1
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 0-9341
Security National Financial Corporation
(Exact name of registrant as specified in its Charter)
UTAH 87-034594
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(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
5300 South 360 West, Suite 250 Salt Lake City, Utah 84123
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 264-1060
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Securities registered pursuant to Section 12(d) of the Act:
Title of each Class Name of each exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $2.00 Par Value Class C Common Stock, $0.20 Par Value
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(Title of Class) (Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 31, 2003, was approximately $30,734,548.
As of March 31, 2003, registrant had issued and outstanding 4,642,681 shares of
Class A Common Stock and 6,110,920 shares of Class C Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the registrant's 2003 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
============================================================================
Item 1. Business
Security National Financial Corporation (the "Company") operates in three main
business segments: life insurance, cemetery and mortuary, and mortgage loans.
The life insurance segment is engaged in the business of selling and servicing
selected lines of life insurance, annuity products and accident and health
insurance. These products are marketed in 35 states through a commissioned sales
force of independent licensed insurance agents who may also sell insurance
products of other companies. The cemetery and mortuary segment of the Company
consists of five cemeteries in the state of Utah and one in the state of
California and eight mortuaries in the state of Utah and five in the state of
Arizona. The Company also engages in pre-need selling of funeral, cemetery and
cremation services through its Utah operations. Many of the insurance agents
also sell pre-need funeral, cemetery and cremation services. The mortgage loan
segment is an approved governmental and conventional lender that originates and
underwrites residential and commercial loans for new construction and existing
homes and real estate projects. The mortgage loan segment operates through ten
offices in six states.
The design and structure of the Company is that each segment is related to the
others and contributes to the profitability of the other segments. Because of
the cemetery and mortuary operations in Utah, California and Arizona, the
Company enjoys a level of public awareness that assists in the sales and
marketing of insurance and pre-need cemetery and funeral products. Security
National Life Insurance Company, a Utah domiciled life insurance company
("Security National Life") invests its assets (representing in part the pre-paid
funerals) in investments authorized by the Insurance Departments of the States
of Florida and Utah. One such investment authorized by the Insurance Departments
is high quality mortgage loans. Thus, while each segment is a profit center on a
stand-alone basis, this horizontal integration of each segment is planned to
lead to improved profitability of the Company. The Company also pursues growth
through acquisitions of both life insurance companies and cemeteries and
mortuaries. The Company's acquisition business strategy is based on reducing the
overhead cost of the acquired company by utilizing existing personnel,
management, and technology while still providing quality service to customers
and policyholders.
The Company was organized as a holding company in 1979 when Security National
Life became a wholly owned subsidiary of the Company and the former stockholders
of Security National Life became stockholders of the Company. Security National
Life was formed in 1965 and has grown through the direct sale of life insurance
and annuities and through the acquisition of other insurance companies,
including the acquisitions of Capital Investors Life Insurance Company in
December 1994, Civil Service Employees Life Insurance Company in December 1995,
Southern Security Life Insurance Company in December 1998. Most recently on
December 23, 2002, the Company completed an asset purchase transaction with
Acadian Life Insurance Company, a Louisiana domiciled life insurance company
("Acadian"), from which it acquired $75,000,000 in assets and $75,000,000 in
insurance reserves. On January 1, 2003, the Company entered into an assumption
reinsurance agreement in which Acadian agreed to transfer and assign to Security
National Life all of its right, title and interest in the reinsured policies.
The cemetery and mortuary operations have also grown through the acquisition of
other cemetery and mortuary companies, including the acquisitions of Paradise
Chapel Funeral Home, Inc. in 1989, Holladay Memorial Park, Inc., Cottonwood
Mortuary, Inc. and Deseret Memorial, Inc. in 1991, Sunset Funeral Home in
January 1994, Greer-Wilson Funeral Home, Inc. in April 1995 and Crystal Rose
Funeral Home in February 1997. In July 1993, the Company formed Security
National Mortgage Company ("Security National Mortgage") to originate and
refinance mortgage loans. Since 1993 Security National Mortgage Company has
opened ten branches in six states. See Notes to Consolidated Financial
Statements for additional disclosure and discussion regarding segments of the
business.
Life Insurance
Products
The Company, through its insurance subsidiaries, Security National Life and
Southern Security Life Insurance Company, issues and distributes selected lines
of life insurance and annuities. The Company's life insurance business includes
funeral plans, interest-sensitive whole life insurance, as well as other
traditional life and accident and health insurance products. The Company places
specific marketing emphasis on funeral plans and traditional whole life products
sold in association with the funding of higher education costs.
A funeral plan is a small face value life insurance policy that generally has a
face coverage of up to $5,000. The Company believes that funeral plans represent
a marketing niche that has lower competition since most insurance companies do
not offer similar coverages. The purpose of the funeral plan policy is to pay
the costs and expenses incurred at the time of a person's death. On a per
thousand dollar cost of insurance basis, these policies can be more expensive to
the policyholder than many types of non-burial insurance due to their low face
amount, requiring the fixed cost of the policy to be distributed over a smaller
policy size, and the simplified underwriting practices that result in higher
mortality costs.
Through the Company's higher education funding division the Company markets
strategies for the funding of a child's education. Pursuant to those strategies
the Company conducts scholarship searches and originates and funds government
guaranteed student loans. The traditional whole life product marketed in
conjunction with funding of higher education costs is a 10-Pay Whole Life with
an Annuity Rider. Both the paid-up aspect of the Whole Life policy and the
savings aspect of the Annuity Rider are marketed as a tool for parents to help
fund the cost of their children's higher education. The product is offered to
parents who have children generally under the age of 16.
Markets and Distribution
The Company is licensed to sell insurance in 35 states. The Company, in
marketing its life insurance products, seeks to locate, develop and service
specific "niche" markets. A "niche" market is an identifiable market, which the
Company believes is not emphasized by most insurers. The Company generally sells
its life insurance products to people of middle age who have a need for
insurance to protect the income of the wage earner of the family, to pay off
debts at the time of death and for other estate planning purposes.
Funeral plan policies are sold primarily to persons who range in age from 45 to
75. Even though people of all ages and income levels purchase funeral plans, the
Company believes that the highest percentage of funeral plan purchasers are
individuals who are older than 45 and have low to moderate income.
Higher education funding is for families that desire to prepare for their
children's higher education needs. Such preparation can include searches for
scholarships, grant applications, guaranteed student loan applications, and the
purchase of life insurance and annuities. In 1965 the Higher Education Act
("HEA") created the guaranteed student loan programs participated in by the
Company. Federal Family Education Loan ("FFEL") Program, which now comprises
Federal Stafford Loans (formerly Guaranteed Student Loans), Federal PLUS Loans,
and Federal Consolidation Loans. The FFEL Program makes these long-term loans
available to students attending institutions of higher education, vocation,
technical, business and trade schools and some foreign schools. State or private
nonprofit guaranty agencies insure FFEL's and the Federal Government reimburses
these agencies for all or part of the insurance claims they pay to lenders. The
federal guaranty on a FFEL replaces the security (collateral) usually required
for a long-term consumer loan. These government programs have numerous rules for
qualification and have limits on how much you can borrow. The Company's whole
life product has an Annuity Rider that can provide a way for families to save
additional funds for their children's education. The Company has a student loan
resource department, which is available to policyholders to help parents and
students apply for various scholarships, grants and loans.
A majority of the Company's funeral plan premiums come from the states of
Arizona, Colorado, Idaho, Mississippi, Nevada, Oklahoma, Texas and Utah. A
majority of the Company's non-funeral plan life insurance premiums come from the
states of Alabama, California, Florida, Georgia, Louisiana, New Mexico, South
Carolina and Utah.
The Company sells its life insurance products through direct agents and brokers
and independent licensed agents who may also sell insurance products of other
companies. The commissions on life insurance products range from approximately
10% to 100% of first year premiums. In those cases where the Company utilizes
its direct agents in selling such policies, those agents customarily receive
advances against future commissions.
In some instances, funeral plan insurance is marketed in conjunction with the
Company's cemetery and mortuary sales force. When it is marketed by that group,
the beneficiary is usually the Company. Thus, death benefits that become payable
under the policy are paid to the Company's cemetery and mortuary subsidiaries to
the extent of services performed and products purchased.
In marketing the funeral plan insurance, the Company also seeks and obtains
third-party endorsements from other cemeteries and mortuaries within its
marketing areas. Typically, these cemeteries and mortuaries will provide letters
of endorsement and may share in mailing and other lead-generating costs. The
incentive for such businesses to share the costs is that these businesses are
usually made the beneficiary of the policy. The following table summarizes the
life insurance business for the five years ended December 31, 2002:
2002 2001 2000 1999 1998
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Life Insurance
Policy/Cert
Count as of December 31 341,909(2) 74,335 71,178 75,808 69,895(1)
Insurance
in force as of December 31
(omitted 000) $2,635,436(2) $2,425,557 $2,049,789 $2,113,893 $2,123,734(1)
Premiums Collected
(omitted 000) $14,699 $14,860 $14,959 $15,261(1) $5,718
(1) Includes acquisition of Southern Security Life Insurance Company on
December 17, 1998.
(2) Includes asset purchase transaction with Acadian Life Insurance Company on
December 23, 2002.
Underwriting
Factors considered in evaluating an application for insurance coverage can
include the applicant's age, occupation, general health and medical history.
Upon receipt of a satisfactory application, which contains pertinent medical
questions, the Company writes insurance based upon its medical limits and
requirements subject to the following general non-medical limits:
Age Nearest Non-Medical
Birthday Limits
0-50 $75,000
51-up Exam Required
When underwriting life insurance, the Company will sometimes issue policies with
higher premium rates for substandard risks.
The Company also sells funeral plan insurance. This insurance is a small face
amount, with a maximum policy size of $10,000. It is written on a simplified
medical application with underwriting requirements being a completed
application, a phone inspection on each applicant and a Medical Information
Bureau inquiry. There are several underwriting classes in which an applicant can
be placed. If the Company receives conflicting or incomplete underwriting
information, an attending physician's statement can be ordered.
Annuities
Products
The Company's annuity business includes single premium deferred annuities,
flexible premium deferred annuities and immediate annuities. A single premium
deferred annuity is a contract where the individual remits a sum of money to the
Company which is retained on deposit until such time as the individual may wish
to purchase an immediate annuity or surrender the contract for cash. A flexible
premium deferred annuity gives the contract holder the right to make premium
payments of varying amounts or to make no further premium payments after his
initial
payment. These single and flexible premium deferred annuities can have initial
surrender charges. The surrender charges act as a deterrent to individuals who
may wish to surrender their annuity contracts. Annuities have guaranteed
interest rates of 3% to 4 1/2% per annum. Above that, the interest rate credited
is periodically determined by the Board of Directors at their discretion. An
immediate annuity is a contract in which the individual remits to the Company a
sum of money in return for the Company's obligation to pay a series of payments
on a periodic basis over a designated period of time, such as an individual's
life, or for such other period as may be designated.
Holders of annuities enjoy a significant benefit under the current federal
income tax law in that interest accretions that are credited to the annuities do
not incur current income tax expense on the part of the contract holder.
Instead, the interest income is tax deferred until such time as it is paid out
to the contract holder. In order for the Company to realize a profit on an
annuity product, the Company must maintain an interest rate spread between its
investment income and the interest rate credited to the annuities. From that
spread must be deducted commissions, issuance expenses and general and
administrative expenses. The Company's annuities currently have credited
interest rates ranging from 3% to 5%.
Markets and Distribution
The general market for the Company's annuities is middle to older age
individuals who wish to save or invest their money in a tax-deferred
environment, having relatively high yields. The major source of annuity
considerations comes from direct agents. Annuities are also sold in conjunction
with other insurance sales. This is true in both the funeral planning and higher
education planning areas. If an individual does not qualify for a funeral plan
due to health considerations, the agent will often sell that individual an
annuity to fund those final expenses. In the higher education planning area,
most life insurance sales have as part of the transaction an annuity piece that
is used to accumulate funds. The commission rates on annuities are up to 10%.
The following table summarizes the annuity business for the five years ended
December 31, 2002:
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Annuities
Policy/Cert
Count as of
December 31 7,711 8,021 8,443 8,369 7,890(1)
Deposits Collected
(omitted 000) $3,215 $2,550 $3,039 $3,906(1) $2,770
(1) Includes acquisition of Southern Security Life Insurance Company on
December 17, 1998.
Accident and Health
Products
Prior to the acquisition of Capital Investors Life in December 1994, the Company
did not actively market accident and health products. With the acquisition of
Capital Investors Life, the Company acquired a block of accident and health
policies which pay limited benefits to policyholders. The Company is currently
offering a low-cost comprehensive diver's accident policy and a limited cancer
benefit policy. The diver's policy provides worldwide coverage for medical
expense reimbursement in the event of diving or water sports accidents. The
cancer policy provides a lump sum payment for the occurrence of cancer.
Markets and Distribution
The Company currently markets its diver's policy through water sports magazine
advertising and dive shops throughout the world. The Company pays direct
commissions ranging from 15% to 30% for new business generated.
The following table summarizes the accident and health business for the five
years ended December 31, 2002:
2002 2001 2000 1999 1998
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Accident
and Health
Policy/Cert. Count
as of December 31 18,921 19,343 21,454 24,078 27,201(1)
Premiums Collected
(omitted 000) $365 $413 $464 $549(1) $375
(1) Includes acquisition of Southern Security Life Insurance Company on
December 17, 1998.
Reinsurance
When a given policy exceeds the Company's retention limits, the Company
reinsures with other companies that portion of the individual life insurance and
accident and health policies it has underwritten. The primary purpose of
reinsurance is to enable an insurance company to write a policy in an amount
larger than the risk it is willing to assume for itself. The Company remains
obligated for amounts ceded in the event the reinsurers do not meet their
obligations.
The Company's policy is to retain no more than $75,000 of ordinary insurance per
insured life. Excess risk is reinsured. The total amount of life insurance in
force at December 31, 2002, reinsured by other companies aggregated
$220,749,000, representing approximately 9.1% of the Company's life insurance in
force on that date.
The Company currently cedes and assumes certain risks with various authorized
unaffiliated reinsurers pursuant to reinsurance treaties which are renewable
annually. The premiums paid by the Company are based on a number of factors,
primarily including the age of the insured and the risk ceded to the reinsurer.
Investments
The investments that support the Company's life insurance and annuity
obligations are determined by the Investment Committee of the Board of Directors
of the various subsidiaries and ratified by the full Board of Directors of the
respective subsidiaries. A significant portion of the investments must meet
statutory requirements governing the nature and quality of permitted investments
by insurance companies. The Company's interest-sensitive type products,
primarily annuities and interest-sensitive whole life, compete with other
financial products such as bank certificates of deposit, brokerage sponsored
money market funds as well as competing life insurance company products. While
it is not the Company's policy to offer the highest yield in this climate, in
order to offer what the Company considers to be a competitive yield, it
maintains a diversified portfolio consisting of common stocks, preferred stocks,
municipal bonds, investment and non-investment grade bonds including high-yield
issues, mortgage loans, real estate, short-term and other securities and
investments.
See "Management's Discussion and Analysis of Results of Operations and Financial
Condition" and "Notes to Consolidated Financial Statements" for additional
disclosure and discussion regarding investments.
Cemetery and Mortuary
Products
The Company has six wholly-owned cemeteries and 13 wholly-owned mortuaries. The
cemeteries are non-denominational. Through its cemetery and mortuary operations,
the Company markets a variety of products and services both on a pre-need basis
(prior to death) and an at-need basis (at the time of death). The products
include grave spaces, interment vaults, mausoleum crypts and niches, markers,
caskets, flowers and other related products. The services include professional
services of funeral directors, opening and closing of graves, use of chapels and
viewing rooms, and use of automobiles and clothing. The Company has a funeral
chapel at each of its cemeteries, other than Holladay Memorial Park and Singing
Hills Memorial Park, and has ten separate stand-alone mortuary facilities.
Markets and Distribution
The Company's pre-need cemetery and mortuary sales are marketed to persons of
all ages but are generally purchased by persons 45 years of age and older. The
Company also markets its mortuary and cemetery products on an at-need basis. The
Company is limited in its geographic distribution of these products to areas
lying within an approximate 20-mile radius of its mortuaries and cemeteries. The
Company's at-need sales are similarly limited in geographic area.
The Company actively seeks to sell its cemetery and funeral products to
customers on a pre-need basis. The Company employs cemetery sales
representatives on a commission basis to sell these products. Many of these
pre-need cemetery and mortuary sales representatives are also licensed insurance
salesmen and sell funeral plan insurance. In many instances, the Company's
cemetery and mortuary facilities are the named beneficiary of the funeral plan
policies.
The sales representatives of the Company's cemetery and mortuary operations are
commissioned and receive no salary. The sales commissions range from 10% to 22%
for cemetery products and services and 10% to 100% of first year premiums for
funeral plan insurance. Potential customers are located via telephone sales
prospecting, responses to letters mailed by the sales representatives, newspaper
inserts, referrals, contacts made at funeral services, and door-to-door
canvassing. The Company trains its sales representatives and generates leads for
them. If a customer comes to one of the Company's cemeteries on an at-need
basis, the sales representatives are compensated on a commission basis.
Mortgage Loans
Products
The Company, through its mortgage subsidiary, Security National Mortgage
Company, originates and underwrites residential and commercial loans for new
construction and existing homes and real estate projects. The Company is
approved to underwrite and process government guaranteed and conventional loans.
Most of the loans are sold directly to investors. The Company has available
warehouse lines of credit with affiliated companies and unaffiliated financial
institutions to fund mortgage loans prior to the purchase by investors.
Markets and Distribution
The Company's mortgage lending services are marketed primarily to individual
homeowners and has branch offices in Salt Lake City and Orem, Utah; Valencia and
Sacramento, California; Orlando, Florida; Colorado Springs, Colorado; Phoenix,
Arizona and Houston, Texas. The average loan size for residential loans is
$150,000. The Company's mortgage loan originations are through full time
mortgage loan officers and wholesale brokers who are paid a sales commission
ranging between .7% to 3.0% of the loan amount. Prospective customers are
located through contacts with builders, real estate agents and regional sales
representatives..
Recent Acquisitions and Other Business Activities
Acadian Life Insurance Company
On December 23, 2002, the Company completed an asset purchase transaction
through its wholly owned subsidiary, Security National Life with Acadian from
which it acquired $75,000,000 in assets and $75,000,000 in insurance reserves.
The acquired assets consist primarily of approximately 275,000 funeral insurance
policies in force in the state of Mississippi. The assets were originally
acquired by Acadian from Gulf National Life Insurance Company ("GNLIC") on June
6, 2001, which, at that time consisted of all of GNLIC's insurance policies in
force and in effect on June 1, 2001 (the "Reinsured Business").
As a part of the transaction, Security National Life entered into a Coinsurance
Agreement with Acadian, in which Security National Life agreed to reinsure all
the liabilities related to policies held by Mississippi policyholders. The terms
included the payment of all legal liabilities, obligations, claims and
commissions of the acquired policies. The effective date of the Coinsurance
Agreement was September 30, 2002, subsequent to Acadian's recapture of the
insurance in force from its reinsurer Scottish Re (U.S.) Inc. on September 30,
2002.
Under the terms of the Coinsurance Agreement, Security National Life agreed to
assume all of the risks (including deaths, surrenders, disability, accidental
deaths and dismemberment) on the reinsurance policies as of the effective date
of the Agreement. Acadian represented and warranted that each of the reinsured
policies was in force as of the effective date (including policies which may be
lapsed subject to the right of reinstatement, policies not lapsed but in
arrears, and policies in force and in effect as paid up and extended term
policies) with premiums paid and its face amount, insured, and all other
characteristics accurately reflected. Security National Life accepted liability
for all the risks under the reinsured policies on eligible lives for all
benefits occurring on or after the effective date of the agreement. The
liability of Security National Life under the coinsurance treaty began as of
September 30, 2002.
The Coinsurance Agreement further provided Security National Life the right to
assume all right, title and interest to the reinsured policies, as well as other
similar policies written by Acadian under similar terms and conditions in the
state of Mississippi from September 30, 2002, through termination of the
Coinsurance Agreement, with an Assumption Reinsurance Agreement, at any time but
in any event not later than nine months subsequent to December 16, 2002, subject
to all regulatory approvals as required by law. In the event Acadian were to
come under any supervision by a state regulator or in the event Acadian were to
apply for or consent in the appointment of, or the taking of possession by, a
receiver, custodian, regulator, trustee or liquidator of itself or of all or a
substantial part of its assets, make a general assignment for the benefit of its
creditors, commence a voluntary case under the Federal Bankruptcy Code, file a
petition seeking to take advantage of any other law relating to bankruptcy,
insolvency, reorganization or winding up, Security National Life and Acadian
were to be deemed to have converted the Coinsurance Agreement to an Assumption
Reinsurance Agreement one day prior to such insolvency or other actions and
Security National Life was to be deemed to have assumed the reinsurance policies
as of one day prior to the date thereof.
The Coinsurance Agreement further provided that Acadian was required to pay
Security National Life an initial coinsurance premium in cash or assets
acceptable to Security National Life in an amount equal to the full coinsurance
reserves, not including the Incurred But Not Reported (IBNR) reserve as of the
effective date. The ceding commission to be paid by Security National Life to
Acadian for the reinsured policies is to be the recapture amount to be paid by
Acadian to Scottish Re (U.S.), Inc., which was approximately $10,000,000. After
the initial coinsurance premium, the coinsurance premiums payable by Acadian to
Security National Life are to be equal to all of the premiums collected by
Acadian on the reinsurance policies subsequent to December 31, 2002.
Subsequent to the coinsurance agreement, Security National Life entered into an
Assumption Agreement effective January 1, 2003, with Acadian, in which Security
National Life agreed to assume certain of the liabilities related to the
reinsurance policies. Under the terms of the Assumption Agreement, Acadian
agreed to cede to Security National Life, and Security National Life agreed to
assume the stated insurance risks and contractual obligations of Acadian
relating to the Reinsured Business. Security National Life agreed to pay all
legal liabilities and obligations, including claims and commissions, of Acadian
with respect to the Reinsured Business arising on or after January 1, 2003, in
accordance with the terms and conditions of the reinsured policies.
The Assumption Agreement also requires Security National Life to issue a
certificate of assumption for each policy in force included in the Reinsured
Business, reinsuring such policies according to the terms thereof, provided that
Security National Life may be subrogated to and substituted for all rights,
privileges and interests accruing under such policies, and provided further that
all obligations and liabilities assumed by Security National Life are assumed
subject to the terms, limitations and conditions of the insurance policies
included in the Reinsured Business and all defenses, counterclaims and off-sets
that are or might thereafter become available to Security National Life.
Under the Assumption Agreement Security National Life agreed to assume only
those insurance risks in contractual obligations included within the Reinsured
Business of Acadian. Security National Life did not agree to assume any extra
contractual or other liability or obligations of Acadian. In addition, Security
National Life did not agree to assume any policy issued to an insured whose
death occurred prior to January 1, 2003, and for which a death claim had been
received by Acadian prior to that date. However, Security National Life did
agree to assume any valid claim of an insured whose death occurred prior to
January 1, 2003, and for which a death claim was not received by Acadian prior
to that date.
The Assumption Agreement further provided that as of January 1, 2003, Acadian
was to transfer and assign to Security National Life all of its right, title and
interest in the reinsured policies, including policies which may be lapsed
subject to the right of reinstatement, and policies in force and in effect as
paid up and extended term policies. Acadian further agreed to turn over to
Security National Life, as of January 1, 2003, all policy owner service,
underwriting and other files on hand that may be needed by Security National
Life in the continuation of the Reinsured Business, and Acadian further agreed
to turn over all such records and record books as may be necessary for carrying
on the Reinsured Business, including all such permanent records of Acadian
necessary for Security National Life to continue in force in effect the
reinsured policies.
On December 23, 2002, Security National Life also entered into an Asset Purchase
Agreement with Acadian, in which Acadian agreed to transfer and convey to
Security National Life all of Acadian's right, title and interest in and to the
certain assets of Acadian. The assets included the following: (i) computer
hardware; (ii) licensed software from International Business Machines, Inc.
("'IBM") for certain software utilized in the maintenance of Acadian's general
ledger accounting records, for use on Acadian's AS400 computer; (iii) owned
software developed by employees or contractors of Acadian or Gulf National Life
Insurance Company and utilized by Acadian in accounting for premiums received,
reserve computations, and for other purposes; (iv) certain furniture and
equipment; (v) the use of the name "Gulf National Life Insurance Company" alone
or as part of any other tradename, as well as the logo "GNL"; (vi) the sublease
of certain real property located in Jackson, Mississippi; and (vii) the
assignment and assumption of certain agreements and arrangements. Following the
closing of the asset purchase transaction with Acadian, Security National Life
intends to continue to operate the business it acquired from Acadian in the
state of Mississippi.
Menlo Life Insurance Company
On June 30, 1999 the Company entered into a Coinsurance and Assumption Agreement
(the "Agreement") with Menlo Life Insurance Company ("Menlo Life"), wherein the
Company has assumed 100% of the policies in force of Menlo Life. The Agreement
was not in effect until it was approved by Menlo Life's domiciled state of
Arizona and the state of California. These approvals were obtained on September
9, 1999 for the Arizona Insurance Department, and on December 9, 1999 for the
California Insurance Department.
SSLIC Holding Company
On December 17, 1998, the Company completed the acquisition of SSLIC Holding
Company, (formerly Consolidare Enterprises, Inc.), a Florida corporation ("SSLIC
Holding") pursuant to the terms of the Acquisition Agreement which the Company
entered into on April 17, 1998 with SSLIC Holding and certain shareholders of
SSLIC Holding for the purchase of all of the outstanding shares of common stock
of SSLIC Holding and all of the outstanding shares of stock of Insuradyne Corp.,
a Florida Corporation ("Insuradyne"). As of December 31, 2002, SSLIC Holding
owns approximately 75% of the outstanding shares of common stock of Southern
Security Life Insurance Company, a Florida corporation ("Southern Security").
Southern Security is a Florida domiciled insurance company with total assets as
of December 31, 2002, of approximately $77.3 million. Southern Security is
currently licensed to transact business in 14 states. Southern Security is also
a reporting company under Section 13 of the Securities Exchange Act of 1934.
Reference is made to Southern Security's annual report on Form 10-K for the year
ended December 31, 2002, which was filed with the Securities Exchange Commission
on March 31, 2003, Commission File No. 2-35669.
Crystal Rose Funeral Home
In February 1997, the Company purchased all of the outstanding shares of common
stock of Crystal Rose Funeral Home, Inc. ("Crystal Rose"), an Arizona
corporation. In connection with this transaction, the Company also acquired
certain real estate and other assets related to the business of Crystal Rose
from the sole stockholder of Crystal Rose. The Company continues to operate
Crystal Rose, which is located in Tolleson, Arizona, as a funeral home and
mortuary.
Regulation
The Company's insurance subsidiaries, Security National Life and Southern
Security, are subject to comprehensive regulation in the jurisdictions in which
they do business under statutes and regulations administered by state insurance
commissioners. Such regulation relates to, among other things, prior approval of
the acquisition of a controlling interest in an insurance company; standards of
solvency which must be met and maintained; licensing of insurers and their
agents; nature of and limitations on investments; deposits of securities for the
benefit of policyholders; approval of policy forms and premium rates; periodic
examinations of the affairs of insurance companies; annual and other reports
required to be filed on the financial condition of insurers or for other
purposes; and requirements regarding aggregate reserves for life policies and
annuity contracts, policy claims, unearned premiums, and other matters. The
Company's insurance subsidiaries are subject to this type of regulation in any
state in which they are licensed to do business. Such regulation could involve
additional costs, restrict operations or delay implementation of the Company's
business plans.
The Company is currently subject to regulation in Utah and Florida under
insurance holding company legislation, and other states where applicable.
Generally, intercorporate transfers of assets and dividend payments from its
insurance subsidiaries are subject to prior notice of approval from the State
Insurance Department, if they are deemed "extraordinary" under these statutes.
The insurance subsidiaries are required, under state insurance laws, to file
detailed annual reports with the supervisory agencies in each of the states in
which they do business. Their business and accounts are also subject to
examination by these agencies.
The Company's cemetery and mortuary subsidiaries are subject to the Federal
Trade Commission's comprehensive funeral industry rules and are subject to state
regulations in the various states where such operations are domiciled. The
morticians must be licensed by the respective state in which they provide their
services. Similarly, the mortuaries and cemeteries are governed and licensed by
state statutes and city ordinances in Utah, Arizona and California. Reports are
required to be kept on file on a yearly basis which include financial
information concerning the number of spaces sold and, where applicable, funds
provided to the Endowment Care Trust Fund. Licenses are issued annually on the
basis of such reports. The cemeteries maintain city or county licenses where
they conduct business.
The Company's mortgage loan subsidiary, Security National Mortgage, is subject
to the rules and regulations of the U.S. Department of Housing and Urban
Development and to various state licensing acts and regulations. These
regulations, among other things, specify minimum capital requirements, the
procedures for the origination, the underwriting, the licensing of wholesale
brokers, quality review audits and the amounts that can be charged to borrowers
for all FHA and VA loans. Each year the Company must have an audit by an
independent CPA firm to verify compliance under these regulations. In addition
to the government regulations, the Company must meet loan requirements of
various investors who purchase the loans.
Income Taxes
The Company's insurance subsidiaries, Security National Life and Southern
Security, are taxed under the Life Insurance Company Tax Act of 1984. Pursuant
thereto, life insurance companies are taxed at standard corporate rates on life
insurance company taxable income. Life insurance company taxable income is gross
income less general business deductions, reserves for future policyholder
benefits (with modifications), and a small life insurance company deduction (up
to 60% of life insurance company taxable income). The Company may be subject to
the corporate Alternative Minimum Tax (AMT). The exposure to AMT is primarily a
result of the small life insurance company deduction. Also, under the Tax Reform
Act of 1986, distributions in excess of stockholder's surplus account or
significant decrease in life reserves will result in taxable income.
Security National Life and Southern Security may continue to receive the benefit
of the small life insurance company deduction. In order to qualify for the small
company deduction, the combined assets of the Company must be less than
$500,000,000 and the taxable income of the life insurance companies must be less
than $3,000,000. To the extent that the net income limitation is exceeded, then
the small life insurance company deduction is phased out over the next
$12,000,000 of life insurance company taxable income.
Since 1990, Security National Life and Southern Security have computed their
life insurance taxable income after establishing a provision representing a
portion of the costs of acquisition of such life insurance business. The effect
of the provision is that a certain percentage of the Company's premium income is
characterized as deferred expenses and recognized over a five to ten year
period.
The Company's non-life insurance company subsidiaries are taxed in general under
the regular corporate tax provisions. For taxable years beginning January 1,
1987, the Company may be subject to the Corporate Alternative Minimum Tax and
the proportionate disallowance rules for installment sales under the Tax Reform
Act of 1986.
Competition
The life insurance industry is highly competitive. There are approximately 2,000
legal reserve life insurance companies in business in the United States. These
insurance companies differentiate themselves through marketing techniques,
product features, price and customer service. The Company's insurance
subsidiaries compete with a large number of insurance companies, many of which
have greater financial resources, a longer business history, and a more
diversified line of insurance coverage than the Company. In addition, such
companies generally have a larger sales force. Further, many of the companies
with which the Company competes are mutual companies which
may have a competitive advantage because all profits accrue to policyholders.
Because the Company is small by industry standards and lacks broad
diversification of risk, it may be more vulnerable to losses than larger,
better-established companies. The Company believes that its policies and rates
for the markets it serves are generally competitive.
The cemetery and mortuary industry is also highly competitive. In the Salt Lake
City, Phoenix and San Diego areas in which the Company competes, there are a
number of cemeteries and mortuaries which have longer business histories, more
established positions in the community and stronger financial positions than the
Company. In addition, some of the cemeteries with which the Company must compete
for sales are owned by municipalities and, as a result, can offer lower prices
than can the Company. The Company bears the cost of a pre-need sales program
that is not incurred by those competitors that do not have a pre-need sales
force. The Company believes that its products and prices are generally
competitive with those in the industry.
The mortgage loan industry is highly competitive with a number of mortgage
companies and banks in the same geographic area in which the Company is
operating that are better capitalized, have longer business histories, and more
established positions in the community. The mortgage market in general is
sensitive to changes in interest rates and the refinancing market is
particularly vulnerable to changes in interest rates.
Employees
As of December 31, 2002, the Company employed 328 full-time and 45 part-time
employees.
Item 2. Properties
The following table sets forth the location of the Company's office facilities
and certain other information relating to these properties.
Approximate
Owned/ Square
Location Function Leased Footage
-------- -------- ------ -------
5300 So. 360 West Corporate Headquarters Owned (1) 33,000
Salt Lake City, UT
1603 Thirteenth St Insurance Sales Owned (2) 10,000
Lubbock, TX
755 Rinehart Rd Insurance Operations/ Owned (3) 27,000
Lake Mary, FL Mortgage Sales
6522 Dogwood View Pkwy Insurance Operations Leased (4) 5,300
Jackson, MS
1236 No. Spencer, Ste. 2
Mesa, AZ Mortgage Sales Leased (5) 3,700
27201 Tourney Rd., Ste. 121
Valencia, CA Mortgage Sales Leased (6) 1,600
12150 Tributary Pnt. Dr.,
Ste. 160
Gold River, CA Mortgage Sales Leased (7) 2,000
1901 No. Union, Ste. 104
Colorado Springs, CO Mortgage Sales Leased (8) 2,200
Item 2. Properties (Continued)
- --------------------
Approximate
Owned/ Square
Location Function Leased Footage
-------- -------- ------ -------
10850 Richmond Ave., Ste 270
Houston, TX Mortgage Sales Leased (9) 1,600
595 West 800 North
Orem, UT Mortgage Sales Leased (10) 2,000
970 East Holladay Rd.
Murray, UT Mortgage Sales Leased (11) 6,600
(1) The Company leases an additional 7,484 square feet of the facility to
unrelated third parties for approximately $70,300 per year, under leases
expiring at various dates after 2002.
(2) The Company leases an additional 7,265 square feet of the facility to
unrelated third parties for approximately $33,000 per year, under leases
expiring at various dates after 2002.
(3) The Company leases an additional 13,301 square feet of the facility to
unrelated third parties for approximately $232,600 per year, under leases
expiring at various dates after 2002.
(4) The Company leases this facility for $84,000 per year. The lease expires in
July 2005
(5) The Company leases this facility for $47,400 per year. The lease expires in
August 2004.
(6) The Company leases this facility for $39,600 per year. The lease expires in
November 2005.
(7) The Company leases this facility for $43,800 per year. The lease expires in
July 2004.
(8) The Company leases this facility for $28,200 per year. The lease expires in
July 2003.
(9) The Company leases this facility for $37,200 per year. The lease expires in
November 2004.
(10) The Company leases this facility for $34,800 per year. The lease expires in
February 2007.
(11) The Company leases this facility for $103,800 per year. The lease expires
in December 2003.
The Company believes the office facilities it occupies are in good operating
condition, are adequate for current operations and has no plan to build or
acquire additional office facilities. The Company believes its office facilities
are adequate for handling its business in the foreseeable future.
The following table summarizes the location and acreage of the six Company owned
cemeteries:
Net Saleable Acreage
Acres
Sold as Total
Name of Date Developed Total Cemetery Available
Cemetery Location Acquired Acreage(1) Acreage(1) Spaces(2) Acreage(1)
- ------------ -------- -------- ---------- ---------- --------- ----------
Memorial Estates, Inc.:
Lakeview
Cemetery(3) 1700 E. Lakeview Dr.
Bountiful, UT 1973 7 40 7 33
Mountain View
Cemetery(3) 3115 E. 7800 So.
Salt Lake City, UT 1973 26 54 17 37
Redwood
Cemetery(3)(5) 6500 So. Redwood Rd.
West Jordan, UT 1973 40 78 35 43
Holladay Memorial
Park(4)(5) 4800 So. Memory Lane
Holladay, UT 1991 6 14 6 8
Lakehills
Cemetery(4) 10055 So. State
Sandy, UT 1991 12 41 6 35
Singing Hills
Memorial
Park(6) 2798 Dehesa Rd.
El Cajon, CA 1995 6 35 3 32
(1) The acreage represents estimates of acres that are based upon survey
reports, title reports, appraisal reports or the Company's inspection
of the cemeteries.
(2) Includes spaces sold for cash and installment contract sales.
(3) As of December 31, 2002, there were mortgages of approximately $45,000
collateralized by the property and facilities at Memorial Estates
Lakeview, Mountain View and Redwood Cemeteries.
(4) As of December 31, 2002, there were mortgages of approximately
$1,600,000 collateralized by the property and facilities at Deseret
Mortuary, Cottonwood Mortuary, Holladay Memorial Park, Lakehills
Cemetery and Colonial Mortuary.
(5) These cemeteries include two granite mausoleums.
(6) As of December 31, 2002, there was a mortgage of approximately
$534,000 collateralized by the property.
The following table summarizes the location, square footage and the number of
viewing rooms and chapels of the thirteen Company owned mortuaries:
Name of Date Viewing Square
Mortuary Location Acquired Room(s) Chapel(s) Footage
-------- -------- -------- ------ --------- -------
Memorial Mortuary 5850 South 900 East
Salt Lake City, UT 1973 3 1 20,000
Memorial Estates, Inc.:
Redwood Mortuary 6500 South Redwood Rd.
West Jordan, UT 1973 2 1 10,000
Mountain View
Mortuary 3115 East 7800 South
Salt Lake City, UT 1973 2 1 16,000
Lakeview
Mortuary 1700 East Lakeview Dr.
Bountiful, UT 1973 0 1 5,500
Paradise Chapel 3934 East Indian
Funeral Home School Road
Phoenix, AZ 1989 2 1 9,800
Deseret Memorial, Inc.:
Colonial
Mortuary(2) 2128 South State St.
Salt Lake City, UT 1991 1 1 14,500
Deseret
Mortuary(2) 36 East 700 South
Salt Lake City, UT 1991 2 2 36,300
Lakehills
Mortuary 10055 South State St.
Sandy, UT 1991 2 1 18,000
Cottonwood
Mortuary(2) 4670 South Highland Dr.
Salt Lake City, UT 1991 2 1 14,500
Camelback Sunset
Funeral Home(1) 301 West Camelback Rd.
Phoenix, AZ 1994 2 1 11,000
Name of Date Viewing Square
Mortuary Location Acquired Room(s) Chapel(s) Footage
-------- -------- -------- ------ --------- -------
Greer-Wilson:
Greer-Wilson
Funeral Home 5921 West Thomas Road
Phoenix, AZ 1995 2 2 25,000
Avondale
Funeral Home 218 North Central
Avondale, AZ 1995 1 1 1,850
Crystal Rose
Funeral Home(3) 9155 W. VanBuren
Tolleson, AZ 1997 0 1 9,000
(1) As of December 31, 2002 there were mortgages of approximately $150,000
collateralized by the property and facilities of Camelback Sunset
Funeral Home.
(2) As of December 31, 2002, there were mortgages of approximately
$1,600,000 collateralized by the property and facilities at Deseret
Mortuary, Cottonwood Mortuary, Holladay Memorial Park, Lakehills
Cemetery and Colonial Mortuary.
(3) As of December 31, 2002, there was a mortgage of approximately
$200,000, collateralized by the property and facilities of Crystal
Rose Funeral Home.
Item 3. Legal Proceedings
An action was brought against Southern Security Life Insurance Company in July
1999 by Dorothy Ruth Campbell in the Circuit Court of Escambia County, Alabama.
The action arose out of a denial of coverage under a $10,000 insurance policy.
The claims were for breach of contract, bad faith and fraudulent
misrepresentation. In the action, Campbell sought compensatory and punitive
damages plus interest. The case was dismissed by order of summary judgment on
January 21, 2003. The appeal time, if appeal is taken, is 42 days.
An action was brought against the Company in May 2001, by Glenna Brown Thomas
individually and as personal representative of the Estate of Lynn W. Brown in
the Third Judicial Court, Salt Lake County, Utah. The action asserts that
Memorial Estates delivered to Lynn W. Brown six stock certificates representing
2,000 shares in 1970 and 1971. Mr. Brown died in 1972. It is asserted that at
the time the 2,000 shares were issued and outstanding, such represented a 2%
ownership of Memorial Estates. It is alleged Mr. Brown was entitled to
preemptive rights and that after the issuance of the stock to Mr. Brown there
were further issuances of stock without providing written notice to Mr. Brown or
his estate with respect to an opportunity to purchase more stock. It is asserted
among other things that the plaintiff "has the right to a transfer of Brown's
shares to Thomas on defendants' (which includes Security National Financial
Corporation as well as Memorial Estates, Inc.) books and to restoration of
Brown's proportion of share ownership in Memorial at the time of his death by
issuance and delivery to Thomas of sufficient shares of defendant's publicly
traded and unrestricted stock in exchange for the 2,000 shares of Memorial stock
and payment of all dividends from the date of Thomas's demand, as required by
Article XV of the Articles of Incorporation." Based on present information, the
Company intends to vigorously defend the matter, including an assertion that the
statute of limitations bars the claims.
An action was brought against Southern Security Life Insurance Company by
National Group Underwriters, Inc. ("NGU") in state court in the State of Texas.
The case was removed by the Company to the United States District Court for the
Northern District of Texas, Fort Worth Division, with Civil No. 4:01-CV-403-E.
An Amended Complaint was filed on or about July 18, 2001. The Amended Complaint
asserts that NGU had a contract with the Company wherein NGU would submit
applications for certain policies of insurance to be issued by the Company. It
is alleged that disputes have arisen between NGU and the Company with regard to
the calculation and payment of certain advanced commissions as well as certain
production bonuses.
NGU alleged that it has been damaged far in excess of the $75,000 minimum
jurisdictional limits of this Court. NGU also seeks attorney's fees and costs as
well as prejudgment and postjudgment interest. A second amended complaint and a
third amended complaint which included a fraud claim were filed. A motion was
filed by the Company to dismiss the third amended complaint, including the fraud
claim. The court denied the motion. The Company has counterclaimed for what it
claims to be a debit balance owing to it pursuant to the relationship between
the parties with said counterclaim seeking a substantial amount from NGU (the
amount subject to reduction as premiums are received). The Company is also
seeking to recover attorney's fees and costs, as well as punitive damages on
three of its causes of action. The change of venue motion of the Company was
denied. Certain discovery has taken place. The federal case was dismissed per
stipulation. The matter was refiled in Texas state court, Tarrant County, Case
No. 348 195490 02. The claims of the respective parties are essentially the
same as set forth above which claims include fraudulent inducement relative to
entering into a contract, fraud, breach of contract, breach of duty of good
faith and fair dealing, attorneys' fees and exemplary damages. Further discovery
involving the parties is anticipated. The Company intends to vigorously defend
the matter as well as prosecute its counterclaim.
An action was brought by Bernice Johnson against Southern Security Life
Insurance Company in May, 2002 in the Circuit Court of Jefferson County,
Alabama, Civil Action No. CV02 2963. The face amount of coverage under the
policy is $15,000. The insured died in July 2001. Claims are made for
non-payment of the policy amount. The claims for relief include
misrepresentation, mental anguish and emotional distress, fraud, intentional and
bad faith non payment of the benefit, intentional and bad faith failure to
investigate the claim for benefits, reckless and negligent and wanton action
relative to misrepresentation and/or concealment of facts, negligence and the
wanton hiring, training and supervision of agent. Compensatory and punitive
damages are sought along with interest and costs. An answer has been filed by
the Company and discovery is in process.
The Company is not a party to any other legal proceedings outside the ordinary
course of the Company's business or to any other legal proceedings which, if
adversely determined, would have a material adverse effect on the Company or its
business.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
- -------------------------------------------------------------------------------
The Company's Class A Common Stock trades on the Nasdaq National Market under
the symbol "SNFCA." Prior to August 13, 1987, there was no active public market
for the Class A and Class C Common Stock. As of March 31, 2003, the closing
sales price of the Class A Common Stock was $6.62 per share. The following are
the high and low market closing sales prices for the Class A Common Stock by
quarter as reported by Nasdaq since January 1, 2001:
Period (Calendar Year) Price Range
- ---------------------- -----------------
High Low
------ ----
2001
First Quarter $2.32 $1.81
Second Quarter 2.27 1.82
Third Quarter 2.63 2.00
Fourth Quarter 2.63 2.09
2002
First Quarter 2.81 2.20
Second Quarter 6.48 2.38
Third Quarter 6.10 2.74
Fourth Quarter 6.43 2.48
2003
First Quarter 7.26 4.75
The above sales prices have been adjusted for the effect of annual stock
dividends.
The Class C Common Stock is not actively traded, although there are occasional
transactions in such stock by brokerage firms. (See Note 11 to the Consolidated
Financial Statements.)
The Company has never paid a cash dividend on its Class A or Class C Common
Stock. The Company currently anticipates that all of its earnings will be
retained for use in the operation and expansion of its business and does not
intend to pay any cash dividends on its Class A or Class C Common Stock in the
foreseeable future. Any future determination as to cash dividends will depend
upon the earnings and financial position of the Company and such other factors
as the Board of Directors may deem appropriate. A 5% stock dividend on Class A
and Class C Common Stock has been paid each year from 1989 through 2002.
As of December 31, 2002, there were 4,583 record holders of Class A Common Stock
and 143 record holders of Class C Common Stock.
Item 6. Selected Financial Data - The Company and Subsidiaries (Consolidated)
- ------------------------------------------------------------------------------
The following selected financial data for each of the five years in the period
ended December 31, 2002, are derived from the audited consolidated financial
statements. The data as of December 31, 2002 and 2001, and for the three years
ended December 31, 2002, should be read in conjunction with the consolidated
financial statements, related notes and other financial information included
herein.
Consolidated Statement of Earnings Data:
Year Ended December 31,
2002 2001 2000 1999(1) 1998
---- ---- ---- ------- ----
Revenue
Premiums $14,077,000 $13,151,000 $12,876,000 $13,176,000 $5,916,000
Net investment income 12,540,000 12,947,000 12,136,000 10,631,000 7,459,000
Net mortuary and cemetery income 11,256,000 10,603,000 9,417,000 10,178,000 9,226,000
Realized gains on investments 1,021,000 10,000 424,000 313,000 74,000
Mortgage fee income 57,008,000 40,086,000 22,922,000 14,503,000 10,082,000
Other 479,000 152,000 305,000 856,000 63,000
------------ ------------ ------------ ------------ ------------
Total revenue 96,381,000 76,949,000 58,080,000 49,657,000 32,820,000
------------ ------------ ------------ ------------ ------------
Expenses
Policyholder benefits 13,756,000 11,775,000 12,931,000 11,976,000 6,932,000
Amortization of deferred
policy acquisition costs 3,994,000 3,870,000 3,189,000 4,858,000 1,274,000
General and administrative expenses 68,459,000 52,247,000 35,959,000 26,959,000 19,649,000
Interest expense 1,970,000 2,791,000 2,126,000 1,119,000 999,000
Cost of goods & services of
the mortuaries & cemeteries 2,663,000 2,494,000 2,628,000 3,295,000 2,940,000
------------ ------------ ------------ ------------ ------------
Total benefits & expenses 90,842,000 73,177,000 56,833,000 48,207,000 31,794,000
------------ ------------ ------------ ------------ ------------
Income before
income tax expense 5,539,000 3,772,000 1,247,000 1,450,000 1,026,000
Income tax expense (1,565,000) (913,000) (305,000) (230,000) (255,000)
Minority interest in (income)
loss of subsidiary 18,000 (18,000) (46,000) (244,000) --
------------ ------------ ------------ ------------ ------------
Net earnings $3,992,000 $2,841,000 $896,000 $976,000 $771,000
============ ============ ============ ============ ============
Net earnings per common share(3) $.83 $.63 $.21 $.22 $.18
============ ============ ============ ============ ============
Weighted average outstanding
common shares 4,824,000 4,506,000 4,318,000 4,397,000 4,273,000
Net earnings per common
share-assuming dilution(3) $.80 $.63 $.21 $.22 $.18
============ ============ ============ ============ ============
Weighted average outstanding
common shares-assuming dilution 4,995,000 4,507,000 4,335,000 4,397,000 4,273,000
Item 6. Selected Financial Data - The Company and Subsidiaries (Consolidated)
- ------------------------------------------------------------------------------
Balance Sheet Data:
Year Ended December 31,
2002(2) 2001 2000 1999 1998(1)
------- ---- ---- ---- -------
Assets
Investments and restricted assets $106,162,000 $94,514,000 $108,810,000 $113,208,000 $126,332,000
Cash 38,199,000 8,757,000 11,275,000 12,423,000 6,671,000
Receivables 101,684,000 58,701,000 36,413,000 38,074,000 28,309,000
Other assets 61,112,000 51,088,000 52,249,000 50,593,000 51,953,000
------------ ------------ ------------ ------------ ------------
Total assets $307,157,000 $213,060,000 $208,747,000 $214,298,000 $213,265,000
============ ============ ============ ============ ============
Liabilities
Policyholder benefits $217,895,000 $142,291,000 $141,755,000 $140,368,000 $137,466,000
Notes & contracts payable 19,273,000 12,098,000 14,046,000 23,341,000 22,887,000
Cemetery & mortuary liabilities 10,076,000 9,344,000 8,659,000 6,638,000 6,917,000
Other liabilities 21,102,000 15,121,000 12,921,000 11,415,000 12,536,000
------------ ------------ ------------ ------------ ------------
Total liabilities 268,346,000 178,854,000 177,381,000 181,762,000 179,806,000
------------ ------------ ------------ ------------ ------------
Minority interest 4,298,000 4,237,000 4,625,000 6,046,000 6,779,000
Stockholders' equity 34,513,000 29,969,000 26,741,000 26,490,000 26,680,000
------------ ------------ ------------ ------------ ------------
Total liabilities and
stockholders' equity $307,157,000 $213,060,000 $208,747,000 $214,298,000 $213,265,000
============ ============ ============ ============ ============
(1) Reflects the acquisition of SSLIC Holding Company and subsidiaries as
of December 17, 1998.
(2) Reflects the asset purchase transaction with Acadian Life Insurance
Company on December 23, 2002.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- ------------------------------------------------------------------------------
Overview
The Company's operations over the last several years generally reflect three
trends or events which the Company expects to continue: (i) increased attention
to "niche" insurance products, such as the Company's funeral plan policies and
traditional whole life products; (ii) emphasis on cemetery and mortuary
business; and (iii) capitalizing on lower interest rates by originating and
refinancing mortgage loans.
During the years ending December 31, 2002 and 2001, Security National Mortgage
Company (SNMC) experienced increases in revenue and expenses due to the increase
in loan volume of its operations. SNMC is a mortgage lender incorporated under
the laws of the State of Utah. SNMC is approved and regulated by the Federal
Housing Administration (FHA), a department of the U.S. Department of Housing and
Urban Development (HUD), to originate mortgage loans that qualify for government
insurance in the event of default by the borrower. SNMC obtains loans primarily
from independent brokers and correspondents. SNMC funds the loans from internal
cash flows and lines of credit from financial institutions. SNMC receives fees
from the borrowers and other secondary fees from third party investors who
purchase the loans from SNMC. SNMC sells all of its loans to third party
investors and does not retain servicing to these loans. SNMC pays the brokers
and correspondents a commission for loans that are brokered through SNMC. In
1999, SNMC opened new wholesale branches in Sacramento, California and Valencia,
California. In 2000, SNMC opened new wholesale branches in Orlando, Florida;
Colorado Springs, Colorado and Provo, Utah. In 2001, SNMC opened wholesale
branches in Phoenix, Arizona and Houston, Texas. SNMC originated and sold 11,737
($1,721,000,000 loan amount), 8,738 ($1,268,000,000 loan amount), and 4,845
($652,000,000 loan amount) loans in 2002, 2001 and 2000, respectively.
On December 17, 1998, the Company purchased all of the outstanding shares of
common stock of SSLIC Holding Company ("SSLIC Holding") (formerly "Consolidare
Enterprises, Inc.") and Insuradyne Corporation ("Insuradyne") for a total cost
of $12,248,194. As of December 31, 2002, SSLIC Holding held approximately 75% of
the outstanding shares of common stock of Southern Security Life Insurance
Company ("Southern Security").
On December 23, 2002, the Company completed an asset purchase transaction with
Acadian Life Insurance Company, a Louisiana domiciled life insurance company
("Acadian"), in which it acquired from Acadian $75,000,000 in assets and
$75,000,000 in insurance reserves through its wholly owned subsidiary, Security
National Life Insurance Company, a Utah domiciled life insurance company. The
acquired assets consist primarily of approximately 275,000 funeral insurance
policies in force in the state of Mississippi. The assets were originally
acquired by Acadian from Gulf National Life Insurance Company ("GNLIC") on June
6, 2001, consisting of all of GNLIC's insurance policies in force and in effect
on June 1, 2001.
Significant Accounting Policies and Estimates
The following is a brief summary of our significant accounting policies and a
review of our most critical accounting estimates. For a complete description of
our significant accounting policies, see Note 1 to our financial statements.
Insurance Operations
In accordance with accounting principles generally accepted in the United States
of America (GAAP), premiums and considerations received for interest sensitive
products such as universal life insurance and ordinary annuities are reflected
as increases in liabilities for policyholder account balances and not as
revenues. Revenues reported for these products consist of policy charges for the
cost of insurance, administration charges, amortization of policy initiation
fees and surrender charges assessed against policyholder account balances.
Surrender benefits paid
relating to these products are reflected as decreases in liabilities for
policyholder account balances and not as expenses. The Company receives
investment income earned from the funds deposited into account balances, a
portion of which is passed through to the policyholders in the form of interest
credited. Interest credited to policyholder account balances and benefit claims
in excess of policyholder account balances are reported as expenses in the
financial statements.
Premium revenues reported for traditional life insurance products are recognized
as revenues when due. Future policy benefits are recognized as expenses over the
life of the policy by means of the provision for future policy benefits.
The costs related to acquiring new business, including certain costs of issuing
policies and other variable selling expenses (principally commissions), defined
as deferred policy acquisition costs, are capitalized and amortized into
expense. For nonparticipating traditional life products, these costs are
amortized over the premium paying period of the related policies, in proportion
to the ratio of annual premium revenues to total anticipated premium revenues.
Such anticipated premium revenues are estimated using the same assumption used
for computing liabilities for future policy benefits and are generally "locked
in" at the date the policies are issued. For interest sensitive products, these
costs are amortized generally in proportion to expected gross profits from
surrender charges and investment, mortality and expense margins. This
amortization is adjusted when the Company revises the estimate of current or
future gross profits or margins. For example, deferred policy acquisition costs
are amortized earlier than originally estimated when policy terminations are
higher than originally estimated or when investments backing the related
policyholder liabilities are sold at a gain prior to their anticipated maturity.
Death and other policyholder benefits reflect exposure to mortality risk and
fluctuate from year to year on the level of claims incurred under insurance
retention limits. The profitability of the Company is primarily affected by
fluctuations in mortality, other policyholder benefits, expense levels, interest
spreads (i.e., the difference between interest earned on investments and
interest credited to policyholders) and persistency. We have the ability to
mitigate adverse experience through adjustments to credited interest rates,
policyholder dividends or cost of insurance charges.
Cemetery and Mortuary Operations
Pre-need sales of funeral services and caskets - revenue and costs associated
with the sales of pre-need funeral services and caskets are deferred until the
services are performed.
Pre-need sales of cemetery interment rights (cemetery burial property) - revenue
and costs associated with the sales of pre-need cemetery interment rights are
recognized in accordance with the retail land sales provisions of Statement of
Financial Accounting Standards No. 66, "Accounting for the Sales of Real Estate"
(FAS No. 66). Under FAS 66, recognition of revenue and associated costs from
constructed cemetery property must be deferred until a minimum percentage of the
sales price has been collected. Revenues related to the pre-need sale of
unconstructed cemetery property will be deferred until such property is
constructed and meets the criteria of FAS No. 66 described above.
Pre-need sales of cemetery merchandise (primarily markers and vaults) - revenue
and costs associated with the sales of pre-need cemetery merchandise are
deferred until the merchandise is delivered.
Pre-need sales of cemetery services (primarily merchandise delivery and
installation fees and burial opening and closing fees) - revenue and costs
associated with the sales of pre-need cemetery services are deferred until the
services are performed.
Prearranged funeral and pre-need cemetery customer obtaining costs - costs
incurred related to obtaining new pre-need cemetery and prearranged funeral
business are accounted for under the guidance of the provisions of Statement
of Financial Accounting Standards No. 60 "Accounting and Reporting by Insurance
Enterprises" (FAS No. 60). Obtaining costs, which include only costs that vary
with and are primarily related to the acquisition of new pre-need cemetery and
prearranged funeral business, are deferred until the merchandise is delivered or
services are performed.
Cemetery merchandise and services trust investment earnings - investment
earnings generated by assets included in merchandise and services trusts are
deferred until the associated merchandise is delivered or services performed.
The Company is required to place specified amounts into restricted asset
accounts for products sold on a pre-need basis. Income from assets placed in
these restricted asset accounts are used to offset required increases to the
estimated future liability.
Revenues and costs for at-need sales are recorded when the services are
performed.
Mortgage Operations
Mortgage fee income is generated through the origination and refinancing of
mortgage loans and is deferred until such loans are determined to be sold in
accordance with FAS No. 140.
All loans are sold to third party investors and the Company does not retain
servicing rights. The amounts sold to investors are shown on the balance sheet
as due from sale of loans, and are shown on the basis of the amount of fees due
from the investors.
Use of Significant Accounting Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses and the disclosure of contingent
assets and liabilities. It is reasonably possible that actual experience could
differ from the estimates and assumptions utilized which could have a material
impact on the financial statements. The following is a summary of our
significant accounting estimates, and critical issues that impact them:
Fixed Maturities Available for Sale
Securities available-for-sale are carried at fair value, with unrealized holding
gains and losses reported in accumulated other comprehensive income which is
included in stockholders' equity after adjustment for deferred income taxes and
deferred acquisition costs related to universal life products.
The Company uses fair market values based on National Association of Insurance
Commissioners (NAIC) values, versus values associated with normal marketing
pricing services. The Company considers the difference to be immaterial.
The Company is required to exercise judgment to determine when a decline in the
value of a security is other than temporary. When the value of a security
declines and the decline is determined to be other than temporary, the carrying
value of the investment is reduced to its fair value and a realized loss is
recorded to the extent of the decline.
Deferred Acquisition Costs
Amortization of deferred policy acquisition costs for interest sensitive
products is dependent upon estimates of current and future gross profits or
margins on this business. Key assumptions used include the following: yield
on investments supporting the liabilities, amount of interest or dividends
credited to the policies, amount of policy fees and charges, amount of expenses
necessary to maintain the policies, and amount of death and surrender benefits
and the length of time the policies will stay in force.
These estimates, which are revised periodically, are based on historical results
and our best estimate of future expenses.
Cost of Insurance Acquired
Cost of insurance acquired is the present value of estimated future profits of
the acquired business and is amortized similar to deferred acquisition costs.
The critical issues explained for deferred acquisition costs would also apply
for cost of insurance acquired.
Allowance for Doubtful Accounts
The Company accrues an estimate of potential losses for the collection of
receivables. The significant receivables are the result of the Company's
cemetery and mortuary operations and mortgage loan operations. The allowance is
based upon the Company's experience. The critical issues that would impact the
cemetery and mortuary operations is the overall economy. The critical issues for
the mortgage loan operations would be interest rate risk and loan underwriting.
Future Policy Benefits
Reserves for future policy benefits for traditional life insurance products
requires the use of many assumptions, including the duration of the policies,
mortality experience, expenses, investment yield, lapse rates, surrender rates,
and dividend crediting rates.
These assumptions are made based upon historical experience, industry standards
and a best estimate of future results and, for traditional life products,
include a provision for adverse deviation. For traditional life insurance, once
established for a particular series of products, these assumptions are generally
held constant.
Unearned Revenue
The universal life products the Company sells have a significant policy
initiation fees (front-end load), which are deferred and amortized into revenues
over the estimated expected gross profits from surrender charges and investment,
mortality and expense margins. The same issues that impact deferred acquisition
costs would apply to unearned revenue.
Deferred Pre-need Cemetery and Funeral Contracts Revenues and Estimated Future
Cost of Pre-need Sales
- -------------------------------------------------------------------------------
The revenue and cost associated with the sales of pre-need cemetery merchandise
and funeral services are deferred until the merchandise is delivered. Also,
trust investment earnings from any pre-need sales placed into trust are also
deferred until the merchandise is delivered.
The Company, through its mortuary and cemetery operations, provides a guaranteed
funeral arrangement wherein a prospective customer can receive future goods and
services at guaranteed prices. To accomplish this, the Company, through its life
insurance operations, sells to the customer an increasing benefit life insurance
policy that is assigned to the mortuaries. If, at the time of need, the
policyholder/potential mortuary customer utilizes one of the Company's
facilities, the guaranteed funeral arrangement contract that has been assigned
will provide the funeral goods and services at the contracted price. The
increasing life insurance policy will cover the difference between the original
contract prices and current prices. Risks may arise if the difference cannot be
fully met by the life insurance policy.
Results of Operations
2002 Compared to 2001
Total revenues increased by $19,432,000, or 25.3%, from $76,949,000 for fiscal
year 2001 to $96,381,000 for fiscal year 2002. Contributing to this increase in
total revenues was a $16,922,000 increase in mortgage fee income, a $653,000
increase in net mortuary and cemetery sales and a $926,000 increase in insurance
premiums and other considerations.
Insurance premiums and other considerations increased by $926,000, from
$13,151,000 in 2001 to $14,077,000 in 2002. This increase was primarily due to
the additional premiums from increased sales of the Company's traditional life
products.
Net investment income decreased by $407,000, from $12,947,000 in 2001 to
$12,540,000 in 2002. This decrease was primarily attributable to reduced
interest earned as a result of lower interest rates during 2002.
Net mortuary and cemetery sales increased by $653,000, from $10,603,000 in 2001
to $11,256,000 in 2002. This increase was primarily due to additional at-need
cemetery and mortuary sales.
Mortgage fee income increased by $16,922,000, from $40,086,000 in 2001 to
$57,008,000 in 2002. This increase was primarily attributable to a greater
number of loan originations during 2002 due to lower interest rates.
Total benefits and expenses were $90,842,000 for 2002, which constituted 94.3%
of the Company's total revenues, as compared to $73,177,000, or 95.1% of the
Company's total revenues for 2001.
During 2002, there was a net increase of $902,000 in death benefits, surrenders
and other policy benefits, and an increase of $1,079,000 in future policy
benefits from $11,775,000 in 2001 to $13,756,000 in 2002. This net increase was
primarily the result of an increase in traditional life reserves.
Amortization of deferred policy and pre-need acquisition costs and cost of
insurance acquired increased by $124,000, from $3,870,000 in 2001 to $3,994,000
in 2002. This increase was reasonable based on the underlying nature of
assumptions.
General and administrative expenses increased by $16,212,000, from $52,247,000
in 2001 to $68,459,000 in 2002. Contributing to this increase was a $12,255,000
increase in commission expenses, from $29,859,000 in 2001 to $42,114,000 in
2002. Salaries increased $1,386,000, from $9,028,000 in 2001 to $10,414,000 in
2002. Other expenses increased $2,571,000, from $13,360,000 in 2001 to
$15,931,000 in 2002. These increases were primarily the result of additional
expenses due to increased numbers of loan originations made by the Company's
mortgage subsidiary in 2002.
Interest expense decreased by $821,000, from $2,791,000 in 2001 to $1,970,000 in
2002. This decrease was due to more loan originations from the Company's
mortgage subsidiary being funded from internal sources of funds and lower
interest rates from borrowings from third parties.
Cost of the mortuary and cemetery goods and services sold increased by $169,000,
from $2,494,000 in 2001 to $2,663,000 in 2002. This increase was primarily due
to greater at-need cemetery and mortuary sales.
2001 Compared to 2000
Total revenues increased by $18,870,000, or 32.5%, from $58,079,000 for fiscal
year 2000 to $76,949,000, for fiscal year 2001. Contributing to this increase in
total revenues was a $17,165,000 increase in mortgage fee income, an $810,000
increase in net investment income, a $1,187,000 increase in net mortuary and
cemetery sales and a $275,000 increase in insurance premiums and other
considerations.
Insurance premiums and other considerations increased by $275,000, from
$12,876,000 in 2000 to $13,151,000 in 2001. This increase was primarily due to
the additional premiums from increased sales of the Company's traditional life
products.
Net investment income increased by $810,000, from $12,136,000 in 2000 to
$12,946,000 in 2001. This increase was primarily attributable to additional
interest earned as a result of a greater number of loan originations during
2001.
Net mortuary and cemetery sales increased by $1,187,000, from $9,417,000 in 2000
to $10,603,000 in 2001. This increase was primarily due to additional at-need
cemetery and mortuary sales.
Mortgage fee income increased by $17,165,000, from $22,921,000 in 2000 to
$40,086,000 in 2001. This increase was primarily attributable to a greater
number of loan originations during 2001 due to lower interest rates, resulting
in more borrowers refinancing their mortgage loans.
Total benefits and expenses were $73,177,000 for 2001, which constituted 95.1%
of the Company's total revenues, as compared to $56,832,000, or 97.9% of the
Company's total revenues for 2000.
During 2001, there was a net increase of $1,160,000 in death benefits,
surrenders and other policy benefits, and a decrease of $2,316,000 in future
policy benefits from $12,931,000 in 2000 to $11,775,000 in 2001. This net
decrease was primarily the result of a decrease in traditional life reserves.
Amortization of deferred policy and pre-need acquisition costs and cost of
insurance acquired increased by $681,000, from $3,189,000 in 2000 to $3,870,000
in 2001. This increase was reasonable based on the underlying actuarial
assumptions.
General and administrative expenses increased by $16,288,000, from $35,959,000
in 2000 to $52,247,000 in 2001. Contributing to this increase was an $11,458,000
increase in commission expenses, from $18,401,000 in 2000 to $29,859,000 in
2001. Salaries increased $1,360,000, from $7,667,000 in 2000 to $9,028,000 in
2001. Other expenses increased $3,470,000, from $9,890,000 in 2000 to
$13,360,000 in 2001. These increases were primarily the result of additional
expenses due to increased numbers of loan originations made by the Company's
mortgage subsidiary in 2001.
Interest expense increased by $665,000, from $2,126,000 in 2000 to $2,791,000 in
2001. This increase was primarily due to more loan originations from the
Company's mortgage subsidiary being funded by third parties in 2001.
Cost of the mortuary and cemetery goods and services sold decreased by $134,000,
from $2,628,000 in 2000 to $2,494,000 in 2001. This decrease was primarily due
to additional sales of cemetery burial properties in 2001, which have a lower
cost of goods sold than other funeral products.
Liquidity and Capital Resources
The Company's life insurance subsidiaries and cemetery and mortuary subsidiaries
realize cash flow from premiums, contract payments and sales on personal
services rendered for cemetery and mortuary business, from interest and
dividends on invested assets, and from the proceeds from the maturity of
held-to-maturity investments or sale of other investments. The mortgage
subsidiary realizes cash flow from fees generated by originating and refinancing
mortgage loans and interest earned on mortgages sold to investors. The Company
considers these sources of cash flow to be adequate to fund future policyholder
and cemetery and mortuary liabilities, which generally are long-term, and
adequate to pay current policyholder claims, annuity payments, expenses on the
issuance of new policies, the maintenance of existing policies, debt service,
and to meet operating expenses.
The Company attempts to match the duration of invested assets with its
policyholder and cemetery and mortuary liabilities. The Company may sell
investments other than those held-to-maturity in the portfolio to help in this
timing; however, to date, that has not been necessary. The Company purchases
short-term investments on a temporary basis to meet the expectations of
short-term requirements of the Company's products.
The Company's investment philosophy is intended to provide a rate of return
which will persist during the expected duration of policyholder and cemetery and
mortuary liabilities regardless of future interest rate movements.
The Company's investment policy is to invest predominately in fixed maturity
securities, mortgage loans, and warehouse mortgage loans on a short-term basis
before selling the loans to investors in accordance with the requirements and
laws governing the life insurance subsidiaries. Bonds owned by the insurance
subsidiaries amounted to $51,530,000 as of December 31, 2002 compared to
$49,271,000 as of December 31, 2001. This represents 51% of the total insurance
related investments in 2002 as compared to 55% in 2001. Generally, all bonds
owned by the life insurance subsidiaries are rated by the National Association
of Insurance Commissioners (NAIC). Under this rating system, there are six
categories used for rating bonds. At December 31, 2002, 4% ($1,903,000) and at
December 31, 2001, 5% ($2,534,000) of the Company's total bond investments were
invested in bonds in rating categories three through six which are considered
non-investment grade.
If market conditions were to cause interest rates to change, the market value of
the fixed income portfolio (approximately $73,458,000) could change by the
following amounts based on the respective basis point swing (the change in the
market values were calculated using a modeling technique):
-200 bps -100 bps +100 bps +200 bps
-------- -------- -------- --------
Change in
Market Value
(in thousands) $4,960 $3,275 $(4,335) $(10,258)
The Company has classified certain of its fixed income securities, including
high-yield securities, in its portfolio as available for sale, with the
remainder classified as held to maturity. However, in accordance with Company
policy, any such securities purchased in the future will be classified as held
to maturity. Business conditions, however, may develop in the future which may
indicate a need for a higher level of liquidity in the investment portfolio. In
that event the Company believes it could sell short-term investment grade
securities before liquidating higher-yielding longer-term securities.
The Company is subject to risk based capital guidelines established by statutory
regulators requiring minimum capital levels based on the perceived risk of
assets, liabilities, disintermediation, and business risk. At December 31, 2002
and 2001, the life subsidiaries exceeded the regulatory criteria.
The Company's total capitalization of stockholders' equity and bank debt and
notes payable was $53,787,000 and $42,067,000 as of December 31, 2002 and 2001,
respectively. Stockholders' equity as a percent of total capitalization was 64%
and 71% as of December 31, 2002 and 2001, respectively.
Lapse rates measure the amount of insurance terminated during a particular
period. The Company's lapse rate for life insurance in 2002 was 10.7%, as
compared to a rate of 13.2% in 2001.
On December 17, 1998, the Company completed the acquisition of Consolidare
Enterprises, Inc., a Florida corporation ("Consolidare") pursuant to the terms
of the Acquisition Agreement which the Company entered into on April 17, 1998
with Consolidare and certain shareholders of Consolidare for the purchase of all
of the outstanding shares of common stock of Consolidare. Consolidare owns
approximately 75% of the outstanding shares of common stock of Southern Security
Life Insurance Company, a Florida corporation ("SSLIC"), and all of the
outstanding shares of stock of Insuradyne Corp., a Florida corporation
("Insuradyne").
As consideration for the purchase of the shares of Consolidare, the Company paid
to the stockholders of Consolidare at closing an aggregate of $12,248,194. In
order to pay the purchase consideration, the Company obtained $6,250,000 from
bank financing, with the balance of $5,998,194 obtained from funds then
currently held by the Company. In addition to the purchase consideration, the
Company caused SSLIC to pay, on the closing date, $1,050,000 to George Pihakis,
the President and Chief Executive Officer of SSLIC prior to closing, as a lump
sum settlement of the executive compensation agreement between SSLIC and Mr.
Pihakis.
In connection with the acquisition of Consolidare, the Company entered into an
Administrative Services Agreement dated December 17, 1998 with SSLIC. Under the
terms of the agreement, the Company has agreed to provide SSLIC with certain
defined administrative and financial services, including accounting services,
financial reports and statements, actuarial, policyholder services,
underwriting, data processing, legal, building management, marketing advisory
services and investment services. In consideration for the services to be
provided by the Company, SSLIC shall pay the Company an administrative services
fee of $250,000 per month, provided, however, that such fee shall be reduced to
zero for so long as the capital and surplus of SSLIC is less than or equal to
$6,000,000, unless SSLIC and the Company otherwise agree in writing and such
agreement is approved by the Florida Department of Insurance.
The administrative services fee may be increased, beginning on January 1, 2002,
to reflect increases in the Consumer Price Index, over the index amount as of
January 1, 2001. The Administrative Services Agreement shall remain in effect
for an initial term expiring on December 16, 2003. The term of the agreement may
be automatically extended for additional one-year terms unless either the
Company or SSLIC shall deliver a written notice on or before September 30 of any
year stating to the other its desire not to extend the term of the agreement.
However, in no event can the agreement be terminated prior to December 16, 2003.
On June 30, 1999, the Company entered into a Coinsurance and Assumption
Agreement (the "Agreement") with Menlo Life Insurance Company ("Menlo Life"),
wherein the Company has assumed 100% of the policies in force of Menlo Life. The
Agreement was not in effect until it was approved by Menlo Life's domiciled
state of Arizona and the state of California. These approvals were obtained on
September 9, 1999 for the Arizona Insurance Department, and on December 9, 1999
for the California Insurance Department. Menlo Life paid consideration to the
Company in the form of statutory admitted assets to equal the liabilities
assumed. On September 25, 2001, Menlo Life paid to the Company $308,978 in
policy loans and $2,269,403 in cash.
On December 23, 2002, the Company completed an asset purchase transaction
through its wholly owned subsidiary, Security National Life with Acadian from
which it acquired $75,000,000 in assets and $75,000,000 in insurance reserves.
The acquired assets consist primarily of approximately 275,000 funeral insurance
policies in force in the state of Mississippi. The assets were originally
acquired by Acadian from Gulf National Life Insurance Company ("GNLIC") on June
6, 2001, which, at that time consisted of all of GNLIC's insurance policies in
force and in effect on June 1, 2001 (the "Reinsured Business").
As a part of the transaction, Security National Life entered into a Coinsurance
Agreement with Acadian, in which Security National Life agreed to reinsure all
the liabilities related to policies held by Mississippi policyholders. The terms
included the payment of all legal liabilities, obligations, claims and
commissions of the acquired policies. The effective date of the Coinsurance
Agreement was September 30, 2002, subsequent to Acadian's recapture of the
insurance in force from its reinsurer Scottish Re (U.S.) Inc. on September 30,
2002.
Under the terms of the Coinsurance Agreement, Security National Life agreed to
assume all of the risks (including deaths, surrenders, disability, accidental
deaths and dismemberment) on the reinsurance policies as of the effective date
of the Agreement. Acadian represented and warranted that each of the reinsured
policies was in force as of the effective date (including policies which may be
lapsed subject to the right of reinstatement, policies not lapsed but in
arrears, and policies in force and in effect as paid up and extended term
policies) with premiums paid and its face amount, insured, and all other
characteristics accurately reflected. Security National Life accepted liability
for all the risks under the reinsured policies on eligible lives for all
benefits occurring on or after the effective date of the agreement. The
liability of Security National Life under the coinsurance treaty began as of
September 30, 2002.
The Coinsurance Agreement further provided Security National Life the right to
assume all right, title and interest to the reinsured policies, as well as other
similar policies written by Acadian under similar terms and conditions in the
state of Mississippi from September 30, 2002, through termination of the
Coinsurance Agreement, with an Assumption Reinsurance Agreement, at any time but
in any event not later than nine months subsequent to December 16, 2002, subject
to all regulatory approvals as required by law. In the event Acadian were to
come under any supervision by a state regulator or in the event Acadian were to
apply for or consent in the appointment of, or the taking of possession by, a
receiver, custodian, regulator, trustee or liquidator of itself or of all or a
substantial part of its assets, make a general assignment for the benefit of its
creditors, commence a voluntary case under the Federal Bankruptcy Code, file a
petition seeking to take advantage of any other law relating to bankruptcy,
insolvency, reorganization or winding up, Security National Life and Acadian
were to be deemed to have converted the Coinsurance Agreement to an Assumption
Reinsurance Agreement one day prior to such insolvency or other actions and
Security National Life was to be deemed to have assumed the reinsurance policies
as of one day prior to the date thereof.
The Coinsurance Agreement further provided that Acadian was required to pay
Security National Life an initial coinsurance premium in cash or assets
acceptable to Security National Life in an amount equal to the full coinsurance
reserves, not including the Incurred But Not Reported (IBNR) reserve as of the
effective date. The ceding commission to be paid by Security National Life to
Acadian for the reinsured policies is to be the recapture amount to be paid by
Acadian to Scottish Re (U.S.), Inc., which was approximately $10,000,000. After
the initial coinsurance premium, the coinsurance premiums payable by Acadian to
Security National Life are to be equal to all of the premiums collected by
Acadian on the reinsurance policies subsequent to December 31, 2002.
Subsequent to the coinsurance agreement, Security National Life entered into an
Assumption Agreement effective January 1, 2003, with Acadian, in which Security
National Life agreed to assume certain of the liabilities related to the
reinsurance policies. Under the terms of the Assumption Agreement, Acadian
agreed to cede to Security National Life, and Security National Life agreed to
assume the stated insurance risks and contractual obligations of Acadian
relating to the Reinsured Business. Security National Life agreed to pay all
legal liabilities and obligations, including claims and commissions, of Acadian
with respect to the Reinsured Business arising on or after January 1, 2003, in
accordance with the terms and conditions of the reinsured policies.
The Assumption Agreement also requires Security National Life to issue a
certificate of assumption for each policy in force included in the Reinsured
Business, reinsuring such policies according to the terms thereof, provided that
Security National Life may be subrogated to and substituted for all rights,
privileges and interests accruing under such policies, and provided further that
all obligations and liabilities assumed by Security National Life are assumed
subject to the terms, limitations and conditions of the insurance policies
included in the Reinsured Business and all defenses, counterclaims and off-sets
that are or might thereafter become available to Security National Life.
Under the Assumption Agreement Security National Life agreed to assume only
those insurance risks in contractual obligations included within the Reinsured
Business of Acadian. Security National Life did not agree to assume any extra
contractual or other liability or obligations of Acadian. In addition, Security
National Life did not agree to assume any policy issued to an insured whose
death occurred prior to January 1, 2003, and for which a death claim had been
received by Acadian prior to that date. However, Security National Life did
agree to assume any valid claim of an insured whose death occurred prior to
January 1, 2003, and for which a death claim was not received by Acadian prior
to that date.
The Assumption Agreement further provided that as of January 1, 2003, Acadian
was to transfer and assign to Security National Life all of its right, title and
interest in the reinsured policies, including policies which may be lapsed
subject to the right of reinstatement, and policies in force and in effect as
paid up and extended term policies. Acadian further agreed to turn over to
Security National Life, as of January 1, 2003, all policy owner service,
underwriting and other files on hand that may be needed by Security National
Life in the continuation of the Reinsured Business, and Acadian further agreed
to turn over all such records and record books as may be necessary for carrying
on the Reinsured Business, including all such permanent records of Acadian
necessary for Security National Life to continue in force in effect the
reinsured policies.
At December 31, 2002, $22,964,225 of the Company's consolidated stockholders'
equity represents the statutory stockholders' equity of the Company's insurance
subsidiaries. The life insurance subsidiaries cannot pay a dividend to its
parent company without the approval of insurance regulatory authorities.
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets". Under SFAS No. 142, amortization of goodwill is precluded,
however, its recoverability must be periodically (at least annually) reviewed
and tested for impairment. Goodwill must be tested at the reporting unit level
for impairment in the year of adoption, including an initial test performed
within six months of adoption. If the initial test indicates a potential
impairment, then a more detailed analysis to determine the extent of impairment
must be completed within twelve months of adoption. SFAS No. 142 also requires
that useful lives for intangibles other than goodwill be reassessed and
remaining amortization periods be adjusted accordingly. The adoption of SFAS No.
142 did not have a material impact on the Company's financial condition or
results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 establishes an accounting model for
long-lived assets to be disposed of by sale that applies to all long-lived
assets, including discontinued operations. SFAS No. 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. The provisions of SFAS No. 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001. Adoption
of SFAS No. 144 did not have a material impact on the Company's financial
condition or results of operations. In April 2002, FASB issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections". Under historical guidance, all gains and
losses resulting from the extinguishment of debt were required to be aggregated
and, if material, classified as an extraordinary item, net of related income tax
effect. SFAS No. 145 rescinds that guidance and requires that gains and losses
from extinguishments of debt be classified as extraordinary items only if they
are both unusual and infrequent in occurrence. SFAS No. 145 also amends SFAS No.
13, "Accounting for Leases" for the required accounting treatment of certain
lease modifications that have economic effects similar to sale-leaseback
transactions. SFAS No. 145 requires that those lease modifications be accounted
for in the same manner as sale-leaseback transactions. The provisions of SFAS
No. 145 related to SFAS No. 13 are effective for transactions occurring after
May 15, 2002. Adoption of the provisions of SFAS No. 145 related to SFAS No. 13
did not have a material impact on the Company's financial condition or results
of operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Action (including Certain Costs
Incurred in a Restructuring)" ("Issue 94-3"). The principal difference between
SFAS No. 146 and Issue 94-3 is that SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred, rather than at the date of an entity's commitment to an
exit plan. SFAS No. 146 is effective for exit or disposal activities after
December 31, 2002. Based upon a preliminary review, adoption of SFAS No. 146
would not have a material impact on the Company's financial condition or results
of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 requires certain guarantees to be
recorded at fair value and also requires a guarantor to make new disclosures,
even when the likelihood of making payments under the guarantee is remote. In
general, the Interpretation applies to contracts or indemnification agreements
that contingently require the guarantor to make payments to the guaranteed party
based on changes in an underlying that is related to an asset, liability, or an
equity security of the guaranteed party. The recognition provisions of FIN 45
are effective on a prospective basis for guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective for financial
statements of interim and annual periods ending after December 15, 2002. Based
upon a preliminary review, adoption of FIN 45 would not have a material impact
on the Company's financial condition or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure and Amendment to FASB No. 123", which
provides three optional transition methods for entities that decide to
voluntarily adopt the fair value recognition principles of SFAS No. 123,
"Accounting for Stock Issued to Employees", and modifies the disclosure
requirements of that Statement. Under the prospective method, stock-based
compensation expense is recognized for awards granted after the beginning of the
fiscal year in which the change is made. The modified prospective method
recognizes stock-based compensation expense related to new and unvested awards
in the year of change equal to that which would have been recognized had SFAS
No. 123 been adopted as of its effective date, fiscal years beginning after
December 15, 1994. The retrospective restatement method recognizes stock
compensation costs for the year of change and restates financial statements for
all prior periods presented as though the fair value recognition provisions of
SFAS No. 123 had been adopted as of its effective date. Since the Company does
not intend to voluntarily adopt the fair value presentation for FASB 123,
adoption of SFAS 148 would not have a material effect on the financial condition
or results of operations of the Company. However, pro forma disclosures required
by SFAS 148 will be included in the Company's future interim financial
statements when necessary.
In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable
Interest Entities" ("FIN 46"), which requires an enterprise to assess if
consolidation of an entity is appropriate based upon its variable economic
interests in a variable interest entity (VIE). The initial determination of
whether an entity is a VIE shall be made on the date at which an enterprise
becomes involved with the entity. A VIE is an entity in which the equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. An
enterprise shall consolidate a VIE if it has a variable interest that will
absorb a majority of the VIE's expected losses if they occur, receive a majority
of the entity's expected residual returns if they occur or both. A direct or
indirect ability to make decisions that significantly affect the results of the
activities of a VIE is a strong indication that an enterprise has one or both of
the characteristics that would require consolidation of the VIE.
FIN 46 is effective for new VIE's established subsequent to January 31, 2003 and
for existing VIE's as of July 1, 2003. Based upon a preliminary review, the
adoption of FIN 46 would not have a material impact on the Company's financial
condition or results of operations as there were no material VIE's identified
which would require consolidation. FIN 46 further requires the disclosure of
certain information related to VIE's in which the Company holds a significant
variable interest. The Company does not believe that it owns any such interests
that require disclosure at this time.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
Page No.
Financial Statements:
Report of Independent Auditors......................................34
Consolidated Balance Sheet, December 31,
2002 and 2001.......................................................35
Consolidated Statement of Earnings,
Years Ended December 31, 2002, 2001,
and 2000............................................................37
Consolidated Statement of Stockholders'
Equity, Years Ended December 31, 2002, 2001
and 2000. ..........................................................38
Consolidated Statement of Cash Flows,
Years Ended December 31, 2002, 2001 and
2000 ............................................................39
Notes to Consolidated Financial
Statements..........................................................41
Financial Statement Schedules:
I. Summary of Investments -- Other than
Investments in Related Parties....................................75
II. Condensed Financial Information of
Registrant........................................................77
IV. Reinsurance.......................................................83
V. Valuation and Qualifying Accounts.................................84
All other schedules to the consolidated financial statements required by Article
7 of Regulation S-X are not required under the related instructions or are
inapplicable and therefore have been omitted.
REPORT OF INDEPENDENT AUDITORS'
To The Board of Directors and Stockholders
of Security National Financial Corporation
We have audited the accompanying consolidated balance sheet of Security National
Financial Corporation and subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for the three years in the period ended December 31, 2002. In connection
with our audits of the consolidated financial statements, we have also audited
the amounts included in the consolidated financial statement schedules as listed
in the accompanying index under Item 8. These consolidated financial statements
and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Security National Financial Corporation and subsidiaries at December 31, 2002
and 2001, and the consolidated results of their operations and their cash flows
for the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the related consolidated financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
/S/ TANNER + CO
Salt Lake City, Utah
March 28, 2003
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheet
December 31,
Assets: 2002 2001
- ------- ---- ----
Insurance-related investments:
Fixed maturity securities
held to maturity, at amortized cost (market
$33,927,051 and $28,697,986 for 2002 and 2001) $33,015,097 $27,799,909
Fixed maturity securities available
for sale, at market (cost $17,153,223 in 2002
and $20,565,833 in 2001) 18,514,943 21,470,729
Equity securities available for sale,
at market (cost $1,929,540 and $1,605,980
for 2002 and 2001) 2,642,093 2,641,549
Mortgage loans on real estate 21,016,008 15,479,305
Real estate, net of accumulated
depreciation and allowances for
losses of $3,728,539 and $3,523,912
for 2002 and 2001 9,331,248 9,051,691
Policy, student and other loans 10,974,165 11,277,975
Short-term investments 5,335,478 1,453,644
------------- ------------
Total insurance-related investments 100,829,032 89,174,802
Restricted assets of cemeteries and mortuaries 5,332,736 5,339,436
Cash 38,199,041 8,757,246
Receivables:
Trade contracts 11,358,027 6,945,274
Mortgage loans sold to investors 89,455,105 50,695,073
Receivable from agents 2,054,071 2,061,541
Receivable from officers 70,290 102,200
Other 1,131,977 1,183,927
------------- ------------
Total receivables 104,069,470 60,988,015
Allowance for doubtful accounts (2,385,309) (2,287,241)
------------- ------------
Net receivables 101,684,161 58,700,774
Policyholder accounts on deposit
with reinsurer 6,955,691 7,148,068
Land and improvements held for sale 8,429,215 8,346,448
Accrued investment income 928,287 1,059,789
Deferred policy and pre-need
acquisition costs 15,917,257 14,453,023
Property, plant and equipment, net 10,921,635 10,802,387
Cost of insurance acquired 15,984,340 7,615,348
Excess of cost over net assets
of acquired subsidiaries 1,029,562 1,065,045
Other 945,805 597,209
------------- ------------
Total assets $307,156,762 $213,059,575
============= ============
See accompanying notes to consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheet (Continued)
December 31,
------------
2002 2001
---- ----
Liabilities:
- ------------
Future life, annuity, and other
policy benefits $215,980,207 $140,504,866
Unearned premium reserve 1,914,700 1,785,977
Bank loans payable 16,113,227 8,461,900
Notes and contracts payable 3,160,009 3,635,776
Deferred pre-need cemetery and funeral
contracts revenues and estimated
future cost of pre-need sales 10,002,396 9,338,353
Accounts payable 1,553,777 1,319,319
Funds held under reinsurance treaties 1,334,964 1,379,640
Other liabilities and accrued expenses 10,182,382 5,552,799
Income taxes 8,103,882 6,874,597
------------- -------------
Total liabilities 268,345,544 178,853,227
Commitments and contingencies -- --
Minority interest 4,297,807 4,237,030
Stockholders' Equity:
- --------------------
Common stock:
Class A: $2 par value, authorized
10,000,000 shares, issued 5,794,492
shares in 2002 and 5,363,591 shares
in 2001 11,588,984 10,727,182
Class C: $0.20 par value, authorized
7,500,000 shares, issued 6,182,669
shares in 2002 and 6,113,430 shares
in 2001 1,236,533 1,222,686
------------- -------------
Total common stock 12,825,517 11,949,868
Additional paid-in capital 11,280,842 10,168,523
Accumulated other comprehensive income, net of
deferred taxes of $293,519 and
$212,734 for 2002 and 2001 1,191,863 1,223,930
Retained earnings 11,992,542 9,989,230
Treasury stock at cost (1,151,811 Class
A shares and 71,749 Class C shares
in 2002; 1,294,716 Class A shares and
68,332 Class C shares in 2001, held
by affiliated companies) (2,777,353) (3,362,233)
------------- -------------
Total stockholders' equity 34,513,411 29,969,318
------------- -------------
Total liabilities and stockholders' equity $307,156,762 $213,059,575
============= =============
See accompanying notes to consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Earnings
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Revenues:
- --------
Insurance premiums and other considerations $14,076,652 $13,150,875 $12,875,585
Net investment income 12,539,430 12,946,499 12,136,072
Net mortuary and cemetery sales 11,256,069 10,603,451 9,416,927
Realized gains on investments and other assets 1,020,820 10,428 423,805
Mortgage fee income 57,008,283 40,086,097 22,921,585
Other 479,424 151,945 304,886
------------ ------------ ------------
Total revenue 96,380,678 76,949,295 58,078,860
Benefits and expenses:
- ---------------------
Death benefits 5,637,217 5,354,522 3,959,811
Surrenders and other policy benefits 2,086,829 1,467,323 1,702,251
Increase in future policy benefits 6,031,685 4,953,008 7,268,720
Amortization of deferred
policy and pre-need acquisition
costs and cost of insurance acquired 3,993,393 3,870,158 3,188,752
General and administrative expenses:
Commissions 42,114,240 29,859,295 18,401,314
Salaries 10,414,392 9,027,523 7,667,263
Other 15,930,804 13,360,362 9,890,197
Interest expense 1,970,342 2,790,627 2,126,169
Cost of goods and services sold of the
mortuaries and cemeteries 2,662,791 2,494,367 2,628,260
------------ ------------ ------------
Total benefits and expenses 90,841,693 73,177,185 56,832,737
------------ ------------ ------------
Earnings before income taxes 5,538,985 3,772,110 1,246,123
Income tax expense (1,565,393) (913,539) (304,640)
Minority interest 17,688 (17,791) (45,754)
------------ ------------ ------------
Net earnings $3,991,280 $2,840,780 $895,729
============ ============ ============
Net earnings per common share $.83 $.63 $.21
============ ============ ============
Weighted average
outstanding common shares 4,823,914 4,506,476 4,317,779
Net earnings per common share-
assuming dilution $.80 $.63 $.21
============ ============ ============
Weighted average outstanding common
shares assuming-dilution 4,995,285 4,506,858 4,335,044
See accompanying notes to consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Accumulated
Additional Other
Class Class Paid-in Comprehensive Retained Treasury
A C Capital Income Earnings Stock Total
-------- ------- --------- ------------- -------- ----- -----
Balance at January 1, 2000 $9,727,462 $1,111,070 $10,015,942 $665,691 $7,516,640 $(2,547,112) $26,489,693
------------ ---------- ----------- ------------ ------------ ------------ -----------
Comprehensive income:
Net earnings -- -- -- -- 895,729 -- 895,729
Unrealized gain on securities -- -- -- 171,060 -- -- 171,060
Total comprehensive income -- -- -- -- -- -- 1,066,789
------------
Stock dividends 486,786 55,503 38,774 -- (581,063) -- --
Conversion Class C to Class A 1,014 (1,012) (2) -- -- -- --
Purchase of treasury stock -- -- -- -- -- (815,121) (815,121)
------------ ---------- ----------- ------------ ------------ ------------ ----------
Balance at December 31, 2000 $10,215,262 $1,165,561 $10,054,714 $836,751 $7,831,306 $(3,362,233) $26,741,361
------------ ---------- ----------- ----------- ------------ ------------ -----------
Comprehensive income:
Net earnings $ -- $ -- $ -- $ -- $2,840,780 $ -- $2,840,780
Unrealized gain on securities -- -- -- 387,179 -- -- 387,179
Total comprehensive income -- -- -- -- -- -- 3,227,959
------------
Stock dividends 510,826 58,221 113,809 -- (682,856) -- --
Conversion Class C to Class A 1,094 (1,096) -- -- -- -- (2)
------------ ---------- ----------- ------------ ------------ ------------ -----------
Balance at December 31, 2001 $10,727,182 $1,222,686 $10,168,523 $1,223,930 $9,989,230 $(3,362,233) $29,969,318
------------ ---------- ----------- ---------- ------------ ------------ -----------
Comprehensive income:
Net earnings $ -- $ -- $ -- $ -- $3,991,280 $ -- $3,991,280
Unrealized gain on securities -- -- -- (32,067) -- -- (32,067)
------------
Total comprehensive income -- -- -- -- -- -- 3,959,213
------------
Stock dividends 552,024 58,883 -- -- (610,907) -- --
Conversion Class C to Class A 45,036 (45,036) -- -- -- -- --
Exercise of stock options 264,742 -- 1,112,319 -- (1,377,061) -- --
Sale of treasury stock -- -- -- -- -- 584,880 584,880
------------ ---------- ----------- ---------- ------------ ------------ -----------
Balance at December 31, 2002 $11,588,984 $1,236,533 $11,280,842 $1,191,863 $11,992,542 $(2,777,353) $34,513,411
============ =========== ============ ========== =========== =========== ===========
See accompanying notes to consolidated financial statements
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net earnings $3,991,280 $2,840,780 $895,729
Adjustments to reconcile net earnings
to net cash provided by (used in) operating activities:
Realized gains on investments and other assets (1,020,820) (10,428) (423,805)
Depreciation 1,553,399 1,350,372 1,202,158
Provision for losses on real estate
accounts and loans receivable 96,520 793,194 219,269
Amortization of goodwill, premiums, and discounts 121,329 197,793 214,355
Provision for deferred income taxes 970,139 522,047 259,952
Policy and pre-need acquisition costs deferred (4,462,624) (3,834,432) (5,365,417)
Policy and pre-need acquisition costs amortized 3,256,076 3,045,996 2,320,710
Cost of insurance acquired amortized 737,317 824,162 868,042
Change in assets and liabilities net of effects from purchases and
disposals of subsidiaries:
Land and improvements held for sale 626,688 139,075 37,164
Future life and other benefits 5,349,152 5,734,205 7,023,493
Receivables for mortgage loans sold (38,760,032) (24,786,179) 2,185,751
Other operating assets and liabilities 578,750 2,400,265 1,028,892
------------ ------------ ------------
Net cash provided by (used in) operating activities (26,962,826) (10,783,150) 10,466,293
------------ ------------ ------------
Cash flows from investing activities:
Securities held to maturity:
Purchase - fixed maturity securities (4,147,878) (402,995) (4,801,309)
Calls and maturities - fixed maturity securities 8,025,610 12,086,818 5,137,323
Securities available for sale:
Purchases - equity securities (327,726) -- (418,365)
Sales - equity securities 3,303,095 2,826,094 4,797,396
Purchases of short-term investments (13,819,476) (14,301,717) (7,523,432)
Sales of short-term investments 9,937,642 13,876,000 7,785,815
Purchases of restricted assets (56,899) (497,617) (604,345)
Mortgage, policy, and other loans made (10,129,993) (3,114,060) (3,016,125)
Payments received for mortgage, policy, and other loans 4,939,374 5,626,747 4,782,778
Purchases of property, plant, and equipment (1,348,752) (1,006,824) (1,719,120)
Disposal of property and equipment -- -- 625,507
Purchases of real estate (3,153,299) (784,677) (1,329,347)
Sale of real estate 2,825,666 195,562 --
Cash received in assumed reinsurance 55,827,793 -- --
------------ ------------ ------------
Net cash provided by investing activities 51,875,157 14,503,331 3,716,776
------------ ------------ ------------
See accompanying notes to the consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Cash Flows (Continued)
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Cash flows from financing activities:
Annuity and pre-need contract receipts 7,635,422 9,707,844 8,714,642
Annuity and pre-need contract withdrawals (10,866,398) (13,997,537) (13,935,567)
Repayment of bank loans and notes and contracts payable (1,824,440) (2,698,272) (1,652,036)
Proceeds from borrowings on bank loans and notes and
contracts payable 9,000,000 750,000 1,044,202
Sale (purchase) of treasury stock 584,880 -- (815,121)
Net change in line of credit for financing of mortgage loans -- -- (8,687,023)
------------ ------------ ------------
Net cash provided by (used in) financing activities 4,529,464 (6,237,965) (15,330,903)
------------ ------------ ------------
Net change in cash 29,441,795 (2,517,784) (1,147,834)
Cash at beginning of year 8,757,246 11,275,030 12,422,864
------------ ------------ ------------
Cash at end of year $38,199,041 $8,757,246 $11,275,030
============ ============ ============
Supplemental Schedule of Cash Flow Information:
The following information shows the non-cash items in connection with the
assumption of reinsurance from Acadian Life Insurance Company on December 23,
2002:
Liabilities assumed $74,199,194
Less non-cash items:
Cost of insurance acquired (9,106,309)
Bonds received (9,032,818)
Policy loans received (82,126)
Premiums due and unpaid (150,148)
------------
Cash received $55,827,793
===========
See accompanying notes to the consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
1) Significant Accounting Principles
General Overview of Business
Security National Financial Corporation and its wholly owned subsidiaries (the
"Company") operates in three main business segments; life insurance, cemetery
and mortuary, and mortgage loans. The life insurance segment is engaged in the
business of selling and servicing selected lines of life insurance, annuity
products and accident and health insurance marketed primarily in the
intermountain west, California, Florida, Mississippi, Oklahoma and Texas. The
cemetery and mortuary segment of the Company consists of five cemeteries in
Utah, one cemetery in California, eight mortuaries in Utah and five mortuaries
in Arizona. The mortgage loan segment is an approved governmental and
conventional lender that originates and underwrites residential and commercial
loans for new construction, existing homes and real estate projects primarily in
California, Colorado, Florida, Utah, Arizona and Texas.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles which, for the
life insurance subsidiaries, differ from statutory accounting principles
prescribed or permitted by regulatory authorities.
Risks
The following is a description of the most significant risks facing the Company
and how it mitigates those risks:
Legal/Regulatory Risk - the risk that changes in the legal or regulatory
environment in which the Company operates will create additional expenses and/or
risks not anticipated by the Company in developing and pricing its products.
That is, regulatory initiatives designed to reduce insurer profits, new legal
theories or insurance company insolvencies through guaranty fund assessments may
create costs for the insurer beyond those recorded in the consolidated financial
statements. In addition, changes in tax law with respect to mortgage interest
deductions or other public policy or legislative changes may affect the
Company's mortgage sales. Also, the Company may be subject to further
regulations in the cemetery/mortuary business. The Company mitigates this risk
by offering a wide range of products and by diversifying its operations, thus
reducing its exposure to any single product or jurisdiction, and also by
employing underwriting practices which identify and minimize the adverse impact
of such risk.
Credit Risk - the risk that issuers of securities owned by the Company or
mortgagors of mortgage loans on real estate owned by the Company will default or
that other parties, including reinsurers and holders of cemetery/ mortuary
contracts which owe the Company money, will not pay. The Company minimizes this
risk by adhering to a conservative investment strategy, by maintaining sound
reinsurance and credit and collection policies and by providing for any amounts
deemed uncollectible.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
1) Significant Accounting Principles (Continued)
----------------------------------
Interest Rate Risk - the risk that interest rates will change which may cause a
decrease in the value of the Company's investments or impair the ability of the
Company to market its mortgage and cemetery/mortuary products. This change in
rates may cause certain interest-sensitive products to become uncompetitive or
may cause disintermediation. The Company mitigates this risk by charging fees
for non-conformance with certain policy provisions, by offering products that
transfer this risk to the purchaser, and/or by attempting to match the maturity
schedule of its assets with the expected payouts of its liabilities. To the
extent that liabilities come due more quickly than assets mature, the Company
might have to borrow funds or sell assets prior to maturity and potentially
recognize a gain or loss.
Mortality/Morbidity Risk - the risk that the Company's actuarial assumptions may
differ from actual mortality/morbidity experience may cause the Company's
products to be underpriced, may cause the Company to liquidate insurance or
other claims earlier than anticipated and other potentially adverse consequences
to the business. The Company minimizes this risk through sound underwriting
practices, asset/liability duration matching, and sound actuarial practices.
Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
The estimates susceptible to significant change are those used in determining
the liability for future policy benefits and claims, those used in determining
valuation allowances for mortgage loans on real estate, and those used in
determining the estimated future costs for pre-need sales. Although some
variability is inherent in these estimates, management believes the amounts
provided are adequate.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts and
operations of the Company. The Company's subsidiaries at December 31, 2002, are
as follows:
Security National Life Insurance Company
Security National Mortgage Company
Memorial Estates, Inc.
Memorial Mortuary
Paradise Chapel Funeral Home
Singing Hills Memorial Park
Cottonwood Mortuary, Inc.
Deseret Memorial, Inc.
Holladay Cottonwood Memorial Foundation
Holladay Memorial Park
Camelback Sunset Funeral Home, Inc.
Greer-Wilson Funeral Home
Crystal Rose Funeral Home
Hawaiian Land Holdings
SSLIC Holding Company
Insuradyne Corporation
Southern Security Life Insurance Company (75%)
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
1) Significant Accounting Principles (Continued)
---------------------------------
All significant intercompany transactions and accounts have been eliminated in
consolidation.
On December 17, 1998, the Company purchased all of the outstanding shares of
common stock of SSLIC Holding Company (formerly Consolidare Enterprises, Inc.),
(SSLIC Holding) and Insuradyne Corporation (Insuradyne) for a total cost of
$12,248,194. SSLIC Holding owns approximately 75% of the outstanding shares of
common stock of Southern Security Life Insurance Company (Southern Security).
The acquisition was accounted for using the purchase method.
On December 23, 2002, the Company, through its wholly-owned subsidiary Security
National Life Insurance Company completed the asset purchase transaction with
Acadian Life Insurance Company ("Acadian") from which it acquired from Acadian
$75,000,000 in assets and $75,000,000 in statutory insurance reserves. Security
National Life paid a ceding commission of $10,254,803. On January 1, 2003,
Security National entered into an assumption agreement in which Acadian
transferred and assigned to Security National Life all of its right, title and
interest in the reinsured policies and Security National Life took over the
operations of this block of business. The assets and liabilities acquired have
been included in the Company's consolidated balance sheet as of December 31,
2002. Since the Company did not take over the operations from Acadian until
January 1, 2003, nothing was included in the consolidated statement of earnings.
The unaudited consolidated pro forma results of operations assuming consummation
of the purchase as of January 1, 2001 are summarized as follows:
Pro Forma
2002 2001
---- ----
(In thousands except earnings per share)
Total revenues $109,678 $90,518
Net earnings 5,397 3,543
Earnings per share 1.12 .77
Investments
Investments are shown on the following basis:
Fixed maturity securities held to maturity - at cost, adjusted for amortization
of premium or accretion of discount. Although the Company has the ability and
intent to hold these investments to maturity, infrequent and unusual conditions
could occur under which it would sell certain of these securities. Those
conditions include unforeseen changes in asset quality, significant changes in
tax laws, and changes in regulatory capital requirements or permissible
investments.
Fixed maturity and equity securities available for sale - at fair value, which
is based upon quoted trading prices. Changes in fair values net of income taxes
are reported as unrealized appreciation or depreciation and recorded as an
adjustment directly to stockholders' equity and, accordingly, have no effect on
net income.
Mortgage loans on real estate - at unpaid principal balances, adjusted for
amortization of premium or accretion of discount, less allowance for possible
losses.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
1) Significant Accounting Principles (Continued)
---------------------------------
Real estate - at cost, less accumulated depreciation provided on a straight-line
basis over the estimated useful lives of the properties, and net of allowance
for impairment in value, if any.
Policy, student, and other loans - at the aggregate unpaid balances, less
allowances for possible losses.
Short-term investments at cost - consists of certificates of deposit and
commercial paper with maturities of up to one year.
Restricted assets of cemeteries and mortuaries - consists of cash,
participations in mortgage loans with Security National Life Insurance Company,
and mutual funds carried at cost; fixed maturity securities carried at cost
adjusted for amortization of premium or accretion of discount; and equity
securities carried at fair market value.
Realized gains and losses on investments - realized gains and losses on
investments and declines in value considered to be other than temporary, are
recognized in operations on the specific identification basis.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash equivalents.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Depreciation is calculated
principally on the straight-line method over the estimated useful lives of the
assets which range from three to thirty years. Leasehold improvements are
amortized over the lesser of the useful life or remaining lease terms.
Recognition of Insurance Premiums and Other Considerations
Premiums for traditional life insurance products (which include those products
with fixed and guaranteed premiums and benefits and consist principally of whole
life insurance policies, limited-payment life insurance policies, and certain
annuities with life contingencies) are recognized as revenues when due from
policyholders. Revenues for interest-sensitive insurance policies (which include
universal life policies, interest-sensitive life policies, deferred annuities,
and annuities without life contingencies) consist of policy charges for the cost
of insurance, policy administration charges, and surrender charges assessed
against policyholder account balances during the period.
Deferred Policy Acquisition Costs and Cost of Insurance Acquired
Commissions and other costs, net of commission and expense allowances for
reinsurance ceded, that vary with and are primarily related to the production of
new insurance business have been deferred. Deferred policy acquisition costs for
traditional life insurance are amortized over the premium-paying period of the
related policies using assumptions consistent with those used in computing
policy benefit reserves. For interest-sensitive insurance products, deferred
policy acquisition costs are amortized generally in proportion to the present
value of expected
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
1) Significant Accounting Principles (Continued)
---------------------------------
gross profits from surrender charges, investment, mortality and expense margins.
This amortization is adjusted when estimates of current or future gross profits
to be realized from a group of products are reevaluated. Deferred acquisition
costs are written off when policies lapse or are surrendered.
Cost of insurance acquired is the present value of estimated future profits of
the acquired business and is amortized similar to deferred policy acquisition
costs.
Future Life, Annuity and Other Policy Benefits
Future policy benefit reserves for traditional life insurance are computed using
a net level method, including assumptions as to investment yields, mortality,
morbidity, withdrawals, and other assumptions based on the life insurance
subsidiaries experience, modified as necessary to give effect to anticipated
trends and to include provisions for possible unfavorable deviations. Such
liabilities are, for some plans, graded to equal statutory values or cash values
at or prior to maturity. The range of assumed interest rates for all traditional
life insurance policy reserves was 4.5% to 10%. Benefit reserves for traditional
limited-payment life insurance policies include the deferred portion of the
premiums received during the premium-paying period. Deferred premiums are
recognized as income over the life of the policies. Policy benefit claims are
charged to expense in the period the claims are incurred.
Future policy benefit reserves for interest-sensitive insurance products are
computed under a retrospective deposit method and represent policy account
balances before applicable surrender charges. Policy benefits and claims that
are charged to expense include benefit claims incurred in the period in excess
of related policy account balances. Interest crediting rates for
interest-sensitive insurance products ranged from 4% to 6.5%.
Participating Insurance
Participating business constitutes 2%, 2%, and 2% of insurance in force for
2002, 2001 and 2000, respectively. The provision for policyholders' dividends
included in policyholder obligations is based on dividend scales anticipated by
management. Amounts to be paid are determined by the Board of Directors.
Reinsurance
The Company follows the procedure of reinsuring risks in excess of $75,000 to
provide for greater diversification of business, allow management to control
exposure to potential losses arising from large risks, and provide additional
capacity for growth. The Company remains liable for amounts ceded in the event
the reinsurers are unable to meet their obligations.
The Company has entered into coinsurance agreements with unaffiliated insurance
companies under which the Company assumed 100% of the risk for certain life
insurance policies and certain other policy-related liabilities of the insurance
company.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
1) Significant Accounting Principles (Continued)
---------------------------------
Reinsurance premiums, commissions, expense reimbursements, and reserves related
to reinsured business are accounted for on a basis consistent with those used in
accounting for the original policies issued and the terms of the reinsurance
contracts. Expense allowances received in connection with reinsurance ceded are
accounted for as a reduction of the related policy acquisition costs and are
deferred and amortized accordingly.
Cemetery and Mortuary Operations
Pre-need sales of funeral services and caskets - revenue and costs associated
with the sales of pre-need funeral services and caskets are deferred until the
services are performed.
Pre-need sales of cemetery interment rights (cemetery burial property) - revenue
and costs associated with the sales of pre-need cemetery interment rights are
recognized in accordance with the retail land sales provisions of Statement of
Financial Accounting Standards No. 66, "Accounting for the Sales of Real Estate"
(FAS No. 66). Under FAS 66, recognition of revenue and associated costs from
constructed cemetery property must be deferred until a minimum percentage of the
sales price has been collected. Revenues related to the pre-need sale of
unconstructed cemetery property will be deferred until such property is
constructed and meets the criteria of FAS No. 66 described above.
Pre-need sales of cemetery merchandise (primarily markers and vaults) - revenue
and costs associated with the sales of pre-need cemetery merchandise are
deferred until the merchandise is delivered.
Pre-need sales of cemetery services (primarily merchandise delivery and
installation fees and burial opening and closing fees) - revenue and costs
associated with the sales of pre-need cemetery services are deferred until the
services are performed.
Prearranged funeral and pre-need cemetery customer obtaining costs - costs
incurred related to obtaining new pre-need cemetery and prearranged funeral
business are accounted for under the guidance of the provisions of Statement of
Financial Accounting Standards No. 60 "Accounting and Reporting by Insurance
Enterprises" (FAS No. 60). Obtaining costs, which include only costs that vary
with and are primarily related to the acquisition of new pre-need cemetery and
prearranged funeral business, are deferred until the merchandise is delivered or
services are performed.
Cemetery merchandise and services trust investment earnings - investment
earnings generated by assets included in merchandise and services trusts are
deferred until the associated merchandise is delivered or services performed.
The Company is required to place specified amounts into restricted asset
accounts for products sold on a pre-need basis. Income from assets placed in
these restricted asset accounts are used to offset required increases to the
estimated future liability.
Revenues and costs for at-need sales are recorded when the services are
performed.
The Company, through its mortuary and cemetery operations, provides a guaranteed
funeral arrangement wherein a prospective customer can receive future goods and
services at guaranteed prices. To accomplish this, the Company, through its life
insurance operations, sells to the customer an increasing benefit life insurance
policy that is assigned
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
1) Significant Accounting Principles (Continued)
---------------------------------
to the mortuaries. If, at the time of need, the policyholder/potential mortuary
customer utilizes one of the Company's facilities, the guaranteed funeral
arrangement contract that has been assigned will provide the funeral goods and
services at the contracted price. The increasing life insurance policy will
cover the difference between the original contract prices and current prices.
Risks may arise if the difference cannot be fully met by the life insurance
policy. However, management believes that given current inflation rates and
related price increases of goods and services, the risk of exposure is minimal.
Mortgage Operations
Mortgage fee income is generated through the origination and refinancing of
mortgage loans and is deferred until such loans are determined to be sold in
accordance with FAS No. 140.
Substantially all loans are sold to third party investors and the Company does
not retain servicing rights. The amounts sold to investors are shown on the
balance sheet as due from sale of loans, and are shown on the basis of the
amount of fees due from the investors. Any impairment to sold loans or possible
loan losses are included in a separate provision for loan losses. At December
31, 2002 and 2001 the provision for loan losses was $906,000 and $509,000,
respectively.
Excess of Cost Over Net Assets of Acquired Businesses
Previous acquisitions have been accounted for as purchases under which assets
acquired and liabilities assumed were recorded at the fair values. The Company
periodically evaluates the recoverability of amounts recorded. In accordance
with FAS 142 the Company no longer amortizes excess of cost over net assets of
acquired business ("goodwill"). Pro forma information related to the
amortization of goodwill has not been presented since it is not material.
Income Taxes
Income taxes include taxes currently payable plus deferred taxes related to the
tax effect of temporary differences in the financial reporting basis and tax
basis of assets and liabilities. Such temporary differences are related
principally to the deferral of policy acquisition costs and the provision for
future policy benefits in the insurance operations, and unrealized gains on
fixed maturity and equity securities available for sale.
Earnings Per Common Share
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". This
Standard requires presentation of two new amounts, basic and diluted earnings
per share. Basic earnings per share are computed by dividing net earnings by the
weighted average number of common shares outstanding during each year presented,
after the effect of the assumed conversion of Class C Common Stock to Class A
Common Stock, the acquisition of treasury stock, and the retroactive effect of
stock dividends declared. Diluted earnings per share is computed by dividing net
earnings by the weighted average number of common shares outstanding during the
year plus the incremental shares that would have been outstanding under certain
deferred compensation plans.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
1) Significant Accounting Principles (Continued)
---------------------------------
Stock Compensation
The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation".
In accordance with the provisions of SFAS 123, the Company has elected to
continue to apply Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB Opinion No. 25"), and related interpretations
in accounting for its stock option plans.
The Company has two fixed option plans (the "1993 Plan" and the "2000 Plan"). In
accordance with APB Opinion No. 25, no compensation cost has been recognized for
these plans. Had compensation cost for these plans been determined based upon
the fair value at the grant date consistent with the methodology prescribed
under SFAS No. 123, the Company's net income would have been reduced by
approximately $533,520, $3,143, and $0 in 2002, 2001, and 2000, respectively. As
a result, basic and diluted earnings per share would have been reduced by $.07,
$0, and $0 in 2002, 2001 and 2000, respectively.
The weighted average fair value of each option granted in 2002 under the 1993
Plan is estimated at $2.88 as of the grant date using the Black Scholes
option-pricing model with the following assumptions: dividend yield of 5%,
volatility of 74%, risk-free interest rate of 3.8%, and an expected life of five
to ten years.
The weighted average fair value of options granted in 2001 under the 1993 Plan
and the 2000 Plan is estimated at $1.25 as of the grant date using the Black
Scholes Option Pricing Model with the following assumptions: dividend yield of
5%, volatility of 31.8%, risk-free interest rate of 5.14%, and an expected life
of five to ten years.
The weighted average fair value of options granted in 2000 under the 1993 Plan
and the 2000 Plan is estimated at $1.50 as of the grant date using the Black
Scholes Option Pricing Model with the following assumptions: dividend yield of
5%, volatility of 30.8%, risk-free interest rate of 6.6%, and an expected life
of five to ten years.
The Company also has one variable option plan (the "1987 Plan"). In accordance
with APB Opinion No. 25, compensation cost related to options granted and
outstanding under these plans is estimated and recognized over the period of the
award based on changes in the current market price of the Company's stock over
the vesting period. Options granted under the 1987 Plan are exercisable for a
period of ten years from the date of grant.
Concentration of Credit Risk
The Company maintains its cash in bank deposit accounts, which at times may
exceed federally insured limits. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant credit risk on
cash and cash equivalents.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets". Under SFAS No. 142, amortization of goodwill is precluded,
however, its recoverability must be periodically (at least annually) reviewed
and tested for
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
1) Significant Accounting Principles (Continued)
---------------------------------
impairment. Goodwill must be tested at the reporting unit level for impairment
in the year of adoption, including an initial test performed within six months
of adoption. If the initial test indicates a potential impairment, then a more
detailed analysis to determine the extent of impairment must be completed within
twelve months of adoption. SFAS No. 142 also requires that useful lives for
intangibles other than goodwill be reassessed and remaining amortization periods
be adjusted accordingly. The adoption of SFAS No. 142 did not have a material
impact on the Company's financial condition or results of operations. In August
2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets". SFAS No. 144 establishes an accounting model for
long-lived assets to be disposed of by sale that applies to all long-lived
assets, including discontinued operations. SFAS No. 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. The provisions of SFAS No. 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001. Adoption
of SFAS No. 144 did not have a material impact on the Company's financial
condition or results of operations. In April 2002, FASB issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections". Under historical guidance, all gains and
losses resulting from the extinguishment of debt were required to be aggregated
and, if material, classified as an extraordinary item, net of related income tax
effect. SFAS No. 145 rescinds that guidance and requires that gains and losses
from extinguishments of debt be classified as extraordinary items only if they
are both unusual and infrequent in occurrence. SFAS No. 145 also amends SFAS No.
13, "Accounting for Leases" for the required accounting treatment of certain
lease modifications that have economic effects similar to sale-leaseback
transactions. SFAS No. 145 requires that those lease modifications be accounted
for in the same manner as sale-leaseback transactions. The provisions of SFAS
No. 145 related to SFAS No. 13 are effective for transactions occurring after
May 15, 2002. Adoption of the provisions of SFAS No. 145 related to SFAS No. 13
did not have a material impact on the Company's financial condition or results
of operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Action (including Certain Costs
Incurred in a Restructuring)" ("Issue 94-3"). The principal difference between
SFAS No. 146 and Issue 94-3 is that SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred, rather than at the date of an entity's commitment to an
exit plan. SFAS No. 146 is effective for exit or disposal activities after
December 31, 2002. Based upon a preliminary review, adoption of SFAS No. 146
would not have a material impact on the Company's financial condition or results
of operations.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
1) Significant Accounting Principles (Continued)
---------------------------------
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 requires certain guarantees to be
recorded at fair value and also requires a guarantor to make new disclosures,
even when the likelihood of making payments under the guarantee is remote. In
general, the Interpretation applies to contracts or indemnification agreements
that contingently require the guarantor to make payments to the guaranteed party
based on changes in an underlying that is related to an asset, liability, or an
equity security of the guaranteed party. The recognition provisions of FIN 45
are effective on a prospective basis for guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective for financial
statements of interim and annual periods ending after December 15, 2002. Based
upon a preliminary review, adoption of FIN 45 would not have a material impact
on the Company's financial condition or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure and Amendment to FASB No. 123", which
provides three optional transition methods for entities that decide to
voluntarily adopt the fair value recognition principles of SFAS No. 123,
"Accounting for Stock Issued to Employees", and modifies the disclosure
requirements of that Statement. Under the prospective method stock-based
compensation expense is recognized for awards granted after the beginning of the
fiscal year in which the change is made. The modified prospective method
recognizes stock-based compensation expense related to new and unvested awards
in the year of change equal to that which would have been recognized had SFAS
No. 123 been adopted as of its effective date, fiscal years beginning after
December 15, 1994. The retrospective restatement method recognizes stock
compensation costs for the year of change and restates financial statements for
all prior periods presented as though the fair value recognition provisions of
SFAS No. 123 had been adopted as of its effective date. Since the Company does
not intend to voluntarily adopt the fair value presentation for FASB 123,
adoption of SFAS 148 would not have a material effect on the financial condition
or results of operations of the Company. However, pro forma disclosures by SFAS
148 will be included in the Company's future interim financial statements when
necessary.
In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable
Interest Entities" ("FIN 46"), which requires an enterprise to assess if
consolidation of an entity is appropriate based upon its variable economic
interests in a variable interest entity (VIE). The initial determination of
whether an entity is a VIE shall be made on the date at which an enterprise
becomes involved with the entity. A VIE is an entity in which the equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. An
enterprise shall consolidate a VIE if it has a variable interest that will
absorb a majority of the VIE's expected losses if they occur, receive a majority
of the entity's expected residual returns if they occur or both. A direct or
indirect ability to make decisions that significantly affect the results of the
activities of a VIE is a strong indication that an enterprise has one or both of
the characteristics that would require consolidation of the VIE.
FIN 46 is effective for new VIE's established subsequent to January 31, 2003 and
for existing VIE's as of July 1, 2003. Based upon a preliminary review, the
adoption of FIN 46 would not have a material impact on the Company's financial
condition or results of operations as there were no material VIE's identified
which would require consolidation. FIN 46 further requires the disclosure of
certain information related to VIE's in which the Company holds a significant
variable interest. The Company does not believe that it owns any such interests
that require disclosure at this time.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
2) Investments
------------
The Company's investments in fixed maturity securities held to maturity and
equity securities available for sale are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- --------- ---------- ---------
December 31, 2002:
- -------------------
Fixed maturity securities held to maturity:
Bonds:
U.S. Treasury securities
and obligations of U.S
Government agencies $ 2,835,420 $ 214,146 $ (1,964) $3,047,602
Obligations of states and
political subdivisions 188,303 21,805 (725) 209,383
Corporate securities including
public utilities 21,106,651 806,023 (254,369) 21,658,305
Mortgage-backed securities 8,856,718 125,310 -- 8,982,028
Redeemable preferred stock 28,005 8,775 (7,047) 29,733
----------- ----------- ----------- -----------
Total fixed maturity
securities held to maturity $33,015,097 $1,176,059 $(264,105) $33,927,051
=========== =========== =========== ===========
Securities available for sale:
Bonds
U.S. Treasury securities
and obligations of U.S.
Government agencies $594,439 $ 103,697 $ -- $698,136
Corporate securities including
public utilities 16,558,784 1,258,023 -- 17,816,807
Non-redeemable preferred stock 56,031 33,810 (7,256) 82,585
Common stock 1,873,509 1,281,528 (595,529) 2,559,508
----------- ----------- ----------- -----------
Total securities available for sale $19,082,763 $2,677,058 $(602,785) $21,157,036
=========== =========== =========== ===========
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
2) Investments (Continued)
-----------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- --------- ---------- ---------
December 31, 2001:
- -----------------
Fixed maturity securities held to maturity:
Bonds:
U.S. Treasury securities and obligations
of U.S. Government agencies $4,212,280 $227,446 $ -- $4,439,726
Obligations of states and political subdivisions 180,660 12,507 (7,684) 185,484
Corporate securities including public utilities 19,206,038 736,038 (168,158) 19,773,918
Mortgage-backed securities 4,172,926 98,203 (578) 4,270,550
Redeemable preferred stock 28,005 7,350 (7,047) 28,308
----------- ----------- ----------- -----------
Total fixed maturity securities
held to maturity $27,799,909 $1,081,544 $(183,467) $28,697,986
=========== =========== =========== ===========
Securities available for sale:
Bonds
U.S. Treasury securities and obligations
of U.S. Government agencies $594,568 $58,415 $ -- $652,983
Corporate securities including public utilities 19,971,265 846,481 -- 20,817,746
Non-redeemable preferred stock 56,031 32,150 (6,931) 81,250
Common stock 1,549,949 1,523,382 (513,032) 2,560,299
----------- ----------- ----------- -----------
Total securities available for sale $22,171,813 $2,460,428 $(519,963) $24,112,278
=========== =========== =========== ===========
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
2) Investments (Continued)
-----------------------
The fair values for fixed maturity securities are based on quoted market prices,
when available. For fixed maturity securities not actively traded, fair values
are estimated using values obtained from independent pricing services, or in the
case of private placements, are estimated by discounting expected future cash
flows using a current market value applicable to the coupon rate, credit and
maturity of the investments. The fair values for equity securities are based on
quoted market prices.
The amortized cost and estimated fair value of fixed maturity securities at
December 31, 2002, by contractual maturity, are shown below. Expected maturities
may differ from contractual maturities because certain borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
Amortized Estimated Fair
Held to Maturity: Cost Value
---------- --------------
Due in 2003 $8,026,827 $8,166,873
Due in 2004 through 2007 8,077,359 8,578,724
Due in 2008 through 2012 ` 7,048,229 7,150,450
Due after 2012 977,959 1,019,243
Mortgage-backed securities 8,856,718 8,982,028
Redeemable preferred stock 28,005 29,733
----------- -----------
$33,015,097 $33,927,051
=========== ===========
Amortized Estimated Fair
Available for Sale: Cost Value
---------- ---------
Due in 2003 $3,852,677 $3,969,924
Due in 2004 through 2007 9,973,676 10,829,215
Due in 2008 through 2012 3,229,099 3,598,364
Due after 2012 97,771 117,440
Mortgage-backed securities -- --
----------- -----------
$17,153,223 $18,514,943
=========== ===========
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
2) Investments (Continued)
-----------------------
The Company's realized gains and losses in investments are summarized as
follows:
2002 2001 2000
---- ---- ----
Fixed maturity securities held to maturity:
Gross realized gains $37,172 $20,228 $3,125
Gross realized losses (557) (565) (53)
Securities available for sale:
Gross realized gains 354 6 884,199
Gross realized losses (1,424) (111) (463,466)
Other assets 985,275 (9,130) --
----------- -------- --------
Total $1,020,820 $10,428 $423,805
=========== ======== ========
Generally gains and losses from held to maturity securities are a result of
early calls and related amortization of premiums or discounts.
Mortgage loans consist of first and second mortgages. The mortgage loans bear
interest at rates ranging from 7% to 15%, maturity dates range from one to 29
years and are secured by real estate. Concentrations of credit risk arise when a
number of mortgage loan debtors have similar economic characteristics that would
cause their ability to meet contractual obligations to be similarly affected by
changes in economic conditions. Although the Company has a diversified mortgage
loan portfolio consisting of residential and commercial loans and requires
collateral on all real estate exposures, a substantial portion of its debtors'
ability to honor obligations is reliant on the economic stability of the
geographic region in which the debtors do business. The Company has 68% of its
mortgage loans in the state of Utah.
Investments, aggregated by issuer, in excess of 10% of shareholders' equity
(before net unrealized gains and losses on available for sale securities) at
December 31, 2002, other than investments issued or guaranteed by the United
States Government, are as follows:
Carrying Amount
Dean Witter Discover $4,457,852
Philip Morris, Inc. $5,834,031
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
Major categories of net investment income are as follows:
2002 2001 2000
---- ---- ----
Fixed maturity securities $3,228,042 $3,776,132 $4,629,916
Equity securities 53,889 49,281 235,491
Mortgage loans on real estate 1,350,882 1,570,478 1,735,590
Real estate 1,501,534 1,548,507 1,507,239
Policy loans 663,554 630,352 641,272
Short-term investments 189,894 379,562 402,350
Other 6,501,763 5,973,092 3,962,362
------------ ------------ ------------
Gross investment income 13,489,558 13,927,404 13,114,220
Investment expenses (950,128) (980,905) (978,148)
------------ ------------ ------------
Net investment income $12,539,430 $12,946,499 $12,136,072
============ ============ ============
Net investment income includes net investment income earned by the restricted
assets of the cemeteries and mortuaries of approximately $924,000, $872,000 and
$717,000 for 2002, 2001, and 2000, respectively.
Investment expenses consist primarily of depreciation, property taxes and an
estimated portion of administrative expenses relating to investment activities.
Securities on deposit for regulatory authorities as required by law amounted to
$7,819,262 at December 31, 2002 and $8,829,559 at December 31, 2001.
3) Cost of Insurance Acquired
Information with regard to cost of insurance acquired is as follows:
2002 2001 2000
---- ---- ----
Balance at
beginning of year $7,615,348 $8,729,264 $9,597,306
Cost of insurance
acquired 9,106,309 (289,754) --
Imputed interest at 7% 507,268 572,061 641,325
Amortization (1,244,585) (1,396,223) (1,509,367)
------------ ------------ ------------
Net amortization
charged to income (737,317) (824,162) (868,042)
------------ ------------ ------------
Balance at end
of year $15,984,340 $7,615,348 $8,729,264
============ ============ ============
Presuming no additional acquisitions, net amortization charged to income is
expected to approximate $1,281,286, $1,177,041, $1,081,769, $983,719, and
$915,240 for the years 2003 through 2007. Actual amortization may vary based on
changes in assumptions or experience.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
4) Property, Plant and Equipment
The cost of property, plant and equipment is summarized below:
December 31,
------------
2002 2001
---- ----
Land and Buildings $11,098,907 $10,930,790
Furniture and equipment 8,725,925 7,557,210
------------ ------------
19,824,832 18,488,000
Less accumulated depreciation (8,903,197) (7,685,613)
------------ ------------
Total $10,921,635 $10,802,387
============ ============
5) Bank Loans Payable and Lines of Credit
Bank loans payable are summarized as follows:
December 31,
------------
2002 2001
---- ----
6.59% note payable in monthly installments of $34,680 including
principal and interest, collateralized by 15,000
shares of Security National Life stock, due December 2004. $727,524 $1,101,543
10% note payable in monthly installments of $8,444 including
principal and interest, collateralized by real property,
which book value is approximately $982,000, due January 2013. 645,124 680,020
One-year treasury constant maturity plus 2.75% (8.03%
at December 31, 2001) note payable in monthly installments
of $6,000, including principal and interest, collateralized by
real property, which book value is approximately
$332,000, paid in full October 2002. -- 48,971
6.93% note payable in monthly installments of $20,836, including
principal and interest, collateralized by real property, which
book value is approximately $952,537, due November 2007. 1,472,560 1,590,487
$4,171,803 revolving line of credit at 6.15% interest payable
monthly and a reduction in principal due in semi-annual
installments collateralized by 15,000 shares of Security
National Life Insurance Company stock, due December 2005. 3,144,673 3,703,767
Bank prime rate plus 1/2% (4.75% at December 31, 2002) note
payable in monthly installments of $7,235 including principal
and interest, collateralized by real property, which book
value is approximately $771,061, due August 2004. 150,564 235,450
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
5) Bank Loans Payable and Lines of Credit (Continued)
---------------------------------------
December 31,
------------
2002 2001
---- ----
Bank prime rate less 1.35% (3.40% at December 31, 2002) note
payable in monthly installments of $2,736 including
principal and interest, collateralized by 15,000 shares of
Security National Life Insurance Company stock, due
December 2005. 128,738 156,549
7.35% note payable in monthly installments of $14,975 including
principal and interest collateralized by 15,000 shares of
Security National Life Insurance Company stock,
due December 2006. 610,170 750,000
Bank prime rate less .28% (4.22% at December 31, 2002) Note
payable interest only to July 1, 2003, thereafter interest
plus monthly principal payments of $116,883, collateralized
by 15,000 shares of Security National Life
Insurance Company Stock, due January 2010. 9,000,000 --
Other collateralized bank loans payable 233,874 195,113
--------------- ---------
Total bank loans 16,113,227 8,461,900
Less current installments 2,282,575 1,677,683
-------------- ----------
Bank loans, excluding
current installments $ 13,830,652 $ 6,784,217
============ ===========
In addition to the lines of credit described above, the Company has line of
credit agreements with banks for $2,000,000 and $5,000,000, of which none were
outstanding at December 31, 2002 or 2001. The lines of credit are for general
operating purposes. The $2,000,000 line of credit bears interest at the bank's
prime rate and must be repaid every 30 days. The $5,000,000 line of credit bears
interest at a variable rate with interest payable monthly and is collateralized
by student loans equaling 115% of the unpaid principal balance.
See Note 6 for summary of maturities in subsequent years.
6) Notes and Contracts Payable
Notes and contracts payable are summarized as follows:
December 31,
------------
2002 2001
---- ----
Due to former stockholders of Deseret Memorial, Inc. resulting from the
acquisition of such entity. Amount represents the present value discounted at
8% of monthly annuity payments ranging from $4,600 to $5,000 plus an index
adjustment in the 7th through the
12th years, due September 2011. $574,526 $604,265
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
6) Notes and Contracts Payable (Continued)
----------------------------
December 31,
------------
2002 2001
---- ----
Due to former stockholders of Greer Wilson resulting from
the acquisition of such entity. Amount represents the present
value discounted at 10% of monthly annuity
payments of $7,000, due March 2005. 168,621 232,259
Due to former stockholders of Civil Service Employees Life
Insurance Company resulting from the acquisition of such
entity. 7% note payable in seven annualinstallments with
principal payments of $151,857, paid in full December 2002. -- 151,857
Due to former stockholders of Crystal Rose Funeral Home
resulting from the acquisition of such entity. Amount
represents the present value discounted at 9% of monthly annuity
payments of $2,675 due February 2007. 5,296 35,420
9% note payable in monthly installments of $10,000 including
principal and interest collateralized by real property,
which book value is approximately $2,908,000, due July 2008. 534,111 602,653
Due to Memorial Estates Endowment Care Trust Fund for the
remodel of the Cottonwood Funeral Home. 6% note payable
in monthly installments of $5,339 including principal and
interest collateralized by the Funeral Home, which book value
is approximately $881,631 due March 2030. 951,807 861,748
Due to former shareholders of Southern Security Life Insurance
Company resulting from the acquisition of such entity.
6.5% note payable in five annual installments with principal
payments of $158,840 due April 2005 476,520 635,361
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
6) Notes and Contracts Payable (Continued)
----------------------------
December 31,
------------
2002 2001
---- ----
Other notes payable 449,128 512,213
--------- ----------
Total notes and contracts payable 3,160,009 3,635,776
Less current installments 447,569 600,894
--------- ----------
Notes and contracts, excluding
current installments $2,712,440 $3,034,882
========== ==========
The following tabulation shows the combined maturities of bank loans payable,
lines of credit and notes and contracts payable:
2003 $2,730,144
2004 3,801,840
2005 3,325,101
2006 2,145,441
2007 1,929,913
Thereafter 5,340,797
------------
Total $19,273,236
===========
Interest paid approximated interest expense in 2002, 2001 and 2000.
7) Cemetery and Mortuary Endowment Care and Pre-need Merchandise Funds
-------------------------------------------------------------------
- -The Company owns and operates several endowment care cemeteries, for which it
has established and maintains an endowment care fund. The Company records a
liability to the fund for each space sold at current statutory rates. The
Company is not required to transfer assets to the fund until the spaces are
fully paid for. As of December 31, 2001 the Company had transferred $5,586 in
excess of the required contribution to the fund, and as of December 31, 2002,
the Company owed the fund $73,151.
The Company has established and maintains certain restricted asset accounts to
provide for future merchandise obligations incurred in connection with its
pre-need sales. Such amounts are reported as restricted assets of cemeteries and
mortuaries in the accompanying consolidated balance sheet.
Assets in the restricted asset account are summarized as follows:
December 31,
------------
2002 2001
---- ----
Cash and cash equivalents $378,388 $475,712
Mutual funds 188,732 188,732
Fixed maturity securities 301,928 348,737
Equity securities 77,778 77,778
Participation in mortgage loans
with Security National Life 4,352,214 4,214,781
Time certificate of deposit 33,696 33,696
---------- ----------
Total $5,332,736 $5,339,436
========== ==========
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
8) Income Taxes
The Company's income tax liability at December 31 is summarized as follows:
December 31,
------------
2002 2001
---- ----
Current $45,702 $(86,569)
Deferred 8,058,180 6,961,166
----------- -----------
Total $8,103,882 $6,874,597
=========== ===========
Significant components of the Company's deferred tax assets and liabilities at
December 31 are approximately as follows:
2002 2001
---- ----
Assets
Future policy benefits $(1,849,395) $(1,727,742)
Unearned premium (1,717,492) (1,829,505)
Difference between book
and tax basis of bonds (34,178) (43,176)
Net operating loss carryforwards
expiring in the years 2003 through 2011 (1,132,874) (84,350)
Other (575,788) (631,375)
------------ ------------
Total deferred tax assets (5,309,727) (4,316,148)
------------ ------------
Liabilities
Deferred policy acquisition costs 5,235,909 5,140,228
Cost of insurance acquired 2,643,596 1,553,301
Installment sales 1,997,256 1,838,465
Depreciation 883,667 643,243
Trusts 1,184,382 1,162,077
Tax on unrealized appreciation 644,148 583,213
Other 778,949 356,789
------------ ------------
Total deferred tax liabilities 13,367,907 11,277,316
------------ ------------
Net deferred tax liability $8,058,180 $6,961,166
============ ============
The Company paid $462,983, $564,327 and $94,365 in income taxes for 2002, 2001
and 2000, respectively. The Company's income tax expense (benefit) is summarized
as follows:
2002 2001 2000
---- ---- ----
Current $595,254 $391,492 $44,688
Deferred 970,139 522,047 259,952
---------- ---------- ----------
Total $1,565,393 $913,539 $304,640
========== ========== ==========
The reconciliation of income tax expense at the U.S. federal statutory rates is
as follows:
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
8) Income Taxes (Continued)
-------------
2002 2001 2000
---- ---- ----
Computed expense at statutory rate $1,883,255 $1,282,517 $423,682
Special deductions allowed
small life insurance companies (315,923) (356,734) (68,769)
Dividends received deduction (737) (6,405) (24,418)
Minority interest taxes 7,429 (7,466) (19,222)
Other, net (8,631) 1,627 (6,633)
----------- ----------- -----------
Tax expense $1,565,393 $913,539 $304,640
=========== =========== ===========
A portion of the life insurance income earned prior to 1984 was not subject to
current taxation but was accumulated for tax purposes, in a "policyholders'
surplus account." Under provisions of the Internal Revenue Code, the
policyholders' surplus account was frozen at its December 31, 1983 balance and
will be taxed generally only when distributed. As of December 31, 2002, the
policyholders' surplus accounts approximated $4,500,000. Management does not
intend to take actions nor does management expect any events to occur that would
cause federal income taxes to become payable on that amount. However, if such
taxes were accrued, the amount of taxes payable would be approximately
$1,500,000.
The insurance companies have remaining loss carry forwards of approximately
$8,300,000, approximately $286,000 of which is subject to an annual limitation
of approximately $300,000.
9) Reinsurance, Commitments and Contingencies
The Company follows the procedure of reinsuring risks in excess of a specified
limit, which ranged from $30,000 to $75,000 at December 31, 2002 and 2001. The
Company is liable for these amounts in the event such reinsurers are unable to
pay their portion of the claims. The Company has also assumed insurance from
other companies having insurance in force amounting to $1,174,604,000 at
December 31, 2002 and $838,421,000 at December 31, 2001.
As part of the acquisition of Southern Security, the Company has a co-insurance
agreement with The Mega Life and Health Insurance Company ("MEGA"). On December
31, 1992 Southern Security ceded to MEGA 18% of all universal life policies in
force at that date. MEGA is entitled to 18% of all future premiums, claims,
policyholder loans and surrenders relating to the ceded policies. In addition,
Southern Security receives certain commission and mortgage loans originated and
sold to unaffiliated investors are sold subject to certain recourse provisions.
The Company is a defendant in various other legal actions arising from the
normal conduct of business. Management believes that none of the actions will
have a material effect on the Company's financial position or results of
operations.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
10) Retirement Plans
The Company and its subsidiaries have a noncontributory Employee Stock Ownership
Plan (ESOP) for all eligible employees. Eligible employees are primarily those
with more than one year of service, who work in excess of 1,040 hours per year.
Contributions, which may be in cash or stock of the Company, are determined
annually by the Board of Directors. The Company's contributions are allocated to
eligible employees based on the ratio of each eligible employee's compensation
to total compensation for all eligible employees during each year. ESOP
contribution expense totaled $99,612, $191,557, and $0 for 2002, 2001, and 2000,
respectively. At December 31, 2002 the ESOP held 507,490 shares of Class A and
1,408,653 shares of Class C common stock of the Company. All shares held by the
ESOP have been allocated to the participating employees and all shares held by
the ESOP are considered outstanding for purposes of computing earnings per
share.
The Company has a 401(k) savings plan covering all eligible employees, as
defined above, which includes employer participation in accordance with the
provisions of Section 401(k) of the Internal Revenue Code. The plan allows
participants to make pretax contributions up to the lesser of 15% of total
annual compensation or the statutory limits. The Company may match up to 50% of
each employee's investment in Company stock, up to 1/2% of the employee's total
annual compensation. The Company's match will be Company stock and the amount of
the match will be at the discretion of the Company's Board of Directors. The
Company's matching 401(k) contributions for 2002, 2001, and 2000 were $7,975,
$18,458, and $0 respectively. Also, the Company may contribute at the discretion
of the Company's Board of Directors an Employer Profit Sharing Contribution to
the 401(k) savings plan. The Employer Profit Sharing Contribution shall be
divided among three different classes of participants in the plan based upon the
participant's title in the Company. The Company contributions for 2002, 2001 and
2000 were $142,218, $260,350, and $0, respectively. All amounts contributed to
the plan are deposited into a trust fund administered by an independent trustee.
In 2001, the Company's Board of Directors adopted a Deferred Compensation Plan.
Under the terms of the Plan, the Company will provide deferred compensation for
a select group of management or highly compensated employees, within the meaning
of Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income
Security Act of 1974, as amended. The Board has appointed a Committee of the
Company to be the Plan Administrator and to determine the employees who are
eligible to participate in the plan. The employees who participate may elect to
defer a portion of their compensation into the plan. The Company may contribute
into the plan at the discretion of the Company's Board of Directors. The
Company's contribution for 2002 and 2001 was $100,577 and $220,038,
respectively.
The Company has Deferred Compensation Agreements with its Chief Executive
Officer and its past Senior Vice President. The Deferred Compensation is payable
on the retirement or death of these individuals either in monthly installments
(120 months) or in a lump sum settlement, if approved by the Board of Directors.
The amount payable
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
10) Retirement Plans (Continued)
-----------------
is $60,000 per year with cost of living adjustments each anniversary. The
Compensation Agreements also provides that any remaining balance will be payable
to their heirs in the event of their death. In addition the Agreement provides
that the Company will pay the Group Health coverages for these individuals
and/or their spouses. In 2002 the Company increased its liability for these
future obligations by $31,000. The current balance as of December 31, 2002 is
$702,000.
11) Capital Stock
The following table summarizes the activity in shares of capital stock for the
three-year period ended December 31, 2002:
Class A Class C
---------- ----------
Balance at January 1, 2000 4,863,731 5,555,350
Stock Dividends 243,393 277,515
Conversion of Class C to Class A 507 (5,060)
---------- ----------
Balance at December 31, 2000 5,107,631 5,827,805
Stock Dividends 255,413 291,104
Conversion of Class C to Class A 547 (5,479)
---------- ----------
Balance at December 31, 2001 5,363,591 6,113,430
Exercise of stock options 132,371 --
Stock Dividends 276,012 294,419
Conversion of Class C to Class A 22,518 (225,180)
---------- ----------
Balance at December 31, 2002 5,794,492 6,182,669
========== ==========
The Company has two classes of common stock with shares outstanding, Class A and
Class C. Class C shares vote share for share with the Class A shares on all
matters except election of one-third of the directors who are elected solely by
the Class A shares, but generally are entitled to a lower dividend participation
rate. Class C shares are convertible into Class A shares at any time on a ten to
one ratio.
Stockholders of both classes of common stock have received 5% stock dividends in
the years 1989 through 2002, as authorized by the Company's Board of Directors.
The Company has Class B Common Stock of $1.00 par value, 5,000,000 shares
authorized, of which none are issued. Class B shares are non-voting stock except
to any proposed amendment to the Articles of Incorporation which would affect
Class B Common Stock.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
11) Capital Stock (Continued)
-------------
In accordance with SFAS 128, the basic and diluted earnings per share amounts
were calculated as follows:
2002 2001 2000
---- ---- ----
Numerator:
Net income $3,991,280 $2,840,780 $895,729
========== ========== ==========
Denominator:
Denominator for basic earnings
per share-weighted-average
shares 4,823,914 4,506,476 4,317,779
Effect of dilutive securities:
Employee stock options 169,543 382 17,265
Stock appreciation rights 1,828 -- --
---------- ---------- ----------
Dilutive potential common shares 171,371 382 17,265
---------- ---------- ----------
Denominator for diluted earnings per
share-adjusted weighted-average
shares and assumed conversions 4,995,285 4,506,858 4,335,044
========== ========== ==========
Basic earnings per share $.83 $.63 $.21
========== ========== ==========
Diluted earnings per share $.80 $.63 $.21
========== ========== ==========
12) Deferred Compensation Plans
In 1987, the Company adopted the 1987 Incentive Stock Option Plan (the 1987
Plan). The 1987 Plan provides that shares of the Class A Common Stock of the
Company may be optioned to certain officers and key employees of the Company.
The 1987 Plan establishes a Stock Option Plan Committee which selects the
employees to whom the options will be granted and determines the price of the
stock. The 1987 Plan establishes the minimum purchase price of the stock at an
amount which is not less than 100% of the fair market value of the stock (110%
for employees owning more than 10% of the total combined voting power of all
classes of stock).
The 1987 Plan provides that if additional shares of Class A Common Stock are
issued pursuant to a stock split or a stock dividend, the number of shares of
Class A Common Stock then covered by each outstanding option granted hereunder
shall be increased proportionately with no increase in the total purchase price
of the shares then covered, and the number of shares of Class A Common Stock
reserved for the purpose of the 1987 Plan shall be increased by the same
proportion.
In the event that the shares of Class A Common Stock of the Company from time to
time issued and outstanding are reduced by a combination of shares, the number
of shares of Class A Common Stock then covered by each outstanding option
granted hereunder shall be reduced proportionately with no reduction in the
total price of the shares then so covered, and the number of shares of Class A
Common Stock reserved for the purposes of the 1987 Plan shall be reduced by the
same proportion.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
12) Deferred Compensation Plans (Continued)
---------------------------
The 1987 Plan terminated in 1997 and options granted are non-transferable.
Options granted and outstanding under the 1987 Plan include Stock Appreciation
Rights which permit the holder of the option to elect to receive cash, amounting
to the difference between the option price and the fair market value of the
stock at the time of the exercise, or a lesser amount of stock without payment,
upon exercise of the option.
Activity of the 1987 Plan is summarized as follows:
Number Option
of Shares Price
Outstanding at January 1, 2000 171,329 $3.89 - $4.28
Dividend 8,566
Exercised --
--------
Outstanding at December 31, 2000 179,895 $3.70 - $4.07
--------
Dividend 8,995
Exercised --
-------
Outstanding at December 31, 2001 188,890 $3.53 - $3.88
--------
Dividend 576
Exercised (119,974)
Expired (58,773)
---------
Outstanding at December 31, 2002 10,719 $3.36
=========
Exercisable at end of year 10,719 $3.36
=========
Available options for future grant
1987 Stock Incentive Plan --
=========
On June 21, 1993, the Company adopted the Security National Financial
Corporation 1993 Stock Incentive Plan (the "1993 Plan"), which reserved 300,000
shares of Class A Common Stock for issuance thereunder.
The 1993 Plan allows the Company to grant options and issue shares as a means of
providing equity incentives to key personnel, giving them a proprietary interest
in the Company and its success and progress.
The 1993 Plan provides for the grant of options and the award or sale of stock
to officers, directors, and employees of the Company. Both "incentive stock
options," as defined under Section 422A of the Internal Revenue Code of 1986
(the "Code"), and "non-qualified options" may be granted pursuant to the 1993
Plan. Options intended as incentive stock options may be issued only to
employees, and must meet certain conditions imposed by the Code, including a
requirement that the option exercise price be not less than the fair market
value of the option shares on the date of grant. The 1993 Plan provides that the
exercise price for non-qualified options will be not less than at least 50% of
the fair market value of the stock subject to such option as of the date of
grant of such options, as determined by the Company's Board of Directors.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
12) Deferred Compensation Plans (Continued)
---------------------------
The options were granted to reward certain officers and key employees who have
been employed by the Company for a number of years and to help the Company
retain these officers by providing them with an additional incentive to
contribute to the success of the Company.
The 1993 Plan is administered by the Board of Directors or by a committee
designated by the Board. The 1993 Plan provides that if the shares of Common
Stock shall be subdivided or combined into a greater or smaller number of shares
or if the Company shall issue any shares of Common Stock as a stock dividend on
its outstanding Common Stock, the number of shares of Common Stock deliverable
upon the exercise of options shall be increased or decreased proportionately,
and appropriate adjustments shall be made in the purchase price per share to
reflect such subdivision, combination or stock dividend. No options may be
exercised for a term of more than ten years from the date of grant.
The 1993 Plan has a term of ten years. The Board of Directors may amend or
terminate the 1993 Plan at any time, subject to approval of certain
modifications to the 1993 Plan by the shareholders of the Company as may be
required by law or the 1993 Plan.
On November 7, 1996, the Company amended the Plan as follows: (i) to increase
the number of shares of Class A Common Stock reserved for issuance under the
plan from 300,000 Class A shares to 600,000 Class A shares; and (ii) to provide
that the stock subject to options, awards and purchases may include Class C
common stock.
On October 14, 1999, the Company amended the 1993 Plan to increase the number of
shares of Class A Common Stock reserved for issuance under the plan from 746,126
Class A shares to 1,046,126 Class A shares.
Activity of the 1993 Plan is summarized as follows:
Number of
Shares Option Price
---------- -------------
Outstanding at January 1, 2000 519,998 $2.22 - $3.96
Dividend 27,313
Granted 26,000
--------
Outstanding at December 31, 2000 573,311 $2.12 - $3.77
Dividend 36,765
Granted 172,500
Expired (10,513)
---------
Outstanding at December 31, 2001 772,063 $2.02 - $3.59
Dividend 21,077
Granted 185,250
Expired (190,018)
Exercised (283,703)
--------
Outstanding at December 31, 2002 504,669 $2.02 - $4.46
=========
Exercisable at end of year 358,588 $2.02 - $4.46
=========
Available options for future grant
1993 Stock Incentive Plan 388,361
=========
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
12) Deferred Compensation Plans (Continued)
---------------------------
On October 16, 2000, the Company adopted the Security National Financial
Corporation 2000 Director Stock Option Plan (the "2000 Plan"), which reserved
50,000 shares of Class A Common Stock for issuance thereunder. Effective
November 1, 2000, and on each anniversary date thereof during the term of the
2000 Plan, each outside Director who shall first join the Board after the
effective date shall be granted an option to purchase 1,000 shares upon the date
which such person first becomes an outside Director and an annual grant of an
option to purchase 1,000 shares on each anniversary date thereof during the term
of the 2000 Plan. The options granted to outside Directors shall vest in their
entirety on the first anniversary date of the grant.
The primary purposes of the 2000 Plan are to enhance the Company's ability to
attract and retain well-qualified persons for service as directors and to
provide incentives to such directors to continue their association with the
Company.
The 2000 Plan provides that if the shares of Common Stock shall be subdivided or
combined into a greater or smaller number of shares or if the Company shall
issue any shares of Common Stock as a stock dividend on its outstanding Common
Stock, the number of shares of Common Stock deliverable upon the exercise of
options shall be increased or decreased proportionately, and appropriate
adjustments shall be made in the purchase price per share to reflect such
subdivisions, combination or stock dividend.
The term of the 2000 Plan will be five years.
Activity of the 2000 Plan is summarized as follows:
Number Option
of Shares Price
Outstanding at
December 31, 1999 0
Dividend 200
Granted 4,000
-------
Outstanding at
December 31, 2000 4,200 $2.14
Dividend 410
Granted 4,000
-------
Outstanding at
December 31, 2001 8,610 $2.04 - $2.43
-------
Dividend 631
Granted 4,000
-------
Outstanding at
December 31, 2002 13,241 $1.94 - $2.86
======
Exercisable at end of year 9,041 $1.94 - $2.31
=======
Available options for future
grant 2000 Director Plan 44,641
======
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
13) Statutory-Basis Financial Information
The Company's life insurance subsidiaries are domiciled in Utah and Florida and
prepare their statutory-basis financial statements in accordance with accounting
practices prescribed or permitted by the Utah and Florida Insurance Departments.
"Prescribed" or "Permitted" statutory accounting practices are interspersed
throughout state insurance laws and regulations. The National Association of
Insurance Commissioners ("NAIC") Accounting Practices and Procedures Manual
version effective January 1, 2001, has been adopted as a prescribed or permitted
practices by the States of Utah and Florida.
Statutory net income and statutory stockholder's equity for the life
subsidiaries as reported to state regulatory authorities, is presented below:
Statutory Net Income (Loss)
December 31,
2002 2001 2000
---- ---- ----
Security National Life $1,547,253 $1,732,018 $796,047
Southern Security Life (427,439) (429,143) 80,477
Statutory Stockholders' Equity
December 31,
2002 2001 2000
---- ---- ----
Security National Life $14,381,257 $16,316,605 $14,309,515
Southern Security Life 8,582,968 8,459,700 8,405,211
Generally, the net assets of the life insurance subsidiaries available for
transfer to the Company are limited to the amounts that the life insurance
subsidiaries net assets, as determined in accordance with statutory accounting
practices, exceed minimum statutory capital requirements; however, payments of
such amounts as dividends are subject to approval by regulatory authorities.
The Utah and Florida Insurance Departments impose minimum risk-based capital
requirements that were developed by the NAIC on insurance enterprises. The
formulas for determining the risk-based capital ("RBC") specify various factors
that are applied to financial balances or various levels of activity based on
the perceived degree of risk. Regulatory compliance is determined by a ratio
(the "Ratio") of the enterprise's regulatory total adjusted capital, as defined
by the NAIC, to its authorized control level, as defined by the NAIC.
Enterprises below specific trigger points or ratios are classified within
certain levels, each of which requires specified corrective action. The life
insurance subsidiaries have a Ratio that is greater than 569% of the first level
of regulatory action.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
14) Business Segment Information
Description of Products and Services by Segment
The Company has three reportable segments: life insurance, cemetery and
mortuary, and mortgage loans. The Company's life insurance segment consists of
life insurance premiums and operating expenses from the sale of insurance
products sold by the Company's independent agency force and net investment
income derived from investing policyholder and segment surplus funds. The
Company's cemetery and mortuary segment consists of revenues and operating
expenses from the sale of at-need cemetery and mortuary merchandise and services
at its mortuaries and cemeteries and the net investment income from investing
segment surplus funds. The Company's mortgage loan segment consists of loan
originations fee income and expenses from the originations of residential
mortgage loans and interest earned and interest expenses from warehousing
pre-sold loans before the funds are received from financial institutional
investors.
Measurement of Segment Profit or Loss and Segment Assets
The accounting policies of the reportable segments are the same as those
described in the Significant Accounting Principles. Intersegment revenues are
recorded at cost plus an agreed upon intercompany profit.
Factors Management Used to Identify the Enterprise's Reportable Segments
The Company's reportable segments are business units that offer different
products and are managed separately due to the different products and the need
to report to the various regulatory jurisdictions.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
14) Business Segment Information (Continued)
-----------------------------
2002
Life Cemetery/ Reconciling
Insurance Mortuary Mortgage Items Consolidated
--------- -------- -------- ----- ------------
Revenues:
From external sources:
Revenue from customers $14,076,652 $11,256,069 $57,008,283 $ -- $82,341,004
Net investment income 6,065,652 1,011,786 5,461,992 -- 12,539,430
Realized gains on investments 311,365 709,455 -- -- 1,020,820
Other revenues 69,741 85,146 324,537 -- 479,424
Intersegment revenues:
Net investment income 4,741,338 -- -- (4,741,338) --
------------- ------------- ------------- ------------- -------------
25,264,748 13,062,456 62,794,812 (4,741,338) 96,380,678
------------- ------------- ------------- ------------- -------------
Expenses:
Death and other policy benefits 7,724,046 -- -- -- 7,724,046
Increase in future policy benefits 6,031,685 -- -- -- 6,031,685
Amortization of deferred policy
acquisition costs and cost of
insurance acquired 3,718,627 274,766 -- -- 3,993,393
Depreciation 383,139 678,851 167,513 -- 1,229,503
General, administrative and other costs:
Intersegment -- 36,672 173,872 (210,544) --
Other 5,670,217 10,604,689 53,617,818 -- 69,892,724
Interest expense:
Intersegment 90,000 201,118 4,239,676 (4,530,794) --
Other 321,896 428,498 1,219,948 -- 1,970,342
------------- ------------- ------------- ------------- -------------
23,939,610 12,224,594 59,418,827 (4,741,338) 90,841,693
------------- ------------- ------------- ------------- -------------
Earnings (losses)
before income taxes $1,325,138 $837,862 $ 3,375,985 $ -- $5,538,985
============= ============ ============ =========== ===========
Identifiable assets $295,177,565 $42,255,381 $14,055,057 $(44,331,241) $307,156,762
============= ============= ============= ============= ============
Expenditures for long-lived assets $189,156 $677,561 $ 482,035 $ -- $ 1,348,752
============= ============= ============= ============= ============
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
14) Business Segment Information (Continued)
----------------------------
2001
Life Cemetery/ Reconciling
Revenues: Insurance Mortuary Mortgage Items Consolidated
--------- -------- -------- ----- ------------
From external sources:
Revenue from customers $13,150,875 $10,603,451 $40,086,097 $ -- $63,840,423
Net investment income 7,018,047 959,655 4,968,797 -- 12,946,499
Realized gains on investments 10,428 -- -- -- 10,428
Other revenues 53,053 42,356 56,536 -- 151,945
Intersegment revenues:
Net investment income 3,679,133 -- -- (3,679,133) --
------------ ------------ ------------ ------------ ------------
23,911,536 11,605,462 45,111,430 (3,679,133) 76,949,295
------------ ------------ ------------ ------------ ------------
Expenses:
Death and other policy benefits 6,821,845 -- -- -- 6,821,845
Increase in future policy benefits 4,953,008 -- -- -- 4,953,008
Amortization of deferred policy
and pre-need acquisition costs
and cost of insurance acquired 3,561,895 308,263 -- -- 3,870,158
Depreciation 330,892 595,082 103,162 -- 1,029,136
General, administrative
and other costs:
Intersegment -- 36,672 136,867 (173,539) --
Other 7,035,455 9,396,691 37,280,266 -- 53,712,412
Interest expense:
Intersegment 98,095 243,732 3,163,767 (3,505,594) --
Other 317,988 418,488 2,054,150 -- 2,790,626
------------ ------------ ------------ ------------ ------------
23,119,178 10,998,928 42,738,212 (3,679,133) 73,177,185
------------ ------------ ------------ ------------ ------------
Earnings (losses)
before income taxes $792,358 $606,534 $2,373,218 $ -- 3,772,110
============ ============ ============ ============ ============
Identifiable assets $201,193,249 $38,915,291 $6,411,222 $(33,460,187) $213,059,575
============ ============ ============ ============ ============
Expenditures for
long-lived assets $219,762 $505,045 $323,014 $ -- $1,047,821
============ ============ ============ ============ ============
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
14) Business Segment Information (Continued)
----------------------------
2000
Life Cemetery/ Reconciling
Insurance Mortuary Mortgage Items Consolidated
--------- -------- -------- ----- ------------
Revenues:
From external sources:
Revenue from customers $12,875,585 $9,416,927 $22,921,585 $ -- $45,214,097
Net investment income 8,222,688 716,813 3,196,571 -- 12,136,072
Realized gains on investments 423,805 -- -- -- 423,805
Other revenues 85,927 23,479 195,480 -- 304,886
Intersegment revenues:
Net investment income 2,551,644 -- -- (2,551,644) --
------------ ------------ ------------ ------------ ------------
24,159,649 10,157,219 26,313,636 (2,551,644) 58,078,860
------------ ------------ ------------ ------------ ------------
Expenses:
Death and other policy benefits 5,662,062 -- -- -- 5,662,062
Increase in future policy benefits 7,268,720 -- -- -- 7,268,720
Amortization of deferred policy
acquisition costs and cost of
insurance acquired 3,188,752 -- -- -- 3,188,752
Depreciation 322,418 451,259 61,744 -- 835,421
General, administrative
and other costs:
Intersegment -- 36,672 101,288 (137,960) --
Other 5,585,178 9,369,839 22,796,596 -- 37,751,613
Interest expense:
Intersegment -- 210,984 2,202,700 (2,413,684) --
Other 394,868 518,845 1,212,456 -- 2,126,169
------------ ------------ ------------ ------------ ------------
22,421,998 10,587,599 26,374,784 (2,551,644) 56,832,737
------------ ------------ ------------ ------------ ------------
Earnings (losses)
before income taxes $1,737,651 $(430,380) $(61,148$ -- $1,246,123
============ ============ ============ ============ ============
Identifiable assets $199,694,971 $36,704,436 $3,495,907 $(31,148,813) $208,746,501
============ ============ ============ ============ ============
Expenditures for
long-lived assets $260,836 $680,626 $220,856$ -- $1,162,318
============ ============ ============ ============ ============
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
15) Related Party Transactions
On December 19, 2001, the Company entered into an option agreement with Monument
Title, LLC, a Utah limited liability company ("Monument Title") in which the
Company made available a $100,000 line of credit to Monument Title at an
interest rate of 8% per annum. The line of credit is secured by the assets of
Monument Title. From December 28, 2001 to June 14, 2002, the Company advanced
Monument Title a total of $77,953 under the line of credit. The amount advanced
under the line of credit plus accrued interest are payable upon demand. The
owners of Monument Title are brother-in-laws of the President and Chief
Operating Officer of the Company. The Company has the right under the option
agreement for a period of five years from the date thereof to acquire 100% of
the outstanding common shares of Monument Title for the sum of $10. The Company
believes that it is currently prohibited from directly owning shares of stock
representing control of a title company. The purpose of the transaction, which
was approved by the Company's board of directors, is to insure that the title
and escrow work performed for Security National Mortgage Company in connection
with its mortgage loans are completed as accurately as possible by Monument
Title to avoid any economic losses to the Company.
The Company has a non-interest bearing note receivable from the Chairman of the
Board and Chief Executive Officer. No installment payments are required under
the terms of the note, but the note must be paid in full as of December 31,
2007. The outstanding balance of the note was approximately $70,000 and $102,000
at December 31, 2002 and 2001, respectively.
16) Disclosure about Fair Value of Financial Instruments
The fair values of investments in fixed maturity and equity securities along
with methods used to estimate such values are disclosed in Note 2. The following
methods and assumptions were used by the Company in estimating the "fair value"
disclosures related to other significant financial instruments:
Cash, Receivables, Short-term Investments, and Restricted Assets of the
Cemeteries and Mortuaries: The carrying amounts reported in the accompanying
balance sheets for these financial instruments approximate their fair values.
Mortgage, Policy, Student, and Collateral Loans: The fair values are estimated
using interest rates currently being offered for similar loans to borrowers with
similar credit ratings. Loans with similar characteristics are aggregated for
purposes of the calculations. The carrying amounts reported in the accompanying
balance sheets for these financial instruments approximate their fair values.
Investment Contracts: The fair values for the Company's liabilities under
investment-type insurance contracts are estimated based on the contracts' cash
surrender values. The carrying amount and fair value as of December 31, 2002 and
December 31, 2001, were approximately $87,351,000 and $86,544,000, respectively.
The fair values for the Company's insurance contracts other than investment-type
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, such that the Company's
exposure to changing interest rates is minimized through the matching of
investment maturities with amounts due under insurance contracts.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
17) Other Comprehensive Income
The following summarizes other comprehensive income:
2002 2001 2000
---- ---- ----
Unrealized gains (losses)
on available for-sale securities $84,263 $769,684 $736,803
Less: reclassification
adjustment for net realized
gains in net income (35,544) (10,428) (420,739)
--------- --------- ---------
Net unrealized gains (losses) 48,719 759,256 316,064
Tax expense on net unrealized
gain (losses) (80,786) (372,077) (145,004)
--------- --------- ---------
Other comprehensive income (loss) $(32,067) $387,179 $171,060
========= ========= =========
Schedule I
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Summary of Investments
Other than Investments in Related Parties
As of December 31, 2002:
Amount at
Which
Shown
Estimated in the
Type of Investment Amortized Fair Balance
- ------------------ Cost Value Sheet
-------- --------- ---------
Fixed maturity securities held to maturity:
Bonds:
U.S. Treasury securities and obligations
of U.S. Government agencies $2,835,420 $3,047,602 $2,835,420
Obligations of states and political subdivisions 188,303 209,383 188,303
Corporate securities
including public utilities 21,106,651 21,658,305 21,106,651
Mortgage backed securities 8,856,718 8,982,028 8,856,718
Redeemable preferred stocks 28,005 29,733 28,005
------------ ------------ ------------
Total Fixed Securities held to maturity 33,015,097 33,927,051 33,015,097
------------ ------------ ------------
Securities available for sale:
Bonds:
U.S. Treasury securities and obligations
of U.S. Government agencies 594,439 698,136 698,136
Corporate securities
including public utilities 16,558,784 17,816,807 17,816,807
Mortgage-backed securities -- -- --
Nonredeemable preferred stock 56,031 82,585 82,585
Common stock:
Public utilities 314,014 375,570 375,570
Banks, trusts and insurance companies 520,683 818,146 818,146
Industrial, miscellaneous and all other 1,038,812 1,365,792 1,365,792
------------ ------------ ------------
Total Securities available for sale 19,082,763 21,157,036 21,157,036
------------ ------------ ------------
Mortgage loans on real estate 21,016,008 21,016,008
Real estate 9,331,248 9,331,248
Policy loans 10,974,165 10,974,165
Other investments 5,335,478 5,335,478
------------ ------------
Total investments $98,754,759 $100,829,032
============ ============
Schedule I (Continued)
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Summary of Investments
Other than Investments in Related Parties
As of December 31, 2001:
Amount at
Which
Shown
Estimated in the
Type of Investment Amortized Fair Balance
- ------------------ Cost Value Sheet
-------- --------- ---------
Fixed maturity securities held to maturity:
Bonds:
U.S. Treasury securities and obligations
of U.S. Government agencies $4,212,280 $4,439,726 $4,212,280
Obligations of states and political subdivisions 180,660 185,484 180,660
Corporate securities
including public utilities 19,206,038 19,773,918 19,206,038
Mortgage backed securities 4,172,926 4,270,550 4,172,926
Redeemable preferred stocks 28,005 28,308 28,005
----------- ----------- -----------
Total Fixed Securities held to maturity 27,799,909 28,697,986 27,799,909
----------- ----------- -----------
Securities available for sale:
Bonds:
U.S. Treasury securities and
obligations of U.S. Government agencies 594,568 652,983 652,983
Corporate securities
including public utilities 19,971,265 20,817,746 20,817,746
Mortgage-backed securities -- -- --
Nonredeemable preferred stock 56,031 81,250 81,250
Common stock:
Public utilities 315,068 504,243 504,243
Banks, trusts and insurance companies 195,983 389,210 389,210
Industrial, miscellaneous and all other 1,038,898 1,666,846 1,666,846
----------- ----------- -----------
Total Securities available for sale 22,171,813 24,112,278 24,112,278
----------- ----------- -----------
Mortgage loans on real estate 15,479,305 15,479,305
Real estate 9,051,691 9,051,691
Policy loans 11,277,975 11,277,975
Other investments 1,453,644 1,453,644
----------- -----------
Total investments $87,234,337 $89,174,802
=========== ===========
Schedule II
SECURITY NATIONAL FINANCIAL CORPORATION
(Parent Company Only)
Balance Sheets
December 31,
------------
2002 2001
---- -----
Assets
Cash $(3,870) $1,065
Investment in subsidiaries
(equity method) 50,069,998 46,128,864
Receivables:
Receivable from
affiliates 10,662,465 1,664,955
Other (74,653) (42,743)
------------ ------------
Total receivables 10,587,812 1,622,212
------------ ------------
Property, plant and
equipment, at cost,
net of accumulated
depreciation of $575,724
for 2002 and $457,338
for 2001 415,144 427,345
Other assets 66,915 21,366
------------ ------------
Total assets $61,135,999 $48,200,852
============ ============
See accompanying notes to parent company only financial statements.
Schedule II (Continued)
SECURITY NATIONAL FINANCIAL CORPORATION
(Parent Company Only)
Balance Sheets (Continued)
December 31,
2002 2001
Liabilities:
Bank loans payable:
Current installments $2,082,175 $1,386,857
Long-term 11,400,191 4,168,453
Notes and contracts payable:
Current installments 961 152,818
Long-term -- --
Advances from affiliated companies 10,031,968 10,431,231
Other liabilities and accrued expenses 965,555 996,228
Income taxes 2,141,738 1,095,947
------------ ------------
Total liabilities 26,622,588 18,231,534
------------ ------------
Stockholders' equity:
Common Stock:
Class A: $2 par value, authorized
10,000,000 shares, issued 5,794,492
shares in 2002 and 5,363,591 shares
in 2001 11,588,984 10,727,182
Class C: $0.20 par value,
authorized 7,500,000 shares, issued
6,182,669 shares in 2002 and 6,113,430
shares in 2001 1,236,533 1,222,686
------------ -----------
Total common stock 12,825,517 11,949,868
Additional paid-in capital 11,280,842 10,168,523
Accumulated other comprehensive income 1,191,863 1,223,930
Retained earnings 11,992,542 9,989,230
Treasury stock at cost
(1,151,811 Class A shares and 71,749
Class C shares in 2002; 1,294,716 Class
A shares and 68,332 Class C shares in 2001,
held by affiliated companies) (2,777,353) (3,362,233)
------------ ------------
Total stockholders' equity 34,513,411 29,969,318
------------ ------------
Total liabilities and
stockholders' equity $61,135,999 $48,200,852
============ ============
See accompanying notes to parent company only financial statements.
Schedule II (Continued)
SECURITY NATIONAL FINANCIAL CORPORATION
(Parent Company Only)
Statements of Earnings
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Revenue:
Net investment income $34,053 $188 $96
Fees from affiliates 3,772,293 3,824,259 3,878,458
----------- ----------- -----------
Total revenue $3,806,346 3,824,447 3,878,554
----------- ----------- -----------
Expenses:
General and administrative
Expenses 3,287,683 4,082,438 1,873,323
Interest expense 351,599 373,815 593,228
----------- ----------- -----------
Total expenses 3,639,282 4,456,253 2,466,551
----------- ----------- -----------
Earnings (loss)before income
taxes, and earnings of
subsidiaries 167,064 (631,806) 1,412,003
Income tax expense (1,045,791) (531,270) (373,075)
Equity in earnings
(loss) of subsidiaries 4,870,007 4,003,856 (143,199)
----------- ----------- -----------
Net earnings $3,991,280 $2,840,780 $895,729
=========== =========== ===========
See accompanying notes to parent company only financial statements.
Schedule II (Continued)
SECURITY NATIONAL FINANCIAL CORPORATION
(Parent Company Only)
Statements of Cash Flow
Year Ended December 31,
-----------------------
2002 2001 2000
Cash flows from operating activities:
Net earnings $3,991,280 $2,840,780 $895,729
Adjustments to reconcile net earnings
to net cash provided by
operating activities:
Depreciation and amortization 118,386 113,042 29,904
Undistributed (earnings) losses
of affiliates (4,870,007) (4,003,856) 143,199
Provision for income taxes 1,045,791 531,271 373,075
Change in assets and liabilities:
Accounts receivable 31,909 60,751 558
Other assets (45,549) 25,638 25,637
Other liabilities (30,673) 282,349 1,836
----------- ----------- -----------
Net cash provided by operating activities 241,137 (150,025) 1,469,938
----------- ----------- -----------
Cash flows from investing activities:
Dividends received from subsidiaries 2,381,687 -- --
Purchase of equipment (106,185) (2,954) (556,802)
Investment in subsidiaries (900,000) -- --
----------- ----------- -----------
Net cash used in investing activities 1,375,502 (2,954) (556,802)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from advances from affiliates (9,396,773) 1,922,758 303,299
Payments of advances to affiliates -- (28,998) (101,514)
Payments of notes and contracts payable (1,224,801) (1,676,940) (1,128,972)
Purchase of treasury stock -- (783,086) --
Proceeds from borrowings on notes and
contracts payable 9,000,000 750,000 --
----------- ----------- -----------
Net cash provided (used) by
financing activities (1,621,574) 183,734 (927,187)
----------- ----------- -----------
Net change in cash (4,935) 30,755 (14,051)
Cash at beginning of year 1,065 (29,690) (15,639)
----------- ----------- -----------
Cash at end of year $(3,870) $1,065 $(29,690)
=========== =========== ===========
See accompanying notes to parent company only financial statements.
Schedule II (Continued)
SECURITY NATIONAL FINANCIAL CORPORATION
Notes to Parent Company Only Financial Statements
1) Bank Loans Payable
Bank loans payable are summarized as follows:
December 31,
2002 2001
$4,171,803 revolving line of credit at 6.15% interest
payable monthly and a reduction in principal due
in semi-annual installments collateralized by
15,000 shares of Security National Life Insurance Company
stock, due December 2005. $ 3,144,672 $ 3,703,767
6.59% note payable in monthly installments of $34,680 including
principal and interest, collateralized by 15,000 shares of
Security National Life stock, due December 2004. 727,524 1,101,543
7.35% note payable in monthly installments of $14,975 including
principal and interest collateralized by 15,000 shares of
Security National Life Insurance Company stock, due December 2006. 610,170 750,000
Bank prime rate less .28% (4.22% at December 31, 2002) Note
payable interest only to July 2, 2003, thereafter interest
plus monthly principal payment of $116,883, collateralized
by 15,000 shares of Security National Life Insurance Company
stock, due January 2010. 9,000,000 --
-------------- ------------
Total bank loans 13,482,366 5,555,310
Less current installments 2,082,175 1,386,857
------------- -----------
Bank loans, excluding current
installments $11,400,191 $4,168,453
=========== ==========
2) Notes and Contracts Payable
Notes and contracts are summarized as follows:
December 31,
2002 2001
Due to former stockholders of Civil Service Employees
Life Insurance Company resulting from the acquisition
of such entity. 7% note payable in seven annual principal
payments of $151,857 paid in full December 2002 $ -- $ 151,857
Other 961 961
Total notes and contracts 961 152,818
--------------- -----------
Less current installments 961 152,818
---------------- ------------
Notes and contracts, excluding current installments $ -- $ --
================== =============
Schedule II (Continued)
SECURITY NATIONAL FINANCIAL CORPORATION
Notes to Parent Company Only Financial Statements
The following tabulation shows the combined maturities of bank loans payable and
notes and contracts payable:
2003 $ 2,083,136
2004 3,019,075
2005 2,715,818
2006 1,574,384
2007 1,402,596
Thereafter 2,688,318
-------------
Total $13,483,327
===========
3) Advances from Affiliated Companies
December 31,
2002 2001
Non-interest bearing advances from affiliates:
Cemetery and Mortuary
subsidiary $ 1,366,930 $ 1,366,930
Life Insurance subsidiary 8,655,038 9,054,301
Mortgage subsidiary 10,000 10,000
----------- ------------
$10,031,968 $10,431,231
=========== ===========
4) Dividends
In 2002 Security National Life Insurance Company, a wholly owned subsidiary of
the Registrant, paid to the registrant cash dividends of $2,381,687. There were
no dividends paid for years 2001 and 2000 by any subsidiaries.
Schedule IV
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Reinsurance
Percentage
Ceded to Assumed of Amount
Direct Other from Other Net Assumed
Amount Companies Companies Amount to Net
2002
- ----
Life Insurance
in force ($000) $1,460,832 $220,749 $1,174,604 $2,414,687 48.6%
=========== =========== =========== =========== =======
Premiums:
Life Insurance $13,678,397 $889,401 $922,158 $13,711,154 6.7%
Accident and
Health Insurance 364,275 380 1,603 365,498 .4%
----------- ----------- ----------- ----------- -------
Total premiums $14,042,672 $889,781 $923,761 $14,076,652 6.6%
=========== =========== =========== =========== =======
2001
- ----
Life Insurance
in force ($000) $1,587,136 $216,369 $838,421 $2,209,188 37.9%
=========== =========== =========== =========== =======
Premiums:
Life Insurance $12,930,418 $1,035,984 $845,736 $12,740,170 6.6%
Accident and
Health Insurance 406,393 285 4,597 410,705 1.1%
----------- ----------- ----------- ----------- -------
Total premiums $13,336,811 $1,036,269 $850,333 $13,150,875 6.5%
=========== =========== =========== =========== =======
2000
- ----
Life Insurance
in force ($000) $1,469,502 $253,698 $580,287 $1,796,091 32.3%
=========== =========== =========== =========== =======
Premiums:
Life Insurance $12,934,701 $1,151,262 $634,899 $12,418,338 5.11%
Accident and
Health Insurance 454,656 427 3,018 457,247 .66%
----------- ----------- ----------- ----------- -------
Total premiums $13,389,357 $1,151,689 $637,917 $12,875,585 4.95%
=========== =========== =========== =========== =======
Schedule V
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Valuation and Qualifying Accounts
Balance at Additions Charged Deductions Balance
Beginning to Costs Disposals and at End of
of Year and Expenses Write-offs Year
--------- ------------ ---------- --------
For the Year Ended December 31, 2002
Accumulated depreciation
on real estate $3,404,644 $323,895 $ -- $3,728,539
Accumulated depreciation
on property, plant
and equipment 7,685,613 1,229,504 (11,920) 8,903,197
Allowance for doubtful accounts 2,287,241 517,299 (419,231) 2,385,309
Allowance for real estate losses 119,269 -- (119,269) --
For the Year Ended December 31, 2001
Accumulated depreciation
on real estate $3,088,761 $321,234 $(5,352) $3,404,643
Accumulated depreciation
on property, plant
and equipment 6,699,141 1,029,137 (42,665) 7,685,613
Allowance for doubtful accounts 1,656,223 832,798 (201,780) 2,287,241
Allowance for real estate losses -- 119,269 -- 119,269
For the Year Ended December 31, 2000
Accumulated depreciation
on real estate $2,722,024 $366,737 $ -- $3,088,761
Accumulated depreciation
on property, plant
and equipment 5,989,643 835,421 (125,923) 6,699,141
Allowance for doubtful accounts 1,467,954 190,930 (2,661) 1,656,223
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
- -------------------------------------------------------------------------------
None
PART III
Item 10. Directors and Executive Officers
The Company's Board of Directors consists of seven persons, four of whom are not
employees of the Company. There is no family relationship between or among any
of the directors, except that Scott M. Quist and G. Robert Quist are the sons of
George R. Quist. The following table sets forth certain information with respect
to the directors and executive officers of the Company.
Name Age Position with the Company
- ----- --- ----------------------------
George R. Quist 82 Chairman of the Board and Chief
Executive Officer
Scott M. Quist 49 President, General Counsel, Chief
Operating Officer and Director
Stephen M. Sill 57 Vice President, Treasurer and Chief
Financial Officer
G. Robert Quist 51 First Vice President and Secretary
J. Lynn Beckstead, Jr. 49 Vice President and Director
Charles L. Crittenden 82 Director
Robert G. Hunter 43 Director
H. Craig Moody 51 Director
Norman G. Wilbur 64 Director
Committees of the Board of Directors include an executive committee, on which
Messrs. George Quist, Scott Quist, and Moody serve; an audit committee, on which
Messrs. Crittenden, Moody, and Wilbur serve; and a compensation committee, on
which Messrs. Crittenden, Wilbur, and George Quist serve.
Directors
The following is a description of the business experience of each of the
Company's directors.
George R. Quist has been Chairman of the Board and Chief Executive Officer of
the Company since October 1979. In addition, he served as President of the
Company from October 1979 until July 2002. Mr. Quist has also served as Chairman
of the Board and Chief Executive Officer of Southern Security Life Insurance
Company since December 1998, and as its President from December 1998 to July
2002. From 1960 to 1964, he was Executive Vice President and Treasurer of
Pacific Guardian Life Insurance Company. From 1946 to 1960, he was an agent,
District Manager and Associate General Agent for various insurance companies.
Mr. Quist also served from 1981 to 1982 as the President of The National
Association of Life Companies, a trade association of 642 life insurance
companies, and from 1982 to 1983 as its Chairman of the Board.
Scott M. Quist has been President of the Company since July 2002, its Chief
Operating Officer since October 2001 and its General Counsel and a director
since May 1986. Mr. Quist served as First Vice President of the Company from May
1986 to July 2002. Mr. Quist has also served as President of Southern Security
Life Insurance Company since July 2002, its Chief Operating Officer since
October 2001, and its General Counsel and a director since December 1998. Mr.
Quist also served as First Vice President of Southern Security Life Insurance
Company from December 1998 to July 2002. From 1980 to 1982, Mr. Quist was a tax
specialist with Peat, Marwick, Mitchell, & Co., in Dallas, Texas. From 1986 to
1991, he was a treasurer and director of The National Association of Life
Companies, a trade association of 642 insurance companies until its merger with
the American Council of Life Companies. Mr. Quist has been a member of the Board
of Governors of the Forum 500 Section (representing small insurance companies)
of the American Council of Life Insurance. Mr. Quist has also served as regional
director of Key Bank of Utah since November 1993. Mr. Quist is currently a
director and past president of the National Alliance of Life Companies, a trade
association of over 200 life companies.
J. Lynn Beckstead Jr. has been a Vice President and a director of the Company
since March 2002. Mr. Beckstead has also served as Vice President and director
of Southern Security Life Insurance Company since March 2002. In addition, he is
President of Security National Mortgage Company, an affiliate of the Company,
and has served in this position since July 1993. From 1980 to 1993, Mr.
Beckstead was Vice President and a director of Republic Mortgage Corporation.
From 1983 to 1990, Mr. Beckstead was Vice President and director of Richards
Woodbury Mortgage Corporation. From 1980 to 1983, he was a principal broker for
Boardwalk Properties. From 1978 to 1980, Mr. Beckstead was a residential loan
officer for Medallion Mortgage Company. From 1977 to 1978, he was a residential
construction loan manager of Citizens Bank.
Charles L. Crittenden has been a director of the Company since October 1979. Mr.
Crittenden is also a director of Southern Security Life Insurance Company and
has served in this position since December 1998. Mr. Crittenden has been sole
stockholder of Crittenden Paint & Glass Company since 1958. He is also an owner
of Crittenden Enterprises, a real estate development company, and Chairman of
the Board of Linco, Inc.
Robert G. Hunter, M.D. has been a director of the Company since October 1998.
Dr. Hunter is also a director of Southern Security Life Insurance Company and
has served in this position since December 1998. Dr. Hunter is currently a
practicing physician in private practice. Dr. Hunter created the State Wide
E.N.T. Organization (Rocky Mountain E.N.T., Inc.) where he is currently a member
of the Executive Committee. He is Chairman of Surgery at Cottonwood Hospital, a
delegate to the Utah Medical Association and a delegate representing the State
of Utah to the American Medical Association, and a member of several medical
advisory boards.
H. Craig Moody has been a director of the Company since September 1995. Mr.
Moody is also a director of Southern Security Life Insurance Company and has
served in this position since December 1998. Mr. Moody is owner of Moody &
Associates, a political consulting and real estate company. He is a former
Speaker and House Majority Leader of the House of Representatives of the State
of Utah.
Norman G. Wilbur has been a director of the Company since October 1998. Mr.
Wilbur is also a director of Southern Security Life Insurance Company and has
served in this position since December 1998. Mr. Wilbur worked for J.C. Penny's
regional offices in budget and analysis. His final position was Manager of
Planning and Reporting for J.C. Penney's stores. After 36 years with J.C.
Penny's, he took an option of an early retirement in 1997. Mr. Wilbur is a past
board member of a homeless organization in Plano, Texas.
Executive Officers
The following is a description of the Company's executive officers, who are not
also directors of the Company.
Stephen M. Sill has been Vice President, Treasurer and Chief Financial Officer
of the Company since March 2002. From 1997 to March 2002, Mr. Sill was Vice
President and Controller of the Company. He has also served as Vice President,
Treasurer and Chief Financial Officer of Southern Security Life Insurance
Company since March 2002. From 1998 to March 2002, Mr. Sill also served as Vice
President and Controller of Southern Security Life Insurance Company. From 1994
to 1997, Mr. Sill was Vice President and Controller of Security National Life
Insurance Company. From 1989 to 1993, he was Controller of Flying J. Inc. From
1978 to 1989, Mr. Sill was Senior Vice President and Controller of Surety Life
Insurance Company. From 1975 to 1978, he was Vice President and Controller of
Sambo's Restaurant, Inc. From 1974 to 1975, Mr. Sill was Director of Reporting
for Northwest Pipeline Corporation. From 1970 to 1974, he was an auditor with
Arthur Andersen & Co. Mr. Sill is the President and a director of the Insurance
Accounting and Systems Association (IASA), a national association of over 1,300
insurance companies and associate members.
G. Robert Quist has been First Vice President and Secretary of the Company since
March 2002. Mr. Quist also served as a director of Southern Security Life
Insurance Company since April 1999 and has been Vice President and Secretary
since March 2002. Mr. Quist has also served as First Vice President of Singing
Hills Memorial Park since 1996. Mr. Quist has also served as Vice President of
Memorial Estates since 1982; he began working for Memorial Estates in 1978. Mr.
Quist has also served as President and a director of Big Willow Water Company
since 1987 and was a director of Investors Equity Life Insurance Company of
Hawaii in 1987. He has also served as a director and Secretary-Treasurer of the
Utah Cemetery Association since 1987. From 1976 to 1978 he worked for Wyoming
Minerals and from 1974 to 1976 for Rocky Mountain Geochemical Corp.
The Board of Directors of the Company has a written procedure which requires
disclosure to the board of any material interest or any affiliation on the part
of any of its officers, directors or employees which is in conflict or may be in
conflict with the interests of the Company.
No director, officer or 5% stockholder of the Company or its subsidiaries, or
any affiliate thereof has had any transactions with the Company or its
subsidiaries during 2002 or 2001.
Each of the Directors of the Company are directors of Southern Security Life
Insurance Company, which has a class of equity securities registered under the
Securities Exchange Act of 1934. In addition, Scott M. Quist is an advisory
director of Key Bank of Utah. All directors of the Company hold office until the
next annual meeting of stockholders and until their successors have been duly
elected and qualified.
Item 11. Executive Officer Compensation
The following table sets forth, for each of the last three fiscal years, the
compensation received by George R. Quist, the Company's President and Chief
Executive Officer, and all other executive officers (collectively, the "Named
Executive Officers") at December 31, 2002 whose salary and bonus for all
services in all capacities exceed $100,000 for the fiscal year ended December
31, 2002.
Summary Compensation Table
--------------------------
Annual Compensation Long-Term Compensation
------------------- -----------------------
Other
Annual Restricted Securities Long-Term All Other
Name and Compen- Stock Underlying Incentive Compen-
Principal Position Year Salary($) Bonus($) sation($)(2) Awards($) Options/SARs(#) Payout($) sation($)(3)
- ------------------ ---- --------- -------- ------------ --------- --------------- --------- ------------
George R. Quist (1) 2002 $165,600 $25,000 $2,400 0 0 0 $31,186
Chairman of the 2001 148,737 20,200 2,400 0 50,000 0 37,358
Board and Chief 2000 147,204 20,200 2,400 0 50,000 0 5,281
Executive Officer
Scott M. Quist (1) 2002 $179,400 $35,000 $7,200 0 0 0 $24,066
President, Chief 2001 152,525 20,000 7,200 0 35,000 0 34,739
Operating Officer
and Director 2000 140,400 18,770 7,200 0 35,000 0 637
(1) George R. Quist is the father of Scott M. Quist.
(2) The amounts indicated under "Other Annual Compensation" consist of
payments related to the operation of automobiles by the Named
Executive Officers. However, such payments do not include the
furnishing of an automobile by the Company to George R. Quist and
Scott M. Quist nor the payment of insurance and property taxes with
respect to the automobiles operated by the Named Executive Officers.
(3) The amounts indicated under "All Other Compensation" consist of (a)
amounts contributed by the Company into a trust for the benefit of the
Named Executive Officers under the Security National Financial
Corporation Deferred Compensation Plan (for the years 2002, 2001, and
2000 such amounts were George R. Quist, $16,207, $32,077, and $0
respectively; and Scott M. Quist, $19,219, $34,102, and $0
respectively); (b) insurance premiums paid by the Company with respect
to a group life insurance plan for the benefit of the Named Executive
Officers (for the years 2002, 2001 and 2000, such amounts were for
George R. Quist $125, $637, and $637 respectively; for Scott M. Quist
$642, $637, and $637 respectively); (c) life insurance premiums paid
by the Company for the benefit of the family of George R. Quist
($4,644 for each of the years 2002, 2001 and 2000); Scott M. Quist
($4,205 for the year 2002, $0 for 2001 and $0 for 2000); (d)
compensation paid for the cashless exercise of 50,000 shares of
Company stock exercised by George R. Quist ($10,210) The amounts under
"All Other Compensation" do not include the no interest loan in the
amount of $172,000 that the Company made to George R. Quist on April
29, 1998, to exercise stock options. See "Item 13 Certain
Relationships and Related Transactions".
The following table sets forth information concerning the exercise of options to
acquire shares of the Company's Common Stock by the Named Executive Officers
during the fiscal year ended December 31, 2002, as well as the aggregate number
and value of unexercised options held by the Named Executive Officers on
December 31, 2002.
Aggregated Option/SAR Exercised in Last Fiscal Year and Fiscal Year-End
Option/SAR Values:
Number of
Securities
Underlying Value of
Unexercised Unexercised
Options/SARs In-the-Money
Shares at Options/SARs at
Acquired on December 31, December 31,
Exercise Value 2002(#) 2002
------- ------
Name (#) Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
George R.
Quist 44,946 $233,719 84,000 44,100 $192,120 $192,075
Scott M.
Quist 56,341 $292,975 42,000 44,100 $113,100 $201,675
Retirement Plans
George R. Quist, who has been Chairman and Chief Executive Officer of the
Company since 1979, and President from 1979 to July 2002, has a Deferred
Compensation Agreement, dated December 8, 1988, with the Company (the
"Compensation Agreement"). This Compensation Agreement was amended effective
January 2, 2001, to reflect the following benefits. The employment agreements
between the Company and George R. Quist be amended to adjust for inflation in
accordance with the United States Consumer Index commencing January 2, 2002, and
for each year thereafter of the term of the agreement and that for the year 2001
the adjustment for his retirement is $60,000 per year instead of $50,000 per
year. The agreements shall also be amended to provide his spouse, in the event
of his pre-mature death, with health insurance coverage equivalent to that
carried on executive personnel with the coverage for the entire period of the
agreement. In the event of death of George R. Quist and his spouse prior to the
expiration of the terms of the agreement, payments shall be paid to his estate
or as otherwise directed by him in writing.
The Compensation Agreement further provides that the Board of Directors may
elect to pay the entire amount of deferred compensation in the form of a single
lump-sum payment or other installment payments, so long as the term of such
payments do not exceed 10 years. However, in the event Mr. Quist's employment
with the Company is terminated for any reason other than retirement, death or
disability, the entire deferred compensation shall be forfeited by him. The
Company has accrued a liability for the Compensation Agreement at December 31,
2002 of $294,000.
Employment Agreement
The Company maintains an employment agreement with Scott M. Quist. The
agreement, which has a five-year term, was entered into in 1996, and renewed in
1997 and 2002. Under the terms of the agreement, Mr. Quist is to devote his full
time to the Company serving as its President, General Counsel and Chief
Operating Officer at not less than his current salary and benefits, and to
include $500,000 of life insurance protection. In the event of disability, Mr.
Quist's salary would be continued for up to five years at 50% of its current
level. In the event of a sale or merger of the Company, and Mr. Quist were not
retained in his current position, the Company would be obligated to continue Mr.
Quist's current compensation and benefits for seven years following the merger
or sale.
Director Compensation
Directors of the Company (but not including directors who are employees) are
paid a director's fee of $12,000 per year by the Company for their services and
are reimbursed for their expenses in attending board and committee meetings. No
additional fees are paid by the Company for committee participation or special
assignments. However, each director is provided with an annual grant of stock
options to purchase 1,000 shares of Class A Common Stock under the 2000 Director
Stock Option Plan.
Employee 401(k) Retirement Savings Plan
In 1995, the Company's Board of Directors adopted a 401(k) Retirement Savings
Plan. Under the terms of the 401(k) plan, effective as of January 1, 1995, the
Company may make discretionary employer matching contributions to its employees
who choose to participate in the plan. The plan allows the board to determine
the amount of the contribution at the end of each year. The Board adopted a
contribution formula specifying that such discretionary employer matching
contributions would equal 50% of the participating employee's contribution to
the plan to purchase Company stock up to a maximum discretionary employee
contribution of 1/2% of a participating employee's compensation, as defined by
the plan.
All persons who have completed at least one year's service with the Company and
satisfy other plan requirements are eligible to participate in the 401(k) plan.
All Company matching contributions are invested in the Company's Class A Common
Stock. The Company's matching contributions for 2002, 2001, and 2000 were
approximately $7,975, $18,458, and 0, respectively. Also, the Company may
contribute at the discretion of the Company's Board of Directors an Employer
Profit Sharing Contribution to the 401(k) plan. The Employer Profit Sharing
Contribution shall be divided among three different classes of participants in
the plan based upon the participant's title in the Company. All amounts
contributed to the plan are deposited into a trust fund administered by an
independent trustee. The Company's contributions to the plan for 2002, 2001 and
2000, were $142,218, $260,350, and 0, respectively.
Employee Stock Ownership Plan
Effective January 1, 1980, the Company adopted an employee stock ownership plan
(the "Ownership Plan") for the benefit of career employees of the Company and
its subsidiaries. The following is a description of the Ownership Plan, and is
qualified in its entirety by the Ownership Plan, a copy of which is available
for inspection at the Company's offices.
Under the Ownership Plan, the Company has discretionary power to make
contributions on behalf of all eligible employees into a trust created under the
Ownership Plan. Employees become eligible to participate in the Ownership Plan
when they have attained the age of 19 and have completed one year of service (a
twelve-month period in which the Employee completes at least 1,040 hours of
service). The Company's contributions under the Ownership Plan are allocated to
eligible employees on the same ratio that each eligible employee's compensation
bears to total compensation for all eligible employees during each year. To
date, the Ownership Plan has approximately 170 participants and had $99,612
contributions payable to the Plan in 2002. Benefits under the Ownership Plan
vest as follows: 20% after the third year of eligible service by an employee, an
additional 20% in the fourth, fifth, sixth and seventh years of eligible service
by an employee.
Benefits under the Ownership Plan will be paid out in one lump sum or in
installments in the event the employee becomes disabled, reaches the age of 65,
or is terminated by the Company and demonstrates financial hardship. The
Ownership Plan Committee, however, retains discretion to determine the final
method of payment. Finally, the Company reserves the right to amend or terminate
the Ownership Plan at any time. The trustees of the trust fund under the
Ownership Plan are George R. Quist, Scott M. Quist and Robert G. Hunter, who
each serve as a director of the Company.
Deferred Compensation Plan
In 2001, the Company's Board of Directors adopted a Deferred Compensation Plan.
Under the terms of the Deferred Compensation Plan, the Company will provide
deferred compensation for a select group of management or highly compensated
employees, within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of the
Employee Retirement Income Security Act of 1974, as amended. The board has
appointed a committee of the Company to be the plan administrator and to
determine the employees who are eligible to participate in the plan. The
employees who participate may elect to defer a portion of their compensation
into the plan. The Company may contribute into the plan at the discretion of the
Company's Board of Directors. The Company's contribution for 2002 and 2001 was
$100,577 and $220,038, respectively.
1987 Incentive Stock Option Plan
In 1987, the Company adopted the 1987 Incentive Stock Option Plan (the 1987
Plan). The 1987 Plan provides that shares of the Class A Common Stock of the
Company may be optioned to certain officers and key employees of the Company.
The Plan establishes a Stock Option Plan Committee which selects the employees
to whom the options will be granted and determines the price of the stock. The
Plan establishes the minimum purchase price of the stock at an amount which is
not less than 100% of the fair market value of the stock (110% for employees
owning more than 10% of the total combined voting power of all classes of
stock).
The Plan provides that if additional shares of Class A Common Stock are issued
pursuant to a stock split or a stock dividend, the number of shares of Class A
Common Stock then covered by each outstanding option granted hereunder shall be
increased proportionately with no increase in the total purchase price of the
shares then so covered, and the number of shares of Class A Common Stock
reserved for the purpose of the Plan shall be increased by the same proportion.
In the event that the shares of Class A Common Stock of the Company from time to
time issued and outstanding are reduced by a combination of shares, the number
of shares of Class A Common Stock then covered by each outstanding option
granted hereunder shall be reduced proportionately with no reduction in the
total price of the shares then so covered, and the number of shares of Class A
Common Stock reserved for the purposes of the Plan shall be reduced by the same
proportion.
The Plan terminated in 1997 and options granted are non-transferable. The Plan
permits the holder of the option to elect to receive cash, amounting to the
difference between the option price and the fair market value of the stock at
the time of the exercise, or a lesser amount of stock without payment, upon
exercise of the option.
1993 Stock Option Plan
On June 21, 1993, the Company adopted the Security National Financial
Corporation 1993 Stock Incentive Plan (the "1993 Plan"), which reserves shares
of Class A Common Stock for issuance thereunder. The 1993 Plan was approved at
the annual meeting of the stockholders held on June 21, 1993. The 1993 Plan
allows the Company to grant options and issue shares as a means of providing
equity incentives to key personnel, giving them a proprietary interest in the
Company and its success and progress.
The 1993 Plan provides for the grant of options and the award or sale of stock
to officers, directors, and employees of the Company. Both "incentive stock
options," as defined under Section 422A of the Internal Revenue Code of 1986
(the "Code"), and "non-qualified options" may be granted pursuant to the 1993
Plan. The exercise prices for the options granted are equal to or greater than
the fair market value of the stock subject to such options as of the date of
grant, as determined by the Company's Board of Directors. The options granted
under the 1993 Plan, were to reward certain officers and key employees who have
been employed by the Company for a number of years and to help the Company
retain these officers by providing them with an additional incentive to
contribute to the success of the Company.
The 1993 Plan is to be administered by the Board of Directors or by a committee
designated by the Board. The terms of options granted or stock awards or sales
effected under the 1993 Plan are to be determined by the Board of Directors or
its committee. The Plan provides that if the shares of Common Stock shall be
subdivided or combined into a greater or smaller number of shares or if the
Company shall issue any shares of Common Stock as a stock dividend on its
outstanding Common Stock, the number of shares of Common Stock deliverable upon
the exercise of Options shall be increased or decreased proportionately, and
appropriate adjustments shall be made in the purchase price per share to reflect
such subdivision, combination or stock dividend. In addition, the number of
shares of Common Stock reserved for purposes of the Plan shall be adjusted by
the same proportion. No options may be exercised for a term of more than ten
years from the date of grant.
Options intended as incentive stock options may be issued only to employees, and
must meet certain conditions imposed by the code, including a requirement that
the option exercise price be no less than the fair market value of the option
shares on the date of grant. The 1993 Plan provides that the exercise price for
non-qualified options will be not less than at least 50% of the fair market
value of the stock subject to such option as of the date of grant of such
options, as determined by the Company's Board of Directors.
The 1993 Plan has a term of ten years. The Board of Directors may amend or
terminate the 1993 Plan at any time, subject to approval of certain
modifications to the 1993 Plan by the shareholders of the Company as may be
required by law or the 1993 Plan. On November 7, 1996, the Company amended the
1993 Plan as follows: (i) to increase the number of shares of Class A Common
Stock reserved for issuance under the 1993 Plan from 300,000 Class A shares to
600,000 Class A shares; and (ii) to provide that the stock subject to options,
awards and purchases may include Class C common stock.
On October 14, 1999, the Company amended the 1993 Plan to increase the number of
shares of Class A Common Stock reserved for issuance under the plan from 746,126
Class A shares to 1,046,126 Class A shares.
2000 Director Stock Option Plan
On October 16, 2000, the Company adopted the 2000 Directors Stock Option Plan
(the "Director Plan") effective November 1, 2000. The Director Plan provides for
the grant by the Company of options to purchase up to an aggregate of 50,000
shares of Class A Common Stock for issuance thereunder. The Director Plan
provides that each member of the Company's Board of Directors who is not an
employee or paid consultant of the Company automatically is eligible to receive
options to purchase the Company's Class A Common Stock under the Director Plan.
Effective as of November 1, 2000, and on each anniversary date thereof during
the term of the Director Plan, each outside director shall automatically receive
an option to purchase 1,000 shares of Class A Common Stock. In addition, each
new outside director who shall first join the Board after the effective date
shall be granted an option to purchase 1,000 shares upon the date which such
person first becomes an outside director and an annual grant of an option to
purchase 1,000 shares on each anniversary date thereof during the term of the
Director Plan. The options granted to outside directors shall vest in their
entirety on the first anniversary date of the grant. The primary purposes of the
Director Plan are to enhance the Company's ability to attract and retain
well-qualified persons for service as directors and to provide incentives to
such directors to continue their association with the Company.
In the event of a merger of the Company with or into another company, or a
consolidation, acquisition of stock or assets or other change in control
transaction involving the Company, each option becomes exercisable in full,
unless such option is assumed by the successor corporation. In the event the
transaction is not approved by a majority of the "Continuing Directors" (as
defined in the Director Plan), each option becomes fully vested and exercisable
in full immediately prior to the consummation of such transaction, whether or
not assumed by the successor corporation.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The following table sets forth security ownership information of the Company's
Class A and Class C Common Stock as of March 31, 2003, (i) for persons who own
beneficially more than 5% of the Company's outstanding Class A or Class C Common
Stock, (ii) each director of the Company, (iii) each of the Company's named
executive officers, and (iv) for all executive officers and directors of the
Company as a group.
Class A and
Class A Class C Class C
Common Stock Common Stock Common Stock
------------ ------------ ------------
Amount Amount Amount
Name and Address of Beneficially Percent Beneficially Percent Beneficially Percent
Beneficial Owner Owned of Class Owned of Class Owned of Class
- ----------------- ------- -------- ----- -------- ----- --------
George R. Quist (1)(2)(3)(4)(5)
4491 Wander Lane
Salt Lake City, UT 84124 288,728 5.8% 428,207 7.0% 716,935 6.4%
George R. and Shirley C
Quist Family
Partnership, Ltd.(6)
4491 Wander Lane
Salt Lake City, UT 84124 383,899 7.6% 3,045,052 49.8% 3,428,951 30.8%
Employee Stock
Ownership Plan (7)
5300 S. 360 W., Suite 250
Salt Lake City, UT 84123 507,490 10.1% 1,408,653 23.1% 1,916,143 17.2%
Scott M. Quist (1)(3)(4)(8)
7 Wanderwood Way
Sandy, UT 84092 229,106 4.6% 233,178 3.8% 462,284 4.2%
Associated Investors (9)
5300 S. 360 W. Suite 250
Salt Lake City, UT 84123 84,170 1.7% 594,658 9.7% 678,828 6.1%
Item 12 - Security Ownership of Certain Beneficial Owners and Management (Continued)
- -------------------------------------------------------------------------
Class A and
Class A Class C Class C
Common Stock Common Stock Common Stock
------------ ------------ ------------
Amount Amount Amount
Name and Address of Beneficially Percent Beneficially Percent Beneficially Percent
Beneficial Owner Owned of Class Owned of Class Owned of Class
- ----------------- ------- -------- ----- -------- ----- --------
G. Robert Quist (10)
2678 Cave Hollow Way
Bountiful, UT 84010 68,794 1.4% 221,363 3.6% 290,157 2.6%
Stephen M. Sill (11)
1595 North Fort Lane
Layton, UT 84041 35,261 * 35,261 *
J. Lynn Beckstead, Jr. (12)
190 Matterhorn Drive
Alpine, UT 84004 74,449 1.5% 74,449 *
Charles L. Crittenden(13)
2334 Fillmore Avenue
Ogden, UT 84401 3,321 * 3,321 *
H. Craig Moody(14)
1782 East Faunsdale Dr.
Sandy, Utah 84092 3,100 * 3,100 *
Norman G. Wilbur (15)
2520 Horseman Drive
Plano, TX 75025 3,357 * 3,357 *
Robert G. Hunter, M.D (1)(3)(16)
2 Ravenwood Lane
Sandy, UT 84092 4,563 * 4,563 *
All directors and executive officers
(9 persons)(1)(2)(3)(4) 1,094,578 21.8% 3,927,800 64.3% 5,022,378 45.1%
* Less than one percent
(1) Does not include 507,490 shares of Class A Common Stock and 1,408,653
shares of Class C Common Stock owned by the Company's Employee Stock Ownership
Plan (ESOP), of which George R. Quist, Scott M. Quist, and Robert G. Hunter are
the trustees and accordingly, exercise shared voting and investment powers with
respect to such shares.
(2) Does not include 84,170 shares of Class A Common Stock and 594,658
shares of Class C Common Stock owned by Associated Investors, a Utah general
partnership, of which George R. Quist is the managing partner and, accordingly,
exercises voting and investment powers with respect to such shares.
(3) Does not include 171,222 shares of Class A Common Stock owned by the
Company's 401(k) Retirement Savings Plan, of which George R. Quist, Scott M.
Quist, and Robert G. Hunter are members of the Investment Committee and,
accordingly, exercise shared voting and investment powers with respect to such
shares.
(4) Does not include 76,997 shares of Class A Common Stock owned by the
Company's Deferred Compensation Plan, of which George R. Quist and Scott M.
Quist are members of the Investment Committee and, accordingly, exercise shared
voting and investment powers with respect to such shares.
(5) Includes options to purchase 84,000 shares of Class A common stock
granted to George R. Quist, that are currently exercisable or will become
exercisable within 60 days of March 31, 2003.
(6) This stock is owned by the George R. and Shirley C. Quist Family
Partnership, Ltd., of which George R. Quist is the general partner.
(7) The trustees of the Employee Stock Ownership Plan (ESOP) are George R.
Quist, Scott M. Quist, and Robert G. Hunter, who exercise shared voting and
investment powers.
(8) Includes options to purchase 42,000 shares of Class A common stock
granted to Scott M. Quist, that are currently exercisable or will become
exercisable within 60 days of March 31, 2003.
(9) The managing partner of Associated Investors is George R. Quist, who
exercises voting and investment powers.
(10) Includes options to purchase 5,250 shares of Class A common stock
granted to G. Robert Quist, that are currently exercisable or will become
exercisable within 60 days of March 31, 2003.
(11) Includes options to purchase 5,250 shares of Class A common stock
granted to Mr. Sill, that are currently exercisable or will become exercisable
within 60 days of March 31, 2003.
(12) Includes options to purchase 43,076 shares of Class A common stock
granted to Mr. Beckstead, that are currently exercisable or will become
exercisable within 60 days of March 31, 2003.
(13) Includes options to purchase 2,261 shares of Class A common stock
granted to Mr. Crittenden, that are currently exercisable or will become
exercisable within 60 days of March 31, 2003.
(14) Includes options to purchase 2,261 shares of Class A common stock
granted to Mr. Moody, that are currently exercisable or will become exercisable
within 60 days of March 31, 2003.
(15) Includes options to purchase 2,261 shares of Class A common stock
granted to Mr. Wilbur, that are currently exercisable or will become exercisable
within 60 days of March 31, 2003.
(16) Includes options to purchase 2,261 shares of Class A common stock
granted to Mr. Hunter, that are currently exercisable or will become exercisable
within 60 days of March 31, 2003.
The Company's officers and directors, as a group, own beneficially approximately
45.1% of the outstanding shares of the Company's Class A and Class C Common
Stock.
Item 13. Certain Relationships and Related Transactions
The Company has made a loan in the amount of $172,000 to George R. Quist, the
Company's Chief Executive Officer, without requiring the payment of any
interest. The loan was made under a Promissory Note dated April 29, 1998 in
order for Mr. Quist to exercise stock options which were granted to him under
the 1993 Stock Option Plan. No installment payments are required under the terms
of the note, but the note must be paid in full as of December 31, 2007. Mr.
Quist has the right to make prepayments on the note at any time. As of March 31,
2003, the outstanding balance of the note was $62,790. The loan was approved by
the Company's directors on March 12, 1999, with Mr. Quist abstaining, at a
special meeting of the Board of Directors.
On December 19, 2001, the Company entered into an option agreement with Monument
Title, LLC, a Utah limited liability company ("Monument Title") in which the
Company made available a $100,000 line of credit to Monument Title at an
interest rate of 8% per annum. The line of credit is secured by the assets of
Monument Title. From December 28, 2001 to June 14, 2002, the Company advanced
Monument Title a total of $77,953 under the line of credit. The amount advanced
under the line of credit plus accrued interest are payable upon demand. Ron
Motzkus and Troy Lashley, who own 90% and 10% of the outstanding shares of
Monument Title, respectively are brother-in-laws of Scott M. Quist, President
and Chief Operating Officer of the Company. The Company has the right under the
option agreement for a period of five years from the date thereof to acquire
100% of the outstanding common shares of Monument Title for the sum of $10. The
Company believes that it is currently prohibited from directly owning shares of
stock representing control of a title company. The purpose of the transaction,
which was approved by the Company's board of directors, is to insure that the
title and escrow work performed for Security National Mortgage Company in
connection with its mortgage loans are completed as accurately as possible by
Monument Title to avoid any economic losses to the Company.
The Company's Board of Directors has a written procedure which requires
disclosure to the Board of any material interest or any affiliation on the part
of any of its officers, directors or employees which is in conflict or may be in
conflict with the interests of the Company.
Item 14. Controls and Procedures
(a) Evaluation of disclosure controls and procedures - The Company's
Principal Executive Officer and Principal Financial Officer have reviewed and
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Rules 240.13a-14(c) and 15d-14(c) under the Securities and
Exchange Act of 1934 (the "Exchange Act") as of a date within ninety days before
the filing date of this annual report. Based on that evaluation, the Principal
Executive Officer and the Principal Financial Officer have concluded that the
Company's disclosure controls and procedures are effective, providing them with
material information relating to the Company as required to be disclosed in the
reports the Company files or submits under the Exchange Act on a timely basis.
(b) Changes in internal controls - There were no significant changes in the
Company's controls or in other factors that could significantly affect the
Company's disclosure controls and procedures subsequent to the date of their
evaluation, nor were there any significant deficiencies or material weaknesses
in the Company's internal controls. As a result, no corrective actions were
required or undertaken.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a)(1)(2) Financial Statements and Schedules
See "Index to Consolidated Financial Statements and Supplemental Schedules"
under Item 8 above.
(a)(3) Exhibits
The following Exhibits are filed herewith pursuant to Rule 601 of
Regulation S-K or are incorporated by reference to previous filings.
Exhibit
Table No Document
(a)(3) Exhibits:
3.A. Articles of Restatement of Articles of Incorporation (8)
B. Bylaws (1)
4.A. Specimen Class A Stock Certificate (1)
B. Specimen Class C Stock Certificate (1)
C. Specimen Preferred Stock Certificate and Certificate of Designation
of Preferred Stock (1)
10. A. Restated and Amended Employee Stock Ownership Plan and Trust Agreement(1)
B. Deferred Compensation Agreement with George R. Quist (2)
C. 1993 Stock Option Plan (3)
D. 2000 Director Stock Option Plan (12)
E. Promissory Note with Key Bank of Utah (4)
F. Loan and Security Agreement with Key Bank of Utah (4)
G. General Pledge Agreement with Key Bank of Utah (4)
H. Note Secured by Purchase Price Deed of Trust and Assignment of Rents
with the Carter Family Trust and the Leonard M. Smith Family Trust (5)
I. Deed of Trust and Assignment of Rents with the Carter Family Trust and
the Leonard M. Smith Family Trust (5)
J. Promissory Note with Page and Patricia Greer (6)
K. Pledge Agreement with Page and Patricia Greer (6)
L. Promissory Note with Civil Service Employees Insurance Company (7)
M. Deferred Compensation Agreement with William C. Sargent (8)
N. Employment Agreement with Scott M. Quist. (8)
O. Acquisition Agreement with Consolidare Enterprises, Inc., and certain
shareholders of Consolidare. (9)
P. Agreement and Plan of Merger between Consolidare Enterprises, Inc.,
and SSLIC Holding Company. (10)
Q. Administrative Services Agreement with Southern Security Life
Insurance Company. (11)
R. Promissory Note with George R. Quist (13)
S. Deferred Compensation Plan (14)
T. Coinsurance Agreement between Security National Life and Acadian (15)
U. Assumption Agreement among Acadian, Acadian Financial Group, Inc.,
Security National Life and the Company (15)
V. Asset Purchase Agreement between Acadian, Acadian Financial Group,
Inc., Security National Life and the Company (15)
W. Promissory Note with Key Bank of Utah
X. Loan and Security Agreement with Key Bank of Utah
(1) Incorporated by reference from Registration Statement on Form S-1, as
filed on June 29, 1987.
(2) Incorporated by reference from Annual Report on Form 10-K, as filed on
March 31, 1989.
(3) Incorporated by reference from Annual Report on Form 10-K, as filed on
March 31, 1994.
(4) Incorporated by reference from Report on Form 8-K, as filed on
February 24, 1995.
(5) Incorporated by reference from Annual Report on Form 10K, as filed on
March 31, 1995.
(6) Incorporated by reference from Report on Form 8-K, as filed on May 1,
1995.
(7) Incorporated by reference from Report on Form 8-K, as filed on January
16, 1996.
(8) Incorporated by reference from Annual Report on Form 10-K, as filed on
March 31, 1998.
(9) Incorporated by reference from Report on Form 8-K, as filed on May 11,
1998.
(10) Incorporated by reference from Report on Form 8-K, as filed on January
4, 1999.
(11) Incorporated by reference from Report on Form 8-K, as filed on March
4, 1999.
(12) Incorporated by reference from Schedule 14A Definitive Proxy
Statement, filed August 29, 2000, relating to the Company's Annual
Meeting of Shareholders.
(13) Incorporated by reference from Report on Form 10-K, as filed on April
16, 2001.
(14) Incorporated by reference from Report on Form 10-K, as filed on April
3, 2002.
(15) Incorporated by reference from Report on Form 8-K-A as filed on
January 8, 2003.
21. Subsidiaries of the Registrant
(b) Reports on Form 8-K:
Asset purchase transaction with Acadian Life Insurance Company on December
23, 2002:
Form 8-K filed on January 7, 2003
Form 8-K/A filed on January 8, 2003
Form 8-K /A-2 filed on March 10, 2003
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SECURITY NATIONAL FINANCIAL CORPORATION
Dated: April 15, 2003 By: George R. Quist,
---------------
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934 as amended,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
George R. Quist Chairman of the April 15, 2003
Board and Chief Executive
Officer (Principal
Executive Officer)
Scott M. Quist President, General April 15, 2003
Counsel, Chief
Operating Officer
and Director April 15, 2003
Stephen M. Sill Vice President,
Treasurer and Chief
Financial Officer (Principal
Financial and Accounting
Officer) April 15, 2003
G. Robert Quist First Vice President and
Secretary April 15, 2003
J. Lynn Beckstead, Jr. Vice President and Director April 15, 2003
Charles L. Crittenden Director April 15, 2003
H. Craig Moody Director April 15, 2003
Norman G. Wilbur Director April 15, 2003
Robert G. Hunter Director April 15, 2003
CERTIFICATIONS
I, George R. Quist, certify that:
1. I have reviewed this annual report on Form 10-K of Security National
Financial Corporation.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 15, 2003
By: George R. Quist
Chairman of the Board and
Chief Executive Officer
CERTIFICATIONS
I, Stephen M. Sill, certify that:
1. I have reviewed this annual report on Form 10-K of Security National
Financial Corporation.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 15, 2003
By: Stephen M. Sill
Vice President, Treasurer and
Chief Financial Officer
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C.ss.1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Security National Financial Corporation
(the "Company") on Form 10K for the period ending December 31, 2002, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, George R. Quist, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that, to the best of my knowledge and belief:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
George R. Quist
Chief Executive Officer
April 15, 2003
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C.ss.1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Security National Financial Corporation
(the "Company") on Form 10K for the period ending December 31, 2002, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Stephen M. Sill, Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that, to the best of my knowledge and belief:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
Stephen M. Sill
Chief Financial Officer
April 15, 2003
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Year Ended December 31, 2003
SECURITY NATIONAL FINANCIAL CORPORATION
Commission File No. 0-9341
E X H I B I T S
Exhibit Index
Exhibit No. Document Name
21 Subsidiaries of the Registrant
10 Promissory Note
10 Loan Agreement
EXHIBIT 21
Subsidiaries of Security National
Financial Corporation
as of March 31, 2003
Exhibit 21
Subsidiaries of Security National Financial Corporation (as of March 31, 2003)
Security National Life Insurance Company
Security National Mortgage Company
Memorial Estates, Inc.
Memorial Mortuary
Paradise Chapel Funeral Home, Inc.
California Memorial Estates, Inc.
Cottonwood Mortuary, Inc.
Deseret Memorial, Inc.
Holladay Cottonwood Memorial Foundation
Holladay Memorial Park, Inc.
Camelback Sunset Funeral Home, Inc.
Greer-Wilson Funeral Home, Inc.
Crystal Rose Funeral Home, Inc.
Hawaiian Land Holdings
SSLIC Holding Company
Insuradyne Corporation
Southern Security Life Insurance Company
Exhibit W
Promissory Note
Exhibit W
Exhibit X
Loan and Security Agreement with KeyBank National Association
Exhibit X
$9,000,000 December 24, 2002
Salt Lake City, Utah
PROMISSORY NOTE
This Promissory Note is made and given on the day first written above by
SECURITY NATIONAL FINANCIAL CORPORATION, a Utah corporation ("Borrower"), as
maker, to and for the benefit of KEYBANK NATIONAL ASSOCIATION, a national
banking association, and its successors and assigns ("Lender") as payee.
Borrower and Lender are parties to that certain "Loan and Security Agreement" of
even or recent dater herewith (the "Agreement") pursuant to which Lender agreed
to make a loan to Borrower in the original principal amount of $9,000,000.00
(the "Loan") upon the terms and conditions therein set forth. This Promissory
Note is made in connection with the Agreement and is the Promissory Note
referred to therein. Capitalized terms used in this Promissory Note which are
not defined herein shall have the meanings given them in the Agreement.
1. Promise to Pay Principal and Interest. For value received, Borrower
promises to pay to Lender the principal sum of NINE MILLION DOLLARS AND NO/100
DOLLARS ($9,000,000.00), together with interest on the unpaid principal balance
at a variable or floating rate equal to the sum of an index and a margin, where
the index is Lender's Prime Rate and the margin is a minus twenty-eight (-28)
basis points (i.e., -.28%) per annum, the sum of which is the "Effective Rate".
Changes to the Effective Rate will be made on the same day as changes occur to
Lender's Prime Rate. Lender need not give Borrower prior notice of any changes
in the Prime Rate. Interest will be calculated on a basis of 360-day year and
charged for the actual number of days elapsed. As used herein, the term "Prime
Rate" means the interest rate established and designated as such from time to
time by Lender. Such rate is an index based on certain factors selected from
time to time by Lender such as the prime or the base lending rates announced by
other financial institutions. The Prime Rate serves as the basis upon which
effective rates of interest are calculated for variable-rate loans made by
Lender which use that term as an index. Prime Rate does not necessarily mean the
lowest or best rate at which Lender may make a loan or otherwise extend credit.
2. Repayment. Borrower shall pay accrued interest on the outstanding
principal balance monthly commencing on February 1, 2003, and continuing on the
first day of each month thereafter to and including July 1, 2003. Commencing on
August 1, 2003, and continuing on the first day of each month thereafter,
Borrower shall make monthly payments equal to the sum of (a) $125,000.00
principal reduction, and (b) accrued interest; provided, however, if Borrower
enters into an interest rate hedge or "swap" agreement with Lender or one of
Lender's affiliates, the monthly payment of amount shall be adjusted based on
such swap agreement, and Borrower and Lender shall attach a payment schedule as
an exhibit to this Promissory Note to reflect such monthly payment amounts.
Notwithstanding anything in the Agreement, this Promissory Note, or the other
Loan Documents to the contrary, the entire unpaid principal balance of the Loan
and this Promissory Note, together with all accrued interest and other unpaid
charges due to Lender pursuant to the Agreement, this Promissory Note, and the
other Loan Documents, shall be due and payable on January 1, 2010. All payments
shall be made in lawful currency of the United States of America at KeyBank
Tower, Suite 2007, 50 South Main Street, Salt Lake City, Utah 84144, or such
other place as the holder of the Promissory Note may designate. Payments falling
due on a day that is a Saturday, Sunday, or other day on which commercial banks
in the State of Utah are required or authorized to be closed for the general
transaction of banking business shall be due on the next succeeding business
day; provided, however, for purposes of determining late charges or other
matters that are determined or calculated with respect to the date a payment is
due, all payments shall be considered to
be due on the originally-scheduled payment date. All payments received by Lender
under the Promissory Note or otherwise on account of the obligations or
indebtedness evidenced hereby, shall be applied in the following priority:
First, to the payment of late charges; Second, to the payment of any costs and
expenses incurred by Lender under the Promissory Note for which Borrower has
agreed to pay or reimburse Lender; Third, to the payment of accrued interest;
and Fourth, to the payment of principal. Notwithstanding, the foregoing, upon
the occurrence of an Event of Default, as hereinafter defined, Lender may, in
its sole discretion, alter the priority of payments among the above-described
categories.
3. Late Charges. If any payment is not paid within ten (10) days after it's
scheduled payment date, Borrower agrees to pay a late charge equal to the
greater of $50 or five percent (5%) of the amount of the delinquent payment. The
late charge is intended to cover, in part, the extra expense of Lender in
handling such delinquent payment and its loss opportunity costs. Borrower
acknowledges that it would be impractical for the Borrower and Lender to
determine the exact amount of damages Lender will incur if a payment is
delinquent, and that the amount set forth in this Paragraph 3 is a good faith
estimate of, and shall be presumed to be, the amount of damages that will be
sustained by Lender as a result of a delinquent payment. Acceptance by Lender of
any late charge shall not be construed as a waiver any other right or remedy
Lender may have with respect to a delinquent payment
4. Default Interest Rate. Upon the occurrence of an Event of Default and
during the continuance thereof, the margin used to compute the Effective Rate
shall, at Lender's sole option and without prior notice to Borrower, immediately
increase by an additional four hundred (400) basis points (i.e., 4%) and shall
continue at such rate, both before and after judgment, until the Loan has been
repaid in full and all of Borrower's other obligations to Lender under this
Promissory Note, the Agreement, and the other Loan Documents have been fully
paid and discharged.
5. Collateral. The obligations and liabilities of Borrower under this
Promissory Note are secured by Collateral described in the Agreement.
6. Events of Default; Remedies. The occurrence of an Event of Default under
the Agreement shall constitute a default under this Promissory Note. Upon the
occurrence of an Event of Default, Lender shall have all of the rights and
remedies set forth in the Agreement. Without limiting the foregoing, Lender may
accelerate the entire unpaid principal balance of this Promissory Note, together
with accrued interest thereon, and declare the same to be immediately due and
payable without presentment, demand, protest, or other notice of any kind.
Without waiving any right or remedy available to it, Lender may proceed against
Borrower, Guarantor, or any Collateral simultaneously or in any order it
chooses. To the fullest extent permitted by law, Borrower waives any rights to
presentment, demand, protest, or notice of any kind in connection with the
Agreement, this Promissory Note, or the other Loan Documents. No failure or
delay on the part of Lender in exercising any right, power, or privilege
hereunder will preclude any other or further exercise thereof or the exercise of
any other right, power, or privilege.
7.Governing Law. This Promissory Note is deemed to be negotiated,
delivered, and to be performed in Salt Lake City, Utah, and shall be governed
and construed in accordance with the laws of the State of Utah.
8. Conflicts with Loan Agreement. In the event of a conflict or
inconsistency between any term or provision contained in this Promissory Note
and any term or provision contained in the Agreement, the terms and provisions
of this Promissory Note shall have priority over the terms and provisions of the
Agreement.
SECURITY NATIONL FINANCIAL
CORPORATION, a Utah corporation
By: s/s Scott M. Quist
President
LOAN AND SECURITY AGREEMENT
This Loan and Security Agreement (this "Agreement") is made and entered
into in Salt Lake City, Utah, this 24th day of December, 2002, by and between
KEYBANK NATIONAL ASSOCIATION, a national banking association ("Lender"), and
SECURITY NATIONAL FINANCIAL CORPORATION, a Utah corporation ("Borrower").
Borrower and Lender are sometimes referred to herein, collectively, as the
"Parties."
In consideration of the mutual covenants and agreements contained herein,
the Parties agree as follows:
1. Term Loan. Subject to all of the terms and conditions contained in this
Agreement, Lender agrees to make a loan (the "Loan") to Borrower in the
principal amount of NINE MILLION AND NO/100 DOLLARS ($9,000,000). The Loan is a
non-revolving line of credit that will be fully disbursed at the time of
closing. In connection herewith, and as further evidence of the Loan, Borrower,
as maker, shall execute and deliver to Lender, as payee, a promissory note (the
"Promissory Note") for the amount of Loan, which Promissory Note shall be in
form and content satisfactory to Lender. All sums advanced on the Loan pursuant
to the terms of this Agreement shall be deemed advances or disbursements of
principal under the Promissory Note.
2. Commercial Purpose of Loan. The purpose of the Loan is to provide funds
for the acquisition by Borrower or one or more of its subsidiaries of the
capital stock in, or the book of insurance business, of Gulf National Life. No
other use of the proceeds of this Promissory Note shall be made without Lender's
prior written consent.
3. Interest; Default Interest. All sums advanced or disbursed pursuant to
this Agreement and the Promissory Note shall bear interest form the date hereof
until paid in full, both before and after judgment, at a variable or floating
rate equal to the sum of an index and a margin (the sum of which is the
"Effective Rate") where the index is the Prime Rate and the margin is a minus
twenty-eight (28) basis points (i.e., - .28%) per annum. Adjustments to the
Effective Rate shall be made on and as of the same day that changes occur to the
Prime Rate. As used herein, "Prime Rate" means the percentage rate of interest
designated from time to time by Lender as its "prime" or base lending rate. The
Prime Rate is based on certain factors which Lender selects from time to time,
such as the prime or base lending rates of other financial institutions. The
Prime Rate is an index used by Lender to establish the effective interest rate
for variable-rate loans made by it which use that term as an index. Prime Rate
does not necessarily mean the lowest or best rate at which Lender may make loans
or extend credit. Interest will be calculated on the basis of a 360-day year and
charged for the actual number of days elapsed. Upon the occurrence of an Event
of Default (as hereinafter defined) and during the continuance thereof, the
margin used to compute the Effective Rate shall, at Lender's sole option and
without prior notice to Borrower, immediately increase by an additional four
hundred (400) basis points (i.e., 4%) and shall continue at such rate, both
before and after judgment, until the Loan and the Promissory Note have been
repaid in full and all of Borrower's other obligations to Lender thereunder have
been fully paid and discharged.
4.Payments. Borrower shall make payments in the amounts, at the times, and
in the manner set forth in the Promissory Note. The Parties contemplate that
Borrower will enter into an interest rate hedge, derivative, or "swap" agreement
with Lender or an affiliate of Lender in connection with the Loan, upon terms
and conditions as may be mutually satisfactory to them. If Borrower and Lender
enter into such interest rate hedge, derivative, or swap agreement, the monthly
payment amount due under the Promissory Note shall be adjusted in accordance
with a schedule or exhibit or be attached thereto.
5. Late Charges. If any payment is not paid within five (5) days after it's
scheduled payment date, Borrower agrees to pay a late charge equal to the
greater of $50 or five percent (5%) of the amount of the delinquent payment. The
late charge is intended to cover, in part, the extra expense of Lender in
handling such delinquent payment and loss opportunity costs. Borrower
acknowledges that it would be impractical for the Parties to determine the exact
amount of damages Lender will incur if a payment is delinquent, and that the
amount set forth in this Paragraph 5 is a good faith estimate of, and shall be
presumed to be, the amount of damages that will be sustained by Lender as a
result of a delinquent payment. Nothing herein shall be construed to waive any
other right or remedy Lender may have with respect to a delinquent payment.
6. Loan Fees and Other Expenses. Borrower agrees to pay to Lender a loan or
commitment fee in the amount of $9,000.00 upon execution of this Agreement. Such
loan or commitment fee shall be deemed fully earned and non-refundable. In
addition, Borrower agrees to pay or reimburse Lender for all of Lender's costs
and expenses incurred by Lender in connection with the transaction contemplated
herein, including without limitation filing fees and reasonable attorney's fees
and expenses. Such costs and expenses shall be due and payable upon execution of
this Agreement, or if incurred thereafter, upon demand by Lender.
7. Collateral. The obligations, undertakings, liabilities and indebtedness
of Borrower with respect to the Loan or in any manner arising under this
Agreement, the Promissory Note, the other Loan Documents (as hereinafter
defined), and any obligation or liability that Borrower may now or hereafter owe
to Lender in connection with or arising from any interest rate hedge,
derivative, or "swap" agreement made with respect to the Loan, including without
limitation obligations which may arise pursuant to any "ISDA Master Agreement"
and any schedules thereto, whether presently existing or hereafter arising or
entered into, and any early termination fees (collectively, the "Obligation")
shall be secured by, and Borrower hereby assigns, transfers, and conveys to
Lender, and grants Lender a security interest in and to, the following
(collectively, the "Collateral"):
(a) All of the issued and outstanding capital stock (the "Pledged
Stock") of Security National Life Insurance Company, a Utah corporation
("SNLIC"), a wholly owned subsidiary of Borrower. Without limiting the
foregoing, Lender shall have a security interest in that certain stock
certificate Number 1 representing 15,000 shares of common stock in SNLIC
(the "Pledged Stock Certificate")
(b) All shares and associated rights and interests resulting or
derived from the Pledged Stock, including without limitation stock issued
in connection with forward and reverse stock splits, stock dividends,
warrants, stock appreciation rights, and stock and other consideration or
distributions received with respect to or on account of Pledged Stock in
any merger, consolidation, reorganization, recapitalization, or similar
transaction.
(c) All dividends and distributions, whether in cash or kind, made
with respect to, or on account of, the Pledged Stock.
(d) All products and proceeds from any of the foregoing.
Borrower shall execute and deliver to Lender, or shall cause to be executed
and delivered to Lender, such assignments, security agreements, UCC financing
statements (including continuation statements and amendments), pledges,
hypothecations, consents, acknowledgments, and other documents and instruments,
and shall take such other action, as Lender may request to further effect or
perfect its security interest in the Collateral. Such documents, together with
this Agreement, the Promissory Note, and the Guaranty (as hereinafter defined)
are referred to as the "Loan Documents". Borrower agrees that the Pledged Stock,
together with any additional stock that may be issued with respect thereto or
issued in conversion or exchange thereof, shall be delivered to and held by
Lender or its nominee at all times, and agrees to take all necessary action to
effect such delivery. Notwithstanding the foregoing, the Parties acknowledge
that Lender is currently holding the Pledge Stock Certificate in its possession
pursuant to a "Commercial Pledge and Security Agreement" dated December 8, 1998
(the "Pledge Agreement"), and is holding the same as security for certain other
loans and extensions of credit made by Lender to Borrower. The Parties agree
that the term "Indebtedness" as used in the Pledge Agreement shall include,
without limitation, the Obligations, and that the Pledge Agreement constitutes
one of the Loan Documents.
8. Guarantor. The Obligation of Borrower to Lender shall be absolutely and
unconditionally guaranteed by SECURITY NATIONAL LIFE INSURANCE COMPANY, a Utah
corporation ("Guarantor"), using a form of guaranty agreement satisfactory to
Lender (the "Guaranty").
9. Conditions Precedent. Lender shall not be required to make any
disbursement on the Loan or under the Promissory
Note unless and until the following conditions have been, and continue to be,
met to the satisfaction of the Lender:
(a) This Agreement, the Promissory Note, the Guaranty, and any other
Loan Documents required by Lender shall have been duly executed by the
parties thereto, acknowledged (if required), and delivered to Lender, and
the same shall be in full force and effect.
(b) Borrower shall have provided evidence satisfactory to Lender that
Borrower and any other person signing any Loan Document (other than Lender)
have the authority to do so.
(c) The representations and warranties contained in this Agreement and
the other Loan Documents executed by Borrower (including without limitation
the Pledge Agreement) shall be true and correct in all material respects.
(d) The security interest of Lender in and to the Collateral shall be
valid, perfected, in full force and effect, and shall constitute a first
lien position senior in interest and right to all other liens, claims, and
encumbrances.
(e) No Event of Default shall have occurred and be continuing, and no
condition shall exist or event shall have occurred which, with the giving
of notice or the lapse of time or both, would constitute an Event of
Default.
Notwithstanding anything in this Agreement or the other Loan Documents to
the contrary, the foregoing conditions are solely for the benefit and protection
of Lender. Lender may, in its sole discretion, waive or defer the performance of
any condition on one or more occasions. Any such waiver or deferral shall not
establish a course of dealings or otherwise obligate Lender to waiver or defer
any condition on other occasions.
10. Representations and Warranties. In order to induce Lender to enter into
this Agreement and to make the Loan, Borrower represents and warrants to Lender
as follows:
(a) Borrower is a corporation, duly organized, validly existing, and
in good standing under the laws of the State of Utah with the power to own
its assets and to transact business in Utah, and in such other states where
its business is conducted and it is required to be registered or otherwise
qualified to transact business.
(b) Borrower has all requisite authority and power to execute and
deliver this Agreement, the Promissory Note, and any other Loan Document to
which it is a party, and to perform its obligations thereunder and any
condition or obligation imposed under the terms thereof.
(c) The execution, delivery and performance by Borrower of this
Agreement, the Promissory Note, and other Loan Document, and each document
incident hereto will not violate any provision of any applicable law,
regulation, order, judgment, decree, article of incorporation, by-law,
indenture, contract, agreement, or other undertaking to which Borrower is a
party, or which purports to be binding on Borrower or its assets and will
not result in the creation or imposition of a lien on any of its assets,
other than the security interest granted to Lender and the Permitted
Encumbrances.
(d) There is no action, suit, investigation, or proceeding pending or,
to the knowledge of Borrower, threatened, against or affecting Borrower or
any of its assets which, if adversely determined, would have a material
adverse affect on the financial condition of Borrower or the operation of
its business.
(e) Any financial statements which have heretofore been provided to
Lender by Borrower or at Borrower's request, are correct and complete in
all material respects, and truly, fairly, and accurately represent the
financial position of Borrower as of the date of such financial statements.
Since the date of such statements there have been no material adverse
changes
(f) No information or report furnished by Borrower to Lender in
connection with its request or application for the Loan or in the
negotiation of this Agreement or any other Loan Document contained any
material misstatement of fact or omitted to state a material fact or any
fact necessary to make the statements contained therein not misleading.
(g) Borrower has (1) filed all applicable federal, state, and local
tax returns or other statements required to be filed in connection with its
business, including those for income taxes, sales taxes, property taxes,
payroll taxes, payroll withholding amounts, FICA contributions, and similar
items; (2) maintained appropriate reserves for the accrual of the same; and
(3) paid when due all such taxes, or sums or assessments made in connection
therewith. Provided, however, that (until distraint, foreclosure, sale, or
similar proceedings have been commenced) nothing herein will require
Borrower to pay any sum or assessment, the validity of which is being
contested in good faith by proceedings diligently pursued and as to which
adequate reserves have been made.
(h) Lender's security interest in the Collateral is in a first lien
position senior in right and title to all other liens, claims, and
encumbrances of any kind.
(i) Borrower is not engaged in the business of extending credit for
the purpose of purchasing or carrying margin stock (as defined in
Regulation U issued by the Board of Governors of the Federal Reserve
System), and no proceeds of the Loan will be used to purchase or carry any
margin stock or to extend credit to others for the purpose of purchasing or
carry margin stock in violation of Regulation U.
(j) As used in this Agreement, "ERISA" means the Employee Retirement
Income Security Act of 1974, as amended, together with all regulations
issued pursuant thereto; "ERISA Affiliate" means each trade or business
(whether or not incorporated) which, together with Borrower, will be
treated as a single employer under ERISA; "Plan" means any plan defined in
Section 4021(a) of the Internal Revenue Code or in respect of which
Borrower is an "employer" or a "substantial employer" as said terms are
defined in ERISA; and "Prohibited Transaction" means any transaction
described in Section 406 of ERISA which is not otherwise exempt and any
transaction described in Section 4975(c) of the Internal Revenue Code which
is not otherwise exempt. Except as has been disclosed to Lender in writing
on or before the date hereof, neither Borrower nor any of its ERISA
Affiliates nor any Plan is in material violation of any provision of ERISA
or any other applicable state or federal law, including the requirements of
the Internal Revenue Code; no Prohibited Transaction or reportable event
has occurred with respect to any Plan; no notice of intent to terminate a
Plan has been filed within the twenty-four (24) month period preceding the
date hereof nor has any Plan been terminated under Section 4041(c) of ERISA
since September 2, 1974; no proceeding has been instituted by the Pension
Benefit Guaranty Corporation ("PBGC") to terminate or appoint a trustee to
administer a Plan; and to the best of Borrower's knowledge, no event has
occurred or condition exists which might constitute grounds for the
termination of or appointment of a trustee to administer any Plan; each
Plan meets the minimum funding requirements of Internal Revenue Code
Section 412 and no waiver from the minimum funding requirement has been
applied for or approved; and neither Borrower nor any ERISA Affiliate has
incurred or expects to incur any withdrawal liability to any multi-employer
Plan within the meaning of Section 4001(a)(3) of ERISA.
(k) The Pledged Stock Certificate represents all of the issued and
outstanding capital stock of SNLIC. The Pledged Stock has been duly
authorized, validly issued, fully paid and is non-assessable. There is no
agreement or arrangement restricting the transfer of the Pledged Stock or
the transfer of any other Collateral. SNLIC is not a party to any document,
option, warrant, or other agreement, however designated, pertaining to the
issuance of any additional capital stock in SNLIC.
11. Affirmative Covenants. So long as any of the Obligation remains unpaid,
Borrower covenants and agrees that, except with the prior written consent of
Lender, it shall do the following:
(a) Borrower shall furnish to Lender such financial statements as
Lender may from time to time reasonably request. Without limiting the
foregoing, Borrower shall, at a minimum, provide the following financial
information to Lender:
(i) within 120 days after the end of each fiscal year, copies of
Borrower's audited financial statements, including all notes thereto
and the opinion of Borrower's independent auditors.;
(ii) within 45 days after the end of each fiscal quarter, copies
of Borrower's internally prepared financial statements, including
balance sheet and income statement; and
(iii) annually, within 30 days after filing, copies of Borrower's
federal income tax returns (or requests for filing extensions, if
applicable), including all schedules and exhibits thereto.
(b) Borrower shall promptly notify Lender in writing of any Event of
Default under the terms hereof, or the existence of any condition or the
occurrence of any event which, with the giving of notice of the lapse of
time or both, would constitute an Event of Default, or of any litigation,
proceeding, or development which may have a material adverse effect on
Borrower's ability to perform under the terms of this Agreement. Such
notice shall include a description of the matter requiring the notice to be
given and the actions that Borrower intends to take with respect thereto.
(c) Borrower shall duly and timely observe and conform to all valid
requirements or any governmental authority relative to the conduct of its
business, its properties, or its asset. Borrower shall maintain and keep in
full force and effect (1) all licenses and permits necessary to the proper
conduct of its business, and (2) its existence in good standing as
corporation.
(d) Borrower shall keep proper books of records and accounts in which
full, true, and correct entries will be made of all dealings or
transactions relating to its business and activities.
(e) Borrower shall (1) file all applicable federal, state, and local
tax returns or other statements required to be filed in connection with its
business, including those for income taxes, sales taxes, property taxes,
payroll taxes, payroll withholding amounts, FICA contributions, and similar
items; (2) maintained appropriate reserves for the accrual of the same; and
(3) paid when due all such taxes, or sums or assessments made in connection
therewith. Provided, however, that (until distraint, foreclosure, sale, or
similar proceedings have been commenced) nothing herein will require
Borrower to pay any sum or assessment, the validity of which is being
contested in good faith by proceedings diligently pursued and as to which
adequate reserves have been made.
(f) Borrower shall permit any person designated in writing by Lender
to visit and inspect any of the corporate books and financial records of
Borrower and to discuss its affairs and finances with its principal
officers, all at such reasonable times and as often as Lender may in good
faith request, subject to any reasonable conditions imposed by Borrower.
(g) Borrower will materially comply with all applicable provisions of
ERISA and, promptly after the filing or receiving thereof, will provide
copies of all reports and notices which Borrower or any ERISA Affiliate
files with or receives from the PBGC or the U.S. Department of Labor under
ERISA. As soon as possible, and in any event within thirty (30) days after
the Borrower or any ERISA Affiliate knows or has reason to know that any
reportable event or Prohibited Transaction has occurred with respect to any
Plan or the PBGC, or Borrower or an ERISA Affiliate has instituted or will
institute a proceeding under Title IV of ERISA to terminate any Plan,
Borrower will deliver to Lender a certificate of the Chief Financial
Officer of Borrower setting forth details as to such reportable event,
Prohibited Transaction or planned termination and the action that Borrower
proposes to take with respect thereto.
(h) Borrower shall, on a consolidated basis, at all times maintain the
following financial covenants and ratios:
(i) Borrower shall maintain a Net Worth of not less than
$20,000,000. As used herein, "Net Worth" means Borrower's total
tangible and intangible assets less Total Debt; and "Total Debt" means
all of Borrower's liabilities, including debt which has been
subordinated to this Loan in a manner approved by Lender on a
case-by-case basis. Compliance with the foregoing covenant shall be
tested at the end of each fiscal quarter.
(ii) Borrower shall maintain a ratio of Operating Cash Flow to
Fixed Charges of not less than 1.25 5o 1.00. As used herein,
"Operating Cash Flow" means net income after taxes and exclusive of
extraordinary gains and losses, gains on the sale of fixed assets, and
other extraordinary income, plus depreciation, amortization, interest
expense, and lease expense, less dividends and distributions; and
"Fixed Charges " means the sum of interest expense, lease expense,
current maturities of long-term debt, and current maturities of
capital leases (all calculated for the preceding 12-month period).
Compliance with the foregoing ratio shall be tested at the end of each
fiscal quarter for the preceding 12-month period.
(f) Borrower shall maintain a ratio of Total Liabilities less
outstanding balances on revolving credit lines relating to mortgage
operations to Net Worth of not more than 6.50 to 1. As used herein, "Total
Liabilities" means all liabilities of Borrower, and Net Worth shall have
the meaning in clause (i) above. Compliance with the foregoing ratio shall
be tested at the end of each fiscal quarter.
7. In addition to the foregoing, Guarantor shall be required to maintain the
following ratio and covenant:
(i) Guarantor shall maintain a ratio of Total Adjusted Capital to
Required Risk Based Capital of not less than 3 to 1 (i.e. 300%). As
used herein, "Total Adjusted Capital" shall have the meaning given
thereto by statutory accounting principles applicable to insurance
companies. Compliance with the foregoing ratio shall be tested at the
end of each fiscal year.
(ii) Guarantor shall maintain a Net Change in Capital Surplus of
not less than 5%. As used herein, "Net Change in Capital Surplus"
shall have the meaning given thereto by statutory accounting
principles applicable to insurance companies. Compliance with the
foregoing covenant shall be tested annually at the end of each fiscal
year.
12. Negative Covenants. So long as any of the Obligation remains unpaid,
Borrower covenants that, except with the prior written consent of Lender, it
will not do any of the following:
(a) Borrower shall not enter into any transaction of merger or
consolidation, or acquire all or substantially all of the assets or
business of a person or other legal entity without the prior written
consent of Lender.
(b) Borrower shall not create or permit to exist any lien, claim, or
encumbrance on the Collateral or any part thereof, except as granted to
Lender. Borrower shall not do or refrain from doing any act which may in
any manner adversely affect Lender's interest in the Collateral or diminish
the value thereof.
(c) Borrower will not at any time permit any Plan maintained by it to
engage in any Prohibited Transaction; incur any "accumulated funding
deficiency" as such term is defined in ERISA; or terminate any such Plan in
a manner which could result in the imposition of a lien on any property of
Borrower pursuant to ERISA.
13. Covenants as to the Pledged Stock So long as any of the Obligation
remains unpaid, Borrower covenants and agrees as follows:
(a) Perfection. Concurrently with the execution and delivery of this
Agreement, Borrower shall (i) deliver to Lender ---------- all certificates
representing the Pledged Stock, accompanied by undated stock powers duly
executed in blank and medallion guaranteed, and (ii) take all such other
actions as shall be necessary or as Lender may reasonably request to
perfect and establish the priority of the lien in the Collateral granted by
this Agreement. Notwithstanding the generality of the foregoing, and in
addition to the Lender's physical possession of any certificates as
provided for herein, Borrower hereby expressly consents (x) to the filing
of any UCC-1 financing statement by Lender in any jurisdiction Lender deems
necessary or appropriate, or (y) the delivery to SNLIC or any other third
party of any notice or correspondence deemed appropriate by Lender in order
to perfect the priority of the liens granted by this Agreement.
(b) Preservation and Protection of Security Interests. Borrower shall:
(i) upon the acquisition after the date hereof by Borrower of any
Collateral, promptly either (x) transfer and deliver to Lender all
such Collateral (together with the certificates (if any) representing
such Collateral duly endorsed in blank or accompanied by updates stock
powers duly executed in blank), or (y) take such other action as
Lender shall reasonably deem necessary or appropriate to perfect, and
establish the priority of, the lien granted by this Agreement in such
Collateral; and
(ii) give, execute, deliver, file or record any and all financing
statements, notices, contracts, agreements or other instruments,
obtain any and all governmental approvals and take any and all steps
that may be necessary or as Lender may reasonably request to create,
perfect, establish the priority of, or to preserve the validity,
perfection or priority of, the lien granted by this Agreement or to
enable Lender to exercise and enforce its rights, remedies, powers and
privileges under this Agreement with respect to such lien.
(c) Grant of Proxy; Appointment of Lender as Attorney-in-Fact.
(i) Borrower hereby grants to Lender a proxy to vote all shares
of the Pledged Stock, so long as an Event of Default has occurred and
is continuing. Such proxy, being coupled with an interest, is
irrevocable until the earlier of (x) the date when the Event of
Default shall cease to exist, or (y) that date on which all of the
Obligation has been indefeasibly paid in full.
(ii) So long as an Event of Default has occurred and is
continuing, Borrower hereby appoints Lender and any designee of Lender
as Borrower's attorney-in-fact and authorizes Lender or such designee,
at Borrower's sole expense, to exercise at any time in Lender's or
such designee's discretion all or any of the following powers (such
power of attorney, being coupled with an interest, being irrevocable
until all of the Obligation has been indefeasibly paid in full); (A)
to ask, demand, collect, sue for, recover, receive and give receipt
and discharge for amounts due and to become due under and in respect
of all or any part of the Collateral; (B) to receive, endorse and
collect any drafts, instruments, documents and chattel paper in
connection with clause (A) above; (C) to file any claims or take any
action or proceeding that Lender may deem necessary or advisable for
the collection of all or any part of the Collateral; (D) to execute,
in connection with any sale or disposition of the Collateral permitted
hereunder, any endorsements, assignments, bills of sale or other
instruments of conveyance or transfer with respect to all or any part
of the Collateral; (E) to enter and remain upon the premises of
Borrower and take possession of all or any part of the Collateral,
with or without judicial process; (F) to use the materials, services,
and books and records of Borrower for the purpose of liquidating or
collecting the Collateral, whether by foreclosure, auction, or
otherwise; (G) to remove the same to the premises of Lender or any
designated agent for such time as Lender may desire in order
effectively collect or liquidated the Collateral; and (H) to exercise
(1) all voting, consensual, and other rights and powers pertaining to
the Collateral (whether or not transferred into the name of Lender),
at any meeting of shareholders, exchange, subscription, and any other
rights, privileges, or options pertaining to the Collateral as if it
were the absolute owner thereof.
(d) Special Provisions Relating to Stock Collateral.
(i) So long as no Event of Default shall have occurred and be
continuing, Borrower shall have the right to exercise all voting,
consensual and other powers of ownership pertaining to the stock
Collateral for all purposes, provided that Borrower agrees that it
will not vote the stock Collateral in any manner that is inconsistent
with any covenant by it in this Agreement or any other Loan Document.
Lender shall, at Borrower's expense, execute and deliver to Borrower,
or cause to be executed and delivered to Borrower, all such proxies,
powers of attorney, dividend and other orders and other instruments,
without recourse, as Borrower may reasonably request for the purpose
of enabling Borrower to exercise the rights and powers which it is
entitled to exercise in this Paragraph 13(d)(i).
(ii) If any Event of Default shall have occurred and be
continuing, and whether or not Lender exercises any available right to
declare the Obligations or any part thereof due and payable or seeks
or pursues any other right, remedy, power or privilege available to it
under applicable law, this Agreement, the Promissory Note, or the
other Loan Documents, Lender shall be entitled to vote the proxy
granted to it pursuant to Paragraph 13 (c)(i).
(iii) Borrower shall be entitled to receive and retain any
interest, income, cash dividends, cash distributions and other amounts
paid or payable in respect of any Collateral (including stock
Collateral); providing, however, that, if an Event of Default shall
have occurred and be continuing, and whether or not Lender exercises
any available right to declare the Obligation due and payable or seeks
or pursues any other right, remedy, power or privilege available to it
under applicable law, this Agreement or the other Loan Documents, all
interest, dividends, distributions, and other amounts paid or payable
in respect of the Collateral shall be paid directly to Lender and be
retained by Lender as part of the Collateral (except to the extent
applied upon receipt to the payment of the Obligation). Upon the
occurrence and during the continuation of an Event of Default, Lender
shall also be entitled to receive directly: (A) all interest, income,
dividends, distributions, or other amounts paid or payable in cash or
other property in respect of any Collateral in connection with the
dissolution, liquidation, recapitalization or reclassification or the
capital of SNLIC to the extent representing (in the reasonable
judgment of Lender) an extraordinary, liquidating, or other
distribution in return of capital; (B) all additional membership
interests, warrants, options, or other securities or property (other
than cash) paid or payable or distributed or distributable in respect
of any Collateral in connection with any noncash dividend,
distribution, return of capital, spin-off, stock split, split-up,
reclassification, combination of shares or interests or similar
arrangement; and (C) without affecting any restrictions against such
actions otherwise contained herein, all additional membership
interests, warrants, options, or other securities or property
(including cash) paid or payable or distributed or distributable in
respect of any Collateral in connection with any consolidation,
merger, exchange of securities, liquidation, or other reorganization.
All interest, income, dividends, distributions, or other amounts that
are received by Borrower in violation of provisions hereof shall be
received in trust for the benefit of Lender, shall be segregated from
other property or funds of Borrower, and shall be forthwith delivered
to Lender as Collateral in the same form as so received (with any
necessary endorsements).
(iv) Borrower shall cause SNLIC to not issue any additional
capital stock, or enter into any agreement for the issuance of
additional capital stock, or to grant an option, warrant, or other
right to acquire any of the capital stock, and Borrower shall vote
against any such proposal.
14. Events of Default. The occurrence of any of the following events or
conditions shall constitute an "Event of Default" hereunder:
(a) Borrower fails to make any payment of principal or interest on the
Promissory Note or under this Agreement within ten (10) days after the same
becomes due.
(b) Any representation or warranty made by Borrower in this Agreement
or the Promissory Note, or in any certificate, financial statement, or
other statement furnished by Borrower to Lender, is untrue in any material
respect at the time when made.
(c) Borrower defaults in the observance or performance of any other
covenant or agreement contained in this Agreement, other than a default
constituting a separate and distinct Event of Default under this Paragraph
14,and such default continues unremedied for a period of twenty (20) days
after notice thereof is given to Borrower.
(d) Borrower defaults in the observance or performance of any other
covenant or agreement contained in any other Loan Document or other
document or agreement made and given in connection with this Agreement,
other than a default constituting a separate and distinct Event of Default
under this Paragraph 14, and the continuance of the same unremedied for a
period of thirty (30) days after notice thereof is given to Borrower.
(e) Any of the Loan Documents or other instrument executed and
delivered in connection herewith for any reason ceases to be valid or in
full force and effect or the validity or enforceability of which is
challenged or disputed by any signer thereof, other than Lender.
(f) Borrower defaults in the payment of principal or interest on any
other obligation for borrowed money other than hereunder, or defaults in
the payment of the deferred purchase price of property beyond the period of
grace, if any, provided with respect thereto, or defaults in the
performance or observance of any obligation or in any agreement relating
thereto, if the effect of such default is to cause or permit the holder or
holders of such obligation (or trustee on behalf of such holder or holders)
to cause such obligation to become due prior to the stated maturity.
(g) Borrower or Guarantor files a voluntary petition in bankruptcy
seeking reorganization, arrangement or readjustment of debts, or any other
relief under the Bankruptcy Code as amended or under any other insolvency
act or law, state or federal, now or hereafter existing.
(h) An involuntary petition is filed against Borrower or Guarantor in
bankruptcy seeking reorganization, arrangement or readjustment of debts, or
any other relief under the Bankruptcy Code as amended, or under any other
insolvency act or law, state or federal, now or hereafter existing, and the
continuance thereof for sixty (60) days undismissed, unbonded, or
undischarged.
(i) All or any substantial part of the property of Borrower or
Guarantor shall be condemned, seized, or otherwise appropriated, or custody
or control of such property is assumed by any governmental agency or any
court of competent jurisdiction, and is retained for a period of thirty
(30) days.
(j) Guarantor shall default in any term, condition, of covenant
contained in the Guaranty or in any other agreement or undertaking it may
now or hereafter have with Lender.
(k) Lender otherwise in good faith deems itself to be insecure, or the
value of the Collateral to have significantly declined from the date
hereof, or the prospect of timely payment or performance to be impaired,
provided, however, Lender shall have given Borrower written notice of the
grounds thereof, and Borrower shall have failed to correct such matter or
given Lender other assurance satisfactory to Lender within twenty (20) days
thereof.
15. Remedies
(a) Upon the occurrence of an Event of Default, Lender may accelerate
the entire unpaid principal balance of the Promissory Note, together with
accrued interest thereon, and declare the same to be immediately due and
payable without presentment, demand, protest, or other notice of any kind.
Without waiving any right or remedy available to it, Lender may proceed
against Borrower, Guarantor, or any Collateral simultaneously or in any
order it chooses. To the fullest extent permitted by law, Borrower waives
any rights to presentment, demand, protest, or notice of any kind in
connection with this Agreement, the Promissory Note, or the other Loan
Documents. No failure or delay on the part of Lender in exercising any
right, power, or privilege hereunder will preclude any other or further
exercise thereof or the exercise of any other right, power or privilege.
(b) The rights and remedies provided herein are cumulative and not
exclusive of any other rights or remedies provided at law or in equity.
Without limiting the foregoing, upon the occurrence and during the
continuation of an Event of Default, Lender shall have the right in
Lender's sole and absolute discretion to determine which rights, security,
liens, or remedies Lender shall at any time pursue, relinquish,
subordinate, modify or take any other action with respect thereto, without
in any way modifying or affecting any of them or any of Lender's rights
hereunder or the Obligation, and Lender, among its other rights and
remedies, shall have all of the rights and remedies of a secured party
under the Uniform Commercial Code of the State of Utah (as amended, the
"UCC"). Without in any way limiting the generality of the foregoing, Lender
may, upon the --- occurrence and during the continuation of an Event of
Default: (A) subject to compliance with the terms of Section 70A-9a-609 of
the UCC, cause the Collateral to be transferred to Lender's name or in the
name of a nominee and, thereafter, exercise all of the rights, powers, and
remedies of an owner thereof; and (B) sell, resell, assign and deliver, in
its sole discretion, all or any of the Collateral, in on or more lots or
parcels, subject to applicable federal and state securities laws, at public
or private sale, at any of the Lender's offices or elsewhere, for cash,
upon credit, or for future delivery, at such time or times and at such
price or prices and upon such other terms as Lender may deem satisfactory.
If any of the Collateral is sold by Lender upon credit or for future
delivery, Lender shall not be liable for the failure of the purchaser to
purchase or pay for the same and, in the event of any such failure, Lender
may resell such Collateral. In no event shall Borrower be credited with any
part of the proceeds of sale of any Collateral until and to the extent cash
payment in respect thereof has actually been received by Lender. Each
purchaser at any such sale shall hold the property sold absolutely free
from any claim or right of any kind whatsoever, including any equity or
right of redemption of Borrower, and Borrower expressly waives, to the
fullest extent permitted by applicable law, all rights of redemption, stay
or appraisal, and all rights to require Lender to marshal any assets in
favor of Borrower or any other person or against or in payment of any or
all of the Obligation, that it has or may have under any rule of law or
statute now existing or hereafter adopted. No demand, presentment, protest,
advertisement, or notice of any kind (except any notice required by law, as
referred to below), all of which are hereby expressly waived by Borrower,
shall be required in connection with any sale or other disposition of all
or any part of the Collateral. If any notice of a proposed sale or other
disposition of all or any part of the Collateral shall be required under
applicable law, Lender shall give Borrower at least ten (10) days' prior
notice of the time and place of any public sale and of the time after which
any private sale or other disposition is to be made, which notice Borrower
agrees is commercially reasonable. Lender shall not be obligated to make
any sale of Collateral if it shall determine not to do so, regardless of
the fact that notice of sale may have been given. Lender may, without
notice or publication, adjourn any public or private sale or cause the same
to be adjourned from time to time by announcement at the time and place
fixed for sale, and such sale may, without further notice, be made at the
time and place to which the same was so adjourned. Upon each public sale
and, to the extent permitted by applicable law, upon each private sale,
Lender may purchase all or any of the Collateral being sold, free from any
equity, right of redemption, or other claim or demand, and may make payment
therefore by endorsement and application (without recourse) of the
Obligation in lieu of cash as a credit on account of the purchase price for
such Collateral. If, following the occurrence and during the continuation
of an Event of Default, Lender seeks to take possession of any or all of
the Collateral by judicial process, Borrower hereby irrevocably waives: (x)
any bond and any surety or security relating thereto by any statute, court
rule or otherwise as an incident to such possession; (y) any demand for
possession prior to the commencement of any suit or action to recover
possession thereof; and (z) any requirement that Lender retain possession
of and not dispose of any such Collateral until after trial or final
judgment. The enumeration of the rights and remedies of Lender in this
Paragraph 15 is not intended to be exhaustive and the exercise of any such
rights or remedies shall not preclude the exercise of any other rights or
remedies, all of which shall be cumulative.
(c ) Lender shall incur no liability as a result of the sale, lease,
or other disposition of all or any part of the Collateral at any private
sale pursuant to this Paragraph 15 conducted in a commercially reasonable
manner. Borrower hereby waives any claims against Lender arising by reason
of the fact that the price at which all or any portion of the Collateral
may have been sold at such private sale was less than the price which might
have been obtained at a public sale or was less than the aggregate amount
of the Obligation, even if Lender accepts the first offer received and does
not offer such Collateral to ore than one offeree, provided that such sale
is in all other respects conducted in a commercially reasonable manner.
(d) Borrower recognizes that, by reason of certain prohibitions
contained in the Securities Act of 1933, as amended (the "Securities Act"),
and applicable state or foreign securities laws, Lender may be compelled,
with respect to any sale of all or any portion of the Collateral to limit
purchasers to those who will agree, among other things, to acquire the
Collateral (or any portion thereof) for their own account, for investment,
and not with a view to distribution or sale. Borrower acknowledges that any
such private sale may be at prices and on terms less favorable to Lender
than those obtained through a public sale without such restrictions, and,
notwithstanding such circumstances, aggress that any such private sale
shall be deemed to have been made in a commercially reasonable manner and
that Lender shall have no obligation to engage in public sales. Borrower
further acknowledges that SNLIC is under no legal or contractual obligation
to register any of the Collateral under the Securities Act.
(e) Subject to the provisions of the Promissory Note, the proceeds
from any sale or other disposition of Collateral by Lender shall first be
applied to any costs and expenses incurred by Lender, or any of its agents
or representatives (i) in securing possession thereof or in storing,
repairing, and finishing same for sale, or (ii) in connection with any sale
thereof, with the balance, if any, of such proceeds to be applied toward
the payment of the Obligation in any manner deemed appropriate by Lender
Party in its sole and absolute discretion. Application of the net proceeds
as to any particular portion of the Obligation or as to principal or
interest shall be in the Lender's sole and absolute discretion,
notwithstanding any contrary instructions which Lender may have received or
receive from any other person. Any deficiency will be paid to Lender
forthwith upon demand. Any surplus will be paid by Lender, subject to the
claims of third persons, to Borrower.
(f) Borrower agrees to pay all costs and expenses incurred by Lender
by reason of the default, including court costs and reasonable attorney's
fees whether incurred prior to, during, or subsequent to any bankruptcy,
reorganization, receivership, liquidation, legal, judicial, appellate, or
other proceeding involving Borrower or any of its assets.
16. Notices. Unless otherwise specifically provided herein, all notices
required to be given shall be in writing addressed to the respective party as
set forth below and shall be either personally served, sent by overnight courier
service, or sent by registered or certified United States mail, return receipt
requested. Such notices shall be deemed to have been given: (a) if delivered in
person, when delivered; (b) if delivered by overnight courier, on the first
business day after depositing the same with the overnight courier; or (c) if by
United States mail, on the first date that delivery was attempted or three (3)
business days after depositing in the United States mail, postage prepaid and
properly addressed, whichever first occurs. Notices shall be addressed as
follows:
If to Lender: KeyBank National Association
Attn: Commercial Loan Dept.
KeyBank Tower, Suite 2007
50 South Main Street
Salt Lake City, Utah 84144
If to Borrower: Security National Financial Corporation
Attn: President
5300 South 360 West. Suite 310
Salt Lake City, Utah 84123
or to such other address as the party to whom such notice is intended shall
have previously designated by written notice to the serving party.
17. General Provisions. All representations and warranties made in this
Agreement, the Promissory Note, any other Loan Document, and in any certificate
delivered pursuant thereto shall survive the execution and delivery of this
Agreement and the making of the Loan hereunder. This Agreement will be binding
upon and inure to the benefit of Borrower and Lender, their respective
successors and assigns, except that Borrower may not assign or transfer its
rights or delegate its duties hereunder without the prior written consent of
Lender. This Agreement, the Promissory Note, the other Loan Documents, and all
documents and instruments associated herewith will be governed by and construed
and interpreted in accordance with the laws of the State of Utah. Time is of the
essence hereof. Lender may set off against any debt or account it owns Borrower,
now existing or hereafter arising, in accordance with its rules and regulations
governing deposit accounts then in existence, and for such purposes is hereby
granted a security interest in all such accounts.
18. Waiver of Jury Trial. BORROWER AND LENDER EACH WAIVE ANY RIGHT TO A
TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER
THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS OR RELATING THERETO OR ARISING FROM
THE LENDING RELATIONSHIP WHICH IS THE SUBJECT OF THIS AGREEMENT AND AGREE THAT
ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A
JURY.
19. Entire Agreement. This Agreement, together with the Promissory Note and
the other Loan Documents, constitutes the entire understanding and agreement of
the Parties with respect to the general subject matter hereof; supersede all
prior negotiations and agreements with respect thereto; and may not be
contradicted by evidence of any alleged oral agreement. This Agreement, the
Promissory Note, and the other Loan Documents may not be amended, modified, or
rescinded in any manner except by a written agreement signed by Lender which
clearly and unequivocally expresses an intent to amend, modify, or rescind the
same.
EXECUTED on the day and year first written above.
SECURITY NATIONAL FINANCIAL
CORPORATION, a Utah corporation
By: s/s Scott M. Quist
President
KEYBANK NATIONAL ASSOCIATION
A national banking association
By: s/s Roger L. Ford
Vice President
