SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A-1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report
(Date of Earliest Event Reported): December 17, 1998
SECURITY NATIONAL FINANCIAL CORPORATION
(Exact name of registrant as specified in this Charter)
Utah 0-9341 87-0345941
- ---------------------------- ---------------- ---------------
(State or other jurisdiction (Commission File (IRS Employer
of incorporation) Number) Identification No.)
5300 South 360 West, Suite 310 Salt Lake City, Utah 84123
- ----------------------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number,
Including Area Code: (801) 264-1060
---------------
Does Not Apply
(Former name or former address, if changed since last report)
ITEM 2. Acquisition of Consolidare Enterprises, Inc.
On December 17, 1998, Security National Financial Corporation
(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 57.4% of the outstanding shares of common
stock of Southern Security Life Insurance Company, a Florida
corporation ("SSLIC"), and all of the outstanding shares of stock
of Insuradyne Corp., a Florida corporation ("Insuradyne"). SSLIC
is a Florida domiciled insurance company with total assets of
approximately $82.1 million. SSLIC is currently licensed to
transact business in 14 states. SSLIC's total revenues for the
year ended December 31, 1997 were $11,695,756. SSLIC had a net
income of $195,000 for fiscal 1997.
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 to cause 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.
Following the closing of the Acquisition Agreement, SSLIC
Holding Company, a Utah corporation and a newly formed wholly-
owned subsidiary of Security National Life Insurance Company, was
merged into Consolidare with Consolidare the surviving
corporation pursuant to the terms of the Agreement and Plan of
Merger dated December 17, 1998 between Consolidare and SSLIC
Holding Company. As a result of the merger, Consolidare became
a wholly-owned subsidiary of Security National Life Insurance
Company and continues to own 57.4% of the outstanding shares of
common stock of SSLIC.
In connection with the acquisition of Consolidare, the
Company entered into an Administrative Services Agreement dated
December 17, 1998 with SSLIC. Under the terms of the agreement,
the Company has agreed to provide SSLIC with certain defined
administrative and financial services, including accounting
services, financial reports and statements, actuarial,
policyholder services, underwriting, data processing, legal,
building management, marketing advisory services and investment
services. In consideration for the services to be provided by
the Company, SSLIC shall pay the Company an administrative
services fee of $250,000 per month, provided, however, that such
fee shall be reduced to zero for so long as the capital and
surplus of SSLIC is less than or equal to $6,000,000, unless
SSLIC and the Company otherwise agree in writing and such
agreement is approved by the Florida Department of Insurance.
The administrative services fee may be increased, beginning
on January 1, 2001, to reflect increases in the Consumer Price
Index, over the index amount as of January 1, 2000. The
Administrative Services Agreement shall remain in effect for an
initial term expiring on December 16, 2003. The term of the
agreement may be automatically extended for additional one-year
terms unless either the Company or SSLIC shall deliver a written
notice on or before September 30 of any year stating to the other
its desire not to extend the term of the agreement. However, in
no event can the agreement be terminated prior to December 16,
2003.
On December 28, 1998, Capitol Indemnity Corporation, a
shareholder of SSLIC, filed a Notice of Appeal with the Florida
District Court of Appeal for the First District (Capitol
Indemnity Corporation vs. State of Florida, Department of
Insurance, Case No. 24318-98-C), appealing the final order
entered by the Florida Department of Insurance (the "Department")
on November 25, 1998, which approved the Company"s acquisition of
Consolidare. Capitol Indemnity Corporation and another SSLIC
shareholder had previously taken exceptions to the acquisition
application which the Company had filed with the Department on
May 20, 1998. Following a hearing before the Hearing Examiner
for the Department with respect to the exceptions, the Department
issued a final order approving the application. The Company
believes there is no basis to the appeal of the Department's
final order by Capitol Indemnity Corporation.
ITEM 7. Financial Statements and Exhibits.
(a) The following consolidated financial statements of
Consolidare and subsidiaries are included herein:
Independent Auditors' Reports
Balance Sheets as of December 31, 1997 and 1996
Statements of Income for the years ended December
31, 1997, 1996 and 1995
Statements of Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
Notes to Financial Statements
Condensed Balance Sheet as of September 30, 1998
(unaudited)
Condensed Statements of Income for the nine months
ended September 30, 1998 and 1997 (unaudited)
Condensed Statements of Shareholders' Equity for the
nine months ended September 30, 1998 (unaudited)
Condensed Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997 (unaudited)
Notes to Condensed Interim Financial Statements
(unaudited)
(b) The following pro forma statements of Security
National Financial Corporation are included herein:
Pro Forma Condensed Consolidated Balance Sheet as of
September 30, 1998 (unaudited)
Pro Forma Condensed Consolidated Statement of Income
for the nine months ended September 30, 1998
(unaudited)
Pro Forma Condensed Consolidated Statement of Income
for the year ended December 31, 1997 (unaudited)
Notes to Pro Forma Condensed Consolidated Financial
Statements (unaudited)
(c) Exhibits
10.1. Acquisition Agreement among Security National
Financial Corporation, Consolidare Enterprises, Inc. and certain
shareholders of Consolidare (including related exhibits).*
10.2. Agreement and Plan of Merger between
Consolidare Enterprises, Inc. and SSLIC Holding Company.**
10.3. Administrative Services Agreement between
Security National Financial Corporation and Southern Security
Life Insurance Company.
27. Financial Data Schedule for the periods December 31,
1997, 1996 and 1995 included herewith.
* Incorporated by reference from Report on Form 8-K, as filed
on May 11, 1998.
** Incorporated by reference from Report on Form 8-K, as
filed on January 4, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
SECURITY NATIONAL FINANCIAL CORPORATION
(Registrant)
Date: March 4, 1999 By: Scott M. Quist
First Vice President,
General Counsel and Treasurer
Exhibit Index
Current Report on Form 8-K
SECURITY NATIONAL FINANCIAL CORPORATION
Exhibit No.
10.1 Acquisition Agreement among Security National
Financial Corporation, Consolidare Enterprises, Inc., and certain
shareholders of Consolidare (including related exhibits).*
10.2 Agreement and Plan of Merger between Consolidare
Enterprises, Inc., and SSLIC Holding Company.**
10.3. Administrative Services Agreement between Security
National Financial Corporation and Southern Security Life
Insurance Company.
27. Financial Data Schedule for the periods December 31,
1997, 1996 and 1995 included herewith.
*Incorporated by reference from Report on Form 8-K,
as filed on May 11, 1998.
**Incorporated by reference from Report on Form 8-K, as
filed on January 4, 1999.
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
September 30, 1998
(In Thousands)
ASSETS
Investments:
Fixed maturities held to maturity
at amortized costs (fair value
$6,627,107) $ 6,436
Securities available for sale,
at fair value
Fixed maturities (cost of $31,492,707)
Equity securities 32,702
(cost of $202,422) 202
Policy and student loans 8,184
TOTAL INVESTMENTS 47,524
Cash 8,372
Accrued investment income 920
Policyholder account balances on
deposit with reinsurer 8,533
Other receivables 1,889
Deferred policy acquisition costs 13,389
Property and equipment - at cost,
less accumulated depreciation 2,621
TOTAL ASSETS $ 83,248
See notes to financial statements
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
September 30, 1998
(In Thousands)
LIABILITIES AND
SHAREHOLDERS' EQUITY
LIABILITIES
Future policy benefits and policyholder
account balances $54,357
Unearned premiums 6,487
Other policy claims and benefits payable 718
Funds held in reinsurance with reinsurer 1,397
Deferred income taxes 883
Other liabilities 1,633
Convertible subordinated debentures 1,875
---------
TOTAL LIABILITIES 67,350
Minority interest 6,499
Net excess of underlying equity in
net assets of subsidiaries over cost 343
SHAREHOLDERS' EQUITY
Common stock, $.25 par value:
Authorized - 5,850,000 shares
issued and outstanding- 3,961,340
shares 990
Additional paid-in capital 3,342
Unrealized appreciation of securities 309
Retained earnings 4,888
Common stock held in treasury at cost
(578,196 shares) (473)
Total stockholders' equity 9,056
-------
Total liabilities and stockholders'equity $83,248
See notes to financial statements.
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
Nine Months Ending September 30,
(In Thousands)
1998 1997
REVENUES
Premium, policy charges,
net of reinsurance $ 5,807 $ 6,036
Net investment income 2,806 2,692
Realized gains on investments 414 430
9,027 9,158
BENEFITS, LOSSES, and EXPENSES
Benefits, claims and losses 3,692 3,469
Underwriting, acquisition, and
insurance expenses 4,981 5,920
8,673 9,389
INCOME (LOSS) BEFORE FEDERAL INCOME TAXES 354 (231)
Federal income taxes (benefit) 125 (244)
INCOME BEFORE MINORITY INTEREST 229 13
Minority Interest 125 27
NET INCOME (LOSS) $104 $(14)
See notes to financial statements.
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(In Thousands)
Balance at Increase in Balance at
12/31/97 Net Income Market Value 09/30/98
Common Stock $ 990 $ $ $ 990
Additional paid-in
Capital 3,342 3,342
Unrealized Appreciation
in Securities 153 156 309
Retained Earnings 4,784 104 4,888
Treasury Shares (473) (473)
Total Shareholders'
Equity $ 8,796 $ 104 $ 156 $ 9,056
See notes to financial statements.
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ending September 30,
(In Thousands)
1998 1997
Cash flows provided by (used in)
operating activities:
Net income (loss) $ 104 $ (14)
Adjustments to reconcile net income
to net cash provided by operating activities:
Net realized gains on sale of investments (414) (430)
Depreciation 218 109
Deferred income taxes 125 (244)
Amortization of deferred policy
acquisition costs 2,088 2,741
Acquisition costs deferred (1,020) (1,437)
Minority interest in net income
of subsidiary 125 27
Changes in operating assets and liabilities:
Increase in accrued investment income (283) (367)
Increase in future policy benefits
and policyholder account balances 2,252 1,655
Decrease in unearned premium (622) (806)
(Decrease) increase in other
assets and liabilities (29) 149
Net cash provided by (used in)
operating activities 2,544 1,383
Cash flows from Investing Activities
Purchase of investments (6,783) (32,560)
Sales or maturities of investments 11,245 32,577
Net change in policy and student loans (239) (261)
Acquisition of property and equipment (69) (13)
Net cash provided by (used in)
investing activities 4,154 (257)
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ending September 30,
(In Thousands)
1998 1997
Cash flows from financing activities
Receipt from universal life and annuities 2,070 1,916
Return of policyholder account balances
for universal life and annuities (3,480) (2,809)
Net cash used in financing activities (1,410) (893)
Net increase in cash 5,288 233
Cash at beginning of year 3,084 957
Cash at end of year $ 8,372 $ 1,190
See notes to financial statements
NOTES TO UNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS
Note 1) Consolidare Enterprises, Inc., (the Company) is a
holding company for its subsidiaries, Southern Security Life
Insurance Company, ("Southern Security") and Insuradyne. The
primary business activities are the marketing, underwriting and
servicing of life insurance products through Southern Security
and Insuradyne. The accompanying unaudited interim financial
statements for the Company have been prepared in accordance with
generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. However
these financial statements reflect all adjustments which are, in
the opinion of management, necessary to a fair statement of the
results for the interim periods presented. The operating results
are not indicative of the results which might be expected for a
twelve month period. Footnote disclosures which would
substantially duplicate the footnotes included in the 1997
audited consolidated financial statements have been omitted.
Please refer to the footnotes of the 1997 consolidated financial
statements included elsewhere herein.
Note 2) On December 17, 1998, Security National Financial
Corporation (Security National) purchased all of the outstanding
shares of common stock of the Company. As consideration for the
purchase of the shares of the Company, Security National, paid to
the stockholders of the Company at closing an aggregate of
$12,248,194. In order to pay the purchase consideration,
Security National 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,
Security National to cause Southern Security to pay, on the
closing date, $1,050,000 to George Pihakis, the President and
Chief Executive Officer of Southern Security prior to closing, as
a lump sum settlement of the executive compensation agreement
between Southern Security and Mr. Pihakis.
Following the closing of the Acquisition Agreement, SSLIC Holding
Company, a Utah corporation and a newly formed wholly-owned
subsidiary of Security National Life Insurance Company was merged
into the Company with the Company being the surviving corporation
pursuant to the terms of the Agreement and Plan of Merger dated
December 17, 1998 between the Company and SSLIC Holding Company.
As a result of the merger, the Company became a wholly-owned
subsidiary of Security National Life Insurance Company and
continues to own 57.4% of the outstanding shares of common stock
of Southern Security.
Item 7 (b) Pro Forma Financial Information
The accompanying unaudited pro forma condensed consolidated
financial statements give effect to the acquisition of the
Company by Security National. The adjustments to the pro forma
condensed consolidated balance sheet assume that the acquisition
took place on September 30, 1998, while the adjustments to the
pro forma condensed consolidated statements of income assume that
the acquisition was consummated on the first day of the year
ended December 31, 1997. The pro forma adjustments and the
assumptions on which they are based are described in the
accompanying notes to pro forma condensed consolidated financial
statements.
Item 7 (b) Pro Forma Financial Information (Continued)
The pro forma information for Security National is taken from the
Form 10-Q and Form 10-K as filed with the Securities and Exchange
Commission for the third quarter ended September 30, 1998 and
year ended December 31, 1997. The pro forma information for the
Company is obtained from the financial statements presented
elsewhere in this Form 8-K filing. The pro forma condensed
consolidated financial statements are presented for illustrative
purposes only and should be read in conjunction with the
financial statements referred to in the two preceding sentences.
The pro forma condensed consolidated financial statements are not
necessarily indicative of the results that actually would have
occurred if the acquisition had been in effect as of and for the
period presented or that may be achieved in periods subsequent to
the acquisition.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Pro Forma condensed Consolidated Balance Sheet as of September 30, 1998
(Unaudited)
(In Thousands)
Security
National Consolidare
Financial Enterprises Pro Forma Pro Forma
Corporation Inc. Adjustments Consolidated
Fixed maturities held
to maturity
at amortized cost $ 42,718 $ 6,436 $ 191 (b) $ 49,345
Securities available
for sale at market 4,587 32,904 37,491
Mortgage loans 10,321 10,321
Real Estate 7,974 7,974
Other invested assets 9,747 8,284 18,031
--------- -------- -------- --------
Total investments 75,347 47,624 191 123,162
Cash 1,065 8,272 (5,998) (a) 2,289
(1,050) (g)
Receivables, net 26,575 10,421 36,996
Land and improvements 8,544 8,544
Deferred acquisition
costs and cost of 7,845 13,390 14,911 (c) 22,756
insurance acquired (13,390)(c)
Property, plant and
equipment, net 6,988 2,621 9,609
Other assets 3,263 920 4,183
------- ------- --------- -------
Total assets $129,627 $ 83,248 $ (5,336) $207,539
======== ======== ======== ========
Policyholder
obligations $ 79,214 $ 61,560 $ $140,774
Bank loans payable 7,432 6,250 (a) 13,682
Notes and contracts
payable 3,575 3,575
Convertible debentures 1,875 (1,875) (f)
Estimated future
costs of pre-need
sales 6,305 6,305
Other liabilities 6,864 3,915 350 (d) 10,755
(374)(g)
------- -------- ------ --------
Total liabilities 103,390 67,350 4,351 175,091
-------- -------- ------ --------
Minority interest 6,499 (288)(g) 6,211
Excess equity 343 (343)(e)
Common stock 9,832 990 1,875 (f) 9,832
(2,865)(e)
Paid in capital 9,259 3,342 (3,342)(e) 9,259
Unrealized
appreciation on
investments 662 309 (309)(e) 662
Retained earnings 8,280 4,888 (4,888)(e) 8,280
(388)(g)
388 (e)
Treasury stock at cost (1,796) (473) 473 (e) (1,796)
-------- -------- ------- --------
Total stockholders'
equity 26,237 9,056 (9,056) 26,237
-------- -------- ------- --------
Total liabilities and
stockholders' equity $129,627 $ 83,248 $ (5,336) $207,539
======== ======== ======== ========
See notes to pro forma condensed consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Pro Forma condensed Consolidated Statement of Income (Unaudited)
For the Nine Months Ended September 30, 1998
(In Thousands)
Security
National Consolidare
Financial Enterprises Pro Forma Pro Forma
Corporation Inc. Adjustments Consolidated
Revenue:
Premiums $ 4,523 $ 5,808 $ $ 10,331
Investment income 5,587 2,805 (211) (j) 8,167
(14) (i)
Realized gains (losses) 103 414 517
Mortuary and cemetery income 6,966 6,966
Mortgage fee income 6,687 6,687
Other 52 52
-------- ------- ------- -------
Total revenue 23,918 9,027 (225) 32,720
-------- ------- ------- -------
Benefits and Expenses:
Death and policy benefits 2,577 3,333 5,910
Increase in future
policy benefits 2,481 359 2,840
Amortization of DPAC 994 2,088 (2,088) (k) 3,231
2,237 (k)
General and
administrative expenses 13,947 2,893 (760) (l) 16,080
Interest Expense 683 316 (h) 999
Cost of goods and services
of mortuaries and
cemeteries 2,264 2,264
-------- -------- ------- -------
Total benefits
and expenses 22,946 8,673 (295) 31,324
-------- ------- ------- -------
Earnings before income
tax expense 972 354 70 1,396
Income tax expense 225 125 16 (m) 366
Minority Interest 125 125
-------- -------- ----- --------
Net income $ 747 $ 104 $54 $ 905
======== ======== ====== ========
See notes to pro forma condensed consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Pro Forma condensed Consolidated Statement of Income (Unaudited)
For the Twelve Months Ended December 31, 1997
(In Thousands)
Security
National Consolidare
Financial Enterprises Pro Forma Pro Forma
Corporation Inc. Adjustments Consolidated
Revenue:
Premiums $ 6,141 $ 7,644 $ $ 13,785
Investment income 7,140 3,590 (282) (j) 10,429
(19) (i)
Realized gains (losses) 253 506 759
Mortuary and cemetery income 9,231 9,231
Mortgage fee income 5,662 5,662
Other 49 49
------- -------- ------- --------
Total revenue 28,476 11,740 (301) 39,915
------- -------- ------- --------
Benefits and Expenses:
Death and policy benefits 3,695 4,307 8,002
Increase in future
policy benefits 2,975 124 3,099
Amortization of DPAC 1,132 3,175 (3,175) (k) 4,114
2,982 (k)
General and
administrative expenses 15,361 3,787 (1,014) (l) 18,134
Interest Expense 948 422 (h) 1,370
Cost of goods and services
of mortuaries
and cemeteries 2,696 2,696
-------- -------- --------- -------
Total benefits
and expenses 26,807 11,393 (785) 37,415
-------- -------- ------- -------
Earnings before income
tax expense 1,669 347 484 2,500
Income tax expense 360 114 111 (m) 585
Minority Interest 122 122
------- ------- ------- -------
Net income $ 1,309 $ 111 $ 373 $ 1,793
======= ======= ======= =======
See notes to pro forma condensed consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Pro Forma Condensed Consolidated Financial Statements (Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited pro forma condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for pro forma financial information and with the
instructions to Form 8-K and Article II of Regulation S-X. The
acquisition will be accounted for as a purchase by Security National.
The pro forma adjustments presented are estimates as of the periods
presented and do not necessarily reflect the actual amounts that will
be booked on the actual purchase date and subsequent adjustments
required for an appropriate pro forma presentation have been included.
On December 17, 1998, Security National Financial Corporation (Security
National) purchased all of the outstanding shares of common stock of
the Company. As consideration for the purchase of the shares the
Company, Security National, paid to the stockholders of the Company at
closing an aggregate of $12,248,194. In order to pay the purchase
consideration, Security National 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, Security National to cause Southern Security to pay, on
the closing date, $1,050,000 to George Pihakis, the President and Chief
Executive Officer of Southern Security prior to closing, as a lump sum
settlement of the executive compensation agreement between Southern
Security and Mr. Pihakis.
Following the closing of the Acquisition Agreement, SSLIC Holding
Company, a Utah corporation and a newly formed wholly-owned subsidiary
of Security National Life Insurance Company was merged into the Company
with the Company the surviving corporation pursuant to the terms of the
Agreement and Plan of Merger dated December 17, 1998 between the
Company and SSLIC Holding Company. As a result of the merger, the
Company became a wholly-owned subsidiary of Security National Life
Insurance Company and continues to own 57.4% of the outstanding shares
of common stock of Southern Security.
Note 2. Pro Forma Adjustments
The following pro forma adjustments are made to the unaudited
condensed consolidated balance sheet as if the acquisition and related
transactions occurred September 30, 1998. Reference numbers correspond
to those on the statement.
a. To reflect the payment of $5,998,194 in cash and the borrowing of
$6,250,000 to acquire the outstanding shares of the Company.
b. To adjust assets of the Company to market value as of the date of
acquisition.
c. To eliminate the Company's historical deferred policy acquisition
costs and establish a new asset representing the present value of
future profits on the insurance contracts acquired.
d. To accrue certain nonrecurring expenses that include but are not
limited to, attorney and accounting fees, acquisition finder fees,
and other acquisition related costs.
e. To eliminate the Company's historical equity.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Pro Forma Condensed Consolidated Financial Statements (Unaudited)
Note 2. Pro Forma Adjustments (Continued)
f. To convert the Company's convertible debenture to equity in
accordance with the Purchase Agreement.
g. To reflect the payment of $1,050,000 to George Pihakis as a lump
sum settlement of the executive compensation agreement between
Southern Security and Mr. Pihakis.
The following pro forma adjustments are made to the unaudited condensed
consolidated statements of income as if the Company's acquisition and
related transactions occurred at the beginning of the periods
presented. Reference numbers correspond to those presented on the
statements.
h. To reflect Security National's interest expense on the $6,250,000
borrowed to partially finance the Company acquisition.
i. To reflect the amortization of premiums and accretion of
discounts on investments based on purchased values.
j. To reflect investment income lost on the $5,998,000 cash paid by
Security National to finance the acquisition of the Company and
the $1,050,000 cash paid for the lump sum settlement of the
executive compensation agreement between Southern Security and
George Pihakis, the President and Chief Executive Officer of
Southern Security prior to the acquisition.
k. To eliminate the Company's amortization of deferred policy
acquisition costs and cost of insurance acquired and reflect the
amortization of the new cost of insurance acquired established by
Security National.
l. To reflect decreases in operating expenses due to the
consolidation of administrative functions.
m. To reflect the tax effect for the pro forma adjustments.
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Table of Contents
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Schedules
I. Summary of Investments Other than Investments in Related
Parties - December 31, 1997
III. Supplementary Insurance Information
IV. Reinsurance
Independent Auditors' Report
Board of Directors
Consolidare Enterprises, Inc.
and subsidiaries:
We have audited the accompanying consolidated balance sheets of
Consolidare Enterprises, Inc. and subsidiaries (the "Company")
as of December 31, 1997 and 1996 and the related consolidated
statements of income, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31,
1997. In addition we have audited the financial statement
schedules listed in the accompanying index. 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
financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used
and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
financial position of Consolidare Enterprises, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1997 in conformity
with generally accepted accounting principles. Also, in our
opinion, the financial statement schedules, when considered in
relation to the consolidated financial statements taken as a
whole, present fairly, in all material respects, the
information set forth therein.
Our audits were made for the purpose of forming an opinion on
the consolidated financial statements taken as a whole. The
supplementary information included in the exhibit is presented
for purposes of additional analysis and is not a required part
of the basic consolidated financial statements. Such
information has been subjected to the audit procedures applied
in the audits of the consolidated financial statements, and in
our opinion, is fairly stated in all material respects in
relation to the consolidated financial statements taken as a
whole.
Orlando, Florida
April 21, 1998, except as to
note 16, which is as of
December 17, 1998
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
1997 1996
Assets
Investments (note 3):
Fixed maturities held to maturity
(fair value of $10,631,003
and $15,140,919 at December 31,
1997 and 1996, respectively) $10,501,712 14,974,962
Securities available for sale,
at fair value:
Fixed maturities (cost $30,880,390
and $24,298,618 at December 31,
1997 and 1996, respectively) 31,483,324 24,476,239
Equity securities (cost $800,000
and $-0- at December 31, 1997
and 1996, respectively) 839,973 --
Policy and student loans
(notes 3 and 9) 7,945,381 7,315,809
Short-term investments 100,000 4,539,106
Other invested assets -- 13,100
----------- -----------
Total investments 50,870,390 51,319,216
Cash and cash equivalents 3,083,560 956,576
Accrued investment income 637,460 687,699
Deferred policy acquisition
costs (note 4) 14,457,483 15,893,401
Policyholder account balances
on deposit with reinsurer (note 8) 8,667,241 8,522,449
Reinsurance receivable (note 8) 359,688 379,692
Receivables:
Agents' balances 590,368 611,975
Other 330,671 369,099
Income tax receivable 171,285 --
Property and equipment, net,
at cost (note 5) 2,670,203 2,785,666
----------- -----------
$81,838,349 81,525,773
=========== ===========
See accompanying notes to consolidated financial statements
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
1997 1996
Liabilities and Shareholders' Equity
Policy liabilities and
accruals (notes 7 and 8):
Future policy benefits $1,409,031 985,720
Policyholders'
account balances 52,335,511 52,347,996
Unearned premiums 7,108,662 8,249,190
Other policy claims
and benefits payable 427,649 293,221
Other policyholders' funds,
dividends and endowment
accumulations 59,686 59,596
Funds held in reinsurance
treaty with reinsurer (note 8) 1,339,927 1,193,366
Convertible subordinated
debentures (note 10) 1,875,300 1,875,300
Other liabilities 1,312,044 1,335,192
Deferred income taxes
(note 11) 550,700 155,100
Income taxes payable -- 104,288
66,418,510 66,598,969
Minority interest 6,272,129 6,032,609
Net excess of underlying
equity in net assets of
subsidiary over cost (note 6) 351,082 360,123
Shareholders' equity
(notes 2, 10 and 12):
Common stock, $.25 par:
authorized 5,850,000 shares,
issued and outstanding
3,961,340 shares 990,335 990,335
Capital in excess of par 3,342,375 3,342,375
Unrealized appreciation
(depreciation) of securities
(note 3) 152,922 (5,099)
Accumulated earnings (note 11) 4,784,377 4,673,458
Common stock held in treasury,
at cost (578,196 and
573,940 shares in 1997 and 1996,
respectively) (527,245) (520,861)
Capital in excess of par-
treasury stock 53,864 53,864
8,796,628 8,534,072
Contingencies and commitments
(notes 8, 9 and 14) ----------- -----------
$81,838,349 81,525,773
=========== ===========
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
December 31, 1997, 1996 and 1995
1997 1996 1995
Revenues:
Premium and
policy charges $7,499,760 7,702,639 7,919,361
Surrender fee
income 1,057,961 1,243,061 1,441,008
Less reinsurance
ceded (914,071) (1,030,673) (1,201,432)
7,643,650 7,915,027 8,158,937
Net investment
income (notes 3 and 9) 3,589,596 3,529,339 3,027,985
Realized gain on
investments (note 3) 506,795 869,502 60,237
11,740,041 12,313,868 11,247,159
Benefits, losses
and expenses:
Annuity, death,
surrender and
other benefits 4,307,013 3,818,562 4,061,096
Increase (decrease)
in future policy
benefits 124,461 (5,201) (12,971)
Amortization of
deferred policy
acquisition costs
(note 4) 3,174,750 2,945,386 2,733,919
Operating expenses 3,786,511 3,574,675 3,043,657
11,392,735 10,333,422 9,825,701
Income before
income taxes 347,306 1,980,446 1,421,458
Income tax expense (note 11) 114,066 311,636 220,350
Income before minority
interest 233,240 1,668,810 1,201,108
Minority interest in net income
of subsidiary 122,321 562,288 455,810
$ 110,919 1,106,522 745,298
See accompanying notes to consolidated financial statements.
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1997, 1996 and 1995
Unrealized
Capital appreciation
in (depreciation
Common excess of
stock of par securities
Balances, December 31, 1994: $990,335 3,342,375 (296,038)
Net income -- -- --
Unrealized appreciation of
equity securities investments -- -- 609,613
Balances, December 31, 1995 990,335 3,342,375 313,575
Net income -- -- --
Unrealized appreciation of
equity securities investments -- -- (318,674)
Balances, December 31, 1996 990,335 3,342,375 (5,099)
Net income -- -- --
Unrealized appreciation of
equity securities investments -- -- 158,021
Purchase of treasury stock -- -- --
Balances, December 31, 1997 $990,335 3,342,375 152,922
See accompanying notes to consolidated financial statements.
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1997, 1996 and 1995
Common
Accumulated stock Capital in
earnings held in excess of
(note 2) treasury treasury Total
Balances, December 31, 1994: 2,821,638 (520,861) 53,864 6,391,313
Net income 745,298 -- -- 745,298
Unrealized appreciation
of equity securities
investments -- -- -- 609,613
Balances, December 31, 1995 3,566,936 (520,861) 53,864 7,746,224
Net income 1,106,522 -- -- 1,106,522
Unrealized appreciation
of equity securities
investments -- -- -- (318,674)
Balances, December
31, 1996 4,673,458 (520,861) 53,864 8,534,072
Net income 110,919 -- -- 110,919
Unrealized appreciation
of equity securities
investments -- -- -- 158,021
Purchase of treasury stock (6,384) -- (6,384)
Balances, December 31, 1997 4,784,377 (527,245) 53,864 8,769,628
See accompanying notes to consolidated financial statements.
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
December 31, 1997, 1996 and 1995
1997 1996 1995
Cash flows from operating activities:
Net income $110,919 1,106,522 745,298
Adjustments to reconcile
net income
to net cash provided by
operating activities:
Depreciation and
amortization 232,471 173,601 182,971
Amortization of
excess of underlying
cost in net assets
of subsidiary over (9,041) 4,968 (6,871)
Net realized gains
on investments (506,795) (873,298) (60,237)
Minority interest in
net income of subsidiary 122,321 562,288 455,810
Loss on disposal of
property, plant,
and equipment 100 -- 918
Deferred income taxes 232,100 56,900 (241,000)
Amortization of deferred
policy acquisition
costs 3,174,750 2,945,386 2,733,919
Acquisition costs
deferred (1,793,916) (1,704,836) (2,392,505)
Change in assets and
liabilities affecting
cash provided by operating
activities:
(Increase) decrease in:
Accrued investment income 50,239 (48,890) (33,958)
Other invested assets 13,100 -- --
Receivables 60,035 (265,686) 168,537
Reinsurance receivable 20,004 134,649 (191,157)
Income tax receivable (171,285) -- 214,455
Increase (decrease) in:
Unearned premiums (1,114,188) (962,941) (427,955)
Other policy claims
and benefits
payable and future
policy benefits 557,739 36,488 (96,568)
Policyholder account
balances 2,065,521 2,332,863 2,388,047
Funds held in reinsurance
treaty 146,561 215,950 276,714
Dividend and endowment
accumulations 90 2,152 2,069
Other liabilities (23,148) (143,472) (365,930)
Income taxes payable (104,288) 51,588 52,700
Net cash provided by
operating activities 3,063,289 3,624,232 3,405,257
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
(Continued)
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
Cash flows from investing activities:
Purchase of investments
held to maturity -- (1,965,240) (3,492,860)
Purchase of investments
available for sale (32,704,906) (8,085,785) (3,754,242)
Purchase of equity
securities (3,316,249) -- --
Net change in
short-term investments 4,439,106 (3,040,006) 376,658
Net change in other
investments 2,178 7,605 8,476
Net (increase) decrease
in policy and
student loans (629,572) 2,655,845 (1,104,685)
Proceeds from maturities
of held to maturity
securities 4,488,354 2,165,750 1,135,203
Proceeds from sale of
available for sale
securities -- 635,533 141,150
Proceeds from sale of
available for sale
securities 29,049,745 6,367,780 2,664,089
Acquisition of
furniture and
equipment (35,779) (60,561) (204,142)
Net cash provided by
(used in) investing
activities 1,292,877 (1,319,079) (4,230,353)
Cash flows from financing activities:
Receipts from universal
life and certain annuity
policies credited to
policyholder account
balances 4,042,137 5,213,760 5,609,910
Return of policyholder
account balances on
universal life and certain
annuity policies (6,264,935) (5,904,692) (5,334,176)
Proceeds from short-term
borrowings -- 2,500,000 3,250,000
Repayment of short-term
borrowings -- (3,900,553) (2,741,270)
Purchase of treasury
stock (6,384) -- --
Net cash provided
by (used in)
financing activities (2,229,182) (2,091,485) 784,464
Increase (decrease)
in cash and cash
equivalents 2,126,984 213,668 (40,632)
Cash and cash
equivalents at
beginning of year 956,576 742,908 783,540
Cash and cash
equivalents
at end of year $3,083,560 956,576 742,908
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES (Continued)
Consolidated Statements of Cash Flows
Years Ending December 31, 1997, 1996 and 1995
1997 1996 1995
Supplemental disclosures of cash flow information:
Interest paid during
the year $267,320 279,325 292,165
Income taxes paid
during the year $212,615 208,326 284,782
Change in market value adjustments:
Investments available for sale -
Fixed maturities 425,313 (557,065) 2,109,314
Equity securities 39,973 (418,345) 406,612
Change in deferred
acquisition costs (55,084) 181,196 (1,669,168)
Change in premium
deposit funds 26,340 (95,241) 871,220
Deferred income tax
asset (liability) (163,500) 333,800 (651,000)
Other 2,178 (1,872) 204
Change related to
minority interest (117,199) 238,853 (457,569)
Net change in
unrealized appreciation
(depreciation) $ 158,021 (318,674) 609,613
See accompanying notes to consolidated financial statements.
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(1) Nature of Business and Summary of Significant Accounting Policies
(a)Nature of Business
The primary business purpose of Consolidare Enterprises, Inc.
("Consolidare") and its subsidiaries (the "Company") is the issuance
of long duration universal life insurance contracts. Prior to 1986,
the Company's business included traditional whole life insurance and
annuity contracts. The majority of the Company's business is
conducted in the states of Florida (43%), Georgia (13%) and Texas
(14%). The Company is licensed to conduct business in an additional
eight states, none of which individually accounts for more than 10%
of the Company's total business.
The following is a description of the most significant risks facing
the Company and how the Company mitigates those risks:
Legal/Regulatory Risk is the risk that changes in the legal or
regulatory environment in which an insurer operates will create
additional expenses not anticipated by the insurer in pricing its
products. That is, regulatory initiatives designed to reduce insurer
profits, new legal theories or insurance company insolvencies through
guaranty fund assessments may create costs for the insurer beyond
those recorded in the consolidated financial statements. The Company
seeks to mitigate this risk through geographic marketing of their
insurance products.
Credit Risk is the risk that issuers of securities owned by the
Company will default or that other parties, including reinsurers,
which owe the Company money, will not pay. The Company minimizes
this risk by adhering to a conservative investment strategy, by
maintaining sound reinsurance and by providing for any amounts deemed
uncollectible.
Interest Rate Risk is the risk that interest rates will change and
cause a decrease in the value of an entity's investments. 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 nonconformance with certain
policy provisions, by offering products that transfer this risk to
the purchaser, and/or by attempting to match the maturity schedule of
its assets with the expected payouts of its liabilities. To the
extent that liabilities come due more quickly than assets mature, an
insurer would have to sell assets prior to maturity and potentially
recognize a gain or loss.
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(b) Principles of Consolidation
The consolidated financial statements include the accounts of
the Company, its wholly-owned subsidiary and its 57 percent
owned subsidiary. The wholly-owned subsidiary consists of
Insuradyne Corporation of Florida, which provides underwriting
services for insurance agencies. The 57 percent owned
subsidiary, Southern Security Life Insurance Company ("Southern
Security"), is publicly traded and sells life insurance and
annuity contracts. Significant intercompany accounts,
transactions and profits have been eliminated in the
consolidated financial statements.
Southern Security is included in the accompanying consolidated
financial statements, on the basis of generally accepted
accounting principles ("GAAP") which vary from reporting
practices prescribed or permitted by regulatory authorities (see
note 2).
(c) Agency Relationship
Insuradyne, a wholly owned subsidiary of Consolidare,
underwrites and sells life insurance polices exclusively for
Southern Security. Therefore the income generated by Insuradyne
is wholly dependent upon the continued operations of Southern
Security.
(d) Use of Estimates
In preparing the consolidated financial statements, management
is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements and the reported income and benefits and other
deductions during the reporting period. Actual results could
differ significantly from those estimates.
The estimates susceptible to significant change are those used
in determining the liability for future policy benefits and
claims, deferred income taxes and deferred policy acquisition
costs. Although some variability is inherent in these
estimates, management believes that the amounts provided are
adequate.
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(e) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash
equivalents.
(f) Investments
Investments in all debt securities and those equity securities
with readily determinable market values be classified into one
of three categories: held-to-maturity, trading or available-
for-sale. Classification of investments is based upon
management's current intent. Debt securities which management
has a positive intent and ability to hold until maturity are
classified as securities held-to-maturity and are carried at
amortized cost. Unrealized holding gains and losses on
securities held-to-maturity are not reflected in the
consolidated financial statements. Debt and equity securities
that are purchased for short-term resale are classified as
trading securities. Trading securities are carried at fair
value, with unrealized gains and losses included in earnings.
All other debt and equity securities not included in the above
two categories are classified as securities available-for-sale.
Securities available-for-sale are carried at fair value, with
unrealized holding gains and losses reported as a separate
component of shareholders' equity, net of tax and a valuation
allowance against deferred acquisition costs. At December 31,
1997 and 1996, the Company did not have any investments
categorized as trading securities.
Net unrealized appreciation or depreciation of equity securities
relates to assets owned by Southern Security. The Company's
equity interest (57 percent) in such unrealized appreciation or
depreciation is included in a separate shareholder's equity
account. The specific identification method is used in
determining the cost of investments sold.
The Company's carrying value for investments in the held-to-
maturity and available-for-sale categories is reduced to its
estimated realizable value if a decline in the market value is
deemed other than temporary. Such reductions in carrying values
are recognized as realized losses and charged to income.
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
Interest on fixed maturities and short-term investments is
recorded as income as it accrues on the principal amounts
outstanding, adjusted for amortization of premiums and discounts
computed by the scientific method, which approximates the
effective yield method. Realized gains and losses on
disposition of investments are included in net income. The cost
of investments sold is determined on the specific identification
method. Dividends are recorded as income on the ex-dividend
dates.
Policy loans and student loans are carried at the unpaid
principal balance, less any amounts deemed to be uncollectible.
No policy loans are made for amounts in excess of the cash
surrender value of the related policy. Accordingly, policy
loans are fully collateralized by the related liabilities for
future policy benefits for traditional insurance policies and
the policyholders' account balances for interest sensitive
policies.
(g) Deferred Policy Acquisition Costs
The costs of acquiring new business net of the effects of
reinsurance, principally commissions and those home office
expenses that tend to vary with and are primarily related to the
production of new business, have been deferred. Deferred policy
acquisition costs applicable to non-universal life policies are
being amortized over the premium-paying period of the related
policies in a manner which will charge each year's operations in
direct proportion to the estimated receipt of premium revenue
over the life of the policies. Premium revenue estimates are
made using the same interest, mortality and withdrawal
assumptions as are used for computing liabilities for future
policy benefits. Acquisition costs relating to universal life
policies are being amortized at a constant rate based on the
present value of the estimated gross profit amounts expected to
be realized over the life of the policies. Deferred policy
acquisition costs are adjusted to reflect the impact of
unrealized gains and losses on fixed maturity securities
available for sale.
The Company has performed several tests concerning the
recoverability of deferred acquisition costs. These methods
include those typically used by many companies in the life
insurance industry. Further, the Company conducts a sensitivity
analysis of its assumptions that are used to estimate the future
expected gross profits, which management has used to determine
the future recoverability of the deferred acquisition costs.
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(h) Depreciation
Depreciation of property and equipment is being provided on
the straight-line method over the estimated useful lives of
the assets.
(i) Liability for Future Policy Benefits
The liability for future policy benefits has been provided on
a net level premium method based upon investment yields,
withdrawals, mortality and other assumptions which were
appropriate at the time the policies were issued. Such
estimates are based upon industry data and Southern Security's
past experience adjusted to provide for possible adverse
deviation from the estimates.
(j) Recognition of Premium Revenue and Related Costs
Premiums are recognized as revenue as follows:
Universal life policies - premiums received from policyholders
are reported as deposits. Cost of insurance and expense
charges, which are charged against the policyholder account
balance, are recognized as revenue as earned. Amounts
assessed against the policyholder account balance that
represent compensation to Southern Security for services to be
provided in future periods are reported as unearned premiums
and recognized in income using the same assumptions and
factors used to amortize acquisition costs capitalized.
Annuity contracts with flexible terms - premiums received from
policyholders are reported as deposits.
All other policies - premiums received from policyholders are
recognized as revenue over the premium paying period.
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(k) Income Taxes
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in
which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
(l) Reclassification
Certain amounts presented in 1996 and 1995 consolidated
financial statements have been reclassified to conform to
the 1997 presentation.
(2) Basis of Financial Information of Insurance
Subsidiary
As discussed at note 1(c), the accounts of Southern Security as
included in the consolidated financial statements of the
Company are reported in accordance with GAAP. The more
significant generally accepted accounting principles applied in
the preparation of these accounts that differ from life
insurance statutory accounting practices prescribed or
permitted by regulatory authorities (which are primarily
designed to demonstrate solvency) are as follows:
(a) Costs of acquiring new business are deferred and
amortized, rather than being charged to operations as
incurred.
(b) The liability for future policy benefits and expenses is
based on conservative estimates of expected mortality,
morbidity, interest, withdrawals, and future maintenance
and settlement expenses, rather than on statutory rates
for mortality and interest.
(c) The liability for policyholder funds associated with
universal life and certain annuity contracts represent
policy account balances before applicable surrender
charges, rather than on the statutory rates for mortality
and interest.
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(d) Investments in securities are reported as described in
note 1(f), rather than in accordance with valuations
established by the National Association of Insurance
Commissioners ("NAIC"). Pursuant to NAIC valuations,
bonds eligible for amortization are reported at amortized
value; other securities are carried at values prescribed
by or deemed acceptable by NAIC including common stocks,
other than stocks of affiliates, at market value.
(e) Deferred income taxes, if applicable, are recognized for
future tax consequences attributable to differences
between the financial statement carrying amounts of
existing assets and liabilities and their respective tax
bases.
(f) The statutory liabilities for the asset valuation reserve
and interest maintenance reserve have not been provided
for in the consolidated financial statements.
(g) Certain assets, principally receivables from agents and
equipment, are reported as assets rather than being
treated as nonadmitted and charged directly to surplus.
(h) Realized gains or losses on the sale or maturity of
investments are included in the consolidated statement of
income and are not recorded net of taxes and amounts
transferred to the interest maintenance reserve as
required by statutory accounting practices.
(i) Certain obligations from a note payable that are treated
as shareholders' equity for statutory purposes are treated
as a liability of Southern Security and eliminated upon
consolidation within the Company under generally accepted
accounting principles.
(j) Reinsurance assets and liabilities are reported on a gross
basis rather than shown on a net basis as permitted by
statutory accounting practices.
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
A reconciliation of net income of Southern Security, before
eliminations, for the years ended December 31, 1997, 1996 and 1995
and shareholders' equity, before eliminations, as of December 31,
1997 and 1996 between the amounts reported on a statutory basis and
the related amounts presented on the basis of generally accepted
accounting principles is as follows:
Net income
Years ended December 31,
1997 1996 1995
As reported on
a statutory basis $45,398 1,022,182 232,180
Adjustments:
Deferred policy
acquisition
costs, net (1,472,840) (1,346,695) (290,344)
Future policy
benefits, unearned
premiums and
policyholders'
funds 1,644,330 1,626,090 1,006,862
Deferred income
taxes (198,100) (16,900) 221,000
Asset valuation reserve -- -- --
Interest maintenance
reserve 129,109 (18,221) 24,909
Unrealized gains -- -- --
Non-admitted assets -- -- --
Capital and
surplus note -- -- --
Other adjustments,
net 47,313 126,049 (79,704)
Net increase 149,812 370,323 882,723
As reported on a
GAAP basis $195,210 1,392,505 1,114,903
Under applicable insurance laws and regulations, Southern Security
is required to maintain minimum surplus as to policyholders,
determined in accordance with regulatory accounting practices, in
the aggregate amount of $1,900,000.
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
A reconciliation of net income of Southern Security, before
eliminations, for the years ended December 31, 1997, 1996 and 1995
and shareholders' equity, before eliminations, as of December 31,
1997 and 1996 between the amounts reported on a statutory basis and
the related amounts presented on the basis of generally accepted
accounting principles is as follows:
Shareholders' equity
December 31,
1997 1996
As reported on
a statutory basis 9,316,922 9,283,928
Adjustments:
Deferred policy
acquisition costs,
net 15,451,689 16,979,611
Future policy
benefits, unearned
premiums and
policyholders'
funds (8,915,443) (10,643,224)
Deferred income
taxes (949,700) (588,100)
Asset valuation reserve 465,452 307,364
Interest maintenance
reserve 338,845 209,736
Unrealized gains 602,934 177,621
Non-admitted assets 698,024 795,659
Capital and surplus note (1,000,000) (1,000,000)
Other adjustments, net 123,295 138,993
Net increase 6,815,096 6,377,660
As reported on
a GAAP basis 16,132,018 15,661,588
Under applicable insurance laws and regulations, Southern Security
is required to maintain minimum surplus as to policyholders,
determined in accordance with regulatory accounting practices, in
the aggregate amount of $1,900,000.
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
Consolidare's ability to pay dividends, service convertible
subordinated debentures and meet certain other cash flow requirements
is dependent on certain fees, commissions and dividends paid to it by
Southern Security. The payment of dividends by Southern Security is
subject to the regulation of the State of Florida Department of
Insurance. A dividend may be paid without prior Florida Insurance
Commissioner's approval if the dividend is equal to or less than the
greater of: (a) 10% of Southern Security's statutory surplus as to
policyholders' derived from realized net operating profits on its
business and net realized capital gains; or (b) Southern Security's
entire statutory net operating profits and realized net capital gains
derived during the immediately preceding calendar year, if Southern
Security will have statutory surplus as to policyholders equal to or
exceeding 115% of the minimum required statutory surplus as to
policyholders after the dividend is made. As a result of such
restrictions, the maximum dividend payable by Southern Security
during 1998 without prior approval is approximately $45,400.
The Risk-Based Capital ("RBC") for Life and/or Health Insurers Model
Act (the "Model Act") was adopted by the NAIC in 1992. The main
purpose of the Model Act is to provide a tool for insurance
regulators to evaluate the capital of insurers. Based on
calculations using the appropriate NAIC formula, Southern Security
exceeded the RBC requirements at December 31, 1997.
(3) Investments
(a) Equity Securities and Fixed Maturities
Equity securities consist of $839,973 and $-0- of common stock
at December 31, 1997 and 1996, respectively. Unrealized
appreciation in investments in equity securities for the years
ended December 31, 1997 and 1996 is $39,973 and $-0-,
respectively.
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
The amortized cost and estimated fair values of investments in fixed
maturities are as follows:
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
December 31, 1997:
Held to maturity:
U.S. Treasury
securities and
obligations of
U.S. government
corporations and
agencies
(guaranteed) $2,516,052 53,948 -- 2,570,000
Corporate
securities 6,976,738 79,620 4,277 7,052,081
Special revenue
and special assessment
obligations and all
nonguaranteed
obligations of
agencies and
authorities of
governments and
their political
subdivisions 1,008,922 -- -- 1,008,922
10,501,712 133,568 4,277 10,631,003
(Continued)
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
Available for sale:
U.S. Treasury
securities and
obligations of
U.S. government
corporations and
agencies
(guaranteed) 9,301,191 173,517 -- 9,474,708
Corporate
securities 21,481,892 429,907 -- 21,911,799
Special revenue and
special assessment
obligations and all
nonguaranteed
obligations of
agencies and
authorities of
governments and
their political
subdivisions 97,307 -- 490 96,817
----------- -------- ------ -----------
30,880,390 603,424 490 31,483,324
----------- -------- ------ -----------
41,382,102 736,992 4,767 42,114,327
=========== ======== ====== ===========
(Continued)
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
December 31, 1996:
Held to maturity:
U.S. Treasury
securities and
obligations of
U.S. government
corporations and
agencies
(guaranteed) $4,503,477 76,523 15,000 4,565,000
Corporate
securities 9,461,064 125,340 4,385 9,582,019
Special revenue
and special
assessment
obligations and
all nonguaranteed
obligations of
agencies and
authorities of
governments and
their political
subdivisions 1,010,421 -- 16,521 993,900
14,974,962 201,863 35,906 15,140,919
(Continued)
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
Available for sale:
U.S. Treasury
securities and
obligations of
U.S. government
corporations and
agencies
(guaranteed) 20,383,080 288,882 108,210 20,563,752
Corporate
securities 3,585,084 24,331 26,415 3,583,000
Special revenue
and special
assessment
obligations and
all nonguaranteed
obligations of
agencies and
authorities of
governments and
their political
subdivisions 330,454 -- 967 329,487
24,298,618 313,213 135,592 24,476,239
$39,273,580 515,076 171,498 42,114,327
Unrealized (depreciation) appreciation of fixed maturities for years
ending December 31, 1997 and 1996 is $388,847 and $(720,253),
respectively.
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
The amortized cost and estimated fair value of fixed maturities at
December 31, 1997, by contractual maturity, are summarized below.
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties:
Fixed maturity securities held-to-maturity:
Amortized Estimated
cost fair value
Due in one year or less $3,949,982 3,960,500
Due after one year through five years 5,281,472 5,400,245
Due after ten years 261,336 261,336
9,492,790 9,622,081
Mortgage backed securities 1,008,922 1,008,922
$10,501,712 10,631,003
Fixed maturity securities available-for-sale:
Amortized Estimated
cost fair value
Due after one year through five years $9,130,069 9,229,142
Due after five years through ten years 15,121,559 15,477,301
Due after ten years 6,531,455 261,336
30,783,083 31,386,507
Mortgage backed securities 97,307 96,817
$30,880,390 31,483,324
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
Proceeds from sale of equity securities and fixed maturities available
for sale and related realized gains and losses are summarized as
follows:
1997 1996 1995
Proceeds from sale of equity
securities $2,873,980 2,885,010 854,339
Proceeds from sale of fixed
maturities available
for sale $26,175,765 3,482,770 1,809,750
Fixed maturities:
Gross realized gains 278,904 15,013 145,136
Gross realized (losses) (150,045) (18,881) (119,908)
Equity securities:
Gross realized gains 357,731 930,919 55,543
Other realized (losses) -- (57,620) (20,540)
$486,590 869,431 60,231
Certain of the fixed maturity securities classified as held to maturity
were called during the years ended December 31, 1997, 1996 and 1995,
resulting in gross realized gains of $20,205, $71 and $6, respectively.
(b)Concentrations of Credit Risk
At December 31, 1997 and 1996, the Company did not hold any unrated or
less-than-investment grade corporate debt securities. The Company also
invests in subsidized and unsubsidized student loans totaling $244,361
and $514,483 at December 31, 1997 and 1996, respectively, which are
guaranteed by agencies of the U.S. government. Subsequent to December
31, 1997, all of those loans were sold at their unpaid principal
balance.
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(c)Investment Income
Net investment income for the years ended December 31, 1997, 1996 and
1995 is summarized as follows:
1997 1996 1995
Interest:
Fixed maturities $2,918,006 2,581,198 2,319,914
Policy and student loans 401,621 526,820 483,382
Short-term investments 276,627 312,665 362,960
Other -- 178,205 --
Dividends on equity
securities 16,189 31,245 28,247
3,612,443 3,630,133 3,194,503
Less investment expenses 22,847 100,794 166,518
$3,589,596 3,529,339 3,027,985
(d) Investments on Deposit
At December 31, 1997 and 1996 certain investments were on deposit with
the Insurance Departments of the following states in order to comply
with statutory regulations:
1997 1996
Florida $1,727,034 1,718,751
Alabama 100,000 100,000
South Carolina 304,816 306,028
Georgia 254,013 255,024
Indiana 199,317 199,752
$2,585,180 2,579,555
Certain of these assets, totaling approximately $850,000 for each of
the years ended December 31, 1997 and 1996, are restricted for the
future benefit of policyholders in a particular state.
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(4)Deferred Policy Acquisition Costs
Deferred policy acquisition costs as of December 31, 1997, 1996 and
1995 are summarized as follows:
1997 1996 1995
Deferred policy acquisition
costs, beginning of year $15,893,401 16,952,755 18,963,322
Policy acquisition costs deferred:
Commissions 928,742 717,668 1,031,767
Underwriting and issue costs 450,800 652,868 805,794
Other 414,374 334,300 554,955
Change in unrealized
gains (losses) (55,084) 181,196 (1,669,164)
1,738,832 1,886,032 723,352
Amortization of deferred
policy acquisition costs 3,174,750 2,945,386 2,733,919
Deferred policy acquisition
costs, end of year $14,457,483 15,893,401 16,952,755
(5) Property and Equipment
Property and equipment as of December 31, 1997 and 1996 is summarized
as follows:
1997 1996
Land $ 982,027 982,027
Building and improvements 2,169,975 2,173,955
Furniture and equipment 1,057,586 1,019,621
4,209,588 4,175,603
Less accumulated depreciation 1,539,385 1,389,937
$2,670,203 2,785,666
Depreciation expense for the years ended December 31, 1997, 1996 and
1995 totaled $145,912, $151,950 and $150,213, respectively.
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(6) Excess of Underlying Equity in Net Assets of Subsidiary Over Cost
Consolidare has purchased certain outstanding common stock of Southern
Security over a period of years beginning in 1977. The Company's
acquisition of common stock of Southern Security can be summarized as
follows:
Cumulative
Year ending Number of shares percentage of
December 31, purchased (1) ownership
1977 677,656 37.25%
1978 1,320 37.32
1979 26,294 38.77
1980 24,720 39.57
1981 28,380 41.10
1982 53,832 44.00
1983 30,000 45.66
1984 20,640 46.77
1985 57,480 49.89
1987 53,892 52.81
1988 18,000 53.80
1989 8,400 54.30
1990 14,080 55.00
1991 64,615 58.51
1992 2,999 58.67
1993 7,000 57.09
1995 1,188 57.15
1996 5,000 57.40
1,095,496
(1)Gives retroactive effect to Southern Security stock split during
1990.
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
At December 31, 1997 and 1996, net excess of the underlying equity in
net assets of Southern Security over Consolidare's cost of purchasing
Southern Security stock consists of the following:
1997 1996
Gross cost in excess
of equity in
underlying assets $456,010 456,010
Less accumulated
amortization (based
on straight-line
method over 40 years) (223,475) (212,075)
232,535 243,935
Gross equity in underlying
assets in excess
of cost 817,645 817,645
Less accumulated
amortization (based
on straight-line
method over 40 years) (234,028) (213,587)
583,617 604,058
Net excess of underlying
equity in net assets
of subsidiary over cost $351,082 360,123
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(7) Future Policy Benefits
Future policy benefits, exclusive of universal life and flexible
term annuities, as of December 31, 1997 and 1996 are summarized
as follows:
1997 1996
Life insurance $ 1,103,462 672,913
Annuities 295,525 304,394
Accident and health insurance 10,044 8,413
Total future policy benefits $1,409,031 985,720
Life insurance in-force aggregated approximately $1.2 billion and $1.3
billion at December 31, 1997 and 1996, respectively.
Mortality and withdrawal assumptions are based upon Southern Security's
experience and actuarial judgment with an allowance for possible
unfavorable deviations from the expected experience.
The mortality table used in calculating benefit reserves is the 1965-
1970 Basic Select and Ultimate for Males.
For non-universal life policies written during 1983 through 1987,
interest rates used are 8 percent for policy years one through five,
decreasing by .1 percent per year for policy years six through twenty,
to 6.5 percent for policy years twenty-one and thereafter. For non-
universal life policies written in 1982 and prior, interest rates vary,
depending on policy type, from 7 percent for all policy years to 6
percent for policy years one through five and 5 percent for years six
and thereafter. For universal life policies written since 1988, the
interest rate used is a credited rate based upon the Company's
investment yield less 1 percent.
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(8) Reinsurance
Southern Security routinely cedes and, to a limited extent, assumes
reinsurance to limit its exposure to loss on any single insured.
Ceded insurance is treated as a risk and liability of the assuming
companies. As of December 31, 1997, ordinary insurance coverage in
excess of $75,000 is reinsured; however, for some policies
previously issued, the first $30,000, $40,000 or $50,000 was
retained and the excess ceded. The retention limit for some
substandard risks is less than $75,000. Reinsured risks would give
rise to liability to Southern Security only in the event that the
reinsuring company might be unable to meet its obligations under
the reinsurance agreement in force, as Southern Security remains
primarily liable for such obligations. Under these contracts,
Southern Security ceded premiums of $432,486, $448,327 and $525,662
included in the Company's balance of reinsurance ceded, and
received recoveries of $131,449, $608,355 and $204,171 included in
the Company's balance of annuity, death and other benefits for the
years ended December 31, 1997, 1996 and 1995, respectively.
On December 31, 1992, the Company entered into a reinsurance
agreement ceding an 18% share of all universal life policies in
force at December 31, 1992 as a measure to manage the future needs
of the Company. The reinsurance agreement is a co-insurance treaty
entitling the assuming company to 18% of all future premiums, while
making the assuming company responsible for 18% of all future
claims and policyholder loans relating to the ceded policies. In
addition, the Company receives certain commission and expense
reimbursements.
For the years ended December 31, 1997, 1996 and 1995, Southern
Security ceded premiums of $481,585, $582,346 and $675,770,
included in reinsurance ceded, and received recoveries of $503,159,
$367,295 and $459,090, included in annuity, death and other
benefits, respectively. The funds held in reinsurance treaties
with the reinsurer of $1,339,927 and $1,193,366 represent the 18%
share of policy loans ceded to the reinsurer at December 31, 1997
and 1996, respectively.
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(9) Notes Payable
As of December 31,1997, Southern Security had an unused line of
credit of $5,000,000 which is secured by student loans equaling
115% of the unpaid principal balance. The note bears interest at
a variable rate per annum payable monthly and expires on September
18, 2007.
Interest expense relating to these notes payable during the years
ended December 31, 1997, 1996 and 1995 totaled $-0-, $12,094 and
$26,240, respectively, and is included in net investment income.
(10) Convertible Subordinated Debentures and Convertible Preferred
Stock
Pursuant to a private offering memorandum dated May 1989, the
Company issued $858,600 of 15 percent convertible subordinated
debentures (the "Debentures") with interest payable semi-annually
and 38,160 shares of Class B redeemable convertible preferred stock
(the "Preferred Stock") for $30 per share. The Preferred Stock
paid cumulative dividends monthly at an annual interest rate of
27.5 percent to shareholders.
On September 1, 1992, the Company redeemed all of the outstanding
Debentures and Preferred Stock. The holders of the Debentures had
the option of either (1) redeeming the Debentures for a redemption
price equal to 109% of the principal amount plus accrued interest;
(2) converting the Debentures into shares of common stock of the
Company at a conversion price of $1.50 per share of common stock;
or, (3) exchanging the Debentures for 14-1/4% convertible
subordinated debentures (the "New Debentures") at 100% of the
principal amount. The holders of the Preferred Stock had the
option of either (1) redeeming the Preferred Stock at par value
plus unpaid dividends; (2) converting each share of Preferred Stock
into one share of common stock of the Company at a conversion price
of $3.00 per share, or, (3) exchanging the Preferred Stock for the
New Debentures at the par value of the Preferred Stock. All
holders of the Debentures and Preferred Stock elected to receive
the New Debentures, except for 2,440 shares of Preferred Stock and
$54,900 of Debentures, which were redeemed at the cash conversion
prices.
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
The Company issued $1,875,300 of the New Debentures. The New
Debentures require the payment of interest monthly and are due
September 1, 2002. The New Debentures are convertible, at the
option of the holder, into shares of common stock at a conversion
price of $2.10 per share, subject to adjustment, at any time prior
to maturity. The New Debentures may be redeemed early, at the
Company's option, upon payment of a premium. Interest expense
relating to the New Debentures totaled approximately $267,000
during each of the years ended December 31, 1997, 1996 and 1995.
(11) Income Taxes
Income taxes for the years ended December 31, 1997, 1996 and 1995
are summarized as follows:
1997 1996 1995
Current:
Federal $(125,084) 228,336 451,150
State 7,050 26,400 10,200
(118,034) 254,736 461,350
Deferred:
Federal 198,100 48,600 (208,700)
State 34,000 8,300 (32,300)
232,100 56,900 (241,000)
$114,066 311,636 220,350
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
The principal elements of deferred income tax expense consist of the
following:
1997 1996 1995
Deferred policy
acquisition costs $(433,000) (391,500) (783,300)
Future policy
benefits 694,000 532,000 305,300
Difference in bases
in investments -- -- 299,500
Other (28,900) (83,600) (62,500)
$232,100 56,900 (241,000)
Consolidare and its wholly-owned subsidiaries file consolidated income
tax returns. Southern Security files separate income tax returns.
Income taxes are comprised of combined income taxes for Consolidare and
its wholly-owned subsidiaries and Southern Security.
Differences between the "expected" tax (computed by applying the
federal corporate income tax rate of 34% to income before income taxes)
and actual tax expense for the years ended December 31, 1997, 1996 and
1995 consisted of:
1997 1996 1995
Computed "expected" tax
expense 121,558 693,000 497,500
Increase (reduction)
in income taxes
resulting from:
Small life insurance
company deduction (76,000) (346,000) (340,200)
Changes in the
valuation allowance
for deferred tax
assets, allocated
to income tax expense 11,100 64,900 62,600
State taxes, net
of federal income
tax benefit 27,093 22,902 (14,600)
(Over)/under accrual
of prior year
expense 23,800 (112,300) (4,000)
Other, net 6,515 (10,866) 19,050
114,066 311,636 220,350
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
Under tax laws in effect prior to 1984, a portion of a life insurance
company's gain from operations was not currently taxed but was
accumulated in a memorandum "Policyholders' Surplus Account". As a
result of the Tax Reform Act of 1984, the balance of the Policyholders'
Surplus Account has been frozen as of December 31, 1983 and no
additional amounts will be accumulated in this account. The balance of
the account will continue to be taxed, as under previous laws, if any
of the following conditions occur:
(a) The Policyholders' Surplus Account exceeds a prescribed maximum;
(b) Distributions, other than stock dividends, are made to
shareholders in excess of Policyholder Surplus Account as defined
by prior law; or
(c) The entity ceases to quality for taxation as a life insurance
company.
At December 31, 1997, Policyholders' Surplus Account aggregated
approximately $236,000. Neither the Company nor Southern Security
recorded deferred income taxes totaling approximately $80,000 relating
to this amount as there is no plan to distribute the amounts in the
policyholder's surplus in the foreseeable future.
The Tax Reform Act of 1986 enacted a new separate parallel tax system
referred to as the Alternative Minimum Tax (AMT) system. AMT is based
on a flat rate applied to a broader tax base. It is calculated
separately from the regular Federal income tax and the higher of the
two taxes is paid. The excess of the AMT over regular tax is a tax
credit, which can be carried forward indefinitely to reduce regular
tax liabilities of future years. In 1997, 1996 and 1995, AMT for
Southern Security exceeded its regular tax by $11,100, $64,900 and
$62,600, respectively. At December 31, 1997, the AMT tax credit
available to reduce future regular tax totaled $409,600.
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 are presented below:
1997 1996
Deferred tax assets:
Unearned premiums,
due to deferral of
"front-end" fee $2,760,000 3,180,000
Policy liabilities
and accruals,
principally due to
adjustments to
reserves for tax
purposes 1,540,000 1,814,000
Deferred policy
acquisition costs
related to unrealized
appreciation (depreciation) 81,200 68,900
Other 120,000 141,900
Alternative minimum
tax credit carry-
forwards 409,600 398,500
Total gross deferred
tax assets 4,910,800 5,603,300
Less valuation
allowance (409,600) (398,500)
Net deferred tax
assets 4,501,200 5,204,800
Deferred tax liabilities:
Deferred acquisition
costs, principally
due to deferrals (4,779,000) (5,212,000)
Other (31,000) (81,100)
Unrealized
appreciation (241,900) (66,800)
Total gross deferred
tax liabilities (5,051,900) (5,359,900)
Net deferred
tax liability $(550,700) (155,100)
The net change in the total valuation allowance for the years ended
December 31, 1997, 1996 and 1995 was an increase of $11,100, $64,900
and $62,600, respectively. It is management's opinion that it is more
likely than not that the results of future operations will generate
sufficient taxable income to realize the net deferred tax assets.
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. Based
upon the level of historical taxable income and projections for
future taxable income over the periods which the deferred tax assets
are deductible, management believes it is more likely than not the
Company will realize the benefits of these deductible differences,
net of the existing valuation allowances at December 31, 1997.
(12) Agents' Incentive Stock Bonus Plan
The Company has an incentive bonus plan for agents that was adopted
January 1, 1995 by the Company's Board of Directors and is effective
through December 31, 2001. Agents that qualify under the plan have
the option to purchase shares of common stock. The number of shares
of common stock is determined, on the date of the award, as the
number of whole shares equal to the award based on the applicable
stock price as of December 31 of the year in which the agent
qualified for the bonus. For each share of common stock purchased
by the agent, the Company will concurrently award an equivalent
number of shares to the agent.
The first awards were granted in 1997 under this plan. The Company
incurred expenses of approximately $13,000 relating to the Company's
matching number of shares. If the agent, does not purchase the
shares within the designated period, then the agent forfeits their
rights to purchase the shares of common stock as well as the matching
number of shares to be contributed by the Company.
(13) Disclosures About Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 "Disclosures
About Fair Value of Financial Instruments" (SFAS 107) requires the
Company to disclose estimated fair value information. The following
methods and assumptions were used by the Company in estimating fair
values of financial instruments as disclosed herein:
Cash and cash equivalents, short-term investments and policy and
student loans: The carrying amount reported in the balance sheet for
these instruments approximate their fair value.
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
Investment securities available-for-sale and held-to-maturity: Fair
value for fixed maturity and equity securities is based on quoted
market prices at the reporting date for those or similar investments.
Policyholders' account balances: The fair values for policyholders'
account balances are based on their approximate surrender values.
The following table presents the carrying amounts and estimated fair
values of financial instruments held at December 31, 1997 and 1996.
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between
willing parties.
1997 1996
Carrying Estimated Carrying Estimated
amount fair amount fair
value value
Financial assets:
Fixed maturities
held to maturity
(see note 3) $10,501,712 10,631,003 $14,974,962 15,140,919
Fixed maturities
available for sale
(see note 3) 31,483,324 31,483,324 24,476,239 24,476,239
Equity securities
available for sale 839,973 839,973 -- --
Policy and
student loans 7,945,381 7,945,381 7,315,809 7,315,809
Short-term
investments 100,000 100,000 4,539,106 4,539,106
Cash and
cash equivalents 3,083,560 3,083,560 956,756 956,756
Financial liabilities:
Policy liabilities-
policyholders' account
balances 52,335,511 43,862,974 52,347,996 43,751,355
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(14) Legal Proceedings
Lawsuits against the Company have arisen in the normal course of the
Company's business. However, contingent liabilities arising from
litigation and other matters are not considered material in relation
to the financial position and operating results of the Company.
To the best of the Company's knowledge, it has no potential or
pending contingent liabilities that might be material to the
Company's financial condition, results of operations or liquidity
pursuant to product or environmental liabilities.
(15) Year 2000
The Company is aware of potential problems certain computer systems
face with respect to the year 2000, and has investigated various
solutions. Present plans call for the conversion to be completed by
the end of 1998. It is estimated to cost approximately $200,000,
which would not have a material impact on the Company.
Testing for hardware problems will be done during the second quarter
of 1999, although the Company is not expecting any problems which
could not be solved before December 31, 1999.
(16) Subsequent Event
On December 17, 1998, Security National Life Financial Company
("Security National") completed the acquisition of the Company
pursuant to the terms of the Acquisition Agreement which had been
entered into by the parties on April 17, 1998.
Following the closing of the Acquisition Agreement, the Company was
merged into SSLIC Holding Company, a Utah Company.
Exhibit
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Financial Data Schedule
For the Periods Ending December 31, 1997, 1996 and 1995
YTD YTD YTD
December 31, December 31, December 31,
1997 1996 1995
Fixed maturities
held for sale $31,843,324 24,276,239 21,812,096
Fixed maturities
held to maturity
(carrying value) 10,501,712 14,974,962 15,165,395
Fixed maturities
held to maturity
(market value) 10,631,003 15,140,919 15,494,540
Investment in
equity securities 839,973 -- 1,715,386
Mortgage loans on
real estate -- -- --
Investment in real
estate -- -- --
Total investments 50,870,390 51,319,216 50,186,208
Cash and cash equivalents 3,083,560 956,576 742,908
Reinsurance recoverable
on paid losses 359,688 379,692 514,341
Deferred policy
acquisition costs 14,457,483 15,893,401 16,952,755
Total assets 81,838,349 81,525,773 81,068,250
Policy liabilities-
future benefits,
losses, claims 1,409,031 985,720 1,050,498
Policy liabilities-
unearned premiums 7,108,662 8,249,190 9,116,890
Policy liabilities-
other claims and
benefits 427,649 293,221 191,955
Other policyholder funds 59,686 59,596 57,444
Notes payable,bonds,
mortgages, and similar
debt 1,875,300 1,875,300 1,875,300
Preferred stocks mandatory
redemption -- -- --
Preferred stock non-mandatory
redemption -- -- --
Common stock 990,335 990,335 990,335
Other stockholders'
equity 3,342,375 3,342,375 3,342,375
Total liabilities and
stockholders' equity 81,838,349 81,525,773 81,068,250
Premiums 7,643,650 7,915,019 8,158,938
Net investment income 3,589,596 3,529,339 3,027,985
Realized investment gains
and losses 506,795 869,502 60,237
Other income -- -- --
Benefits, claims, losses
and settlement expenses 4,431,474 3,812,463 4,048,125
Underwriting acquisitions
and insurance expenses-
amortization of deferred
policy acquisition
costs 3,174,750 2,945,386 2,733,919
Schedule I
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Summary of Investments Other than Investments in Related Parties
December 31, 1997
Number of
shares of Amount at
unit-principal which shown
amounts of in the
bonds or Fair balance
notes Cost Value sheet
Type of investments
Fixed maturities held for investment:
U.S. Government and government
agencies and
authorities 2,500,000 $2,516,052 2,570,000 2,516,052
Public utilities 500,000 506,520 525,000 506,520
Industrial and
miscellaneous 6,484,173 6,470,218 6,527,081 6,470,218
Special revenue and special
assessment of agencies
and authorities of
governments and
political
subdivisions 1,000,000 1,008,922 1,008,922 1,008,922
Total fixed
maturities 10,484,173 10,501,712 10,631,003 10,501,712
Fixed maturities available for sale:
U.S. Government and
government agencies
and authorities 11,700,000 9,301,191 9,474,708 9,474,708
Public utilities 855,000 899,891 917,950 917,950
Industrial and
miscellaneous 19,940,000 20,582,001 20,993,849 20,993,849
Special revenue and special
assessment of agencies
and authorities of
governments and
political
subdivisions 97,451 97,307 96,817 96,817
32,592,451 30,880,390 31,483,324 31,483,324
Total fixed
maturities 43,076,624 41,382,102 42,114,327 41,985,036
Equity securities:
Common, including investments
in mutual funds 53,071 800,000 839,973 839,973
Policy loans 7,701,020 7,701,020
Student loans 244,361 244,361
Short-term investments 100,000 100,000
Other investments -- --
Total investments $50,227,483 50,870,390
See accompanying auditors' report
Schedule II
Page 2 of 2
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Financial Data Schedule
For the Periods Ending December 31, 1997, 1996 and 1995
YTD YTD YTD
December 31, December 31, December 31,
1997 1996 1995
Underwriting acquisitions
and insurance expense
other 3,786,511 3,574,675 3,043,657
Income or loss before taxes 347,306 1,980,446 1,421,458
Income tax expense 114,066 311,636 220,350
Income/loss continuing
operations before
minority interest 233,240 1,668,810 1,201,108
Discounted operations -- -- --
Minority interest in
net income of subsidiary 122,321 562,288 455,810
Extraordinary items -- -- --
Cumulative effect-changes
in accounting principles -- -- --
Net income 110,919 1,106,522 745,298
See accompanying auditors' report.
Schedule III
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Supplementary Insurance Information
December 31, 1997, 1996 and 1995
Future policy
Deferred benefits, Other policy
policy losses claims Policyholders' claims and
acquisition and loss account Unearned benefits
cost expenses balances premiums payable
1997 Life and
Annuities 14,457,483 1,409,031 52,335,511 7,108,662 427,649
1996 Life and
Annuities 15,893,401 985,720 52,347,996 8,249,190 293,221
1995 Life and
Annuities 16,952,755 1,050,498 50,624,276 9,116,890 191,955
See accompanying auditors' report
Schedule III
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Supplementary Insurance Information
December 31, 1997, 1996 and 1995
Benefits Amortization
claims losses of deferred
Net and policy Other
Premium investment settlement acquisition operating
revenue income expenses costs expenses
1997 Life and
Annuities 7,643,650 3,589,596 4,431,474 3,174,750 3,786,511
1996 Life and
Annuities 7,915,091 3,529,339 3,813,361 2,945,386 3,574,675
1995 Life and
Annuities 8,158,938 3,027,985 4,048,125 2,733,919 3,043,657
See accompanying auditors' report
Schedule IV
CONSOLIDARE ENTERPRISES, INC. AND SUBSIDIARIES
Reinsurance
December 31, 1997, 1996 and 1995
Assumed Percentage of
Ceded to from amount
Gross other other Net assumed to
amount companies companies amount net
December 31, 1997:
Life insurance
in
force 1,026,038,000 337,901,000 532,772,000 1,220,909,000 4.4%
Premiums:
Life
insurance 8,055,672 914,071 490,726 7,632,327 6.4%
Accident
& health
insurance 11,323 -- -- 11,323 --
Total
premiums 8,066,995 914,071 490,726 7,643,650 6.4%
December 31, 1996:
Life insurance
in force 1,165,948,000 386,084,000 537,743,000 1,317,607,000 41%
Premiums:
Life
insurance 8,415,790 1,030,673 528,636 7,913,753 6.7%
Accident
& health
insurance 1,274 -- -- 1,274 --
Total premiums 8,417,064 1,030,673 528,636 7,915,027 6.7%
December 31, 1995:
Life insurance
in force 1,298,205,000 448,382,000 507,552,000 1,357,357,000 37%
Premiums:
Life
insurance 8,829,073 1,201,432 529,912 8,157,553 7%
Accident
& health
insurance 1,385 -- -- 1,385 --
Total
premiums 8,830,458 1,201,432 529,912 8,158,938 7%
See accompanying auditors' report
ADMINISTRATIVE SERVICES AGREEMENT
THIS AGREEMENT (the "Agreement") is effective as of December 17, 1998
(the "Effective Date") and is made and entered into by and between
SOUTHERN SECURITY LIFE INSURANCE COMPANY, a Florida domiciled life
insurance company ("SSLIC"), and SECURITY NATIONAL FINANCIAL
CORPORATION, a Utah corporation ("SNFC").
WITNESSETH:
WHEREAS, SNFC is a holding company that provides certain financial and
administrative advice and other services to its subsidiary
corporations, including life insurance companies;
WHEREAS, SSLIC is a life insurance company engaged in the business of
providing life, accident and health insurance;
WHEREAS, SSLIC's computer and administrative systems are not Year 2000
compliant and would take major modifications to achieve compliance, do
not calculate statutory, GAAP, or federal income tax reserves nor is
the system integrated but instead relies on two fundamentally different
programs;
WHEREAS, SSLIC sees little likelihood of reducing its general and
administrative expenses in the foreseeable future, given the nature of
the system improvements that have to be made;
WHEREAS, SSLIC expended $3,600,000 in general and administrative
expenses in 1994, $3,286,000 in general and administrative expenses in
1995, $3,577,000 in general and administrative expenses in 1996, and
$3,233,000 in general and administrative expenses in 1997;
WHEREAS, SSLIC now desires to reduce its level of general and
administrative expenses and to provide a greater level of certainty
concerning the amount of general and administrative expenses in the
future;
WHEREAS, SNFC, based upon the representations of SSLIC as to the
status of its administrative systems, duties of employees, and other
representations, is willing to provide said general and administrative
services on a fixed price basis;
WHEREAS, the provision of such services contemplated by this agreement
of necessity requires SNFC to make long-term commitments and plans such
that it can provide such services; and
WHEREAS, SSLIC desires to retain SNFC to provide general and
administrative advice and other services in accordance with the terms
and conditions hereinafter contained, and SNFC desires to provide such
services in accordance with such terms and conditions;
NOW, THEREFORE, in consideration of the mutual promises, covenants,
representations and undertakings hereinafter contained, the parties
hereto agree as follows:
ARTICLE I
Term and Termination
Section 1.1This Agreement shall commence on the Effective Date and
shall remain in full force and effect for an initial term expiring on
December 16, 2003, subject to extensions as provided below.
Section 1.2.Unless either SSLIC or SNFC shall deliver written notice
(a "Non-Extension Notice") to the other of its desire not to extend the
term of this agreement, on or before September 30th of any year (the
"Applicable Year") during the term of this agreement, commencing after
December 31, 2000 the term of this Agreement shall be extended for an
additional year as of December 31st of such Applicable Year. Following
delivery of a Non-Extension Notice during any Applicable Year in
accordance with this Section, the term of this Agreement shall expire
on December 31st of the second year following such Applicable Year (but
in no event shall the Agreement expire prior to December 16, 2003) and
shall not be extended to a later date except upon the mutual agreement
of the parties hereto.
Section 1.3.Either party may elect to deliver a Non-Extension Notice
in its sole discretion with or without cause.
Section 1.4.In the event of any material breach of any duty or
obligation under this Agreement by either party to this Agreement, the
other party may, at its sole discretion, terminate this Agreement by
written notice sent to the breaching party at least one hundred twenty
(120) days prior to the termination date stated in said notice;
provided that the breaching party shall be entitled to remedy such
breach within such one hundred twenty (120) day period, and in the
event of such remedy, such termination shall be deemed not to have
occurred pursuant to this Section 1.4.
Section 1.5.In the event that any required license, permit, approval
or authorization of SNFC to perform or act under this Agreement is
suspended or revoked for any reason whatsoever by any governmental
authority or instrumentality with jurisdiction over the transactions
contemplated hereby and the Company, and, for any reason, SNFC fails to
restore such authorization or to commence and diligently pursue
corrective action to restore such authorization within one hundred
twenty (120) days from the date of notification to SNFC of such
suspension or revocation, this Agreement may be terminated.
Section 1.6.This Agreement shall be automatically terminated without
notice by SSLIC to SNFC in the event that SNFC files a petition in
bankruptcy or becomes insolvent.
Section 1.7.Notwithstanding any other provision of this Section 1.7,
the parties hereto may terminate this Agreement at any time by mutual
consent in writing signed by both parties.
Section 1.8.Any termination of this Agreement shall not affect the
rights and obligations of the parties hereto as to transactions or acts
done or performed by either party prior to the effective date of
termination.
ARTICLE II
Appointment, Authority and Duties of SNFC
Section 2.1.SSLIC hereby engages SNFC to provide SSLIC with the
administrative and financial services described herein. Without
limiting the generality of the foregoing, SNFC shall, directly or
indirectly, and at the reasonable request and direction of the Board of
Directors of SSLIC, perform or render the following administrative and
financial services relating to:
A. Accounting Services. These services shall include policyholder
billing, collection of policyholder premiums, payment of commissions,
maintaining records of accounts receivable and accounts payable,
payment of expenses, providing management reports to include budgeting
and interim financial reports, payroll administration to the extent the
Company has employees outside the scope of this Administrative Services
Agreement, proper posting of financial transactions to the policyholder
in force, among other items.
B. Financial Reports and Statements. Preparation of financial reports
and statements to include the preparation of generally accepted
accounting principles reports for submission to shareholders, including
reports on Form 10-K and Form 10-Q for submission to the Securities and
Exchange Commission, the preparation of statutory reports including
quarterly and annual reports for the submission to the State of Florida
Insurance Department and other relevant jurisdictions, other management
reports to be agreed upon, periodic reports to the Internal Revenue
Service, including tax returns, the management and payment of an audit
fee with an acceptable certified public accounting firm, management of
insurance department examinations, and the payment of the fees
therefore.
C. Actuarial. SNFC shall make available all existing products of
SNLIC or related subsidiaries, shall maintain reserves and reserve
calculations for financial statement, including GAAP, statutory, and
Federal Income Tax, and internal purposes, shall perform profitability
analysis and shall be available for limited product development and/or
product enhancement work.
D. Policyholder Services. Policyholder services shall handle all
policyholder correspondence, shall calculate cash surrender values,
maintain lapses, cancellations, reinstatement, and shall provide claim
services, including investigation and administration of claims and the
payment thereof.
E. Underwriting. To include the receipt of applications, analysis of
said applications, and selection of risks to include the management of
medical evaluation of such risks, requesting MIB reports, requesting
and evaluating attending physician statements, medical examinations,
and upon the acceptance of such risks the issuance of the policy.
F. Data Processing. To allow SSLIC access to the data processing
system of SNFC and to provide data processing services such that the
services contemplated by this Agreement can be provided on a timely
basis, including new policy issue, policyholder services, accounting,
in-force maintenance, commissions and other functions.
G. Legal. To include review of contracts, drafting or review of
contracts for the purpose of agents or other purposes, and management
of legal expenses incurred by SSLIC for litigation or otherwise.
H. Building Management. Leasing services to include the drafting of
leases to insure the prompt receipt of monies, to insure the building
is properly maintained, and to develop the excess property of the
Company.
I. Marketing Advisory Services. To include agent licensing,
calculation of commissions, payment of commissions, maintenance of the
agency system, providing market analysis of various opportunities, and
managing policy acquisition costs including commissions, advertising,
marketing contests, sales conventions, and other items.
J. Investment Services. To provide investment services including the
recommendation of publicly traded investments, mortgage loan services
including purchase of loans and investments in mortgage warehouse
lines, investment accounting including preparation of Schedule D of the
Statutory Annual Statement, and investment maintenance including calls
and redemption of securities.
Section 2.2.All services including underwriting, claims management and
investment services provided to SSLIC hereunder are to be based upon
the written criteria, standards and guidelines of SSLIC. In the
absence of such written procedures, SNFC shall be entitled to rely upon
its own best judgment in the respective matter. The standard shall be
that of a prudent person managing his own affairs. SSLIC shall have
the ultimate and final authority over all decisions and policies,
including but not limited to, decisions and policies related to the
acceptance, rejection or canceling of rights, the payment or nonpayment
of claims and the purchase and sale of securities.
Section 2.3.Notwithstanding any other provision of this Agreement, it
is understood that the business and affairs of SSLIC shall be managed
by its Board of Directors, and to the extent delegated by such Board,
by its appropriately designated officers. The Board of Directors and
officers of SNFC shall not have any management prerogatives with
respect to the business affairs or operations of SSLIC.
Section 2.4.All services provided by SNFC hereunder shall be performed
in accordance with generally accepted professional standards, and, in
this regard, SNFC shall (a) maintain a staff of competent and trained
personnel, supplies and equipment for the purpose of performing its
duties hereunder; (b) use reasonable efforts to service SSLIC
diligently and faithfully, to promote and safeguard the best interests
of SSLIC; and (c) perform all acts reasonably necessary to ensure the
smooth and proper conduct of the subject business on behalf of SSLIC.
SNFC may employ other persons or entities to furnish SNFC with
statistical and other factual information, advice and assistance as
SNFC may deem necessary or desirable for the proper and efficient
conduct of its activities hereunder.
Section 2.5.Standard of care and standard of performance of duties.
Duties and obligations of SNFC shall be provided in a manner consistent
with the nature, type, timeliness, and amount of service that was
provided by SSLIC's own employees. Where services are to be provided
by SNFC that had not previously been provided by SSLIC's employees, the
standard for such services shall be that of a reasonable person
managing his own affairs engaged in similar service.
Section 2.6.It is contemplated that SNFC will hire certain current
employees of SSLIC in order to accomplish the purpose of this
Agreement. SSLIC agrees to cooperate in retaining such employees and
in other ways to effectuate the purposes of this Agreement. SSLIC
represents and agrees that all employees are "at will" employees not
subject to any employment agreement or retirement plan.
Section 2.7.Warranties and Limitation of Liability. It is understood
and agreed that SNFC will be using certain commercially available
products to include software and computer hardware among others. SNFC
specifically makes no guarantees, warranties, or otherwise regarding
such items and the only such warranty or guaranty is that provided by
the manufacturer. Furthermore, it is specifically agreed that in
undertaking this Agreement SNFC is relying upon SSLIC's representation
as to its needs, requirements, and past capabilities. SNFC makes no
warranty or guaranty and accepts no liability with regards to its
services. SNFC makes no warranty or guaranty with regards to its
investment advice. SSLIC agrees that sixty (60) days after the payment
of any month's service fee that it is foreclosed from raising any
complaint with regards to the closed period. The parties remedy, in
the case of material complaints, shall be termination of this Agreement
in accordance with the provisions of Article I. There shall be no
liability or consequential or incidental damages.
ARTICLE III
Charges, Expenses and Compensation of SNFC
Section 3.1.Except as otherwise provided in this Agreement, the
Administrative Fee shall provide compensation for expenses incurred in
the performance of SNFC's duties hereunder, including, without
limitation, governmental fees, fees and expenses of independent
auditors, legal fees in the ordinary course of business not to include
extensive litigation, consulting fees in the ordinary course of
business, custodian and transfer agent fees, brokerage fees and
commissions, occupancy expenses (including a fair and reasonable charge
for overhead) and other expenses, including expenses in connection with
the execution of securities transactions on behalf of SSLIC. The
parties comprehend that there may be expenses incurred by the Company
outside the scope of this Administrative Services Agreement. Such
expenses could include, for example, but not by way of limitation,
extensive product development work by outside actuaries, litigation
expense for outside counsel, and/or other extraordinary costs outside
the scope of this Administrative Services Agreement. SNFC shall pre-
approve and SSLIC shall pay such expenses promptly upon receipt of
invoices therefore. SNFC may pay such pre-approved expenses, on the
express understanding that SSLIC will promptly reimburse SNFC therefore
upon receipt of reasonably acceptable proof of payment coupled with
details of the nature of such payments.
Section 3.2.SNFC shall furnish at SNFC's own expense, executive,
supervisory and other personnel and services in connection with the
services of SNFC as contemplated by this Agreement.
Section 3.3.
(a)In full consideration for the services tendered by SNFC hereunder,
during each year of the term of this Agreement, SSLIC shall pay to SNFC
an Administrative Services Fee (the "Administrative Services Fee") of
$250,000 per month, provided, however, that the Administrative Services
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 SNFC
otherwise agree in writing and such agreement is approved by the
Florida Department of Insurance.
(b)The Administrative Services Fee with respect to each calendar year
shall be payable in twelve (12) monthly installments on the last day of
each month such services were rendered.
(c)The Administrative Services Fee may be increased, beginning on
January 1, 2001, to reflect increases in the Consumer Price Index -
U.S. City Average - All Urban Consumers (the "Index"), as published by
the United States Bureau of Labor Statistics, over the Index amount as
of January 1, 2000. On the first fee adjustment date, the then current
Index shall be compared to the Index established as of January 2000.
On the second fee adjustment date, the Index on that date shall be
compared to the Index established as of January 2001.
Section 3.4.Following the end of each month, SNFC shall send SSLIC a
statement showing all expenses and costs of SNFC to be reimbursed and
paid by SSLIC hereunder. Within fifteen (15) days following receipt of
such statement, SSLIC shall pay to SNFC by check or wire transfer all
amounts shown to be due thereon.
Section 3.5.All expenses that are shared by SSLIC and SNFC shall be
allocated in a manner consistent with any requirements contained in the
Florida Insurance Statutes, and any regulations promulgated thereunder,
as amended from time to time, and the rules therefore set forth in The
Accounting Practices and Procedures Manual for Life and Accident and
Health Insurance Companies promulgated by the National Association of
Insurance Commissioners.
ARTICLE IV
Representations and Warranties
Section 4.1.SSLIC hereby represents and warrants to SNFC that it has
full corporate power and authority to enter into this Agreement and
that the officer executing this Agreement has full authority and right
to do so on behalf of SSLIC.
Section 4.2.SNFC hereby represents and warrants to SSLIC that it has
full corporate power and authority to enter into this Agreement, and
that the officer executing this Agreement has full authority and right
to do so on behalf of SNFC.
ARTICLE V
Compliance with the SSLIC Policies
SNFC covenants and agrees that the investment planning, investment
advice and services that it furnishes SSLIC hereunder will be in
accordance with the general investment policies of SSLIC set forth from
time to time by its Board of Directors or any appropriate committee
thereof, and in any memoranda or letter agreements to SNFC, in
accordance with the criteria and limitations provided by Sections
of the Florida Insurance Laws, as amended from time to time.
ARTICLE VI
Records
Section 6.1.SNFC agrees that it will maintain all records, memoranda,
instructions and authorizations relating to the services performed
hereunder on behalf of SSLIC (the "Records"). The Records shall (a) be
and remain the property of SSLIC, (b) be open at all times to
inspection and audit by SSLIC or its authorized representatives, and
(c) shall be delivered to SSLIC upon written demand therefore provided
that SNFC may retain a copy or duplicate of each Record, delivered to
SSLIC pursuant to (d) and SSLIC will reimburse SNFC for all reasonable
expenses incurred in delivering Records to SSLIC, including without
limitation the cost to photocopy Records, copies of which are retained
by SNFC, and delivery expenses.
Section 6.2.SNFC shall, at the request of SSLIC, assist and provide
operational support in connection with any audit of any records with
respect to the services provided hereunder that is undertaken by
SSLIC's auditors, its firm of CPA's, its actuaries or the insurance
department of any state or any other governmental agency.
Section 6.3.SNFC shall provide, upon SSLIC's reasonable request, any
Records in its possession and control which are necessary to file any
report required by any federal, state or local governmental agencies.
If such Records are not timely provided, SNFC will pay any cost
reasonably incurred by SSLIC in compiling the necessary information.
Section 6.4.The terms and conditions of this Agreement and the Records
in the possession and the control of SNFC are confidential and shall be
treated as such by SNFC and its employees.
ARTICLE VII
Independent Contractors
This Agreement is not a contract of employment and nothing herein
contained shall be construed to created the relationship of employer
and employee between SSLIC and SNFC. SNFC is an independent contractor
and shall be free to exercise judgment and discretion with regard to
its duties under this Agreement.
ARTICLE VIII
Notices
Section 8.1.All notices, requests, demands and other communications
under this Agreement or in connection therewith shall be given or made
as follows:
If to SSLIC:
Southern Security Life Insurance Company
755 Rinehart Road
Lake Mary, Florida 83746
Facsimile:(407) 323-9701
With copies to:
Don B. Long, Jr., Esq.
Johnston Barton Proctor & Powell LLP
2900 Amsouth/Harvest Plaza
1901 Sixth Avenue North
Birmingham, Alabama 35203-2618
Facsimile:(205) 458-9500
and
Randall A. Mackey, Esq.
Mackey Price & Williams
170 South Main Street, Suite 900
Salt Lake City, Utah 84101
Facsimile:(801) 575-5006
If to SNFC:
Security National Financial Corporation
5300 South 360 West, Suite 101
Salt Lake City, Utah 84123
Facsimile:(801) 265-9882
with a copy to:
Randall A. Mackey, Esq.
Mackey Price & Williams
170 South Main Street, Suite 900
Salt Lake City, Utah 84101
Facsimile:(801) 575-5006
Section 8.2.Any notice or communication required or permitted to be
given in terms of this Agreement shall be valid and effective only if
in writing.
Section 8.3.Either party may by written notice to the other sent by
prepaid registered mail change its address to another physical address
provided that change of address shall only become effective on the
seventh (7th) day after dispatch of the notice.
Section 8.4.Any notice or communication sent by prepaid United States
mail pursuant to this Agreement shall be deemed to have been received
within ten (10) days of the date of posting. Any notice or
communication sent by facsimile transmission pursuant to this Agreement
shall be deemed to have been received on the day that such notice was
transmitted and confirmation of receipt of transmission was received.
ARTICLE IX
Mediation
Section 9.1.In the event of any dispute or difference of opinion
hereafter arising with respect to the rights and obligations or the
parties under this Agreement (a "Dispute"), it is hereby mutually
agreed that such Dispute shall be submitted to mediation and the
parties hereto shall cooperate with any mediator appointed to seek a
resolution of such Dispute.
Section 9.2.
(a)The mediation process shall begin upon written request (a
"Mediation Request") being made by one party (the "Requesting Party")
upon the other (the "Responding Party") which request shall designate
a mediator (the "First Mediator"), who shall be an individual
experienced in the insurance business.
(b)Within fifteen (15) days after receipt of a Mediation Request, the
Responding Party shall either accept the First Mediator or by written
notice to the Requesting Party designate an alternate mediator (the
"Second Mediator"). The failure of the Responding Party to
affirmatively accept the First Mediator or to designate the Second
Mediator within such fifteen (15) days period shall be deemed to be an
acceptance of the First Mediator.
(c)Unless the Second Mediator shall be accepted in writing by the
Requesting Party within fifteen (15) days of the designation thereof,
if the Second Mediator shall have been designated by the Responding
Party, the First Mediator and the Second Mediator shall designate a
mediator who shall be an individual experienced in the insurance
business (the "Third Mediator") (together with the First Mediator and
the Second Mediator, individually a "Mediator" and, collectively, the
"Mediators") and the Third Mediator shall be deemed accepted by both
parties.
(d) The parties hereto agree to
make reasonable efforts requested by the Mediator accepted or deemed
accepted hereunder (the "Accepted Mediator") to resolve the applicable
Dispute for a period of thirty (30) days following acceptance of the
Accepted Mediator.
Section 9.3.Each party shall bear one half of the expenses of the
Mediators designated hereunder.
Section 9.4.Any meetings relating to mediation shall take place at a
time and location mutually agreed upon by the parties to this
Agreement. If the parties to this Agreement fail to agree upon a time
and location, such meetings shall take place in Salt Lake City, Utah,
at a time and location designated by the Accepted Mediator.
ARTICLE X
Miscellaneous
Section 10.1.This Agreement shall be governed by and interpreted
according to the laws of the State of Utah and the parties agree to
submit themselves to the jurisdiction of any competent Utah court, both
state and federal.
Section 10.2.This Agreement embodies the final, complete and entire
agreement between the parties with respect to the Matters set forth
herein. No other representations, understandings or agreements have
been made or relied upon in the making of this Agreement other than
those specifically set forth or referred to herein.
Section 10.3.Any alterations, modifications, amendments, variations
or additions to this Agreement shall only be valid if in writing and
executed with the same formalities as this instrument.
Section 10.4.The failure of either party to enforce at any time any
of the provisions of this Agreement shall in no way be construed to be
a waiver of such provisions, nor in any way to affect the validity of
this Agreement, or any part thereof, or the rights of either party to
thereafter enforce each and every such provision.
Section 10.5.This Agreement shall not be assigned, delegated,
subdelegated, charged or otherwise disposed of by SSLIC without the
prior express written consent of SNFC. Upon written notice to SSLIC,
SNFC may assign, delegate, subdelegate, charge or otherwise transfer
this Agreement and its obligations hereunder; provided that any such
assignee, delegee, subdelegee, chargee or transferee agrees in writing
to be bound hereunder.
Section 10.6.This Agreement may be executed in two separate
counterparts, each of which shall be deemed to be an original hereof,
but all of which shall constitute one and the same instrument.
IN WITNESS WHEREOF, SSLIC and SNFC have executed this Agreement as of
the Effective Date.
SOUTHERN SECURITY LIFE INSURANCE COMPANY
By:________________________________
Its:_____________________________
SECURITY NATIONAL FINANCIAL CORPORATION
By:________________________________
Its:____________________________
