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SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 0-9341
Security National Financial Corporation
(Exact name of registrant as specified in its Charter)
UTAH 87-0345941
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
5300 South 360 West, Suite 250 Salt Lake City, Utah 84123
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 264-1060
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each Class Name of each exchange on which registered
- ------------------------------- -----------------------------------------
Class A Common Stock, $2.00 Par Value Nasdaq National Market
Class C Common Stock, $0.20 Par Value None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No___
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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of the last business day of Registrant's most recently completed
second fiscal quarter was $29,890,000, based upon the closing price on that date
on the Nasdaq National Market. There were 5,054,906 shares of Class A Common
Stock and 6,260,793 shares of Class C Stock outstanding at March 25, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the registrant's 2004 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
============================================================================
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 36 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 mortgage loan segment operates through 17
offices in seven states.
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. Because of
the 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. The Company's
insurance subsidiaries invest their assets (representing in part the pre-paid
funerals) in investments authorized by the respective insurance departments of
their states of domicile. 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 is
planned to lead to improved profitability of the Company. The Company also
pursues growth through acquisitions of both life insurance companies and
cemeteries and mortuaries. The Company's acquisition business strategy is based
on reducing the overhead cost of the acquired company by utilizing existing
personnel, management, and technology while still providing quality service to
customers and policyholders.
The Company was organized as a holding company in 1979, when Security National
Life Insurance Company ("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 1994, Civil Service Employees
Life Insurance Company in 1995, Southern Security Life Insurance Company in 1998
and an asset purchase transaction with Acadian Life Insurance Company in
December 2002. Most recently, on March 16, 2004, the Company purchased all of
the outstanding common stock of Paramount Security Life Insurance Company, a
Louisiana domiciled life insurance company ("Paramount") for the purchase price
of $4,398,000. The purchase was effective January 26, 2004. 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 1994, Greer-Wilson
Funeral Home, Inc. in 1995 and Crystal Rose Funeral Home in 1997. In 1993, the
Company formed Security National Mortgage Company ("Security National Mortgage")
to originate and refinance mortgage loans. Since 1993 Security National Mortgage
Company has opened 17 branches in seven states. 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,
Southern Security Life Insurance Company, and Paramount, issues and distributes
selected lines of life insurance and annuities. The Company's life insurance
business includes funeral plans, interest-sensitive whole life insurance, as
well as other traditional life and accident and health insurance products. The
Company places specific marketing emphasis on funeral plans and traditional
whole life products sold in association with the funding of higher education
costs.
A funeral plan is a small face value life insurance policy that generally has a
face coverage of up to $15,000. 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 can be 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 the simplified underwriting practices that
result in higher mortality costs.
Through the Company's higher education funding division the Company markets
strategies for the funding of a child's education. Pursuant to those strategies
the Company conducts scholarship searches and originates and funds government
guaranteed student loans. The traditional whole life product marketed in
conjunction with funding of higher education costs is a 10-Pay Whole Life with
an Annuity Rider. Both the paid-up aspect of the Whole Life policy and the
savings aspect of the Annuity Rider are marketed as a tool for parents to help
fund the cost of their children's higher education. The product is offered to
parents who have children generally under the age of 25.
Markets and Distribution
The Company is licensed to sell insurance in 36 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.
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.
Higher education funding is for families that desire to prepare for their
children's higher education needs. Such preparation can include searches for
scholarships, grant applications, guaranteed student loan applications, and the
purchase of life insurance and annuities. In 1965, the Higher Education Act
("HEA") created the guaranteed student loan programs participated in by the
Company. Federal Family Education Loan ("FFEL") Program, which now comprises
Federal Stafford Loans (formerly Guaranteed Student Loans), Federal PLUS Loans,
and Federal Consolidation Loans. The FFEL Program makes these long-term loans
available to students attending institutions of higher education, vocation,
technical, business and trade schools and some foreign schools. State or private
nonprofit guaranty agencies insure FFEL's and the Federal Government reimburses
these agencies for all or part of the insurance loans they pay to lenders. The
federal guaranty on a FFEL replaces the security (collateral) usually required
for a long-term consumer loan. These government programs have numerous rules for
qualification and have limits on how much you can borrow. The Company's whole
life product has an Annuity Rider that can provide a way for families to save
additional funds for their children's education. The Company has a student loan
resource department, which is available to policyholders to help parents and
students apply for various scholarships, grants and loans.
A majority of the Company's funeral plan premiums come from the states of
Arizona, Colorado, Idaho, Mississippi, Nevada, Oklahoma, Texas and Utah. 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 100% 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's cemeteries and mortuaries. 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, 2003:
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Life Insurance
Policy/Cert.
Count as of December 31 353,017(1)(2) 341,909(1) 74,335 71,178 75,808
Insurance
in force as of December 31
(omitted 000) $3,164,744(1)(2) $2,635,436(1) $2,425,557 $2,049,789 $2,113,893
Premiums Collected
(omitted 000) $32,255(1)(2) $14,699 $14,860 $14,959 $15,261(1)
(1) Includes asset purchase transaction with Acadian Life Insurance Company on
December 23, 2002. (2) Includes reinsurance assumed under agreement with
Guaranty Income Life Insurance Company on October 1, 2003.
Underwriting
Factors considered in evaluating an application for ordinary life insurance
coverage can 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 based upon its medical limits
and requirements subject to the following general non-medical limits:
Age Nearest Non-Medical
Birthday Limits
0-50 $75,000
51-up Medical information
required (APS or exam)
When underwriting life insurance, the Company will sometimes issue policies with
higher premium rates for substandard risks.
The Company also sells funeral plan insurance. This insurance is a small face
amount, with a maximum policy size of $15,000. It is written on a simplified
medical application with underwriting requirements being a completed
application, a phone inspection on selected applicant and a Medical Information
Bureau inquiry. There are several underwriting classes in which an applicant can
be placed.
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 annuitize 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. Annuities have guaranteed
interest rates of 3% 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 3% to 5%.
Markets and Distribution
The general market for 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 major source of annuity
considerations comes from direct agents. Annuities are also sold in conjunction
with other insurance sales. This is true in both the funeral planning and higher
education planning areas. If an individual does not qualify for a funeral plan
due to health considerations, the agent will often sell that individual an
annuity to fund those final expenses. In the higher education planning area,
most life insurance sales have as part of the transaction an annuity portion
that is used to accumulate funds. The commission rates on annuities are up to
10%.
The following table summarizes the annuity business for the five years ended
December 31, 2003:
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Annuities
Policy/Cert
Count as of
December 31 26,871(1) 7,711 8,021 8,443 8,369
Deposits Collected
(omitted 000) $2,026 $3,215 $2,550 $3,039 $3,906
(1) Includes increase of 19,477 in reinsurance assumed mainly from
Guaranty Income Life Insurance Company Reinsurance Agreement.
Accident and Health
Products
Prior to the acquisition of Capital Investors Life in 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. The diver's policy provides
worldwide coverage for medical expense reimbursement in the event of diving or
water sports accidents.
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, 2003:
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Accident
and Health
Policy/Cert. Count
as of December 31 17,391 18,921 19,343 21,454 24,078
Premiums Collected
(omitted 000) $352 $365 $413 $464 $549
Reinsurance
When a given policy exceeds the Company's retention limits, the Company
reinsures with other companies that portion 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. The Company remains
obligated for amounts ceded in the event the reinsurers do not meet their
obligations.
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, 2003, reinsured by other companies aggregated
$213,515,000, representing approximately 14.7% 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 13 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 nine separate stand-alone mortuary facilities.
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 100% 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
approved to underwrite and process 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. The Company has branch offices in Salt Lake City (3), Bountiful and
Orem, Utah; Valencia, San Diego and Sacramento, California; Orlando,
Jacksonville and Tampa, Florida; Colorado Springs and Denver, Colorado; Phoenix,
Arizona; Las Vegas, Nevada; and Dallas and Houston, Texas. The average loan size
for residential loans is $150,000.
The Company's mortgage loan originations are through full time mortgage loan
officers and wholesale brokers who are paid a sales commission ranging between
..7% to 3.0% of the loan amount. Prospective customers are located through
contacts with builders, real estate agents and regional sales representatives..
Recent Acquisitions and Other Business Activities
Paramount Security Life Insurance Company
On March 16, 2004, with the approval of the Louisiana Department of Insurance,
Security National Life Insurance Company completed a stock purchase transaction
with Paramount Security Life Insurance Company, a Louisiana domiciled insurance
company located in Shreveport, Louisiana, to purchase all outstanding shares of
common stock of Paramount. As of December 31, 2003, Paramount had 9,383 policies
in force and 29 agents. The purchase consideration was $4,398,000 and was
effective January 26, 2004. For the year ended December 31, 2003, Paramount had
revenues of $614,000 and net income of $76,000. As of December 31, 2003,
statutory assets and capital and surplus were $6,073,000 and $4,100,000,
respectively.
Paramount is licensed in the State of Louisiana and is permitted to appoint
agents who do not have a full life insurance license. These agents are limited
to selling small life insurance policies in the final expense market. The
Company believes that with this license it will be able to expand its operations
in Louisiana. The Company anticipates servicing the Paramount policyholders out
of its Jackson, Mississippi office and has closed the Shreveport office.
Acadian Life Insurance Company
On December 23, 2002, the Company completed an asset purchase transaction
through its wholly owned subsidiary, Security National Life with Acadian from
which it acquired $75,000,000 in assets and $75,000,000 in insurance reserves.
The acquired assets consist primarily of approximately 275,000 funeral insurance
policies in force in the state of Mississippi. The assets were originally
acquired by Acadian from Gulf National Life Insurance Company ("GNLIC") on June
6, 2001, which, at that time consisted of all of GNLIC's insurance policies in
force and in effect on June 1, 2001 (the "Reinsured Business").
As a part of the transaction, Security National Life entered into a Coinsurance
Agreement with Acadian, in which Security National Life agreed to reinsure all
the liabilities related to policies held by Mississippi policyholders. The terms
included the payment of all legal liabilities, obligations, claims and
commissions of the acquired policies. The effective date of the Coinsurance
Agreement was September 30, 2002, subsequent to Acadian's recapture of the
insurance in force from its reinsurer Scottish Re (U.S.) Inc. on September 30,
2002.
Under the terms of the Coinsurance Agreement, Security National Life agreed to
assume all of the risks (including deaths, surrenders, disability, accidental
deaths and dismemberment) on the reinsurance policies as of the effective date
of the Agreement. Acadian represented and warranted that each of the reinsured
policies was in force as of the effective date (including policies which may be
lapsed subject to the right of reinstatement, policies not lapsed but in
arrears, and policies in force and in effect as paid up and extended term
policies) with premiums paid and its face amount, insured, and all other
characteristics accurately reflected. Security National Life accepted liability
for all the risks under the reinsured policies on eligible lives for all
benefits occurring on or after the effective date of the agreement. The
liability of Security National Life under the coinsurance treaty began as of
September 30, 2002.
The Coinsurance Agreement further provided that Acadian was required to pay
Security National Life an initial coinsurance premium in cash or assets
acceptable to Security National Life in an amount equal to the full coinsurance
reserves, not including the Incurred But Not Reported (IBNR) reserve as of the
effective date. The ceding commission to be paid by Security National Life to
Acadian for the reinsured policies is to be the recapture amount to be paid by
Acadian to Scottish Re (U.S.), Inc., which was approximately $10,000,000. After
the initial coinsurance premium, the coinsurance premiums payable by Acadian to
Security National Life are to be equal to all of the premiums collected by
Acadian on the reinsurance policies subsequent to December 31, 2002.
The Coinsurance Agreement further provided Security National Life the right to
assume all right, title and interest to the reinsured policies, as well as other
similar policies written by Acadian under similar terms and conditions in the
state of Mississippi from September 30, 2002, through termination of the
Coinsurance Agreement, with an Assumption Reinsurance Agreement, subject to all
regulatory approvals as required by law, including Security National Life
becoming an admitted insurer in the State of Mississippi. In the event Acadian
were to come under any supervision by a state regulator or in the event Acadian
were to apply for or consent in the appointment of, or the taking of possession
by, a receiver, custodian, regulator, trustee or liquidator of itself or of all
or a substantial part of its assets, make a general assignment for the benefit
of its creditors, commence a voluntary case under the Federal Bankruptcy Code,
file a petition seeking to take advantage of any other law relating to
bankruptcy, insolvency, reorganization or winding up, Security National Life and
Acadian were to be deemed to have converted the Coinsurance Agreement to an
Assumption Reinsurance Agreement one day prior to such insolvency or other
actions and Security National Life was to be deemed to have assumed the
reinsurance policies as of one day prior to the date thereof.
Subsequent to the coinsurance agreement, Security National Life entered into an
Assumption Agreement effective January 1, 2003, with Acadian, in which Security
National Life agreed to assume certain of the liabilities related to the
reinsurance policies. Under the terms of the Assumption Agreement, Acadian
agreed to cede to Security National Life, and Security National Life agreed to
assume the stated insurance risks and contractual obligations of Acadian
relating to the Reinsured Business. Security National Life agreed to pay all
legal liabilities and obligations, including claims and commissions, of Acadian
with respect to the Reinsured Business arising on or after January 1, 2003, in
accordance with the terms and conditions of the reinsured policies.
The Assumption Agreement also requires Security National Life to issue a
certificate of assumption for each policy in force included in the Reinsured
Business, reinsuring such policies according to the terms thereof, provided that
Security National Life may be subrogated to and substituted for all rights,
privileges and interests accruing under such policies, and provided further that
all obligations and liabilities assumed by Security National Life are assumed
subject to the terms, limitations and conditions of the insurance policies
included in the Reinsured Business and all defenses, counterclaims and off-sets
that are or might thereafter become available to Security National Life.
Under the Assumption Agreement Security National Life agreed to assume only
those insurance risks and contractual obligations included within the Reinsured
Business of Acadian. Security National Life did not agree to assume any extra
contractual or other liability or obligations of Acadian. In addition, Security
National Life did not agree to assume any policy issued to an insured whose
death occurred prior to January 1, 2003, and for which a death claim had been
received by Acadian prior to that date. However, Security National Life did
agree to assume any valid claim of an insured whose death occurred prior to
January 1, 2003, and for which a death claim was not received by Acadian prior
to that date.
The Assumption Agreement further provided that as of January 1, 2003, Acadian
was to transfer and assign to Security National Life all of its right, title and
interest in the reinsured policies, including policies which may be lapsed
subject to the right of reinstatement, and policies in force and in effect as
paid up and extended term policies. Acadian further agreed to turn over to
Security National Life, as of January 1, 2003, all policy owner service,
underwriting and other files on hand that may be needed by Security National
Life in the continuation of the Reinsured Business, and Acadian further agreed
to turn over all such records and record books as may be necessary for carrying
on the Reinsured Business, including all such permanent records of Acadian
necessary for Security National Life to continue in force in effect the
reinsured policies.
On December 23, 2002, Security National Life also entered into an Asset Purchase
Agreement with Acadian, in which Acadian agreed to transfer and convey to
Security National Life all of Acadian's right, title and interest in and to the
certain assets of Acadian. The assets included the following: (i) computer
hardware; (ii) licensed
software from International Business Machines, Inc. ("'IBM") for certain
software utilized in the maintenance of Acadian's general ledger accounting
records, for use on Acadian's AS400 computer; (iii) owned software developed by
employees or contractors of Acadian or Gulf National Life Insurance Company and
utilized by Acadian in accounting for premiums received, reserve computations,
and for other purposes; (iv) certain furniture and equipment; (v) the use of the
name "Gulf National Life Insurance Company" alone or as part of any other
tradename, as well as the logo "GNL"; (vi) the sublease of certain real property
located in Jackson, Mississippi; and (vii) the assignment and assumption of
certain agreements and arrangements. Following the closing of the asset purchase
transaction with Acadian, Security National Life intends to continue to operate
the business it acquired from Acadian in the state of Mississippi.
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.
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, 2003, SSLIC Holding
owns approximately 77% 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, 2003, of approximately $77.7 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, 2003, which was filed with the Securities Exchange Commission
on March 29, 2004, Commission File No. 2-35669.
Regulation
The Company's insurance subsidiaries, Security National Life, Southern Security,
and Paramount 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, Florida and Louisiana
under insurance holding company legislation, and other states where applicable.
Generally, 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 and cemeteries are governed and licensed by
state statutes and city 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 and to various state licensing acts and regulations. These
regulations, among other things, specify minimum capital requirements, 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.
Income Taxes
The Company's insurance subsidiaries, Security National Life, Southern Security
and Paramount 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, Southern Security and Paramount 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, Southern Security and Paramount 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 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 a number of mortgage
companies and banks in the same geographic area in which the Company is
operating that are better capitalized, have longer business histories, and more
established positions in the community. The mortgage market in general is
sensitive to changes in interest rates and the refinancing market is
particularly vulnerable to changes in interest rates.
Employees
As of December 31, 2003, the Company employed 407 full-time and 38 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 Headquarters Owned (1) 33,000
Salt Lake City, Utah
755 Rinehart Rd. Insurance Operations/ Owned (2) 27,000
Lake Mary, Florida Mortgage Sales
6522 Dogwood View Parkway Insurance Operations Leased (3) 5,300
Jackson, Mississippi
410 North 44th Street,
Ste 190 Mortgage Sales Leased (4) 3,700
Phoenix, Arizona
12150 Tributary Point Dr.
Ste.160 Mortgage Sales Leased (5) 1,800
Gold River, California
7676 Hazard Center Drive
Ste. 625 Mortgage Sales Leased (6) 1,300
San Diego, California
27201 Tourney Road Ste. 125 Mortgage Sales Leased (7) 1,600
Valencia, California
Item 2. Properties (Continued)
- --------------------
Approximate
Owned Square
Location Function Leased Footage
- -------- -------- ------ -------
6208 Lehman Drive Ste. 201 Mortgage Sales Leased (8) 2,200
Colorado Springs, Colorado
14001 East Lliff Ave.
Ste. 120 Mortgage Sales Leased (9) 1,800
Aurora, Colorado
7785 Baymeadows Way, Ste. 101 Mortgage Sales Leased (10) 1,800
Jacksonville, Florida
5620 Tara Blvd. Ste. 103 Mortgage Sales Leased (11) 1,200
Bradenton, Florida
6655 W. Sahara Ste. A-214 Mortgage Sales Leased (12) 2,300
Las Vegas, Nevada
12750 Merit Drive, Ste. 1212 Mortgage Sales Leased (13) 2,100
Dallas, Texas
10850 Richmond Ave., Ste. 270 Mortgage Sales Leased (14) 2,400
Houston, Texas
535 West 500 South, Ste. 1 Mortgage Sales Leased (15) 1,500
Bountiful, Utah
5258 Pinemont Dr. Ste. B280 Mortgage Sales Owned (16) 2,900
Murray, Utah
970 East Murray-Holladay Rd. Mortgage Sales Leased (17) 6,600
Ste. 4A
Salt Lake City, Utah
474 West 800 North, Ste. 102 Mortgage Sales Leased (18) 2,000
Orem, Utah
(1) The Company leases an additional 5,576 square feet of the facility to
unrelated third parties for approximately $96,500 per year, under
leases expiring at various dates after 2003.
(2) The Company leases an additional 9,903 square feet of the facility to
unrelated third parties for approximately $160,400 per year, under
leases expiring at various dates after 2003.
(3) The Company leases this facility for $84,000 per year. The lease
expires in July 2005
(4) The Company leases this facility for $35,300 per year. The lease
expires in August 2004.
(5) The Company leases this facility for $48,100 per year. The lease
expires in July 2004.
(6) The Company leases this facility for $42,800 per year. The lease
expires in June 2008.
(7) The Company leases this facility for $39,200 per year. The lease
expires in November 2005.
(8) The Company leases this facility for $27,300 per year. The lease
expires in June 2006.
(9) The Company leases this facility for $27,500 per year. The lease
expires in June 2006.
(10) The Company leases this facility for $27,200 per year. The lease
expires in September 2006.
(11) The Company leases this facility for $23,800 per year. The lease
expires in July 2006.
(12) The Company leases this facility for $49,100 per year. The lease
expires in October 2006.
(13) The Company leases this facility for $25,600 per year. The lease
expires in January 2006.
(14) The Company leases this facility for $37,400 per year. The lease
expires in November 2004.
(15) The Company leases this facility for $17,800 per year. The lease
expires in October 2006.
(16) The Company leases an additional 113,839 square feet of the facility
to unrelated third parties for approximately $931,600 per year, under
leases expiring at various dates after 2003.
(17) The Company leases this facility for $103,800 per year. The lease
expires in December 2004.
(18) The Company leases this facility for $34,800 per year. The lease
expires in February 2007.
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 its business in the foreseeable future.
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, Utah 1973 7 40 7 33
Mountain View
Cemetery(3) 3115 E. 7800 So.
Salt Lake City, Utah 1973 26 54 17 37
Redwood
Cemetery(3)(5) 6500 So. Redwood Rd.
West Jordan, Utah 1973 40 78 35 43
Holladay Memorial
Park(4)(5) 4800 So. Memory Lane
Holladay, Utah 1991 6 14 6 8
Lakehills Cemetery(4) 10055 So. State
Sandy, Utah 1991 12 41 6 35
Singing Hills Memorial
Park(6) 2798 Dehesa Rd.
El Cajon, California 1995 6 35 3 32
(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, 2003, there were mortgages of approximately $36,000
collateralized by the property and facilities at Memorial Estates
Lakeview, Mountain View and Redwood Cemeteries.
(4) As of December 31, 2003, there were mortgages of approximately
$1,600,000 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, 2003, there was a mortgage of approximately
$459,000 collateralized by the property.
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, Utah 1973 3 1 20,000
Memorial Estates, Inc.:
Redwood Mortuary 6500 South Redwood Rd.
West Jordan, Utah 1973 2 1 10,000
Mountain View Mortuary 3115 East 7800 South
Salt Lake City, Utah 1973 2 1 16,000
Lakeview Mortuary 1700 East Lakeview Dr.
Bountiful, Utah 1973 0 1 5,500
Paradise Chapel 3934 East Indian
Funeral Home School Road
Phoenix, Arizona 1989 2 1 9,800
Deseret Memorial, Inc.:
Colonial Mortuary(2) 2128 South State St.
Salt Lake City, Utah 1991 1 1 14,500
Deseret Mortuary(2) 36 East 700 South
Salt Lake City, Utah 1991 2 2 36,300
Lakehills Mortuary 10055 South State St.
Sandy, Utah 1991 2 1 18,000
Cottonwood Mortuary(2) 4670 South Highland Dr.
Salt Lake City, Utah 1991 2 1 14,500
Camelback Sunset
Funeral Home(1) 301 West Camelback Rd.
Phoenix, Arizona 1994 2 1 11,000
Name of Date Viewing Square
Mortuary Location Acquired Room(s) Chapel(s) Footage
-------- -------- -------- ------- --------- -------
Greer-Wilson:
Greer-Wilson
Funeral Home 5921 West Thomas Road
Phoenix, Arizona 1995 2 2 25,000
Avondale Funeral Home 218 North Central
Avondale, Arizona 1995 1 1 1,850
Crystal Rose Funeral Home(3) 9155 W. VanBuren
Tolleson, Arizona 1997 0 1 9,000
(1) As of December 31, 2003 there were mortgages of approximately $61,000
collateralized by the property and facilities of Camelback Sunset
Funeral Home.
(2) As of December 31, 2003, there were mortgages of approximately
$1,600,000 collateralized by the property and facilities at Deseret
Mortuary, Cottonwood Mortuary, Holladay Memorial Park, Lakehills
Cemetery and Colonial Mortuary.
(3) As of December 31, 2003, there was a mortgage of approximately
$195,000, collateralized by the property and facilities of Crystal
Rose Funeral Home.
Item 3. Legal Proceedings
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 in
the Third Judicial Court, Salt Lake County, Utah. The action asserts that
Memorial Estates delivered to Lynn W. Brown six 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 also asserted among other things that Thomas "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." The formal discovery
cutoff was January 15, 2004. The Company has been verbally informed that Thomas
will dismiss the case but such has not been communicated in writing. Until the
foregoing actually happens, the Company intends to vigorously defend the matter,
including an assertion that the statute of limitations bars the claims.
An action was brought against Southern Security Life Insurance Company by
National Group Underwriters, Inc. ("NGU") in state court in the State of Texas.
The case was removed by the Company to the United States District Court for the
Northern District of Texas, Fort Worth Division, with Civil No. 4:01-CV-403-E.
An amended complaint was filed on or about July 18, 2001. The amended complaint
asserted that NGU had a contract with the Company wherein NGU would submit
applications for certain policies of insurance to be issued by the Company. It
is alleged that disputes have arisen between NGU and the Company with regard to
the calculation and payment of certain commissions as well as certain production
bonuses.
NGU alleged that it had been damaged far in excess of the $75,000 minimum
jurisdictional limits of the federal court. NGU also sought attorney's fees and
costs as well as prejudgment and postjudgment interest. A second amended
complaint and a third amended complaint, which included a fraud claim, were
filed. A motion was filed by the Company to dismiss the third amended complaint,
including the fraud claim. The court denied the motion. The Company
counterclaimed for what it claimed to be a debit balance owing to it pursuant to
the relationship between the parties (the amount subject to reduction as
premiums are received). The Company also sought to recover attorney's fees and
costs, as well as punitive damages on three of its causes of action.
Certain discovery took place. The federal case was dismissed by stipulation. The
matter was refiled in Texas state court, Tarrant County, Case No. 348 195490 02.
The claims of the respective parties are essentially the same as those in
federal court, which claims include fraudulent inducement relative to entering
into a contract, fraud, breach of contract, breach of duty of good faith and
fair dealing, attorney's fees and exemplary damages as well as seeking an
accounting and contesting the interest charges. Certain depositions have been
taken since the filing again in state court and further discovery is
anticipated. The court has yet to rule on the motion. The Company filed a motion
for partial summary judgment with respect to certain items. A trial is presently
set for October 2004. The Company intends to vigorously defend the matter as
well as prosecute its counterclaim.
The Company is not a party to any other legal proceedings outside the ordinary
course of the Company's business or to any other legal proceedings, which, if
adversely determined, would have a material adverse effect on the Company or its
business.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of the Company's shareholders during the
quarter ended December 31, 2003.
PART II
Item 5. Market for the 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. As of March 25, 2004, the closing
sales price of the Class A Common Stock was $7.00 per share. The following are
the high and low market closing sales prices for the Class A Common Stock by
quarter as reported by Nasdaq since January 1, 2002:
Period (Calendar Year) Price Range
High Low
2002
First Quarter 2.81 2.20
Second Quarter 6.48 2.38
Third Quarter 6.10 2.74
Fourth Quarter 6.43 2.48
2003
First Quarter 7.75 4.57
Second Quarter 6.48 5.15
Third Quarter 7.00 5.11
Fourth Quarter 7.49 5.75
2004
First Quarter (through
March 25, 2004) 8.46 6.51
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 1990 through 2003.
As of December 31, 2003, there were 4,518 record holders of Class A Common Stock
and 131 record holders of Class C Common Stock.
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, 2003, are derived from the audited consolidated financial
statements. The data as of December 31, 2003 and 2002, and for the three years
ended December 31, 2003, 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,
2003(1) 2002 2001 2000 1999
------- ---- ---- ---- ----
Revenue
Premiums $23,295,000 $14,077,000 $13,151,000 $12,876,000 $13,176,000
Net investment income 17,303,000 12,540,000 12,947,000 12,136,000 10,631,000
Net mortuary and cemetery sales 10,944,000 10,638,000 9,881,000 8,741,000 9,566,000
Realized (losses) gains on investments (2,000) 1,021,000 10,000 424,000 313,000
Mortgage fee income 92,955,000 57,008,000 40,086,000 22,922,000 14,503,000
Other 550,000 479,000 152,000 305,000 856,000
---------------- ------------- ------------- ------------- -------------
Total revenue 145,045,000 95,763,000 76,227,000 57,404,000 49,045,000
------------- ----------- ----------- ------------ -----------
Expenses
Policyholder benefits 21,755,000 13,756,000 11,775,000 12,931,000 11,976,000
Amortization of deferred
policy acquisition costs 4,929,000 3,994,000 3,870,000 3,189,000 4,858,000
General and administrative expenses 102,926,000 68,459,000 52,247,000 35,959,000 26,959,000
Interest expense 3,642,000 1,970,000 2,791,000 2,126,000 1,119,000
Cost of goods and services of
the mortuaries and cemeteries 2,328,000 2,045,000 1,772,000 1,952,000 2,683,000
--------------- ------------- ------------ ----------- -------------
Total benefits and expenses 135,580,000 90,224,000 72,455,000 56,157,000 47,595,000
------------- ------------ ----------- ----------- ------------
Income before
income tax expense 9,465,000 5,539,000 3,772,000 1,247,000 1,450,000
Income tax expense (2,891,000) (1,565,000) (913,000) (305,000) (230,000)
Minority interest in (income)
loss of subsidiary 22,000 18,000 (18,000) (46,000) (244,000)
--------------- ------------- -------------- ------------- ------------
Net earnings $ 6,596,000 $3,992,000 $ 2,841,000 $ 896,000 $ 976,000
=========== ========== =========== =========== ===========
Net earnings per common share(3) $1.23 $.83 $.63 $.21 $.22
===== ==== ==== ==== ====
Weighted average outstanding
common shares 5,359,000 4,824,000 4,506,000 4,318,000 4,397,000
Net earnings per common
share-assuming dilution(3) $1.20 $.80 $.63 $.21 $.22
===== ==== ==== ==== ====
Weighted average outstanding
common shares-assuming dilution 5,510,000 4,995,000 4,507,000 4,335,000 4,397,000
Item 6. Selected Financial Data - The Company and Subsidiaries (Consolidated)
(Continued)
Balance Sheet Data:
Year Ended December 31,
2003(2) 2002(1) 2001 2000 1999
------- ------- ---- ---- ----
Assets
Investments and restricted assets $112,006,000 $106,161,000 $ 94,514,000 $108,810,000 $ 113,208,000
Cash 19,704,000 38,199,000 8,757,000 11,275,000 12,423,000
Receivables 124,125,000 102,590,000 59,210,000 36,413,000 38,074,000
Other assets 61,075,000 61,112,000 51,088,000 52,249,000 50,593,000
-------------- -------------- -------------- -------------- --------------
Total assets $316,910,000 $308,062,000 $213,569,000 $208,747,000 $214,298,000
============ ============ ============ ============ ============
Liabilities
Policyholder benefits $220,739,000 $217,895,000 $142,291,000 $141,755,000 $140,368,000
Notes & contracts payable 17,863,000 19,273,000 12,098,000 14,046,000 23,341,000
Cemetery & mortuary liabilities 10,562,000 10,076,000 9,344,000 8,659,000 6,638,000
Other liabilities 24,614,000 22,007,000 15,630,000 12,921,000 11,415,000
--------------- ------------- ------------ ------------ ------------
Total liabilities 273,778,000 269,251,000 179,363,000 177,381,000 181,762,000
-------------- ------------- ------------ ------------ ------------
Minority interest 3,957,000 4,298,000 4,237,000 4,625,000 6,046,000
Stockholders' equity 39,175,000 34,513,000 29,969,000 26,741,000 26,490,000
------------- ------------ ------------ ------------ ------------
Total liabilities and
stockholders' equity $316,910,000 $308,062,000 $213,569,000 $208,747,000 $214,298,000
============ ============ ============ ============ ============
(1) Reflects the asset purchase transaction with Acadian Life Insurance
Company on December 23, 2002.
(2) Includes reinsurance assumed under agreement with Guaranty Income Life
Insurance Company on October 1, 2003.
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
traditional whole life 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, 2003 and 2002, 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, including the
Company's insurance subsidiaries. SNMC receives fees from the borrowers and
other secondary fees from third party investors who purchase the loans from
SNMC. SNMC pays the brokers and correspondents a commission for loans that are
brokered through SNMC. In 2001, SNMC opened wholesale branches in Phoenix,
Arizona and Houston, Texas. In 2002 SNMC opened an office in San Diego,
California. In 2003 SNMC opened offices in Tampa and Jacksonville, Florida; Las
Vegas, Nevada; Denver, Colorado; Bountiful, Utah; and Dallas, Texas. SNMC
originated and sold 17,494 ($2,560,000,000 loan amount), 11,737 ($1,721,000,000
loan amount), and 8,738 ($1,268,000,000 loan amount) loans in 2003, 2002 and
2001, respectively.
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, 2003, SSLIC Holding held approximately 77% of
the outstanding shares of common stock of Southern Security Life Insurance
Company ("Southern Security").
On December 23, 2002, the Company completed an asset purchase transaction with
Acadian Life Insurance Company, a Louisiana domiciled life insurance company
("Acadian"), in which it acquired from Acadian $75,000,000 in assets and
$75,000,000 in insurance reserves through its wholly owned subsidiary, Security
National Life Insurance Company, a Utah domiciled life insurance company. The
acquired assets consist primarily of approximately 275,000 funeral insurance
policies in force in the state of Mississippi. The assets were originally
acquired by Acadian from Gulf National Life Insurance Company ("GNLIC") on June
6, 2001, consisting of all of GNLIC's insurance policies in force and in effect
on June 1, 2001.
Significant Accounting Policies and Estimates
The following is a brief summary of our significant accounting policies and a
review of our most critical accounting estimates. For a complete description of
our significant accounting policies, see Note 1 to our financial statements.
Insurance Operations
In accordance with accounting principles generally accepted in the United States
of America (GAAP), premiums and considerations received for interest sensitive
products such as universal life insurance and ordinary annuities are reflected
as increases in liabilities for policyholder account balances and not as
revenues. Revenues reported for these products consist of policy charges for the
cost of insurance, administration charges, amortization of policy initiation
fees and surrender charges assessed against policyholder account balances.
Surrender benefits paid relating to these products are reflected as decreases in
liabilities for policyholder account balances and not as expenses. The Company
receives investment income earned from the funds deposited into account
balances, a portion of which is passed through to the policyholders in the form
of interest credited. Interest credited to policyholder account balances and
benefit claims in excess of policyholder account balances are reported as
expenses in the financial statements.
Premium revenues reported for traditional life insurance products are recognized
as revenues when due. Future policy benefits are recognized as expenses over the
life of the policy by means of the provision for future policy benefits.
The costs related to acquiring new business, including certain costs of issuing
policies and other variable selling expenses (principally commissions), defined
as deferred policy acquisition costs, are capitalized and amortized into
expense. For nonparticipating traditional life products, these costs are
amortized over the premium paying period of the related policies, in proportion
to the ratio of annual premium revenues to total anticipated premium revenues.
Such anticipated premium revenues are estimated using the same assumption used
for computing liabilities for future policy benefits and are generally "locked
in" at the date the policies are issued. For interest sensitive products, these
costs are amortized generally in proportion to expected gross profits from
surrender charges and investment, mortality and expense margins. This
amortization is adjusted when the Company revises the estimate of current or
future gross profits or margins. For example, deferred policy acquisition costs
are amortized earlier than originally estimated when policy terminations are
higher than originally estimated or when investments backing the related
policyholder liabilities are sold at a gain prior to their anticipated maturity.
Death and other policyholder benefits reflect exposure to mortality risk and
fluctuate from year to year on the level of claims incurred under insurance
retention limits. The profitability of the Company is primarily affected by
fluctuations in mortality, other policyholder benefits, expense levels, interest
spreads (i.e., the difference between interest earned on investments and
interest credited to policyholders) and persistency. The Company has the ability
to mitigate adverse experience through adjustments to credited interest rates,
policyholder dividends or cost of insurance charges.
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.
Revenues and costs for at-need sales are recorded when a valid contract exists,
the services are performed, collection reasonably assured and there are no
significant obligations remaining.
Mortgage Operations
Mortgage fee income is generated through the origination and refinancing of
mortgage loans and is realized in accordance with FAS No. 140.
The majority of loans originated are sold to third party investors. The amounts
sold to investors are shown on the balance sheet as due from sale of loans, and
are shown on the basis of the amount of fees due from the investors.
Use of Significant Accounting Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses and the disclosure of contingent
assets and liabilities. It is reasonably possible that actual experience could
differ from the estimates and assumptions utilized which could have a material
impact on the financial statements. The following is a summary of our
significant accounting estimates, and critical issues that impact them:
Fixed Maturities Available for Sale
Securities available-for-sale are carried at fair value, with unrealized holding
gains and losses reported in accumulated other comprehensive income which is
included in stockholders' equity after adjustment for deferred income taxes and
deferred acquisition costs related to universal life products.
The Company uses fair market values based on National Association of Insurance
Commissioners (NAIC) values, versus values associated with normal marketing
pricing services. The Company considers the difference to be immaterial.
The Company is required to exercise judgment to determine when a decline in the
value of a security is other than temporary. When the value of a security
declines and the decline is determined to be other than temporary, the carrying
value of the investment is reduced to its fair value and a realized loss is
recorded to the extent of the decline.
Deferred Acquisition Costs
Amortization of deferred policy acquisition costs for interest sensitive
products is dependent upon estimates of current and future gross profits or
margins on this business. Key assumptions used include the following: yield on
investments supporting the liabilities, amount of interest or dividends credited
to the policies, amount of policy fees and charges, amount of expenses necessary
to maintain the policies, and amount of death and surrender benefits and the
length of time the policies will stay in force.
These estimates, which are revised periodically, are based on historical results
and our best estimate of future expenses.
Cost of Insurance Acquired
Cost of insurance acquired is the present value of estimated future profits of
the acquired business and is amortized similar to deferred acquisition costs.
The critical issues explained for deferred acquisition costs would also apply
for cost of insurance acquired.
Allowance for Doubtful Accounts
The Company accrues an estimate of potential losses for the collection of
receivables. The significant receivables are the result of the Company's
cemetery and mortuary operations and mortgage loan operations. The allowance is
based upon the Company's experience. The critical issues that would impact the
cemetery and mortuary operations is the overall economy. The critical issues for
the mortgage loan operations would be interest rate risk and loan underwriting.
Future Policy Benefits
Reserves for future policy benefits for traditional life insurance products
requires the use of many assumptions, including the duration of the policies,
mortality experience, expenses, investment yield, lapse rates, surrender rates,
and dividend crediting rates.
These assumptions are made based upon historical experience, industry standards
and a best estimate of future results and, for traditional life products,
include a provision for adverse deviation. For traditional life insurance, once
established for a particular series of products, these assumptions are generally
held constant.
Unearned Revenue
The universal life products the Company sells have a significant policy
initiation fees (front-end load), which are deferred and amortized into revenues
over the estimated expected gross profits from surrender charges and investment,
mortality and expense margins. The same issues that impact deferred acquisition
costs would apply to unearned revenue.
Deferred Pre-need Cemetery and Funeral Contracts Revenues and Estimated Future
Cost of Pre-need Sales
The revenue and cost associated with the sales of pre-need cemetery merchandise
and funeral services are deferred until the merchandise is delivered. Also,
trust investment earnings from any pre-need sales placed into trust are also
deferred until the merchandise is delivered.
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.
Mortgage Loan Loss Reserve
The Company accrues an estimate of future losses on mortgage loans sold to third
party investors. The Company may be required to reimburse third party investors
for costs associated with early payoff of loans within the first year of
duration and to repurchase loans in default within the first year. The estimates
are based upon historical experience and best estimate of future liabilities.
Results of Operations
2003 Compared to 2002
Total revenues increased by $49,282,000, or 50.5%, from $95,763,000 for fiscal
year 2002 to $145,045,000 for fiscal year 2003. Contributing to this increase in
total revenues was a $35,947,000 increase in mortgage fee income, a $4,763,000
increase in net investment income, and a $9,218,000 increase in insurance
premiums and other considerations.
Insurance premiums and other considerations increased by $9,218,000, from
$14,077,000 in 2002 to $23,295,000 in 2003. This increase was primarily due to
the additional premiums from policies acquired in the asset purchase transaction
with Acadian Life.
Net investment income increased by $4,763,000, from $12,540,000 in 2002 to
$17,303,000 in 2003. This increase was primarily attributable to the additional
investment income from the assets acquired in the asset purchase transaction
with Acadian Life.
Net mortuary and cemetery sales increased by $306,000, from $10,638,000 in 2002
to $10,944,000 in 2003. This increase was primarily due to additional at-need
cemetery and mortuary sales.
Realized gains on investments and other assets decreased by $1,023,000, from a
gain of $1,021,000 in 2002 to a loss of $2,000 in 2003. The realized gains on
investment and other assets in 2002 was primarily from the sale of property at
Lake Hills Cemetery.
Mortgage fee income increased by $35,947,000, from $57,008,000 in 2002 to
$92,955,000 in 2003. This increase was primarily attributable to a greater
number of loan originations during 2003 due to the opening of new offices and to
lower interest rates resulting in additional borrowers refinancing their
mortgage loans.
Total benefits and expenses were $135,580,000 for 2003, which constituted 93.5%
of the Company's total revenues, as compared to $90,224,000, or 94.2% of the
Company's total revenues for 2002.
During 2003, there was a net increase of $7,999,000 in death benefits,
surrenders and other policy benefits, and in future policy benefits from
$13,756,000 in 2002 to $21,755,000 in 2003. This net increase was primarily due
to the additional death benefits, surrenders and other policy benefits acquired
from the additional policies acquired in the asset purchase transaction with
Acadian Life.
Amortization of deferred policy and pre-need acquisition costs and cost of
insurance acquired increased by $935,000, from $3,994,000 in 2002 to $4,929,000
in 2003. This increase was primarily due to the additional amortization of
deferred policy acquisition costs and cost of insurance acquired from the
additional policies acquired in the asset purchase transaction with Acadian
Life.
General and administrative expenses increased by $34,467,000, from $68,459,000
in 2002 to $102,926,000 in 2003. Contributing to this increase was a $25,422,000
increase in commission expenses, from $42,114,000 in 2002 to $67,537,000 in
2003. Salaries increased $3,666,000, from $10,414,000 in 2002 to $14,080,000 in
2003. Other expenses increased $5,379,000, from $15,931,000, in 2002 to
$21,310,000 in 2003. These increases were primarily the result of additional
expenses due to increased numbers of loan originations made by the Company's
mortgage subsidiary in 2003 and to additional expenses associated with the asset
purchase transaction with Acadian Life.
Interest expense increased by $1,672,000, from $1,970,000 in 2002 to $3,642,000
in 2003. This increase was primarily due to additional warehouse lines of credit
required from the additional mortgage loan originations by the Company's
mortgage subsidiary and bank borrowings for the asset purchase transaction with
Acadian Life.
Cost of the mortuary and cemetery goods and services sold increased by $282,000,
from $2,045,000 in 2002 to $2,327,000 in 2003. This increase was primarily due
to increased at-need cemetery and mortuary sales.
2002 Compared to 2001
Total revenues increased by $19,536,000, or 25.6%, from $76,227,000 for fiscal
year 2001 to $95,763,000 for fiscal year 2002. Contributing to this increase in
total revenues was a $16,922,000 increase in mortgage fee income, a $757,000
increase in net mortuary and cemetery sales and a $926,000 increase in insurance
premiums and other considerations.
Insurance premiums and other considerations increased by $926,000, from
$13,151,000 in 2001 to $14,077,000 in 2002. This increase was primarily due to
the additional premiums from increased sales of the Company's traditional life
products.
Net investment income decreased by $407,000, from $12,947,000 in 2001 to
$12,540,000 in 2002. This decrease was primarily attributable to reduced
interest earned as a result of lower interest rates during 2002.
Net mortuary and cemetery sales increased by $757,000, from $9,881,000 in 2001
to $10,638,000 in 2002. This increase was primarily due to additional at-need
cemetery and mortuary sales.
Mortgage fee income increased by $16,922,000, from $40,086,000 in 2001 to
$57,008,000 in 2002. This increase was primarily attributable to a greater
number of loan originations during 2002 due to lower interest rates.
Total benefits and expenses were $90,224,000 for 2002, which constituted 94.2%
of the Company's total revenues, as compared to $72,455,000, or 95.1% of the
Company's total revenues for 2001.
During 2002, there was a net increase of $902,000 in death benefits, surrenders
and other policy benefits, and an increase of $1,079,000 in future policy
benefits from $11,775,000 in 2001 to $13,756,000 in 2002. This net increase was
primarily the result of an increase in traditional life reserves.
Amortization of deferred policy and pre-need acquisition costs and cost of
insurance acquired increased by $124,000, from $3,870,000 in 2001 to $3,994,000
in 2002. This increase was reasonable based on the underlying nature of
assumptions.
General and administrative expenses increased by $16,212,000, from $52,247,000
in 2001 to $68,459,000 in 2002. Contributing to this increase was a $12,255,000
increase in commission expenses, from $29,859,000 in 2001 to $42,114,000 in
2002. Salaries increased $1,386,000, from $9,028,000 in 2001 to $10,414,000 in
2002. Other expenses increased $2,571,000, from $13,360,000 in 2001 to
$15,931,000 in 2002. These increases were primarily the result of additional
expenses due to increased numbers of loan originations made by the Company's
mortgage subsidiary in 2002.
Interest expense decreased by $821,000, from $2,791,000 in 2001 to $1,970,000 in
2002. This decrease was due to more loan originations from the Company's
mortgage subsidiary being funded from internal sources of funds and lower
interest rates from borrowings from third parties.
Cost of the mortuary and cemetery goods and services sold increased by $169,000,
from $1,772,000 in 2001 to 2,045,000 in 2002. This increase was primarily due to
greater at-need cemetery and mortuary sales.
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 $51,564,000 as of December 31, 2003 compared to
$51,530,000 as of December 31, 2002. This represents 48% of the total insurance
related investments in 2003 as compared to 51% in 2002. 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, 2003, 3% ($1,739,000) and at
December 31, 2002, 4% ($1,903,000) of the Company's total bond investments were
invested in bonds in rating categories three through six which are considered
non-investment grade.
If market conditions were to cause interest rates to change, the market value of
the fixed income portfolio (approximately $82, 810,000) 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) $8,263 $5,456 $(7,221) $(17,089)
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, 2003
and 2002, the life subsidiaries exceeded the regulatory criteria.
The Company's total capitalization of stockholders' equity and bank debt and
notes payable was $57,039,000 and $53,787,000 as of December 31, 2003 and 2002,
respectively. Stockholders' equity as a percent of total capitalization was 69%
and 64% as of December 31, 2003 and 2002, respectively.
Lapse rates measure the amount of insurance terminated during a particular
period. The Company's lapse rate for life insurance in 2003 was 8.6%, as
compared to a rate of 10.7% in 2002.
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 77% of the outstanding shares of common stock of Southern Security
Life Insurance Company, a Florida corporation ("SSLIC"). The Company also
acquired 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.
The Company has 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.
The administrative services fee may be increased, beginning on January 1, 2002,
to reflect increases in the Consumer Price Index, over the index amount as of
January 1, 2001. 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.
The agreement was automatically extended for an additional year.
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.
On December 23, 2002, the Company completed an asset purchase transaction
through its wholly owned subsidiary, Security National Life with Acadian from
which it acquired $75,000,000 in assets and $75,000,000 in insurance reserves.
The acquired assets consist primarily of approximately 275,000 funeral insurance
policies in force in the state of Mississippi. The assets were originally
acquired by Acadian from Gulf National Life Insurance Company ("GNLIC") on June
6, 2001, which, at that time consisted of all of GNLIC's insurance policies in
force and in effect on June 1, 2001 (the "Reinsured Business").
As a part of the transaction, Security National Life entered into a Coinsurance
Agreement with Acadian, in which Security National Life agreed to reinsure all
the liabilities related to policies held by Mississippi policyholders. The terms
included the payment of all legal liabilities, obligations, claims and
commissions of the acquired policies. The effective date of the Coinsurance
Agreement was September 30, 2002, subsequent to Acadian's recapture of the
insurance in force from its reinsurer Scottish Re (U.S.) Inc. on September 30,
2002.
Under the terms of the Coinsurance Agreement, Security National Life agreed to
assume all of the risks (including deaths, surrenders, disability, accidental
deaths and dismemberment) on the reinsurance policies as of the effective date
of the Agreement. Acadian represented and warranted that each of the reinsured
policies was in force as of the effective date (including policies which may be
lapsed subject to the right of reinstatement, policies not lapsed but in
arrears, and policies in force and in effect as paid up and extended term
policies) with premiums paid and its face amount, insured, and all other
characteristics accurately reflected. Security National Life accepted liability
for all the risks under the reinsured policies on eligible lives for all
benefits occurring on or after the effective date of the agreement. The
liability of Security National Life under the coinsurance treaty began as of
September 30, 2002.
The Coinsurance Agreement further provided Security National Life the right to
assume all right, title and interest to the reinsured policies, as well as other
similar policies written by Acadian under similar terms and conditions in the
state of Mississippi from September 30, 2002, through termination of the
Coinsurance Agreement, with an Assumption Reinsurance Agreement, at any time but
in any event not later than nine months subsequent to December 16, 2002, subject
to all regulatory approvals as required by law. In the event Acadian were to
come under any supervision by a state regulator or in the event Acadian were to
apply for or consent in the appointment of, or the taking of possession by, a
receiver, custodian, regulator, trustee or liquidator of itself or of all or a
substantial part of its assets, make a general assignment for the benefit of its
creditors, commence a voluntary case under the Federal Bankruptcy Code, file a
petition seeking to take advantage of any other law relating to bankruptcy,
insolvency, reorganization or winding up, Security National Life and Acadian
were to be deemed to have converted the Coinsurance Agreement to an Assumption
Reinsurance Agreement one day prior to such insolvency or other actions and
Security National Life was to be deemed to have assumed the reinsurance policies
as of one day prior to the date thereof.
The Coinsurance Agreement further provided that Acadian was required to pay
Security National Life an initial coinsurance premium in cash or assets
acceptable to Security National Life in an amount equal to the full coinsurance
reserves, not including the Incurred But Not Reported (IBNR) reserve as of the
effective date. The ceding commission to be paid by Security National Life to
Acadian for the reinsured policies is to be the recapture amount to be paid by
Acadian to Scottish Re (U.S.), Inc., which was approximately $10,000,000. After
the initial coinsurance premium, the coinsurance premiums payable by Acadian to
Security National Life are to be equal to all of the premiums collected by
Acadian on the reinsurance policies subsequent to December 31, 2002.
Subsequent to the coinsurance agreement, Security National Life entered into an
Assumption Agreement effective January 1, 2003, with Acadian, in which Security
National Life agreed to assume certain of the liabilities related to the
reinsurance policies. Under the terms of the Assumption Agreement, Acadian
agreed to cede to Security National Life, and Security National Life agreed to
assume the stated insurance risks and contractual obligations of Acadian
relating to the Reinsured Business. Security National Life agreed to pay all
legal liabilities and obligations, including claims and commissions, of Acadian
with respect to the Reinsured Business arising on or after January 1, 2003, in
accordance with the terms and conditions of the reinsured policies.
The Assumption Agreement also requires Security National Life to issue a
certificate of assumption for each policy in force included in the Reinsured
Business, reinsuring such policies according to the terms thereof, provided that
Security National Life may be subrogated to and substituted for all rights,
privileges and interests accruing under such policies, and provided further that
all obligations and liabilities assumed by Security National Life are
assumed subject to the terms, limitations and conditions of the insurance
policies included in the Reinsured Business and all defenses, counterclaims and
off-sets that are or might thereafter become available to Security National
Life.
Under the Assumption Agreement Security National Life agreed to assume only
those insurance risks in contractual obligations included within the Reinsured
Business of Acadian. Security National Life did not agree to assume any extra
contractual or other liability or obligations of Acadian. In addition, Security
National Life did not agree to assume any policy issued to an insured whose
death occurred prior to January 1, 2003, and for which a death claim had been
received by Acadian prior to that date. However, Security National Life did
agree to assume any valid claim of an insured whose death occurred prior to
January 1, 2003, and for which a death claim was not received by Acadian prior
to that date.
The Assumption Agreement further provided that as of January 1, 2003, Acadian
was to transfer and assign to Security National Life all of its right, title and
interest in the reinsured policies, including policies which may be lapsed
subject to the right of reinstatement, and policies in force and in effect as
paid up and extended term policies. Acadian further agreed to turn over to
Security National Life, as of January 1, 2003, all policy owner service,
underwriting and other files on hand that may be needed by Security National
Life in the continuation of the Reinsured Business, and Acadian further agreed
to turn over all such records and record books as may be necessary for carrying
on the Reinsured Business, including all such permanent records of Acadian
necessary for Security National Life to continue in force in effect the
reinsured policies.
At December 31, 2003, $26,512,545 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.
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements to encourage companies to provide prospective
information about their businesses without fear of litigation so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those projected in such statements. The
Company desires to take advantage of the "safe harbor" provisions of the act.
This Annual Report of Form 10-K contains forward-looking statements, together
with related data and projections, about the Company's projected financial
results and its future plans and strategies. However, actual results and needs
of the Company may vary materially from forward-looking statements and
projections made from time to time by the Company on the basis of management's
then-current expectations. The business in which the Company is engaged involves
changing and competitive markets, which may involve a high degree of risk, and
there can be no assurance that forward-looking statements and projections will
prove accurate.
Factors that may cause the Company's actual results to differ materially from
those contemplated or projected, forecast, estimated or budgeted in such forward
looking statements include among others, the following possibilities: (i)
heightened competition, including the intensification of price competition, the
entry of new competitors, and the introduction of new products by new and
existing competitors; (ii) adverse state and federal legislation or regulation,
including decreases in rates, limitations on premium levels, increases in
minimum capital and reserve requirements, benefit mandates and tax treatment of
insurance products; (iii) fluctuations in interest rates causing a reduction of
investment income or increase in interest expense and in the market value of
interest rate sensitive investment; (iv) failure to obtain new customer, retain
existing customers or reductions in policies in force by existing customers; (v)
higher service, administrative, or general expense due to the need for
additional advertising, marketing, administrative or management information
systems expenditures; (vi) loss or retirement of key executives or employees;
(vii) increases in medical costs; (viii) changes in the Company's liquidity due
to changes in asset and
liability matching; (ix) restrictions on insurance underwriting based on genetic
testing and other criteria; (x) adverse changes in the ratings obtained by
independent rating agencies; (xi) failure to maintain adequate reinsurance;
(xii) possible claims relating to sales practices for insurance products and
claim denials and (xiii) adverse trends in mortality and morbidity.
Off-Balance Sheet Agreements
The Company's off-balance sheet arrangements consist of operating leases for
rental of office space and equipment.
The Company leases office space and equipment under various non-cancelable
agreements, with remaining terms up to four years. Minimum lease payments under
these non-cancelable operating leases as of December 31, 2003, are approximately
as follows:
Years Ending December 31:
2004 $570,000
2005 460,000
2006 236,000
2007 6,000
--------------
$1,272,000
Total rent expense related to these non-cancelable operating leases for the
years ended December 31, 2003 and 2002 was approximately $396,000 and $200,000
respectively.
Recent Accounting Pronouncements
In April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
Under historical guidance, all gains and losses resulting from the
extinguishment of debt were required to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. SFAS No.
145 rescinds that guidance and requires that gains and losses from
extinguishments of debt be classified as extraordinary items only if they are
both unusual and infrequent in occurrence. SFAS No. 145 also amends SFAS No. 13,
"Accounting for Leases" for the required accounting treatment of certain lease
modifications that have economic effects similar to sale-leaseback transactions.
SFAS No. 145 requires that those lease modifications be accounted for in the
same manner as sale-leaseback transactions. The provisions of SFAS No. 145
related to SFAS No. 13 are effective for transactions occurring after May 15,
2002. Adoption of the provisions of SFAS No. 145 related to SFAS No. 13 did not
have a material impact on the Company's financial condition or results of
operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Action (including Certain Costs
Incurred in a Restructuring)" ("Issue 94-3"). The principal difference between
SFAS No. 146 and Issue 94-3 is that SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred, rather than at the date of an entity's commitment to an
exit plan. SFAS No. 146 is effective for exit or disposal activities after
December 31, 2002. The adoption of SFAS No. 146 did not have a material impact
on the Company's financial condition or results of operations. In November 2002,
the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" ("FIN 45"). FIN 45 requires certain guarantees to be recorded at fair
value and also requires a guarantor to make new disclosures, even when the
likelihood of making payments under the guarantee is remote. In general, the
Interpretation applies to contracts or indemnification agreements that
contingently require the guarantor to make payments to
the guaranteed party based on changes in an underlying that is related to an
asset, liability, or an equity security of the guaranteed party. The recognition
provisions of FIN 45 are effective on a prospective basis for guarantees issued
or modified after December 31, 2002. The disclosure requirements are effective
for financial statements of interim and annual periods ending after December 15,
2002. The adoption of FIN 45 did not have a material impact on the Company's
financial condition or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure and Amendment to FASB No. 123", which
provides three optional transition methods for entities that decide to
voluntarily adopt the fair value recognition principles of SFAS No. 123,
"Accounting for Stock Issued to Employees", and modifies the disclosure
requirements of that Statement. Under the prospective method, stock-based
compensation expense is recognized for awards granted after the beginning of the
fiscal year in which the change is made. The modified prospective method
recognizes stock-based compensation expense related to new and unvested awards
in the year of change equal to that which would have been recognized had SFAS
No. 123 been adopted as of its effective date, fiscal years beginning after
December 15, 1994. The retrospective restatement method recognizes stock
compensation costs for the year of change and restates financial statements for
all prior periods presented as though the fair value recognition provisions of
SFAS No. 123 had been adopted as of its effective date. Since the Company does
not intend to voluntarily adopt the fair value presentation for FASB 123,
adoption of SFAS 148 would not have a material effect on the financial condition
or results of operations of the Company. However, pro forma disclosures required
by SFAS 148 are included in the Company's interim financial statements, when
necessary.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This Statement is effective for
contracts entered into or modified after June 30, 2003, with certain exceptions,
and for hedging relationships designated after September 30, 2003. The adoption
of SFAS No. 149 did not have a material effect on the Company's results of
operations and financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
requires that certain financial instruments, which under previous guidance may
have been accounted for as equity, must now be accounted for as liabilities (or
an asset in some circumstances). The financial instruments affected include
mandatory redeemable stock, certain financial instruments that require or may
require the issuer to buy back some of its shares in exchange for cash or other
assets and certain obligations that can be settled with shares of stock. This
Statement is effective for all such financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The Company entered into an
agreement with a stockholder in August 2003, wherein it purchased 124,000 shares
of Class A Common Stock from this stockholder for $6.00 per share. The purchase
of these shares is reflected in treasury stock. Also, under the terms of this
agreement, the stockholder has agreed not to purchase or control, directly or
indirectly, any additional shares of Class A or Class C Common Stock through
August 2007, and on August 27, 2004, 2005, and 2006, the stockholder may
request, but is not obligated to request, the Company to purchase an additional
100,000 shares of Class A Common Stock held by this stockholder for $6.00 per
share. At December 31, 2003, the Company's stock had a closing price of $7.45
per share, which exceeds the stockholder's option and under SFAS No. 150 does
not require the recording of a liability as of December 31, 2003.
Effective December 31, 2003, the Company adopted EITF Issue No. 03-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments ("EITF 03-1"). EITF 03-1 provides guidance on the disclosure
requirements for other-than-temporary Impairments of debt and marketable equity
investments that are accounted for under Statement of Financial Accounting
Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and
Equity Securities. The adoption of EITF 03-1 requires the Company to include
certain quantitative and qualitative disclosures for debt and marketable equity
securities classified as available-for-sale or held-to-maturity under SFAS 115
that are impaired at the balance sheet date but for which an
other-than-temporary impairment has not been recognized. The adoption of EITF
03-1 did not have a material impact on the Company's financial position or
results of operations.
In April 2003, the FASB cleared Statement 133 Implementation Issue No. B36,
Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments
That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially
Related to the Creditworthiness of the Obligor under Those Instruments ("Issue
B36"). Issue B36 concluded that (i) a company's funds withheld payable and/or
receivable under certain reinsurance arrangements, and (ii) a debt instrument
that incorporates credit risk exposures that are unrelated or only partially
related to the creditworthiness of the obligor include an embedded derivative
feature that is not clearly and closely related to the host contract. Therefore,
the embedded derivative feature must be measured at fair value on the balance
sheet and changes in fair value reported in income. Issue B36 became effective
on October 1, 2003. The adoption of Issue No. B36 did not have a material impact
on the Company's financial position or results of operations.
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51", and subsequently issued a revision to this
Interpretation in December 2003. This Interpretation addresses the consolidation
by business enterprises of variable interest entities as defined in the
Interpretation. The Interpretation applies to those variable interest entities
considered to be special-purpose entities no later than December 31, 2003. The
Interpretation must also be applied to all other variable interest entities no
later March 31, 2004. The Company is evaluating this interpretation, but does
not anticipate that it will have a material effect on the results of operations
or financial position of the Company.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company has no activities in derivative financial or commodity instruments
other than those recorded and disclosed in the financial statements. See note 17
of the consolidated financial statements included elsewhere in this Form 10K.
The Company's exposure to market risks (i.e., interest rate risk, foreign
currency exchange rate risk and equity price risk) through other financial
instruments, including cash equivalents, accounts receivable and lines of
credit, is not material.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
Page No.
Financial Statements:
Report of Independent Auditors....................................37
Consolidated Balance Sheet, December 31,
2003 and 2002.....................................................38
Consolidated Statement of Earnings,
Years Ended December 31, 2003, 2002,
and 2001..........................................................40
Consolidated Statement of Stockholders'
Equity, Years Ended December 31, 2003, 2002
and 2001. ........................................................41
Consolidated Statement of Cash Flows,
Years Ended December 31, 2003, 2002 and
2001 ..........................................................42
Notes to Consolidated Financial
Statements........................................................44
Financial Statement Schedules:
I. Summary of Investments -- Other than
Investments in Related Parties..................................81
II. Condensed Financial Information of
Registrant......................................................83
IV. Reinsurance.....................................................89
V. Valuation and Qualifying Accounts...............................90
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.
REPORT OF INDEPENDENT AUDITORS
To The Board of Directors and Stockholders
of Security National Financial Corporation
We have audited the accompanying consolidated balance sheet of Security National
Financial Corporation and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for the three years in the period ended December 31, 2003. 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 audits 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 as of December 31, 2003
and 2002, and the consolidated results of their operations and their cash flows
for the three years in the period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the related 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.
/s/ TANNER + CO
Salt Lake City, Utah
March 19, 2004
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheet
December 31,
Assets: 2003 2002
- ------- ---- ----
Insurance-related investments:
Fixed maturity securities
held to maturity, at amortized cost (market
$38,624,978 and $33,927,051 for 2003 and 2002) $37,293,989 $33,015,097
Fixed maturity securities available
for sale, at market (cost $13,214,057 in 2003
and $17,153, 223 in 2002) 14,270,037 18,514,943
Equity securities available for sale,
at market (cost $1,981,461 and $1,929,540
for 2003 and 2002) 3,453,444 2,642,093
Mortgage loans on real estate 29,914,745 21,016,008
Real estate, net of accumulated
depreciation and allowances for
losses of $4,059,934 and $3,728,539
for 2003 and 2002 8,519,680 9,331,248
Policy, student and other loans 11,753,617 10,974,165
Short-term investments 2,054,248 5,335,478
------------- ------------
Total insurance-related investments 107,259,760 100,829,032
------------- ------------
Restricted assets of cemeteries and mortuaries 4,745,709 5,332,736
------------- ------------
Cash 19,704,358 38,199,041
------------- ------------
Receivables:
Trade contracts 8,600,212 11,358,027
Mortgage loans sold to investors 114,788,185 89,455,105
Receivable from agents 1,318,958 2,054,071
Receivable from officers 37,540 70,290
Other 1,086,523 1,131,977
------------- ------------
Total receivables 125,831,418 104,069,470
Allowance for doubtful accounts (1,706,678) (1,479,728)
------------- ------------
Net receivables 124,124,740 102,589,742
------------- ------------
Policyholder accounts on deposit
with reinsurer 6,795,983 6,955,691
Land and improvements held for sale 8,387,061 8,429,215
Accrued investment income 1,142,690 928,287
Deferred policy and pre-need
acquisition costs 17,202,489 15,839,119
Property, plant and equipment, net 11,009,416 10,921,635
Cost of insurance acquired 14,980,763 16,408,849
Excess of cost over net assets
of acquired subsidiaries 683,191 683,191
Other 873,424 945,805
------------- ------------
Total assets $316,909,584 $308,062,343
============= ============
See accompanying notes to consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheet (Continued)
December 31,
2003 2002
---- ----
Liabilities:
- ------------
Future life, annuity, and other
policy benefits $218,793,693 $215,980,207
Unearned premium reserve 1,945,203 1,914,700
Bank loans payable 14,422,670 16,113,227
Notes and contracts payable 3,440,694 3,160,009
Deferred pre-need cemetery and funeral
contracts revenues and estimated
future cost of pre-need sales 10,520,280 10,002,396
Accounts payable 1,274,183 1,553,777
Funds held under reinsurance treaties 1,294,589 1,334,964
Other liabilities and accrued expenses 11,171,368 11,089,763
Income taxes 10,914,845 8,103,882
------------- -------------
Total liabilities 273,777,525 269,251,125
------------- -------------
Commitments and contingencies -- --
------------- -------------
Minority interest 3,956,628 4,297,807
------------- -------------
Stockholders' Equity:
Common stock:
Class A: $2 par value, authorized
10,000,000 shares, issued 6,275,104
shares in 2003 and 5,794,492 shares
in 2002 12,550,208 11,588,984
Class C: $0.20 par value, authorized
7,500,000 shares, issued 6,469,638
shares in 2003 and 6,182,669 shares
in 2002 1,293,927 1,236,533
------------- -------------
Total common stock 13,844,135 12,825,517
Additional paid-in capital 13,569,582 11,280,842
Accumulated other comprehensive income (loss)
and other items, net of deferred taxes of
$274,091 and $293,519 for 2003 and 2002 (437,973) 1,191,863
Retained earnings 15,414,681 11,992,542
Treasury stock at cost (1,276,518 Class
A shares and 75,336 Class C shares in
2003; 1,151,811 Class A shares and
71,749 Class C shares in 2002, held
by affiliated companies) (3,214,994) (2,777,353)
------------- -------------
Total stockholders' equity 39,175,431 34,513,411
------------- -------------
Total liabilities and stockholders'
equity $316,909,584 $308,062,343
============= =============
See accompanying notes to consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Earnings
Year Ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Revenues:
Insurance premiums and other considerations $23,294,373 $14,076,652 $13,150,875
Net investment income 17,302,597 12,539,430 12,946,499
Net mortuary and cemetery sales 10,944,365 10,638,754 9,881,248
Realized gains (losses) on investments
and other assets (2,155) 1,020,820 10,428
Mortgage fee income 92,955,165 57,008,283 40,086,097
Other 550,064 479,424 151,945
------------- ------------- -------------
Total revenue 145,044,409 95,763,363 76,227,092
------------- ------------- -------------
Benefits and expenses:
Death benefits 13,315,266 5,637,217 5,354,522
Surrenders and other policy benefits 1,726,275 2,086,829 1,467,323
Increase in future policy benefits 6,712,961 6,031,685 4,953,008
Amortization of deferred
policy and pre-need acquisition
costs and cost of insurance acquired 4,929,006 3,993,393 3,870,158
General and administrative expenses:
Commissions 67,536,703 42,114,240 29,859,295
Salaries 14,079,908 10,414,392 9,027,523
Other 21,309,897 15,930,804 13,360,362
Interest expense 3,642,046 1,970,342 2,790,627
Cost of goods and services sold of the
mortuaries and cemeteries 2,327,475 2,045,476 1,772,164
------------- ------------- -------------
Total benefits and expenses 135,579,537 90,224,378 72,454,982
------------- ------------- -------------
Earnings before income taxes 9,464,872 5,538,985 3,772,110
Income tax expense (2,890,669) (1,565,393) (913,539)
Minority interest 22,294 17,688 (17,791)
------------- ------------- -------------
Net earnings $6,596,497 $3,991,280 $2,840,780
============= ============= =============
Net earnings per common share $1.23 $.83 $.63
============= ============= =============
Weighted average
outstanding common shares 5,358,503 4,823,914 4,506,476
Net earnings per common share
assuming dilution $1.20 $.80 $.63
============= ============= =============
Weighted average outstanding common
shares assuming dilution 5,510,462 4,995,285 4,506,858
See accompanying notes to consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Accumulated
Other
Additional Comprehensive
Class Class Paid-in Income (loss), Retained Treasury
A C Capital and Other Items Earnings Stock Total
-------- ------- --------- ----------- -------- ----- -----
Balance at January 1, 2001 $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)
------------ ------------ ------------ ----------- ------------ ------------ ------------
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
------------ ------------ ------------ ----------- ------------ ------------ ------------
Comprehensive income:
Net earnings $ -- $ -- $ -- $ -- $ 3,991,280 $ -- $3,991,280
Unrealized loss on securities -- -- -- (32,067) -- -- (32,067)
-----------
Total comprehensive income -- -- -- -- -- -- 3,959,213
------------
Stock dividends 552,024 58,883 690,316 -- (1,301,223) -- --
Conversion Class C to Class A 45,036 (45,036) -- -- -- -- --
Exercise of stock options 264,742 -- 422,003 -- (686,745) -- --
Sale of treasury stock -- -- -- -- -- 584,880 584,880
------------ ------------ ----------- ---------- ----------- ----------- -----------
Balance at December 31, 2002 $11,588,984 $1,236,533 $11,280,842 $1,191,863 $11,992,542 $(2,777,353) $34,513,411
------------ ------------ ----------- ---------- ----------- ----------- -----------
Comprehensive income:
Net earnings $ -- $ -- $ -- $ -- $6,596,497 $ -- $6,596,497
Unrealized gain on securities -- -- -- 352,784 -- -- 352,784
------------
Total comprehensive income -- -- -- -- -- -- 6,949,281
------------
Acquisition of Company Stock held
in escrow (see note 18) -- -- -- (1,982,620) -- -- (1,982,620)
Stock dividends 603,549 61,617 1,529,240 -- (2,194,406) -- --
Conversion Class C to Class A 4,225 (4,223) (2) -- -- -- --
Exercise of stock options 353,450 -- 759,502 -- (979,952) -- 133,000
Purchase of treasury stock -- -- -- -- -- (437,641) (437,641)
----------- ------------ ----------- --------- ----------- ---------- ------------
Balance at December 31, 2003 $12,550,208 $1,293,927 $13,569,582 $(437,973) $15,414,681 (3,214,994) $39,175,431
============ ============ ============ ========== ============ ========== ===========
See accompanying notes to consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Year Ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Cash flows from operating activities:
Net earnings $6,596,497 $3,991,280 $2,840,780
Adjustments to reconcile net earnings
to net cash provided by (used in) operating
activities:
Realized (gains) losses on investments
and other assets 2,155 (1,020,820) (10,428)
Depreciation 1,866,924 1,553,399 1,350,372
Provision for losses on real estate
accounts and loans receivable 225,072 (300,412) 284,545
Amortization of goodwill, premiums,
and discounts 44,092 121,329 197,793
Provision for deferred income taxes 2,862,343 970,139 522,047
Policy and pre-need acquisition costs deferred (4,527,546) (4,462,624) (3,834,432)
Policy and pre-need acquisition costs amortized 3,611,674 3,214,710 3,004,188
Cost of insurance acquired amortized 1,317,332 778,683 865,970
Change in assets and liabilities net of effects from purchases and
disposals of subsidiaries:
Land and improvements held for sale 42,154 626,688 139,075
Future life and other benefits 7,426,761 5,349,152 5,734,205
Receivables for mortgage loans sold (25,333,080) (38,760,032) (24,786,179)
Other operating assets and liabilities 3,402,371 975,682 2,908,914
------------ ------------ ------------
Net cash used in operating activities (2,463,251) (26,962,826) (10,783,150)
------------ ------------ ------------
Cash flows from investing activities:
Securities held to maturity:
Purchase - fixed maturity securities (15,396,993) (4,147,878) (402,995)
Calls and maturities - fixed maturity securities 11,147,744 8,025,610 12,086,818
Securities available for sale:
Purchases - equity securities (51,921) (327,726) --
Sales - equity securities 3,860,000 3,303,095 2,826,094
Purchases of short-term investments (19,065,874) (13,819,476) (14,301,717)
Sales of short-term investments 22,347,104 9,937,642 13,876,000
Purchases of restricted assets 610,155 (56,899) (497,617)
Mortgage, policy, and other loans made (30,192,467) (10,129,993) (3,114,060)
Payments received for mortgage, policy, and
other loans 20,479,056 4,939,374 5,626,747
Purchases of property, plant, and equipment (1,623,310) (1,348,752) (1,006,824)
Purchases of real estate (1,807,658) (3,153,299) (784,677)
Sale of real estate 2,287,831 2,825,666 195,562
Cash received in assumed reinsurance -- 55,827,793 --
------------ ------------ ------------
Net cash (used in) provided by investing activities (7,406,333) 51,875,157 14,503,331
------------ ------------ ------------
See accompanying notes to the consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Cash Flows (Continued)
Year Ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Cash flows from financing activities:
Annuity and pre-need contract receipts 5,785,310 7,635,422 9,707,844
Annuity and pre-need contract withdrawals (10,410,247) (10,866,398) (13,997,537)
Repayment of bank loans and notes and
contracts payable (3,695,521) (1,824,440) (2,698,272)
Proceeds from borrowings on bank loans and notes
and contracts payable -- 9,000,000 750,000
Stock options exercised 133,000 -- --
Sale (purchase) of treasury stock (437,641) 584,880 --
------------ ------------ ------------
Net cash provided by (used in) financing activities (8,625,099) 4,529,464 (6,237,965)
------------ ------------ ------------
Net change in cash (18,494,683) 29,441,795 (2,517,784)
------------ ------------ ------------
Cash at beginning of year 38,199,041 8,757,246 11,275,030
------------ ------------ ------------
Cash at end of year $19,704,358 $38,199,041 $8,757,246
============ ============ ============
Supplemental Schedule of Cash Flow Information:
The following information shows the non-cash items in connection with the
assumption of reinsurance from Acadian Life Insurance Company on December 23,
2002:
Liabilities assumed $74,199,194
Less non-cash items:
Cost of insurance acquired (9,106,309)
Bonds received (9,032,818)
Policy loans received (82,126)
Premiums due and unpaid (150,148)
------------
Cash received $55,827,793
===========
See accompanying notes to the consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
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, Mississippi, 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
Arizona, California, Colorado, Florida, Nevada, Texas and Utah.
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.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
1) Significant Accounting Principles (Continued)
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.
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, 2003, 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 (77%)
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
1) Significant Accounting Principles (Continued)
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 77% of the outstanding shares of
common stock of Southern Security Life Insurance Company (Southern Security).
The acquisition was accounted for using the purchase method.
On December 23, 2002, the Company, through its wholly-owned subsidiary Security
National Life Insurance Company completed the asset purchase transaction with
Acadian Life Insurance Company ("Acadian") from which it acquired from Acadian
$75,000,000 in assets and $75,000,000 in statutory insurance reserves. Security
National Life paid a ceding commission of $10,254,803. On January 1, 2003,
Security National entered into an assumption agreement in which Acadian
transferred and assigned to Security National Life all of its right, title and
interest in the reinsured policies and Security National Life took over the
operations of this block of business. The assets and liabilities acquired have
been included in the Company's consolidated balance sheet as of December 31,
2002. Since the Company did not take over the operations from Acadian until
January 1, 2003, nothing was included in the consolidated statement of earnings
during 2002.
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 at cost - consists of certificates of deposit and
commercial paper with maturities of up to one year.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
1) Significant Accounting Principles (Continued)
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.
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.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
1) Significant Accounting Principles (Continued)
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%. 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%.
Participating Insurance
Participating business constitutes 2%, 2%, and 2% of insurance in force for
2003, 2002 and 2001, 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.
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.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
1) Significant Accounting Principles (Continued)
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.
Revenues and costs for at-need sales are recorded when a valid contract exists,
the services are performed, collection reasonably assured and there are no
significant obligations remaining.
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.
Mortgage Operations
Mortgage fee income is generated through the origination and refinancing of
mortgage loans and is recognized in accordance with FAS No. 140.
The majority of loans originated are sold to third party investors. The amounts
sold to investors are shown on the balance sheet as due from sale of loans, and
are shown on the basis of the amount of fees due from the investors. Any
impairment to sold loans or possible loan losses are included in a separate
provision for loan losses. At December 31, 2003 and 2002 the provision for loan
losses was $1,919,000 and $906,000, respectively.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
1) Significant Accounting Principles (Continued)
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 the fair values. The Company
periodically evaluates the recoverability of amounts recorded. In accordance
with FAS 142 the Company no longer amortizes excess of cost over net assets of
acquired business ("goodwill"). Pro forma information related to the
amortization of goodwill has not been presented since it is not material.
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 $490,145, $533,520 and $3,143 in 2003, 2002 and 2001,
respectively. As a result, basic and diluted earnings per share would have been
reduced by $.09, $.11, and $0 in 2003, 2002 and 2001, respectively.
The weighted average fair value of options granted in 2003 under the 1993 Plan
and the 2000 Plan is estimated at $2.63 as of the grant date using the Black
Scholes Option Pricing Model with the following assumptions: dividend yield of
5%, volatility of 73%, risk-free interest rate of 3.4%, and an expected life of
two years.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
1) Significant Accounting Principles (Continued)
The weighted average fair value of each option granted in 2002 under the 1993
Plan and the 2000 Plan is estimated at $2.88 as of the grant date using the
Black Scholes option-pricing model with the following assumptions: dividend
yield of 5%, volatility of 74%, risk-free interest rate of 3.8%, and an expected
life of five to ten years.
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
5%, volatility of 31.8%, risk-free interest rate of 5.14%, and an expected life
of five to 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.
Concentration of Credit Risk
The Company maintains its cash in bank deposit accounts, which at times may
exceed federally insured limits. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant credit risk on
cash and cash equivalents.
Recent Accounting Pronouncements
In April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
Under historical guidance, all gains and losses resulting from the
extinguishment of debt were required to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. SFAS No.
145 rescinds that guidance and requires that gains and losses from
extinguishments of debt be classified as extraordinary items only if they are
both unusual and infrequent in occurrence. SFAS No. 145 also amends SFAS No. 13,
"Accounting for Leases" for the required accounting treatment of certain lease
modifications that have economic effects similar to sale-leaseback transactions.
SFAS No. 145 requires that those lease modifications be accounted for in the
same manner as sale-leaseback transactions. The provisions of SFAS No. 145
related to SFAS No. 13 are effective for transactions occurring after May 15,
2002. Adoption of the provisions of SFAS No. 145 related to SFAS No. 13 did not
have a material impact on the Company's financial condition or results of
operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Action (including Certain Costs Incurred in
a Restructuring)" ("Issue 94-3"). The principal difference between SFAS No. 146
and Issue 94-3 is that SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred, rather than at the date of an entity's commitment to an exit plan.
SFAS No. 146 is effective for exit or disposal activities after December 31,
2002. The adoption of SFAS No. 146 did not have a material impact on the
Company's financial condition or results of operations.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
1) Significant Accounting Principles (Continued)
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 requires certain guarantees to be
recorded at fair value and also requires a guarantor to make new disclosures,
even when the likelihood of making payments under the guarantee is remote. In
general, the Interpretation applies to contracts or indemnification agreements
that contingently require the guarantor to make payments to the guaranteed party
based on changes in an underlying that is related to an asset, liability, or an
equity security on changes in an underlying that is related to an asset,
liability, or an equity security of the guaranteed party. The recognition
provisions of FIN 45 are effective on a prospective basis for guarantees issued
or modified after December 31, 2002. The disclosure requirements are effective
for financial statements of interim and annual periods ending after December 15,
2002. The adoption of FIN 45 did not have a material impact on the Company's
financial condition or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure and Amendment to FASB No. 123", which
provides three optional transition methods for entities that decide to
voluntarily adopt the fair value recognition principles of SFAS No. 123,
"Accounting for Stock Issued to Employees", and modifies the disclosure
requirements of that Statement. Under the prospective method stock-based
compensation expense is recognized for awards granted after the beginning of the
fiscal year in which the change is made. The modified prospective method
recognizes stock-based compensation expense related to new and unvested awards
in the year of change equal to that which would have been recognized had SFAS
No. 123 been adopted as of its effective date, fiscal years beginning after
December 15, 1994. The retrospective restatement method recognizes stock
compensation costs for the year of change and restates financial statements for
all prior periods presented as though the fair value recognition provisions of
SFAS No. 123 had been adopted as of its effective date. Since the Company does
not intend to voluntarily adopt the fair value presentation for FASB 123,
adoption of SFAS 148 would not have a material effect on the financial condition
or results of operations of the Company. However, pro forma disclosures by SFAS
148 are included in the Company's interim financial statements, when necessary.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This Statement is effective for
contracts entered into or modified after June 30, 2003, with certain exceptions,
and for hedging relationships designated after September 30, 2003. The adoption
of SFAS No. 149 did not have a material effect on the Company's results of
operations and financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
requires that certain financial instruments, which under previous guidance may
have been accounted for as equity, must now be accounted for as liabilities (or
an asset in some circumstances). The financial instruments affected include
mandatory redeemable stock, certain financial instruments that require or may
require the issuer to buy back some of its shares in exchange for cash or other
assets and certain obligations that can be settled with shares of stock. This
Statement is effective for all such financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The Company entered into an
agreement with a stockholder in August
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
1) Significant Accounting Principles (Continued)
2003, wherein it purchased 124,000 shares of Class A Common Stock from this
stockholder for $6.00 per share. The purchase of these shares is reflected in
treasury stock. Also, under the terms of this agreement, this stockholder has
agreed not to purchase or control, directly or indirectly, any additional shares
of Class A or Class C Common Stock through August 2007, and on August 27, 2004,
2005, and 2006, this stockholder may request, but is not obligated to request,
the Company to purchase an additional 100,000 shares of Class A Common Stock
held by this stockholder for $6.00 per share. At December 31, 2003, the
Company's stock had a closing price of $7.45 per share, which exceeds the
stockholder's option and under SFAS No. 150 does not require the recording of a
liability as of December 31, 2003.
Effective December 31, 2003, the Company adopted EITF Issue No. 03-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments ("EITF 03-1"). EITF 03-1 provides guidance on the disclosure
requirements for other-than-temporary Impairments of debt and marketable equity
investments that are accounted for under Statement of Financial Accounting
Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and
Equity Securities. The adoption of EITF 03-1 requires the Company to include
certain quantitative and qualitative disclosures for debt and marketable equity
securities classified as available-for-sale or held-to-maturity under SFAS 115
that are impaired at the balance sheet date but for which an
other-than-temporary impairment has not been recognized. The adoption of EITF
03-1 did not have a material impact on the Company's financial position or
results of operations.
In April 2003, the FASB cleared Statement 133 Implementation Issue No. B36,
Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments
That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially
Related to the Creditworthiness of the Obligor under Those Instruments ("Issue
B36"). Issue B36 concluded that (i) a company's funds withheld payable and/or
receivable under certain reinsurance arrangements, and (ii) a debt instrument
that incorporates credit risk exposures that are unrelated or only partially
related to the creditworthiness of the obligor include an embedded derivative
feature that is not clearly and closely related to the host contract. Therefore,
the embedded derivative feature must be measured at fair value on the balance
sheet and changes in fair value reported in income. Issue B36 became effective
on October 1, 2003. The adoption of Issue No. B36 did not have a material impact
on the Company's financial position or results of operations.
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51", and subsequently issued a revision to this
Interpretation in December 2003. This Interpretation addresses the consolidation
by business enterprises of variable interest entities as defined in the
Interpretation. The Interpretation applies to those variable interest entities
considered to be special-purpose entities no later than December 31, 2003. The
Interpretation must also be applied to all other variable interest entities no
later March 31, 2004. The Company is evaluating this interpretation, but does
not anticipate that it will have a material effect on the results of operations
or financial position of the Company.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
2) Investments
The Company's investments in fixed maturity securities held to maturity and
equity securities available for sale as of December 31, 2003, are summarized as
follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- --------- ---------- ---------
December 31, 2003:
Fixed maturity securities held to maturity:
Bonds:
U.S. Treasury securities
and obligations of U.S
Government age $3,080,471 $180,125 $ -- $3,260,596
Obligations of states and
political subdivisions 261,360 25,091 (693) 285,758
Corporate securities including
public utilities 30,289,401 1,176,618 (110,514) 31,355,505
Mortgage-backed securities 3,634,752 78,663 (28,654) 3,684,761
Redeemable preferred stock 28,005 17,400 (7,047) 38,358
----------- ----------- ----------- -----------
Total fixed maturity
securities held to maturity $37,293,989 $1,477,897 $(146,908) $38,624,978
=========== =========== =========== ===========
Securities available for sale:
Bonds
U.S. Treasury securities and
obligations of U.S.
Government agencies $595,177 $ 81,604 $ -- $676,781
Corporate securities including
public utilities 12,618,880 974,376 -- 13,593,256
Non-redeemable preferred stock 56,030 42,688 (4,006) 94,712
Common stock 1,925,431 1,958,319 (525,018) 3,358,732
----------- ----------- ----------- -----------
Total securities available for sale $15,195,518 $3,056,987 $(529,024) $17,723,481
=========== =========== =========== ===========
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
2) Investments (Continued)
The Company's investments in fixed maturity securities held to maturity and
equity securities available for sale as of December 31, 2002 are summarized as
follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- --------- ---------- ---------
December 31, 2002:
Fixed maturity securities held to maturity:
Bonds:
U.S. Treasury securities
and obligations of U.S
Government agencies $2,835,420 $214,146 $(1,964) $3,047,602
Obligations of states and
political subdivisions 188,303 21,805 (725) 209,383
Corporate securities including
public utilities 21,106,651 806,023 (254,369) 21,658,305
Mortgage-backed securities 8,856,718 125,310 -- 8,982,028
Redeemable preferred stock 28,005 8,775 (7,047) 29,733
----------- ----------- ----------- -----------
Total fixed maturity
securities held to maturity $33,015,097 $1,176,059 $(264,105) $33,927,051
=========== =========== =========== ===========
Securities available for sale:
Bonds
U.S. Treasury securities
and obligations of U.S.
Government agencies $594,439 $ 103,697 $ -- $698,136
Corporate securities including
public utilities 16,558,784 1,258,023 -- 17,816,807
Non-redeemable preferred stock 56,031 33,810 (7,256) 82,585
Common stock 1,873,509 1,281,528 (595,529) 2,559,508
----------- ----------- ----------- -----------
Total securities available for sale $19,082,763 $2,677,058 $(602,785) $21,157,036
=========== =========== =========== ===========
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
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, 2003, 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.
Amortized Estimated Fair
Held to Maturity: Cost Value
---------- ---------
Due in 2004 $ 2,048,933 $ 2,066,458
Due in 2005 through 2008 6,556,028 7,123,868
Due in 2009 through 2013 8,968,018 9,478,788
Due after 2013 12,336,094 12,424,625
Mortgage-backed securities 7,356,911 7,492,881
Redeemable preferred stock 28,005 38,358
------------ ------------
$37,293,989 $38,624,978
=========== ===========
Amortized Estimated Fair
Available for Sale: Cost Value
--------- ---------
Due in 2004 $2,681,414 $2,747,175
Due in 2005 through 2008 9,249,570 10,051,451
Due in 2009 through 2013 1,185,251 1,357,501
Due after 2013 97,822 113,910
Mortgage-backed securities -- --
----------- ------------
$13,214,057 $14,270,037
=========== ===========
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
2) Investments (Continued)
The Company's realized gains and losses in investments are summarized as
follows:
2003 2002 2001
---- ---- ----
Fixed maturity securities
held to maturity:
Gross realized gains $3,549 $37,172 $20,228
Gross realized losses (5,665) (557) (565)
Securities available for sale:
Gross realized gains 1 354 6
Gross realized losses (40) (1,424) (111)
Other assets -- 985,275 (9,130)
----------- ----------- -----------
Total $(2,155) $1,020,820 $10,428
=========== =========== ===========
Generally gains and losses from held to maturity securities are a result of
early calls and related amortization of premiums or discounts.
Mortgage loans consist of first and second mortgages. The mortgage loans bear
interest at rates ranging from 4.25% to 15%, maturity dates range from three
months to 30 years and are secured by real estate. 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 68% 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, 2003, other than investments issued or guaranteed by the United
States Government, are as follows:
Carrying Amount
Dean Witter Discover $4,023,115
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
Major categories of net investment income are as follows:
2003 2002 2001
---- ---- ----
Fixed maturity securities $3,407,177 $3,228,042 $3,776,132
Equity securities 54,481 53,889 49,281
Mortgage loans on real estate 1,931,358 1,350,882 1,570,478
Real estate 1,509,932 1,501,534 1,548,507
Policy loans 676,201 663,554 630,352
Short-term investments 105,094 189,894 379,562
Other 10,813,469 6,501,763 5,973,092
------------ ------------ ------------
Gross investment income 18,497,712 13,489,558 13,927,404
Investment expenses (1,195,115) (950,128) (980,905)
------------ ------------ ------------
Net investment income $17,302,597 $12,539,430 $12,946,499
============ ============ ============
Net investment income includes net investment income earned by the restricted
assets of the cemeteries and mortuaries of approximately $848,000, $924,000 and
$872,000 for 2003, 2002, and 2001, 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
$8,850,755 at December 31, 2003 and $7,819,262 at December 31, 2002.
3) Cost of Insurance Acquired
Information with regard to cost of insurance acquired is as follows:
2003 2002 2001
---- ---- ----
Balance at
beginning of year $16,408,849 $8,081,223 $9,236,947
------------ ------------ ------------
Cost of insurance
acquired (110,754) 9,106,309 (289,754)
------------ ------------ ------------
Imputed interest at 7% 1,098,636 857,153 606,136
Amortization (2,415,968) (1,635,836) (1,472,106)
------------ ------------ ------------
Net amortization
charged to income (1,317,332) (778,683) (865,970)
------------ ------------ ------------
Balance at end
of year $14,980,763 $16,408,849 $8,081,223
============ ============ ============
Presuming no additional acquisitions, net amortization charged to income is
expected to approximate $1,206,546, $1,111,526, $1,014,348, $946,593, and
$884,330 for the years 2004 through 2008. Actual amortization may vary based on
changes in assumptions or experience.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
4) Property, Plant and Equipment
The cost of property, plant and equipment is summarized below:
December 31,
2003 2002
---- ----
Land and Buildings $11,140,690 $11,098,907
Furniture and equipment 10,288,299 8,725,925
------------ ------------
21,428,989 19,824,832
Less accumulated depreciation (10,419,573) (8,903,197)
------------ ------------
Total $11,009,416 $10,921,635
============ ============
5) Bank Loans Payable and Lines of Credit
Bank loans payable are summarized as follows:
December 31,
2003 2002
---- ----
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. $391,363 $727,524
10% note payable in monthly installments of
$8,444 including principal and interest,
collateralized by real property, which book
value is approximately $982,000, due January 2013. -- 645,124
6% note payable in monthly installments of $5,693
including principal and interest,
collateralized by real property, which
book value is approximately $950,000
due September 2010. 662,944 --
6.93% note payable in monthly installments of
$14,175 including principal and interest,
collateralized by real property, which
book value is approximately $915,000, due
November 2007. 1,519,198 1,472,560
$2,230,016 in 2003 and $3,234,489 in 2002 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. 2,178,075 3,144,673
Bank prime rate plus 1/2% (4.50% at December 31, 2003)
note payable in monthly installments of $7,235
including principal and interest, collateralized by
real property, which book value is approximately
$717,000, due August 2004. 60,683 150,564
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
5) Bank Loans Payable and Lines of Credit (Continued)
December 31,
2003 2002
---- ----
Bank prime rate less 1.35% (2.65% at December 31,
2003) 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. 98,880 128,738
7.35% note payable in monthly installments of
$14,975 including principal and
interest collateralized by 15,000
shares of Security National Life Insurance
Company stock, due December 2006. 482,394 610,170
5.87% note payable interest only to July 1, 2003,
thereafter interest and monthly principal
payments of $139,000, collateralized by
15,000 shares of Security National Life
Insurance Company Stock, due January 2010. 8,413,993 9,000,000
Mark to market adjustment (see note 17) 303,029 --
Other collateralized bank loans payable 312,111 233,874
------------- -------------
Total bank loans 14,422,670 16,113,227
Less current installments 3,688,647 2,282,575
------------- -------------
Bank loans, excluding current installments $ 10,734,023 $ 13,830,652
============= ============
In addition to the lines of credit described above, the Company has line of
credit agreements with banks for $2,500,000 and $5,000,000, of which none were
outstanding at December 31, 2003 or 2002. The lines of credit are for general
operating purposes. The $2,500,000 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,
2003 2002
---- ----
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. $545,921 $574,526
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
6) Notes and Contracts Payable (Continued)
December 31,
2003 2002
---- ----
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. 98,319 168,621
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 $2,675. -- 5,296
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. 459,138 534,111
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 $828,000
due March 2030. 954,475 951,807
Due to former shareholder 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 317,680 476,520
Due to shareholder of Security National
Financial Corporation 6.0% note payable in
annual installments of $100,000 including
principal and interest due July 2005 200,000 --
Due to shareholder of Security National
Financial Corporation 4.0% note payable in
annual installments of $160,873 including
principal and interest due January 2006 482,620 --
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
6) Notes and Contracts Payable (Continued)
December 31,
2003 2002
---- ----
Other notes payable 382,541 449,128
---------- ----------
Total notes and contracts payable 3,440,694 3,160,009
Less current installments 732,715 447,569
---------- ----------
Notes and contracts, excluding
current installments $2,707,979 $2,712,440
========== ==========
The following tabulation shows the combined maturities of bank loans payable,
lines of credit and notes and contracts payable:
2004 $4,421,362
2005 3,640,897
2006 2,325,645
2007 1,931,906
2008 1,826,064
Thereafter 3,717,490
-----------
Total $17,863,364
===========
Interest paid approximated interest expense in 2003, 2002 and 2001.
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. As of
December 31, 2002 the Company owed the fund $73,151 in excess of the required
contribution to the fund, and as of December 31, 2003, the Company owed the fund
$41,335.
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 consolidated balance sheet.
Assets in the restricted asset account are summarized as follows:
December 31,
2003 2002
---- ----
Cash and cash equivalents $617,142 $378,388
Mutual funds 188,732 188,732
Fixed maturity securities 108,554 301,928
Equity securities 77,778 77,778
Participation in mortgage loans
with Security National Life 3,719,807 4,352,214
Time certificate of deposit 33,696 33,696
---------- ----------
Total $4,745,709 $5,332,736
========== ==========
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
8) Income Taxes
The Company's income tax liability at December 31 is summarized as follows:
December 31,
2003 2002
----- ----
Current $18,585 $45,702
Deferred 10,896,260 8,058,180
----------- -----------
Total $10,914,845 $8,103,882
=========== ===========
Significant components of the Company's deferred tax (assets) and liabilities at
December 31 are approximately as follows:
2003 2002
---- ----
Assets
Future policy benefits $(1,676,881 $(1,849,395)
Unearned premium (1,635,912) (1,717,492)
Difference between book
and tax basis of bonds (27,951) (34,178)
Net operating loss carryforwards -- (1,132,874)
Other (605,932) (575,788)
------------ ------------
Total deferred tax assets (3,946,676) (5,309,727)
------------ ------------
Liabilities
Deferred policy acquisition costs 4,889,696 5,235,909
Cost of insurance acquired 2,486,035 2,643,596
Installment sales 2,367,510 1,997,256
Depreciation 891,725 883,667
Trusts 1,054,323 1,184,382
Tax on unrealized appreciation 568,944 644,148
Reinsurance 1,974,996 --
Other 609,707 778,949
------------ ------------
Total deferred tax liabilities 14,842,936 13,367,907
------------ ------------
Net deferred tax liability $10,896,260 $8,058,180
============ ============
The Company paid $55,442, $462,983 and $564,327 in income taxes for 2003, 2002
and 2001, respectively. The Company's income tax expense (benefit) is summarized
as follows:
2003 2002 2001
---- ---- ----
Current $28,326 $595,254 $391,492
Deferred 2,862,343 970,139 522,047
---------- ---------- ----------
Total $2,890,669 $1,565,393 $913,539
========== ========== ==========
The reconciliation of income tax expense at the U.S. federal statutory rates is
as follows:
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
8) Income Taxes (Continued)
2003 2002 2001
---- ---- ----
Computed expense at statutory rate $3,218,056 $1,883,255 $1,282,517
Special deductions allowed
small life insurance companies (285,991) (315,923) (356,734)
Dividends received deduction (5,611) (737) (6,405)
Minority interest taxes 13,469 7,429 (7,466)
Other, net (49,254) (8,631) 1,627
----------- ----------- -----------
Tax expense $2,890,669 $1,565,393 $913,539
=========== =========== ===========
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, 2003, 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 Company does not have any loss carry forward as of December 31, 2003.
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, 2003 and 2002. 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 $940,050,000 at December
31, 2003 and $1,174,604,000 at December 31, 2002.
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 mortgage loans originated and
sold to unaffiliated investors are sold subject to certain recourse provisions.
On December 26, 2003, the Company entered into a partially Coinsurance and a
partially Modified Coinsurance Agreement (CoModco Agreement) with Guaranty
Income Life Insurance Company (Guaranty) effective September 30, 2003. The
Company has reinsured 100% of certain blocks of Guaranty's traditional life,
universal life and annuity businesses. The total liabilities reinsured for these
blocks of businesses on October 1, 2003 were $60,527,887. The Company paid a
ceding commission to Guaranty of $3,400,000 and will receive from Guaranty a
risk charge of 1% of the outstanding Coinsurance per calendar quarter. Guaranty
put into a bank trust investment grade bonds, which equal the outstanding
liabilities assumed by the Company. The Company is named as a beneficiary of the
trust and the terms of the trust are such that Guaranty will maintain investment
grade bonds in the trust to equal the outstanding liabilities assumed by the
Company. Under the CoModco Agreement the Coinsurance and the increase in
reserves are equal. Under U. S. GAAP the Coinsurance and the reserve increases
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
are netted since these are non-cash items, and the Company expects to recapture
the Coinsurance from future profits of the reinsured business. Guaranty has the
right to recapture the business at any time after December 31, 2004 upon 90 days
advance notice. As of December 31, 2003 the outstanding Coinsurance amount was
$3,344,793. The Company recorded as income the risk charge of $34,000 for the
fourth quarter. In the event that the Company believes it will not recover the
Coinsurance it will have to record as an expense and a future liability for the
amount of such impairment.
The Company leases office space and equipment under various non-cancelable
agreements, with remaining terms up to four years. Minimum lease payments under
these non-cancelable operating leases as of December 31, 2003, are approximately
as follows:
Years Ending December 31:
2004 $570,000
2005 460,000
2006 236,000
2007 6,000
--------------
$1,272,000
Total rent expense related to these non-cancelable operating leases for the
years ended December 31, 2003 and 2002 was approximately $396,000 and $200,000
respectively.
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 in
the Third Judicial Court, Salt Lake County, Utah. The action asserts that
Memorial Estates delivered to Lynn W. Brown six 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 also asserted among other things that Thomas "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." The formal discovery
cutoff was January 15, 2004. The Company has been verbally informed that Thomas
will dismiss the case but such has not been communicated in writing. Until the
foregoing actually happens, the Company intends to vigorously defend the matter,
including an assertion that the statute of limitations bars the claims.
An action was brought against Southern Security Life Insurance Company by
National Group Underwriters, Inc. ("NGU") in state court in the State of Texas.
The case was removed by the Company to the United States District Court for the
Northern District of Texas, Fort Worth Division, with Civil No. 4:01-CV-403-E.
An amended complaint was filed on or about July 18, 2001. The amended complaint
asserted that NGU had a contract with the Company wherein NGU would submit
applications for certain policies of insurance to be issued by the Company. It
is alleged that disputes have arisen between NGU and the Company with regard to
the calculation and payment of certain commissions as well as certain production
bonuses.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
NGU alleged that it had been damaged far in excess of the $75,000 minimum
jurisdictional limits of the federal court. NGU also sought attorney's fees and
costs as well as prejudgment and postjudgment interest. A second amended
complaint and a third amended complaint, which included a fraud claim, were
filed. A motion was filed by the Company to dismiss the third amended complaint,
including the fraud claim. The court denied the motion. The Company
counterclaimed for what it claimed to be a debit balance owing to it pursuant to
the relationship between the parties (the amount subject to reduction as
premiums are received). The Company also sought to recover attorney's fees and
costs, as well as punitive damages on three of its causes of action.
Certain discovery took place. The federal case was dismissed by stipulation. The
matter was refiled in Texas state court, Tarrant County, Case No. 348 195490 02.
The claims of the respective parties are essentially the same as those in
federal count, which claims include fraudulent inducement relative to entering
into a contract, fraud, breach of contract, breach of duty of good faith and
fair dealing, attorney's fees and exemplary damages as well as seeking an
accounting and contesting the interest charges. Certain depositions have been
taken since the filing again in state court and further discovery is
anticipated. The Company filed a motion for partial summary judgment with
respect to certain items. The court has yet to rule on the motion. A trial is
presently set for October 2004. The Company intends to vigorously defend the
matter as well as prosecute its counterclaim.
The Company is 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.
Subsequent to the year ended December 31, 2003, the Company entered a settlement
agreement with one of its mortgage loan investors to resolve certain commitments
under the investor agreement with the Company. The agreement requires a payment
of $350,000 to be made to the investor with an additional $100,000 to be paid if
the Company does not deliver a specified volume of loans during 2004. The amount
of the settlement has been included in management's estimate in calculating the
reserve for losses on contractual obligations.
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 $98,588, $99,612, and $191,557 for 2003, 2002, and
2001, respectively. At December 31, 2003 the ESOP held 546,344 shares of Class A
and 1,479,087 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.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
10) Retirement Plans
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
2003, 2002, and 2001 were $4,493, $7,975, and $18,458 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 contributions for 2003, 2002 and 2001 were $110,081, $142,218, and
$260,350, 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 2003, 2002 and 2001 were $95,485, $100,577, and
$220,038, respectively.
The Company has Deferred Compensation Agreements with its Chief Executive
Officer and its past 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 $62,667 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 2003 the Company increased its
liability for these future obligations by $10,000. The current balance as of
December 31, 2003 is $712,000.
During 2003 the Company entered into an employment agreement with the President
of Security National Mortgage Company. The agreement has a five-year term, but
the Company has agreed to renew the agreement in 2008 and 2013 for additional
five-year terms, provided certain employee performs his duties with usual and
customary care and diligence. Under the terms of the agreement certain employee
is to devote his full time to the Company serving as President of Security
National Mortgage Company at not less than his current salary and benefits, and
to include $350,000 of life insurance protection. In the event of disability,
certain employee's salary would be continued for up to five years at 50% of its
current level. In the event of a sale or merger of the Company, and certain
employee were not retained in his current position, the Company would be
obligated to continue certain employee current compensation and benefits for
five years following the merger or sale. The agreement further provides that
certain employee is entitled to receive annual retirement benefits beginning one
month from the date of his retirement and his having obtained the age of 62 1/2,
five years following complete disability or upon termination of his employment
without cause. These retirement benefits are to be paid for a period of ten
years in annual installments in the amount equal to one-half of his then current
annual salary. However, in the event certain employee dies prior to receiving
all retirement benefits thereunder, the remaining benefits are to be paid to his
heirs. The Company accrued in 2003 approximately $172,000 to cover the present
value of the retirement benefit of the agreement.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
10) Retirement Plans (Continued)
The Company has an employment agreement with its President, which was entered
into in 1996 and renewed in 1997 and 2002. Under the agreement the President is
to devote his full time to the Company serving as its 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, his salary would be continued for up to five years at 50% of its
current level. In the event of a sale or merger of the Company, and he is not
retained in his current position, the Company would be obligated to continue his
current compensation and benefits for seven years following the merger or sale.
The Company is in the process of amending the agreement with its President to
provide for retirement benefits. The Company accrued approximately $328,000 in
2003 to cover the present value of anticipated retirement benefits that would be
owed once the agreement is amended.
11) Capital Stock
The following table summarizes the activity in shares of capital stock for the
three-year period ended December 31, 2003:
Class A Class C
Balance at January 1, 2001 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
Exercise of stock options 132,371 --
Stock Dividends 276,012 294,419
Conversion of Class C to Class A 22,518 (225,180)
---------- ----------
Balance at December 31, 2002 5,794,492 6,182,669
---------- ----------
Exercise of stock options 176,725 --
Stock Dividends 301,774 308,086
Conversion of Class C to Class A 2,113 (21,117)
---------- ----------
Balance at December 31, 2003 6,275,104 6,469,638
========== ==========
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.
Stockholders of both classes of common stock have received 5% stock dividends in
the years 1989 through 2003, as authorized by the Company's Board of Directors.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
11) Capital Stock (Continued)
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:
2003 2002 2001
---- ---- ----
Numerator:
Net income $6,596,497 $3,991,280 $2,840,780
========== ========== ==========
Denominator:
Denominator for basic earnings
per share-weighted-average shares 5,358,503 4,823,914 4,506,476
Effect of dilutive securities:
Employee stock options 149,952 169,543 382
Stock appreciation rights 2,007 1,828 --
---------- ---------- ----------
Dilutive potential common shares 151,959 171,371 382
---------- ---------- ----------
Denominator for diluted earnings per
share-adjusted weighted-average
shares and assumed conversions 5,510,462 4,995,285 4,506,858
========== ========== ==========
Basic earnings per share $1.23 $.83 $.63
===== ==== ====
Diluted earnings per share $1.20 $.80 $.63
===== ==== ====
12) Stock 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.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
12) Stock Compensation Plans (Continued)
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 January 1, 2001 179,895 $3.70 - $4.07
Dividend 8,995
Exercised --
-----
Outstanding at December 31, 2001 188,890 $3.53 - $3.88
-------
Dividend 576
Exercised (119,974)
Expired (58,773)
-------
Outstanding at December 31, 2002 10,719 $3.36
-----
Dividend 201
Exercised (6,700)
-------
Outstanding at December 31, 2003 4,220 $3.20
======= =====
Exercisable at end of year 4,220 $3.20
======== =====
Available options for future grant
1987 Stock Incentive Plan --
=====
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.
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.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
12) Stock Compensation Plans (Continued)
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 Plan 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.
Activity of the 1993 Plan is summarized as follows:
Number of Shares Option Price
Outstanding at January 1, 2001 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
Dividend 21,077
Granted 185,250
Expired (190,018)
Exercised (283,703)
-------------
Outstanding at December 31, 2002 504,669 $2.02 - $4.46
Dividend 30,609
Granted 371,000
Exercised (263,496)
-------------
Outstanding at December 31, 2003 642,782 $2.07 - $6.18
=============
Exercisable at end of year 642,782 $2.07 - $6.18
=============
Available options for future grant
1993 Stock Incentive Plan --
=============
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
12) Stock Compensation Plans (Continued)
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.
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 January 1, 2001 4,200 $2.14
Dividend 410
Granted 4,000
-----------
Outstanding at December 31, 2001 8,610 $2.04 - $2.43
----------
Dividend 631
Granted 4,000
----------
Outstanding at December 31, 2002 13,241 $1.94 - $2.86
----------
Dividend 697
Granted 4,000
Exercised (3,311)
----------
Outstanding at December 31, 2003 14,627 $1.85 - $5.72
==========
Exercisable at end of year 10,627
==========
Available options for future
grant 2000 Director Plan 42,673
==========
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
12) Stock Compensation Plans (Continued)
On July 11, 2003, the Company adopted the Security National Financial
Corporation 2003 Stock Option Plan (the "2003 Plan"), which reserved 500,000
shares of Class A Common Stock and 1,000,000 shares of Class C Common Stock for
issuance thereunder. The 2003 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 2003 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 under the 2003 Plan.
The 2003 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
affected under the 2003 Plan are to be determined by the Board of Directors or
its committee. No options may be exercised for a term of more than ten years
from the date of the 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 then fair
market value of the option shares on the date of grant. The 2003 Plan provides
that the exercise price for non-qualified options will not be 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 2003 Plan has a term of ten years. The Board of Directors may amend or
terminate the 2003 Plan at any time, from time to time, subject to approval of
certain modifications to the 2003 Plan by the shareholders of the Company as may
be required by law or the 2003 Plan.
Activity of the 2003 Plan is summarized as follows:
Number of Number of
Class A Shares Class C Shares
Outstanding at December 31, 2003 -0- -0-
=== ===
Available options for future grant
2003 Stock Incentive Plan 525,000 1,050,000
======= =========
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.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
13) Statutory-Basis Financial Information (Continued)
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)
for the year ended
December 31,
2003 2002 2001
---- ---- ----
Security National Life $(5,404,687) $1,547,253 $1,732,018
Southern Security Life 2,431,499 (427,439) (429,143)
Statutory Stockholders' Equity
December 31,
2003 2002 2001
---- ---- ----
Security National Life $15,069,057 $14,381,257 $16,316,605
Southern Security Life 11,443,488 8,582,968 8,459,700
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 73.0% 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.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
14) Business Segment Information (Continued)
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.
2003
Life Cemetery/ Reconciling
Insurance Mortuary Mortgage Items Consolidated
Revenues:
From external sources:
Revenue from customers $23,391,497 $10,944,365 $92,955,165$ -- $127,291,027
Net investment income 6,571,404 936,118 9,795,075 -- 17,302,597
Realized gains (losses)
on investments (2,155) -- -- -- (2,155)
Other revenues 157,850 94,907 200,183 -- 452,940
Intersegment revenues:
Net investment income 10,028,748 47,651 -- (10,076,399) --
------------- -------------- ------------- ------------- ------------
40,147,344 12,023,041 102,950,423 (10,076,399) 145,044,409
------------- ------------- ------------- -------------- ------------
Expenses:
Death and other policy
benefits 15,041,541 -- -- -- 15,041,541
Increase in future policy
benefits 6,712,961 -- -- -- 6,712,961
Amortization of deferred policy
acquisition costs and
cost of insurance acquired 4,683,556 245,450 -- -- 4,929,006
Depreciation 464,844 760,091 310,595 -- 1,535,530
General, administrative
and other costs:
Intersegment -- 84,323 208,362 (292,685) --
Other 10,398,872 9,807,357 83,512,224 -- 103,718,453
Interest expense:
Intersegment 90,001 179,803 9,513,910 (9,783,714) --
Other 743,884 436,828 2,461,334 -- 3,642,046
----------- ------------- -------------- ------------- ------------
38,135,659 11,513,852 96,006,425 (10,076,399) 135,579,537
------------ ------------ ------------- ------------- ------------
Earnings (losses)
before income taxes $ 2,011,685 $ 509,189 $ 6,943,998 $ -- $ 9,464,872
============ ============= ============= ============ ============
Identifiable assets $302,319,614 $44,018,131 $ 20,364,399 $(49,792,560) $316,909,584
============ =========== ============= ============ ============
Expenditures for
long-lived assets $ 235,631 $ 559,435 $ 828,244 $ -- $ 1,623,310
============ ============ =============== ============= ============
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
14) Business Segment Information (Continued)
2002
Life Cemetery/ Reconciling
Insurance Mortuary Mortgage Items Consolidated
Revenues:
From external sources:
Revenue from
customers $ 14,076,652 $10,638,754 $57,008,283 $ -- $ 81,723,689
Net investment income 6,065,652 1,011,786 5,461,992 -- 12,539,430
Realized gains on
investments 311,365 709,455 -- -- 1,020,820
Other revenues 69,741 85,146 324,537 -- 479,424
Intersegment revenues:
Net investment income 4,741,338 -- -- (4,741,338) --
------------- ------------ ------------ ------------ -----------
25,264,748 12,445,141 62,794,812 (4,741,338) 95,763,363
------------- ------------ ------------ ------------ -----------
Expenses:
Death and other policy
benefits 7,724,046 -- -- -- 7,724,046
Increase in future
policy benefits 6,031,685 -- -- -- 6,031,685
Amortization of deferred
Policy acquisition costs
and cost of insurance
acquired 3,718,627 274,766 -- -- 3,993,393
Depreciation 383,139 678,851 167,513 -- 1,229,503
General, administrative
and other costs:
Intersegment (900,000) 486,672 623,872 (210,544) --
Other 6,570,217 9,537,374 53,167,818 -- 69,275,409
Interest expense:
Intersegment 90,000 201,118 4,239,676 (4,530,794) --
Other 321,896 428,498 1,219,948 -- 1,970,342
-------------- ------------- ------------ ------------- --------------
23,939,610 11,607,279 59,418,827 (4,741,338) 90,224,378
-------------- ------------- ------------ ------------- --------------
Earnings (losses)
before income taxes $ 1,325,138 $ 837,862 $ 3,375,985 $ -- $ 5,538,985
============ ============= =========== ============= =============
Identifiable assets $295,177,565 $42,255,381 $14,960,638 $ (44,331,241) $308,062,343
============ =========== =========== ============= ==============
Expenditures for long-
lived assets $ 189,156 $ 677,561 $ 482,035 $ -- $ 1,348,752
================ ============= ============== ============= ==============
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
14) Business Segment Information (Continued)
2001
Life Cemetery/ Reconciling
Insurance Mortuary Mortgage Items Consolidated
Revenues: ---------- ----------- ---------- ------------ -------------
From external sources:
Revenue from
customers $ 13,150,875 $ 9,881,248 $40,086,097$ -- $ 63,118,220
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 10,883,259 45,111,430 (3,679,133) 76,227,092
----------- ----------- ----------- ----------- ------------
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 8,674,488 37,280,266 -- 52,990,209
Interest expense:
Intersegment 98,095 243,732 3,163,767 (3,505,594) --
Other 317,988 418,488 2,054,150 -- 2,790,626
------------ ----------- ------------ ------------ ------------
23,119,178 10,276,725 42,738,212 (3,679,133) 72,454,982
------------ ----------- ------------ ----------- ------------
Earnings (losses)
before income taxes $ 792,358 $ 606,534 $ 2,373,218 $ -- $ 3,772,110
============ ============ =========== ============= ============
Identifiable assets $201,193,249 $38,915,291 $ 6,919,871 $(33,460,187) $213,568,224
============= =========== =========== ============ ============
Expenditures for
long-lived assets $ 219,762 $ 505,045 $ 323,014 $ -- $ 1,047,821
============ ============= ============ ============= ============
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
15) Related Party Transactions
On December 19, 2001, the Company entered into an option agreement with Monument
Title, LLC, a Utah limited liability company ("Monument Title") in which the
Company made available a $100,000 line of credit to Monument Title at an
interest rate of 8% per annum. The line of credit is secured by the assets of
Monument Title. From December 28, 2001 to June 14, 2002, the Company advanced
Monument Title a total of $77,953 under the line of credit. The amount advanced
under the line of credit plus accrued interest are payable upon demand. This
receivable was fully allowed for in 2003. The owners of Monument Title are
brothers-in-law of the President and Chief Operating Officer of the Company. The
Company has the right under the option agreement for a period of five years from
the date thereof to acquire 100% of the outstanding common shares of Monument
Title for the sum of $10. The purpose of the transaction, which was approved by
the Company's board of directors, is to insure that the title and escrow work
performed for Security National Mortgage Company in connection with its mortgage
loans are completed as accurately as possible by Monument Title to avoid any
economic losses to the Company.
The Company has a non-interest bearing note receivable from the Chairman of the
Board and Chief Executive Officer. No installment payments are required under
the terms of the note, but the note must be paid in full as of December 31,
2007. The outstanding balance of the note was approximately $38,000 and $70,000
at December 31, 2003 and 2002, respectively.
16) 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, 2003 and
December 31, 2002, were approximately $86,389,000 and $87,351,000, 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.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
17) Accumulated Other Comprehensive Income (Loss), and Other Items
The following summarizes other comprehensive income:
2003 2002 2001
---- ---- ----
Unrealized gains (losses)
on available for-sale securities $638,540 $84,263 $769,684
Less: reclassification
adjustment for net realized
gains (losses) in net income (2,155) (35,544) (10,428)
----------- ----------- -----------
Net unrealized gains (losses) 636,385 48,719 759,256
Potential unrealized losses for
derivative bank loans (303,029) -- --
Tax expense on net unrealized
gain (losses) 19,428 (80,786) (372,077)
----------- ----------- -----------
Other comprehensive income (loss) $352,784 $(32,067) $387,179
=========== =========== ===========
Other items:
Acquisition of Company Stock
held in escrow (1,982,620) -- --
=========== =========== ===========
The "Acquisition of Company Stock held in Escrow" above is held in escrow and
voted by trustee until the balances shown under Note 6 "Notes and Contracts
Payable" in the amounts of $200,000 and $482,620 are paid per terms of the
agreement and promissory note.
The Company considers its interest rate swap instruments (swaps) effective cash
flow hedges against the variable interest rates of certain bank loans. The swaps
expire on the maturity dates of the bank loans they hedge. In the event a swap
is terminated, any resulting gain or loss would be deferred and amortized to
interest expense over the remaining life of the bank loan it hedged. In the
event of early extinguishment of a hedged bank loan, any realized or unrealized
gain or loss from the hedging swap would be recognized in income coincident with
the extinguishment.
Information regarding the swaps is as follows as of December 31, 2003:
Weighted average variable interest rate of
the hedged bank loans (prime less .5%) 3.5%
Weighted average fixed interest rate of the swaps 6.1%
Market value of the swaps- potential unrealized
loss position $(303,029)
The respective market values of the swaps are derived from proprietary models of
the financial institution with whom the Company purchased the swaps and from
whom the Company obtained the hedged bank loans.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002, and 2001
18) Subsequent Event
On March 16, 2004, with the approval of the Louisiana Insurance Department,
Security National Life Insurance Company purchased all of the outstanding common
stock of Paramount Security Life Insurance Company, a Louisiana domiciled
company (Paramount) located in Shreveport, Louisiana. As of December 31, 2003,
Paramount had 9,383 policies in force and approximately, 29 agents. The purchase
consideration was $4,397,994 and was effective January 26, 2004. For the year
ended December 31, 2003, Paramount had revenues of $614,000 and net income of
$76,000. As of December 31, 2003, statutory assets and capital and surplus were
$6,073,000 and $4,100,000, respectively.
Paramount is licensed in the State of Louisiana and is permitted to appoint
agents who do not have a full life insurance license. These agents are limited
to selling small life insurance policies in the final expense market. The
Company believes that with this license it will be able to expand its operations
in Louisiana. The Company is planning on servicing Paramount policyholders out
of its Jackson Mississippi office and has closed the Shreveport office.
Schedule I
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Summary of Investments
Other than Investments in Related Parties
As of December 31, 2003:
Amount at
which shown
Estimated in the
Type of Investment Amortized Fair Consolidated
Cost Value Balance Sheet
Fixed maturity securities held to maturity:
Bonds:
U.S. Treasury securities and obligations
of U.S. Government agencies $3,080,471 $3,260,596 $3,080,471
Obligations of states and political subdivisions 261,360 285,758 261,360
Corporate securities
including public utilities 30,289,401 31,355,505 30,289,401
Mortgage backed securities 3,634,752 3,684,761 3,634,752
Redeemable preferred stocks 28,005 38,358 28,005
------------ ------------ ------------
Total Fixed Securities held to maturity 37,293,989 38,624,978 37,293,989
------------ ------------ ------------
Securities available for sale:
Bonds:
U.S. Treasury securities and
obligations of U.S. Government agencies 595,177 676,781 676,781
Corporate securities
including public utilities 12,618,880 13,593,256 13,593,256
Mortgage-backed securities -- -- --
Non-redeemable preferred stock 56,031 94,712 94,712
Common stock:
Public utilities 314,014 447,172 447,172
Banks, trusts and insurance companies 520,683 989,305 989,305
Industrial, miscellaneous and all other 1,090,733 1,922,255 1,922,255
------------ ------------ ------------
Total Securities available for sale 15,195,518 17,723,481 17,723,481
------------ ------------ ------------
Mortgage loans on real estate 29,914,745 29,914,745
Real estate 8,519,680 8,519,680
Policy loans 11,753,617 11,753,617
Other investments 2,054,248 2,054,248
------------ ------------
Total investments $104,731,797 $107,259,760
============ ============
Schedule I (Continued)
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Summary of Investments
Other than Investments in Related Parties
As of December 31, 2002:
Amount at
Which Shown
Estimated in the
Type of Investment Amortized Cost Fair Value Balance Sheet
Fixed maturity securities held to maturity:
Bonds:
U.S. Treasury securities and obligations
of U.S. Government agencies $2,835,420 $3,047,602 $2,835,420
Obligations of states and political subdivisions 188,303 209,383 188,303
Corporate securities
including public utilities 21,106,651 21,658,305 21,106,651
Mortgage backed securities 8,856,718 8,982,028 8,856,718
Redeemable preferred stocks 28,005 29,733 28,005
------------ ------------ ------------
Total Fixed Securities held to maturity 33,015,097 33,927,051 33,015,097
------------ ------------ ------------
Securities available for sale:
Bonds:
U.S. Treasury securities and obligations
of U.S. Government agencies 594,439 698,136 698,136
Corporate securities
including public utilities 16,558,784 17,816,807 17,816,807
Mortgage-backed securities -- -- --
Nonredeemable preferred stock 56,031 82,585 82,585
Common stock:
Public utilities 314,014 375,570 375,570
Banks, trusts and insurance companies 520,683 818,146 818,146
Industrial, miscellaneous and all other 1,038,812 1,365,792 1,365,792
------------ ------------ ------------
Total Securities available for sale 19,082,763 21,157,036 21,157,036
------------ ------------ ------------
Mortgage loans on real estate 21,016,008 21,016,008
Real estate 9,331,248 9,331,248
Policy loans 10,974,165 10,974,165
Other investments 5,335,478 5,335,478
------------ ------------
Total investments $98,754,759 $100,829,032
============ ============
Schedule II
SECURITY NATIONAL FINANCIAL CORPORATION
(Parent Company Only)
Balance Sheet
December 31,
2003 2002
---- ----
Assets
Cash $(791,521) $(3,870)
Investment in subsidiaries
(equity method) 56,188,527 50,069,998
Receivables:
Receivable from
Affiliates 10,680,182 10,662,465
Other (107,403) (74,653)
------------ ------------
Total receivables 10,572,779 10,587,812
------------ ------------
Property, plant and
equipment, at cost,
net of accumulated
depreciation of $730,230
for 2003 and $575,724
for 2002 300,744 415,144
Other assets 79,504 66,915
------------ ------------
Total assets $66,350,033 $61,135,999
============ ============
See accompanying notes to parent company only financial statements.
Schedule II (Continued)
SECURITY NATIONAL FINANCIAL CORPORATION
(Parent Company Only)
Balance Sheets (Continued)
December 31,
2003 2002
---- ----
Liabilities:
Bank loans payable:
Current installments $2,995,831 $2,082,175
Long-term 8,641,418 11,400,191
Notes and contracts payable:
Current installments 261,835 961
Long-term 421,746 --
Advances from affiliated companies 8,868,497 10,031,968
Other liabilities and accrued expenses 1,060,083 965,555
Income taxes 4,925,192 2,141,738
------------ ------------
Total liabilities 27,174,602 26,622,588
------------ ------------
Stockholders' equity:
Common Stock:
Class A: $2 par value, authorized
10,000,000 shares, issued 6,275,104
shares in 2003 and 5,794,492 shares
in 2002 12,550,208 11,588,984
Class C: $0.20 par value, authorized
7,500,000 shares, issued 6,469,638
shares in 2003 and 6,182,669 shares
in 2002 1,293,927 1,236,533
------------ ------------
Total common stock 13,844,135 12,825,517
Additional paid-in capital 13,569,582 11,280,842
Accumulated other comprehensive income,
(loss), and other items (437,973) 1,191,863
Retained earnings 15,414,681 11,992,542
Treasury stock at cost
(1,276,518 Class A shares and 75,336
Class C shares in 2003; 1,151,811 Class
A shares and 71,749 Class C shares in 2002,
held by affiliated companies) (3,214,994) (2,777,353)
------------ ------------
Total stockholders' equity 39,175,431 34,513,411
------------ ------------
Total liabilities and
stockholders' equity $66,350,033 $61,135,999
============ ============
See accompanying notes to parent company only financial statements.
Schedule II (Continued)
SECURITY NATIONAL FINANCIAL CORPORATION
(Parent Company Only)
Statements of Earnings
Year Ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Revenue:
Net investment income $52 $34,053 $188
Fees from affiliates 4,200,683 3,772,293 3,824,259
----------- ----------- -----------
Total revenue 4,200,735 3,806,346 3,824,447
----------- ----------- -----------
Expenses:
General and administrative
Expenses 2,439,659 3,287,683 4,082,438
Interest expense 763,088 351,599 373,815
----------- ----------- -----------
Total expenses 3,202,747 3,639,282 4,456,253
----------- ----------- -----------
Earnings (loss)before income
taxes, and earnings of
subsidiaries 997,988 167,064 (631,806)
Income tax expense (2,841,738) (1,045,791) (531,270)
Equity in earnings
(loss) of subsidiaries 8,440,247 4,870,007 4,003,856
----------- ----------- -----------
Net earnings $6,596,497 $3,991,280 $2,840,780
=========== =========== ===========
See accompanying notes to parent company only financial statements.
Schedule II (Continued)
SECURITY NATIONAL FINANCIAL CORPORATION
(Parent Company Only)
Statements of Cash Flow
Year Ended December 31,
2003 2002 2001
---- ---- ----
Cash flows from operating activities:
Net earnings $6,596,497 $3,991,280 $2,840,780
Adjustments to reconcile net earnings
to net cash provided by (used in)
operating activities:
Depreciation and amortization 154,506 118,386 113,042
Undistributed (earnings) losses
of affiliates (8,440,247) (4,870,007) (4,003,856)
Provision for income taxes 2,841,738 1,045,791 531,271
Change in assets and liabilities:
Accounts receivable (128,778) 31,909 60,751
Other assets (12,589) (45,549) 25,638
Other liabilities 94,529 (30,673) 282,349
----------- ----------- -----------
Net cash provided by (used in)
operating activities 1,105,656 241,137 (150,025)
----------- ----------- -----------
Cash flows from investing activities:
Dividends received from subsidiaries 1,150,000 2,381,687 --
Purchase of equipment (40,106) (106,185) (2,954)
Investment in subsidiaries -- (900,000) --
----------- ----------- -----------
Net cash used in investing activities 1,109,894 1,375,502 (2,954)
----------- ----------- -----------
Cash flows from financing activities:
Advances from (to) affiliates (1,019,660) (9,396,773) 1,922,758
Payments of advances to affiliates -- -- (28,998)
Payments of notes and contracts payable (2,116,541) (1,224,801) (1,676,940)
Stock options exercised 133,000 -- --
Purchase of treasury stock -- -- (783,086)
Proceeds from borrowings on notes and
contracts payable -- 9,000,000 750,000
----------- ----------- -----------
Net cash provided by (used in)
financing activities (3,003,201) (1,621,574) 183,734
----------- ----------- -----------
Net change in cash (787,651) (4,935) 30,755
Cash at beginning of year (3,870) 1,065 (29,690)
----------- ----------- -----------
Cash at end of year $(791,521) $(3,870) $1,065
=========== =========== ===========
See accompanying notes to parent company only financial statements.
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,
2003 2002
$2,230,016 in 2003 and $3,234,489 in
2002 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. $ 2,178,075 $ 3,144,672
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. 391,363 727,524
7.35% note payable in monthly installments
of $14,975 including principal and
interest collateralized by 15,000 shares
of Security National Life Insurance
Company stock, due December 2006. 482,394 610,170
5.87% note payable interest only to July 2, 2003,
thereafter interest plus monthly principal
payment of $125,000, collateralized by 15,000
shares of Security National Life
Insurance Company stock, due January 2010. 8,413,993 9,000,000
Mark-to-market adjustment 171,424 --
------------ -------------
Total bank loans 11,637,249 13,482,366
Less current installments 2,995,831 2,082,175
------------ -------------
Bank loans, excluding current
Installments $ 8,641,418 $11,400,191
=========== ===========
2) Notes and Contracts Payable
Notes and contracts are summarized as follows:
December 31,
2003 2002
Due to shareholders of Security
National Financial Corporation 6.0%
note payable in annual installments
of $100,000 including principal and
interest due July 2005 $ 200,000 $ --
Due to shareholders of Security National
Financial Corporation 4.0% note payable
in annual installments of $160,873
including principal and interest due
January 2005 482,620 --
Schedule II (Continued)
SECURITY NATIONAL FINANCIAL CORPORATION
Notes to Parent Company Only Financial Statements
2) Notes and Contracts Payable (Continued)
Other 961 961
-------- --------
Total notes and contracts 683,581 961
-------- --------
Less current installments 261,835 961
-------- --------
Notes and contracts, excluding current installments $421,746 $ --
======== ========
The following tabulation shows the combined maturities of bank loans payable and
notes and contracts payable:
2004 $ 3,257,665
2005 2,803,263
2006 1,690,786
2007 1,439,220
2008 1,526,011
Thereafter 1,603,885
-------------
Total $12,320,830
===========
3) Advances from Affiliated Companies
December 31,
2003 2002
Non-interest bearing advances from affiliates:
Cemetery and Mortuary
Subsidiary $1,366,930 $ 1,366,930
Life Insurance subsidiary 7,491,567 8,655,038
Mortgage subsidiary 10,000 10,000
----------- -----------
$8,868,497 $10,031,968
4) Dividends
In 2003, 2002 and 2001, Security National Life Insurance Company, a wholly owned
subsidiary of the Registrant, paid to the registrant cash dividends of
$1,150,000, $2,381,687, and $-0- respectively.
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
2003
Life Insurance
in force ($000) $1,974,388 $213,515 $940,050 $2,700,923 44.1%
=========== =========== =========== =========== ======
Premiums:
Life Insurance
Accident and $15,108,643 $973,632 $8,807,752 $22,942,763 38.4%
Health Insurance 350,371 -- 1,239 351,610 .4%
----------- ----------- ----------- ----------- ------
Total premiums $15,459,014 $973,632 $8,808,991 $23,294,373 38.8%
=========== =========== =========== =========== ======
2002
Life Insurance
in force ($000) $1,460,832 $220,749 $1,174,604 $2,414,687 48.6%
=========== =========== =========== =========== ======
Premiums:
Life Insurance $13,678,397 $889,401 $922,158 $13,711,154 6.7%
Accident and
Health Insurance 364,275 380 1,603 365,498 .4%
----------- ----------- ----------- ----------- ------
Total premiums $14,042,672 $889,781 $923,761 $14,076,652 6.6%
=========== =========== =========== =========== ======
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%
=========== =========== =========== =========== ======
Schedule V
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Valuation and Qualifying Accounts
Balance at Additions Charged Deductions Balance
Beginning to Costs Disposals and at End of
of Year and Expenses Write-offs Year
--------- ------------ ---------- --------
For the Year Ended December 31, 2003
Accumulated depreciation
on real estate $3,728,539 $331,395 $ -- $4,059,934
Accumulated depreciation
on property, plant
and equipment 8,903,197 1,535,529 (19,153) 10,419,573
Allowance for doubtful accounts 1,479,728 472,897 (245,947) 1,706,678
Allowance for real estate losses -- -- -- --
For the Year Ended December 31, 2002
Accumulated depreciation
on real estate $3,404,644 $323,895 $ -- $3,728,539
Accumulated depreciation
on property, plant
and equipment 7,685,613 1,229,504 (11,920) 8,903,197
Allowance for doubtful accounts 1,778,592 90,357 (389,221) 1,479,728
Allowance for real estate losses 119,269 -- (119,269) --
For the Year Ended December 31, 2001
Accumulated depreciation
on real estate $3,088,761 $321,234 $(5,352) $3,404,643
Accumulated depreciation
on property, plant
and equipment 6,699,141 1,029,137 (42,665) 7,685,613
Allowance for doubtful accounts 1,656,223 195,940 (73,571) 1,778,592
Allowance for real estate losses -- 119,269 -- 119,269
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Item 9A. Controls and Procedures
(a) Evaluation of disclosure controls and procedures - The Company's
principal executive officer and principal financial officer have reviewed and
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Rules 240.13a-14(c) and 15d-14(c) under the Securities Exchange
Act of 1934 (the "Exchange Act") as of the end of the period covered by this
annual report. Based on that evaluation, the principal executive officer and the
principal financial officer have concluded that the Company's disclosure
controls and procedures are effective, providing them with material information
relating to the Company as required to be disclosed in the reports the Company
files or submits under the Exchange Act on a timely basis.
(b) Changes in internal controls - There were no significant changes in the
Company's internal controls over financial reporting or in other factors that
could significantly affect the Company's internal controls and procedures
subsequent to the date of their most recent evaluation, nor were there any
significant deficiencies or material weaknesses in the Company's internal
controls. As a result, no corrective actions were required or undertaken.
PART III
Item 10. Directors and Executive Officers
The Company's Board of Directors consists of seven 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 83 Chairman of the Board and Chief Executive
Officer
Scott M. Quist 50 President, General Counsel, Chief Operating
Officer and Director
Stephen M. Sill 58 Vice President, Treasurer and Chief
Financial Officer
G. Robert Quist 52 First Vice President and Secretary
J. Lynn Beckstead, Jr. 50 Vice President and Director
Charles L. Crittenden 83 Director
Robert G. Hunter 44 Director
H. Craig Moody 52 Director
Norman G. Wilbur 65 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.
The audit committee is composed of directors who are, in the opinion of the
Board of Directors, free from any relationship which would interfere with the
exercise of independent judgment and who possess an understanding of financial
statements and generally accepted accounting principles. Thus, each member is an
"independent" director as that term is defined by the regulations of the
Security Exchange Act of 1934. The Board of Directors has determined that Norman
G. Wilbur, who currently serves as a director of the Company as well as a member
of its audit committee, is an independent audit committee financial expert.
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 and Chief Executive Officer of
the Company since October 1979. Mr. Quist served as President of the Company
from 1979 until July 2002. Mr. Quist has also served as Chairman of the Board
and Chief Executive Officer of Southern Security Life Insurance Company since
December 1998, and as its President from December 1998 to July 2002. From 1960
to 1964, he was Executive Vice President and Treasurer of Pacific Guardian Life
Insurance Company. From 1946 to 1960, he was an agent, District Manager and
Associate General Agent for various insurance companies. Mr. Quist also served
from 1981 to 1982 as the President of The National Association of Life
Companies, a trade association of 642 life insurance companies, and from 1982 to
1983 as its Chairman of the Board.
Scott M. Quist has been President of the Company since July 2002, its Chief
Operating Officer since October 2001, and its General Counsel and a director
since May 1986. Mr. Quist served as First Vice President of the Company from May
1986 to July 2002. Mr. Quist has also served as President of Southern Security
Life Insurance Company since July 2002, its Chief Operating Officer since
October 2001, and its General Counsel and a director since December 1998. Mr.
Quist also served as First Vice President of Southern Security Life Insurance
Company from December 1998 to July 2002. From 1980 to 1982, Mr. Quist was a tax
specialist with Peat, Marwick, Mitchell, & Co., in Dallas, Texas. From 1986 to
1991, he was Treasurer and a director of The National Association of Life
Companies, a trade association of 642 insurance companies until its merger with
the American Council of Life Companies. Mr. Quist has been a member of the Board
of Governors of the Forum 500 Section (representing small insurance companies)
of the American Council of Life Insurance. He has also served as a regional
director of Key Bank of Utah since November 1993. Mr. Quist is currently a
director and 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 2002. Mr. Beckstead has also served as Vice President and a director
of Southern Security Life Insurance Company since March 2002. In addition, he is
President of Security National Mortgage Company, an affiliate of the Company,
having 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 a director of Richards Woodbury
Mortgage Corporation. From 1980 to 1983, he was a principal broker for Boardwalk
Properties. From 1978 to 1980, Mr. Beckstead was a residential loan officer for
Medallion Mortgage Company. From 1977 to 1978, he was a residential construction
loan manager of Citizens Bank.
Charles L. Crittenden has been a director of the Company since 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 statewide
E.N.T. Organization (Rocky
Mountain E.N.T., Inc.) where he is currently a member of the Executive
Committee. He is also Chairman of Surgery at Cottonwood Hospital, a delegate to
the Utah Medical Association and a delegate representing the State of 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.
Executive Officers
Stephen M. Sill has been Vice President, Treasurer and Chief Financial Officer
of the Company since March 2002. From 1997 to March 2002, Mr. Sill was Vice
President and Controller of the Company. He has also served as Vice President,
Treasurer and Chief Financial Officer of Southern Security Life Insurance
Company since March 2002. From 1998 to March 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. Inc. From
1978 to 1989, Mr. Sill was Senior Vice President and Controller of Surety Life
Insurance Company. From 1975 to 1978, he was Vice President and Controller of
Sambo's Restaurant, Inc. From 1974 to 1975, Mr. Sill was Director of Reporting
for Northwest Pipeline Corporation. From 1970 to 1974, he was an auditor with
Arthur Andersen & Co. Mr. Sill is the Immediate Past President and 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 First Vice President and Secretary of the Company since
March 2002. Mr. Quist also served as a director of Southern Security Life
Insurance Company since April 1999 and as its First Vice President and Secretary
since March 2002. He has also served as First Vice President of Singing Hills
Memorial Park since 1996. Mr. Quist has served as Vice President of Memorial
Estates since 1982; he began working for Memorial Estates in 1978. Also since
1987, Mr. Quist has served as President and a director of Big Willow Water
Company and as Secretary-Treasurer and a director of the Utah Cemetery
Association. From 1987 to 1988, he was a director of Investors Equity Life
Insurance Company of Hawaii.
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 that is in conflict or may be in
conflict with the interests of the Company.
No director, officer or 5% stockholder of the Company or its subsidiaries, or
any affiliate thereof has had any transactions with the Company or its
subsidiaries during 2003 or 2002.
Each of the directors 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, as amended. In addition, Scott M. Quist is a
regional director of Key Bank of Utah.
All directors of the Company hold office until the next Annual Meeting of
Stockholders and until their successors have been elected and qualified.
Pursuant to Item 406 of Regulation S-K under the Securities Exchange Act of
1934, the Company has not yet adopted a code of ethics that applies to its
principal executive officer, principal financial officer, controller or persons
performing similar functions. The Company is still in the process of studying
this issue and may adopt a code of ethics in the near future.
Item 11. Executive 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, 2003 whose salary and bonus for all
services in all capacities exceed $100,000 for the fiscal year ended December
31, 2003.
Summary Compensation Table
Annual Compensation Long-Term Compensation
Other
Annual Restricted Securities Long-Term All Other
Name and Compen- Stock Underlying Incentive Compen-
Principal Position Year Salary($) Bonus($) sation($)(2) Awards($) Options/SARs(#) Payout($) sation($)(3)
- ------------------ ---- -------- -------- ------------ --------- --------------------------- ------------
George R. Quist (1) 2003 $165,600 $50,000 $2,400 0 0 0 $23,273
Chairman of the 2002 165,600 25,000 2,400 0 0 0 31,186
Board and Chief 2001 148,737 20,200 2,400 0 50,000 0 37,358
Executive Officer
Scott M. Quist (1) 2003 $205,400 $60,000 $7,200 0 0 0 $29,531
President, Chief 2002 179,400 35,000 7,200 0 0 0 24,066
Operating Officer 2001 152,525 20,000 7,200 0 35,000 0 34,739
and Director
(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 Security National Financial
Corporation Deferred Compensation Plan (for the years 2003, 2002, and
2001, such amounts were George R. Quist, $18,590, $16,207 and $32,077,
respectively; and Scott M. Quist, $23,000, $19,219 and $34,102,
respectively); (b) insurance premiums paid by the Company with respect
to a group life insurance plan for the benefit of the Named Executive
Officers (for the years 2003, 2002 and 2001, such amounts were for
George R. Quist $39, $125 and $637, respectively; for Scott M. Quist,
$354, $642, and $637, respectively); (c) life insurance premiums paid
by the Company for the benefit of the family of George R. Quist
($4,644 for each of the years 2003, 2002 and 2001); Scott M. Quist
($6,177 for the year 2003, $4,205 for the year 2002, $0 for 2001); (d)
compensation paid for the cashless exercise of 50,000 shares of
Company stock exercised by George R. Quist ($10,210) for the year
2002. The amounts under "All Other Compensation" does 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, 2003, as well as the aggregate number
and value of unexercised options held by the Named Executive Officers on
December 31, 2003.
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 2003(#) 2003
------- ------
Name (#) Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
George R.
Quist -0- $ -0- 239,505 -0- $521,582 $-0-
Scott M.
Quist 48,099 336,174 73,500 -0- 134,575 -0-
Retirement Plans
On December 8, 1988, the Company entered into a deferred compensation plan with
George R. Quist, the Chairman and Chief Executive officer of the Company. The
plan was later amended effective January 2, 2001. Under the terms of the plan as
amended, upon the retirement of Mr. Quist, the Company is required to pay him
ten annual installments in the amount of $60,000. Retirement is defined in the
plan as the earlier or later of age 70, as specified by the Board of Directors.
The $60,000 annual payments are to be adjusted for inflation in accordance with
the United States Consumer Price Index for each year after January 1, 2002. If
Mr. Quist's employment is terminated by reason of disability or death before he
reaches retirement age, the Company is to make the ten annual payments to Mr.
Quist, in the event of disability, or to his designated beneficiary, in the
event of death.
The plan also provides that the Board of Directors may, in its discretion, pay
the amounts due under the plan in a single, lump-sum payment. In the event that
Mr. Quist dies before the ten annual payments are made, the unpaid balance will
continue to be paid to his designated beneficiary. The plan further requires the
Company to furnish an automobile for Mr. Quist's use and to pay all reasonable
expenses incurred in connection with its use for a ten year period, and to
provide Mr. Quist with a hospitalization policy with similar benefits to those
provided to him the day before his retirement or disability. However, in the
event Mr. Quist's employment with the Company is terminated for any reason other
than retirement, death, or disability, the entire amount of deferred
compensation payments under the plan shall be forfeited by him.
Employment Agreements
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 and 2002. Under the terms of the agreement, Mr. Quist is to devote his full
time to the Company serving as its 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 five 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.
On December 4, 2003, the Company, through its subsidiary Security National
Mortgage Company, entered into an employment agreement with J. Lynn Beckstead,
Jr., President of Security National Mortgage Company. The agreement has a
five-year term, but the Company has agreed to renew the agreement on December 4,
2008 and
2013 for additional five-year terms, provided Mr. Beckstead performs his duties
with usual and customary care and diligence. Under the terms of the agreement,
Mr. Beckstead is to devote his full time to the Company serving as President of
Security National Mortgage Company at not less than his current salary and
benefits, and to include $350,000 of life insurance protection. In the event of
disability, Mr. Beckstead's salary would be continued for up to five years at
50% of its current level. In the event of a sale or merger of the Company, and
Mr. Beckstead were not retained in his current position, the Company would be
obligated to continue Mr. Beckstead's current compensation and benefits for five
years following the merger or sale. The agreement further provides that Mr.
Beckstead is entitled to receive annual retirement benefits beginning one month
from the date of his retirement and his having obtained the age of 62 1/2, five
years following complete disability, or upon termination of his employment
without cause. These retirement benefits are to be paid for a period of ten
years in annual installments in the amount equal to one-half of his then current
annual salary. However, in the event that Mr. Beckstead dies prior to receiving
all retirement benefits thereunder, the remaining benefits are to be paid to his
heirs.
Director Compensation
Directors of the Company (but not including directors who are employees) are
paid a director's fee of $12,000 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 2003, 2002 and 2001 were
approximately $4,493, $7,975 and $18,458, 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 2003, 2002 and
2001, were $110,081, $142,218 and $260,350, respectively.
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 235 participants and had $98,588
contributions payable to the Plan in 2003. 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 trustees of the trust fund under the
Ownership Plan are George R. Quist, Scott M. Quist and Robert G. Hunter, who
each serve 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 2003, 2002 and 2001
was $95,485, $100,577 and $220,038, respectively.
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.
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
1993 Plan as follows: (i) to increase the number of shares of Class A Common
Stock reserved for issuance under the 1993 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. The Plan terminated in 2003.
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.
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.
2003 Stock Option Plan
On July 11, 2003, the Company adopted the Security National Financial
Corporation 2003 Stock Option Plan (the "2003 Plan"), which reserved 500,000
shares of Class A Common Stock and 1,000,000 shares of Class C Common Stock for
issuance thereunder. The 2003 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 2003 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 under the 2003 Plan.
The 2003 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
affected under the 2003 Plan are to be determined by the Board of Directors or
its committee. No options may be exercised for a term of more than ten years
from the date of the 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 then fair
market value of the option shares on the date of grant. The 2003 Plan provides
that the exercise price for non-qualified options will not be 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 2003 Plan has a term of ten years. The Board of Directors may amend or
terminate the 2003 Plan at any time, from time to time, subject to approval of
certain modifications to the 2003 Plan by the shareholders of the Company as may
be required by law or the 2003 Plan.
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 31, 2004, (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, (iii) each of the Company's named
executive officers, and (iv) for all executive officers and directors of the
Company as a group.
Class A and
Class A Class C 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)(3)(4)(5)
4491 Wander Lane
Salt Lake City, Utah 84124 455,841 8.1% 436,259 6.8% 892,100 7.4%
George R. and Shirley C
Quist Family
Partnership, Ltd.(6)
4491 Wander Lane
Salt Lake City, Utah 84124 400,263 7.1% 3,195,860 50.0% 3,596,123 29.8%
Employee Stock
Ownership Plan (7)
5300 S. 360 W., Suite 250
Salt Lake City, Utah 84123 546,344 9.7% 1,479,087 23.1% 2,025,431 16.8%
Scott M. Quist (1)(3)(4)(8)
7 Wanderwood Way
Sandy, Utah 84092 323,404 5.7% 301,248 4.7% 624,652 5.2%
Associated Investors (9)
5300 S. 360 W. Suite 250
Salt Lake City, Utah 84123 88,379 1.6% 624,391 9.8% 712,770 5.9%
Item 12 - Security Ownership of Certain Beneficial Owners and Management (Continued)
- -------------------------------------------------------------------------
Class A and
Class A Class C Class C
Common Stock Common Stock Common Stock
------------ ------------ ------------
Amount Amount Amount
Name and Address of Beneficially Percen Beneficially Percent Beneficially Percent
Beneficial Owner Owned of Class Owned of Class Owned of Class
- ----------------- ------- -------- ----- -------- ----- --------
G. Robert Quist (10)
4744 Millrace Park Lane
Murray, Utah 84123 87,903 1.6% 225,391 3.5% 313,294 2.6%
Stephen M. Sill (11)
1595 North Fort Lane
Layton, Utah 84041 51,929 * -- -- 51,929 *
J. Lynn Beckstead, Jr. (12)
190 Matterhorn Drive
Alpine, Utah 84004 87,196 1.5% -- -- 87,196 *
Charles L. Crittenden
2334 Fillmore Avenue
Ogden, Utah 84401 4,589 * -- -- 4,589 *
H. Craig Moody(13)
11892 South Brookglen Drive
Sandy, Utah 84092 4,358 * -- -- 4,358 *
Norman G. Wilbur (14)
2520 Horseman Drive
Plano, Texas 75025 4,628 * -- -- 4,628 *
Robert G. Hunter, M.D (1)(3)(15)
2 Ravenwood Lane
Sandy, Utah 84092 5,899 * -- * 5,899 *
All directors and executive officers
(9 persons)(1)(2)(3)(4) 1,426,010 25.2% 4,158,758 65.0% 5,584,768 46.3%
*Less than one percent
(1) Does not include 546,344 shares of Class A Common Stock and 1,479,087 shares
of Class C Common Stock owned by the Company's Employee Stock Ownership Plan
(ESOP), of which George R. Quist, Scott M. Quist, and Robert G. Hunter are the
trustees and accordingly, exercise shared voting and investment powers with
respect to such shares.
(2) Does not include 88,379 shares of Class A Common Stock and 624,391 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 192,520 shares of Class A Common Stock owned by the
Company's 401(k) Retirement Savings Plan, of which George R. Quist, Scott M.
Quist, and Robert G. Hunter are members of the Investment Committee and,
accordingly, exercise shared voting and investment powers with respect to such
shares.
(4) Does not include 98,765 shares of Class A Common Stock owned by the
Company's Deferred Compensation Plan, of which George R. Quist and Scott M.
Quist are members of the Investment Committee and, accordingly, exercise shared
voting and investment powers with respect to such shares.
(5) Includes options to purchase 239,505 shares of Class A common stock granted
to George R. Quist, that are currently exercisable or will become exercisable
within 60 days of March 31, 2004.
(6) This stock is owned by the George R. and Shirley C. Quist Family
Partnership, Ltd., of which George R. Quist is the general partner.
(7) The trustees of the Employee Stock Ownership Plan (ESOP) are George R.
Quist, Scott M. Quist, and Robert G. Hunter, who exercise shared voting and
investment powers.
(8) Includes options to purchase 73,500 shares of Class A common stock granted
to Scott M. Quist, that are currently exercisable or will become exercisable
within 60 days of March 31, 2004.
(9) The managing partner of Associated Investors is George R. Quist, who
exercises voting and investment powers.
(10) Includes options to purchase 42,538 shares of Class A common stock granted
to G. Robert Quist, that are currently exercisable or will become exercisable
within 60 days of March 31, 2004.
(11) Includes options to purchase 10,500 shares of Class A common stock granted
to Mr. Sill, that are currently exercisable or will become exercisable within 60
days of March 31, 2004.
(12) Includes options to purchase 27,326 shares of Class A common stock granted
to Mr. Beckstead, that are currently exercisable or will become exercisable
within 60 days of March 31, 2004.
(13) Includes options to purchase 3,477 shares of Class A common stock granted
to Mr. Moody, that are currently exercisable or will become exercisable within
60 days of March 31, 2004.
(14) Includes options to purchase 3,477 shares of Class A common stock granted
to Mr. Wilbur, that are currently exercisable or will become exercisable within
60 days of March 31, 2004.
(15) Includes options to purchase 3,477 shares of Class A common stock granted
to Mr. Hunter, that are currently exercisable or will become exercisable within
60 days of March 31, 2004.
The Company's officers and directors, as a group, own beneficially approximately
46.3% 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 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, 2007. Mr.
Quist has the right to make prepayments on the note at any time. As of March 31,
2004, the outstanding balance of the note was $28,000. 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.
On December 19, 2001, the Company entered into an option agreement with Monument
Title, LLC, a Utah limited liability company ("Monument Title") in which the
Company made available a $100,000 line of credit to Monument Title at an
interest rate of 8% per annum. The line of credit is secured by the assets of
Monument Title. From December 28, 2001 to June 14, 2002, the Company advanced
Monument Title a total of $77,953 under the line of credit. The amount advanced
under the line of credit plus accrued interest are payable upon demand. Ron
Motzkus and Troy Lashley, who own 90% and 10% of the outstanding shares of
Monument Title, respectively are brother-in-laws of Scott M. Quist, President
and Chief Operating Officer of the Company. The Company has the right under the
option agreement for a period of five years from the date thereof to acquire
100% of the outstanding common shares of Monument Title for the sum of $10. The
purpose of the transaction, which was approved by the Company's board of
directors, is to insure that the title and escrow work performed for Security
National Mortgage Company in connection with its mortgage loans are completed as
accurately as possible by Monument Title to avoid any economic losses to the
Company.
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.
Item 14. Principle Accounting Fees and Services
Fees for the 2003 annual audit of the financial statements and employee benefit
plans and related quarterly reviews were approximately $256,000. There were
$15,000 in other fees during 2003.
PART IV
Item 15. 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.
(3) Exhibits
The following Exhibits are filed herewith pursuant to Rule 601 of
Regulation S-K or are incorporated by reference to previous filings.
3.1 Articles of Restatement of Articles of Incorporation (8)
3.2 Amended Bylaws (11)
4.1 Specimen Class A Stock Certificate (1)
4.2 Specimen Class C Stock Certificate (1)
4.3 Specimen Preferred Stock Certificate and Certificate of Designation
of Preferred Stock (1)
10.1 Restated and Amended Employee Stock Ownership Plan and Trust
Agreement (1)
10.2 1993 Stock Option Plan (3)
10.3 2000 Director Stock Option Plan (5)
10.4 2003 Stock Option Plan (10)
10.5 Deferred Compensation Agreement with George R. Quist (2)
10.6 Employment Agreement with Scott M. Quist (4)
10.7 Promissory Note with George R. Quist (6)
10.8 Deferred Compensation Plan (7)
10.9 Coinsurance Agreement between Security National Life and Acadian (8)
10.10 Assumption Agreement among Acadian, Acadian Financial Group, Inc.,
Security National Life and the Company (8)
10.11 Asset Purchase Agreement between Acadian, Acadian Financial Group,
Inc., Security National Life and the Company (8)
10.12 Promissory Note with Key Bank of Utah (9)
10.13 Loan and Security Agreement with Key Bank of Utah (9)
10.14 Stock Purchase and Sale Agreement with Ault Glazer & Co. Investment
Management LLC (11)
10.15 Stock Purchase Agreement with Paramount Security Life Insurance
Company (12)
10.16 Reinsurance Agreement between Security National Life Insurance
Company and Guaranty Income Life Insurance Company
10.17 Employment agreement with J. Lynn Beckstead, Jr.
10.21 Subsidiaries of the Registrant
31.1 Certification pursuant to 18 U.S.C. Section 1350, as enacted by
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification pursuant to 18 U.S.C. Section 1350, as enacted by
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(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 Annual Report on Form 10-K, as
filed on March 31, 1998
(5) Incorporated by reference from Schedule 14A Definitive Proxy
Statement, filed August 29, 2000, relating to the Company's
Annual Meeting of Shareholders
(6) Incorporated by reference from Annual Report on Form 10-K,
as filed on April 16, 2001
(7) Incorporated by reference from Annual Report on Form 10-K,
as filed on April 3, 2002
(8) Incorporated by reference from Report on Form 8-K/A as filed
on January 8, 2003
(9) Incorporated by reference from Annual Report on Form 10-K,
as filed on April 15, 2003
(10) Incorporated by reference from Schedule 14A Definitive
Proxy Statement, Filed on June 5, 2003, relating to the
Company's Annual Meeting of Shareholders
(11) Incorporated by reference from Report on Form 10-Q, as filed
on November 14, 2003
(12) Incorporated by reference from Report on Form 8-K, as filed
March 30, 2004
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 2003.
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: March 30, 2004 By: George R. Quist,
---------------
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934 as amended,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
George R. Quist Chairman of the March 30, 2004
Board and Chief Executive
Officer (Principal
Executive Officer)
Scott M. Quist President, General March 30, 2004
Counsel, Chief
Operating Officer
and Director March 30, 2004
Stephen M. Sill Vice President,
Treasurer and Chief
Financial Officer (Principal
Financial and Accounting
Officer) March 30, 2004
J. Lynn Beckstead, Jr. Vice President and Director March 30, 2004
Charles L. Crittenden Director March 30, 2004
H. Craig Moody Director March 30, 2004
Norman G. Wilbur Director March 30, 2004
Robert G. Hunter Director March 30, 2004
Exhibit 31.1
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ENACTED BY
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, George R. Quist, certify that:
1. I have reviewed this annual report on Form 10-K of Security National
Financial Corporation.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaing disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant to have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectivness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls over
financial reporting.
Date: March 30, 2004
By: George R. Quist
Chairman of the Board and
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ENACED BY
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Stephen M. Sill, certify that:
1. I have reviewed this annual report on Form 10-K of Security National
Financial Corporation.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaing disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant to have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectivness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls over
financial reporting.
Date: March 30, 2004
By: Stephen M. Sill
Vice President, Treasurer and
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Security National Financial Corporation
(the "Company") on Form 10K for the period ending December 31, 2003, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, George R. Quist, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that, to the best of my knowledge and belief:
(1) the Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of
operations of the Company.
By: George R. Quist
Chief Executive Officer
March 30, 2004
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Security National Financial Corporation
(the "Company") on Form 10K for the period ending December 31, 2003, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Stephen M. Sill, Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that, to the best of my knowledge and belief:
(1) the Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in
all material respects, the financial condition and result of
operations of the Company.
By: Stephen M. Sill
Chief Financial Officer
March 30, 2004
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Year Ended December 31, 2003
SECURITY NATIONAL FINANCIAL CORPORATION
Commission File No. 0-9341
E X H I B I T S
Exhibit Index
Exhibit No. Document Name
10.16 Reinsurance Agreement between Security National Life Insurance Company
and Guaranty Income Life Insurance Company
10.17 Employment Agreement with J. Lynn Beckstead, Jr.
10.21 Subsidiaries of the Registrant
31.1 Certification pursuant to 18 U.S.C. Section 1350, as enacted by
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification pursuant to 18 U.S.C. Section 1350, as enacted by
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 10.21
Subsidiaries of Security National
Financial Corporation
as of March 31, 2004
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 Funding Company
Paramount Security Life Insurance Company