidated
--------- -------- -------- ----- ------------
Revenues:
From external sources:
Revenue from customers $13,175,825 $10,178,246 $14,503,388 $ -- $37,857,459
Net investment income 8,339,759 733,377 1,558,166 -- 10,631,302
Realized gains
on investments 313,013 -- -- -- 313,013
Other revenues 818,631 22,856 14,117 -- 855,604
Intersegment revenues:
Net investment income 1,789,089 -- -- (1,789,089) --
------------ ------------ ------------ ------------ ------------
24,436,317 10,934,479 16,075,671 (1,789,089) 49,657,378
------------ ------------ ------------ ------------ ------------
Expenses:
Death and other
policy benefits 6,274,926 -- -- -- 6,274,926
Increase in future
policy benefits 5,700,784 -- -- -- 5,700,784
Amortization of
deferred policy
acquisition costs
and cost of
insurance acquired 4,857,662 -- -- -- 4,857,662
Depreciation 321,012 452,224 44,633 -- 817,869
General, administrative
and other costs:
Intersegment -- 36,672 85,719 (122,391) --
Other 5,341,843 9,886,188 14,207,923 -- 29,435,954
Interest expense:
Intersegment -- 181,972 1,484,726 (1,666,698) --
Other 377,375 540,051 201,976 -- 1,119,402
------------ ------------ ------------ ------------ ------------
22,873,602 11,097,107 16,024,977 (1,789,089) 48,206,597
------------ ------------ ------------ ------------ ------------
Earnings (losses)
before income taxes $1,562,715 $(162,628) $50,694 $ -- $1,450,781
============ ============ ============ ============ ============
Identifiable
assets $198,772,156 $34,013,032 $11,020,380 $(29,507,131) $214,298,437
============ ============ ============ ============ ============
Expenditures for
long-lived assets $11,268 $527,658 $90,819 $ -- $629,745
============ ============ ============ ============ ============
61
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000, and 1999
15) Disclosure about Fair Value of Financial Instruments
The fair values of investments in fixed maturity and equity securities along
with methods used to estimate such values are disclosed in Note 2. The following
methods and assumptions were used by the Company in estimating the "fair value"
disclosures related to other significant financial instruments:
Cash, Receivables, Short-term Investments, and Restricted Assets of the
Cemeteries and Mortuaries: The carrying amounts reported in the accompanying
balance sheets for these financial instruments approximate their fair values.
Mortgage, Policy, Student, and Collateral Loans: The fair values are estimated
using interest rates currently being offered for similar loans to borrowers with
similar credit ratings. Loans with similar characteristics are aggregated for
purposes of the calculations. The carrying amounts reported in the accompanying
balance sheets for these financial instruments approximate their fair values.
Investment Contracts: The fair values for the Company's liabilities under
investment- type insurance contracts are estimated based on the contracts' cash
surrender values. The carrying amount and fair value as of December 31, 2001
were approximately $86,544,000 and $83,021,000, respectively.
The fair values for the Company's insurance contracts other than investment-type
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, such that the Company's
exposure to changing interest rates is minimized through the matching of
investment maturities with amounts due under insurance contracts.
16) Other Comprehensive Income
The following summarizes other comprehensive income:
2001 2000 1999
---- ---- ----
Unrealized gains (losses)
on available for-sale
securities $769,684 $736,803 $(696,162)
Less: reclassification
adjustment for net realized
gains in net income (10,428) (420,739) (14,126)
--------- --------- ---------
Net unrealized gains (losses) 759,256 316,064 (710,288)
Tax expense on net unrealized
gain (losses) (372,077) (145,004) 294,866
--------- --------- ---------
Other comprehensive income (loss) $387,179 $171,060 $(415,422)
========= ========= =========
62
Schedule I
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Summary of Investments
Other than Investments in Related Parties
As of December 31, 2001:
Amount at
Which
Shown
Estimated in the
Type of Investment Amortized Fair Balance
- ------------------ Cost Value Sheet
-------- --------- ---------
Fixed maturity securities held to maturity:
Bonds:
U.S. Treasury securities
and obligations
of U.S. Government
agencies $4,212,280 $4,439,726 $4,212,280
Obligations of states
and political
subdivisions 180,660 185,484 180,660
Corporate securities
including public
utilities 19,206,038 19,773,918 19,206,038
Mortgage backed
securities 4,172,926 4,270,550 4,172,926
Redeemable preferred
stocks 28,005 28,308 28,005
----------- ----------- -----------
Total Fixed
Securities held
to maturity 27,799,909 28,697,986 27,799,909
----------- ----------- -----------
Securities
available for sale:
Bonds:
U.S. Treasury
securities and
obligations of U.S.
Government agencies 594,568 652,983 652,983
Corporate securities
including public
utilities 19,971,265 20,817,746 20,817,746
Mortgage-backed
securities -- -- --
Nonredeemable
preferred stock 56,031 81,250 81,250
Common stock:
Public utilities 315,068 504,243 504,243
Banks, trusts and
insurance companies 195,983 389,210 389,210
Industrial, miscellaneous
and all other 1,038,898 1,666,846 1,666,846
----------- ----------- -----------
Total Securities
available for
sale 22,171,813 24,112,278 24,112,278
----------- ----------- -----------
Mortgage loans on
real estate 15,479,305 15,479,305
Real estate 9,051,691 9,051,691
Policy loans 11,277,975 11,277,975
Other investments 1,453,644 1,453,644
----------- -----------
Total investments $87,234,337 $89,174,802
=========== ===========
63
Schedule II
SECURITY NATIONAL FINANCIAL CORPORATION
(Parent Company Only)
Balance Sheets
December 31,
------------
2001 2000
---- ----
Assets
Cash$ 1,065 $(29,690)
Investment in subsidiaries
(equity method) 46,128,864 40,954,743
Receivables:
Receivable from
affiliates 1,664,955 1,731,480
Other (42,743) 18,008
------------ ------------
Total receivables 1,622,212 1,749,488
Property, plant and
equipment, at cost,
net of accumulated
depreciation of $457,338
for 2001 and $344,296
for 2000 427,345 537,433
Other assets 21,366 47,004
------------ ------------
Total assets $48,200,852 $43,258,978
============ ============
See accompanying notes to parent company only financial statements.
64
Schedule II Continued)
SECURITY NATIONAL FINANCIAL CORPORATION
(Parent Company Only)
Balance Sheets (Continued)
December 31,
------------
2001 2000
---- ----
Liabilities:
- ------------
Bank loans payable:
Current installments $ 1,386,857 $ 1,035,585
Long-term 4,168,453 5,294,808
Notes and contracts payable:
Current installments 152,818 152,818
Long-term -- 151,857
Advances from affiliated companies 10,431,231 8,603,996
Other liabilities and
accrued expenses 996,228 513,877
Income taxes 1,095,947 764,676
------------ ------------
Total liabilities 18,231,534 16,517,617
------------ ------------
Stockholders' equity:
Common Stock:
Class A: $2 par value, authorized
10,000,000 shares, issued
5,363,591 shares in 2001 and
5,107,631 shares in 2000 10,727,182 10,215,262
Class C: $0.20 par value,
authorized 7,500,000 shares,
issued 6,113,430 shares in 2001
and 5,827,805 shares in 2000 1,222,686 1,165,561
------------ ------------
Total common stock 11,949,868 11,380,823
Additional paid-in capital 10,168,523 10,054,714
Accumulated other
comprehensive income 1,223,930 836,751
Retained earnings 9,989,230 7,831,306
Treasury stock at cost
(1,294,716 Class A shares
and 68,332 Class C shares
in 2001; 1,233,064 Class A shares
and 65,078 Class C shares in 2000,
held by affiliated companies) (3,362,233) (3,362,233)
------------ ------------
Total stockholders' equity 29,969,318 26,741,361
------------ ------------
Total liabilities and
stockholders' equity $ 48,200,852 $ 43,258,978
============ ============
See accompanying notes to parent company only financial statements.
65
Schedule II (Continued)
SECURITY NATIONAL FINANCIAL CORPORATION
(Parent Company Only)
Statements of Earnings
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Revenue:
Net investment
income $ 188 $ 96 $ 39,694
Fees from
affiliates 3,824,259 3,878,458 3,838,704
----------- ----------- -----------
Total revenue 3,824,447 3,878,554 3,878,398
----------- ----------- -----------
Expenses:
General and
administrative
expenses 4,082,438 1,873,323 2,396,015
Interest expense 373,815 593,228 641,282
----------- ----------- -----------
Total expenses 4,456,253 2,466,551 3,037,297
----------- ----------- -----------
Earnings (loss)
before income
taxes, and
earnings of
subsidiaries (631,806) 1,412,003 841,101
Income tax expense (531,271) (373,075) (277,810)
Equity in earnings
(loss) of subsidiaries 4,003,856 (143,199) 412,604
----------- ----------- -----------
Net earnings $ 2,840,779 $ 895,729 $ 975,895
=========== =========== ===========
See accompanying notes to parent company only financial statements.
66
Schedule II (Continued)
SECURITY NATIONAL FINANCIAL CORPORATION
(Parent Company Only)
Statements of Cash Flow
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net earnings $ 2,840,779 $ 895,729 $ 975,895
Adjustments to reconcile net earnings
to net cash provided by
(used in) operating activities:
Depreciation and amortization 113,042 29,904 533
Undistributed (earnings) losses
of affiliates (4,003,856) 143,199 (412,604)
Provision for income taxes 531,271 373,075 277,810
Change in assets and liabilities:
Accounts receivable 60,751 558 57,802
Other assets 25,638 25,637 (72,245)
Other liabilities 282,350 1,836 17,687
----------- ----------- -----------
Net cash provided by operating activities (150,025) 1,469,938 844,878
Cash flows from investing activities:
Purchase of short-term investments -- -- (11,045)
Proceeds from sale of short term
investments -- -- 305,972
Purchase of equipment (2,954) (556,802) (11,002)
Investment in subsidiaries -- -- (6,388,198)
----------- ----------- -----------
Net cash used in investing activities (2,954) (556,802) (6,104,273)
Cash flows from financing activities:
Proceeds from advances from affiliates 1,922,758 303,299 6,388,198
Payments of advances to affiliates (28,998) (101,514) (169,023)
Payments of notes and contracts payable (1,676,940) (1,128,972) (1,094,150)
Purchase of treasury stock (783,086) -- --
Proceeds from borrowings on notes and
contracts payable 750,000 -- --
----------- ----------- -----------
Net cash provided (used) by
financing activities 183,734 (927,187) 5,125,025
----------- ----------- -----------
Net change in cash 30,755 (14,051) (134,370)
Cash at beginning of year (29,690) (15,639) 118,731
----------- ----------- -----------
Cash at end of year $ 1,065 $ (29,690) $ (15,639)
=========== =========== ===========
See accompanying notes to parent company only financial statements.
67
Schedule II (Continued)
SECURITY NATIONAL FINANCIAL CORPORATION
Notes to Parent Company Only Financial Statements
1) Bank Loans Payable
Bank loans payable are summarized as follows:
December 31,
------------
2001 2000
---- ----
$4,171,803 revolving line of
credit at 6.15% interest payable
monthly and a reduction in principal
due in semi-annual installments
collateralized by 15,000
shares of Security National Life
Insurance Company stock, due December 2005 $3,703,767 $4,904,426
6.59% note payable in monthly
installments of $34,680 including
principal and interest, collateralized
by 15,000 shares of Security National Life stock,
due December 2004 1,101,543 1,425,967
7.35% note payable in monthly installments
of $14,975 including principal and
interest collaterized by 15,000 shares
of Security National Life Insurance
Company stock, due December 2006 750,000 --
---------- ----------
Total bank loans 5,555,310 6,330,393
Less current installments 1,386,857 1,035,585
---------- ----------
Bank loans, excluding current
installments $4,168,453 $5,294,808
========== ==========
2) Notes and Contracts Payable
Notes and contracts are summarized as follows:
December 31,
------------
2001 2000
---- ----
10 year notes due April 16, 1999,
1% over U.S. Treasury 6 month
bill rate $ 536 $ 536
Due to former stockholders of Civil
Service Employees Life Insurance Company
resulting from the acquisition of such
entity. 7% note payable in seven
annual principal payments of
$151,857 due December 2002 151,857 303,714
Other 425 425
-------- --------
Total notes and contracts 152,818 304,675
-------- --------
Less current installments 152,818 152,818
-------- --------
Notes and contracts, excluding current
installments $ -- $151,857
======== ========
68
Schedule II (Continued)
SECURITY NATIONAL FINANCIAL CORPORATION
Notes to Parent Company Only Financial Statements
The following tabulation shows the combined maturities of bank loans payable and
notes and contracts payable:
2002 $1,539,675
2003 1,504,827
2004 1,632,508
2005 845,186
2006 185,932
Thereafter --
----------
Total $5,708,128
==========
3) Advances from Affiliated Companies
December 31,
2001 2000
Non-interest bearing advances ----- -----
from affiliates:
Cemetery and Mortuary
subsidiary $ 1,366,930 $ 1,366,930
Life Insurance subsidiary 9,054,301 7,227,066
Mortgage subsidiary 10,000 10,000
----------- -----------
$10,431,231 $ 8,603,996
=========== ===========
4) Dividends
No dividends have been paid to the registrant for each of the last three years
by any subsidiaries.
69
Schedule IV
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Reinsurance
Percentage
Ceded to Assumed of Amount
Direct Other from Other Net Assumed
Amount Companies Companies Amount to Net
------ --------- --------- ------ ------
2001
- ----
Life Insurance
in force ($000) $ 1,587,136 $ 216,369 $ 838,421 $ 2,209,188 37.9%
=========== =========== =========== =========== =======
Premiums:
Life Insurance $12,930,418 $ 1,035,984 $ 845,736 $12,740,170 6.6%
Accident and
Health Insurance 406,393 285 4,597 410,705 1.1%
----------- ----------- ----------- ----------- -------
Total premiums $13,336,811 $ 1,036,269 $ 850,333 $13,150,875 6.5%
=========== =========== =========== =========== =======
2000
- ----
Life Insurance
in force ($000) $ 1,469,502 $ 253,698 $ 580,287 $ 1,796,091 32.3%
=========== =========== =========== =========== =======
Premiums:
Life Insurance $12,934,701 $ 1,151,262 $ 634,899 $12,418,338 5.11%
Accident and
Health Insurance 454,656 427 3,018 457,247 .66%
----------- ----------- ----------- ----------- -------
Total premiums $13,389,357 $ 1,151,689 $ 637,917 $12,875,585 4.95%
=========== =========== =========== =========== =======
1999
- ----
Life Insurance
in force ($000) $ 1,532,597 $ 296,936 $ 581,296 $ 1,816,957 32.00%
=========== =========== =========== =========== =======
Premiums:
Life Insurance $12,983,927 $ 1,063,696 $ 722,080 $12,642,311 5.71%
Accident and
Health Insurance 563,592 34,643 4,565 533,514 .85%
----------- ----------- ----------- ----------- -------
Total premiums $13,547,519 $ 1,098,339 $ 726,645 $13,175,825 5.51%
=========== =========== =========== =========== =======
70
Schedule V
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Valuation and Qualifying Accounts
Balance Additions Deductions, Balance
at Charged Disposals at
Beginning to Costs and End of
of Year and Expenses Write-offs Year
--------- ------------ ---------- --------
For the Year Ended December 31, 2001
Accumulated depreciation
on real estate $3,088,761 321,235 (5,352) $3,404,644
Accumulated depreciation on
property, plant and equipment 6,699,141 1,029,137 (42,665) 7,685,613
Allowance for doubtful accounts 1,656,223 832,798 (201,780) 2,287,241
Allowance for real estate losses -- 119,269 -- 119,269
For the Year Ended December 31, 2000
Accumulated depreciation
on real estate $2,722,024 $ 366,737 $ -- $3,088,761
Accumulated depreciation on
property, plant and equipment 5,989,643 835,421 (125,923) 6,699,141
Allowance for doubtful accounts 1,467,954 190,930 (2,661) 1,656,223
For the Year Ended December 31, 1999
Accumulated depreciation
on real estate $2,380,874 $ 369,557 $ (28,407) $2,722,024
Accumulated depreciation on
property, plant and equipment 5,312,791 817,869 (141,017) 5,989,643
Allowance for doubtful accounts 1,576,668 150,981 (259,695) 1,467,954
71
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers
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.
Name Age Position with the Company
- ----- ----- ------------------------
George R. Quist 81 Chairman of the Board, President
and Chief Executive Officer
Scott M. Quist 48 First Vice President, General Counsel,
Chief Operating Officer and Director
Stephen M. Sill 56 Vice President, Treasurer and
Chief Financial Officer
G. Robert Quist 50 Vice President and Secretary
J. Lynn Beckstead, Jr. 48 Vice President and Director
Charles L. Crittenden 82 Director
Robert G. Hunter 42 Director
H. Craig Moody 48 Director
Norman G. Wilbur 63 Director
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.
Directors
The following is a description of the business experience of each of the
Company's directors.
George R. Quist has been Chairman of the Board, President and Chief Executive
Officer of the Company since October 1979. Mr. Quist has also served as Chairman
of the Board, President and Chief Executive Officer of Southern Security Life
Insurance Company since December 1998. 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 First Vice President, General Counsel and a director of
the Company since May 1986 and its Chief Operating Officer since October 2001.
Mr. Quist has also served as First Vice President, General Counsel and a
director of Southern Security Life Insurance Company since December 1998 and its
Chief Operating Officer since
72
October 2001. From 1980 to 1982, Mr. Quist was a tax specialist with Peat,
Marwick, Mitchell, & Co., in Dallas, Texas. From 1986 to 1991, he was a
treasurer and 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. Mr. Quist 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.
J. Lynn Beckstead Jr. has been a Vice President and a director of the Company
since March 15, 2002. Mr. Beckstead has also served as Vice President and
director of Southern Security Life Insurance Company since March 15, 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 1980 to 1993,
Mr. Beckstead was Vice President and a director of Republic Mortgage
Corporation. From 1983 to 1990, Mr. Beckstead was Vice President and 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 October 1979. Mr.
Crittenden is also a director of Southern Security Life Insurance Company and
has served in this position since December 1998. 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 October 1998.
Dr. Hunter is also a director of Southern Security Life Insurance Company and
has served in this position since December 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 September 1995. Mr.
Moody is also a director of Southern Security Life Insurance Company and has
served in this position since December 1998. 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 October 1998. Mr.
Wilbur is also a director of Southern Security Life Insurance Company and has
served in this position since December 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.
73
Executive Officers
The following is a description of the Company's executive officers, who are not
also directors of the Company.
Stephen M. Sill has been Vice President, Treasurer and Chief Financial Officer
of the Company since March 15, 2002. He has been a Vice President, Treasurer and
Chief Financial Officer of Southern Security Life Insurance Company since March
15, 2002. From 1997 to 2002, Mr. Sill was Vice President and Controller of the
Company. From 1998 to 2002, Mr. Sill also served as Vice President and
Controller of Southern Security Life Insurance Company. From 1994 to 1997 Mr.
Sill was Vice President and Controller of Security National Life Insurance
Company. From 1989 to 1993, he was Controller of Flying J. 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 of the Insurance Accounting and Systems
Association (IASA), a national association of over 1,300 insurance companies and
associate members.
G. Robert Quist has been Vice President and Secretary of the Company since March
15, 2002. Mr. Quist is also a director of Southern Security Life Insurance
Company since April 1999 and has been Vice President and Secretary since March
15, 2002. He has served as President and a director of Big Willow Water Company
since 1987 and as a director of Associated Investors Company of Hawaii since
1987. He has also served as a director and Secretary-Treasurer of the Utah
Cemetery Association since 1987.
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 2001 or 2000.
Each of the Directors of the Company are directors of Southern Security Life
Insurance Company, which has a class of equity securities registered under the
Securities Exchange Act of 1934. In addition, Scott M. Quist is a director of
Key Bank of Utah. All directors of the Company hold office until the next annual
meeting of stockholders and until their successors have been duly elected and
qualified.
74
Item 11. Executive Officer Compensation
The following table sets forth, for each of the last three fiscal years, the
compensation received by George R. Quist, the Company's President and Chief
Executive Officer, and all other executive officers (collectively, the "Named
Executive Officers") at December 31, 2001 whose salary and bonus for all
services in all capacities exceed $100,000 for the fiscal year ended December
31, 2001.
Summary Compensation Table
Annual Compensation Long-Term Compensation
Other
Annual Restricted Securities Long-Term All Other
Name and Compen- Stock Underlying Incentive Compen-
Principal Position Year Salary($) Bonus($) sation($)(2) Awards($) Options/SARs(#) Payout($) sation($)(3)
- ------------------ ---- --------- -------- ------------ ----- --------------- ----- ------------
George R. Quist (1) 2001 148,737 20,200 2,400 0 50,000 0 36,795
Chairman of the Board, 2000 147,204 20,200 2,400 0 50,000 0 5,281
President and Chief 1999 147,204 20,200 2,400 0 50,000 0 20,247
Executive Officer
William C. Sargent 2001 137,643 17,325 4,500 0 45,000 0 38,148
Senior Vice President, 2000 147,798 17,325 4,500 0 45,000 0 637
Secretary and 1999 148,058 17,325 4,500 0 45,000 0 16,879
Director
Scott M. Quist (1) 2001 152,525 20,000 7,200 0 35,000 0 34,727
First Vice President, 2000 140,400 18,770 7,200 0 35,000 0 637
General Counsel 1999 129,400 18,770 7,200 0 35,000 0 15,201
Treasurer and Director
75
(1) George R. Quist is the father of Scott M. Quist.
(2) The amounts indicated under "Other Annual Compensation" consist of
payments related to the operation of automobiles by the Named Executive
Officers. However, such payments do not include the furnishing of an automobile
by the Company to George R. Quist and Scott M. Quist nor the payment of
insurance and property taxes with respect to the automobiles operated by the
Named Executive Officers.
(3) The amounts indicated under "All Other Compensation" consist of (a)
amounts contributed by the Company into a trust for the benefit of the Named
Executive Officers under the Non-qualified Deferred Compensation Plan (for
fiscal 2001, such amounts were George R. Quist, $32,077; William C. Sargent,
$37,523; and Scott M. Quist, $34,102); (b) insurance premiums paid by the
Company with respect to a group life insurance plan for the benefit of the Named
Executive Officers (for fiscal 2001, $1,911 was paid for all Named Executive
Officers as a group, or $637 each for George R. Quist, William C. Sargent and
Scott M. Quist); and (c) life insurance premiums paid by the Company for the
benefit of the family of George R. Quist ($4,644). The amounts under "All Other
Compensation" do not include the no interest loan in the amount of $172,000 that
the Company made to George R. Quist on April 29, 1998, to exercise stock
options. See "Item 13 Certain Relationships and Related Transactions".
The following table sets forth information concerning the exercise of options to
acquire shares of the Company's Common Stock by the Named Executive Officers
during the fiscal year ended December 31, 2001, as well as the aggregate number
and value of unexercised options held by the Named Executive Officers on
December 31, 2001.
Aggregated Option/SAR Exercised in Last Fiscal Year and Fiscal Year-End
Option/SAR Values:
Number of
Securities
Underlying Value of
Unexercised Unexercised
Options/SARs In-the-Money
Shares at Options/SARs at
Acquired on December 31, December 31,
Exercise Value 2001(#) 2001
Name (#) Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
George R
Quist -0- $0 182,471 42,000 $0 $ 408
William C
Sargent -0- $0 261,292 42,000 $0 $10,008
Scott M
Quist -0- $0 139,306 42,000 $0 $10,008
Retirement Plans
George R. Quist, who has been Chairman, President and Chief Executive Officer of
the Company since 1979, has a Deferred Compensation Agreement, dated December 8,
1988, with the Company (the "Compensation Agreement"). This Compensation
Agreement was amended effective January 2, 2001, to reflect the following
benefits. The employment agreements between the Company and George R. Quist be
amended to adjust for inflation in accordance with the United States Consumer
Index commencing January 2, 2002, and for each year thereafter of the term of
the agreement and that for the year 2001 the adjustment for his retirement is
$60,000 per year instead of $50,000 per year. The agreements shall also be
amended to provide his spouse, in the event of his pre-mature death, with health
insurance coverage equivalent to that carried on executive personnel with the
coverage for the entire period of the agreement. In the event of death of George
R. Quist and his spouse prior to the expiration of the terms of the agreement,
payments shall be paid to his estate or as otherwise directed by him in writing.
The Compensation Agreement further provides that the Board of Directors may
elect to pay the entire amount of deferred compensation in the form of a single
lump-sum payment or other installment payments, so long as the term of such
payments do not exceed 10 years. However, in the event Mr. Quist's employment
with the Company is terminated for any reason other than retirement, death or
disability, the entire deferred compensation shall be forfeited by him. The
Company has accrued a liability for the Compensation Agreement at December 31,
2001 of $276,441.
76
William C. Sargent, recently deceased, who was the former Senior Vice President
and Secretary of the Company, had a Deferred Compensation Agreement dated April
15, 1994, with the Company (the "Compensation Agreement"). This Compensation
Agreement was amended effective January 2, 2001, to reflect the following
benefits. The employment agreement between the Company and William C. Sargent be
amended to adjust for inflation in accordance with the United States Consumer
Index commencing January 2, 2002, and for each year thereafter of the term of
the agreement and that for the year 2001 the adjustment for his retirement is
$60,000 per year instead of $50,000 per year. The agreements shall also be
amended to provide his spouse, in the event of his pre-mature death, with health
insurance coverage equivalent to that carried on executive personnel with the
coverage for the entire period of the agreement. In the event of death of
William C. Sargent and his spouse prior to the expiration of the terms of the
agreement, payments shall be paid to his estate or as otherwise directed by him
in writing.
The Compensation Agreement further provides that the Board of Directors may
elect to pay the entire amount of deferred compensation in the form of a single
lump-sum payment or other installment payments, so long as the term of such
payments do not exceed 10 years. The Company has accrued a liability for the
Compensation Agreement at December 31, 2001 in the amount of $394,639 and has
begun making payments to Mr. Sargent's spouse.
Employment Agreement
The Company maintains an employment agreement with Scott M. Quist. The
agreement, which has a five year term, was entered into in 1996, and renewed in
1997. Under the terms of the agreement, Mr. Quist is to devote his full time to
the Company serving as its First Vice President, General Counsel and Chief
Operating Officer at not less than his current salary and benefits, and to
include $500,000 of life insurance protection. In the event of disability, Mr.
Quist's salary would be continued for up to 5 years at 50% of its current level.
In the event of a sale or merger of the Company, and Mr. Quist were not retained
in his current position, the Company would be obligated to continue Mr. Quist's
current compensation and benefits for seven years following the merger or sale.
Director Compensation
Directors of the Company (but not including directors who are employees) are
paid a director's fee of $10,200 per year by the Company for their services and
are reimbursed for their expenses in attending board and committee meetings. No
additional fees are paid by the Company for committee participation or special
assignments. However, each director is provided with an annual grant of stock
options to purchase 1,000 shares of Class A Common Stock under the 2000 Director
Stock Option Plan.
Employee 401(k) Retirement Savings Plan
In 1995, the Company's Board of Directors adopted a 401(k) Retirement Savings
Plan. Under the terms of the 401(k) plan, effective as of January 1, 1995, the
Company may make discretionary employer matching contributions to its employees
who choose to participate in the plan. The plan allows the board to determine
the amount of the contribution at the end of each year. The Board adopted a
contribution formula specifying that such discretionary employer matching
contributions would equal 50% of the participating employee's contribution to
the plan to purchase Company stock up to a maximum discretionary employee
contribution of 1/2% of a participating employee's compensation, as defined by
the plan.
All persons who have completed at least one year's service with the Company and
satisfy other plan requirements are eligible to participate in the 401(k) plan.
All Company matching contributions are invested in the Company's Class A Common
Stock. The Company's matching contributions for 2001, 2000, and 1999 were
approximately $18,458, $0, and $3,858 respectively. Also, the Company may
contribute at the discretion of the Company's Board of Directors an Employer
Profit Sharing Contribution to the 401-K plan. The Employer Profit Sharing
Contribution shall be divided among three different classes of participants in
the plan based upon the participant's title in the Company. All amounts
contributed to the plan are deposited into a trust fund administered by an
independent trustee. The Company's contributions to the plan for 2001, 2000 and
1999, were $260,350, $0 and $130,958, respectively.
77
Employee Stock Ownership Plan
Effective January 1, 1980, the Company adopted an employee stock ownership plan
(the "Ownership Plan") for the benefit of career employees of the Company and
its subsidiaries. The following is a description of the Ownership Plan, and is
qualified in its entirety by the Ownership Plan, a copy of which is available
for inspection at the Company's offices.
Under the Ownership Plan, the Company has discretionary power to make
contributions on behalf of all eligible employees into a trust created under the
Ownership Plan. Employees become eligible to participate in the Ownership Plan
when they have attained the age of 19 and have completed one year of service (a
twelve-month period in which the Employee completes at least 1,040 hours of
service). The Company's contributions under the Ownership Plan are allocated to
eligible employees on the same ratio that each eligible employee's compensation
bears to total compensation for all eligible employees during each year. To
date, the Ownership Plan has approximately 107 participants and had $191,557
contributions payable to the Plan in 2001. Benefits under the Ownership Plan
vest as follows: 20% after the third year of eligible service by an employee, an
additional 20% in the fourth, fifth, sixth and seventh years of eligible service
by an employee.
Benefits under the Ownership Plan will be paid out in one lump sum or in
installments in the event the employee becomes disabled, reaches the age of 65,
or is terminated by the Company and demonstrates financial hardship. The
Ownership Plan Committee, however, retains discretion to determine the final
method of payment. Finally, the Company reserves the right to amend or terminate
the Ownership Plan at any time. The trustee of the trust fund under the
Ownership Plan is Mr. George R. Quist, who serves as a director of the Company.
Deferred Compensation Plan
In 2001, the Company's Board of Directors adopted a Deferred Compensation Plan.
Under the terms of the Deferred Compensation Plan, the Company will provide
deferred compensation for a select group of management or highly compensated
employees, within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of the
Employee Retirement Income Security Act of 1974, as amended. The board has
appointed a committee of the Company to be the plan administrator and to
determine the employees who are eligible to participate in the plan. The
employees who participate may elect to defer a portion of their compensation
into the plan. The Company may contribute into the plan at the discretion of the
Company's Board of Directors. The Company's contribution for 2001 was $220,038.
1987 Incentive Stock Option Plan
In 1987, the Company adopted the 1987 Incentive Stock Option Plan (the 1987
Plan). The 1987 Plan provides that shares of the Class A Common Stock of the
Company may be optioned to certain officers and key employees of the Company.
The Plan establishes a Stock Option Plan Committee which selects the employees
to whom the options will be granted and determines the price of the stock. The
Plan establishes the minimum purchase price of the stock at an amount which is
not less than 100% of the fair market value of the stock (110% for employees
owning more than 10% of the total combined voting power of all classes of
stock).
The Plan provides that if additional shares of Class A Common Stock are issued
pursuant to a stock split or a stock dividend, the number of shares of Class A
Common Stock then covered by each outstanding option granted hereunder shall be
increased proportionately with no increase in the total purchase price of the
shares then so covered, and the number of shares of Class A Common Stock
reserved for the purpose of the Plan shall be increased by the same proportion.
In the event that the shares of Class A Common Stock of the Company from time to
time issued and outstanding are reduced by a combination of shares, the number
of shares of Class A Common Stock then covered by each outstanding option
granted hereunder shall be reduced proportionately with no reduction in the
total price of the shares then so covered, and the number of shares of Class A
Common Stock reserved for the purposes of the Plan shall be reduced by the same
proportion.
The Plan terminated in 1997 and options granted are non-transferable. The Plan
permits the holder of the option to elect to receive cash, amounting to the
difference between the option price and the fair market value of the stock at
the time of the exercise, or a lesser amount of stock without payment, upon
exercise of the option.
78
1993 Stock Option Plan
On June 21, 1993, the Company adopted the Security National Financial
Corporation 1993 Stock Incentive Plan (the "1993 Plan"), which reserves shares
of Class A Common Stock for issuance thereunder. The 1993 Plan was approved at
the annual meeting of the stockholders held on June 21, 1993. The 1993 Plan
allows the Company to grant options and issue shares as a means of providing
equity incentives to key personnel, giving them a proprietary interest in the
Company and its success and progress.
The 1993 Plan provides for the grant of options and the award or sale of stock
to officers, directors, and employees of the Company. Both "incentive stock
options," as defined under Section 422A of the Internal Revenue Code of 1986
(the "Code"), and "non-qualified options" may be granted pursuant to the 1993
Plan. The exercise prices for the options granted are equal to or greater than
the fair market value of the stock subject to such options as of the date of
grant, as determined by the Company's Board of Directors. The options granted
under the 1993 Plan, were to reward certain officers and key employees who have
been employed by the Company for a number of years and to help the Company
retain these officers by providing them with an additional incentive to
contribute to the success of the Company.
The 1993 Plan is to be administered by the Board of Directors or by a committee
designated by the Board. The terms of options granted or stock awards or sales
effected under the 1993 Plan are to be determined by the Board of Directors or
its committee. The Plan provides that if the shares of Common Stock shall be
subdivided or combined into a greater or smaller number of shares or if the
Company shall issue any shares of Common Stock as a stock dividend on its
outstanding Common Stock, the number of shares of Common Stock deliverable upon
the exercise of Options shall be increased or decreased proportionately, and
appropriate adjustments shall be made in the purchase price per share to reflect
such subdivision, combination or stock dividend. In addition, the number of
shares of Common Stock reserved for purposes of the Plan shall be adjusted by
the same proportion. No options may be exercised for a term of more than ten
years from the date of grant.
Options intended as incentive stock options may be issued only to employees, and
must meet certain conditions imposed by the code, including a requirement that
the option exercise price be no less than the fair market value of the option
shares on the date of grant. The 1993 Plan provides that the exercise price for
non-qualified options will be not less than at least 50% of the fair market
value of the stock subject to such option as of the date of grant of such
options, as determined by the Company's Board of Directors.
The 1993 Plan has a term of ten years. The Board of Directors may amend or
terminate the 1993 Plan at any time, subject to approval of certain
modifications to the 1993 Plan by the shareholders of the Company as may be
required by law or the 1993 Plan. On November 7, 1996, the Company amended the
Articles of Incorporation as follows: (i) to increase the number of shares of
Class A Common Stock reserved for issuance under the Plan from 300,000 Class A
shares to 600,000 Class A shares; and (ii) to provide that the stock subject to
options, awards and purchases may include Class C common stock.
On October 14, 1999, the Company amended the 1993 Plan to increase the number of
shares of Class A Common Stock reserved for issuance under the plan from 746,126
Class A shares to 1,046,126 Class A shares.
2000 Director Stock Option Plan
On October 16, 2000, the Company adopted the 2000 Directors Stock Option Plan
(the "Director Plan") effective November 1, 2000. The Director Plan provides for
the grant by the Company of options to purchase up to an aggregate of 50,000
shares of Class A Common Stock for issuance thereunder. The Director Plan
provides that each member of the Company's Board of Directors who is not an
employee or paid consultant of the Company automatically is eligible to receive
options to purchase the Company's Class A Common Stock under the Director Plan.
79
Effective as of November 1, 2000, and on each anniversary date thereof during
the term of the Director Plan, each outside director shall automatically receive
an option to purchase 1,000 shares of Class A Common Stock. In addition, each
new outside director who shall first join the Board after the effective date
shall be granted an option to purchase 1,000 shares upon the date which such
person first becomes an outside director and an annual grant of an option to
purchase 1,000 shares on each anniversary date thereof during the term of the
Director Plan. The options granted to outside directors shall vest in their
entirety on the first anniversary date of the grant. The primary purposes of the
Director Plan are to enhance the Company's ability to attract and retain
well-qualified persons for service as directors and to provide incentives to
such directors to continue their association with the Company.
In the event of a merger of the Company with or into another company, or a
consolidation, acquisition of stock or assets or other change in control
transaction involving the Company, each option becomes exercisable in full,
unless such option is assumed by the successor corporation. In the event the
transaction is not approved by a majority of the "Continuing Directors" (as
defined in the Director Plan), each option becomes fully vested and exercisable
in full immediately prior to the consummation of such transaction, whether or
not assumed by the successor corporation.
80
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The following table sets forth security ownership information of the Company's
Class A and Class C Common Stock as of March 22, 2002, (i) for persons who own
beneficially more than 5% of the Company's outstanding Class A or Class C Common
Stock, (ii) each director of the Company, and (iii) for all executive officers
and directors of the Company as a group.
Class A
Class A Class C and Class C
Common Stock Common Stock Common Stock
------------ ------------ ------------
Amount Amount Amount
Name and Address of Beneficially Percent Beneficially Percent Beneficially Percent
Beneficial Owner Owned of Class Owned of Class Owned of Class
- ----------------- ------- -------- ----- -------- ----- --------
George R. Quist (1)(2)
4491 Wander Lane
Salt Lake City,
Utah 84124 155,712 3.8% 244,613 4.1% 400,325 4.0%
George R. and Shirley C
Quist Family
Partnership, Ltd.(6)
4491 Wander Lane
Salt Lake City,
Utah 84124 360,927 8.9% 2,900,049 48.0% 3,260,976 32.2%
Employee Stock
Ownership Plan (4)
5300 S. 360 W., Suite 250
Salt Lake City,
Utah 84123 577,402 14.2% 1,341,575 22.2% 1,918,977 19.0%
Scott M. Quist (3)
7 Wanderwood Way
Sandy, Utah 84092 115,064 2.8% 89,200 1.5% 204,264 2.0%
Charles L. Crittenden
2334 Fillmore Avenue
Ogden, Utah 84401 1,811 * 206,997 3.4% 208,808 2.1%
H. Craig Moody
1782 East Faunsdale Dr.
Sandy, Utah 84092 799 * -0- * 799 *
Norman G. Wilbur
2520 Horseman Drive
Plano, Texas 75025 1,044 * -0- * 1,044 *
81
Item 12 - Security Ownership of Certain Beneficial Owners and Management
Class A
Class A Class C and Class C
Common Stock Common Stock Common Stock
------------ ------------ ------------
Amount Amount Amount
Name and Address of Beneficially Percent Beneficially Percent Beneficially Percent
Beneficial Owner Owned of Class Owned of Class Owned of Class
- ----------------- ------- -------- ----- -------- ----- --------
Robert G. Hunter, M.D.
2 Ravenwood Lane
Sandy, Utah 84092 2,192 * -0- * 2,192 *
Associated Investors (5)
5300 S. 360 W. Suite 250
Salt Lake City,
Utah 84123 80,162 2.0% 566,341 9.4% 646,503 6.4%
J. Lynn Beckstead, Jr. 20,286 * 1,658 * 21,944 *
All directors and
executive officers
(9 persons) 700,920 17.2% 3,503,377 58.0% 4,204,297 41.6%
* Less than one percent
82
(1) Does not include 577,402 shares of Class A Common Stock and 1,341,575
shares of Class C Common Stock owned by the Company's Employee Stock Ownership
Plan (ESOP), of which George R. Quist is the trustee and accordingly, exercises
voting and investment powers with respect to such shares.
(2) Does not include 80,162 shares of Class A Common Stock and 566,341
shares of Class C Common Stock owned by Associated Investors, a Utah general
partnership, of which George R. Quist is the managing partner and, accordingly,
exercises voting and investment powers with respect to such shares.
(3) Does not include 117,699 shares of Class A Common Stock owned by the
Company's 401(k) Retirement Savings Plan, of which Scott M. Quist is a member of
the Investment Committee and, accordingly, exercises shared voting and
investment powers with respect to such shares.
(4) The trustee of the Employee Stock Ownership Plan (ESOP) is George R.
Quist who exercises voting and investment powers.
(5) The managing partner of Associated Investors is George R. Quist, who
exercises voting and investment powers.
(6) This stock is owned by the George R. and Shirley C. Quist Family
Partnership, Ltd., of which Mr. Quist is the general partner.
The Company's officers and directors, as a group, own beneficially approximately
41.6% of the outstanding shares of the Company's Class A and Class C Common
Stock.
Item 13. Certain Relationships and Related Transactions
The Company has made a loan in the amount of $172,000 to George R. Quist, the
Company's President and Chief Executive Officer, without requiring the payment
of any interest. The loan was made under a Promissory Note dated April 29, 1998
in order for Mr. Quist to exercise stock options which were granted to him under
the 1993 Stock Option Plan. No installment payments are required under the terms
of the note, but the note must be paid in full as of December 31, 2002. Mr.
Quist has the right to make prepayments on the note at any time. As of March 31,
2002, the outstanding balance of the note was $97,000. The loan was approved by
the Company's directors on March 12, 1999, with Mr. Quist abstaining, at a
special meeting of the Board of Directors.
The Company's Board of Directors 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 engaged in any business transactions with the Company
or its subsidiaries during 2001 or 2000 other than as described herein.
83
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a)(1)(2) Financial Statements and Schedules
See "Index to Consolidated Financial Statements and Supplemental
Schedules" under Item 8 above.
(a)(3) Exhibits
The following Exhibits are filed herewith pursuant to Rule 601 of
Regulation S-K or are incorporated by reference to previous filings.
Exhibit
Table No Document
(a)(3) Exhibits:
3.A. Articles of Restatement of Articles of Incorporation (8)
B. Bylaws (1)
4.A. Specimen Class A Stock Certificate (1)
B. Specimen Class C Stock Certificate (1)
C. Specimen Preferred Stock Certificate and Certificate of Designation of
Preferred Stock (1)
10. A. Restated and Amended Employee Stock Ownership Plan and Trust
Agreement (1)
B. Deferred Compensation Agreement with George R. Quist (2)
C. 1993 Stock Option Plan (3)
D. 2000 Director Stock Option Plan (12)
E. Promissory Note with Key Bank of Utah (4)
F. Loan and Security Agreement with Key Bank of Utah (4)
G. General Pledge Agreement with Key Bank of Utah (4)
H. Note Secured by Purchase Price Deed of Trust and Assignment of Rents
with the Carter Family Trust and the Leonard M. Smith Family Trust (5)
I. Deed of Trust and Assignment of Rents with the Carter Family Trust and
the Leonard M. Smith Family Trust (5)
J. Promissory Note with Page and Patricia Greer (6)
K. Pledge Agreement with Page and Patricia Greer (6)
L. Promissory Note with Civil Service Employees Insurance Company (7)
M. Deferred Compensation Agreement with William C. Sargent (8)
N. Employment Agreement with Scott M. Quist. (8)
O. Acquisition Agreement with Consolidare Enterprises, Inc., and certain
shareholders of Consolidare. (9)
P. Agreement and Plan of Merger between Consolidare Enterprises, Inc.,
and SSLIC Holding Company. (10)
84
Q. Administrative Services Agreement with Southern Security Life
Insurance Company. (11)
R. Promissory Note with George R. Quist (13)
S. Deferred Compensation Plan
(1) Incorporated by reference from Registration Statement on Form
S-1, as filed on June 29, 1987.
(2) Incorporated by reference from Annual Report on Form 10-K, as
filed on March 31, 1989.
(3) Incorporated by reference from Annual Report on Form 10-K, as
filed on March 31, 1994.
(4) Incorporated by reference from Report on Form 8-K, as filed on
February 24, 1995.
(5) Incorporated by reference from Annual Report on Form 10K, as
filed on March 31, 1995.
(6) Incorporated by reference from Report on Form 8-K, as filed on
May 1, 1995.
(7) Incorporated by reference from Report on Form 8-K, as filed on
January 16, 1996.
(8) Incorporated by reference from Annual Report on Form 10-K, as
filed on March 31, 1998.
(9) Incorporated by reference from Report on Form 8-K, as filed on
May 11, 1998.
(10) Incorporated by reference from Report on Form 8-K, as filed on
January 4, 1999.
(11) Incorporated by reference from Report on Form 8-K, as filed on
March 4, 1999.
(12) Incorporated by reference from Schedule 14A Definitive Proxy
Statement, filed August 29, 2000, relating to the Company's
Annual Meeting of Shareholders.
(13) Incorporated by reference from Report on Form 10-K, as filed on
April 16, 2001.
21. Subsidiaries of the Registrant
(b) Reports on Form 8-K:
None
85
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SECURITY NATIONAL FINANCIAL CORPORATION
Dated: April 3, 2002 By: George R. Quist,
---------------
Chairman of the Board,
President 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 on behalf of the Registrant
and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ---------- ------------------- -------------
George R. Quist Chairman of the April 3, 2002
Board, President
and Chief Executive
Officer (Principal
Executive Officer)
Scott M. Quist First Vice April 3, 2002
President, General
Counsel, Chief
Operating Officer
and Director
Stephen M. Sill Vice President
Treasurer and Chief
Financial Officer
(Principal
Financial and Accounting
Officer) April 3, 2002
G. Robert Quist Vice President, Secretary
and Director April 3, 2002
J. Lynn Beckstead, Jr. Vice President and Director April 3, 2002
Charles L. Crittenden Director April 3, 2002
H. Craig Moody Director April 3, 2002
Norman G. Wilbur Director April 3, 2002
Robert G. Hunter Director April 3, 2002
86
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Year Ended December 31, 2001
SECURITY NATIONAL FINANCIAL CORPORATION
Commission File No. 0-9341
E X H I B I T S
Exhibit Index
Exhibit No. Document Name
- ----------- ------------------
21. Subsidiaries of the Registrant
EXHIBIT 21
Subsidiaries of Security National
Financial Corporation
as of March 31, 2001
Exhibit 21
Subsidiaries of Security National Financial Corporation (as of March 31, 2001)
Security National Life Insurance Company
Security National Mortgage Company
Memorial Estates, Inc.
Memorial Mortuary
Paradise Chapel Funeral Home, Inc.
California Memorial Estates, Inc.
Cottonwood Mortuary, Inc.
Deseret Memorial, Inc.
Holladay Cottonwood Memorial Foundation
Holladay Memorial Park, Inc.
Camelback Sunset Funeral Home, Inc.
Greer-Wilson Funeral Home, Inc.
Crystal Rose Funeral Home, Inc.
Hawaiian Land Holdings
SSLIC Holding Company
Insuradyne Corporation
Southern Security Life Insurance Company
SECURITY NATIONAL FINANCIAL CORPORATION
DEFERRED COMPENSATION PLAN
Effective as of January 1, 2001
SECURITY NATIONAL FINANCIAL CORPORATION
DEFERRED COMPENSATION PLAN
Effective as of January 1, 2001
ARTICLE I
INTRODUCTION
1.1 Establishment of Plan
Security National Financial Corporation establishes the Security National
Financial Corporation Deferred Compensation Plan effective as of January 1,
2001.
1.2 Purpose of Plan
Security National Financial Corporation has established this Plan to
provide select employees with the opportunity to defer the receipt of
compensation and a vehicle through which to do so. Security National Financial
Corporation intends to maintain the Plan primarily for the purpose of providing
deferred compensation for a select group of management or highly compensated
employees, within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of the
Employee Retirement Income Security Act of 1974, as amended. The Plan will be
interpreted in a manner consistent with these intentions.
ARTICLE II
DEFINITIONS
Definitions are contained in this article and throughout other sections of
the Plan. The location of a definition is for convenience only and should not be
given any significance. A word or term defined in this article (or in any other
article) will have the same meaning throughout the Plan unless the context
clearly requires a different meaning.
2.1 Base Salary
means (i) in the case of an employee whose remuneration from the Company
does not contain a commission element, the employee's periodic base salary, and
(ii) in the case of an employee whose compensation from the Company contains a
commission element, the employee's total compensation (i.e., base salary plus
commissions, whether under or over target), but without regard to any Bonus(es)
or other additional amount(s) paid or payable to the employee.
2.2 Beneficiary
means the individual(s) or entity(ies) designated by a Participant, or by
the Plan, to receive any benefit payable upon the death of a Participant or
Beneficiary. A Beneficiary designation must be signed by the Participant and
delivered to the Committee on a form specified by the Committee for that
purpose. In the absence of a valid or effective Beneficiary designation, the
Beneficiary will be the Participant's surviving spouse, or if there is no
surviving spouse, the Participant's estate.
2.3 Board
means the Board of Directors of the Company.
2.4 Bonus
means any periodic or non-periodic payment to the Participant which is not
part of the Participant's Base Salary and which is not otherwise excluded from
the definition of Compensation contained in this Plan.
2.5 Code
means the Internal Revenue Code of 1986, as amended from time to time.
2.6 Committee
means the Plan Committee, the members of which are to be appointed by the
Company. The Committee will serve as the "plan administrator" to manage and
control the operation and administration of the Plan, within the meaning of
ERISA Section 3(16)(A).
2.7 Company
means Security National Financial Corporation and any successor of Security
National Financial Corporation, and any affiliate thereto designated by the
Committee as a participating employer. In the event one or more affiliates of
Security National Financial Corporation become participating employer(s) under
this Plan, all rights, duties and responsibilities for operation of this Plan,
including all rights reserved to amend, alter, supplement or terminate this
Plan, shall remain exclusively with and be exercised solely by Security National
Financial Corporation, unless specifically allocated by Security National
Financial Corporation to one or more participating employers.
2.8 Compensation
means the employee's Base Salary plus Bonus(es). Compensation excludes any
other form of remuneration paid or payable to an Eligible Employee, such as
restricted stock, stock options, proceeds from stock options or stock
appreciation rights, severance payments, moving expenses, car or other special
allowances, and any other amounts, whether or not included in an Eligible
Employee's taxable income. Deferral elections under this Plan shall be computed
before taking into account any reduction in an Eligible Employee's Compensation
by salary reduction under Code Section 125 or 401(k), or under this Plan.
2.9 Deferral Account
means a bookkeeping account established for and maintained on behalf of a
Participant to which Compensation amounts are deferred, and net income (or
losses) thereon, are credited under this Plan.
2.10 Deferral Compensation Agreement
means an agreement described in Section 3.4 and entered into by a
Participant and the Company to reduce the Participant's Compensation for a
specified period and contribute such amounts to the Plan, in accordance with
Article III.
2.11 Disability
means "disability" (or similar term) as defined in the Company's long-term
disability program and which results in payments to the Participant under such
program.
2.12 Eligible Employee
means a common law employee of the Company who:
(a) has or will have Compensation for the Plan Year in excess of $85,000.
(b) is a senior officer of the Company; and/or
(c) is identified in writing by the Committee as eligible to participate in
the Plan;
For purposes of determining as of any given date whether the Eligible
Employee's Compensation will satisfy (a) above, the Committee may project the
Eligible Employee's current rate of Compensation on a Plan Year basis. Except as
otherwise provided in Section 3.1 (concerning an individual who ceases to be an
Eligible Employee) and Section 3.3 (concerning an individual who first becomes
an Eligible Employee on or after the first day of a Plan Year), an individual's
status as an Eligible Employee for a Plan Year shall be determined immediately
prior to the first day of the Plan Year. An individual's status who becomes an
Eligible Employee on or after the first day of a Plan Year but prior to the next
calendar quarter shall be determined prior to that calendar quarter.
Notwithstanding the foregoing, the Committee may determine in writing that an
otherwise Eligible Employee shall not be eligible to participate in this Plan.
2.13 ERISA
means the Employee Retirement Income Security Act of 1974, as amended.
2.14 Hardship
means an unforeseeable and unanticipated emergency which is caused by an
event beyond the control of the Participant or Beneficiary, and which would
result in severe financial hardship to the Participant or Beneficiary if a
distribution or revocation of a deferral election were not permitted. Hardship
conditions will be evaluated in accordance with the terms of Treasury
Regulations Section 1.457-2(h)(4). The Committee will have sole discretion to
determine whether a Hardship condition exists and the Committee's determination
will be final.
A Participant must submit a written request for a Hardship to the Committee
on the form and in the manner prescribed by the Committee. The Hardship request
must: (i) describe and certify the Hardship condition and the severe financial
need; and (ii) state whether the Participant requests a withdrawal of all or a
portion of his vested Deferral Account to meet the severe financial need. The
Committee will have sole discretion to determine whether a Hardship exists and
to determine the appropriate action, if any, provided however, in no event will
the Committee approve a Hardship distribution request for expenses related to
any medical condition or expenses related to the death of any person unless the
request for distribution is submitted to the Committee and approved by the
Committee for Hardship distribution prior to the date on which the expense is
incurred. The Committee, in its sole discretion may make exception to the
foregoing rule if it determines that the circumstances creating the expense for
which reimbursement is sought were not reasonably foreseeable. Regardless of
whether the Participant desires to reduce or cease any Compensation amounts to
be deferred after the Hardship request is made, the Participant will be
precluded from deferring Compensation for the remainder of the Plan Year in
which a Hardship is approved by the Committee.
2.15 Insolvent
means the Company is (i) unable to pay its debts as they become due, or
(ii) subject to a pending proceeding as a debtor under the United States
Bankruptcy Code.
2.16 Investment Fund or Funds
means the investment fund or funds designated by the Committee as the basis
for determining the investment return to be allocated to the Participants'
Deferral Accounts. The Committee may change the Investment Funds at such times
as it deems appropriate. An Investment Fund may include or consist solely of
publicly traded securities of the Company.
2.17 Participant
means an Eligible Employee who is eligible to participate in the Plan as
provided in Section 3.1 and who has made an election to defer Compensation
pursuant to the Plan.
2.18 Plan
means the Security National Financial Corporation Deferred Compensation
Plan, as set forth in this document, as amended from time to time.
2.19 Plan Year
means the Company's fiscal year, beginning January 1 and ending December
31.
2.20 Retirement Age
means, while employed by the Company, attainment of age 55 with 10 Years of
Service ("Early Retirement Age"), or attainment of age 65, without regard to
Years of Service.
2.21 Year of Service
means, with respect to a Participant, a calendar year during which the
Eligible Employee was in full time employment with the Company and for the
entire year. Full time employment shall be determined according to the rules
adopted and utilized by the Company to classify full time employees.
ARTICLE III
PARTICIPATION
3.1 Eligibility
An Eligible Employee of the Company shall participate in the Plan only to
the extent and for the period that the Eligible Employee satisfies the
definition of Eligible Employee in this Plan, is selected by the Committee to
participate and is a member of select group of management or highly compensated
employees, as such group is described under Sections 201(2), 301(a)(3) and
401(a)(1) of ERISA. An individual who is an Eligible Employee as of the first
day of the Plan Year but who ceases to be an Eligible Employee during the Plan
Year shall continue to participate in the Plan with respect to any Deferred
Compensation Agreements in effect for the Plan Year, but shall terminate
participation as of the end of the Plan Year. The Participant shall not be
permitted to enter into any new Deferred Compensation Agreements with the
Company unless and until the individual again becomes an Eligible Employee.
3.2 Participation
An Eligible Employee who participates in the Plan may elect to defer the
receipt of compensation earned by the Eligible Employee by executing an
agreement as described in Section 3.4. The Eligible Employee shall make the
election in accordance with Section 3.3. The Company shall withhold amounts
deferred by the Participant in accordance with this election. The Participant's
deferred amounts shall be credited to the Deferral Account as provided in
Article V and distributed in accordance with Article VI. An election to defer
receipt of Compensation shall continue in effect for a given Plan Year unless
the Participant separates from employment.
3.3 Election Procedure
An election to defer Compensation under an agreement described in Section
3.4 is made by executing a Deferred Compensation Agreement on the form and in
the manner prescribed by the Committee. The Agreement must be properly
completed, signed and delivered to the Company prior to the first day of the
Plan Year for which Compensation shall be earned, provided however, that an
individual who becomes an Eligible Employee for the first time on or after the
first day of a Plan Year but prior to the first day of any calendar quarter
during the Plan Year shall be permitted to make an election to defer
Compensation that will be earned on and after the first day of the next
applicable calendar quarter and for the remainder of the Plan Year by executing
a Deferred Compensation Agreement prior to that date.
3.4 Deferred Compensation Agreement
A Deferred Compensation Agreement shall remain in effect for the Plan Year
and for all subsequent Plan years until amended or revoked by the Participant or
terminated by the Company as provided in Section 3.5. The Deferred Compensation
Agreement shall be applicable only to Compensation described in paragraphs (a)
through (c) earned after the date on which the Agreement is effective. The
Agreement shall define the amount of Compensation that shall be deferred for the
Plan Year, and for all subsequent Plan Years and may define differing deferral
amounts of Base Salary and Bonus(es) payable to the Eligible Employee for the
Plan Year, subject to the following:
(a) Base Salary. A Participant shall be permitted to defer a maximum
of fifty (50%) of Base Salary earned in a Plan Year. In the case of a
Participant whose Base Salary contains a commission element, the
Participant shall be permitted to defer a maximum of fifty percent (50%) of
all commissions earned in the Plan Year.
(b) Bonus. A participant shall be permitted to defer a maximum of one
hundred percent (100%) of all Bonus(es) with respect to a Plan Year.
(c) Minimum Deferral. The minimum deferral percentage which may be
elected by an Eligible Employee, whether applicable to Base Salary, Bonus
or both shall be five percent (5%). Additional deferral amounts shall be in
five percent (5%) increments. The Committee may, in its discretion,
establish a greater minimum deferral percentage amount or incremental
deferral percentage applicable to Base Salary or Bonus(es) for any given
Plan Year.
(d) Hardship Withdrawal Request. All deferrals by an Eligible Employee
for the remainder of the Plan Year shall cease in the event the Committee
approves a request of the Eligible Employee for a Hardship withdrawal for
that Plan Year. No cessation of deferrals shall affect any limit
established pursuant to Section 3.4(c) above, and no deferral amounts so
reduced or not made shall be required to be made in addition to any future
deferrals that are not affected by the Hardship request.
3.5 Irrevocable Election
A Participant's Deferred Compensation Agreement for a given Plan Year
cannot be amended by the Participant and, except as provided in Section 3.4(d)
and this Section 3.5, is irrevocable. A Participant shall be permitted, prior to
the commencement of each subsequent Plan Year following execution of the
Deferred Compensation Agreement, to amend the deferral amount applicable to the
Participant's Compensation or to revoke the Deferred Compensation Agreement
entirely. The amendment or revocation shall be effective only as of the first
day of the next following Plan Year and shall be accomplished by execution of a
new Deferred Compensation Agreement, which shall supersede all previously
executed Agreements. The Company reserves the right to modify any Deferred
Compensation Agreement to reflect a change in Plan provisions or for
administrative convenience.
A Participant's election to defer Compensation under the Deferred
Compensation Agreement shall become null and void upon the Participant's
termination from employment with the Company, and no Compensation that may be
payable after the Participant terminates from employment with the Company and
otherwise would be subject to such Agreements shall be deferred under this Plan.
3.6 Community and Marital Property
The spouse of a Participant shall have a community or marital property
interest in the Participant's Deferral Account, but only to the extent required
by applicable law, which the spouse may pass to a third party upon his or her
death. If it is intended that a spouse relinquish his or her community or
marital property interest in the Participant's Deferral Account, the spouse must
execute a waiver in which he or she clearly states an intention to relinquish
his or her rights under community or marital property law with respect to the
Deferral Account. A spouse's consent to a Participant's designation of a
non-spouse Beneficiary is not sufficient to effect a waiver.
ARTICLE IV
COMPANY CONTRIBUTIONS
4.1 Company Contributions
The Company may, in its sole discretion, contribute to the Plan any amount
it determines from time to time. Any Company contribution made pursuant to this
Section 4.1 shall be credited as provided in Article V to the Deferral
Account(s) of the Participant or Participants designated by the Company at the
time the contribution is made and distributed in accordance with Article VI.
4.2 Vesting
A Participant's interest in (i) the Compensation deferred to his or her
Deferral Account pursuant to Sections 3.2 through 3.4 of the Plan, (ii) any
Company contributions made to the Plan for a Plan Year in accordance with
Section 4.1 of the Plan and allocated to his Deferral Account, and (iii) any
earnings credited to the Participant's Deferral Account pursuant to Section 5.6
of the Plan, shall be at all times fully vested and nonforfeitable.
ARTICLE V
PARTICIPANT ACCOUNT BALANCES
5.1 Establishment of Accounts
The Committee may select an independent record keeper (who may be an
affiliate of the Company) to establish and maintain a Deferral Account on behalf
of each Participant. Contributions and net income (or losses) will be credited
to each Deferral Account in accordance with the provision of this Article.
5.2 Bookkeeping
Deferral Accounts will be primarily for accounting purpose and will not
restrict the operation of the Plan or require separate earmarked assets to be
allocated to any account. The establishment of a Deferral Account will not give
any Participant the right to receive any asset held by the Company in connection
with the Plan or otherwise.
5.3 Crediting Deferred Compensation
The Committee will credit to a Participant's Deferral Account any amount
deferred by the Participant as soon as practicable following the pay period to
which such amount would have been paid to the Participant absent a Deferred
Compensation Agreement.
5.4 Crediting Company Contributions
As of the end of each Company payroll period, the Committee shall credit to
Participant's Deferral Account the amount of any Company contributions made by
the Company pursuant to Section 4.1; provided, however, that the Committee may,
in its discretion, credit Company contributions less frequently, but not less
than annually, as the Committee may deem necessary or appropriate in furtherance
of proper Plan administration.
5.5 Establishment of Investment Funds
The Committee, in its sole discretion, will establish one or more
Investment Funds which will be maintained for the purpose of determining the
investment return to be credited to a Participant's Deferral Account. The
Committee may change from time to time the number, identity or composition of
the Investment Funds or discontinue the availability of any Investment Fund. The
Investment Funds will reflect investment options which are available in the
marketplace for self directed accounts in retirement plans and may be (but need
not be) the same funds available through any qualified retirement plan sponsored
by the Company. An Investment Fund may also consist exclusively of publicly
traded securities of the Company.
Pursuant to rules adopted by the Committee each Participant will indicate
the Investment Funds to which contributions under Section 5.3 and any existing
Deferral Account balance are to be credited. Investment Fund elections by
Participants must be made in twenty-five percent (25%) increments and at such
times and in such manner as the Committee will specify. A Participant may change
his or her Investment Fund at any time and in such manner as the Committee may
specify. Each Participant shall be provided from time to time with the
investment "results" of the selected Investment Funds. The Company's liability
to the Participant for amounts in the Deferred Compensation Account will include
gains and losses attributed to the Investment Funds selected by the Participant.
5.5 Crediting Investment Results
A Participant's Deferral Account balance will be increased or decreased to
reflect investment results, as they occur. Deferral Accounts will be credited
with the investment return of the Investment Funds in which the Participant
elected to be deemed to participate. The credited investment return is intended
to reflect the actual performance of the Investment Funds net of any investment
or management fees. Nevertheless, no provision of this Plan shall be interpreted
to require the Company to actually invest any amounts in any particular fund,
whether or not such fund is one of the Investment Funds available for selection
by Participants in the Plan.
5.6 Notification to Participants
The Committee shall notify each Participant with respect to the status of
the Participant's Deferral Account as soon as practicable after the end of each
Plan Year. Neither the Company nor the Committee to any extent warrants,
Guarantees or represents that the value of any Participant's Deferral Account at
any time will equal or exceed the amount previously allocated or contributed
thereto.
ARTICLE VI
DISTRIBUTION OF ACCOUNTS
6.1 Distribution Due to Separation from Employment on or after Retirement Age
A Participant who separates from employment with the Company on or after
attaining Retirement Age (or Early Retirement Age, if applicable) shall receive
his vested Deferral Account at the time and in the manner elected by the
Participant. An election regarding the time (Retirement Age or Early Retirement
Age) and manner of payment of the Participant's Deferral Account balance
(including all future years' contributions) shall be made at the time the
Participant first commences participation in the Plan and may be amended
thereafter at the election of the Participant, provided that any amendment will
only be valid if made concurrent with the Participant's most recent election to
defer Compensation under Section 3.3 or concurrent with the Participant's
amendment of his or her Deferred Compensation Agreement under Section 3.5. An
election in any subsequent Deferred Compensation Agreement regarding the time
and manner of payment of the Participant's Deferral Account which alters a prior
election shall supersede the prior election and shall apply to all amounts in
the Participant's Deferral Account which have accrued and continue to accrue in
the Deferral Account until altered by a later election providing for a different
time or manner of payment.
(a) Time of Payment. A Participant's vested Deferral Account balance
shall be paid (or commence to be paid) on the January 1st immediately
following the date of separation from employment on or after attaining
Retirement Age or Early Retirement Age, as elected. Payment cannot commence
prior to January 1st unless specifically approved by the Committee
following petition to the Committee for earlier commencement submitted by
the Participant.
(b) Manner of Payment. A Participant's vested Deferral Account will be
paid in a lump sum cash payment, or if the Participant has elected to
receive payments in substantially equal monthly installments, then over a
period of five (5) or ten (10) years, as elected. If no election has been
made by the Participant, the Deferral Account will be paid in substantially
equal monthly installments over a period of five (5) years.
(c) Value of Deferred Account Balance. The value of a Participant's
Deferral Account to be distributed shall be determined as of the date a
payment is made, and shall be charged with distributions and adjusted for
gains and losses, through such date. To the extent payment shall be made in
installments, the amount of the installment for a particular month may be
adjusted to take into account the value of the Participant's Deferral
Account (as adjusted) and the number of remaining months over which the
installment payments are to be made.
6.2 Distribution Upon Separation Prior to Death or Attaining Retirement Age
A Participant who separates from employment with the Company prior to
attaining Retirement Age for any reason other than death shall receive amounts
credited to his Deferral Account in a lump sum cash payment only, commencing as
soon as administratively feasible following the date of separation from
employment, but in no event later than one hundred twenty (120) days after the
Participant separates from employment. If the Participant's separation from
employment shall occur during the last quarter of any calendar year, the date of
distribution which shall be administratively feasible shall not occur prior to
the next following January 1st. For purposes of this Section 6.2, the value of a
Participant's Deferral Account to be distributed shall be determined as of the
date the payment is made, and shall be credited with earnings through that date.
6.3 Distribution Upon Death
In the event a Participant dies prior to receiving all of his or her vested
Deferral Account, the Participant's Beneficiary shall receive the unpaid portion
of the Participant's Deferral Account in the form of lump sum cash payment no
later than one hundred twenty (120) days after the Participant dies and the
Committee is provided with written proof of the Participant's death. For
purposes of this Section 6.4, the value of a Participant's Deferral Account to
be distributed shall be determined as of the date the payment is made, and shall
be credited with earnings through such date and, in the case of a Participant
who dies while employed with the Company, any deferred amounts that would have
been credited to the account if the Participant had continued employment with
the Company through such date.
6.4 Unscheduled Distributions
A Participant shall be entitled to receive a distribution from the
Participant's Deferral Account at any time (an "Unscheduled Distribution"),
subject to all of the following rules and limitations:
(a) A Participant may receive no more than one (1) Unscheduled
Distribution in any Plan Year.
(b) The Unscheduled Distribution amount shall not include any amounts
deferred by the Participant during the same Plan Year in which the
Unscheduled Distribution occurs.
(c) The Unscheduled Distribution amount shall equal ninety percent
(90%) of the amount requested by Participant. The remaining ten percent
(10%) of the amount requested shall be permanently forfeited from the
Participant's Deferral Account at the time the Unscheduled Distribution is
made and shall no longer be available for distribution to the Participant
from the Plan.
(d) The Participant shall not be permitted to make further deferrals
to the Plan nor shall the Participant be entitled to any allocation of
Company contributions to the Plan prior to the expiration of twelve (12)
months from the date of the Unscheduled Distribution. Following the twelve
month period the Participant shall be treated as newly eligible under
Article III and shall be eligible to execute a new deferral agreement as
provided in Section 3.3.
6.5 Cash Payments Only
All distributions under the Plan will be made in cash by check.
6.6 Disability
For the purposes of Sections 6.2 and 6.3, in the event of a Participant's
Disability, the Participant will be considered to have separated from employment
as of the first day the Participant first becomes eligible for benefits under
the Company's long-term disability plan as then in effect.
6.7 Separation From Employment
An Employee or Participant shall incur a separation from employment due to
the voluntary or involuntary resignation or discharge from his or her position
with the Company, or his or her death, retirement, failure to return to active
work at the end of an authorized leave of absence or the authorized extension(s)
thereof, or upon the happening of any other event or circumstance which, under
the then current policy of the Company results in the cessation of the
employer-employee relationship. Separation from employment shall not be deemed
to occur merely because of a transfer of employment between participating
employers who are affiliated with the Company.
ARTICLE VII
PLAN ADMINISTRATION
7.1 Plan Administrator
This Plan shall be administered by the Committee, which will be the Plan
Administrator. The Committee members shall be appointed by and serve at the
pleasure of the Board.
7.2 Amendment or Termination
The Board may amend any provision of this Plan, and may terminate the Plan
in its entirety, at any time and for any reason. No amendment or termination of
the Plan will reduce any Participant's Deferral Account balance as of the
effective date of such amendment or termination. Upon termination of the Plan,
each Participant's Deferral Account shall be distributed to the Participant at
the times and in accordance with the distribution rules set forth in Article VI.
7.3 Administration of the Plan
The Committee shall have the sole authority to control and manage the
operation and administration of the Plan and have all powers, authority and
discretion necessary or appropriate to carry out the Plan provisions, and to
interpret and apply the terms of the Plan to particular cases or circumstances.
All decisions, determinations and interpretations of the Committee will be
binding on all interested parties, subject to the claims and appeal procedure
necessary to satisfy the minimum standard of ERISA Section 503, and will be
given the maximum deference allowed by law. The Committee may delegate in
writing its responsibilities as it sees fit.
Committee members who are Participants will abstain from voting on any Plan
matters that relate primarily to themselves or that would cause them to be in
constructive receipt of amounts credited to their respective Deferral Account.
The Board will identify three or more individuals to serve as a temporary
replacement of the Committee members in the event that all three members must
abstain from voting.
7.4 Indemnification
The Company will and hereby does indemnify and hold harmless any of its
employees, officers, directors or members of the Committee who have fiduciary or
administrative responsibilities with respect to the Plan from and against any
and all losses, claims, damages, expenses and liabilities (including reasonable
attorneys' fees and amounts paid, with the approval of the Board, in settlement
of any claim) arising out of or resulting from the implementation of a duty, act
or decision with respect to the Plan, so long as such duty, act or decision does
not involve gross negligence or willful misconduct on the part of any such
individual.
7.5 Claims Procedure
A Participant or his Beneficiary (the "Claimant") may file a written claim
for benefits under the Plan with the Committee. Within sixty (60) days of the
filing of the claim, the Committee shall notify the Claimant of the Committee's
decision whether to approve the claim. Such notice shall include specific
reasons for any denial of the claim. Within sixty (60) days of the date the
Claimant was notified of the denial of a claim, the Claimant may appeal the
Committee's decision by making a written submission containing any pertinent
information. Any decision not appealed within such sixty (60) day period shall
be final, binding and conclusive. The Committee shall review information
submitted with an appeal and render a decision within sixty (60) days of the
submission of the appeal. If it is not feasible for the Committee to render a
decision on an appeal within the prescribed sixty (60) day period, the period
may be extended to a one hundred twenty (120) day period.
ARTICLE VIII
MISCELLANEOUS
8.1 Funding Arrangements
The Committee shall determine the amounts it deems necessary or appropriate
to fund the Company's obligation to pay Deferral Accounts. Such amounts shall be
held in trust by a trustee selected by the Board, and shall be earmarked to pay
benefits under the terms of the Plan. The Committee will direct the Company to
make periodic contributions to the trust at such times and in such amounts as
the Committee deems appropriate.
Trust assets cannot be diverted to, or used for, any purpose except
payments to Participant and Beneficiaries under the terms of the Plan, or if the
Company is insolvent, to pay the Company's creditors. Participants and
Beneficiaries will have no right against the Company with respect to the payment
of any portion of the Participant's Deferral Account, except as a general
unsecured creditor of the Company.
8.2 Nonalienation
No benefit or interest of any Participant or Beneficiary under this Plan
will be subject to any manner of assignment, alienation, anticipation, sale
transfer, pledge or encumbrance, whether voluntary or involuntary.
Notwithstanding the foregoing, the Committee will honor community property or
other marital property rights, but only to the extent required by law. Such
rights shall not extend to the recognition of any order which attempts to
divide, alienate or otherwise execute or levy on any Deferral Account and which
is issued in connection with or as a result of any domestic relations
proceeding, no matter the nature of or basis for the order. Prior to
distribution to a Participant or Beneficiary, no Deferral Account balance will
be in any manner subject to the debts, contracts, liabilities, engagements or
torts of the Participant or Beneficiary. Assets held in trust to fund this Plan
may, however, be diverted to pay the Company's creditors, if the Company is
insolvent.
8.3 Limitation of Rights
Nothing in this Plan will be construed to give a Participant the right to
continue in the employ of the Company at any particular position or to interfere
with the right of the Company to discharge, lay off or discipline a Participant
at any time and for any reason, or to give the Company the right to require any
Participant to remain in its employ or to interfere with the Participant's right
to terminate his or her employment.
8.4 Governing Law
To the extent that state law applies, the provisions of this Plan will be
construed, enforced and administered in accordance with the laws of the state of
Utah, except to the extent pre-empted by ERISA.
IN WITNESS WHEREOF, the Company by its duly authorized officer has executed
this Security National Financial Corporation Deferred Compensation Plan as of
the day of , 2002.
Security National Financial Corporation
By:
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Title:-----------------------------